CI State of the Industry 2018: The Incredible Shrinking AV Industry

Each year in the AV integration industry is like a season of a TV show. There are protagonists, antagonists and story arcs.

The 2017 season of AV integration was action-packed and tumultuous. [related]

It included a turning point at which the industry’s largest trade organization, InfoComm International, rebranded as AVIXA (Audio Visual and Integrated Experience Association), forcing the AV market to consider how it identifies itself and how it presents itself to customers.

There was acquisition after acquisition … after acquisition.

The M&A storyline picked up steam toward the end of the 2017 season with two of its leading characters, AVI-SPL and Diversified, trading significant acquisition blows on consecutive days late in the year, setting up an end-of-season cliffhanger with both entering 2018 within reach of the $1 billion revenue plateau and, more importantly, creating unprecedented space between the industry’s largest firms and the small-and mid-sized integration firms.

On the surface it would appear that the 2018 season of AV integration script will write itself: Davids versus Goliaths.

How can smaller firms compete as private equity investment-fueled behemoth firms continue to fill geographic gaps, add commercial technology expertise, fine-tune managed services offerings and strengthen their global footprints?

AV Market Size Not As Critical

Not so fast. Great TV shows keep audiences guessing. There is indeed a plot twist for the AV integration industry in 2018.

Consider that more than half, 52 percent, of surveyed commercial technology integrators describe their current overall business climate as either “very good” or “excellent,” according to the 2018 Integration Business Outlook study, conducted annually by Commercial Integrator and NSCA.

Meanwhile, a whopping 91 percent of the 188 surveyed commercial technology integrators and consultants report that their overall business climate is good or better.

Optimism for 2018 AV market business is also off the charts. More than one-third of respondents expect their revenues to grow at least 11 percent this year.

Based on the collected data, Commercial Integrator predicts that the AV industry will grow by 9.45 percent in 2018. That’s after 7.6 percent calculated growth in 2017.

Since we began conducting this annual survey eight years ago, 2018 respondents resoundingly show the most optimism about revenue growth for the coming year.

So, while the plot line points to an industry of small-and medium-sized firms cowering as its large competitors keep getting larger, that’s more fiction than reality.

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Is the AV Integration Market Shrinking?

Though it’s probably not a moniker he wants, Chuck Wilson, executive director of NSCA, spent a good portion of 2017 playing industry matchmaker.

He fielded a steady stream of phone calls from integration firm leaders asking for advice on which firms they ought to attempt to acquire.

Often, there are specific parameters such as a need to strengthen their footprint in a particular geographic region or wanting to acquire a firm with command of a particular vertical AV market or commercial technology discipline.

“We’re seeing a very strong directive on the strategic side, to be able to offer a national or international footprint for their client base,” Wilson says.

That’s just what Wilson hears from commercial technology integrators. Many other phone calls are from the investment community.

“We get a call probably every day here from private equity and venture capitalist [people] looking at our industry.”

It’s a “two-headed monster,” as Wilson says, “with our own members trying to do strategic buys and, at the same time, private equity money coming in from the outside trying to make that same acquisition.”

As a result, integration firms generally got bigger in 2017.

In most cases, firms acquired and lumped in their new employees and revenue. Three years ago, the typical integration firm that was an NSCA member had 28 employees. In 2017, that average number ballooned to 45, Wilson says.

It’s a leap, however, to conclude that the dynamics of the AV industry are changing as a result of big companies getting bigger and distancing themselves from medium-sized firms, according to AVIXA executive director David Labuskes.

Even if it’s changing the industry landscape, he adds, that’s pretty normal.

Large integration firms are indeed getting larger due to acquisitions and organic growth.

“What I want to look at,” Labuskes says, “is, ‘How large are they relative to the AV industry itself? What percentage of the AV market do the larger commercial tech integration firms have?”

That is the important variable, Labuskes adds. “If it is in fact concentrating in these larger firms, that changes the competitive landscape.”

Even if that’s the case, a change in the competitive landscape can be “normal industry maturation” and not necessarily a bad thing, he says.

“You have large firms, as an industry grows, become larger, and mid-sized and smaller firms need to adjust their business model, and look at, ‘What are they selling? Who are they selling it to? How do they differentiate themselves?’”

In terms of what percentage of the AV market would be garnered by the industry’s largest firms —we’ve reported that AVI-SPL was on pace for $720 million in 2017 revenue and Diversified projected near $650 — that’s a significant question.

On the security integration side, when Johnson Controls merged with Tyco, it created a combined $32 billion revenue company. That security integration juggernaut, in some sectors of the security integration space, nabs “20 to 30 percent of the entire AV market,” estimates NSCA’s Wilson.

As AVI-SPL and Diversified, based on their aggressive rate of acquisitions, each seems to approach $1 billion in revenue, Wilson considers the potential AV market share.

“It’s hard to say how big the AV industry is. We’ve seen numbers anywhere from $60 billion to $100 billion, so it’d be real interesting to see what impact it would have with one company, say 4 to 5 percent of the entire GDP of our industry, if you will.”

Shrinking AV Industry Exudes Strength

While it’s interesting (and probably smart) to analyze how the increasingly top-heavy AV integration market will evolve, a quick glance at the 2018 Integration Business Outlook data confirms that the sky is not falling.

“Overwhelmingly positive” is how NSCA’s Wilson describes the findings.

“Every indicator points toward us having a really good next couple of years from my perspective. There is just no shortage of opportunities.”

Those opportunities are particularly great for the AV industry compared with the current overall economy. The AV industry “is clearly continuing to grow at a pace significantly above general economic growth,” points out Labuskes.

As such, the great interest that the investment community has taken in the AV integration market, while it might be unsettling for those not benefiting, is an indication of strength.

We know about high-profile firms such as AVI-SPL (acquired by an affiliate of H.I.G. Capital), Diversified (investments by Tailwind Capital) and Verrex (acquired by Five Crowns Capital).

These, however, just scratch the surface. As Wilson says, NSCA is barraged with calls from private equity investors and that wasn’t always the case.

Things started to change about three years ago, and he suggests a few factors that piqued interest in the AV industry’s profile among investors:

• A mindset that interest rates would stay low
• Growing enthusiasm for smart buildings and Internet of Things
• Prices of the devices installed actually declining
• A need to be more energy efficient
• A need to be more safe
• Desire for more functional meeting spaces

The AV integration industry is “kind of in the bull’s eye,” Wilson says.

Influx of Private Cash a Big Part of State of the Industry 2018

The influx of private investment cash is significant because it fuels the industry’s state of hyper mergers-and-acquisitions.

Consider the three examples of integration firms with private equity support — AVI-SPL, Diversified and Verrex — and that each has expanded significantly in the past year.

In Verrex’s case, it has expanded geographically, without acquisitions, no doubt empowered by its private equity parent company.

“Having a larger firm that has either their own individual and private investors willing to keep plowing profits back into the company [for] resources [to] stay on the leading edge of an industry like ours, that’s where I really see the advantage,” Wilson says.

“Those companies that are privately held and not really sure what kind of money the owners want to plow back into their business at the end of the year — those are the ones that have a decision to make about should they actually become an acquisition target.”

The investments are even making a dramatic impact on AVI-SPL.

It wasn’t long after it was acquired by H.I.G. in 2016 that it significantly expanded its European presence with a new office in Germany.

As CEO John Zettel put it at the time, “H.I.G. has brought a strong amount of enthusiasm and support for our vision for the company, and they have brought the resources as well.”

Those resources drive growth. Given that so many investors from outside of the AV industry are interested in the AV market, the empowered firms will continue to expand through acquisition or otherwise.

Whitlock, the AV integration industry’s third largest integration firm, is often left out of these “Goliath” conversations because it hasn’t demonstrated an acquisition strategy.

It is, however, aggressively investing in expansion. It recently expanded its physical presence in the Boston area to pursue what it recognized as significant opportunities in that market.

Indeed, Whitlock does have an acquisition strategy, quipped executive VP Julian Phillips at the Massachusetts office grand opening. “We’re going to acquire AVI-SPL … one customer at a time.” He was joking, mostly.

It raises a question, however: while $300-plus million revenue Whitlock may be confident in its ability to compete with the industry’s even larger firms, can small-and-mid-sized firms continue to compete?

Shrinking AV Industry Stands Tall

As AVIXA’s Labuskes says, it’s not unusual for the gap between an industry’s largest and mid-sized companies to widen. It is, however, a summoning to those smaller companies to make sure they’re continually evaluating how they go to market.

There is reason to believe that, so far, small-and mid-sized integration firms are enjoying as much momentum as the rest of the AV industry.

Based on the 2018 Integration Business Outlook study, 61 percent of surveyed commercial technology integrators saw at least 6 percent revenue growth during the past year and only 8 percent report declines.

AV industry benefits group Professional Systems Network International (PSNI) conducts a similar survey among its members and analyzes trends among different sized companies.

“Our survey showed that the $15 million to $30 million systems integrator, which is kind of our mid-range, had the most revenue growth in 2017,” says executive director Chris Miller.

It can be from a position of power, therefore, that the AV industry smaller firms can evaluate their go-to-market strategies amid a landscape that’s continually changing.

“Of course the landscape is changing,” Labuskes says.

“Recognize the landscape is changing. Take a look at your strengths and your weaknesses as a business, and align your business to an area where you can compete effectively.”

Meanwhile, there are strengths that are inherent to relatively large companies.

“If you’re a large firm, and you’re looking at large projects, you probably are advantaged because you can bring scale to that,” Labuskes says.

“You can bring a mitigation of risk for the buyer, because you have greater capital. You probably have a greater bonding capability.”

Larger firms also have some competitive disadvantages that smaller firms can exploit. Miller says there are pros and cons to both being large and being small.

“We are still in the transactional business to the extent that we still need to deliver products at some level of profitability integrated and designed into systems which we can support and service. We need all those blended incomes from design all the way through services revenue to make a complete picture of profitability. No one aspect can live without the other anymore.”

Along those lines, larger companies “can provide a larger profile of services unique to a specific customer’s needs,” Miller says.

Smaller companies “do become niche and, if they are moving more to a services model, the relevance of the buying power of that company is important but not as important because they’re not worried about top line revenue. They’re just looking at bottom-line profits.”

Similarly, NSCA’s Wilson doesn’t necessarily see a disadvantage for smaller firms competing against larger firms.

“I thought that initially,” he acknowledges. “Then as we started to talk to some of these smaller firms, they told us, ‘You know, this is the best thing that’s ever happened to us.’”

Those smaller integration firms, in a way, are benefiting by what they report to be a void that larger firms leave in the AV market place, according to what they tell Wilson.

“So they’re riding the wave of scaling down to the work that doesn’t even hit the radar of these larger multi-national and multi-location companies now,” Wilson says.

“It’s like their focus, their profitability is actually being improved by the fact that they don’t have the mega-companies finding what they’re doing in their little niche portion of their regional area.”

State of the Industry 2018 Report Says: It’s All about Value

Despite the momentum that the AV integration market carries into 2018, and the health of the AV market which is demonstrated by the investment community’s interest, the commercial technology industry is changing. The fact InfoComm International rebranded as AVIXA during 2017 certainly confirms that.

As NSCA’s Wilson points out, the devices that AV integration firms install are getting less expensive and simpler. End users are getting more involved in learning about products and system design. The industry is becoming more IT-and network-centric.

For integration firms that don’t keep up, there is significant risk of being left in the dust.

As everything around the AV integration industry evolves, the perceived value of what commercial technology integrators provide can’t betaken for granted.

The most important priority for integration firms should be to continue to build their value and amplify it.

“I lose sleep over that every night,” Wilson says.

“As a representative of the systems integration channel, I have to continue to get better every year at making sure our numbers add value to everything that they touch.”

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“If the educated end user who knows just as much about the integration of our products and how to apply these products to problems they’re having, our point of relevance becomes challenged.”

That, he says, should be top of mind for integration firms looking to remain viable.

“My job is to make sure that every NSCA member knows what their value is today and to have three or four things all the time that they’re working on that increase that value for future years,” he says. “That is certainly an issue. We have to think about that as we move forward.”

Commercial technology integrators who take that advice have the luxury of moving forward in an extremely strong AV market.

“Our future is limitless,” Labuskes says. “At the core of the AV industry is connecting human beings with each other. If your business model is about connecting the planet, that’s a great business model and I think that’s our industry.”

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That goes for both the businesses and the people in the AV market, according to Labuskes.

“From an industry perspective, the future couldn’t be brighter. At the individual industry participant level, now is the time to really invest in yourself as an individual or in your business to position yourself to take advantage of that opportunity.”

In some ways, the state of the AV industry is the same as it is every year: for forward-thinking integration firms, the sky’s the limit, while firms unwilling to evolve are doomed. The difference this year is unprecedented optimism — anticipated growth of 9.45 percent.

“It’s a good time to be a systems integrator, but a great time to be an integrator if you have leadership skills and a great executive team that can see into the future, have innovation at the forefront of what you do and the type of clients that really value what your company does for them,” Wilson says.

“I think 2018 is going to be a really good year.”