Multi-Sided Business Models Will Unlock the Energy Control Products Sector

Multi-sided business models could trigger disruptive mass-market prices.
Published: Wed 04 Jun 2014

To see the energy control products market take-off, a tendency towards free and freemium will be the best way forward, explains Susan Furnell, Founder at Furnell Consult. Her company’s aim is to provide strategy and business development services to high tech businesses. She also worked for British Gas as their Senior Strategy Manager in the Connected Home division (Hive) for a few months.

Free and freemium trend is growing

The trend towards free and freemium is growing especially when it comes to products that customers are not clamoring for. Most people are simply not prepared to pay US$200 for thermostats as it is not a status symbol like an iPhone although some higher-end customers obviously like the "coolness" of the Nest thermostat. Furnell says she doubts that the Nest thermostat-type price will attract a mass market.
She suggests two ways in which to unlock the market:
1. A shift towards free and freemium
2. Supporting this shift by thinking outside the box. For instance, sharing costs between departments within a company or between other companies who might also benefit, for example, from demand response.
We asked Furnell if Google might give their products out for free in return for valuable data which would be sold to manufacturers, for instance. She responded by saying that she doesn’t expect them to “disrupt the market just yet” as they are still learning quite a lot about the thermostat market. She predicts that their medium to long term plan will be to extend android inside to In-Home Display and other digital home products. “They will most likely get their data that way but I don’t believe that they will make Nest free just yet. They have annouced that they may advertise on a range of new devices including Google Glass and in-home devices like thermostats”
However, although they may not disrupt just yet, there is evidence of retail deals in the US where Nest is offering 2-for-1 smoke detectors. “So there is some evidence of subsidy going on", says Furnell.

The value of data

The focus of internal multi-sided business models at Google is on the value of data which becomes externalized. For instance, this data can be sold to washing machine vendors who will use it to sell a more energy efficient product to a consumer.  Furnell points out that there are a number of layers at play when using this kind of business model:
1. The company should look at what subsidies and marketing budgets already exist and allocate some of this towards subsidizing a product. The aim of this is to increase sales with the discounted deal.
2. New benefits can be obtained from an adjacent market. For instance, Google can sell their data to white goods manufacturers. In addition to this additional revenue, there is the potential to amortize the costs of some of the kit across to suppliers. For instance, if the white goods manufacturers use the hub which is already sitting inside Nest (instead of building a hub in their own machine) they could then pay towards the existence of that hub. “Therefore, Nest might not have to pay for the entire thing at the hub.”

Will the utility adopt this business model?

Utilities have yet to wake up to the value of the thermostat market, explains Furnell. “Utilities are not quite sure what they want to do now but they will not let an alternative sector take what they think is their lunch. If they start to wake up to the value of the thermostat and they realise that others can disintermediate via the thermostat’s ability to read smart meter data, then I think they will wake up and retaliate.”
She adds that at the moment, this space is not a top priority for utilities but if the Telco’s began to launch massive brand campaigns about energy management and thermostats, utilities will not sit back and do nothing.
She recommends that players should be careful-they should not take something that utilities may not want to give up as this may galvanize them. The thermostat heat-play for a company that is outside of the industry should be a secondary play that they can eventually ramp up.  If utilities do wake up to this market, these secondary players can potentially partner with them.
“I think this is all about partnerships. People will make the most of their money by sticking to their core competency, extending somewhat,  and partnering for the rest.
“We are going to see new roles in the value chain as the market becomes more open. For example, new companies will aggregate customers’ data and give them the opportunity to negotatiate the price at which they can have access. Furnell says that this model already exists in trial in the UK/US, involving a new start-up. She adds, "Utilities are not at the best starting point as they haven’t realized where this world is going yet.”

The market calls for innovation

The digital  home in Europe has yet to be defined as a mass market “unique selling proposition”. This is unlike the US where the starting point for the market was fundamentally different. The US was focused
on monitoring security for a start and then added other home automation equipment like extra video cameras and door locks. Currently, there are 2 million homes in the US with these self-monitoring services and the numbers are growing fast.
No-one in Europe has done anything at scale yet and this is the reason for Furnell’s argument for the multi-sided business model. Survey-based research shows that Europeans will buy the product at “the right price” but it is a lot lower than what the market price is.
Furnell says that the multi-sided business models will help companies achieve that lower price for the European market. “Because the market won’t take off until people get a fundamentally lower price.”
So, how will companies achieve this? By thinking outside of the box, explains Furnell. “You have to be really creative because you can’t build a linear business case to get there.”
“Google, for instance, has a more natural control over how they can share data or monetize it. This is in comparison to other companies that would have to start up quite sophisticated and with deeper relationships which may be harder to get off the ground. That might help shape what does and what doesn’t work.”

Many opportunities

There are so many opportunities for disruption, explains Furnell. “There are many players with so much to gain. It is very rich for creativity and innovation. It’s almost a replica of the internet in its richness for innovation.  You can innovate in the business model, innovate in the value chain, in the partnerships-there are literally hundreds of ways that you can innovate.”
But, with attempts to innovate, there will be a great deal of failures before success is attained. In the connected home, there will be many false starts by start-up’s that don’t make any money and go bust. There will be many attempts at security that will never reach scale. But, over time, solutions will be reached.
Furnell points out that the opportunity for innovation will stimulate partnerships and these partnerships will help reach the fundamental price so that the sector can take off. “You need to stand in the future and ask yourself at what price will the industry take off and what are the killer, simple use cases and propositions that resonate with customers? And how do I get it to that price? Don’t ask, forecasting forward from today, what is the cost and at what price can I make a profit? How many people will take it at that? The answer is too small a market.”