ProAVmag

2009 Outlook: The Road Ahead

If Matt Dlouhy is nervous about how the implosion of the worldwide financial markets might affect pro AV, it doesn't show. His firm, Communications Engineering Co. (CEC), had its highest-booking mont 12/08/2008 6:42 AM Eastern

2009 Outlook: The Road Ahead

If Matt Dlouhy is nervous about how the implosion of the worldwide financial markets might affect pro AV, it doesn't show. His firm, Communications Engineering Co. (CEC), had its highest-booking month of the year in September 2008, and when he talked to Pro AV, he was forecasting sales just as high for October.

Matt Dlouhy, president of Communications Engineering Co., has had to adjust to market conditions, but he expects business to be good.

If Matt Dlouhy is nervous about how the implosion of the worldwide financial markets might affect pro AV, it doesn't show. His firm, Communications Engineering Co. (CEC), had its highest-booking month of the year in September 2008, and when he talked to Pro AV, he was forecasting sales just as high for October.

"If anything, we're seeing business pick up," says Dlouhy, president of the Hiawatha, Iowa-based integrator. "Last year was a record year for us, and this year we're tracking ahead of it."

Dlouhy isn't alone in his optimism, judging by an InfoComm survey conducted in August. "More than two-thirds of integrators said that they're doing better financially than they were six months ago," says Betsy Jaffe, InfoComm's director of public relations.

Even in an exclusive Pro AV survey, conducted in late October after the financial markets were in freefall, the commercial AV industry was mostly optimistic that 2008 would turn out well, and that 2009 was looking up, too. More than 60 percent of respondents said they expect to see more revenue in 2008 than in 2007, and 58 percent expect more revenue next year. More to the point, only 9.4 percent of respondents in Pro AV's forecast survey are predicting less revenue in 2009. (For more results, see "Inside the Numbers.")

Regardless of their optimism, AV pros are adjusting to what's going on around them. Many integrators and manufacturers aren't taking anything for granted, and none are immune from the aftershocks rippling through the economy. They're starting to take steps to protect themselves in case the economy takes its toll on their clients. In CEC's case, for example, that means requiring deposits.

"The current credit issues have forced us to implement a deposit policy, which we've never done before," Dlouhy says. "We were exercising our credit line with the banks on a regular basis because we could have anywhere from 150 to 250 projects going on at any one time. That would tie up a lot of capital for us."

What's more, AV pros say they're preparing to address changes to their industry that may accelerate in a challenging economy. From possible integrator consolidation to fending off competition from IT companies, one thing is clear: 2009 will be a period of change for the AV industry.

Problems as Opportunities

As pundits and the mainstream press use terms such as "recession" and "depression," it's easy to believe that the whole economy is circling the drain, sucking down enterprise and government spending with it. But if history is any guide, the industry likely will bounce back, just as it did after, say, Sept. 11.

"We lost literally a quarter of our business overnight because every one of those financial institutions shut down," says Randy Klein, executive vice president at Rockleigh, N.J.-based Crestron Electronics.

But as they say, it's darkest before the dawn, and what doesn't kill you makes you stronger. "In June 2002, we finished our best year ever," Klein says. "The market forced us to think more creatively and diversely and broadly."

For its part, Crestron used the downtime to pursue the education market and develop QuickMedia, a technology that streamlines presentation systems by integrating various cables into a single Cat-5 wire. "Today, education is more than a quarter of our business," Klein says. "Like competition, [economic downturns] force you to get stronger, be creative, think differently."

For some vendors, the trick is finding the money not only to think differently, but to commercialize those innovations in order to have hot, new products ready to go when the market rebounds. It's here that privately held vendors could have an edge over public ones, which must convince investors that spending heavily on R&D during a downturn is a wise move.

"I could see some companies–especially publicly held ones–having a hard time trying to justify the expense," says Jeff Kindig, vice president of marketing strategies at Richardson, Texas-based AMX, which is privately held.

Of course, not every downturn levels everything in its path, which may be why so many AV pros remain upbeat today. Other industry veterans say that Sept. 11 had little impact on their business.

"The recession of 2001, I missed it," says Mickey Ames, AV project estimator at Rochester, N.Y.-based AV Solutions. "I don't remember it having any effect on us."

Some vendors have a similar view. "We seldom see a lot of fluctuation based on the economy," Kindig says. "I see more opportunity than not."

When asked why, those with similar experiences often point to the fact that down economies play right into hands of certain AV applications. When cash is tight, enterprises and other pro AV customers likely will be more receptive than ever to projects that promise to save money, improve productivity, or both.

Case in point: videoconferencing and telepresence (see "AV Reality Check,"). Both are examples of how crises–Sept. 11 and soaring fuel prices–can actually boost business for pro AV. "There has been a significant increase in the video teleconferencing and data sharing business, especially since the costs associated with using the technology have been significantly reduced," says Glenn Polly, owner of VideoSonic, a New York-based integrator. "Certainly the higher costs for fuel and travel expenses can only add to the need for our clients to invest in VTC systems."

So-called "green" technologies–lighting control, AV systems management–present another opportunity, say many integrators and vendors. The trick is to show how reduced electricity costs can pay for the system. Even then it can be a tough sell to an enterprise on a tight budget, especially as energy costs come down.

"The challenge is to get people to spend money so they can save money," says Crestron's Klein. "They want to hold onto it now."

Where the Spending Is

Some integrators believe the government and education markets will remain relatively healthy as the recession exerts its grip. "They're spending," says CEC's Dlouhy of both markets. "It doesn't seem to affect them."

Take the state IT market, of which AV is a subset: In November 2008, states were on track to spend about $48.4 billion for the year, according to Input, a Reston, Va., research firm that tracks the government IT market. In 2009, spending will hit $52 billion, Input predicts.

"It's a relatively moderate increase," says Chris Dixon, Input's manager of state and local industry analysis. "It may come in a little under that. We have to watch the condition of the state budgets and the potential for some federal bailout money."

If the feds help bail out some states, that money could go mainly to infrastructure and health care. But that would free up budget money for states to spend on technology, including AV.

"State and local educational funding may be reduced due to lower tax revenues and federal funding," says John Laughlin, president and CEO at Conference Technologies (CTI), a St. Louis-based integrator. "However, we find the telephone starts ringing more during this time. Facility managers are now under increased pressure to provide additional conference and communication resources such as videoconferencing, audioconferencing, and increased internal meeting requirements."

We Find the Phone Starts Ringing More During This Time.

We Find the Phone Starts Ringing More During This Time." --John Laughlin, Conference Technologies

Input is particularly bullish on videoconferencing, along with law enforcement applications such as video arraignment and corrections telemedicine. That's because it's relatively easy to calculate, for example, the savings from not having to drive a prisoner a hundred miles or more to the state's only mental health facility for offenders. From a sales perspective, it also helps that states are well aware of those costs.

"Health care costs are the No. 1 driver behind increases in correctional spending," Dixon says.

In both flush and lean times, another plus is that technology spending is a relatively small slice of a state's budget, and AV is only a slice of that slice. That improves the chances that even a relatively large AV project won't get hung up in a lengthy review. "We're not talking about a $200 million database integration project," Dixon says.

Indianapolis-based Sensory Technologies remains bullish on government opportunities after recently finishing major projects at the city airport and the taxpayer-subsidized Lucas Oil Stadium. "They're just chugging away," says Andrew Sellers, CTS, principal. "We've done a lot, and it looks as if we'll continue to do a lot."



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2009 Outlook: The Road Ahead

If Matt Dlouhy is nervous about how the implosion of the worldwide financial markets might affect pro AV, it doesn't show. His firm, Communications Engineering Co. (CEC), had its highest-booking month of the year in September 2008, and when he talked to Pro AV, he was forecasting sales just as high for October.

Signs of the Times

One decidedly commercial AV application that could see strength in government-related installations is digital signage.

"The digital signage market is still a wide open frontier, and the opportunities to provide content and other interactive applications, such as wayfinding and emergency messaging, are available, especially if you're specifying, providing, and integrating the hardware systems anyway," says VideoSonic's Polly.

Some growth opportunities in the signage market are tied to government spending. "Mass transit systems in the United States seem to be a hotbed of activity for digital signage," says Chris Connery, vice president for PC and large-format commercial displays at DisplaySearch, an Austin, Texas-based research firm.

A lot of digital signage is used for advertising, where there are signs of increased spending through the end of 2009. Titan Worldwide, the world's largest transit-advertising company, said it plans on spending $90 million over the next 35 months for digital signage deployments.

Many expect the secondary and higher education markets to also remain strong as schools and particularly universities, which must compete for students and endowments, make good on "digital classroom" initiatives.

"As we move through 2009, we will see more school districts and institutions realizing the educational and financial benefits of integrated, digital AV solutions," says Jeff Volpe, vice president of global brand and emerging technologies at Walnut, Calif.-based ViewSonic.

Perhaps one of the more surprising growth markets is houses of worship. Observers surmise that some people may seek solace in religion during the economic crisis. The more who start attending services at churches, mosques, and synagogues, the more likely those institutions are to expand. That requires money, which, ironically, might be more available than it seems.

"Many people cut back on the extras but still contribute to their church," Laughlin says. "AV needs of churches continue to grow as they reach out to their members with services via broadcast and DVD."

More Competition?

But will AV pros be in a position to win the work that comes out of government, education, and other markets? The fact is, they may not be the only ones competing for those AV dollars. As other industries feel the economic pinch, they'll look for outside opportunities. For example, many integrators and vendors see IT companies and big-box retailers trying to push deeper into the pro AV market.

"Cisco is pushing to have the IT team do AV," says Tim Hennen, senior vice president for audiovisual integrated services at Hauppauge, N.Y.-based IVCi.

In Pro AV's forecast survey, the economy was cited as the biggest short-term challenge. But competition from non-AV companies was the second-biggest concern. IVCi, for example, says it's already competing with Best Buy's Geek Squad for the occasional small-business project. "I think they'll look to expand and try to get as many of these projects as they can," Hennen says. "But do they have the skill set to support them?"

For the forward-thinking AV professional, IT vendors integrators might actually create new opportunities. "We've partnered with, and supported, many of those IT integrators because they can't pull it off," Hennen says. "They don't have the skill set, expertise, or necessary resources to effectively perform that type of work."

Hennen thinks IT companies want to push deeper into AV but might be turned off by the learning curve. He's not alone in that view.

"It's easier for an AV company to understand the network than for an IT company to understand AV," says Derek Paquin, director of business development at Sensory Technologies.

Consolidation Ahead

None of this is to say that AV firms will skate through a recession unscathed. In InfoComm's Economic Snapshot Survey, 24.8 percent of respondents characterized the coming months as fair and 9 percent expected weak results. In Pro AV's forecast survey, 25.6 percent expect to finish 2008 with less revenue than 2007 and 18.8 percent expect 2009 to be flat. (The fact that only 9.4 percent expect 2009 to be a down year could be an indication that firms have already prepared for the worse.)

Tough economies often force companies to sell or acquire their way to stability. So in 2009, will larger integrators or even investment firms scoop up a few dozen struggling local or regional integrators to create a regional or national play?

"Without a doubt," says Sensory Technologies' Sellers. "Maybe even the next two years. You're going to see some organizations struggle, and you're going to see other integrators consolidate."

Some say the gears are already in motion.

"There are big players that are trying to buy up the smaller ones just to get a footprint in a geographic area," says CEC's Dlouhy. "We've been contacted a few times, but I think we're larger than what they're looking to pick up. It's something we've looked at–purchasing smaller integrators here and there. But it has to make sense geographically."

Finding the money to roll up a dozen or more companies is one obvious challenge, especially in a tight credit market. Then there's the challenge of getting all of those formerly independent companies to work together. In fact, execution tripped up Miami Computer Supply (MCSi), which acquired its way to the top of the AV integrator market before going bankrupt several years ago.

"I don't think we're going to see another MCSi situation very soon," says John Stiernberg, principal consultant at Sherman Oaks, Calif.-based Stiernberg Consulting.

One reason is because a large integrator would require extensive credit or other terms from equipment suppliers. And if the integrator struggles or goes under, its vendors would take a hit.

But that's not to say consolidation can't work. Several companies contacted by Pro AV believe the recent merger of Audio Visual Innovations (AVI) and SPL Integrated Solutions has a good chance at succeeding, in part because the union wasn't born out of desperation. Even if mergers and acquisitions aren't the answer, integrators say partnering is important to growing their businesses. "Our business is continuing to grow nationwide, so it's about finding good partners to implement these national installations," says IVCi's Hennen.

Partnerships also tend to be a reflection of the AV market rather than the financial market. "There are a lot of companies that are trying to create partnerships or alliances because their customers are demanding it," says Crestron's Klein. Some integrators are growing organically, with a strategic eye on local markets. For example, Sensory Technologies just opened an office in Charlotte, N.C. The company believes that the Southeast will be less affected by the down economy. (For a different take on the Charlotte area, see "Up Against It," in November 2008's AV Intelligence.)

Of course, attempting to grow a business in a down economy may only serve to magnify another challenge facing pro AV in the years to come: finding quality employees.

In the Pro AV forecast survey, only a handful of companies said they were cutting staff during the downturn. More than 69 percent said their costs would come in higher in 2008 and the biggest chunk–54 percent–said labor costs were the biggest factor.

When asked about the industry's short-term challenges, 36.5 percent of Pro AV survey respondents said finding qualified AV professionals was one of them.

"Anyone I spoke with in the industry was busy and had plenty of jobs booked through the end of the year," says VideoSonic's Polly. "It's staffing up that seems to be the biggest issue. There definitely is a shortage of qualified AV technicians for hire."

But it's clearly one of many challenges. Some AV pros remain worried about energy costs, others are focused on attracting new business, while still others are focused on implementing the proper business practices to succeed in a potentially turbulent market (see "Speaking Out: The Challenges Ahead"). Industry associations NSCA and InfoComm are already looking at programs to help members weather an economic downturn. For now, though, everyone is hoping for the best.

"Our customers will still have a need for AV systems and will have had budgets in place for their 2009 expenditures," says VideoSonic's Polly. "We can only hope the effect [of the economy] is minor. Clients will be even smarter and more careful about how they spend their budgets, so they will be looking for the integrator that can provide both the best solution and value."

Contributing editor Tim Kridel is a freelance writer and analyst based in Columbia, Mo. who covers telecom and technology.


Inside the Numbers: The Revenue Picture

In late October and early November, PRO AV conducted an online survey to assess the industry’s outlook for the remainder of 2008 and into 2009. In all, 143 professionals participated and 115 completed the entire survey. For the most part, respondents remained upbeat about the market for commercial AV systems, but as the following charts show there are signs that challenges lay ahead.

For example, small and medium companies—those that report having less than $2 million in revenue in 2007—are more likely to expect less revenue in 2008 than larger companies. And interestingly, installers, integrators, and consultants, as a subset of the overall AV industry, are more optimistic about growing their revenue this year and next than the general pool of respondents. Do manufacturers and distributors know something the folks on the job don’t?

And as you’d expect, the majority of people in our survey are looking at higher costs this year (see “The Cost Picture,”), but they’re not all not where you might expect. While yes, energy costs are a concern, AV pros tell us labor costs are the biggest issue. In fact, here and in data snapshots throughout this PRO AV forecast, you’ll see indications of an industry ready to acknowledge that change is coming and optimistic about its prospects nonetheless. Pros expect high-defi nition video and digital signage to drive business. They worry about finding qualified workers and competing with non-AV fi rms. And they see overall industry growth slowing in the short-term,
which means adjusting how they do business, but still doing business—successfully. —Brad Grimes 



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