Posted: 07/2002

Dealers Find a New Home for Converged Services

By Bill Ablondi

RESIDENTIAL HOME SALES ARE UP and so is unemployment. The economy is described alternatively as stumbling and recovering. Consumers were expected to sit on the sidelines after their first quarter burst of spending, but it's not happening. The "force" in this economy remains with households as Business Week recently announced: "The only double-dip will be on your ice cream cone." Let's hope it is right.

What does this mean for you? As housing starts continue to rise, high-end residential markets may offer opportunities for phone installers, resellers and VARs to extend their current product and service offerings and enter new markets. Parks Associates' first quarter 2002 survey of dealers designing and installing home telephone, entertainment, security, lighting, networking and control systems and the associated infrastructure indicate sales volumes in 2002 will improve significantly compared to 2001.

Housing starts are key to business growth for these specialized electronics installing dealers. The most economical time to install the structured wiring, in-wall speakers, sensors, control systems and related infrastructure is before the walls are in place. Remodeling and retrofit projects also generate new business, but 75 percent of residential custom electronics installation business in 2001 was in new construction. Approximately 9 percent of the 1.2 million housing starts in 2001 were for residences with a retail sales price of $350,000 or more -- the threshold of the high-end market.

In 2000, 52 percent of houses were built with two or more stories, up from 47 percent in 1991. Similarly, 35 percent were built with four or more bedrooms in 2000 vs. 28 percent in 1991. Houses are getting bigger, costing more and are packed with amenities. The National Association of Home Builders recently reported the typical $350,000 home has 3,000 square feet, multiple phone lines, whole-house wiring, multizone HVAC, a security system and, of course, central vacuum. The buyer of such a house also is installing a whole-house audio system, home theater, lighting controls and a computer network, which provide opportunities for phone installers, resellers and VARs.

Parks Associates, a market research and consulting firm that specializes in tracking the evolution of new technologies into U.S. households, recently established a market research panel to monitor the adoption of innovative products into upscale America through custom installing dealer channels. Parks Associates polls the panel comprising about 300 dealers throughout the United States, with quarterly online surveys -- each probes different aspects of dealers' businesses and tracks trends in the market from their perspective.

Dealers' Expectations for Their Residential Installations Business in 2002 vs. 2001
Source: Installing Dealer ePanel - 1Q02, Parks Associates

To qualify for the panel, dealers must be installing electronic systems in residential markets. About 90 percent of the dealers polled generated 50 percent or more of their installation revenue from residential customers in 2001. The median revenue per installation was $15,000 to $20,000 for product categories including:

• Telephone Systems

• Intercom Systems

• Structure Wiring

• Home Controls

• Security Systems & Monitoring Services

• Whole-House Audio

• Home Theater

• Direct Broadcast Satellite

• High-end Lighting

• Home Networks (excluding structured wiring)

• "No-new-wires" Networking (Wireless, Phone & Power Line)

• Power Quality/Surge Protection

Installing Dealers Optimistic About 2002

Installing dealers are in constant touch with their customers and prospects, so they have a keen sense for the state of the market. Many economic observer decree consumer spending continues to fuel the economy. Dealers that were asked about business prospects for 2002 compared to business in 2001 underscore that observation. About 80 percent of dealers expect their residential installation business to grow in 2002 compared with 2001; fewer than 2 percent expect a decline and 16 percent aren't sure (see chart on page 40).

Will their expectations be fulfilled or are they merely disappointments under construction? We can't say for sure, but past research of installing dealers completed by Parks Associates indicates they have a better feel for the market than do manufacturers that are one or more steps removed from the ultimate customer. A combination of consumer research, analysis of technology trends and manufacturers' product development efforts and channel research, e.g. the Installing Dealer ePanel, provides Parks Associates with the ability to triangulate on where the residential market for electronic systems is headed.

Primary Factors Inhibiting Growth of Residential Installations Business in 4Q01
Source: Installing Dealer ePanel - 1Q02, Parks Associates

Parks Associates sees healthy growth in high-end residential markets across the above mentioned product categories. High-end lighting, security systems and "no-new-wires" networking are expected to lead the growth. Security systems essentially are a "must have" in houses selling for $350,000 or more. Lighting complements security systems, home theater and whole house audio systems. Growth seen by dealers in "no-new-wires" computer networking corroborates Parks' consumer research, which indicates the adoption of broadband Internet access is prompting installation of home networks.

A great 2002 is not a slam-dunk however. Dealers are counting on steady economic improvements to bolster consumer sentiments prompting them to take advantage of historically low mortgage interest rates, move up to larger homes and invest in more amenities. In addition, dealers are counting on manufacturers to continue introducing new products to entice homebuyers.

There's one other key ingredient required to make 2002 a banner year ... marketing.

Installing dealers say "lack of consumer awareness of products we sell/install" was equal to the poor economy in the fourth quarter 2001 as a factor inhibiting their business growth.

This speaks volumes about the marketing efforts required to educate consumers, builders and architects regarding electronic entertainment, communications, contral and security systems' value in terms of enjoyment, security, energy efficiency and resale value. Builders well versed in these benefits can differentiate their properties from the pack, command a premium over comparable houses not as well equipped and sell them faster.

It's not that manufacturers haven't invested in marketing. Rather, it's that many of the products have come down in price thereby becoming affordable to a wider customer base -- people who may purchase if aware, but are not seeking out theater, audio or networking products to support an avocation. In addition, many builders may not be aware of lower cost home controls, networking, security and lighting systems. Understandably, they are loath to add anything to a house that will add cost without increasing margin and salability. Manufacturers are stepping up to the challenge as they recognize the need to reach a broader audience with their message and support the dealers in the trenches.

Is It Time To Look Beyond The Phone?

Many telecommunication specialists already are looking at complementary products. No-new-wires networking may be an excellent choice for many to explore. This category includes wireless networks and those using electrical or phone lines as the physical link. Standards groups have formed around the alternative technologies: HomePNA for phone-line technology, HomePlug Powerline Alliance for use of electrical wires and HomeRF supports one of the wireless technologies. WiFi or 802.11b an IEEE Ethernet standard for wireless networks becoming popular in commercial markets also is penetrating the home market. Discussing the alternatives and surrounding issues is beyond the scope of this article, but the no-new-wires category is definitely one on which phone installers, resellers and VARs should keep their eyes focused.

Home controls, especially environmental controls and energy management systems may compliment the offering of those currently centered on phone systems. Cost-effectively managing power consumption is growing in importance in consumers' minds and is being supported by utilities competing in an increasingly deregulated marketplace.

Security systems are a "must have" in homes being built to sell for $350,000 or more. Standard security systems coupled with medical monitoring capabilities for many senior citizens offer opportunities for telecommunication specialists to expand their offerings. Technologies being employed by security systems installers include networked-based video surveillance, wireless sensors and telecommunication sub-systems. Phone installers can leverage their skills and extend their product portfolio by moving into this category.

Economic conditions are in flux, uncertainty reigns -- so what's new about this? The time is right for phone installers, resellers and VARs to explore a host of opportunities to leverage their capabilities, add products and grow their businesses in high-end residential markets.

Bill Ablondi is an affiliate of Parks Associates, a Dallas-based market research firm specializing in emerging technologies and services for the home.