Footprint

All the biggest stories of 2016 in the AV integration space had to do with acquisition.  The latest round of which relayed that Samsung bought Harman Group, AVI-SPL bought Anderson AV, and Compass Group bought Waveguide. Well the AV prognosticators are already out in force predicting the future and they see more of this consolidation on the horizon for 2017 as well.

Let me start by saying that I agree.  I’d also add that given the general trend it’s not exactly a hard prediction to make.  Look back at the last couple years and you’ll also see that Diversified bought Technical Innovation, Whitlock bought select divisons of Xerox, Harman bought AMX and SVSIMilestone acquired Vaddio, and the list continues.

As you can see the trend has proliferated integration companies and manufacturers alike.

There is one obvious reason that the trend will continue.  Footprint.

giant-footprint

Integration companies and manufacturers are looking for ways to increase their footprint in the world.  A companies’ desires to want to be bigger and more successful are not exactly a new thing though so…

The more compelling question though is “Why Now?”  

What conditions are driving this perceived amount of increased consolidation in our AV marketplace?  I have a couple of ideas.

Focus on Managed Services.  

We’ve heard this for quite a while.  AV Integrators need to be focused on managed services to increase revenues and secure cash flow through recurring monthly revenue (RMR).  Some integrators jumped on that train and have started building out these managed service departments.  They have done well building out regional teams for supporting their clients in the local area.

Large corporations have gone national and even global.  Companies like Google now have offices all over and aren’t confined to a single Silicon Valley campus.  This means that they are starting to demand the same form their service providers.  These companies expect their service providers to keep pace and be able to service their locations across the US and even the world.  When that happens, then footprint becomes extremely important.  One trend you will see in the integrator acquisitions as of late, is that most of the acquisitions give the larger integrator a strong established presence in geographic markets that have either been historically weak or non-existent.

The characteristics of footprint are not limited to the perimeter of the foot itself but include its depth as well.  The other trend you will see is that in many cases the larger integrator may also be gaining some expertise in other verticals that they currently do not have a great presence in.  An integrator with a strong healthcare presence for example may acquire another firm with a strong K-12 portfolio.  So even though their geographic reach may be similar, the depth of their footprint increases through the servicing of new verticals.

Of course the best acquisitions include gains to both geographic and vertical advantages that can be leveraged across all geography creating the potential for exponential gains.

Companies like Compass Group who already have strong managed services portfolios also benefit greatly when being able to expand the scope of those services withing their existing client base.  That is why their acquisition of Waveguide makes so much sense.  They understand that their existing clients already buy these services from 3rd parties and ask “Why not buy them from us instead?”

Shrinking Product Margins and Lower ASPs.

If there is one catalyst in the shift in the focus of the integrator from hardware sales to managed services it is shrinking product margins and lower average selling prices (ASPs).

See related  QSC Acquires Attero Tech

In the days before your whole bid could be shopped on the internet, it was much easier to maintain the 50 point margins that used to be so prevalent in the AV industry.  With prices high and margins healthy, hardware sales could support the business.  However, the transparency of pricing today, as well as the lowering of ASPs in everything from flat panels, to projectors, to touch panels means that businesses need to look elsewhere for profits.  That “elsewhere” in AV has been managed services.

Manufacturers are not immune to this either.  They may be able to maintain their margins to the integrator, but with lower ASPs, maintaining margin will still mean falling revenues.  This means in order to keep the top line growing you have to sell more.  If you already lead the market in your current product categories, that doesn’t give you much room.  That is why the top tier manufacturers have to grow by expanding their footprint into new categories, and many times that means buying other companies.

This type of expansion typically yields quick results given that as a market leader, they have a large customer base to leverage these new products with.

The Rich Get Richer.

The long and short of the footprint game above is that you have to have money to buy someone else. In this regard, the rich get richer.  The large integrators and manufacturers can buy other companies that allow them to grow at an even quicker rate potentially, therefore increasing their advantages.  They create large national and global forces of technicians that can service large corporations allowing them to secure the largest managed service agreements.

Manufacturers go deeper and deeper into their existing client bases with new categories of products, many times providing most of the AV ecosystem all under one corporate umbrella, securing not only increased profits, but a customer base less likely to go to another vendor due to the potential domino effects.

 

What About the Little Guy?

If you’re a smaller integrator or manufacturer wondering how you can keep up with the current competition do not despair.  The truth is that there is a whole market of services popping up just to help you.

Buying groups like USAV, PSNI, and AIN have been around for some time in order to equal the playing field for smaller firms that can’t achieve the advantages of quantity discounts on products.  They have also historically helped smaller companies that may not buy enough annually to get direct access to products an avenue to do so.

But many times these groups also offer the ability to leverage the network of dealers in the buying group in order to perform services for customers in other regions while still utilizing firms that share a common quality standard.  Distributors like Ingram Micro, Almo, and Herman are also jumping into the services business, creating and maintaining a pool of technicians, programmers, project managers, and content developers that help their customers expand their footprints for remote installations and managed services.

So the predictions for more acquisitions in 2017 will most likely come true.  Along with that however, I wager we continue to see an increase in the number companies offering assistance to smaller firms not gobbled up in these acquisitions that continue to give them a way to compete regardless of their traditional geographic limitations.

Remember it’s all about footprint.  You either need to find a way to make your foot bigger, or if you’re the little guy, just wear a bigger shoe.