Boom and Bust for Building IT firms by 2015

Michael LoCascio, senior analyst, Lux Research.

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Lux Research claims large companies are entering the building IT arena by assessing which firms are ripe for acquisition.

In its report, ‘Sifting winners from losers in the building IT acquisition frenzy’, it said firms like Johnson Controls, Siemens, Honeywell, and Schneider Electric are all seeking acquisitions to expand presence in demand response and building monitoring.

Large lighting firms will expand their smart-lighting portfolios and name-brand appliance manufacturers, such as GE and LG Electronics, and traditional IT/Internet software and hardware firms, like IBM, Google, Cisco, and Microsoft, are all moving into smart plugs and circuit monitors, building automation systems, and energy monitoring solutions.

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“It’s the Internet story all over again,” said Michael LoCascio, senior analyst, Lux Research.

“We’re already seeing dozens of companies cropping up, and expect a wave of high-profile acquisitions to follow. Building IT will transform the landscape, but you’ll also see a lot of companies go bust in the process.”

The report finds conventional buildings unnecessarily consume a lot of energy as lighting, climate control, and ventilation are powered with little or no regard for the changing number of occupants, or the surrounding environmental or ambient conditions.

New and established IT technologies introduce a level of intelligence that can potentially reduce overall building energy consumption by 20% while reducing some energy consumption activities, like lighting, by up to 60%.

Moreover, unlike renewable energy technologies, building IT offers a comparatively low risk, fast-to-market, and capital-efficient alternative for cleantech investors. However, the report also warns that with these opportunities come with risks.

Speaking about the effect it will have on FM, LoCascio said: “Although facilities managers have little if any say on the design, construction, and original equipment deployed in buildings, they do have a huge responsibility and play a major role that affects both the energy footprint and overall performance of the building they manage.

“It turns out that the vast majority of building equipment, including sensors, aren’t maintained properly and efficiencies quickly fall. We estimated that simply operating buildings at their design specification, which often requires the utilisation of building information technology, would drop average building energy usage by as much as 20%.“

To identify companies best positioned for acquisition, Lux Research scored firms by their value proposition and their probability of success, measured by criteria such as payback period, brand recognition, market differentiation, installation and operational challenges, distribution channels, and the building market they target.

It then weighted scores by their relevance to six industry sectors: building control firms, lighting companies, first-generation direct response, power producers, appliance manufacturers, and IT companies.

It found power providers will learn to make a profit by selling fewer electrons and more services. The economic crisis has reduced demand for electricity even as independent power producers and utilities are under pressure to promote efficiency improvements on the part of their consumers.

The solution may be to pursue acquisitions in building control and monitoring to add lucrative energy-related services to their conventional role as energy providers.

Entrepreneurs and investors will follow the bright lights and swarm into the market. Recent and impending high-visibility acquisitions have “proven” the viability of building IT to entrepreneurs and investors alike, resulting in a gold rush into the space.

Despite this, there are only a few dozen potential acquirers to purchase the flood of companies starting up in the space. The lack of competitive differentiation, value proposition and IPO potential among these smaller firms spells a major shakeout by 2015.