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Executive Report
Switching perspectives
Creating new business models for a changing world of energy
IBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value, develops
fact-based strategic insights for senior executives around critical public and private
sector issues. This executive report is based on an in-depth study by the Institute’s
research team. It is part of an ongoing commitment by IBM Global Business Services to
provide analysis and viewpoints that help companies realize business value. You may
contact the authors or send an e-mail to iibv@us.ibm.com for more information.
Introduction
A century ago, the first great business model innovation in the • Governmental policy shifts: Efficiency, conservation and
electric power industry was set in motion with the move from renewable generation are receiving tremendous attention
small local plants delivering power over short distances to from governments attempting to meet goals related to climate
central generating plants delivering power great distances over change, energy security, and economic and job growth. At the
high-voltage wires. This innovation was followed by a long same time, most industry revenue models are still based on a
period dominated by a “grow-and-build” philosophy that drove careful balance of the fixed nature of capital expenditures and
the development of near-universal access to electric power in variable cost recovery. The more successful these policies are
much of the world through the mid-twentieth century. This in slowing growth in overall consumption from centrally-
philosophy reached its practical limit during the latter part of generated sources, the stronger the need will be for new
the century – but since then, there has been little evolution of pricing models that can balance electric power companies’
business models from that of the “grow-and-build” years (see desires to support public policy objectives with revenue
sidebar, The rise and fall of the “grow and build” model). requirements to maintain service and reliability levels.
• The emergence of new technologies: The introduction of smart
Today, however, the industry faces relentless pressure to grid and distributed generation and storage technologies will
reassess its business models to accommodate transformations add complexity to the network, moving power and
occurring in several key areas: information in multiple directions. These technologies will
also enable a host of new participants and business models –
some of which will provide strong competition for existing
revenue streams.
2 Switching perspectives
• Changing consumer demands:1 As demonstrated in our previous • Industry model innovation: Innovating the industry value chain
reports “Plugging in the consumer: Innovating utility business by moving into new industries, redefining existing industries
models for the future” and “Lighting the way: Understanding to serve new markets or creating entirely new industries
the smart energy consumer,” consumers are demanding more • Enterprise model innovation: Innovating around the structure of
from their relationships with their energy providers as they the enterprise and the role it plays in new or existing value
seek more control over their energy usage to conserve energy, chains, with focus on those areas of the business where it has
save money and reduce their environmental impact.2 an advantage and delivers value
Revenue model innovation: Innovating how revenue is generated
These dramatic shifts all involve technological changes –
•
The industry’s new value model tion of demand response, power or energy storage to the
The traditional electricity value chain consists of the genera- system, will also be an integral part of the new value chain.
tion-transmission-distribution-retail pathway from energy This recharacterization of the industry value chain (see Figure
source (primary fuel) to end use. Energy and information flow 1) will dramatically reshape the value proposition among
in one direction, and all but the largest of customers play a energy, service and product providers, as well as customers of
passive role. these enterprises and the value model of the industry as a
whole (see sidebar, An evolving value chain).
The introduction of smart grid technologies will add
complexity to the network, moving power and information in A value model is the combination of value provided to
multiple directions and enabling a host of new participants and customers and the reciprocal value received from customers in
business models. Distributed energy resources such as return.12 In the case of the electric power industry, the tradi-
customer-owned renewable generation, plug-in electric tional value model involves customers receiving reliable and
vehicles and energy storage will extend the value chain to universal power at reasonable rates, for which they offer
include assets operated closer to the end user. The end users providers reciprocal value in the form of intermittent (usually
themselves, who may be capable of providing some combina- monthly) revenue (see Figure 2).
Information flow
Source: IBM Institute for Business Value.
Sources: Jansen, Wendy, Wilchard Steenbakkers and Häns Jagers. New • Both information and power will flow in multiple
Business Models for the Knowledge Economy. Gower Publishing. 2007; IBM directions and, as business models emerge to
Institute for Business Value analysis. leverage the exponential increase in information
flow on the network, tremendous value will be
Figure 2: Traditional industry value model. added to the ecosystem.
• Distributed resources (e.g., distributed genera-
Today, customers are demanding more from their providers tion, storage and electric vehicles) will play an
than merely reliable power at reasonable rates. Our global increasingly vital role in both operations and val-
utility consumer surveys show consumers want more control ue creation and, in the longer term, may ultimate-
over their expenditures and environmental impact and more ly be positioned to radically disrupt the portion of
the value chain comprised of the traditional gen-
information about their energy usage – both in content and
eration-transmission-distribution-retail electricity
frequency.13 While customers are becoming more demanding,
pathway.
they also have much more to offer in return to power providers
and other participants than just payment for energy consumed
(see Figure 3).
Figure 1.
Utility industry evolution over the next decade.
Single-sided vs. multisided platforms for shoppers). Thus, some element of network economy is
Many platforms are single-sided platforms, with a seller at one bundled into the shopping mall value proposition. The
end and a buyer at the other and, often, intermediaries (distribu- platform owner (the mall operator) extracts some of this value
tors) between them that transfer the product from buyer to in the form of rents to store owners and, in some cases, service
seller without changing it substantively.18 The electric power fees to shoppers. (There are also organizations not directly
network has historically operated as a single-sided platform. involved in the mall transactions – credit card issuers, for
Until the advent of wholesale generators, the business operated example – that benefit and take revenue from the transactions.)
as the simplest possible form of a platform – the manufacturer But without all of the parties being involved, none would get
(generating utilities), by virtue of owning the entire value chain any of the benefits.
from the point of input of fuel to the point of entry into the
user’s premises, sold directly to the customer with no intermedi- Other examples of multisided platforms include newspapers
aries; in fact, some utilities also controlled the fuel production (with readers serving as one side and advertisers another) and
itself. The emergence of independent generators and pure health maintenance organizations (with patients being one
energy retailers moved the power transmission and distribution side and doctors and pharmaceutical companies serving as
network closer to a position where it did act in an intermediary other sides). Yet another example is video games (with players
fashion, transporting power from wholesalers for purchase and being one side and developers, publishers, content providers,
use by end users. licensors, tools and middleware providers making up the
other sides).
As new value is generated in the network through expansion of
the value and reciprocal value exchanged, industry model In coming years, a smart grid with energy and information
innovators will develop new businesses that more closely flowing in multiple directions will provide support for interac-
resemble multisided platforms. In a multisided platform, there tions among all ecosystem participants, facilitating the devel-
may be multiple types of buyers and/or sellers – in fact, a single opment of electric power industry multisided platforms. These
party can be both a buyer and a seller. platforms will link energy suppliers, service providers, device
manufacturers, application developers and end users (residen-
A shopping mall is an example of a multisided platform: tial/industrial/commercial). Each group of participants needs
manufacturers, retailers and shoppers all benefit from having a access to a platform to reach the other groups, but a platform
single location where they can meet and transact business. does not substitute itself for any particular participant.
Malls provide common facilities, like restrooms and parking,
which help lower costs to stores that otherwise would have to
individually provide them. Since these economies help reduce
costs to retailers, prices can be lower, benefiting shoppers.19
A wider variety of stores and services brings more shoppers;
more shoppers bring higher sales volumes for manufacturers
Smart grid technologies will enable electric
and lower costs for retailers (and, in theory, also lower prices power industry multisided platforms.
IBM Global Business Services 9
Multisided businesses provide benefits to the interacting groups This can be (and has been) a successful and profitable way to
– while profiting from the transactions – by increasing and innovate industry models, allowing for additional value
capturing indirect network externalities (INEs). Figure 4 shows creation and profits throughout the value chain. However, as
how a multistep process stimulates these INEs in a two-sided the builders of broadband infrastructure in the United States
market. In the first step, growth in the number of potential learned in the late 1990s and throughout this past decade, the
customers on side one for complementary products and services entities that construct and maintain multisided platforms aren’t
on side two occurs. This leads to an increase in the quantity and necessarily the ones that will reap all of the profits generated
diversity of complements made available by side two. Next, by such a model. For example, companies such as Amazon,
because side one users are favorably inclined to a wider variety Skype and YouTube benefited strongly from others’ invest-
of products and services on the other side, they are more likely ments in broadband network infrastructure without taking part
to join the platform. This makes it even more attractive for side in the capital outlay for that infrastructure.
two to develop new complements, and the cycle sustains itself.20
Because of their enormous investments in smart grid and other
improvements, today’s electric companies will, in a somewhat
analogous fashion, be responsible for putting in place most of
the infrastructure required for new industry participants to
emerge. At the same time, it is likely that new electricity-
1 Growth in the number of potential related business models that leverage the smart grid infrastruc-
customers on side one for
complementary products and services ture will be launched by entities that did not make direct
on side two occurs. investments in it. While it is healthy for the industry as a whole
to encourage innovation in new products and services,
2 This then leads to an increase in the
quantity and diversity of complements incumbent electricity companies must be aware of this likeli-
made available by side two. hood. Mapping out business models that take advantage of the
Side Side
1 2 new network-enabled capabilities will allow electric companies
3 Because side one users are favorably to reap as much of the ecosystems’ new value as their
inclined to a wider variety of products
and services on the other side, more ambitions permit.
are likely to join the platform.
Demand response Consumers and businesses, distribution companies/utilities Demand response firms
Electric vehicle charging Consumers, power retailers, automakers Public space providers (malls, parking
garages, etc.)
Electricity comparison shopping Consumers, power retailers, advertisers Portal providers
Electricity transport Power retailers, energy users, distributed generators Transmission/distribution companies
Energy aggregator/marketer Consumers, power retailers Energy aggregators
Energy broker Power retailers, energy users, distributed generators, generating Energy brokers/traders
companies
Energy management Consumers and businesses, energy management service Device/system makers or portal
providers, application and content providers providers
Energy storage Distributed generators, energy users Energy storage operators
Information aggregator (device Consumers and businesses, providers of energy products and Device/system makers
based) services, application and content providers
Information aggregator (portal Consumers and businesses, providers of energy products and Portal providers
based) services, application and content providers
Renewable/carbon credit Renewable generation owners, coal/gas/oil generation owners, Third-party market makers
aggregation/trading power retailers, governments
One way value, information and money could be exchanged on The retailer has access, through the platform provider, to a
these platforms is via an energy marketing portal, on which suite of applications to gain access to and evaluate the customer
customers can shop for the best deals on power or for power data. This information is valuable to the energy retailers, and
that meets specific personal requirements (see Figure 6). The they are willing to pay the platform owner for access to it to
platform owner creates value by providing the end user with build marketing programs for products and services aimed at
access to various applications (for energy shopping, energy likely customers. Informed by the platform owner and the
management, etc.) in return for passive usage and preference retailer-side applications, retailers communicate their best
data, which the customer has approved for use for these offers to the buyers seeking deals or new programs. Ultimately,
purposes. This is delivered back to the platform owner through the retailer gets return for its “investment” – paying the
the applications for aggregation and presentation for the other platform owner for access – in the form of increased revenues
side of the platform, the energy retailer. from consumers who value the programs and services they
offer.
IBM Global Business Services 11
Creates value
(information on
A slightly more complex example involves an information products and
Creates value
(physical
aggregator (see Figure 7). An information aggregator builds a services) devices)
End Platform Device
relationship with end users by selling them (possibly at a users owner providers
subsidized price) energy usage display/management devices
that are preloaded with useful applications, all of which are Creates value
(links to buyers)
purchased from third-party developers. They thus serve as the
link between device manufacturers and end users and between
Energy
application developers and end users. management
service providers
Creates value
(expertise in energy
management)
Note that in these two examples, the platform owner is a value of the products and services they already purchase is not
company purely focused on the operation of the platform and dependent on the presence of a second side – this is certainly
the collection and exchange of data. Except for the end user, the case with electric power.21
any one of the parties in the ecosystem can also serve as the
platform owner – visually, this can be seen as “collapsing” the In this scenario, the platform owner facilitates transactions
value exchange in the diagram for that party into the platform between the existing customer base and at least one new side of
owner role in the center. For example, a device manufacturer the platform, adding new functions, services or capabilities to
could set up a multisided platform and take on responsibility as its offering to the former to encourage transactions between
platform owner – including all interactions with application the two. Google, for example, initially launched as a vendor of
providers, end users and energy retailers. Web search services (Google.com and others via license). In its
first two years, Google’s only source of revenue was from
The platform staging challenge search engine license fees. However, after amassing a critical
A critical challenge can be encountered early in the develop- base of end users, it was in a position to offer paid-listing
ment of new platforms when prospective users on each side are advertisements to these customers and transform into one of
reluctant to actively participate until there are sufficient users the most profitable multisided platforms that has emerged.22
on the other side. Often, the platform provider must “stage”
the platform in advance, either heavily subsidizing one side to Capabilities required for a successful
get it on board in sufficient numbers to attract the other side
transition
or by bringing on attractive or highly visible transaction
Companies that envision being platform owners will need to
partners to affiliate exclusively with the platform. When it
have key competencies in marketing, sales and customer
works, profits can be enormous. When it doesn’t, failures can
relationship management. That fact, combined with the
be magnified by this investment. Also, in most instances where
ready-made set of platform participants already present in the
a platform can profitably exist, the combination of strong
form of existing electricity customers, puts retail electric
network effects and high barriers to entry means there is room
providers (or integrated utilities’ retail operations) in a good
for only a few platform owners (and, in some cases, only one).
position to take on the challenge of platform ownership.
However, there are other requirements that are not necessarily
Incumbent energy providers have an advantage in this market
in-house skills.
staging, as they already have a relationship with a critical mass
of customers. Those customers could serve as one side of the
platform in sufficient numbers to attract attention from
application, service and device providers. This strategy is both
less costly to develop and entails less risk than the approach a
company starting from scratch must employ. Success is
dependent on potential participants in the new network who Energy providers are well positioned to become
are already customers of the platform owner on one side. The platform owners.
IBM Global Business Services 13
Software-based platform owners, like information aggregators activities can serve as the basis for a multisided platform (as
and energy shopping portal operators, will need to master exemplified in Figure 5), there are some common questions
systems architecture and application interface development that potential industry model innovators need to address
and support – or find a partner that can offer these services before making major investments.
seamlessly to platform users. This assumes that the platform
owner will cede the job of developing applications themselves How many platforms can effectively serve a single
to third parties interacting with the platform. If the platform purpose? Where strong network economies of scale are in
owner instead plans to internalize application development as place and the cost of participating in multiple platforms is high
well, that adds another level of IT complexity (application for at least one participant, the likelihood is higher that
development and support and IT infrastructure development markets will be served by a single platform. If this appears to
and support). In either case, the company will need to ensure be the case, a strategic decision about whether to fight for sole
that its approach gives it a strong enough set of capabilities in platform ownership or to pool resources in a platform shared
these areas to successfully compete against rival platforms. with others must be addressed early and in depth. While
“winner-take-all” economics make sole ownership of a
Services-based platform owners – such as energy management platform attractive in theory, the reality is that only a company
specialists – will have other challenges. These firms will have to with extensive resources (especially for marketing) and strong
transition at least that part of the organization to function existing relationships with a large number of potential users on
more as a professional services firm than a traditional energy at least one side will be positioned to succeed.23
supply and delivery company, with requisite skills in solution
creation and maintenance, knowledge and intellectual property What are the incentives and costs for platform partici-
management, research and development, and contract manage- pants? Appropriate pricing, support and incentives for
ment. This will require a major cultural shift for a traditional participants are critical success elements for any platform. A
utility, as the focus of management will be human and intellec- key question is whether any particular side requires subsidiza-
tual capital rather than physical assets and processes. tion and, if so, which one. Based on the history of past
platforms from a variety of industries, the most price and/or
Assessing IMI strategies quality sensitive participants and those with high visibility or
Companies willing to tackle industry model innovation and sit attractiveness appear to be the strongest candidates for
at the nexus of new complex relationships among business subsidization.24 A firm able to leverage vendor relationships
partners and customers will be well positioned to create and with one side may not have to provide strong subsidies. As for
capture new demand for emerging products and services. pricing, network economies of scale mean that underpricing
Strong growth in revenues and profits – albeit accompanied by platform participation will lead to suboptimal platform
some risks – is achievable in multisided business models profitability; overpricing participation for any one participant
because of the embedded network economies of scale (i.e., will choke off growth and leave room for competitors to gain a
margins increase with network size). While several types of stronger foothold in the marketplace.
14 Switching perspectives
What is the critical mass needed for success? Companies long period of time, as is the case with many traditional
thinking of transitioning to a multisided platform model must vertically integrated utilities. Conversely, communicating
be confident that the business model embraced is easily intentions too early may elicit strong competitive responses or
scalable.25 Potential platform owners leveraging a vendor lead to unrealistic expectations about future prospects for the
relationship to get a leg up on competitors should critically business (and possible volatile stock price behavior for
examine whether their current customer base is sizable enough publicly-traded companies).27
to ensure this advantage can provide a meaningful head start
and whether other territories can be easily integrated into the What cultural changes are required to successfully
same side of the platform. transition to a platform-centered business model? Leaders
of electric power companies already understand the need for
When should the move toward a platform-centered new workforce skills as the transition to a digital, information-
business model be made? In many platform battles (espe- driven industry environment takes place. However, companies
cially the ones that began in the dot-com era), gaining first- transitioning to a multisided model should also prepare for
mover advantages was viewed as the most critical element of a cultural changes.28 As discussed in the previous section, this
business strategy. However, history has shown that later movers includes some shifts in focus from physical assets and processes
may actually benefit from standing back from the first wave. to human and intellectual capital. Additionally, companies
Google was neither a first mover in Web search nor paid- might have to rethink their approach to customers, as
listing models, but it was able to leverage lessons learned from explained by Amazon CEO Jeff Bezos:
earlier proponents of each to improve on their efforts.26
“One of the things we had to learn through zShops [which host small
When and how should the move toward a platform- merchants] and auctions was that we needed to think of ourselves as
centered business model be communicated? Appropriately serving two different sets of customers. We pride ourselves on being
timing and managing the announcement of a business model customer-centric, but for years, ‘customers’ meant ‘buyers.’ As we
shift is critical. Poorly handled or delayed announcements of began to operate auctions and zShops, we realized that these third-
major changes run the risk of surprising and angering party sellers were equally important customers. And, it took a little
investors, regulators and employees. This is particularly true while for the organization to learn what their needs were and how
for companies that have been operating a certain way for a very we could best meet them.”29
Contributors References
Guido Bartels, General Manager, IBM Global Energy and 1 “Consumers” is used to refer specifically to residential and
Utilities Industry small commercial customers; “customers” is a more
Brad Gammons, Vice President, Sales and Solutions, IBM Global general term including large commercial and industrial
Energy and Utilities Industry users.
Ricardo Klatovsky, Southern Europe Partner, IBM Communica- 2 Valocchi, Michael, Allan Schurr, John Juliano and Ekow
tions Sector Nelson. “Plugging in the consumer: Innovating utility
business models for the future.” IBM Institute for Business
Ekow Nelson, Global Communications Sector Lead, IBM Value. 2007. http://www-935.ibm.com/services/us/gbs/
Institute for Business Value bus/pdf/ibv_g510-7872-00_plugging_in.pdf; Valocchi,
Eric Lesser, Research Director and North American Leader, IBM Michael, John Juliano and Allan Schurr. “Lighting the
Institute for Business Value way: Understanding the smart energy consumer.” IBM
Institute for Business Value. 2009. ftp://ftp.software.ibm.
Zygmunt Lozinski, Telecom Industry Technical Leader, IBM
com/common/ssi/pm/xb/n/gbe03187usen/
Northwest Europe IOT
GBE03187USEN.PDF
Carl Haigney, Executive Partner, Utilities Industry, IBM Global
3 Giesen, Edward, Saul J. Berman, Ragna Bell and Amy
Business Services
Blitz. “Paths to success: Three ways to innovate your
business model.” IBM Institute for Business Value. 2007.
The right partner for a changing world http://www-935.ibm.com/services/us/gbs/bus/pdf/
At IBM, we collaborate with our clients, bringing together g510-6630-01-paths2success.pdf
business insight, advanced research and technology to give
4 Galvin, Robert, Kurt Yeager and Jay Stuller. Perfect Power:
them a distinct advantage in today’s rapidly changing environ-
How the Microgrid Revolution Will Unleash Cleaner, Greener,
ment. Through our integrated approach to business design and
More Abundant Energy. McGraw-Hill. 2008.
execution, we help turn strategies into action. And with
expertise in 17 industries and global capabilities that span 170 5 Ibid.
countries, we can help clients anticipate change and profit 6 Hirsh, Richard F. Technology and Transformation in the
from new opportunities. American Electric Utility Industry. Cambridge University
Press. 1989.
7 Ibid.
8 Ibid.
IBM Global Business Services 17
9 Yahoo! Finance and IBM Institute for Business Value 17 Evans, David S., Andrei Hagiu and Richard Schmalensee.
analysis. Invisible Engines: How Software Platforms Drive Innovation
10 Hirsh, Richard F. Technology and Transformation in the and Transform Industries. Massachusetts Institute of Tech-
American Electric Utility Industry. Cambridge University nology. 2006.
Press. 1989. 18 Ibid.
11 For example, see: “IBM Global CEO Study: The Enter- 19 Ibid.
prise of the Future.” IBM Institute for Business Value. 20 Eisenmann, Thomas and Andrei Hagiu. “Staging
2008. ftp://ftp.software.ibm.com/common/ssi/pm/xb/n/ Two-Sided Platforms.” Harvard Business Publishing. 2007.
gbe03035usen/GBE03035USEN.PDF; “Innovation Index
of Australian Industry.” IBM Australia and Melbourne 21 Ibid.
Institute of Applied Economic and Social Research, The 22 Ibid.
University of Melbourne. 2008. http://www-07.ibm.com/
23 Eisenmann, Thomas, Geoffrey Parker and Marshall W. Van
au/innovationindex/pdf/mi_innovation_index.pdf
Alstyne, “Strategies for Two-Sided Markets.” Harvard
12 The concept of reciprocal value used here is derived from: Business Review. October 2006. http://hbr.org/2006/10/
Jansen, Wendy, Wilchard Steenbakkers and Hans Jägers. strategies-for-two-sided-markets/ar/1
New Business Models for the Knowledge Economy. Gower
24 Evans, David S., Andrei Hagiu and Richard Schmalensee.
Publishing Ltd. 2007.
Invisible Engines: How Software Platforms Drive Innovation
13 Valocchi, Michael, Allan Schurr, John Juliano and Ekow and Transform Industries. Massachusetts Institute of Tech-
Nelson. “Plugging in the consumer: Innovating utility nology. 2006; Eisenmann, Thomas, Geoffrey Parker and
business models for the future.” IBM Institute for Business Marshall W. Van Alstyne, “Strategies for Two-Sided
Value. 2007. http://www-935.ibm.com/services/us/gbs/bus/ Markets.” Harvard Business Review. October 2006. http://
pdf/ibv_g510-7872-00_plugging_in.pdf; Valocchi, Michael, hbr.org/2006/10/strategies-for-two-sided-markets/ar/1
John Juliano and Allan Schurr. “Lighting the way: Under-
25 Eisenmann, Thomas, Geoffrey Parker and Marshall W. Van
standing the smart energy consumer.” IBM Institute for
Alstyne, “Strategies for Two-Sided Markets.” Harvard
Business Value. 2009. ftp://ftp.software.ibm.com/common/
Business Review. October 2006. http://hbr.org/2006/10/
ssi/pm/xb/n/gbe03187usen/GBE03187USEN.PDF
strategies-for-two-sided-markets/ar/1
14 Ibid.
26 Ibid.
15 Ibid.
27 Eisenmann, Thomas and Andrei Hagiu. “Staging
16 Derived from: Eisenmann, Thomas, Geoffrey Parker and Two-Sided Platforms.” Harvard Business Publishing. 2007.
Marshall W. Van Alstyne, “Strategies for Two-Sided
28 Ibid.
Markets.” Harvard Business Review. October 2006. http://
hbr.org/2006/10/strategies-for-two-sided-markets/ar/1 29 Ibid.
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