Simpler, Cheaper Technology Seen as Double-Edged Sword for Custom Integrators

Custom integrators are small businesses in a “huge” electronics market, and consumers are adopting technology “way faster than they used to,” Daniels said. With technology getting “very cheap,” that’s creating a need for dealers to adjust their revenue mix to industry trends, he said. Ten years ago, switching systems in customers’ homes accounted for 20 percent of Xssentials’ revenue, Daniels said, compared with half of that now. “Consumers expect more from less,” he said, as technology keeps getting simpler for them to relate to and buy. “They expect that $100,000 they spend buys them a lot more in reliability, accessibility, usability and fun than ever before.” The $100,000 system of “yesteryear” is now available to customers for $50,000, he said.

Shorter product life cycles and “big-time margin erosion" are impacting integrators’ revenue and profit, Daniels said. “Not only are we selling less revenue per project because technology has gotten cheaper,” he said, “we're making less profit because margin trends are dropping like crazy in all categories.”

According to Daniels, custom electronics categories that will take the biggest near-term hits are audio/video switching, where current 40-60 point margins will trend down to 10-20 points, and lighting control, where current 40-70-point margins are likely to shrink to 0-30 on the rise of low-cost LED-based systems. Already-strapped video margins will sink from 5-40 points to 0-30 points, he said, while source component margins will track downward from today’s 10-40 points to 0-20 points. Automation, once a booming profit-builder for integrators at 40-200 profit margin, will also suffer to an “unknown” extent over the next couple of years as new apps come to market, he said.

Traditional categories including loudspeakers and amplifiers are expected to hold their own long term, Daniels said, maintaining profit margins of 40-80 points. Some of the biggest opportunities for custom integrators are in emerging categories including automatic shades and outdoor living, he said, where there are few specialists and extra expertise is required. Networks will continue to be an important part of dealers’ business long term, offering 10-50-point margin potential, he said.

Daniels didn’t encourage dealers to stop selling TVs despite the loss of profit margin. “It’s okay to have a loss leader,” he said, because the role of integrator is to sell a branded solution and not “products.” If dealer has to sell a top-tier TV at 10-15-point margin because it’s part of a solution, that’s part of the new reality, he said, “because more and more of our products are loss leaders.” Ten percent margin is better than zero margin “and then you own the customer,” he said. “The last thing you want is a guy from Best Buy coming in” and becoming the installer who sells a TV and the more profitable accessories, he said.

New integration companies can become experts in emerging technologies faster than in the past and easily enter dealers’ existing markets, he said, encouraging dealers to be aware of how “more nimble” newcomers could “peel $1 million-$2 million out of your revenue stream.” If three dealers in a market are selling the same product today, “there’s likely going to be 10 in five years,” he said. The education, expertise and experience required to install a TV on a wall, or to install a lighting system, “is a lot different these days than it was five years ago,” he said.

Integrators also increasingly face competition from vendors, some of whom have decided that “our distribution channels are old-school and unnecessary,” Daniels said. Vendors can “go directly to the consumer, make a lot more profit and get rid of all these layers of business” that are affecting their profitability, he said. He called the integrator channel the “end user-retailer” that suffers from layers of distribution that add cost to sales for vendors. The direct-to-consumer model “wipes all that out,” he said.

More contractors from adjacent industries are also moving into the integrator’s space, Daniels warned. He cited electricians, low-voltage contractors and security companies. In some markets, lighting designers are starting to sell lighting control systems. “Be aware of back channels taking bits and pieces of our industry,” he said.

From the vendor perspective, Aaron Gutin, vice president-sales for Access Networks, encouraged Azione integrators to embrace disruptive technologies and build a business model around them. “A lot of people want a piece of the action,” he said, saying the industry has been successful in creating interest in home technology over the past few years. He cited the Nest thermostat as an example of a product consumers have gotten excited about for its “cool” appeal and the data it provides to homeowners on how to save energy. “Disruptive technology can also bring advancement,” he said.