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 focussed 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 annual report 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 £17.9m operating profit during 2010/11 (up 9% on the previous year) and spent £34.7m on capital expenditure. These numbers suggest that telecoms are a strategically important part of the SSE business, yet there is little mention of it. So is a telecommunications business an important strategic growth area for SSE and by association for the other big 6 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 1997. SSE telecoms, according to the 2002 annual report, had two main products:
1) Network services, including managed bandwidth; and
2) Use of the SSE property portfolio for site services – in effect an opportunistic revenue stream adding mobile phone infrastructure to SSE’s existing electricity assets.
npower and Centrica had a different focus to SSE, concentrating more 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 the energy companies to offer competitive prices against incumbent telecoms providers. The reality, however, was that acquisition and operational costs were far higher than expected and customers didn’t understand propositions that mixed energy and other products, so anticipated margins were never realised. The end result was that npower sold its telecoms business to Tiscali in September 2003, enabling it “to focus on electricity, gas and related products[i]”, and Centrica followed suit in December 2005, selling One.tel to the Carphone Warehouse “to focus closely on growing our core energy and related services operations in the UK and internationally[ii]”.
So this historical context may go some way to explaining why SSE doesn’t make more strategic mention of its telecoms business. But has the landscape started to change? Firstly, let’s consider some recent SSE actions:
1) In February 2008 SSE signed a 3-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 may have proven that the white-label model works as a new four-year deal was signed in May 2010;
2) In March 2008 SSE invested £1m in a Smart meter company, Onzo. The focus here, however, 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 in Smart meters is in data rather than asset ownership and operational cost reduction;
3) In May 2009 SSE entered the data centre market, acquiring Cantono Data Centre Services Limited for £4.85m. 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 for SSE. They have also continued to grow this capability since; and
4) Lastly and perhaps most interestingly, in October 2011 it changed its name from Scottish and Southern Energy PLC to SSE PLC. In itself this is not hugely significant, but it’s 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’s also worth noting some changes in the external environment and energy market that may be influencing SSE:
1) Without doubt it is getting increasingly difficult for energy companies to deliver steady earnings growth. Well documented political, regulatory and international energy market factors are all contributing to huge challenges in the energy sector. All energy companies are looking beyond their core vertically integrated energy businesses for growth;
2) The mandated introduction, by 2020[iii], of Smart meters in the UK provides huge possibilities, yet also a significant potential threat to the big 6 energy companies. Ownership along the supply chain, including connectivity and data infrastructure could be a huge source of competitive advantage; and
3) Customers are becoming more and more information and data hungry. Information technology and home / office infrastructure is also becoming increasingly connected. The benefits of having a greater comprehension of energy consumption, how this compares to peers and what they can do to change is starting to be understood by customers. What’s 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 computer / 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 their capability in this area. Perhaps it is because they are slowly building the business unit. Or maybe it is because their board are 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 firm. 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.
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