Hardware: The New Loss Leader?

Anorexic hardware margins have integrators increasingly dependent on services as a key revenue source. Tim Kridel investigates the growth opportunities and regional differences.

If there’s one thing that just about every vendor and integrator can agree on, it’s that turning a decent profit on hardware is tougher than ever. If there’s another consensus, it’s that for integrators, revenue increasingly will have to come from services. 
The trends behind these consensuses are old news for anyone who’s been in pro AV for more than a few years. What’s changed is that two recent surveys – from InfoComm and the National Systems Contractors Association (NSCA) – that quantify these trends, including how the impact varies by country and growth in the types of services that integrators are offering.
“There are very big regional differences,” says Duffy Wilbert, senior vice president of membership at InfoComm International. “In 2009, Europe was about €11.26 billion [total revenue]. Thirty-five percent of that was service. In the Middle East, about 24 percent of their total number was service. Asia is a little larger than Europe in total size, but service-wise, they’re about 23 percent.” These figures come from InfoComm's recently published 2010 InfoComm Global AV Market Definition and Strategy Study. This is the first and only of its kind to cover the global picture.
These regional differences exist partly because some countries have sales channels that are more mature than others.
Some countries are just [now] moving into being very professional in their installations,” says Anders Løkke, international marketing manager at projectiondesign, a Norwegian projector vendor. “Some countries have had a professional integration channel for a number of years.” 
Size is another factor. Markets that are bigger – in terms of volume and revenue – typically have many integrators offering services. 
“When you have a lot of competition, you have to stand out in other ways,” Løkke says. “More developed countries have much more focus on it. I think that will reach the emerging markets, as well.”
Where’d the margins go?
Although the industry isn’t to the point where hardware is a loss leader, sometimes it seems that way.
“Twenty, thirty years ago, you’d hear of companies that, if you bought the equipment from them, they’d pretty much install it for free or for cost,” says Chuck Wilson, the NSCA’s executive director. “Now, it’s like the equipment is at cost, and they have to make it up on the installation.”
That change means rethinking sales strategies. 
“One challenge across all markets is trying to monetise services that in the past, they had given away,” says InfoComm’s Wilbert. “With the erosion of product margins, in the past, maybe I gave my design services away because I rolled them into the cost of the system.” 
In many countries, the pressure on hardware margins comes not just from within the pro industry, from the consumer market, too: Clients get a bid and then wonder aloud why they should pay a premium for pro-grade gear when they can get what they believe is a comparable model at a big-box retailer.
Projectors and displays are particularly hard hit.
“There’s hardly any margin in the displays anymore, and displays tend to be one of the most expensive things [in an installation],” Løkke says.
In some countries, big-box retailers have tried branching into the pro market, such as by offering integration services. For example, some U.S. integrators say they’re increasingly competing with Best Buy’s Geek Squad division. That’s something to keep an eye on in, for example, the U.K., where Best Buy recently opened the first of four stores.
Opportunities abound
At the very least, selling services – of any type – creates a relationship between the integrator and its client that can last a year or more. That constant contact creates opportunities for the integrator to identify additional sales opportunities, such as upgrading the client’s videoconferencing systems to HD.
The long-term opportunities include the services market itself, according to InfoComm’s report.
“In all categories, service growth is projected to grow 9 to 12 percent a year over the next three years,” Wilbert says.
In some countries, services already match hardware.
“In 2009, for the first time, North America was just slightly larger in terms of service than product sales,” Wilbert says.
According to the recent NSCA national survey of the US market:
  • Nearly two-thirds of respondents offer preventative maintenance contracts and say it’s profitable in the education, corporate and health care markets.
  • Twenty-one percent offer managed service agreements, such as remote monitoring, and say it’s driving 5.9 percent of their gross revenue.
  • Twenty-one percent offer training. Of this group, 24 percent began offering training in just the past year.
  • Twenty-four percent offer security, life safety or fire alarm monitoring services. Of this group, almost half has provided these services for more than 16 years .
Another 20 percent are involved in content supply and creation, a sector that the NSCA describes as “extremely niche” but one that’s unlikely to remain that way for long. That’s because the digital signage market is booming, and many clients are looking to outsource content creation, management or both.
InfoComm’s survey also detected opportunities in signage content.
“While we got some response that it’s certainly an area, it was too small of a number to measure,” Wilbert says. “We got a lot of feedback that that’s a growing area.”
Ultimately the ability to sell services depends on creating value in the eye of the beholder. For example, by remotely monitoring AV gear – or even other equipment, such as light fixtures via the Building Automation and Control Network (BACnet) protocol – an integrator could offer services that reduce the client’s energy budget.
“They’re looking at saving money,” says the NSCA’s Wilson. “They’re looking at cutting back on energy. They’re looking at improving the safety and security of their facility and employees. With all of that coming together, and with the skill sets we already have, that’s our road map to the future: being able to provide the things that building owners and facility managers want and need.” 
As with hardware, the services market varies significantly by vertical.
“We’re hearing that the government is the best right now, followed by health care,” Wilson says. “Education so spotty.” 
Even within a single vertical, opportunities vary. For example, colleges and universities on a tight budget often are willing to spend on systems that address safety and mass notifications. That often centres around digital signage, but it also could include services, such as an integrator working with mobile operators and other companies to enable emergency notifications via SMS.
“In higher education, when it comes to the safety of the students, schools will spend a tremendous amount because parents are starting to rank the safety aspects of the college almost as high as they rank its academic aspects,” Wilson says. 
Staff up? Or partner?
Signage content creation and management services highlight one of the decisions that integrators face when expanding their services offerings: hire staff to have those skills in-house, or partner with another company, such as a graphic design firm, in the case signage content. The choice often comes down to how confident they are in that service’s revenue potential.
Regardless of their choice, one thing is clear: The execution has to be first-rate. Whether it’s signage content or IT, the service probably will be a flop if the integrator tries to do it on the cheap, such as by having administrative assistants create content when they’re not answering phones.
Yet another consideration is whether a particular service eventually will become as commoditised as the hardware involved. In the case of signage content creation and management, an integrator could hedge its bet by partnering with a graphic designer. That way, if a growing number of clients handle those tasks themselves, it’s cheaper and easier to dissolve the partnership than to fire or retain staff.
“I’ve seen more the out-sourced version rather than hiring somebody in-house,” says the NSCA’s Wilson. “I think people are hesitant to hire staff for that because they don’t know how long it’s going to be before it becomes so simple that the client can do it themselves.”
In the case of IT services – such as designing and installing the client’s LAN, instead of just hanging signage and endpoints on it – another factor is the competitive environment: Many IT integrators and vendors, such as Cisco, have already expanded into the pro AV market, and that means pricing pressure on IT services, too.
Even so, integrators might have to push deeper into IT services just to win projects simply because of the trend toward putting everything on the network.
“Our members think that because it is a network application, the person who has control over the network will ultimately be the one who wins the project,” says the NSCA’s Wilson.
How vendors can help
The growing emphasis on services affects vendors, too, because the health of their business depends on the health of their primary sales channel: integrators. Vendors benefit by providing products that make it easier for integrators to sell services.
A prime example is device-management platforms, such as projectiondesign’s ProNet, which handles tasks such as calibration and reporting when a projector lamp has failed. Like similar products, ProNet’s value proposition for end users is that they don’t have to dedicate staff to tasks such as checking for burned-out lamps. Instead, it can be cheaper to outsource that task to the integrator that designed and installed their AV system.
“I think that’s the way to go,” says projectiondesign’s Løkke. “We have to have some kind of asset management around it that is cheaper than [using staff] and that would be part of the service/maintenance contract.” 
Historically very few vendors have offered integration, too, because they didn’t want to compete with their sales channel. Even with shrinking margins, that philosophy is unlikely to change, which leaves product features as about the only major way to justify a price premium.
“We have no plans to enter the installation or integration arena ourselves, but we've certainly had to significantly differentiate our products from those in the mainstream by adding specialist features such as edge blending, geometric correction and image warping,” says Calibre’s Brooksbank. “This is in addition to best-in-class image processing, which alone no longer sells products, unlike maybe five years ago, when image quality alone won sales.”
For vendors and integrators alike, there’s one safe bet: Product margins are unlikely to fatten back up – not now, not ever.
“They’re going to continue to erode,” says InfoComm’s Wilbert. “So integrators need to find additional sources of revenue.”

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