Once bitten, twice shy

Utilities are reticent about getting into telecoms again, but propositions that link telecoms to core energy offerings could deliver significant growth. Mark Nicol scrutinises SSE's strategy.

If you read the seven-page strategy section of the 2011 SSE annual report, there is no mention of telecommunications. As you might expect, it is energy focused and states that “SSE’s core purpose is to provide the energy people need in a reliable and sustainable way”.

Yet, later in the same document, there is a headline in the segmental performance section that reads “SSE’s telecoms business is the fourth largest telecoms network company in the UK”. It delivered £17.9 million operating profit in 2010/11 (up 9 per cent on the previous year) and spent £34.7 million on capital expenditure. These numbers suggest that telecoms is a strategically important part of the SSE business, yet there is little mention of it. So is telecoms an important strategic growth area for SSE, and by association for the other big six energy companies too, or not?

The involvement of energy companies in telecoms goes back a number of years. Npower Telecommunications was launched in 1992 by the then Yorkshire Electricity as a joint venture with Kingston Communications. Centrica acquired One.tel in 2001. And SSE formed SSE Telecoms in 1997. SSE Telecoms, according to the 2002 annual report, had two main products:

l network services, including managed bandwidth;

l use of the SSE property portfolio for site services – in effect an opportunistic revenue stream adding mobile phone infrastructure to SSE’s electricity assets (see feature, p17).

Npower and Centrica had a different focus, concentrating on residential customer sales rather than physical infrastructure. The thinking at the time was that customers wanted a string of services provided to them from one company, and economies of scale in billing and databases would allow energy companies to offer competitive prices against incumbent telecoms providers. The reality was that acquisition and operational costs were far higher than expected and customers did not understand propositions that mixed energy and other products, so anticipated margins were never realised.

The result was that Npower sold its telecoms business to Tiscali in September 2003, enabling it “to focus on electricity, gas and related products”. Centrica followed suit in December 2005, selling One.tel to ­Carphone Warehouse “to focus closely on growing our core energy and related services operations in the UK and internationally”.

This historical context may go some way to explaining why SSE does not make more strategic mention of its telecoms business. But has the landscape started to change? First, let us consider some recent SSE actions.

In February 2008, SSE signed a three-year deal with BT to offer landline phone and broadband services to its customers. Clearly this went contrary to the market direction just a few years earlier, but it may have proved that the white label model works, because a new four-year deal was signed in May 2010.

In March 2008, SSE invested £1 million in a smart meter company, Onzo. The focus here is on data services rather than smart devices, as shown by Onzo’s website, which states in the “about us” section: “Onzo is a global leader in big data and analytics for utilities”. This suggests the interest for SSE is in data rather than asset ownership and operational cost reduction.

In May 2009, SSE entered the data centre market, acquiring Cantono Data Centre Services for £4.85 million. This is not a huge sum for a company the size of SSE but an indication that the data and telecoms market is more than a non-core revenue generator. It has also continued to grow this capability since.

Last and perhaps most interestingly, in October 2011 the company changed its name from Scottish and Southern Energy to SSE. In itself this is not hugely significant, but it is also not something that a board would consider doing unless there was good reason – if they wanted to move away from their energy focus, for example.

It is also worth noting some changes in the external environment and energy market that may be influencing SSE. Without doubt it is getting increasingly difficult for energy companies to deliver consistent profit growth. Well-documented political, regulatory and international energy market factors are all contributing to huge challenges. All energy companies are looking beyond their core vertically integrated energy businesses for growth.

Second, while the mandated introduction by 2020 of smart meters in the UK offers huge opportunities to the big six, it also carries a significant potential threat. Ownership along the supply chain, including connectivity and data infrastructure, could be a huge source of competitive advantage. Regulatory indications favouring an independent Data Communications Company may have dissuaded SSE from bidding directly for the smart meter communications services contracts, but SSE’s telecoms network and data capability has the potential to provide partner support to the appointed prime contractor.

Finally, customers are becoming more data hungry, while IT and home and office infrastructure is also becoming increasingly connected. The benefits of having a greater comprehension of energy consumption, how this compares with peers and what they can do to change is starting to be understood by customers. What is more, the ability to remotely command home and office devices, such as heating, lighting or turning on the oven, is also seen as desirable. From SSE’s perspective, ownership of the communications infrastructure and the computers and data processing that facilitates this could be attractive.

So there are clear reasons why energy companies could, and perhaps should, be interested in telecoms. But it is still unclear why SSE has not made more of its capability in this area. Perhaps because it is slowly building the business unit? Or maybe because its board is concerned about the financial market’s reaction to any significant play in a traditionally non-core sector.

More likely, though, the root cause is down to the customer. An energy company’s relationship with its domestic and business customers is anchored to an energy product. Without this, there is little reason for the customer to be interested in purchasing something else from the company. So the challenge for SSE and the other energy companies is to develop customer and market-orientated propositions that link telecoms to the energy offering – for example, smart data aggregation and interpretation, which results in more efficient energy use and lower bills. Critically, this proposition needs to be based on a customer need rather than an expectation that the customer will simply want to purchase other services from an energy company.

The challenge in meeting this need is determining relevance. Energy has traditionally been a low-interest category for customers. But this is changing as technology and data developments, as well as price increases, bring energy more into consideration, both for the residential and business sectors. Propositions that make use of telecoms infrastructure and data services to help customers understand and manage their energy needs could deliver significant growth for energy companies.

Mark Nicol is a consultant at growth and innovation specialist Market Gravity

This article first appeared in Utility Week’s print edition of 16 March 2012.

Get Utility Week’s expert news and comment – unique and indispensible – direct to your desk. Sign up for a trial subscription here: http://bit.ly/zzxQxx