What Energy Utilities can learn from Kodak when it comes to digitalization

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Utilities might want to take a closer look at what happened to Kodak in the past: Kodak had developed a digital camera in 1975 and filed a patent in 1978 which was the basis for the digital camera market as we know it today (Estrin 2015). First, Kodak did not believe in this technology (who would want to watch pictures on a screen?), which seems understandable given the mind-set in the late seventies. Later in the 90ies Kodak had the chance to go public with a digital camera and be 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. Though Kodak managed to survive till today, it is now a much smaller company than it was in the beginning of this century.  

The Kodak story is one of the most prominent examples for disruptive innovation and how traditional good management fails to address the potential of these innovations. More importantly, the fact that Kodak was the one that developed the technology that 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 incumbents’ management is not likely to go for the disruptive innovation. We have discussed the character of disruptive innovation in detail in this post here and applied it to the two cases of renewable energies 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.

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, they failed. While this was a result of different management decisions, Scott D Anthony points at the real challenge for Kodak which they failed to address: identify the business model behind digital cameras. In his HBR article, Scott points at the fact that Kodak was actually on its way to develop an Instagram-like business model in 2001, when Kodak 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 now, this is a huge market now dominated by Facebook’s Instagram.

The Kodak case teaches an interesting lesson for the energy sector: So far, mastering technology equalled mastering business models in the energy sector. This is changing. Understanding technology is just the first step; to identify and develop the business model unlocked by the new technologies has become an equivalent (or even bigger) challenge for utilities now. Due to the fact that many new business models in the energy sector might rather evolve at the B2C level and not only a the 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. In analogy to the Kodak story, we can say that the utilities are currently still focusing on selling all the material for analogue photography, but they know already that 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. Digitalization of the consumer market starts with the smart meter rollout that is currently underway in many states worldwide. We have discussed the different national approaches to the smart meter roll-out in this post.

So far, the understanding in the energy sector seems to be that smart meter themselves need to be a business case. The cost-benefit analysis prepared in Europe to evaluate the potential need for smart metering primarily focuses on three potential benefits from smart metering:

• change in consumer behavior,
• reduced billing costs for retailers and
• reduction of network outages.

This short list of benefits gives a quite good idea of how utilities are approaching data-driven business models. Their imperative seems to be to use data from smart metering or other distributed resources to increase 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: to develop new products and services based on data that change how utilities operate today. But, this perspective is not in the focus of utilities, at least as far as a survey from 2013 by T-Systems tells us. In 2013, T-Systems conducted a survey among 250 managers from Western-European utilities and  nearly 50% of the surveyed experts stated that they see 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 probably are still in similar positions in the energy sector today)  from energy utilities stand with respect to data-drive business models.

Even today, European utilities focus on investment in digital infrastructure (like smart meters or other assets), but investment 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 that are 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 7 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) with data from smart metering offer new business opportunities for utilities. Importantly, smart meter operation itself, the selling and operation of smart meters, it 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 given smart meters to the customers for free

FreshEnergy is a start-up that evolved out of the innovation hub of Innogy, the renewable focus subsidiary of RWE in Germany. FreshEnergy takes a very different approach to smart metering than it is currently applied by most utilities in Germany: FreshEnergy provides its customers with free smart meters. Compared to the 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.) and, 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 parts of FreshEnergy’s products might increase the consumers’ interest to switch to their product, the business model of FreshEnergy is focused on data analytics to derive new insights from the smart meter data that can be used to provide new services to the consumers. For example, FreshEnergy’s software is capable to identify the different electric appliances in the 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. Especially in the smart home realm, FreshEnergy offers potential for further solutions. For example, it might be possible that the FreshEnergy algorithm learns that you need new detergents after your washing machine has run 20 times and posts an order to fil up 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 perspective: 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 that are provided (for example) via a partner network. Thereby, selling electricity becomes the vehicle to develop new revenue streams that might be profitable enough to provide electricity for free. Whether it will be 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 digitalization result in more approaches like 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 secure to not make the same mistakes. Actually, it might even be a good idea to take a look at the current strategic approaches of Kodak. For example, Kodak now 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 an increase of Kodaks’ spot-price by 250% within 24 hours in January 2018. It seems that Kodak has learned from its own history, will the utilities as well?

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