AMR and new business opportunities-not an oxymoron

Michael Wiebe

MW Consulting Inc.

New business opportunities enabled by AMR networks have been a subject of intense debate and marketing hype with little demonstrated success. The additional revenues from new services have been perceived as a critical component of the justification for an AMR network deployment since in many situations the prior business case did not demonstrate the economic merits of AMR. And yet, few success stories are known in the industry.

There are many reasons that have contributed to this situation, but key among them are:

- unrealistic expectations by utilities of new business opportunities;

- poorly defined business opportunities for AMR;

- chasing the wrong opportunities at the wrong time;

- erroneous assumption that meter data management agents (MDMAs) are interested in AMR itself;

- inadequate appreciation of a utility`s real strengths; and

- reluctance of utilities with successful programs to advertise them.

Utilities have been asset-centric businesses and, thus, their AMR focus was in the network`s inherent value that must be owned. The asset-centric business model precluded the idea of a customer-focused enterprise. Consequently, many utilities today do not have the necessary business goals, plans, processes or people to relate to non-utility opportunities or to use AMR for competitive advantage.

As deregulation fosters the unbundling of revenue-cycle services, a new era of AMR and AMR-driven services is emerging. Utilities are allowing a new breed of entrepreneurs to capture revenue opportunities that are a minor incremental business expansion for utilities. Meanwhile, utilities pursue new markets with unknown benefits and risks and little or no value in retaining energy sales.

Perceived opportunities

The concept of "new revenues" must be examined in the context of: "new to whom?" Are the proposed services innovative and truly new, or is the utility attempting to enter an existing market replete with entrenched competitors and accepted industry practices?

Examples of popular new revenue sources for utilities assessing AMR include:

- reading meters for other utilities or power marketers;

- monitoring vending machines;

- managing copiers;

- reading parking meters; and

- supervising alarm services.

Meter reading for other utilities is not a new opportunity. More than 10 percent of all meters in the United States and Canada are already read by third-party service providers including Volt ViewTech, Trace, Schlumberger and others.

In some cases, utilities have agreed to cooperate on meter reading tasks with one meter reader harvesting data from two or more meters at a customer`s premises. Thus, the meter reading service opportunity is really one of competing on price with the existing manual meter reading service firms, the new generation of MDMAs or internal groups.

The latter "new" opportunities are established markets that have been the focus of product development over the last decade using telephony and a host of wireless communication technologies. Suppliers pursuing these opportunities include Motorola, Phillips, Sierra Wireless and others.

There are only about 4 million vending machines in the market, not including cigarette machines. Thus a utility with between 1 and 2 million customers would have from 40,000 to 80,000 vending machines in its services territory. Of these, about 30 percent are controlled by national or regional operators with the expertise and financial resources to act on a demonstrated benefits statement. Small local firms that may lack the business incentives operate the remaining machines or capabilities to use automated systems.

While publicly acknowledged cost savings for the vending market are about $20 per month per saved visit, the real savings are likely about half this figure, perhaps less. If the $20 per month figure were accurate then it is safe to presume that a telephone or radio device would already have been widely deployed, as the monthly cost for such a service is already less than the purported savings.

In aggregate, the vending machine market represents about a $500 million per year business opportunity using a $10 monthly fee and 100 percent market penetration, a somewhat optimistic goal. Some interesting insights for the utility industry from the vending machine business example are:

- The AMR services market is 600 percent larger than vending machine monitoring.

- The vending industry is undergoing consolidation-the fifth largest operator has 15,000 sites.

- There are already several firms offering monitoring services via telephone.

For utilities to successfully penetrate this market, they need to wrest market share from incumbents that already have the customer relationship, industry presence and who otherwise present additional obstacles to successful market entry.

Similar perspectives are attributable to the copier and other traditional high profile new revenue opportunities. It is reasonable to say that the traditional "new" revenue opportunities are often established markets with entrenched suppliers that will not willingly relinquish their businesses.

Real opportunities

What are the characteristics of some real new revenue opportunities? There is no inherent need to own a network in order to earn revenues from its capabilities unless the goal is to be a data transport provider. The outdated belief in the inherent value of network ownership stems from the private AMR network concept. However, a utility can successfully pursue new business opportunities while buying wholesale communication capacity from an MDMA such as CellNet or other competitive communication service providers.

Examples of successful new revenue opportunities that use networks owned by others include at least the following:

- Essential.com-an Internet seller of long distance and energy;

- ADT-alarms services via the telephone network or radio systems;

- Wireless Data Concepts-distributed generation monitoring and control;

- AerComTec International-fleet management and dispatch services;

- Planergy-energy use and billing consolidator; and

- Amazon.com-sales of books, videos and CDs via the Internet.

The point is, a utility has many assets it can employ to create new revenue opportunities. It does not necessarily need to invest in an AMR network to capture these benefits. Of the opportunities identified above, several reflect rapidly growing segments in the utility market where small firms are creating value for the customer. Consequently, a significant proportion of the future value of the customer`s business is migrating away from the utility. Worse, several of these position the providers to become energy sellers if they choose to evolve in that direction.

There are numerous new revenue opportunities that are either energy-market centric or are closely related to the industry, thus empowering the utility to bring existing strengths to bear. The key to successfully pursuing these opportunities is to be customer focused and to capitalize on the utility`s strengths or those of selected strategic partners. The assessment of opportunities must involve a rigorous process that effectively eliminates those that do not contribute to strategic corporate goals, are high risk, marginal return or otherwise unsuited to the utility effectively using its core strengths for competitive advantage.

The result of the analysis will also indicate if the utility should pursue these opportunities directly or in partnership with others. For example, utilities could partner with an MDMA like CellNet or TelData or even with a telecommunication capacity seller such as Aeris to offer the services to their locally based "national business customers." All three stakeholders-customer, utility and MDMA-would benefit without the utility needing to make a significant network investment.

The most attractive opportunities are those that exhibit several of the following characteristics:

- build customer partnerships via existing relationships-focus on preferred customers;

- innovate-absence of numerous competitors already serving a mature need;

- create competitive advantage via energy-use data-selling knowledge-driven services;

- leverage brand-utilities are favorably perceived vs. RBOCs, CATV and others; and

- bundle collateral strengths-financial, purchasing, etc.

Critical role

Many of the services utilities will offer customers require a new generation of customer relationship management (CRM) systems. To maximize their effectiveness, these systems will need more information about customer energy use. Thus, AMR is the cornerstone of the advanced CRM system that will be used in the lifecycle supply of various services to all customers.

Applications to be supported include identifying new service opportunities, monitoring the customer`s use of such services, verifying optimum prices and enhancing profitability. Without the detailed energy-use information, none of the advanced services critical to successful competition can be possible. These systems will be used to offer bundled services to large customers that may in turn aggregate their customers and suppliers. Recent examples of this trend include the activities of Marriott, Cargill, Engelhard Metals and DuPont.

A significant component of an advanced CRM system is a preferred customer opportunity (PCO) Matrix. The PCO Matrix is a method to:

- assess each customer`s lifecycle value to the utility;

- identify the complex array of customer needs;

- characterize the potential business relationship with the utility over time;

- manage implementation of opportunities to continuously upsell the customer; and

- ensure the utility captures increasingly more of a preferred customer`s monthly expenditures.

The PCO Matrix consists of nine basic categories. The least complex activity is defined as coaching the customer. One example of a coaching activity is a situation where a customer could significantly benefit from understanding the mechanics of the rating process as coupled with their load profile to identify opportunities for monthly expense reductions through optimized energy use. To successfully provide this service requires at least daily AMR data, and perhaps it could benefit from hourly information but not necessarily on a continuous basis due to process repeatability factors. Utilities have been resistant to offer such services. However, it may be more desirable to retain the revenue from a reduced energy sale rather than lose it entirely to a competing power marketer. Other examples exist for the remaining eight PCO Matrix categories.

Figure 1 provides a conceptual perspective of one view of a consolidating service supplier model. In this example, the utility assumes the responsibility to provide the customer with a variety of services that were identified as viable opportunities using the PCO Matrix process.

Ownership risks

There are also knowledge-driven opportunities based on data-mining applications. Some of these may be better suited to partnerships with firms already in the direct marketing or infomediary businesses. The addition of energy information to a consumer`s or business`s record with Experian or Equifax will significantly enhance the value of the aggregate profile. However, doing so is the basis for significant risks to consumers, businesses, the utility and other groups with powerful vested interests. Thus, a utility faces a new risk from unbundling, lawsuits stemming from inappropriate data disclosure.

Utilities need to proactively implement data ownership and privacy policies and then secure Commission ratification. This is a complex task given the realities associated with the unbundling of revenue cycle services and the conflicting interests of customers, energy sellers and infomediaries.

E-commerce

The world of e-commerce is rapidly emerging as a significant business opportunity. Utilities already have relationships with businesses and consumers that can be used to foster new revenues based on using energy as the primary attraction for an e-commerce portal or web site.

In March 1999, Microsoft announced its entry into the e-commerce field with both an acquisition of CompareNet and the introduction of a service`s suite. In May, it announced a joint project with NTT in Japan for electronic bill presentment and payment with a goal of supporting utility billing needs in addition to others.

DTE Energy announced The Energy Store concept as a combination price club and affinity purchasing business model where consumers and businesses buy memberships to the "energy store." In return they receive their energy at cost-a pretty good deal depending on the relationship between the monthly fees and savings. However, it does more-it offers discounts to all members for purchases of products and services from other members. Thus it also fosters an affinity group without the need to sell the other services as Affinity Inc. does. Other e-commerce-driven energy sites include utility.com and essential.com.

An interesting question to ask is why not expand this concept to have a utility offer a centralized e-commerce portal service for members where the store could charge a per transaction fee for all purchases. This would create revenues and allow it to better understand the purchasing habits of members and thereby tune its future offerings to optimally meet customer needs.

There are also new Internet-enabled options to improve the effectiveness of a utility`s sales and marketing activities. A current leader in offering a standardized e-commerce portal package for utilities is CellNet and its various ".com" service packages. Currently www.myhomelink.com is the primary focus, but the firm has registered a broad range of web site names covering business, local community and other areas of interest.

The key advantage of the "myhomelink" approach over previous endeavors is that it leverages the rapidly increasing interest of both consumers and businesses to use the Internet. Since annual energy purchases represent a large annual expenditure, it may be successfully used as a drawing card to a utility-sponsored e-commerce portal. Customers might initiate a visit to the site for bill payment, energy-use reports and other energy-related reasons. Then they may stay to use the portal to access other sites for non-energy or utilities purchases and thus create revenues for the utility. Figure 2 provides a perspective of the e-commerce opportunity`s magnitude.

Summary

When viewed in a broader context, the diversity of new revenue opportunities closely aligned with proven utility expertise and resources are numerous. It requires innovative thinking and focus on the first principles of business to succeed at capturing the available benefits. The key to successfully pursuing new business opportunities is to identify those that leverage a utility`s key strategic strengths and to not copy old unsuccessful ideas. Further, to the extent that those new opportunities support customer retention for energy sales, such services may be strategically more valuable than new services that create new revenues.

Finally, AMR is a key enabling technology that will allow utilities to better understand their customer`s needs and to more effectively market energy and other services in the future. AMR should no longer be evaluated on the basis of simplistic savings to meter reading services but as the means to acquire preferred customers and implement Advanced Customer Relationship Management Systems.

Michael Wiebe is president of MW Consulting Inc., a firm that provides strategic marketing, sales and communication technology related services. PennWell has commissioned Wiebe to write a book about AMR and the future direction of the electric power industry. It will be available this fall.