Dilip Sarangan tracks physical security companies for Frost & Sullivan. He expects the industry's "need to have" products to weather the economic storm well, with the big players (now including IBM and Cisco) looking for value-priced acquisitions. CSO: What sectors or companies in physical security markets look particularly strong?Sarangan: Definitely video surveillance looks really strong right now. A lot of people are starting to understand it's not really 'nice to have' technology any more - it's more of a 'need to have'. There's a lot of market education on use of IP cameras and complete IP systems. People are starting to understand the value instead of analog. Now the challenge with IP is making the systems integrators understand that.The physical security guys need to understand how IT systems work. Networks, bandwidth issues. There are a lot of vendors trying to educate those guys so they can get an additional channel for sales. But right now most of the IP sales are going through the IT integrators.Do most traditional analog CCTV vendors now have an IP offering?Most are starting to get there, developing their own lines of IP cameras and management software. They're still a few leagues behind, but catching up. a couple of years before they catch up to Axis or Sony or Panasonic.Plus now, even within the IP camera market, a lot peole are now interested in going with the megapixel and multimegapixel systems. The standard-resolution IP cameras are no better than the analog cameras. You need to take advantage of the digital zoom functions. Time's up for the analog zoom.So the big opportunities there are not just the cameras, but guys that sell SAN, NAS, all the IT storage technologies. You'll the EMCs and Seagates playing a bigger role. HP, IBM, all these guys are going to start focusing more on this market.What's strong outside of video technologies?I think everything is moving towards IT, even access control. You've got a few companies who are focusing on putting access control systems on the network to enable convergence, integration. That's gaining a bit more traction. It's a little behind the video surveillance; more people understand the video but don't completely yet see the value in the access control part.Particularly for highly regulated industries, the ability to simplify access down to a single card - network and building access - and document who's using what, that seems like a no-brainer for some industries. Not for everybody.I think some people are still worried about what happens if you lose the smart card. For the most part they're still using RF technology for access control. But they're starting use the smart cards a little more for authentication in network access control. But there's still some pushback from end users and also integrators aren't completely sure. You know, it's biometrics - every year some body says biometrics will revolutionize security, but it doesn't happen. Fingerprints are the most advanced of the lot, but everyone always talks about facial recognition, and it's just not there yet. the technology hasn't gotten there yet.What sectors are in tougher shape in this economy?Physical security still hasn't been hit as hard [by the general economy] as some others industries. People still need these systems. Obviously slowing down a little bit, but as long as the vendors keep building value proposition...What about IPO and M&A activity next year?The market is just too volatile. If it was me, I would hold off on doing an IPO.But for the most part, it's a very private industry. You have five to ten large companies that are divisions of huge conglomerates; mostly, though, it's smaller, privately held companies looking to develop technology and then sell to a larger competitor. So you're going to see more M&A activity for sure. The big guys like Honeywell, Tyco, GE, even UTC are always buying, always interested. Over the last few years Cisco has bought some companies; EMC is starting to get active. IBM has been quiet but I have a feeling that that will change. Not to build out their portfolio, but as just in order to have new sources of revenue.Look at it this way. Cisco has bought in. Access control is a bit of a stretch for them, video is a bit of a stretch for them - but everything is going IP and they want to sell more routers, more switches. For IBM, it's just an extra avenue for selling services and software. So it just makes sense to get in and make money off of it.I'm surprised that IBM has been this quiet this long. Next year I have a feeling they will acquire some companies.We're going to see a lot of companies offer a lot of different managed services. They're definitely going that route.And I think a lot of these companies have a lot of technologies that can be used as business intelligence, not just security . To integrate our HR function, our business intelligence, our marketing together - that would be the ideal scenario. That's why I see the IBM, Cisco, and EMC ready to make plays; it's added value and they can sell more services. Who better to explain the network [impact] than Cisco? Who better to explain the storage than EMC?