Volume 1, Issue 1

New Years Edition 2005

Inside this Issue

Welcome to the eUpdate
Looking Back: 2004 Predictions - How'd We Do?
2004: High Impact Happenings
What's in Store for 2005: Annual Predications
Market Forecasts - Value Chain Sizing

Welcome

...to the first edition of the Biometrics Market Intelligence eUpdate.

The BMI eUpdate was launched to provide you with the kind of honest, hype-free and unbiased market intelligence you've come to expect from Acuity Market Intelligence in a quick and easy to read electronic format*.

The focus of the eUpdate will be on clear and concise insight and commentary that offers high level perspective on significant developments in the world of biometrics and identification solutions. This first New Year's edition takes a look back at the promise and pitfalls of 2004 and shines some light on what's to come in 2005.

I hope you enjoyed your holidays and are now ready to dive back into what promises to be a really big year for the biometrics industry. As always, your feedback is welcome. And, if you know a colleague that you think ought to be reading the eUpdate, please forward this copy and encourage them to subscribe.

Sincerely,


C. Maxine Most

*For more in-depth analysis and strategic market development expertise, Acuity provides highly targeted custom research and consulting services and also publishes comprehensive biometric and identification solutions market reports and forecasts.

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Looking Back: 2004 Predictions - How'd We Do?

A year ago, Acuity published the BMI Market Outlook 2004 which included a series of prognostications on how the year would pan out for the industry.  Let's take a look back and see how close to the mark Acuity came with our crystal ball gazing.

#1 Prediction: EU Takes the Lead on Public Sector Programs; EBF play a critical role
Accuracy: Pretty close

The EU has indeed taken a leadership position in the development of biometrically enabled passports. The EU Parliament has endorsed the use of facial biometrics for passports and the Council of the EU has mandated the use both facial and finger biometrics for passports. Though there is some confusion on how to resolve contactless RFID interference for multiple visas within a single "smart" passport, more then 10 EU countries have begun or are committed to producing biometrically enabled passports in the next 24 months. The critical role of the European Biometrics Forum (EBF) has failed to materialize. Unfortunately, with the loss of their Managing Director, they seem to have also lost the initial momentum they were generating and have faded from prominence.

#2 Prediction: 2004 Traction; 2005 Land Grab
Accuracy: Right on

Over the last two quarters of 2004 vendors across the biometrics value chain have reported significant increases in the quality and quantity of customer inquiries as well as current and projected revenue. There is almost a palpable sense of anticipation in the industry as 2005 begins. The upswing in the second half of 2004 and the great expectations for 2005 seem to bear this prediction out.

#3 Prediction: Technology Provider/Integrator Relationships Solidify
Accuracy: Sort of

This has begun to happen but not quite as fast as expected. There is still quite a bit of unpredictability in alliances as bets are being hedged across the industry.

#4 Prediction: Capital Flows
Accuracy: Right on

Last year's prediction was that 2004 would see at least double the $100 million accounted for in public and private equity in 2003. Well, the Cogent public offering took care of that all by itself raising close to $250 million. Add that to a number of other deals and 2004 topped $400 million of cash flowing into the biometrics industry. A big win for everybody.

#5 Prediction: One of the "Big Boys" Bids Adieu
Accuracy: Total miss

I was positively certain we would see a major casualty among the well established biometrics companies last year. But in spite of business strategies, practices and pricing models that often seem totally incompatible with sustained performance the industry "Big Boys" continued to hold on. Surviving 2004 may have been just enough to allow these players to make it through what should be a very good year for biometrics in 2005.

Overall Performance? - Well, predictions for 2004 panned out as follows: 2 right on, one dead miss, 1 pretty close and 1 sort of. Not too bad for peering in to the future but I am not quite ready to relocate to Vegas or write for the Farmer's Almanac!

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2004: High Impact Happenings

Now with the brilliance hindsight always offers, let's take a look and see what ended up really impacting the market in 2004.

US-VISIT award - This may actually turn out to be more of an impediment than an opportunity for the US to drive biometrics market development Accenture will likely spend the next several years – 2 at least – making PowerPoint slides and trying to understand exactly what US-VISIT ought to be. Meanwhile, the Europeans are forging ahead by creating a framework for the incorporation of biometrics in border control applications.

US-VISIT extension- Though it was no big surprise that the US extended the October 2004 deadline for visa waiver countries to meet biometrics passport requirements, photographing and fingerprinting citizens of these countries was a tough pill for close allies to swallow. Surprisingly little pushback can only be attributed to business interests and perhaps the falling dollar making the US just too good a bargain to pass up.

US-VISIT Performance?- Regular statements and press releases from the DHS praise US-VISIT and offer continued assurance that the program is working extremely well. However, every immigration officer I spoke to when entering the US - which I did at least ten times last year - assured me than the equipment was not working very well at all. OK, so it is anecdotal but I encourage each of you to do the same. It was amazing how quickly the story changed form "just great" to "not so hot" when I convinced them I was indeed an industry analyst not a employee of the US government.

DHS facial recognition standards – This standard in and of itself is not overwhelmingly significant.  But as the first of many such standards that will be adopted over the next 24 - 36 months, it is a milestone. This type of standardization will create the market environment that facilities accelerated adoption and brings biometrics into the mainstream for both public sector and commercial applications.

Registered Travel & TWIC make progress - After 3 years of slow going, these two large US government pilots actually began in earnest in 2004. Though implementations at individual airports are not interoperable, i.e. you are registered only at your home airport, the Registered Traveler pilots were so successful and well received that pilot extensions are under consideration. TWIC hopes to enroll more than 200,000 participants in their pilot which is ultimately aimed at building an integrated identification system for more than 6 million transportation workers nationwide. There is no doubt that significant progress will continue in 2005 and plans for rolling out full scale interoperable systems will be championed. However, there is a significant roadblock. Both of these programs were intended to test, validate and recommend technology. There is, however, no corresponding funding allocated to roll out these programs. The battle over who pays - government or the transportation industry - is likely to be ugly and contentious.

No centralized database for EU passports - After a long period of wrangling over the details, the EU is moving ahead with the use of finger and facial biometrics for passports. This will have significant positive ramifications for the industry in Europe and will accelerate the use of biometrics across a range of public sector and commercial applications. However, the implementation of a centralized European passport registry was not approved by either the Council of the EU or the EU Parliament - something certain members of the Directorate of Justice and Home Affairs were pushing for.  After two years of debate and pushback form both inside and outside the EU - data protection working groups, privacy advocates, individual Members of Parliament - this current position represents a significant compromise. Biometrics advocates claim victory in the EU endorsement; Biometrics skeptics claim their own victory in preventing the creation of a "surveillance society" centralized database. This compromise is a harbinger of what's to come as battle lines are drawn in the struggle to strike a balance between security and civil liberties when it comes to biometric identification.

Cogent IPO - It's been a long time since the last biometrics IPO. The envy of the industry, Cogent struck gold taking in a whopping $250 million. One of the few biometrics companies that is cash rich, Cogent has effectively leveraged its AFIS technology for law enforcement and government applications including high profile projects such as the EU Commission's EURODAC AFIS asylum seeker identification program. The question for Cogent now is can they effectively leverage this enviable cash rich market position to achieve sustained leadership in the public sector while developing a similarly successful position in the commercial market.

Evolution towards Solutions  - The transformation from an inwardly focused, error rate obsessed core technology industry to a customer focused, solutions based, real world problem marketplace has begun. Select vendors are beginning to see the world of identification solutions though the eyes of their customers and are understanding and taking responsibility for solving their customers' problems. As this shift in focus continues, biometrics in and of themselves will become less and less interesting as the essential challenge of the industry – bridging the human-machine identity gap - is understood, addressed and becomes a non issue.  Getting to this point will take time but the first step in this inevitable progression has begun.

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Market Forecasts - Value Chain Sizing

The biometrically enabled identification solution value chain market sizing indicates the relative revenue for each of the four value chain components: Core Technology (including sensors, devices & algorithms & SW), Integrated Technical Solutions, Application/Point Solutions, and Integrated Identification Solutions. Each component of the value chain incorporates its predecessors. So, for example, the revenue for an Application/Point Solution would include the revenue for the Integrated Technical Solution it is built upon as well as the core technologies.

The graph illustrates the relatively small percent of revenue generated by biometric core technology relative to the other components of the overall value chain. Ultimately biometrics technology will generate little revenue and be subject to the type or market dynamics that exist in the PC marketplace where margins on core technology—disk drives, motherboards—are razor thin and sustained market success is based on developing, deploying and supporting solutions.

These forecast numbers are derived from propriety Acuity Market Intelligence models that calculate potential market revenue based on an analysis of the opportunity to replace or augment existing automated or manual identification processes.

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Copyright 2005 Acuity Market Intelligence, LLC. All Rights Reserved.
The editor makes no guarantees on the opinions expressed herein. This publication may be forwarded electronically in it's entirety. However, no part of this publication may be published in any form without explicit consent of the publisher.