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The current economic environment is tough.  This fact is not lost on most people.  It has certainly been on the minds of many, and it undoubtedly loomed large in the November 4th election. 

This environment also provides investors with a unique opportunity.  The U.S. economy has had several recessions since 1945.  But these periods have all been two years or less.  Overall, the U.S. economy has been in recession for roughly 14% of these 63 years.  This means that even our oldest investors have very little experience at this.  Even an 83 year-old has had only 9 years in this type of environment.

Determining which companies will suffer and which ones will thrive, both now and when the economy turns upward, is the problem they are attempting to solve.  Add to this, the proliferation of new industries that have not faced a down economy, and the “math” becomes even more challenging.

Many of the outcomes will seem so obvious with hindsight.  “They had a differentiated product or service, a demonstrable and proven ROI for their customers, and a large and growing market.  Of course they succeeded!”

When it comes to software, best of breed is a great goal, but usually carries a high price tag that is very difficult to estimate; so unknown that often it’s not done.  Or so expensive that sometimes building capabilities into existing applications is less expensive than performing an integration in the first place.  Right now in the video industry, these are perhaps true more often than not.

I predict that in about 5 years this will change for most of the software and hardware for video and audio surveillance.  The standards will enable growth in the network video industry because products will bring more value.  This value will come from being will be better able to meet customers needs and doing so at a lower cost.

From surveying the activity around ONVIF, SIA and PSIA the first standards will likely do the following things:

1. Enable video streaming from any video source (ie: camera or video recorder)

2. Device discovery to speed installation

3.Method to transmit and receive “meta” data, such as dry contact alerts, video analytics information

4. Security between network video devices

Oh, it won’t take 5 years to make these standards.  But it will take years before there is enough “rough consensus” between vendors in the market that customers will be able to buy equipment and expect it to actually work together when it’s plugged in.

I believe the most important of the above is #3. I’ll explain why in a later post…

It’s actually possible to do almost all the above today using existing standards, it’s just that most vendors do not sell equipment or software that do the above.   Most integrations existing today are custom tailored software.

The recent economic turmoil has been a popular topic of discussion the past month.  I’m personally impressed at the incredibly high level of volatility of the world stock markets.  As investors react to new information, the U.S. market has taken some wild swings.  Down 7, up 5, down 6, down 8, up 11 (as measured by the S&P 500 Index).  This is the type of volatility usually reserved for emerging markets.

What explains this volatility?  Is it simply that investors are more uncertain than is customary as to the direction of the world’s economies?  Or does this reflect growing distrust (and counter support) of the fundamentals of western-style capitalism?

If you “know” the answers, this volatility provides an excellent opportunity. 

Dan Caruso has several posts on this topic of Contrarian Investing in bearonbusiness (Investor Riddle and Contrarian Investing).  It would be worthwhile to read them as you ponder your next move. 

Of note, when many of us were selling, Warren Buffett was buying, both through Berkshire Hathaway and his own personal holdings.  As Mr. Buffett writes in his op-ed to the New York Times:

“A simple rule dictates my buying:  Be fearful when others are greedy, and be greedy when others are fearful.”

Yikes.

It is a crazy time in the world when you see something like the current credit crisis reverberating around the world in such a dramatic and rapid manner.  Thomas Freidman wrote “The World is Flat” to highlight the growing global competitiveness and the fact that it is becoming a much more level international playing field.  Wonder if he ever thought about how inextricably tied global markets are becoming as result and how a major U.S. crisis would have a crippling effect on other economies as well.  While I watch my stock portfolio tank and listen to NPR about how banks are failing or being privatized in countries like Great Britain, Iceland, Russia and elsewhere I of course reflect on how the current economic conditions are going to effect our market – the market for MVaaS.

As I wrote in an earlier post, “Recessions – Bad for most, good for some”, a bad economy might not be the end of the world for video providers.  However, at the time I wrote that post, I had no idea the magnitude of the looming financial issues.  Given how significant it appears the issues are and how long experts are suggesting that the current crisis will last, I’ve had to re-assess my position to see if I still think it holds true.

My current thinking is this: while some potential customers may arbitrarily cease expenditures and others may disappear as bankruptcy related casualties, the current market conditions will accelerate the adoption of MVaaS versus traditional video solutions and the gap will widen between those that have already developed MVaaS solutions and those that have yet to demonstrate material customer traction and results.

Here’s my logic:  In retail and restaurant markets where top-line revenue growth will be off and underlying costs will continue to rise, businesses will look for ways to be more efficient with their existing resources and to increase their profitability.  Capital budgets will disappear or tighten, so any investment in new technology or programs will have to have a very quick payback and a very certain ROI – speculative or experimental technologies will suffer.  Layoffs will hit many of our customers and these layoffs will hit the management layers, the LP teams, and the IT staffs, leaving the organizations trying to do more with less across the board.

The value proposition of MVaaS is fairly compelling in light of these circumstances.  By incorporating MVaaS into their ongoing operational and loss prevention processes, businesses have shown that they can add 1-2% of revenue to their bottom lines as incremental profit.  This also enables businesses to increase the efficiency of their people from operators/managers to loss prevention and other corporate personnel.  The payback on this investment is often less than 6 months and has been proven by some of the leading operators in the industry, far from a speculative investment.  MVaaS does not require material capital expenditures, unlike a traditional video solution, and it also does not require a huge effort from a company’s IT organization, again very much unlike a traditional video solution.

Leaders in this space, like Envysion, will benefit disproportionally from this environment because we have already established ourselves in the market with a differentiated service that has been tested and scaled, we have major customers that are demonstrating the value, and we have plenty of runway because we don’t need to raise capital anytime soon.  Competitors that are small and starting up are going to find capital harder to come by and will face a customer base that is increasingly wary of betting on an unproven commodity.  Larger competitors are likely to be less willing to devote the substantial resources required to implement a new MVaaS solution when they are facing their own financial problems.

I believe that 2009 is going to be a difficult year across the board (says Captain Obvious) but that there will be a very few industries and companies that will thrive in the coming trying times.  I believe that MVaaS will be one of these industries and Envysion will be one of these companies.

In a tough economic environment, Walgreen posted an impressive 12% increase in Q4 profits.  Congratulations Walgreen!

Given the roller-coaster stock market, the cynic in us may attribute this to a surge in the sale of pain relievers and antidepressants.  But while revenues did increase, Walgreen executives attribute a portion of their improved results to cost-cutting. 

We’ve posited on these pages about the strategy of combating the economic slowdown with technology focused on improving operations.  It is unclear if this was part of Walgreen’s cost-cutting activities.  One thing is certain, however.  Success is possible in our current environment.  And investors will flock to companies who deliver outstanding results rather than offer excuses.

Andy Kessler, a former hedge fund manager and author of “How We Got Here” (Collins, 2005), wrote an interesting opinion piece in the Wall Street Journal’s on-line version about the current “bail out” bill being debated in Congress.

The amount ($700 Billion) is staggering, but Mr. Kessler rightly notes that the government is getting something for their investment – namely a portfolio of loans and collateralized debt obligations (CDO’s).  If the economy rebounds, and the housing market improves, Mr. Kessler argues that the portfolio could yield between $1 to $2.2 trillion to the U.S. Treasury, well in excess of the original investment.

The big “if” is how resilient the U.S. economy proves.  There is obviously uncertainty here, but I’m inclined to remain optimistic about our long-term prospects.  How about you?

The demise of Lehman and sale of Merrill Lynch have been the talk near the water cooler in our office.  For those who are interested I found a very simple and quick description of what happened.

What does it mean for the rest of us?  Wall Street may seem like a long way from Main Street (or in our case, Spruce Street), but major bank failures have an impact on all of us.  The extent of the impact is not yet known, but when capital is constrained, either purposefully (banks are unwilling to lend) or through failure, the overall economy is affected.  This is not just a problem for those who seek capital, since less capital means slower overall economic activity.

There may be a silver-lining for MVaaS providers (also see related post by Matt Steinfort).  As capital tightens, aggressive expansion plans may be shelved, at least temporarily.  Eager for improved results, operators may view MVaaS as an inexpensive and impactful way to drive improved results now.

A couple of quick thoughts upon reflection on my trip to ASIS this week…

The economy is definitely impacting the end-users (duh!) that normally attend these shows as I heard from several long-time vendor attendees that they were having trouble getting customer meetings and that customers were cancelling their trips to the show at all due to travel restrictions and cost cutting.

While these shows tend to be a platform for a lot of product announcements and the latest and greatest new thing, I didn’t see or hear anything earthshattering at the show – a lot of people issue press releases but not a lot of really new developments.

I was able to meet the esteemed John Honovich at the show which was great – he’s got a much more detailed and eloquent assessment of the show in his review.

We were able to talk to about a dozen different potential channel partners at the show and they all had the exact same position and objective.  Almost to a company they said “The market is tough right now, we are only looking for differentiated solutions that deliver value to our customers – we don’t need another box/dvr to offer to our customers as we already have a half a dozen”  The good news for us is that we have a great answer for them in this respect.

I should schedule more time to walk the floor – as I mentioned in my post last Saturday I had a lot more meetings lined up than I had in previous years.  When you add the ad hoc meetings that just happen (okay Jackie – they don’t just happen, I know you work tirelessly to make them happen!) your schedule can get crazy.  As a result I didn’t get to spend as much time wandering around as I would have liked.

One of the more interesting (but not necessarily revenue producing) conversations from the conference is actually with a couple of partners and a competitor of ours.  I won’t go into any details but let’s just say that its good to know and be friends with everyone in the industry, you never know how you can help each other.  More on that front if/as it evolves.

ONVIF, PSIA , SIA.  What are they?  Fringe terrorist groups?  l337 techno jargon?  No, they are standards organizations working on Network Video.

Standards can be very valuable to end customers and users of video products.  Value will come to customers by enabling increased competition (lower initial purchase cost) and ease of deployments (lower install cost) for video management software, recording hardware and cameras. In addition, significant value will come from being able to put together “best of breed” solutions.  eg: Solutions that use a combination of information management, video management, recording and cameras that best meet the needs of the customer.

A customer who has more reasons to buy is more likely to buy.   With more applications available, more customers are going to find value.

Hopefully this is what the competing Network Video standards bodies are vying for.

I hope the simplest, easy to obtain and use standard that also WORKS will win.  Having a low barrier to entry into the market will help spurn innovation and increase value for the end customer.  As a long time, but infrequent participant in the IETF (Internet standards body), I tend to lean towards the most simple setups that build off what’s already widely available and has a reference implementation running which is very low cost and/or freely available.

The Internet, the WWW and Voice over IP are all products of such a process.  However, most of the companies involved in the IP Camera/Network video market aren’t part of the Internet world.  It’ll be interesting to see what happens over the next couple years.  (Yes, it’ll take at least that long)

I recommend that you check out this post at IPVideoMarket.info.

The post seeks feedback on an idea to establish a marketplace where buyers of video solutions can find experts to help them with their purchase.  Given the rate of change in the marketplace, including the impact of new solutions like MVaaS, I’m certain that buyers would welcome assistance in narrowing their choices and assuring that they are purchasing a solution right for them.  

From a selfish perspective, video solution providers (at least those with a superior product and service) would also be major beneficiaries.  When buyers are armed with information, they make better and quicker decisions.  

I’m hopeful that this idea takes off!