Market view: A smarter business model

Customers love the smart home idea, the technology is advancing rapidly and agile startups are eating into the energy market. Yunus Ozler and Jonathan Carr set out what smart incumbents should do.

Connected home technologies are seeing a surge in prominence following the launch of products such as Apple’s Home app (to control HomeKit-enabled devices), Google Home and Amazon Echo in the UK. This activity drives mass awareness and the appeal of connected home solutions that can control domestic appliances such as lights, heating and security and spot likely faults before they happen. Forecasts that up to 8 million UK homes will have connected systems within four years look like they are on the money.

Connected home solutions present a new opportunity for established energy suppliers searching for growth and ways to differentiate against price-focused independent competitors. With these technologies becoming mainstream and more affordable, utilities can start to play a broader and more valuable role in their customers’ lives.

This could take the form of utilities helping customers save money by offering them insights into their appliance consumption or auto-optimising their heating and lighting. Remote diagnostics could offer peace of mind and cut boiler repair costs. Device upgrades could be enabled through a mobile-style contract with energy tariffs. All this will, in turn, drive increased customer loyalty.

But energy companies must act fast to seize the window of opportunity. Close to two-thirds of customers are interested in smart systems for managing energy. With smart heating and controls as the starting point for many, 40 per cent of interested customers would trust a utility company to provide this service. Increasing competition from outside the energy market will only dilute this level of interest. At the same time, the enabling technology is evolving fast, moving from single-device or category producers to global platform solutions that can support a host of devices and assist control through voice activation or an app. To compete, energy companies will need to gain a strong foothold in the market.

In the past two years, competition has hotted up. The British Gas Hive range now includes lights and plugs as well as smart thermostats, Samsung bought SmartThings for around $200 million, Nest has created a platform where different providers’ products can work together, and telecoms company O2 has partnered with AT&T Digital Life to trial their own connected home offering.

Companies should take immediate advantage of the smart meter opportunity. By 2020, every home in the UK will have one, allowing suppliers to engage existing customers in transforming energy into a digitally managed service. Energy providers should also look for strategic partners in industries such as security to provide managed household services. This might come in the form of analytics to highlight where heater repairs are needed, while security and safety monitors could flag when home alarms should be reset or adjusted. Customers would have to pay upfront costs for devices and installations, but they would ultimately capture savings and enjoy lower insurance premiums.

Energy companies increasingly see more digitally focused and agile rivals eating into their market share. These are exactly the kinds of businesses they should be looking to emulate. To make the most of the connected home market, they need to think like startups and not incumbents. Opportunistic and flexible business models are essential as connected home products will continuously evolve with the technology. Choosing the right technologies is also key. Companies need to be designing for the “day after tomorrow” to ensure their solutions are compatible with future technology.

To succeed in an uncertain market, it’s important to look for long-term value and to manage expectations around short-term gains. Critically, businesses should allow agile and innovative operating models to experiment and adapt rapidly to changing customer needs, technologies and competition. Nurturing innovation while integrating it with the core business represents a considerable challenge. Some failures will be inevitable, and the key will be to fail fast but still have the support of the wider business.

Firms that lag behind will find themselves left with more commoditised, smaller and lower-margin businesses. Those that act first will capitalise on the opportunities and use them as a platform for growth in new and increasingly affordable technology areas.