ADT Security Systems, Inc.

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ADT Security Systems, Inc.

300 Interplace Parkway
Parsippany, New Jersey 07054
U.S.A.
(201) 316-1000
Fax: (201) 316-1330

Wholly Owned Subsidiary of ADT Ltd.
Incorporated: 1901
Employees: 12,000
Sales: $937 million
Stock Exchanges: New York London Frankfort Toronto
SICs: 7382 Security Systems Services

ADT Security Systems, Inc. is the principal subsidiary of ADT Ltd., which is comprised of a security division (68 percent of sales), a vehicle auction business (25 percent), and miscellaneous holdings. ADT Security Systems provides various security- and safety-related services, but its main source of revenue is electronic monitoring of its installed base of security systems. With operations primarily in the United States and Europe, ADT led the fragmented security industry going into the mid-1990s. Its systems protected more than 25 million people in 1994.

ADT’s roots reach back to 1874, when the American District Telegraph Company (ADTC) was founded in Baltimore to deliver telegraph messages. The telegraph was the speediest means of communication known at the time. When a customer wanted to send a message by telegraph, he would write the communiqué and carry it to a local district telegraph agency. (Other customers had call boxes installed in their home or place of business which they could use to electronically summon a courier to come and get their message.) At the district telegraph agency, the message was reformatted for swift transmission over the telegraph lines to another agency, which would decode the memorandum and dispatch one of its uniformed messenger boys to deliver it.

The ADTC messenger boy system epitomized the intriguing slice of Americana that was the telegraph system. ADTC maintained rigid standards for its messengers, who attained nearly legendary status in some cities. Paramount among requirements were speed and dependability. According to company annals, one rule stated that “messengers on foot may not take more than one-and-one-half minutes per block.” ADTC also required the boys to be in and out of a building in less than two minutes. Some superintendents kept the boys in line by writing regularly to their parents, informing them of their offspring’s performance. Worse yet, the racing messengers would reportedly be chased by children on occasion, who jeered “ADT … all day trotters.”

ADTC was created by merging 57 district telegraph agencies from different cities into a single, consolidated operation. The resultant organization made it possible for the different agencies to benefit from various economies of scale. Importantly, an improved call box allowed customers in some cities to send different signals that would let the agency know their specific need before the messenger was even dispatched. The result of the new system was that customers were suddenly able to signal their need for the police, a doctor, the fire department, or even a wagon or coach.

Thus, the seeds of ADT security had been planted. By the late 1800s, in fact, a jingle had been written to promote ADTC’s services: “A trusty guardian of property … day or night protection constantly … that’s the system, value, and service of ADT.” “Way back, they used to have runners,” explained ADT Operations Supervisor Dave Roersma in the April 28, 1986 Grand Rapids Business Journal. Roersma related: “They’d get signals from different buildings. If somebody had a fire, they’d send a signal down and a runner would grab the message and run down to the fire department. They even used bicycles for a while.”

ADT’s advanced call boxes were installed only in ADT’s more populous districts, while traditional messenger services continued to account for about three-quarters of the company’s sales through the end of the nineteenth century. By the early 1900s, however, local telephone systems were rapidly displacing the labor-intensive messenger services. To combat telephone competition, ADT scrambled to convert the majority of its messenger systems to electronic signaling in a span of only ten years. The successful transition was partly a result of ADT becoming a subsidiary of Western Union in 1901. Western Union dominated the telegraph industry and was able to help finance ADT’s widespread conversion to electronic signaling.

The supremacy of the telegraph system quickly waned after the turn of the century. Emerging communications giant American Telephone and Telegraph Company (AT&T) bought out Western Union, along with ADT, in 1909. Under the auspices of AT&T, ADT’s messenger operations were jettisoned, and the company became focused entirely on the signalling business. AT&T took a particular interest in ADT, placing it under the direct leadership of former AT&T President Theodore N. Vail. Vail steered ADT toward an emphasis on security services. Benefiting from AT&T’s renowned research and development labs, ADT leapfrogged its potential competitors throughout the 1920s and 1930s with ongoing advancements in theft and fire alarm systems.

A manpower shortage during World War II generated a need for automated alarm systems that were less dependent on humans to signal for help. In response, ADT developed several landmark systems that were considered extremely advanced at the time. Chief among its breakthroughs were the ADT Teletherm (an automatic fire detection system) and ADT Telewave (and automated intrusion detection system). ADT experienced strong growth during the postwar U.S. economic expansion of the 1950s and 1960s. In addition to assuming a leadership role in the U.S. security systems industry, ADT began expanding internationally, particularly in the United Kingdom.

ADT broke away from AT&T in 1968 and became a publicly traded company on the New York Stock Exchange. By that time, computer technology was already emerging that would radically change the complexion of communication and security related industries within a few decades. Specifically, semiconductor components began to be incorporated in security and communications equipment, a development that allowed ADT to begin building components and systems that were smaller, less expensive, and more capable. ADT introduced its first solid-state device in the early 1970s and subsequently developed the first multiplex detection and alarm system, which could simultaneously send multiple messages, or signals, on the same radio frequency or wire.

The advanced semiconductor equipment during the 1970s was significant in that it vastly broadened the potential market for all types of security systems. Prior to the 1970s, security and fire detection systems were purchased almost entirely by businesses or only very wealthy individuals. As the cost of new technology began to fall during the 1970s, though, it became clear to ADT that small businesses and middle-income homeowners would soon be added to the industry’s expanding target market. By the late 1970s, in fact, many insurance companies were offering discounted premiums to homeowners who installed security systems.

To take advantage of surging demand, ADT continued to innovate throughout the 1970s and early 1980s. Importantly, ADT launched the first “central station” in the mid-1970s. Central station monitoring represented a major improvement over traditional, locally based fire and intruder systems. From a central station, ADT was able to monitor a large base of customers’ premises electronically, round-the-clock, every day of the year. A single monitoring station would eventually be used to protect thousands of homes in a multi-state area. Integrated into ADT’s central monitoring systems during the early 1980s were a variety of new components and services, including: Unimode, a fire detection system; CentraScan, a patented computer-based comprehensive security system; and Safe-Watch, an advanced residential surveillance system.

ADT continued to benefit from improved technology during the 1980s as its base of both commercial and residential customers expanded. The company also prospered as a result of rising crime rates, particularly in major metropolitan areas. By the late 1980s, ADT was serving virtually every Fortune 500 company in some capacity. Furthermore, even though the industry was highly fragmented, ADT’s five-plus percent market share was estimated to be at least as great as the combined share of its next three largest North American competitors.

Much of ADT’s growth during the 1980s was attributable to residential markets. As consumers became more concerned about crime, and as technology costs dropped, sales of home security systems surged. Instead of tailoring commercial equipment to residential applications, ADT began developing entire product lines specifically for home use. The systems were designed to perform a variety of functions, such as tracking an intruder’s movements inside the home, monitoring the home through the telephone, detecting broken pipes, and even noting whether a customer’s freezer had stopped operating. A typical basic residential ADT system in the mid-1980s could be installed for under $1,000, with monitoring fees usually running less than $250 annually.

In 1987, ADT, Inc. was acquired by Hawley Group Limited of the United Kingdom. Hawley was a group of diversified companies active in service and other industries, including the electronic security industry. It had begun building its North American security company holdings in 1981 with the purchase of Electro-Protective Corporation of America in 1981. Between 1982 and 1985, Hawley purchased an assemblage of small security service businesses throughout North America. Its crowning acquisition was ADT. In fact, after the buyout, Hawley changed its name to ADT Limited, and broke its operations into two divisions, the largest of which became ADT Security Systems, Inc.

As a result of the merger with ADT, Inc. and several of Hawley’s complementary subsidiaries, ADT Security Systems’ sales bolted to about $800 million by the late 1980s. Furthermore, ADT purchased Britannia Security Group PLC, an industry leader in the United Kingdom, in 1990. That purchase, combined with other security company holdings in England purchased by Hawley during the 1980s, helped to boost ADT’s aggregate sales to $880 million. Despite general economic malaise in both the United States and Britain, as well as major financial setbacks related to other of ADT Limited’s holdings, ADT Security Systems, Inc. continued to perform admirably during the early 1990s.

New product introductions were an important contributor to ADT’s expansion during the early 1990s. ADT introduced its popular FOCUS system, which allowed commercial customers to more specifically designate protection zones that could be independently monitored. For example, a perimeter area could be monitored while offices inside the perimeter were left open to employees. ADT also bolstered its line of video surveillance equipment and introduced a slew of home security devices.

By the early 1990s, ADT was offering a full line of advanced security services and systems for the massive upper-middle and middle-income residential market. In most cases, ADT retained ownership of the installed system. The customer paid a onetime installation fee and also agreed to pay an annual service charge for monitoring and maintenance. As new products and services were introduced, ADT expected to make money through system upgrades. The systems, like those designed for commercial use, were commonly configured to detect movement, break-ins, fire, smoke, flooding, and other hazards. ADT could respond by phoning the police, notifying the homeowner, and/or dispatching ADT security personnel to the home.

Besides new products, ADT’s growth during the early 1990s was largely a consequence of its newfound emphasis on the booming residential market. After the 1987 acquisition, ADT implemented an aggressive program of consolidation and growth centered on the home security market. The company cut its number of central monitoring stations from 162 to just 30 in North America and Europe, while at the same time significantly boosting monitoring capacity and geographic coverage. The end result was reduced operating costs and system prices. Lower prices, in turn, translated into a larger base of potential customers, particularly homeowners in lower income, high-crime areas.

During the early 1990s, sales of security services and systems to the commercial sector stagnated, squelching sales and income growth in that segment; ADT’s base of business customers (customers to which ADT continued to provide monitoring services) wavered around the 385,000 mark. In contrast, residential sales exploded. As a result of savvy marketing and proliferating homeowner concerns about security, ADT boosted its base of residential customers to a record 265,000 by 1991. By 1993, moreover, that base had multiplied to 477,000, representing a leading four percent share of the North American home security market.

As residential sales surged, ADT Security Systems’ revenues rose from $880 million in 1991 to $901 million in 1992, and then to a record $937 million during 1993. Net income jumped similarly, to about $150 million in 1993. Adding to ADT’s revenues were sales from its related electronic article surveillance business, which featured systems used to tag articles in inventory, such as retail clothing. The tags had to be removed by a special device to avoid setting off an alarm, which was usually located at the facility’s exit. Electronic article surveillance equipment registered five percent, or about $44 million, of ADT’s sales in 1993.

From a group of 57 telegraph service companies, ADT Security Systems had blossomed into a nearly $1 billion security systems company by the mid-1990s. The subsidiary employed a work force of more than 12,000 and generated more than 20 percent of its revenues from operations outside North America. Steady gains in residential sales and an uptick in commercial markets suggested continued growth in the short term. Likewise, increasing concern about crime in the United States, combined with decreasing technology costs, suggested a bright long term future for the industry leader.