Cheryl Linder, Global Offering Leader, IBM Energy and Utilties IndustryMarch 2011What’s Next for the Smart GridConsumer Be...
IBM Institute for Business ValueWe have provided IBM’s perspective on consumer and businessmodel themes in our last three ...
AgendaConsumer expectations and business model innovation: Why are these important questions to be asking now?Our views on...
Consumer expectations and business model innovation:Why are these important questions to be asking now?                   ...
IBM Institute for Business Value… because in many parts of the world, residential customers havebecome much more of a forc...
IBM Institute for Business Value    … because consumers worldwide are reconsidering their    interactions with energy prov...
IBM Institute for Business Value                                        … because the rapid increase in consumer choice in...
IBM Institute for Business Value… because in a time of great technological innovation for the industry,business model inno...
IBM Institute for Business Value… because those who build major infrastructure aren’t certain toprofit most from its prese...
IBM Institute for Business Value… because large global corporations with marketing savvy and namerecognition are bringing ...
IBM Institute for Business Value… and a host of new entrants are already making headway invarious business that touch the ...
Our views on how the future will evolve                                          © 2010 IBM Corporation
IBM Institute for Business ValueWe envisioned in the 2007 report a future for energy providersdriven by technology evoluti...
IBM Institute for Business ValueHowever, a number of impediments were blocking moves that arenecessary to make these trans...
IBM Institute for Business Value     As these transitions take hold, two factors will be important     determinants of how...
IBM Institute for Business ValueThe new value chain not stop at the meter; it will integrate devicesbeyond the meter and t...
Changing consumer perceptions on energy                                          © 2010 IBM Corporation
IBM Institute for Business ValueAs part of our research we have conducted three major global utilityconsumer surveys, the ...
IBM Institute for Business ValueThe distribution of four consumer profile quadrants is essentially thesame as that in 2008...
IBM Institute for Business ValueMuch of the consumer landscape has remained consistent over thepast 2-3 years       • Ques...
IBM Institute for Business ValueAfter the sharp drop after the global economic crisis began in late2007, spending on non-e...
IBM Institute for Business ValueResidential consumers remain tough customers – their expectationsin many areas far exceed ...
IBM Institute for Business ValueThe more consumers know about topics related to their energyprovider and service, the more...
IBM Institute for Business ValueKnowledge also impacts some of the critical behaviors whichconsumers must embrace if socie...
IBM Institute for Business ValueConsumers with little or no knowledge of energy topics get theirinformation from very diff...
IBM Institute for Business ValueThe dominating influences for the each of the four groups differ…       Sample Size = 5984...
IBM Institute for Business Value… but the extent to which each influences the consumer differs evenmore dramatically      ...
IBM Institute for Business ValueSeveral important findings are emerging from this year’s survey thatrelate to motivations ...
IBM Institute for Business ValueBut the key consumer insight that causes the most headaches forbusiness model innovators i...
Moving into the future: Industry model innovation                                                    © 2010 IBM Corporation
IBM Institute for Business ValueWe expect that industry model innovation will result in enormouschange to the platforms on...
IBM Institute for Business ValueMany platforms are single-sided, with manufacturers and sellers atone end and buyers at th...
IBM Institute for Business ValueThese multi-sided platforms (like Google’s model) can provide the“free stuff” people love…...
IBM Institute for Business ValueThere are numerous examples of multi-sided platforms outside theenergy industry     Source...
IBM Institute for Business ValueThis concept is important because we expect a wide variety of multi-sided platforms to dev...
IBM Institute for Business Value… and because these models can result in significantly higheroperating income and market c...
IBM Institute for Business ValueCommercial enterprises and new initiatives from major companiesare already emerging in man...
IBM Institute for Business ValueMany of the models are heavily dependent on leveraging consumerusage data – which is why p...
Conclusion             © 2010 IBM Corporation
IBM Institute for Business ValueMulti-sided business models are coming – the question is not if, buthow fast              ...
IBM Institute for Business ValueWell-prepared companies will reap the benefits; companies slow toreact risk losing control...
IBM Institute for Business ValueTelecom companies have been through a similar transition – whatcan we learn from it?      ...
Thank You!     cheryl.d.linder@us.ibm.com        www.ibm.com/energy43                                © 2011 IBM Corporation
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Cheryl Linder Smart Grid Lecture 3-7-2011

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Cheryl Linder
Global Offering Leader, IBM Energy and Utilities Industry

What's Next for the Smart Grid? Consumer Behavior and New Business Models in the Utility Industry

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Cheryl Linder Smart Grid Lecture 3-7-2011

  1. 1. Cheryl Linder, Global Offering Leader, IBM Energy and Utilties IndustryMarch 2011What’s Next for the Smart GridConsumer Behavior and New Business Models in the Utility Industry © 2010 IBM Corporation
  2. 2. IBM Institute for Business ValueWe have provided IBM’s perspective on consumer and businessmodel themes in our last three IBM Energy and Utilities papers 2010 2009 2008 Embody creative Reinvent customer Reinvent customer leadership relationships relationships Build business model Embody creative dexterity leadership2 © 2011 IBM Corporation
  3. 3. AgendaConsumer expectations and business model innovation: Why are these important questions to be asking now?Our views on how the future will evolveChanging consumer perceptions on energyMoving into the future: Industry model innovationConclusions3 © 2011 IBM Corporation
  4. 4. Consumer expectations and business model innovation:Why are these important questions to be asking now? © 2010 IBM Corporation
  5. 5. IBM Institute for Business Value… because in many parts of the world, residential customers havebecome much more of a force over the past 20-40 years Changes in residential and industrial electricity consumption in the US, 1949-2009 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 Source: US Energy Information Administration, IBM Institute for Business Value analysis.5 © 2011 IBM Corporation
  6. 6. IBM Institute for Business Value … 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 –  Media6 © 2011 IBM Corporation
  7. 7. IBM Institute for Business Value … because the rapid increase in consumer choice in other industries will shape expectations for the future nature of energy service TV Viewers Energy Consumers Low (Traditional Consumer) -  passive receipt of content -  passive receipt of powerIncreasing Decision-Making Initiative -  limited sources of content generation -  limited sources of power generation -  major media companies exclusively control content -  incumbent utilities exclusively control power generators -  provider-customer relationship one-to-many, driven by demographics -  provider-customer relationship one-to-many, driven by demographics and geography and geography -  consumer interest drives new and more targeted choices in content -  consumer interest drives new and more targeted choices in power -  more interest in and leverage of information on quality indicators for supply content (e.g., TV program rating systems) -  more interest in and leverage of information on quality indicators for -  broader choice of providers drives more active role in provider selection content (e.g., green energy standards) -  consumer does not control content, but has stronger influence via -  broader choice of providers drives more active role in provider selection choices -  consumer does not control generation, but has stronger influence via -  introduction of time-shifting technologies enables more active selection choices and management of content at individual level -  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 -  interactivity and involvement with generation and service providers High (Active increases increases Consumer) -  consumers active in producing content and influencing content -  consumers active in generating power and influencing generation distribution planning decisions -  rapid creation of new content types as techology change causes -  rapid creation of new power supply options as techology change causes explosion in capabilities explosion in capabilities -  dynamic, value-based pricing of content -  dynamic, value-based pricing of power (e.g., time-of-use) -  provider-customer relationship dynamic is increasingly customized to -  provider-customer relationship dynamic is increasingly customized to specific entertainment and information interests, with consumer specific energy management goals, with consumer analytics a key analytics a key driver 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;7 © 2011 IBM Corporation
  8. 8. IBM Institute for Business Value… because in a time of great technological innovation for the industry,business model innovations have not kept pace Percent of CEOs reporting a strong focus on specific BMI areas Unlike most other industries, energy and utility business models have changed little from those in the mid-twentieth century Source: IBM Global CEO Study 20088 © 2011 IBM Corporation
  9. 9. IBM Institute for Business Value… because those who build major infrastructure aren’t certain toprofit most from its presence Who invested in broadband Who benefited most from it? infrastructure? Source: IBM Institute for Business Value (IBV)9 © 2011 IBM Corporation
  10. 10. IBM Institute for Business Value… because large global corporations with marketing savvy and namerecognition are bringing fresh business models to the industry… 2011 International Consumer Electronics Show, Las Vegas, Nevada. Photo credits: Allan Schurr10 © 2011 IBM Corporation
  11. 11. IBM Institute for Business Value… and a host of new entrants are already making headway invarious business that touch the traditional industry Source: IBM Institute for Business Value (IBV) analysis11 © 2011 IBM Corporation
  12. 12. Our views on how the future will evolve © 2010 IBM Corporation
  13. 13. IBM Institute for Business ValueWe envisioned in the 2007 report a future for energy providersdriven by technology evolution and increasing consumer control Utility Industry Models Participatory Network Distributed and Operations Transformation Dynamic A wide variety of grid and network Some combination of grid and network technology evolve to enable shared technology evolves to enable shared responsibility, and consumers’ strong responsibility, but consumers either interest in specific goals creates new Technology Evolution cannot exert much control (or elect not markets (virtual and physical) and new to) and the balance of benefits favors the product demands, which balances utility benefits more equally between the consumers and utilities Passive Persistence Constrained Choice Centralized and Consumers take firm steps to move One-Way Traditional utility market structures toward more control, but are limited to dominate, and consumers either accept certain “levers” (technologies, behaviors, or prefer the traditional supplier-user or choices in providers) by regulatory and/ relationship or technological constraints Low High Degree of 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, 2009.13 © 2011 IBM Corporation
  14. 14. IBM Institute for Business ValueHowever, a number of impediments were blocking moves that arenecessary 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 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 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, 2007.14 © 2011 IBM Corporation
  15. 15. IBM Institute for Business Value 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, 2007.15 © 2011 IBM Corporation
  16. 16. IBM Institute for Business ValueThe new value chain not stop at the meter; it will integrate devicesbeyond the meter and the actions of customers themselves Source: IBM Institute for Business Value (IBV) analysis16 © 2011 IBM Corporation
  17. 17. Changing consumer perceptions on energy © 2010 IBM Corporation
  18. 18. IBM Institute for Business ValueAs part of our research we have conducted three major global utilityconsumer surveys, the most recent wrapping up at the end of 2010 (2010 respondent totals are shown for each country) 2010 8000 responses 2008 5000 responses 2007 1900 responses Source: IBM Global Utility Consumer Surveys, 2007-201018 © 2011 IBM Corporation
  19. 19. IBM Institute for Business ValueThe distribution of four consumer profile quadrants is essentially thesame as that in 2008 Frugal Goal-Seeker (FG) Energy Stalwart (ES) 22% 20% (22% in 2008) (21% in 2008) Passive Ratepayer (PR) Energy Epicure (EE) 33% 24% (31% in 2008) (26% in 2008) Sample Size = 5084 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set19 © 2011 IBM Corporation
  20. 20. IBM Institute for Business ValueMuch of the consumer landscape has remained consistent over thepast 2-3 years • Question was asked for two different levels of savings in 2008. Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set20 Sample Size = 5984 © 2011 IBM Corporation
  21. 21. IBM Institute for Business ValueAfter the sharp drop after the global economic crisis began in late2007, 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) Will consumers open their wallets for new offerings? 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 set21 © 2011 IBM Corporation
  22. 22. IBM Institute for Business ValueResidential consumers remain tough customers – their expectationsin many areas far exceed their perceived service Percent of respondents who believe that their current provider does/should focus on specified activities or attributes 29 point gap 46% 45% 32 point gap 24 point gap 40% Do these gaps 22 point gap 38% invite new entrants and new business 20 point gap 28% models? Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set22 © 2011 IBM Corporation
  23. 23. IBM Institute for Business ValueThe more consumers know about topics related to their energyprovider 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) Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set23 © 2011 IBM Corporation
  24. 24. IBM Institute for Business ValueKnowledge also impacts some of the critical behaviors whichconsumers 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 Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set24 © 2011 IBM Corporation
  25. 25. IBM Institute for Business ValueConsumers with little or no knowledge of energy topics get theirinformation from very different places than more informed ones Sources of energy information for low-awareness and high-awareness consumers Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set25 © 2011 IBM Corporation
  26. 26. IBM Institute for Business ValueThe dominating influences for the each of the four groups differ… Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set26 © 2011 IBM Corporation
  27. 27. IBM Institute for Business Value… but the extent to which each influences the consumer differs evenmore dramatically Percent of respondents that would be likely to change their energy usage patterns based on specific influences ES FG EE PR Sample Size = 5984 Source: IBM 2010 Global Utility Consumer Survey All results presented are preliminary pending completion of analysis of full global survey response set27 © 2011 IBM Corporation
  28. 28. IBM Institute for Business ValueSeveral important findings are emerging from this year’s survey thatrelate 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 All results presented are preliminary pending completion of analysis of full global survey response set28 © 2011 IBM Corporation
  29. 29. IBM Institute for Business ValueBut the key consumer insight that causes the most headaches forbusiness model innovators is… PEOPLE ARE VERY INTERESTED IN NEW ENERGY SERVICES. THEY JUST DON’T WANT TO PAY FOR THEM. All results presented are preliminary pending completion of analysis of full global survey response set29 © 2011 IBM Corporation
  30. 30. Moving into the future: Industry model innovation © 2010 IBM Corporation
  31. 31. IBM Institute for Business ValueWe expect that industry model innovation will result in enormouschange to the platforms on which electric providers operate  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 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 Source: Evans, D., A. Hagiu, and R. Schmalensee, Invisible Engines, MIT Press, 2006; IBM Institute for Business Value analysis.31 © 2011 IBM Corporation
  32. 32. IBM Institute for Business ValueMany platforms are single-sided, with manufacturers and sellers atone end and buyers at the other creates value (access creates value to products and (products and services) services) End Users Distributor/ Manufacturer/ Intermediary Seller Marketing Value Intelligence Cash Applications 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 Source: IBM Institute for Business Value (IBV)32 © 2011 IBM Corporation
  33. 33. IBM Institute for Business ValueThese multi-sided platforms (like Google’s model) can provide the“free stuff” people love… but generate profits for participants 1 5 creates value creates value using service & delivered back application derived to Google via intelligence the services and 4 6 applications Services & Applications Commercial Services & Applications which i consume in return for passive which merchants 2 intelligence consume 3 8 7 9 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 10 Source: IBM. marketing value intelligence cash33 © 2011 IBM Corporation
  34. 34. IBM Institute for Business ValueThere are numerous examples of multi-sided platforms outside theenergy industry 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 analysis34 © 2011 IBM Corporation
  35. 35. IBM Institute for Business ValueThis concept is important because we expect a wide variety of multi-sided platforms to develop in the energy industry in the near future… Source: IBM Institute for Business Value (IBV) analysis35 © 2011 IBM Corporation
  36. 36. IBM Institute for Business Value… and because these models can result in significantly higheroperating income and market capitalization Change in Operating Income per $1M in Change in Market Capitalization per $1M in Revenue for a Platform Provider Revenue for a Platform Provider Two single-sided Two multi-sided Two single-sided Two multi-sided platform model types platform model types platform model types platform model types 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, 2005.36 © 2011 IBM Corporation
  37. 37. IBM Institute for Business ValueCommercial enterprises and new initiatives from major companiesare already emerging in many of these spaces Source: IBM Institute for Business Value (IBV) analysis37 © 2011 IBM Corporation
  38. 38. IBM Institute for Business ValueMany of the models are heavily dependent on leveraging consumerusage data – which is why privacy is emerging as a huge issue 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? 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 Source: IBM 2008 Global Utility Consumer Survey Sample Size = 508438 © 2011 IBM Corporation
  39. 39. Conclusion © 2010 IBM Corporation
  40. 40. IBM Institute for Business ValueMulti-sided business models are coming – the question is not if, buthow fast 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 proceeding40 Source: IBM Institute for Business Value (IBV) analysis. © 2011 IBM Corporation
  41. 41. IBM Institute for Business ValueWell-prepared companies will reap the benefits; companies slow toreact risk losing control of customer relationships 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?41 Source: IBM Institute for Business Value (IBV) analysis. © 2011 IBM Corporation
  42. 42. IBM Institute for Business ValueTelecom companies have been through a similar transition – whatcan we learn from it? Who invested in broadband Who benefited most from it? infrastructure? Source: IBM Institute for Business Value (IBV)42 © 2011 IBM Corporation
  43. 43. Thank You! cheryl.d.linder@us.ibm.com www.ibm.com/energy43 © 2011 IBM Corporation

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