Rising crime rate boosts home-security industry

March 29, 1992|By Martin Zimmerman | Martin Zimmerman,Dallas Morning News

DALLAS -- Fear of crime has done more than spawn TV shows such as "America's Most Wanted." It's made home security a booming industry.

Sales by home security dealers are increasing annually and are expected to hit $2 billion this year. And the future looks even brighter. Only 8 percent of U.S. homes now have alarm systems. That number could double or triple by the year 2000, said Jeffrey Kessler, an industry analyst with Lehman Brothers Inc.

"The [home security] industry is emerging as a dynamic industry of the '90s," said Lee Jones, president of the consulting firm Support Services Group. "It's showing lots of growth, and that's attracting lots of players."

However, as the recent financial troubles of Dallas-based Emergency Networks Inc. demonstrate, it's also an industry marked by stiff competition and squeezed by tight profit margins. And while demand is expected to increase, the financial risks for individual companies remain high.

"It's a recession-proof industry," Mr. Jones said, "but the nTC companies themselves aren't recession-proof."

Also, the companies are wrestling with the increasingly serious problem of false alarms, which some believe is hurting the reliability of the alarm systems.

Until about five years ago, home security systems were mainly a high-end item costing several thousand dollars.

In 1987, slightly more than 6 percent of U.S. households had alarm systems, according to William Sutherland, an analyst with Wheat First Butcher & Singer Inc.

But as Americans became more concerned about crime and systems became cheaper, sales took off. With 8 percent of U.S. homes wired now, the number could increase to 15 or 20 percent by the end of the decade, Mr. Kessler said.

John Genetempo, regional general manager for ADT Security Systems Southwest Inc., a division of industry leader ADT Security Systems Inc., said a home security system cost between $2,000 and $3,000 10 years ago. Now, one can be had for $500 to $600.

"The systems have become more affordable," Mr. Genetempo said. "It used to be a status symbol. Now it's like having central air conditioning."

The home security market has two main camps. There are companies such as ADT that sell systems costing several

hundred to several thousand dollars, and then charge a monthly monitoring fee.

Then there are firms such as Emergency Networks, which installs a bare-bones system for about $200 and then charges a moderate monthly fee -- usually $20 to $25 -- for monitoring. The homeowner doesn't own the alarm system. It will be removed if the monitoring contract lapses. Also, the contract is often sold to a third party, which undertakes the monitoring system.

One problem with the bare-bones approach: The security company must pay for the alarm system up front. But it doesn't start earning a profit until it has collected a few years' worth of monitoring fees, which means large amounts of capital are needed to keep a company growing.

"They're not making any money milking the cow," Mr. Sutherland said. "They're still installing the cow."

The hazards of that system became apparent several weeks ago when Emergency Networks suddenly found itself without a source of long-term financing. The company missed a payroll and angered employees before it could tap new funding.

Emergency Networks, which has attracted such high-profile investors as the Pritzker family of Chicago, appears poised for long-term growth. Some industry observers question the viability the company's cut-rate alarm, saying its limited scope may be of limited effectiveness. But the company insists it can provide valuable protection for a low price. And its service is first-rate, the company says.

Less certain is the fate of smaller companies in the industry. There are about 13,000 firms selling home protection services, and 86 percent of those record less than $1 million a year in sales, Mr. Sutherland noted. Some of these small firms can find a niche, industry watchers say. But they are also being bought up by their bigger rivals.

Still another problem facing the industry is false alarms. The Dallas Police Department estimates that 97 percent of the residential alarms it answers are false. That experience has led Dallas and other cities to charge homeowners for answering false alarms. In some cities, the charge runs as high as $2,000.

"It's the industry's big 'bete noire,' " Mr. Kessler said. "In some cases, police are failing to respond quickly to these alarms any more, or are failing to respond at all."

The false-alarm problem also has left the industry vulnerable to telephone companies, which are expected to vigorously enter the home security market. Mr. Kessler predicts the phone

companies will use the home protection industry's poor record on false alarms as an argument for switching to their products.

The home security companies are struggling to devise some form of alarm verification system that would cut down on the number of false alarms.

A newly introduced British-made camera system shows some promise, but a definitive solution may still be a way off. The camera system costs several hundred dollars to install. And it's too early to tell how effective it will be.

Despite these problems, Mr. Kessler and others are still confident that the boom in home protection sales is more than a fad.

Mr. Kessler said, "The focus on crime is not going to go away and the focus on protecting yourself is not going to go away."

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