Martin Yuill, Utilities Analyst, Datamonitor,
Offering ‘bundled services’ to the home is a strategy that many utilities have followed and abandoned. Is their implementation strategy at fault, or is the concept of non-energy product expansion flawed?
Utility expansion into non-energy products and services has been characterized by a large degree of failure. After a number of years of formulating ambitious expansion strategies, many European utilities have either frozen these initiatives or have abandoned them altogether. However, the Spanish utility, Endesa, seems to be bucking the trend having recently announced an initial 19 per cent penetration rate for its broadband product. This latest initiative looks to have made a success of powerline communication technology – the provision of broadband through the electricity grid network – which formerly characterised the failure of utility product expansion. Does Endesa’s success reveal that the strategy for implementation rather than the concept of non-energy product expansion was flawed?
Figure 1. The non-energy products and services framework
Residential energy supply offers retail utilities limited scope for significant revenue expansion. The inert market dynamic associated with selling a commodity product to a predominately fixed and apathetic customer base confines retail growth. Engaging in market consolidation and delivering process efficiency offers only a short-term solution. Selling additional non-energy products and services gives the ambitious utility the best chance to develop existing customer relationships, meeting shareholder demand for revenue growth.
Delivering viable product offerings by successfully penetrating other mass-market sectors is challenging: spiralling costs, incumbent competitor pressure and entrenched customer apathy have resulted in the failure of the majority of non-energy expansion initiatives. However, Datamonitor research reveals that considerable potential for multi-service expansion remains; provided that scope and scale efficiencies are realised.
Between 2000 and 2002, a large number of Europe’s major utilities were looking to develop non-energy products and services. However an analysis of the current landscape reveals that these initiatives have failed, with the majority of multi-service operators undertaking a change in strategy. One option taken was to freeze expansion; for example, npower’s efforts to build a multi-service consumer brand, providing ‘essential services to the home’, have stalled. It has sold its telecommunications business leaving it mainly focused upon its home services operations. Another route was to revert completely to the core business of energy provision. For example, RWE is now focusing exclusively upon traditional utility provision (energy and water) after its attempts to develop digital services around the home failed. Fortum has also abandoned its residential brand, HemEl, after the failure of its home-related suite of products.
A fundamental reason for failure is that utilities have looked to penetrate non-energy markets without first undertaking the necessary perceptional and operational groundwork which make successful penetration possible. Success lies in persuading customers that it is in their interests to take a non-energy product from their utility. In addition, utilities need to have the necessary operational infrastructure in place to successfully up-sell additional products in an efficient manner.
For example, npower spent heavily in developing a dynamic, multi-product brand identity, recording a customer awareness of 56 per cent in the npower brand. However, its fast M&A growth created a large number of billing and customer service problems within its energy business – these operational glitches within its core energy business undermined its efforts to grow as a multi-service retailer, shifting the focus of resource but also undermining the consumer service perceptions that npower had worked hard to develop.
Operational weaknesses are more apparent in the failure of RWE’s broadband-led, multi-service expansion. Technical problems beset the expansion of RWE’s powerline venture, undermining its commercial viability. However, these were not simply restricted to problems of interference. Regulatory barriers associated with the German market emerged as did problems with the manufacturing side of the venture.
Fortum’s home service venture is another example of perceptional failure. Its Swedish HemEl brand did not resonate with Swedish consumers. Consumers could not connect with its association to the provision of services around the home.
Along with over-ambitious attempts at growth, the types of non-energy markets that utilities have looked to enter have also led to failure. Telecommunications was one of the favoured product choices for expansion due to the ‘utility’ synergies which exist. However, telecommunication incumbents such as Deutsche Telecom and British Telecom continue to hold very dominant positions in their respective markets. In 2001, British Telecom still operated around 20 million residential customer lines within the UK. This makes it hard for new entrants with well-known and resonant brands to make much of a market impact. Utilities have been even less successful. Even Centrica, having acquired the relatively well-known One.Tel brand, has only made a slight impression on the market share positions held by incumbent players.
Efforts at product expansion should look to exploit service opportunities which develop the existing customer relationship. Utilities which expand into home services insurance provision have had success as a result of realising this opportunity. British Gas has leveraged its well known brand and its 5000-plus service engineers to develop a successful home services insurance proposition. By promoting its service strengths it can compete with the incumbents, namely, local businesses. Perceptionally, British Gas launched its ‘Doing the right thing’ advertising strategy, which presented itself as an alternative to the local ‘cowboys’ operating within the home services insurance market.
This has been supported by significant operational investment. Its Jupiter IT project, staged over a number of releases, will deliver a single view of the customer, with release 2 of its Siebel installation providing it with the ability to cross-sell electricity, home services and telecoms across 30 million customer relationships. In the back office, its SAP installation provides a single-source billing capability.
Figure 2. Percentage of consumers that would consider buying non-energy services and products from a utility – UK
Therefore, utilities need to develop ‘stand-out’ products which fulfil specific consumer needs to achieve successful product expansion. The initial success of Endesa’s powerline-driven broadband service to its Spanish customers is another example of this. Endesa has taken advantage of Spanish regulatory support as well as the more favourable broadband environment found within Spain (broadband penetration along traditional DSL-based lines is not as widespread) to launch what has been an initially successful PLC venture, returning a penetration rate of 19 per cent.
Within its home market, Endesa first launched its powerline communications trial in 2000. This continued in selected areas within Barcelona and Seville into 2001. These pilot trials were then superseded by a phase of mass commercial trialling which continued to be in progress up to Q3 of 2003 in the Zaragoza area. Key concerns raised by this extensive trialling focused upon the cost of deployment and the speed of deployment crucial for the company to compete and make a return within the field of broadband provision. Significantly, the trial incorporated data transmission over the medium voltage network which increases the speed of data transmission while reducing the cost of deployment. This rollout is split between two manufacturing partners, with Ascom handling 46 per cent of uptake and DS2 handling the remaining 54 per cent.
Endesa’s powerline communication proposition should very much be viewed as a value-added proposition. It is targeted at a specific niche of customers, namely, ‘heavy’ Internet users, to which the greater data transmission services and download speeds offered by PLC will appeal. The key selling point of the product is that it offers speeds of over 2 Mbps which more than rivals conventional broadband services. By targeting these customers it allows Endesa to sell additional products and services to a particular customer group with particular characteristics which can then be effectively marketed thereby controlling costs and setting realistic customer targets.
By approaching product expansion in this measured, service-centric fashion, detailed in the examples provided, utilities have a far greater opportunity for developing a profitable bundle of services that are truly valued by their residential customers.