Building A New Business: Services Hold The Key To High Margins
Yasin says he has overcome the tough technical and integration hurdles in getting his team trained and up to speed on the complete spectrum of end-to-end digital home products—from security and control offerings from the likes of Home Automation Inc. (HAI) to home networking solutions from On-Q/Legrand.
Yasin senses a big breakthrough in the market as he moves to build a multimillion-dollar business. "I have spent so many days and nights and weekends working on this thing, learning, understanding the market and putting it all together," he says. "Now I see the light at the end of the tunnel. This is going to be big."
Yasin is not alone. Digital home integrators that have come from the IT side, and home theater installers who are increasingly implementing more IT-based products, share the same sense of anticipation about the tremendous market potential for 2006. All of them are predicting record sales.
One reason for the sanguine outlook is a new wave of digital home and entertainment solutions, including more cost-effective, service-rich products and technologies that are helping integrators establish businesses in new markets. Many of those products will dominate the show floor at this year's Consumer Electronics Show.
The biggest blast is expected to come from Intel's Viiv technology platform, which will have a huge rollout at the show. The platform includes Intel's Pentium D dual-core processor, next-gen chipset, high-capacity storage and other technologies to enhance the overall performance and functionality of Microsoft Windows Media Center Edition PCs and servers. Home IT integrators and pro AV installers are rallying around the technology and comparing it to Intel's Centrino platform, which launched several years ago. Indeed, Centrino led to skyrocketing growth in the mobile solutions market. Digital home integrators expect Viiv to have the same impact.
"This is a significant opportunity for the channel," says Bill Davidson, digital home channel marketing manager at Intel, Santa Clara, Calif. "Viiv brings a number of new things to the market including more awareness and demand for these [digital home] products. The channel is well-positioned. They have the ability on a one-on-one basis to demonstrate, design, recommend, build, install, configure and calibrate digital home solutions for customers." At the end of the day, customers want highly specialized and customized digital home scenarios that can only be provided by digital home integrators, he says.
Of course, no one is expecting it to be an easy ride to big profits given the complexities of the market. And there will be many different paths to high margins—from pure product margin on high-end systems aimed at wealthy customers to digital integration services for the mass-market buyers looking for more affordable systems they need professionally integrated into a home network.
Yasin believes that Intel, although it is only providing one piece of the digital home solution pie, is going to play a critical role in 2006. "Intel is taking this to the mass market," he says. "They are bringing technology to the market that anyone can afford." To that end, Yasin is aiming to do at least $2 million in digital home solutions in 2006, up from about $500,000 in 2005. One big deal that Yasin is working on is a contract to outfit some 30 high-end condos with digital home functionality.
The reason for the sales explosion is the momentum he has developed in the market over the past couple of years combined with new mass-market products like Viiv systems. He foresees product margins remaining constant at double digits, while technology integration margins will hold or rise due to the complexity of bringing the complete range of digital solutions to the home. Yasin will continue to run his traditional IT networking business but expects the digital home business to be his primary business going forward.
On the home theater side, where 30 percent margins are not unusual for high-end home theater solutions, digital entertainment integrators are preparing their Viiv game plans. Many are planning to partner with Viiv platform manufacturers.
Doug O'Brien, president and CEO of Projectus, a successful Lake Oswego, Ore., home theater integrator, is poised to take the Viiv platform to all segments of the market through a partnership with Computer Technology Link, which is bringing the Viiv platform to market under its Nexus television brand.
"The revenue opportunity is endless," O'Brien says. Over time, Viiv and other technologies could allow his 10-year-old company to double its revenue in the residential market, he says. What's impressive about Viiv, O'Brien says, is its ability to become a centerpiece of home entertainment, withmultiple devices—from TiVo to a Media server to an iPod to a digital jukebox—all together on one powerful system.
Projectus is aiming to bring a $2,999 Viiv 27-inch LCD-based Nexus appliance to the market, which will net the company $500 in services for implementation and hands-on training. Even on lower-end Nexus-based appliances, O'Brien anticipates $100 an hour in services for installation and customization. He is careful to refer to the Viiv-based platform as an appliance rather than a PC. "This is less of a PC product than a home product," he says. "It has to fit into an entertainment rack and be cooled correctly."
O'Brien expects a gradual ramp of the Viiv platform, noting that there is "mystery" to the product that will drive margins at product launch. "This is a new segment of the channel," he says. "We have the opportunity to learn what the end user wants as we go and further [revise] the product in terms of functionality. That is going to afford us a longer time frame for higher margin."
As for just what spot the margins will settle in at, O'Brien says it will vary based on the segment of the market. "The big luxury buyer is just going to get it," O'Brien says. "I am going to throw him a $2,000 box, and they are just going to get it. On the other end, we'll run the volume proposition. And the volume proposition for us will be much different than the volume proposition in the IT channel."
O'Brien says his overall solution margins are running about 35 percent. "I'd love to think margins are going to go up," he says. "But let's be real frank here. We are finding other ways to make margin beside product. I don't think anyone is saying they can grow their margins by 5 percent." O'Brien says he foresees about 22 percent to 25 percent margins in the digital conference room business environment and about 35 percent in the residential environment.
For digital home integrators that have entered the market from the IT side of the business, the higher margins are a welcome surprise. David Gasaway, founder of Gasaway's Computer And Electronics, Elizabethville, Pa., moved from the commercial IT business, which he has been in since 1993, to his own home integration business in January 2005. With the robust double-digit margins in the home networking side of the business, he says he is only doing the low-end IT business as a convenience to customers that want complete digital home solutions.
"There is no margin in the computer business," says Gasaway. "PCs are a dime a dozen." An exasperated Gasaway says he was constantly being bombarded by IT buyers who would complain about the price of a system after hammering the Internet and getting quotes on comparable Dell, Hewlett-Packard or Gateway systems. In contrast, he says, there is "big-time money in home theaters." Most impressive in the luxury digital home side of the business are the 30 percent to 40 percent solution margins that harken back to the early '80s when $3,000 PCs were the order of the day. Now Gasaway is generating a big business in home theaters.
Besides doing installation work for local Circuit City and Sears stores, Gasaway conducts his home digital integration business with a major emphasis on custom jobs and round-the-clock service. "If a customer is going to spend $20,000 to $30,000 on a home theater, they should be able to get Grade A service," Gasaway says. One recent job was a 10 p.m. Sunday night call that had him hooking up Internet access for a client's mom. Then there is the case of putting an XM Satellite Radio in a Lexus, a job the local dealer said was undoable. That is until Gasaway took a whack at it and won over a new client.
One of the big hurdles Gasaway sees this year is breaking through all the noise and clutter to educate consumers. "There are just so many Jane Does and John Does telling consumers what to buy," he says. Educating customers about the wide range of home automation solutions that can be tailored for them is the key to making sales, Gasaway says. "Once the customer is educated enough to know that they need someone to put the pieces together, that is when this business is going to start to snowball," he says.
To increase his margins, Gasaway favors products likes Russound's multiroom audio systems and companies that cater to home installers and frown on Internet sales. For distributors, he has found smooth sailing with D&H Distributing, Harrisburg, Pa., and ADI, Melville, N.Y.
As for new products, Gasaway is looking forward to bigger LCD displays, which he says will drive more home entertainment solutions. A number of clients are shying away from plasmas but are not ready to make the leap to LCDs because they are waiting for larger displays, Gasaway says. As for the new Intel Viiv platform, Gasaway also sees it replacing TiVo systems. All in all, Gasaway is optimistic that it will be a record year for sales in 2006. "This year has been great, and I'm hoping 2006 is going to be better with more custom home theater installs," he says. "If you have strong customer service and a good reputation, you are going to do fine."
The optimism for 2006 is not just from the digital home integrators. Vendors are also expecting another year of robust growth.
Jay McLellan, president of HAI, a New Orleans-based manufacturer of digital home security and control solutions, is forecasting another year of 50 percent sales growth for 2006. One reason for the continued growth is the increasing number of HAI Internet-connected products, says McLellan. The new products enable homeowners to control their home security and thermostat system from the office or an Internet-connected laptop.
One of the pluses of having dealers coming from the IT side of the business is they already have the networking and router expertise necessary to install and implement the newer products, he says. New wireless products are also advancing digital home solutions in existing homes that have not been wired for the newer products, McLellan says.
With all of the product advances and Intel's Viiv offensive, "opportunities abound" for 2006, he says. Yasin, for his part, agrees. "The market is humongous, and it is about to take off."
