A Transitional Period

Why have entrant firms paved the way?

IP-based video surveillance has grown at a pace of 30 to 40 percent annually over the last few years. Analog video has shown significantly lower growth rates—thus, the technological shift from analog to digital surveillance is now in full swing.

The extent to which this shift has been driven by companies with no past experience in the video surveillance industry is striking. Firms like Axis Communications, IndigoVision and Mobotix are relatively young and have entered the industry with the rise of IP video. Though many well-known firms have entered the realm of IP video, they have so far failed to dominate in this category in the same way they dominated the analog market. If this trend continues, entrant firms that were not even recognized 10 years ago may become the dominant players in the future.

An Emerging Pattern

Studies have shown shifts from analog to digital technology in other industries follow a similar pattern. About 66 percent of the Swiss watch manufacturers were extinguished between 1970 and 1985 when Japanese firms, like Seiko and Casio, flooded the market with inexpensive digital watches. In the early 1970s, manufacturers of mechanical calculators, like Italian Olivetti and Swedish Facit, struggled when Sharp, Texas Instruments and Casio launched smaller, more affordable and better electronic calculators. In the camera industry, former dominant players like Polaroid, Kodak, Fujifilm, Minolta, Hasselblad and Leica have either gone out of business or faced huge problems over the last few years.

Hence, in industry after industry, the digital transition has created an opportunity for new companies to grow and flourish. Why have established firms lost ground to entrant firms in virtually all industries where digital shifts have taken place?

Analog technology showed high growth rates prior to its rapid downfall. For example, global sales of film-based cameras peaked around 2000. At this point, photo kiosks popped up virtually everywhere. A few years later, when digital cameras emerged, most of these stores were shut down. Consequently, firms like Fujifilm, Kodak and AGFA suffered. In the same way, sales of mechanical calculators kept growing in the late 1960s and then decreased at a furious pace from 1971 on. This pattern deceived dominant firms into believing they had nothing to worry about as long as their business kept growing.

Competing for Marketshare

Due to a significant growth in surveillance, analog players have experienced good growth rates over the last years, even though the use of IP video has exploded in the meantime. The examples provided suggest that many dominant players were misled by these growth rates and encountered great problems once the digital avalanche became unstoppable. Entrant firms, on the other hand, seized those opportunities created by the new technology.

Another reason why entrants grab market shares in digital shifts is that they often have a different competence base. For example, Sharp and Casio had extensive experience in consumer electronics and were well prepared to enter the emerging market for electronic calculators in the mid-1960s. The fact that IP leaders, like Axis Communications, have a IT background with knowledge in network technology suggests that the competence base of the industry may be shifting. In order to succeed, the incumbent players need to renew their competence base—and current trends suggest that many of them are doing this.

An additional reason why smaller firms were more successful at entering the market was the initially lower performance of digital technology. This implies that there is no obvious financial logic for an incumbent to launch digital products at an early point since it will not be requested by their customers. The first digital cameras were often dismissed as toys since they were clumsy and could not offer the same picture quality as film-based photography. Why transition into a seemingly inferior technology that customers are not demanding when the current business is showing such high growth rates? Therefore, once the shift happened, the entrants had a jump on their competitors.

The same pattern also can be seen in the video surveillance industry. The first IP-based cameras looked like toys and were not taken seriously. They also were expensive and offered a lower performance in terms of images per second. However, as the technology improved and new functions were added, IP became more interesting and started to steal market shares from the established players. A few years ago, when IP video reached sufficient performance levels, sales suddenly exploded.

Entrant firms have often managed to capture market shares in shifts from analog to digital technology. Good analog growth has deceived established companies into not recognizing the urgency of change. In addition, the shifting competence base has created an opportunity for companies with little experience to gain footing in the industry. Moreover, the initially inferior performance has kept market leaders from finding a financial logic in investing at an early point.

Greater Opportunity

It should be noted that there are exceptions to this pattern. For instance, while the shift to digital photography initially created problems for established firms, like Canon and Nikon, they are very successful in the industry today. The Japanese camera manufacturers entered the digital imaging market and explored it at an early point. They also collaborated extensively in order to establish joint standards and a modular structure where improvements could be made on a component level by other firms, like Sanyo. Moreover, they have been committed to digital imaging and have not been afraid to leave the old technology behind.

The shift from analog to IP-based video surveillance has created an opportunity for new firms to enter the industry and grow rapidly. This is good news to younger firms like Axis, IndigoVision and Mobotix. However, as the established firms get serious about IP video, it will be interesting to see who will emerge as the market leader.

This article originally appeared in the May 2009 issue of Security Today.

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