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Cheryl LinderGlobal Offering Leader, IBM Energy and Utilities IndustryWhat's Next for the Smart Grid? Consumer Behavior and New Business Models in the Utility Industry
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© 2010 IBM Corporation
What’s Next for the Smart Grid Consumer Behavior and New Business Models in the Utility Industry
Cheryl Linder, Global Offering Leader, IBM Energy and Utilties Industry
March 2011
© 2011 IBM Corporation 2
We have provided IBM’s perspective on consumer and business model themes in our last three IBM Energy and Utilities papers
Embody creative leadership
Embody creative leadership
Reinvent customer relationships
Build business model dexterity
IBM Institute for Business Value
Reinvent customer relationships
2010 2009 2008
© 2011 IBM Corporation 3
Consumer expectations and business model innovation: Why are these important questions to be asking now?
Our views on how the future will evolve
Changing consumer perceptions on energy
Moving into the future: Industry model innovation
Conclusions
Agenda
© 2010 IBM Corporation
Consumer expectations and business model innovation: Why are these important questions to be asking now?
© 2011 IBM Corporation 5
Changes in residential and industrial electricity consumption in the US, 1949-2009
IBM Institute for Business Value
… because in many parts of the world, residential customers have become much more of a force over the past 20-40 years
Source: US Energy Information Administration, IBM Institute for Business Value analysis.
As their influence increases, consumers are demanding more from their relationships with their energy providers as they seek options for conserving energy, saving money, and reducing their impact on the environment
© 2011 IBM Corporation 6
… because consumers worldwide are reconsidering their interactions with energy providers – and the energy ecosystem itself
Significant segments of consumers are willing to assume new roles and take on new responsibilities
Their motivating factors differ, but most strike at common outcomes – Climate change concerns
– Desires to conserve energy and natural resources
– National economic health and energy independence
– Volatile (and often high) energy prices
– Growing awareness of technological advancement
– Global financial crises of 2007-present
Their influences are primarily from outside the energy sphere – Entertainment (TV and internet)
– Telecommunications
– Media
IBM Institute for Business Value
© 2011 IBM Corporation 7
… because the rapid increase in consumer choice in other industries will shape expectations for the future nature of energy service
TV Viewers Energy Consumers - passive receipt of content - limited sources of content generation - major media companies exclusively control content - provider-customer relationship one-to-many, driven by demographics
and geography
- passive receipt of power - limited sources of power generation - incumbent utilities exclusively control power generators - provider-customer relationship one-to-many, driven by demographics
and geography
- consumer interest drives new and more targeted choices in content - more interest in and leverage of information on quality indicators for
content (e.g., TV program rating systems) - broader choice of providers drives more active role in provider selection - consumer does not control content, but has stronger influence via
choices - introduction of time-shifting technologies enables more active selection
and management of content at individual level
- consumer interest drives new and more targeted choices in power supply
- more interest in and leverage of information on quality indicators for content (e.g., green energy standards)
- broader choice of providers drives more active role in provider selection - consumer does not control generation, but has stronger influence via
choices - introduction of residential time-of-use programs and green power
options enables more active selection and management of generation deployment at individual level
- interactivity and involvement with content and service providers increases
- consumers active in producing content and influencing content distribution
- rapid creation of new content types as techology change causes explosion in capabilities
- dynamic, value-based pricing of content - provider-customer relationship dynamic is increasingly customized to
specific entertainment and information interests, with consumer analytics a key driver
- interactivity and involvement with generation and service providers increases
- consumers active in generating power and influencing generation planning decisions
- rapid creation of new power supply options as techology change causes explosion in capabilities
- dynamic, value-based pricing of power (e.g., time-of-use) - provider-customer relationship dynamic is increasingly customized to
specific energy management goals, with consumer analytics a key driver
Sources: Berman, Duffy, and Shipnuck, “The End of Television as We Know It,” IBM Institute for Business Value, 2006; “Television Content Rating Systems”, Wikipedia, last viewed September 11, 2007 (http://en.wikipedia.org/wiki/Television_rating_system) IBM Institute for Business Value (IBV) analysis;
Hig
h (A
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onsu
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) Lo
w (T
radi
tiona
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onsu
mer
)
Incr
easi
ng D
ecis
ion-
Mak
ing
Initi
ativ
e IBM Institute for Business Value
© 2011 IBM Corporation 8
Percent of CEOs reporting a strong focus on specific BMI areas
IBM Institute for Business Value
… because in a time of great technological innovation for the industry, business model innovations have not kept pace
Source: IBM Global CEO Study 2008
Unlike most other industries, energy and utility business models have changed little from those in the mid-twentieth century
© 2011 IBM Corporation 9
Who invested in broadband infrastructure?
Who benefited most from it?
… because those who build major infrastructure aren’t certain to profit most from its presence
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV)
© 2011 IBM Corporation 10
… because large global corporations with marketing savvy and name recognition are bringing fresh business models to the industry…
IBM Institute for Business Value
2011 International Consumer Electronics Show, Las Vegas, Nevada. Photo credits: Allan Schurr
© 2011 IBM Corporation 11
… and a host of new entrants are already making headway in various business that touch the traditional industry
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV) analysis
© 2010 IBM Corporation
Our views on how the future will evolve
© 2011 IBM Corporation 13
Operations Transformation Some combination of grid and network technology evolves to enable shared responsibility, but consumers either
cannot exert much control (or elect not to) and the balance of benefits favors the
utility
Participatory Network A wide variety of grid and network
technology evolve to enable shared responsibility, and consumers’ strong interest in specific goals creates new
markets (virtual and physical) and new product demands, which balances benefits more equally between the
consumers and utilities
Constrained Choice Consumers take firm steps to move
toward more control, but are limited to certain “levers” (technologies, behaviors, or choices in providers) by regulatory and/
or technological constraints
Passive Persistence Traditional utility market structures
dominate, and consumers either accept or prefer the traditional supplier-user
relationship
Low High
Tech
nolo
gy E
volu
tion
Utility Industry Models C
entr
aliz
ed a
nd
One
-Way
D
istr
ibut
ed a
nd
Dyn
amic
Degree of Consumer Control
IBM Institute for Business Value
We envisioned in the 2007 report a future for energy providers driven by technology evolution and increasing consumer control
Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007; Valocchi, M, J. Juliano, and A. Schurr, Lighting the way: Understanding the smart energy consumer, IBM Institute for Business Value, 2009.
© 2011 IBM Corporation 14
However, a number of impediments were blocking moves that are necessary to make these transitions
Insufficient business cases for technology deployment
Lack of regulatory structures to enable consumer control
Technologies slower to deploy than forecast
Consumers unable to/unwilling to exert much control
IBM Institute for Business Value
Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007.
Some of these blockers are now being pulled down, strengthening our conviction that we are moving toward a Participatory Network that will create an environment favoring business model changes
© 2011 IBM Corporation 15
As these transitions take hold, two factors will be important determinants of how utilities and consumers interact
1. The degree to which consumers take initiative in decision-making in their energy supply and usage toward meeting specific goals
2. The consumers’ disposable income available for energy choices in supply and conservation
Source: Valocchi, M, A. Schurr, J. Juliano, and E. Nelson, Plugging in the consumer: Innovating utility business models for the future, IBM Institute for Business Value, 2007.
IBM Institute for Business Value
© 2011 IBM Corporation 16
The new value chain not stop at the meter; it will integrate devices beyond the meter and the actions of customers themselves
Source: IBM Institute for Business Value (IBV) analysis
IBM Institute for Business Value
© 2010 IBM Corporation
Changing consumer perceptions on energy
© 2011 IBM Corporation 18
As part of our research we have conducted three major global utility consumer surveys, the most recent wrapping up at the end of 2010
Source: IBM Global Utility Consumer Surveys, 2007-2010
(2010 respondent totals are shown for each country)
2007 1900 responses
2008 5000 responses
2010 8000 responses
IBM Institute for Business Value
© 2011 IBM Corporation 19
The distribution of four consumer profile quadrants is essentially the same as that in 2008
Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5084
IBM Institute for Business Value
22% (22% in 2008)
20% (21% in 2008)
33% (31% in 2008)
24% (26% in 2008)
Frugal Goal-Seeker (FG) Energy Stalwart (ES)
Passive Ratepayer (PR) Energy Epicure (EE)
All results presented are preliminary pending completion of analysis of full global survey response set
© 2011 IBM Corporation 20
Much of the consumer landscape has remained consistent over the past 2-3 years
• Question was asked for two different levels of savings in 2008.
Sample Size = 5984
Source: IBM 2010 Global Utility Consumer Survey
IBM Institute for Business Value
All results presented are preliminary pending completion of analysis of full global survey response set
© 2011 IBM Corporation 21
After the sharp drop after the global economic crisis began in late 2007, spending on non-energy “green products” has also stabilized
Percent of respondents that pay more for non-energy related environmentally friendly products (2007 group of six countries)
Sample Size = 4539 (2010), 3497 (2008), 1893 (2007) Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
Will consumers open their wallets for new offerings?
© 2011 IBM Corporation 22
Residential consumers remain tough customers – their expectations in many areas far exceed their perceived service
Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984
29 point gap
32 point gap
24 point gap
22 point gap
20 point gap
46%
45%
40%
38%
28%
Percent of respondents who believe that their current provider does/should focus on specified activities or attributes
All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
Do these gaps invite new entrants and new business models?
© 2011 IBM Corporation 23
Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey
The more consumers know about topics related to their energy provider and service, the more receptive they are to change
Percent of respondents approving of deployment of smart meters and smart grid locally (underway, proposed, or hypothesized)
All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
© 2011 IBM Corporation 24
Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey
Knowledge also impacts some of the critical behaviors which consumers must embrace if societal goals are to be met
Percent of respondents likely to make specified changes in return for one or more listed benefits
All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
© 2011 IBM Corporation 25
Consumers with little or no knowledge of energy topics get their information from very different places than more informed ones
Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984 All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
Sources of energy information for low-awareness and high-awareness consumers
© 2011 IBM Corporation 26
The dominating influences for the each of the four groups differ…
Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984 All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
© 2011 IBM Corporation 27
… but the extent to which each influences the consumer differs even more dramatically
Percent of respondents that would be likely to change their energy usage patterns based on specific influences
Source: IBM 2010 Global Utility Consumer Survey Sample Size = 5984
ES FG EE PR
All results presented are preliminary pending completion of analysis of full global survey response set
IBM Institute for Business Value
© 2011 IBM Corporation 28
Several important findings are emerging from this year’s survey that relate to motivations and perceptions of consumers
Knowledge and awareness appear to be key drivers of customer acceptance and demand for new initiatives
A multi-front strategy for messaging is critical in gaining acceptance for new initiatives
– Priorities and preferred information sources differ across customer groups
– Knowledge (or lack of it) has deep implications for what consumers want and will accept
– The control of some messages is being seized by other parties (media, activists); this front will also require strategic approaches
Cost control remains the most powerful motivator for change and control overall, but the level to which it motivates consumers depends on their overall profile
Concerns about privacy around energy usage data are escalating, and these concerns are impacting acceptance of some new programs
The strong negative impact of the global financial crisis on consumers’ spending for green products and cleaner power persists; if this persists, it could affect demand for other new products and services as well
IBM Institute for Business Value
All results presented are preliminary pending completion of analysis of full global survey response set
© 2011 IBM Corporation 29
But the key consumer insight that causes the most headaches for business model innovators is…
PEOPLE ARE VERY INTERESTED IN NEW ENERGY SERVICES.
IBM Institute for Business Value
All results presented are preliminary pending completion of analysis of full global survey response set
THEY JUST DON’T WANT TO PAY FOR
THEM.
© 2010 IBM Corporation
Moving into the future: Industry model innovation
© 2011 IBM Corporation 31
A platform is a common structure and set of rules that provide a standard foundation for transactions among two or more parties
Platforms provide a means for providers and buyers of products and services to interact and create value that could not be created otherwise
The platform lowers the costs of providing services by offering some level of standardization for transactions and reducing duplication
Platforms can take different shapes
A platform can be single-sided or multi-sided
IBM Institute for Business Value
We expect that industry model innovation will result in enormous change to the platforms on which electric providers operate
Source: Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006; IBM Institute for Business Value analysis.
The electricity network was one of the earliest technology platforms, providing a means for power generators to move their output to buyers, a means for buyers to accept delivery of the output, and a standardized technological specification
© 2011 IBM Corporation 32
Many platforms are single-sided, with manufacturers and sellers at one end and buyers at the other
IBM Institute for Business Value
Marketing Value Intelligence Cash
Distributor/ Intermediary
Manufacturer/ Seller
End Users
Applications
creates value (products and
services)
creates value (access to products and
services)
Source: IBM Institute for Business Value (IBV)
Electric utilities have operated as single-sided platforms serving electricity users for over 100 years, but the emergence of the smart grid and distributed energy resources – plus the increased engagement of end consumers - will provide the means for a multi-sided applications platforms to develop
© 2011 IBM Corporation 33
These multi-sided platforms (like Google’s model) can provide the “free stuff” people love… but generate profits for participants
IBM Institute for Business Value
Services & Applications
creates value
whi
ch i
cons
ume
in r
etur
n fo
r pa
ssiv
e in
telli
genc
e
delivered back to Google via
the services and applications
creates value
Commercial Services & Applications
whi
ch m
erch
ants
co
nsum
e
using service & application derived
intelligence
1
3
4
2
5
6
7 8
using the value created by Google, the merchant communicates the message to a receptive customer, who has a need coupled with minimal negativity due to minimal intrusion (and real associated value)
and ultimately the customers will pay the merchant for his good or service (tangible commodity value) as a result of him communicating to them when they were in need and it was relevant to them
9
10
marketing value intelligence cash Source: IBM.
© 2011 IBM Corporation 34
There are numerous examples of multi-sided platforms outside the energy industry
IBM Institute for Business Value
Sources: Eisenmann, T., G. Parker, and M. Van Alstyne, “Strategies for Two-Sided Markets,” Harvard Business Review, 2006; Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006; IBM Institute for Business Value analysis
© 2011 IBM Corporation 35
This concept is important because we expect a wide variety of multi-sided platforms to develop in the energy industry in the near future…
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV) analysis
© 2011 IBM Corporation 36
… and because these models can result in significantly higher operating income and market capitalization
Change in Operating Income per $1M in Revenue for a Platform Provider
Change in Market Capitalization per $1M in Revenue for a Platform Provider
IBM Institute for Business Value
Source: Weill, P., et al., “Do Some Business Models Perform Better than Others? A Study of the 1000 Largest US Firms”, Massachusetts Institute of Technology, 2005.
Two single-sided platform model types
Two multi-sided platform model types
Two single-sided platform model types
Two multi-sided platform model types
© 2011 IBM Corporation 37
Commercial enterprises and new initiatives from major companies are already emerging in many of these spaces
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV) analysis
© 2011 IBM Corporation 38
Would you be willing to have your energy usage made available to energy providers if used to provide better service and lower cost to you?
Sample Size = 5084
Many of the models are heavily dependent on leveraging consumer usage data – which is why privacy is emerging as a huge issue
IBM Institute for Business Value
Source: IBM 2008 Global Utility Consumer Survey
Even with two-thirds receptive to an exchange of value for data, the needs and concerns of the one-third that have reservations or are strictly opposed must be addressed
© 2010 IBM Corporation
Conclusion
© 2011 IBM Corporation 40
Multi-sided business models are coming – the question is not if, but how fast
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV) analysis.
Assess whether you have assets, alliances, or capabilities that position you to be a platform owner. If you do…
Evaluate your customer base – is it large enough and engaged enough that is likely to be receptive to your platform-centered offerings?
Determine if your business model is readily scalable and transferable across geographies
If you expect your model to be dominated by a single platform, ensure that you have the marketing resources to support a strong campaign
Look for, and plan ways to overcome, any regulatory barriers to proceeding
© 2011 IBM Corporation 41
Well-prepared companies will reap the benefits; companies slow to react risk losing control of customer relationships
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV) analysis.
If not… Segment your customer base to determine if any key customer groups are likely targets for platform offerings, and align yourself with an emerging platform to provide competitive offerings
Evaluate the profitability of various offerings – it may not hurt (or may be beneficial) to cede some to platform participants
Assess your key strengths – are you strong enough in certain areas to position yourself as a critical element of a developing platform?
© 2011 IBM Corporation 42
Who invested in broadband infrastructure?
Who benefited most from it?
Telecom companies have been through a similar transition – what can we learn from it?
IBM Institute for Business Value
Source: IBM Institute for Business Value (IBV)