One man's projections for 2009
John Honovich posted a fairly controversial projection for the IP video market in 2009 yesterday. I'm at the very least jealous of his many comments.
Before I get into any discussion of it, let me first say that I'm extremely skeptical of any of these kinds of projections. We run a "Stats" page in our paper issue where we recount one of these kinds of reports every month, and I always feel a little guilty about it. The numbers are always so round, the picture almost always so rosy. It's hard not to think that the researchers are just giving the potential buyers, usually larger manufacturers or potential investors in the market, what they want to read.
It's not that I don't think IMS, especially, doesn't do its homework. It's just that I think it's very difficult to predict the future with any reliability, and I've thought that more so ever since I read the excellent Black Swan, a book that really changed the way I thought in a significant fashion. Basically, the book argues that it's always some completely unpredictable occurrence that actually molds the future, and rarely anything that anyone saw coming. Thus, predictions are just about always wrong. I highly recommend the book.
So, with all of that said, what of John's predictions?
Well, there are some round numbers, and some toying with statistics. Take the first sentence:
IP Video market growth will slow by 66% next year due to the unfolding financial implosion.
So, a casual read of that sentence gets you: "Whoah! Sales are going to slow by 66 percent! Crap!" (And, yes, people read like that. Trust me. There's no better confirmation of that than the anti-editorial emails I've been getting.) Of course, that's not what John is saying at all. He's say that GROWTH will slow by 66 percent. But, because IP video was growing so quickly, it can slow by 66 percent and still grow at a 15 percent rate.
Got that?
And 66 percent? You mean 2/3? What's that, the fourth roundest possible prediction, after 100 percent, 0 percent, and 50 percent? Why not 60 percent, or 70 percent? What I don't like about these kinds of numbers is that they imply precision, but in actuality are just as arbitrary as simply using an adverb like "significantly." If John's first sentence had read, "IP Video market growth will slow significantly next year due to the unfolding financial implosion," I'd have said, "Yeah, probably." But since he put in that 66 percent number, I'm all: "Pffft."
But I obviously understand the way this whole "forecasting" thing works and I don't blame John for playing the game. That's how it works. People like numbers and dislike adverbs (assuming they can actually identify an adverb...).
So, moving forward, there are a few points I would argue/add to:
Easy Credit is Over
The easy credit for consumers and businesses that characterized the last 5 years is certainly over. My projections assume that the current financial meltdown will be resolved and that basic liqudity will be restored to the marketplace. Nonetheless, even with this assumed, the regulatory and cultural pressures to restrain risky loans will leave credit far tighter relative to the past 5 years.
This will have significant impact on both GDP growth and business investments.
I agree that easy credit is basically over, but is easy venture capital over? I think there's still a bunch of private money out there that wants to go to work, and since the stock market isn't as great an investment anymore, more VC money may be eyeing the IP video market, where a 15 percent growth market isn't that bad. Getting big loans from banks? Hard. Getting $10 million from a VC fund? Maybe not so hard if you've got a decent business plan and a good management team. I think money is still out there for the taking and since many IP video companies are pretty small and don't need $100 million in capital fuel, the credit crunch might not affect the market that much.
Capital Intensive Projects Will Largely Be Delayed
With consumers spending less and credit being tighter, business will have to delay many capital intensive projects. Both the ability to justify such projects through market growth and the capacity to obtain financing will extremely difficult.
IP Video is, by definition, a capital project. And since IP Video depends on new projects or replacement of analog CCTV systems deployed within the last few years, customers will need to obtain capital or draw down on cash reserves to purchase IP video systems. The financial pressure to resist will be intense. The ability to maintain existing CCTV system will be easy.
This is definitely happening. At least four integrators in the past two weeks have told me that projects they were greenlighted (greenlit?) on were either pushed back or cancelled altogether after the developer couldn't get the funding it was banking on (ha! a bad money pun! sorry about that).
Weak ROI of IP Video Will Be Exposed
The ROI of IP video is generally weak. According to Axis' own numbers, the TCO reduction is only 5-10%. To a CFO, especially in a recession, these will not be attractive. The problems of IP video will be exposed.
A rule of thumb often cited is that innovative technologies should reduce costs by 80%. One example is T1s versus cable modems. Cable modems provided 'good enough' high speed bandwidth at 70% less costs. This caused large migration from T1 to cable modem for Internet use. Unfortunately, IP Video offers such strength in eliminating analog fiber systems relevant to only a small fraction of security buyers.
I think this argument misses the possibilities of leasing and video as a service. If end users can pay a monthly fee for IP video that they can both access themselves at any time, and have a video monitoring service access, they can reduce manpower fees a great deal, get a good deal of return on reduced shrink/less graffiti/property loss, and see HR benefits with real value. Also, the costs of the IP video system are dropping. Cameras are becoming more price competitive, encoders are making it cheaper to leverage an existing analog infrastructure, etc. I think integrators can be better at selling an IP systems' value than John assumes. There is a difference between actual ROI and perceived ROI, and some of that comes from good salespeople.
And, finally:
Where Do These Numbers Come From?
These numbers are projections based on an analysis of macroeconomic conditions and competitive strength of IP video technologies. While I talk with numerous industry leaders, these numbers are not based on vendor projections. The uncertainy in any projection in these conditions is clearly high.
Well, obviously. So why use numbers at all? The problem with numbers is that they're kind of designed to imply exactitude. When you tell someone you want $1,000 for your IP camera, you're not going to be happy if they give you $800 and say, "well, that's pretty close." We have the ability in the English language to talk about degrees. We can say the market is going to slow, growth is going to slow, there will be uncertainty, end users will take less risk, etc. We don't have to say, "end users will be 72.9 percent more squeamish."
Maybe that's idealistic of me, and I understand predictions come with the obvious caveats attached, but I sometimes fail to see the point of the exercise. John's a smart guy and is the best new voice to come into the market lately, but he doesn't need to attach numbers to his thoughts for them to be valid and interesting.
Before I get into any discussion of it, let me first say that I'm extremely skeptical of any of these kinds of projections. We run a "Stats" page in our paper issue where we recount one of these kinds of reports every month, and I always feel a little guilty about it. The numbers are always so round, the picture almost always so rosy. It's hard not to think that the researchers are just giving the potential buyers, usually larger manufacturers or potential investors in the market, what they want to read.
It's not that I don't think IMS, especially, doesn't do its homework. It's just that I think it's very difficult to predict the future with any reliability, and I've thought that more so ever since I read the excellent Black Swan, a book that really changed the way I thought in a significant fashion. Basically, the book argues that it's always some completely unpredictable occurrence that actually molds the future, and rarely anything that anyone saw coming. Thus, predictions are just about always wrong. I highly recommend the book.
So, with all of that said, what of John's predictions?
Well, there are some round numbers, and some toying with statistics. Take the first sentence:
IP Video market growth will slow by 66% next year due to the unfolding financial implosion.
So, a casual read of that sentence gets you: "Whoah! Sales are going to slow by 66 percent! Crap!" (And, yes, people read like that. Trust me. There's no better confirmation of that than the anti-editorial emails I've been getting.) Of course, that's not what John is saying at all. He's say that GROWTH will slow by 66 percent. But, because IP video was growing so quickly, it can slow by 66 percent and still grow at a 15 percent rate.
Got that?
And 66 percent? You mean 2/3? What's that, the fourth roundest possible prediction, after 100 percent, 0 percent, and 50 percent? Why not 60 percent, or 70 percent? What I don't like about these kinds of numbers is that they imply precision, but in actuality are just as arbitrary as simply using an adverb like "significantly." If John's first sentence had read, "IP Video market growth will slow significantly next year due to the unfolding financial implosion," I'd have said, "Yeah, probably." But since he put in that 66 percent number, I'm all: "Pffft."
But I obviously understand the way this whole "forecasting" thing works and I don't blame John for playing the game. That's how it works. People like numbers and dislike adverbs (assuming they can actually identify an adverb...).
So, moving forward, there are a few points I would argue/add to:
Easy Credit is Over
The easy credit for consumers and businesses that characterized the last 5 years is certainly over. My projections assume that the current financial meltdown will be resolved and that basic liqudity will be restored to the marketplace. Nonetheless, even with this assumed, the regulatory and cultural pressures to restrain risky loans will leave credit far tighter relative to the past 5 years.
This will have significant impact on both GDP growth and business investments.
I agree that easy credit is basically over, but is easy venture capital over? I think there's still a bunch of private money out there that wants to go to work, and since the stock market isn't as great an investment anymore, more VC money may be eyeing the IP video market, where a 15 percent growth market isn't that bad. Getting big loans from banks? Hard. Getting $10 million from a VC fund? Maybe not so hard if you've got a decent business plan and a good management team. I think money is still out there for the taking and since many IP video companies are pretty small and don't need $100 million in capital fuel, the credit crunch might not affect the market that much.
Capital Intensive Projects Will Largely Be Delayed
With consumers spending less and credit being tighter, business will have to delay many capital intensive projects. Both the ability to justify such projects through market growth and the capacity to obtain financing will extremely difficult.
IP Video is, by definition, a capital project. And since IP Video depends on new projects or replacement of analog CCTV systems deployed within the last few years, customers will need to obtain capital or draw down on cash reserves to purchase IP video systems. The financial pressure to resist will be intense. The ability to maintain existing CCTV system will be easy.
This is definitely happening. At least four integrators in the past two weeks have told me that projects they were greenlighted (greenlit?) on were either pushed back or cancelled altogether after the developer couldn't get the funding it was banking on (ha! a bad money pun! sorry about that).
Weak ROI of IP Video Will Be Exposed
The ROI of IP video is generally weak. According to Axis' own numbers, the TCO reduction is only 5-10%. To a CFO, especially in a recession, these will not be attractive. The problems of IP video will be exposed.
A rule of thumb often cited is that innovative technologies should reduce costs by 80%. One example is T1s versus cable modems. Cable modems provided 'good enough' high speed bandwidth at 70% less costs. This caused large migration from T1 to cable modem for Internet use. Unfortunately, IP Video offers such strength in eliminating analog fiber systems relevant to only a small fraction of security buyers.
I think this argument misses the possibilities of leasing and video as a service. If end users can pay a monthly fee for IP video that they can both access themselves at any time, and have a video monitoring service access, they can reduce manpower fees a great deal, get a good deal of return on reduced shrink/less graffiti/property loss, and see HR benefits with real value. Also, the costs of the IP video system are dropping. Cameras are becoming more price competitive, encoders are making it cheaper to leverage an existing analog infrastructure, etc. I think integrators can be better at selling an IP systems' value than John assumes. There is a difference between actual ROI and perceived ROI, and some of that comes from good salespeople.
And, finally:
Where Do These Numbers Come From?
These numbers are projections based on an analysis of macroeconomic conditions and competitive strength of IP video technologies. While I talk with numerous industry leaders, these numbers are not based on vendor projections. The uncertainy in any projection in these conditions is clearly high.
Well, obviously. So why use numbers at all? The problem with numbers is that they're kind of designed to imply exactitude. When you tell someone you want $1,000 for your IP camera, you're not going to be happy if they give you $800 and say, "well, that's pretty close." We have the ability in the English language to talk about degrees. We can say the market is going to slow, growth is going to slow, there will be uncertainty, end users will take less risk, etc. We don't have to say, "end users will be 72.9 percent more squeamish."
Maybe that's idealistic of me, and I understand predictions come with the obvious caveats attached, but I sometimes fail to see the point of the exercise. John's a smart guy and is the best new voice to come into the market lately, but he doesn't need to attach numbers to his thoughts for them to be valid and interesting.
Labels: IP video, John Honovich
posted by Sam at 9:37 AM
5 Comments:
Yeah, who needs numbers? Let's all just talk about how things are going to be either up or down, and let's not try to quantify anything. That would be a great way to run a business!
Hi Sam,
First thank you for your thoughtful analysis of the forecast.
I definitely agree with you about the skepticism of such numbers.
I worry about this as well. It is one of the reason that I tried to use 'rounded' numbers ending in 0 or 5. I wanted to give the impression as much as possible that these were approximate estimates.
Your point about end users being 72.9 percent more squeamish is simultaneous very funny and keen analysis.
I am going to write more on the ROI element as it has generated a significant discussion and demands its own treatment.
One final comment, the point I am making about tightening credit is not such much about VC funding but how tightening credit affects GDP growth. Tightening credit will reduce consumer spending forces business to contract and delay capital projects like IP video.
Thanks again for the critique.
Cheers,
John
Do we believe this slowdown to be felt across all vertical markets? Are there any vertical markets that are in a better position than others? Retail vs. Healthcare for example.
Have you heard of projects already been placed on hold? Or are customer projects still moving forward but at a reduced scope / size?
Regards,
Scott
Hey Scott,
I won't speak for John, but what I'm seeing is that where the systems aren't required, there's less buy-in. So, the regulated markets - like health care with its HIPPA regulations, or public companies looking to comply with Sarb-Ox, or facilities with chemical storage that have to comply with CFATS - are where the purchases are actually happening. Sometimes that's not IP video (access control in health care is huge right now from what I'm hearing), but it's generally IP. And once security is on the network in the first place, it's an easier sell to hang the cameras.
Projects are definitely being put on hold. I had an integrator in Florida say last week that a high-end condo job he'd won the bid on had been put on hold, for example.
Also, schools are often financed with bonds, and it's harder for municipalities to float them right now, so I heard last week about a new school that was being put off for a year until the bond markets were easier for a small town to navigate.
Still, though, I was just talking with MDI yesterday, and they said schools are eating up IP video as fast as they can sell it. I'm not sure if that's for the investors' benefit, but he had some real-world examples in Texas to talk about. Big 1,700 camera, district-wide buys.
These are anecdotal examples, of course, but they seem to make sense.
Hi Sam,
Great examples. I am not surprised that schools are still doing well today. The key factor is what happens to schools 3 to 6 months as new loans are harder to get and as tax bases shrink (lower housing prices, higher unemployment, etc). This will be the key test for segments like education that are very strong today.
Cheers,
John
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