Connected homes: What role

should energy companies play?

Home energy services may seem like a natural adjacency

for utilities, but executives need to assess the competitive
landscape and their own capabilities before jumping in.

By Mark Brinda, Jolyon Dove and Stu Levy

Mark Brinda is a partner with Bain & Company in New York. Jolyon Dove is
a Bain partner in London, and Stu Levy is a partner based in Washington, DC.
All three work with Bain’s Global Utilities practice.

Copyright © 2014 Bain & Company, Inc. All rights reserved.

 Connected homes: What role should energy companies play?

What is the role for energy companies in the rapidly There are also recurring costs to support the added
developing market for smart and connected homes? With products and services.
many cable, telecom and home security companies of-
fering smart thermostats and plugs as part of a bundle In the US, cable, telecom and home security companies
of connected home services, it’s a logical question for have taken an early lead in shaping the market by offer-
energy executives to ask. Add to that Google’s acquisition ing connected home bundles that typically build off a
of Nest for $3.2 billion in January, and the potential of common platform to provide basic security services.
energy services in the connected home appears that Companies then add other features like remote lighting,
much more attractive. But are energy providers in the lock controls and carbon monoxide monitoring. This was
best position to offer them? a natural progression in their continued search for addi-
tional recurring monthly revenue (see Figure 1). Many
Many executives at energy providers are wrestling with have also partnered with technology companies to add
this question, both at traditionally integrated and regu- energy management services, including smart thermo-
lated utilities and at competitive energy marketers. stats—a possible barrier to energy providers that might
Unfortunately, there isn’t one right answer. A range of want to partner with them. For example, Time Warner
factors, from the regulatory environment to the existing Cable partnered with tech start-up iControl Networks in
competitive landscape, will shape the answer. There are 2012 to offer its IntelligentHome service.
good reasons to enter the market. In addition to the
recurring revenue from services like remote control and Bundling also allows these companies to spread costs
monitoring, offering these services can improve a com- across a broad set of offerings and adjust pricing to make
pany’s brand, set it apart from competitors and even energy management essentially free, if necessary, to
reduce customer acquisition costs and churn rates— compete with standalone offers. These providers can
particularly valuable in competitive markets. Over time, also justify a greater investment in sales, technology and
markets may even see a reduction in wholesale energy service centers, since most operate across numerous
costs if customers begin to shift their use from peak to states and have much larger overall customer bases than
off-peak times. many energy providers.

In the UK, utilities may have a better opportunity to

shape the market. Regulators have mandated a national
The decision of whether to enter the rollout of smart meters, and now utilities are developing
services that build on them. For example, British Gas is
connected home market—and how—
promoting time-of-use tariffs and remote control services
must be based on clear-eyed analysis that let customers adjust their home heating system
of the costs and benefits. remotely—for example, to lower the temperature if
you forgot to do so before leaving. Operators of distri-
bution grids in the UK are considering demand-response
services that reward customers if they reduce their pow-
But the decision of whether to enter the connected home er use during peak periods. For these companies, it may
market—and how—must be based on clear-eyed analysis be less expensive to develop and offer that service than
of the costs and benefits of developing a new and differ- to build more power distribution capacity.
entiated offering, convincing customers to try it and
keeping them engaged long enough to recoup the initial In the rest of Europe, utilities may have an even greater
investment and generate a profit. Executives should opportunity to shape the market, as the nontraditional
recognize the significant up-front costs for developing players that have defined it elsewhere have been slow
a technology platform and integrating it with the current to enter this region. But as US companies move into
business, as well as for sales, marketing and installation. European markets, that is likely to change quickly. Nest

1
Connected homes: What role should energy companies play?

Figure 1: The connected home market has evolved from communications to energy services and beyond

Video and satellite

1
Cable and telecom
companies attacked
DVR and each other’s core...
on-demand service

Basic programming
Health Communications

Internet service
Connected
Control & monitoring Voice service
home
(e.g., smart thermostats) 2
Reporting & recommendations ...adding energy
services to expand ...then sought
Energy-related services
their bundled services growth in
Energy marketer automation and other
home controls...
Utility 3a
HS&A pursued energy services to
Home security
Energy expand automation, control focus 3b
and find new revenue and automation

Energy offerings with capabilities shared with other connected home products
Note: HS&A is home security and automation
Source: Bain & Company

is among those eyeing the region: The company added will require significant effort to design and implement
time zones and weather information for 10 European the right product and service offering and to distribute it
countries in its January 2014 software upgrade. We see through effective sales channels. Because market con-
several ways these nascent markets could evolve, from ditions influence a provider’s ability to enter and play,
simple metering services into full home automation, executives thinking about competing in energy man-
depending in part on who takes the lead to define the agement or broader connected home services should
early offerings (see Figure 2). consider how the market is already meeting those needs
in their region, what services are gaining traction and
In the end, the decision may come down to understand- the regulatory environment.
ing which risk is greater: entering the market or letting
competitors advance without you. The former requires In spite of the lead nontraditional energy players have,
substantial investment in new capabilities, technologies energy providers could create services that offer greater
and partnerships, but the latter carries the risk of miss- value than many that are available today. Most energy
ing out on a new revenue stream and, more important, management services have focused on basic monitor-
being cut out as the authoritative voice on home energy ing and control, with an eye toward reducing customers’
in an ongoing dialogue with customers. monthly energy bills. Our research suggests that, while
the number of customers who consider energy manage-
Opportunities exist for energy providers with ment a top priority has been growing, they still account
a broader offering for only 12% of subscribers (see Figure 3). And
even for these customers, once they have captured the
We see opportunities for energy providers across regions. initial savings, it’s unlikely they will be willing to con-
But generating sufficient volume and acceptable returns tinue paying a recurring fee, making the long-term

2
 Connected homes: What role should energy companies play?

Figure 2: Three levels of connected home services

Meter Connected home energy services Security and automation

Meter Energy Remote/ Remote/ Safety &

Smart Smart Time of Demand Connected
display usage intelligent intelligent monitor- Lighting Security Other
meter prepay use response appliances
in home advice cooling heating ing

Smart meter

Energy

Full home automation

Source: Bain & Company

sustainability of this type of energy management nology player to develop a standalone energy manage-
offering questionable. ment offer. They can also provide energy management
services on their own.
Some participants in this space have already begun to
look for additional sources of value in their offerings. The situation is different in deregulated markets in the
Take Nest’s residential demand response program, Rush US, where energy providers have more urgency to define
Hour Rewards, offered with its energy partners and also a strategy. There, they face a “prisoner’s dilemma”: They
Comcast’s recent partnership with NRG to launch Energy feel pressure to enter the market if for no other reason
Rewards in Pittsburgh, Pennsylvania, adding electricity than to avoid ceding ground to new entrants that could
supply to a bundle that also includes free HBO for poach their customers and succeed at their expense.
new sign-ups. It’s clear that some of the market leaders This same dilemma also extends to partnerships, with
are broadening their current energy-related offerings. each market offering a limited number of attractive
potential partners. In the Northeast US, for example,
Market dynamics and internal capabilities energy providers would have to consider Comcast’s ar-
should dictate entry strategy rangement with NRG as they assess opportunities to
partner with market leaders.
In regulated markets in the US, energy providers can
view this as an opportunistic play. At a minimum, they While energy providers don’t need partnerships to enter
can enhance their customers’ experience. They might the US market, going alone requires a candid assess-
also generate some additional, unregulated revenue ment of existing capabilities and resources. An energy
through new services or partner with a company offer- company must be able to form its own offer, including
ing a broad array of connected services or with a tech- R&D capabilities to develop a smart thermostat, as well

3
Connected homes: What role should energy companies play?

Figure 3: About 12% of subscribers see energy savings as one of their top three priorities in deciding
whether to purchase connected home services

Highly engaged: Want many features Disengaged: Want fewer features

Health Energy Always Security

Self-reliant Indifferent
managers savers connected focused
“I actively “I want help “Help me better
“Just keep my “I know what I
Primary reason monitor and reducing my secure and “I don’t think
family and my want and how to
for subscribing manage some- energy manage my much about it.”
property safe.” make it work.”
one’s health.” consumption.” home and family.”
Purchased more
3% 5% 25% 47% 7% 13%
than 2 years ago
Purchased or
upgraded in 6% 12% 33% 35% 5% 8%
last 2 years
Average monthly
$40−50 $45−60 $40−50 $35−40 $10−15 $30−35
revenue
Annual US
subscription ~$700M ~$850M ~$2.8B ~$3.3B ~$300M ~$900M
revenue

Total annual US subscription revenue: ~$9 billion

Note: Percentage of customers based on total sample; average monthly revenue calculation based on representative sample
Source: Bain customer survey (total n=1,205; n=960 for customers; n=502 for customers who purchased more than 2 years ago;
n=458 for customers who purchased/upgraded within last 2 years)

as the sales and marketing capabilities required to gen- have begun offering energy management as part of a
erate demand for it. Since many providers, particularly bundle of connected home products and services, it is
regulated utilities, have limited experience in marketing not clear that the energy portion of these bundles will
partnerships, industry executives seem to prefer the yield sustainable, long-term profits.
path of offering limited energy management services
on their own. For that to work, they will need to make Despite these challenges, or perhaps because of them,
a strong case that they have the resources not only to we see opportunities for energy companies across re-
build and deliver those services but also to compete gions, but executives will have to decide the right way
against global companies with similar products. Defining to enter based on market conditions, the potential to
the services is just the beginning of the process; deliv- gain and keep valuable customers, and the investments
ering a sustainable business will require new skills that necessary to sell and deliver the service. Whether they
many energy companies lack. choose to partner with others or go it alone, ultimately,
energy providers will need to find ways to tap their
The future of energy-related services as part of the smart expertise and unique capabilities to create energy service
and connected home market is still being defined. Even offers that go beyond the existing smart thermostat
in markets like the US, where many nonenergy players and create long-term, sustainable value.

4
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 Key contacts in Bain’s Global Utilities practice:

Americas: Matt Abbott in Los Angeles ([email protected])

Mark Brinda in New York ([email protected])
Neil Cherry in San Francisco ([email protected])
Paul Cichocki in Boston ([email protected])
Jason Glickman in San Francisco ([email protected])
Mark Gottfredson in Dallas ([email protected])
Stu Levy in Washington, DC ([email protected])
Alfredo Pinto in São Paulo ([email protected])
Tina Radabaugh in Los Angeles ([email protected])
Joseph Scalise in San Francisco ([email protected])
Bruce Stephenson in Chicago ([email protected])
Jim Wininger in Atlanta ([email protected])

Asia-Pacific: Sharad Apte in Bangkok ([email protected])

Miguel Simoes de Melo in Sydney ([email protected])
Amit Sinha in New Delhi ([email protected])

Europe: Julian Critchlow in London ([email protected])

Jolyon Dove in London ([email protected])
Arnaud Leroi in Paris ([email protected])
Jochem Moerkerken in Amsterdam ([email protected])
Jacek Poswiata in Warsaw ([email protected])
Timo Pohjakallio in Helsinki ([email protected])
Kim Petrick in Munich ([email protected])
Roberto Prioreschi in Rome ([email protected])
Jose Ignacio Rios in Madrid ([email protected])

For more information, visit www.bain.com