Utilities and Counter Positioning
Currently, there's a fascinating game of 3D chess playing out in the energy industry as utilities are under siege from tech giants like Amazon and Google, oil and gas behemoths like Shell and BP, and startups. The attacks from these new entrants are coming on multiple fronts - Amazon and Google want to own the customer, Shell and BP want to be the electricity provider and startups are attacking the business model with new technology.This leaves utilities with a choice - do they become strictly the poles and wires company? Or do they pivot into the services industry in the same way e.On has in Germany and how telecom companies did post the Telecom Act?Any founder that has met with me this year has most likely heard me rave about Hamilton Helmer's 7 Powers: The Foundations of Business Strategy. The book has provided me and countless others with a "simple, but not simplistic" framework to evaluate businesses and the markets they participate in.My favorite power of the seven is counter-positioning which applies when the expected damage to the existing business prevents incumbents from challenging a disruptor in their market. The most basic concepts are:
- Newcomers adopt a superior business model or technology which the incumbent does not mimic due to anticipated risk to the existing business
- New product/business model has a high degree of substitutability for the products from the incumbent
- Risk-adjusted expected collateral damage to the incumbent is high due to the uncertainty of a new approach
- Addressing the new entrant requires upending the existing business and the turmoil risks destroying value as understood by public markets
- Incentives put in place for executive compensation are often tied to performance defined by stock price/market cap
Historical examples of counter-positioning include:Kodak and the digital camera: I used to believe Kodak inventing the digital camera and not capitalizing on it was one of the biggest blunders in business. However, at the time digital photography as a stand-alone business was not interesting to Kodak because it would cannibalize the business where they had the most power (film), and they did not have the necessary resources to create power in the new market (image storage). The negative NPV of creating that power in combination with no one understanding the impact of the semiconductor and it becomes easier to see why Kodak passed on the digital camera opportunity.Netflix and Blockbuster: Blockbuster might have potentially competed with Netflix on a DVD subscription business, but once Netflix went to streaming, Blockbuster was done. By the time the realized what was going on, Netflix had too much share and too much power in a substitute good with a better business model.Where does this leave utilities?From a strictly growth and relevance perspective, utilities should absolutely start thinking about how they can add more value to the network than just the infrastructure or risk eventually getting left out of the growth that is ahead. As smart-home devices continue to penetrate the market and EV's gain share, "service providers" for consumers will become necessary and likely valuable, but it's unclear if utilities will be able to make the transition, if regulators will allow it, or if the NPV trade-off makes sense since the opportunity cost might be giving up lucrative business units like transmission or generation. e.On made a similar decision in 2018 when it swamped generation assets for the retail and transmission business with Innogy to focus on being a service provider so we'll see how the new landscape begins to take place in the coming years.It'll be fascinating to see if the same regulations that have made utilities a monopoly for decades will be the regulations that prevent them from competing in a modernized energy system or if utilities can avoid the same fate as Kodak and Blockbuster by deploying strategies similar to AT&T and Verizon post de-regulation.