---
title: "Why ADT has to lock you into a contract"
url: https://modern-mba.com/case/home-security
sector: "Services"
sector_url: https://modern-mba.com/sector/services
aired: 2023-04-23
published: 2026-11-01
updated: 2026-11-01
reading_time_minutes: 9
charts: 0
video: https://www.youtube.com/watch?v=0DiLan7Knw4
author: "Yishan Lin"
author_url: https://www.linkedin.com/in/yishanlin/
publisher: Modern MBA
license: "© Modern MBA, all rights reserved. Quote and cite with credit and a link; republishing needs written permission."
---

# Why ADT has to lock you into a contract

ADT looks like the model defensive business: the best-known name in home security, five times its nearest rival's share, and revenue that arrives monthly. Underneath, it loses money on each new customer for two to three years, about 13% of its revenue walks away annually, and half its new accounts come from dealers it barely controls. This case study follows how the leader runs on long contracts, price rises after year one and relentless selling, and why the money in home security goes to whoever makes the equipment.

## Key figures

- **2–3 years** — Before ADT earns back what it spends to win a customer
- **13%** — Of ADT's revenue lost to cancellations each year, on average
- **50%** — Of ADT's new accounts each year signed by outside dealers

## The argument

On paper ADT is the safest business in home security. It has the famous blue sign, five times the market share of the next company, and a bill that arrives every month. The economics run the other way. ADT pays for most of the equipment and installation to get into a home, and by its own account it only earns that back somewhere in the second or third year of the contract. Meanwhile about 13% of its revenue is lost to cancellations every year.

So the contract carries the business. Customers sign for three to five years with steep fees to leave early, the advertised $40 to $80 a month holds for the first year only, and the price goes up once they are committed. Half of all new accounts come from independent dealers who are paid per account and only need a customer to last 12 to 15 months, which is where the bait-and-switch complaints come from. ADT cannot rein them in, because it cannot grow without them.

The rest of the industry looks the same. Vivint, the second-largest provider, loses 11 to 12% of customers a year and asks for five years up front. Full-service monitoring sold well when homeowners had no alternative and little information. Now Amazon sells cameras that people put up themselves, the phone carriers can force a $300 million upgrade on ADT by switching off old networks, and growth comes from solar panels. In home security, the profits go to whoever makes the hardware.

## Takeaways

1. **ADT** was the first company to sell home security as an ongoing service. It designs and installs a system, then watches the house day and night for a monthly fee, sending police or other emergency services when a sensor trips. Bundling hardware, installation and a second set of eyes is why it has always charged a premium: **$40** to **$100** a month today.
2. Very little of what **ADT** installs is its own. Cameras, sirens and sensors come from makers such as **Honeywell** with ADT's badge on them, and its newer cloud software is licensed from **Alarm.com**. It owns the central panel and the app on top. The panel generally works only with ADT, so a customer who leaves is usually left with equipment no other provider can use.
3. Against **Ring**, the pitch is independence. A Wi-Fi doorbell goes dark when a burglar unplugs the router or the internet drops. An **ADT** panel reaches the monitoring center over a landline or cellular link, so the siren still sounds and someone still responds. But that link runs on **AT&T**, **Verizon** and **Comcast**, so the independence ends at the phone network.
4. The bet is that the money sits in the labor around the hardware: picking it, placing it, fitting it, servicing it and watching the house. Monitoring only pays once a panel is on the wall, so **ADT** competes on reach and speed, with free quotes, deferred installation fees and next-day appointments nationwide. Each home takes one system from one provider, and the supply of homes is fixed.
5. Getting there first takes the industry's largest sales force: about **3,000** salespeople knocking on doors and **450** call-center staff working leads. The bigger engine is hidden. Local firms in **ADT**'s authorized dealer program trade under their own names but fit only ADT equipment and sell only ADT service, and ADT can buy the accounts they sign.
6. Dealers deliver **50%** of **ADT**'s new accounts every year, at little capital cost to it. The one check is a clawback: if a customer cancels within **12** to **15** months, the dealer refunds ADT or hands over another account. Thousands of homeowners describe surprise fees and promises that changed. It works like a fast-food franchise, except the parent company only wields carrots.
7. Most subscriptions now bill monthly and cancel with a click. **ADT** still writes contracts of **3** to **5** years with heavy early-termination fees. The **$40** to **$80** a month it advertises applies to the first year; after that it has the right to raise the price, and generally does. Installation can be paid up front or rolled into a bigger monthly bill.
8. Installation is a loss leader. It averaged just **13%** of revenue over seven years and, despite the markup on equipment, falls well short of paying for the hardware, the advertising and crews on call for next-day jobs. **ADT** breaks even on a customer between year two and year three, and the most common contract runs three. In the company's words, "Our long-term profitability is dependent on long customer tenure."
9. Monitoring is where the margin lives: **85%** of revenue on average over seven years, at gross margins near **80%** for the last three. The centers, with backup generators and redundant servers, are expensive but built once. Even so, operating margin averages about **5%**, and after half a billion dollars of debt repaid each year, **ADT** reports net losses.
10. The red ink is partly an accounting choice. **ADT** books over **$1.5 billion** of depreciation a year on equipment it capitalizes, which keeps taxable income low, while revenue has grown about **8%** a year for six years. The real business is the cash from monitoring.
11. Then there is churn. Revenue attrition, ADT's measure of customers who do not renew, improved from **14.8%** in 2016 to **12.5%** in 2022 and averaged about **13%**. Those customers have already paid for a system and would rather have none than keep paying. A small software startup lives with that rate. For the physical market's leader, with **five times** its nearest rival's share, it points at the industry.
12. Each lost account has to be replaced by a new one, which costs more to win, or by a higher price for those who stay. **ADT** has leaned on price. Its accounts fell **10%**, from **7.2 million** in 2017 to **6.5 million** in 2019, while monitoring revenue per customer rose from **$46.60** a month to **$55.20**, close to **20%** more.
13. **Vivint**, the second-largest player, shows the problem is not ADT's age. Far younger and free of legacy systems, it still lost **11** to **12%** of customers a year from 2020 to 2022. It requires a **five-year** minimum, subsidizes installation and earns **77** to **79%** gross margins on monitoring. When every provider needs exit penalties to keep customers, the contracts are making up for the service.
14. What **ADT** sells investors is cash flow: monitoring produced over **$1 billion** a year from 2017 to 2020. More than half went to dealers for their accounts, over **$2 million** a year for the average one of its **200** to **300**. In 2020 it bought its biggest dealer, the source of **55%** of indirect sales for a decade, for **$400 million**, its largest year of dealer payouts ever.
15. **ADT** is squeezed from both sides. **Amazon** sells cheaper cameras people mount themselves, while ADT charges **4** to **10** times what competitors do. And the carriers set its costs: retiring 2G and 3G at **AT&T** and **Verizon** cost ADT **$300 million** in one year to move older customers onto 4G. Its answers are a **Google** partnership, self-install kits that still need a long contract, and **ADT Solar**, nearly **$1 billion** in 2022.
16. The full-service model suited a time when information was scarce and the subscription on television looked like the only defense. Real protection is mostly habits: parking in sight, knowing the neighbors, keeping the yard up. Monitoring only reacts. A product can carry any number of services, but a service cannot carry a product. The best thing in a gold rush is to sell shovels, and in home security the winners are the companies that make the equipment.

## Common questions

### How does ADT make money?

Almost entirely from monitoring. The monthly fee to have its staff watch a home and dispatch help made up 85% of revenue on average over seven years, at gross margins of about 80%. Installation is priced below cost to get a system into the house and averaged just 13% of revenue. ADT only breaks even on a customer between year two and year three, so its profit depends on customers staying on and renewing, and on price rises after the first year.

### Why does ADT make you sign a long contract?

Because it loses money on a new customer at first. ADT pays for much of the equipment, the installation and the sales effort up front and earns it back over two to three years of monitoring fees. Its contracts run three to five years, with heavy fees for cancelling early, which protects that investment. In ADT's own words, "Our long-term profitability is dependent on long customer tenure." Vivint, the second-largest provider, asks for a five-year minimum.

### How much does ADT cost per month?

Between $40 and $100 a month, depending on the package. The $40 to $80 it advertises online is a first-year rate: after that the contract lets ADT raise the price, and it generally does. Installation can be paid up front or deferred into a higher monthly payment. Dividing ADT's monitoring revenue by its customers gives an average of $46.60 a month in 2017 and $55.20 in 2019, close to 20% more in two years.

### What is an ADT authorized dealer?

A local security company that trades under its own name but installs only ADT equipment and sells only ADT service. ADT monitors the customers it signs and can buy those accounts outright, so the dealer gets a payout per account. Dealers produce 50% of ADT's new accounts each year. If a purchased customer cancels within 12 to 15 months, the dealer refunds ADT or supplies another account, which rewards keeping customers just past that window and has led to many complaints about fees and misleading terms.

### Can you use ADT equipment with another security company?

Generally not. The cameras, sensors and sirens are made by other manufacturers, such as Honeywell, but ADT's central panel connects them and usually locks them to ADT's service. When a customer leaves, the system is typically unusable with another provider, so switching means buying new equipment. That makes cancelling more expensive than the termination fee alone, and it is part of why customers who do leave often end up with no security system at all.

### Does ADT work without the internet?

Yes. An ADT panel talks to the monitoring center over a landline or cellular connection, so the alarm still sounds and staff can still respond during an internet outage, unlike a Wi-Fi device such as a Ring doorbell, which stops recording and alerting without a connection. The catch is that ADT depends on carriers like AT&T and Verizon instead. When they shut down 2G and 3G, ADT spent $300 million in one year upgrading older customers to 4G.

### How many customers cancel ADT each year?

ADT's revenue attrition, its measure of customers choosing not to renew, was 14.8% in 2016 and 12.5% in 2022, about 13% a year on average over seven years. Its customer accounts fell 10% from 7.2 million in 2017 to 6.5 million in 2019. Vivint, the second-largest provider, lost 11 to 12% of customers a year from 2020 to 2022. Churn like that is common for small software startups but high for the clear leader of a physical service.

### Is ADT profitable?

Not on paper. Its operating margin averages about 5%, and after roughly half a billion dollars of debt repayments a year it reports net losses, helped by over $1.5 billion of annual depreciation that keeps taxable income low. The business is the cash flow: monitoring produced over $1 billion a year from 2017 to 2020. More than half of that went to buying customer accounts from dealers, and much of the rest to subsidizing equipment and installation.

## Discussion

- ADT loses money on a customer until year two or three, and about 13% of its revenue cancels every year. At what churn rate does the model stop working, and how close is ADT to it?
- Half of ADT's new accounts come from dealers it pays per account but can barely discipline. If you ran ADT, would you keep the dealer program, and what would you change in its terms?
- Every major provider relies on multi-year contracts and early-termination fees. Is lock-in a sign of a weak product, or a fair way to finance an expensive installation?
- A Ring doorbell stops working when the Wi-Fi does; an ADT panel keeps going but depends on the phone carriers. How much is that difference worth to a homeowner, and could ADT charge for it month to month?
- The case argues that product-first businesses beat service-first ones at scale. Name a service business that has held its prices against cheaper products. What protected it?

## Sources

Revenue mix, gross and operating margins, revenue attrition, customer accounts, monitoring revenue per customer, cash flow, dealer payments and the 2G/3G upgrade cost are ADT's figures as stated in the episode; Vivint's churn, contract minimum and monitoring margins are as stated in the episode; the sizes of ADT's sales teams, the dealer program's terms and the advertised prices are as stated in the episode

---

From [Modern MBA](https://modern-mba.com/). Read this case in full at [https://modern-mba.com/case/home-security](https://modern-mba.com/case/home-security), or watch the episode at https://www.youtube.com/watch?v=0DiLan7Knw4.