Utilities can learn from Kodak’s past of failing to exploit digitalization, writes Marius Buchmann of Jacobs University in Bremen. Kodak was ahead in digital technology – it just failed to identify a new business model to exploit it. Utilities face the same challenge today. Article courtesy of Buchmann’s blog Enerquire.
Utilities might want to take a closer look at what happened to Kodak in the past. Kodak developed a digital camera in 1975 and filed a patent in 1978. This was the basis for the digital camera market as we know it today (Estrin 2015). At first, Kodak did not believe in this technology (who would want to watch pictures on a screen?), which seems understandable given the mindset in the late seventies.
The Kodak story
Later in the nineties, Kodak had the chance to go public with the digital camera and become the first mover in this market, but the company did not invest in this technology to protect its market share in the traditional photography market. Though Kodak made billions from the patent on the digital camera, the company went bankrupt in 2012. Kodak managed to survive until today, but now it is a much smaller company than it was at the beginning of this century.
The Kodak story is one of the most prominent examples of disruptive innovation and how traditional, good management fails to address the potential of these innovations. More importantly, the fact that it was Kodak that developed the technology which, in the end destroyed its own business case, shows that disruption does not necessarily occur from new market entrants or start-ups.
Rather, incumbents can develop disruptive innovations as well. But due to the nature of disruptive innovations, the management of these firms are not likely to embrace them. We have discussed the character of disruptive innovation in detail in this post here and applied it to the cases of renewable energy and blockchain. We recommend that you take a look at these posts if you would like to get a more detailed overview of disruptive innovations.
Kodak failed to identify the real business case for digital photography: online sharing
With today’s post, however, we want to focus on the fact that even though Kodak had the chance to lead the market for digital cameras, it failed. While this was the result of different management decisions, Scott D Anthony points at the real challenge for Kodak which it failed to address: to identify the business model behind digital cameras.
In his HBR article, Scott points at the fact that Kodak was actually on its way to developing an Instagram-like business model in 2001, when it purchased Ofoto, an online picture platform. But Kodak merely saw Ofoto as a vehicle to increase offline printouts of digital photographs and failed to identify the real business case for digital photography: online sharing. As we all know by now, this is a huge market now dominated by Facebook-owned Instagram.
The Kodak case teaches the energy sector an interesting lesson: So far, mastering technology has equalled mastering business models in the energy sector. This, however, is changing. Understanding technology is only the first step; identifying and developing the business model unlocked by new technologies has become an equal or an even bigger challenge for utilities now.
The fact that many new business models in the energy sector might rather evolve at B2C-level, and not only at B2B-level, requires utilities to take a more consumer-oriented perspective. This, however, is very different from today’s B2B-energy business which does not focus on consumer requirements.
As an analogy for the Kodak story, we can say that utilities are currently still focusing on selling all the material for analogue photography, although they already know this is not a sustainable business model. The question then is: Will utilities be able to identify the potential business models related to new digital technologies?
Smart Metering: Are utilities following the Kodak way?
Utilities in the energy sector have to face many different technological developments at the same time. The digitalization of the consumer market starts with the smart meter rollout that is currently underway in many states worldwide. We have discussed different national approaches to smart meter rollout in this post.
So far, the understanding in the energy sector has seemed to be that smart meters themselves need to be a business case. A cost-benefit analysis prepared in Europe to evaluate the potential need for smart metering primarily focuses on three potential benefits of smart metering:
- change in consumer behaviour
- reduced billing costs for retailers and
- reduction of network outages.
This short list of benefits gives quite a good idea of how utilities approach data-driven business models. Their imperative seems to be to use data from smart metering or other distributed resources to increase the efficiency of existing products, services and tasks. While this is a reasonable and necessary approach, it falls short of exploiting the real potential of data: the development of new products and services based on data that change how utilities operate today.
While optimized sales of electricity and dynamic tariffs seem to be the low-hanging fruits, the combination of new data analytics and data from smart metering offers new business opportunities for utilities
This perspective, however, is not in the focus of utilities, at least as far as a survey from 2013 by T-Systems shows. In 2013, T-Systems conducted a survey among 250 managers from Western-European utilities. Nearly 50% of the experts surveyed stated they saw no value in data from smart metering, even though they expected the available data to increase by 25% annually (T-Systems 2013).
While this survey is already five years old, it is a good indicator of where managers (who may still be in similar positions in the energy sector today) of energy utilities stand with respect to data-driven business models.
Even today, European utilities focus on investment in digital infrastructure (such as smart meters or other assets), but investment has stagnated in the last three years as we have discussed in this post here. Still, there exist different data-based business models, especially based on smart meter data. Bischoff et al (2017) provide a nice overview of the different business models discussed in relation to smart metering.
Bischoff et al (2017) conducted a literature review and compiled a data set of more than 100 publications that discuss potential business models for utilities based on smart metering. Out of this data set, they derived seven categories of smart meter-enabled business models. These categories are summarized in Figure 1 and related to the consumer segment that the individual category is targeting.
Figure 1: Categorization of smart meter based business models (Bischoff et al (2017))
Bischoff et al (2017) show that potential business models based on smart meter go far beyond the models analysed in most cost-benefit-analyses for smart metering in Europe.
While optimized sales of electricity and dynamic tariffs seem to be the low-hanging fruits, the combination of new data analytics (e.g. predictive analytics) and data from smart metering offers new business opportunities for utilities.
More importantly, smart meter operation itself, the sales and operation of smart meters, is not discussed in Bischoff et al (2017) as one of the potential business models related to smart metering for utilities. However, as mentioned before, this is the business case most utilities currently focus on in Europe. But there are other approaches in the market as well.
How FreshEnergy strives for a business model based on providing customers with free smart meters
FreshEnergy is a startup that evolved out of the innovation hub of Innogy, the renewable energy subsidiary of RWE in Germany. FreshEnergy takes a very different approach to smart metering from what is currently applied by most utilities in Germany. The company provides its customers with free smart meters. Compared to the amount – approximately 100 € per year – a household usually has to pay for a smart meter, the offer by FreshEnergy seems to be very attractive.
Furthermore, FreshEnergy operates as a retailer that provides its customers with a green electricity tariff with a life-long guarantee of price stability (excluding taxes, network charges etc.). While most retailers in Germany require their consumers to sign long-term contracts, FreshEnergy allows you to cancel your contract on a monthly basis.
While these elements of FreshEnergy’s product might increase consumers’ interest in switching to its product, its business model is focused on data analytics to derive new insights from the smart meter data that can be used to provide new services to consumers.
For example, FreshEnergy’s software is capable of identifying different electrical appliances in a household and can provide assistance to increase efficiency, e.g. by identifying larger energy consumers and proposing alternative usage or a substitute for the product. Thereby, FreshEnergy fits quite well into the two categories of energy efficiency services and smart home business models in Figure 1.
Selling electricity becomes the vehicle to create new revenue streams that might make the company profitable enough to provide electricity for free
Especially in the smart home realm, FreshEnergy has the potential for further solutions. For example, it might be possible that the FreshEnergy algorithm learns that you need new detergent for your washing machine after 20 cycles and sends you a message to replenish your stocks just in time.
Based on such approaches, FreshEnergy aims at a reduction of the electricity price to 0 cent per kWh in the future. Thereby, FreshEnergy takes a very distinct approach: Rather than focusing on the kWh as the core product, electricity consumption merely becomes a data input to open up a new selling stream for different products provided (for example) via a partner network. Thereby, selling electricity becomes the vehicle to create new revenue streams that might make the company profitable enough to provide electricity for free. Whether it is possible to achieve this vision remains to be seen.
Digitize to sell more electricity?
The case of FreshEnergy points at an interesting question: Will digitalization help utilities sustain the core business model of selling electricity? Or will it result in more approaches like those of FreshEnergy that use electricity consumption as a vehicle to access new revenue streams, which might ultimately result in zero costs for energy consumption?
If the latter is the case, then utilities should take a closer look at Kodak and make sure they avoid the same mistakes. Actually, it might even be a good idea to take a look at the current strategic approaches of Kodak. Today Kodak is one of the companies in the digital-photography realm that strives to apply blockchain technology. Though this initiative is still in its infancies, it resulted in a 250% increase of Kodaks’ spot-price within a 24-hour period in January, 2018. It seems that Kodak has learned from its own history, will utilities be able to do that as well?
Marius Buchmann holds a Ph.D. in energy economics and works as Post Doc at Jacobs University in Bremen, Germany. He writes about energy on his blog Enerquire. This article was first published on Enerquire and is republished here with permission.