Analysis: ADT Acquisition Comes At Critical Point in Home Security Market Evolution

Last week's announced acquisition of ADT by private equity firm Apollo Global Management was big news for the home security industry. In ADT, Apollo got the industry's largest overall player, with a total subscriber count that is approximately 4X bigger than the next biggest competitor in Protection 1, a company also owned by Apollo. Apollo plans to combine ADT and Protection 1 into a unified company, with the new combined company operating under the ADT brand. Combined, ADT and Protection 1 will be almost six to seven times the size of the next biggest competitor.

What does Apollo get in ADT? Beyond netting the biggest and most recognized name in home security, they also get a company that has been trying to reinvent itself. The company just launched its Canopy Security as a Service product at CES, and has been slowly growing its Pulse interactive and smart home business. As of last quarter, ADT reported that 59% of new customers subscribe to ADT Pulse, and ADT Pulse subscribers now account for 25% of total customers.

Above: LG's new smart security device powered by ADT's Canopy service

But despite its efforts with Canopy and Pulse, the company still is a work in progress. It still uses Icontrol's platform to power Pulse and, outside of Canopy, ADT doesn't own a lot of its own technology. It's also fairly "old school" from a business model perspective, at least when contrasted with companies like Frontpoint, which has a self-install model, Vivint, who has invested heavily in developing its own platform, not to mention DIY security or smart home companies like Canary or SmartThings.

The Vivint comparison is maybe the most interesting because of the similarities between the companies' suitors. Like ADT, Vivint was acquired by a private equity firm in Blackstone. Also like ADT, at the time of acquisition Vivint were also still largely reliant on third party technology.

Post acquisition, Vivint has transformed itself. With cash injected into the business by Blackstone, the company created an Innovation center, spurring the development their own cloud platform in Vivint Sky cloud and hardware like its panel and connected doorbell. 

Could the Apollo deal lead to similar reinvention for ADT? Maybe. Unlike the Vivint deal, this one is complicated by what will essentially be a merger between ADT and Protection 1, and the work necessary to combine two companies will consume the combined company's management bandwidth for at least the next 12 months. 

And it's this focus on a merger and increased efficiencies that makes me think the focus for Apollo is not the same as Blackstone's was with Vivint. When Blackstone acquired Vivint, the strategy was clearly to invest in growth.  In fact, Blackstone paid more per subscriber (over $3 thousand per subscriber compared with about $1 thousand per subscriber for ADT) than Apollo because they knew they were paying for what was already a fast-growing company*.

For Apollo, the focus seems more on operational efficiencies, and why not? By leveraging the ADT brand name, reducing overhead and using Protection 1's focus on the business market to grow ADT enterprise market share, you could see there's lots of built in profitability gains if the combined company can execute.

But my worry for the new company is that just as they're focus turns inwards to create a more operationally efficient business, the home security market is accelerating its pace of change. DIY players are beginning to offer monitored security services (where ADT is, admittedly, set to take advantage to a degree with Canopy) and the market is expanding into rental and younger demographics with more flexible business and subscription models. Smart home technology is creating new opportunities for completely new managed service offerings. In the face of all this, the company has started the process of adapting to these changes, but it still feels more at the beginning of the process than at the end, and in today's market timing is of the essence. 

What would I suggest for ADT? A few ideas:

Create own consumer-facing DIY Business for younger, highly mobile users. ADT worked with LG to develop their new smart security device powered by Canopy, which allows consumers to get security for $20 a month and no annual contract.  I would suggest the company build out its own consumer-facing effort grow the DIY market, including possibly its own home security appliance.

Invest in its platform. Vivint and Comcast are two companies that started off using third party platforms, but eventually created their own. The rumors in the space is ADT was evaluating Zonoff (Zonoff is the rumored cloud backend provider for the product, which makes one wonder if they're also powering all of Canopy).  Whether its using Zonoff to create a new, more nimble DIY platform, creating their own for Pulse subscribers, or investing in new point products as Vivint has, ADT would probably benefit long term if they continue to invest in their own technology. 

Focus on becoming a smart home services company. Unlike ADT, Vivint sees itself as a smart home services company and security is only one of those potential services.  With growing opportunities like elder care, smart home concierge services and commerce and more, the new ADT could also benefit from taking a more expansive view of their place as a managed digital home services provider.   

*Part of the higher price per subscriber for Vivint can also be attributed to Vivint Solar, which Blackstone (the company that acquired Vivint) also acquired in the deal. In 2014, the Vivint Solar resulted in Blackstone gaining about $1 billion on the day Vivint Solar's stock debuted. But even with the value of the diversified Vivint assets, there's no doubt the Vivint security and smart home services business was the crown jewel at the time of the deal, and so it's worth asking why Vivint got more? In short, the answer is probably because Vivint is growing lots faster. If you look at 2013 to 2014 growth, Vivint grew over 10%, factoring in attrition, while ADT's growth with attrition factored in is around 3%. 

Speaking of home security and automation, we'll be publishing a new Smart Home Show with an interview with Vivint's Chief Marketing Officer, Jeff Lyman. You can get that here or on iTunes

 Follow Mike on Twitter and listen to his Podcast, the Smart Home Show.  


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