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What Service Providers Can Learn from Utilities

By Jon Arnold (ICP) September 18, 2009
The Smart Grid Summit made its debut at the ITEXPO earlier this month, and even though it was just one day long, several themes emerged that will find a place in upcoming columns here.
 
Our vision behind the Summit – among other things – is to explore common ground between utilities and telcos, and I think they have a lot to learn from each other. Since telcos have already gone down the IP networks path, utilities have most of the catching up to do. Whether they choose learn from telcos remains to be seen, as it’s too early to tell how much utilities see them as friend or foe.
 
With that said, I’d like to explore one Smart Grid idea that telcos may want to consider that is gaining momentum with utilities. One of our panels focused on Demand Response, and a few elements stood out for me that could be adopted by telcos. In short, Demand Response refers to mechanisms utilities can use to manage energy supply during peak demand periods.
 
Unlike everyday energy conservation – which we all want to support – Demand Response is really designed to help utilities manage costs during energy spikes that require them to use more expensive forms of power. They do this by curtailing power consumption during these peaks, and in return, customers can earn rebates against their energy bill. This is a very basic description, but during the Demand Response session, examples were cited where utilities generated enough savings this way to yield rebates for some of their customers. As energy costs become increasingly expensive, this is a trade-off many are willing to make, especially in industrial settings where energy is a major cost factor.
 
I’d like to carry this thread over now to the telco world and their tenuous relationship with consumers – you and me. Of course, the dynamics of telephony and communications are very different from energy. Pricing trends are generally going in the opposite direction, and energy has distinct constraints in the sense that it cannot be stored, and demand is outpacing supply. Telcos live in the world of silicon economics where abundance has replaced scarcity as the mechanism that drives pricing. So, how could Demand Response apply here?
 
As we know, pricing for voice services has been falling for years, but for the mass market, I’m not sure things will get that much cheaper. AT&T is not at risk of losing their landline subscriber base to Skype any time soon. There is still a lot of inherent value in voice, and as I’ve noted in other columns, new money is being made by voice-enabling other types of services, especially in the business market.
 
Telcos are no longer just in the telephony business, and as we all know, the big growth is in data - namely video and mobile broadband. As such, there may be some upside for voice, but most of our communications spend these days is going for data services, primarily wireless. This is where things get interesting because mobile operators face similar challenges to utilities in that demand exceeds supply, and will continue to do so for some time. Demand forecasts for data often show exponential growth curves, which creates an awkward dilemma for operators. They want to keep providing all these lucrative data services, but must continue to invest in expanding network capacity to support the growth. We all know how smartphones have accelerated the demand for mobile broadband in the past year. It’s a great problem to have, but if network capacity issues start to erode the quality of experience, the supply/demand pricing equation will change.
 
In this environment, the Demand Response idea may start to make sense. Telcos have limited options for raising prices and have a ways to go to drive growth through innovation with new services. The Demand Response concept itself, though, could be the basis of some innovative customer retention strategies, and perhaps buy carriers time to upgrade their networks. I’m not advocating giving operators the green light to throttle back bandwidth to manage their networks – they’re essentially doing that already, and we generally learn to live with it. After all, the Internet isn’t quite as critical as electricity, although many probably feel that way.
 
I don’t want to get into Net Neutrality here, but just consider the power of using rebates to change consumer behavior to help the carrier get the desired result. If there’s one area where telcos have a huge advantage over utilities, it’s in subscriber data. Utilities may know a lot about our overall consumption of energy, but very little in terms of which appliances or applications. By using data mining, telcos can compile enough intelligence on our usage patterns to devise pricing or bundling scenarios that better optimize their networks but provide a good end user experience for the applications we value the most.
 
As an example, a pricing plan for Internet-savvy subscribers could be based on limiting bandwidth access during peak times so they would instead do their heavy duty downloading during off-peak hours. Sure, operators do offer premium packages for these types of subscribers, but this only encourages more usage of bandwidth, and will only appeal to those willing pay the price. For the general public, operators will have more options to impact behavior with less expensive offers, which also has the benefit of keeping their networks running more effectively.
 
Furthermore, unlike utilities who only have two forms of currency – pricing and raw power – telcos have many forms of currency to work with. Aside from cash-based rebates, they can offer an endless variety of other incentives, such as free music downloads or blocks of long distance minutes. Can you see where I’m going here?
 
These ideas can be carried much further, and I’m not even talking about innovating with new communications services. Telcos could be doing these things right now with their existing offerings. The main point is that the principles of Demand Response could be reframed in a number of ways that telcos are not doing today. It’s not the only strategy for survival, but I think it has merit, and more importantly – and perhaps not surprisingly – it comes from outside the telecom world. We’ve seen countless examples of this, and my cautionary note to telcos is to not think that utilities are the only ones who can learn from Smart Grid. It’s really just a matter of perspective and looking for new ways to keep the business fresh. Telcos have enough competition to worry about, and should be willing to take good ideas from wherever they come.

Jon Arnold is co-founder of Intelligent Communications Partners (ICP), a strategic advisory consultancy focused on the emerging Smart Grid opportunity. To read more of his Smart Grid articles, please visit his columnist page.

Edited by Michael Dinan

Co-founder, Intelligent Communications Partners

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