Consumer market survey of last-mile communication services using PLC

Consumer market survey of last-mile communication services usingPLC Monika Olsson 1, René Kamphuis 2 1 Sydkraft Bredband, Tycho Brache Vej, AB 205 09 Malmö Monika.Olsson@fek.lu.se, URL:h

Consumer market survey of last-mile communication services using

PLC

Monika Olsson 1, René Kamphuis 2 1

Sydkraft Bredband, Tycho Brache Vej, AB 205 09 Malmö Monika.Olsson@fek.lu.se, URL:http://www.sydkraftbredband.com

2

Energy research Centre of the Netherlands ECN, Business Unit Solar Energy,

Renewable Energy in the Built Environment, P.O Box 1, NL-1755 ZG Petten, The Netherlands, Email: kamphuis@ecn.nl , URL: http://www.ecn.nl/

SUMMARY:

This paper describes, in short, the results from a

market survey performed during spring 2001 in

the Netherlands A much more extensive

analysis has been given in [1] The survey had a

large response rate, which enabled us to make

statistically valid conclusions for the whole

Dutch market The aim was to:

1 Investigate household member's interest

and attitudes concerning services

distributed by last-mile access techniques

like PLC

2 Explore the strategies for service offerings

with a focus on distributed services, based

on PLC only, or in combination with other

access techniques as well as an exploration

of capacity demands

3 Draw conclusions what type of

segmentation model is useful to analyze the

market for communication service

offerings

4 Present an overall strategy advice based on

the market survey and on the strategy

models discussed in this report, as well as

other market oriented deliverables

The questionnaire, containing 30 questions,

focussed on customer loyalty in a liberalised

market, new possible services to be added by

utility companies and the customer's assessment

of energy issues, especially with regard to

renewables The data are analysed using three

different segmentation schemes A

demographic, customer loyalty and decision

style segmentation of the results is presented

I Aim and focus

The purpose of the residential customer survey

was to find out the customer market

expectations and attitudes on both existing and

new services based on last-mile access using

PLC communication that can be offered by an

energy supplier in the future This helps in

identifying new strategies for utilities to enter

the PLC market as well as adding more value to

their existing products and services PLC is a possible narrow band and broadband technique The capacity and transportation characteristics

do influence on which level service offerings can be made A classification of typical applications in this respect has been made in [2] Some energy companies want to offer any services - everything from energy related communication services to entertainment like games and film Others may see limitations to

do this and focus on only PLC as distribution technique for energy related communication services PLC is a fast growing technique and only a few years ago the broadband capacity was thought not to be competitive with other fast speed techniques Today, the development has made a significant step forward, although there are no guaranties that it is a successful technique for fast communication In current application trials, broadband transmission speeds in the Mb/s range are achieved Generally, capacity and high quality in the distribution of services are regarded to be vital issues for survival and expansion on the market when offering services

II Energy companies in the communication service market

Energy companies, when expanding their business to offering communication services start to compete with existing telecom and cable operators There are several strengths that the energy supplier can lean on when entering this communication market There are some weaknesses however, that can easily become limitations when taking the step into a market with other functions than the primary energy business

The energy business has a solid financial background that makes them tolerant and stable

as a new player in the communication market This is needed since the expansion is connected with major investments with long pay-off times Apart from future fiber to the home (FTTH) solutions, no dedicated infrastructure is present for bi-directional high-speed last-mile data-communication accessing homes The existing

electricity infrastructure is regarded to be a

foundation to keep down the investment cost for

building a PLC-based communication

infrastructure Telecom operators have the same

fortunate situation with a copper line to almost

every household but no in-house network Cable

companies in some countries with a high

penetration of the cable TV network have a

similar position Current ICT technology

developments lead to standardization in a large

number of application fields (telephony (VoIP),

embedded control, gateways etc.) to the

IP-protocol (Internet) Furthermore, Internet

application functionality possibilities are

increasing From a distributed file system,

Internet is gradually evolving to a distributed

computing platform This will lead to a radically

different Telecommunication landscape in the

coming years Having an always-on, secure

broadband IP-connection infrastructure will

give a large competitive advantage

Large customer databases are a critical factor It

is generally agreed that it takes five times more

money to get a new customer than to keep

existing customers satisfied and expand the

service offerings to them The weakness with

customer databases is, that these are simple

databases with limited information about the

customer In many cases there are only names,

addresses, energy consumption and the

spending data No other behavioral or

satisfaction level is registered In a fast moving

communicative world, knowing the customer

behavior is important to be able to continuously

develop market offerings in synergy with the

market needs

Energy companies already have existing

resources within the organization like customer

support that can handle a larger amount of

customers, a sales organization, provisions for

billing and to some extent marketing functions

Energy companies have a good potential for

building concepts together with other

companies in strategic alliances They are

attractive as partner for different actors in the

communication and service industry since they

are stable, often with good reputation and

financial strength

On the other hand, what can be seen as

weaknesses are primarily the low experience in

the ICT business and second their monopolistic

background The deregulation process is

transforming, step by step, the whole EU into a

liberalized market Some countries like Sweden

have already adapted fully to the free market

mechanisms since 1999 The Netherlands is

increasing the scope of the deregulated energy

market segments in a stepwise fashion with

residential users having a free utility choice in

2004 In this respect, they lag behind the

telecommunication industry, which has moved earlier to a deregulated market and fierce competition Traditionally, there generally is a long decision process within the energy companies that hinders fast actions in the market As a last weakness, the low knowledge

of working with new business models can be mentioned as a barrier for market introduction

III Service characteristics

All communication services have their special technical and functional characteristics, which make them complex to bundle if several are offered Some require higher delivery speed, others high security and some require thorough logging of consumption patterns One thing they all have in common are that they, in general, have the possibility to be provided with higher value within a controlled, secure narrow- or broadband network instead of reaching them from the open Internet The speed and response time on the Internet is not predictable, security

is lower, unexpected bottlenecks in data transmission may occur A controlled, dedicated network can offer better capacity stability, quality and data storage and security than the open Internet When looking at the demand for bandwidth, the coming services are expected to demand increasing bandwidth over time; the more consuming the more bandwidth demand

is Though, there is an open window between the higher bandwidth demand and the general Internet speed Energy companies can try to focus on services that are in between the highest capacity demand and still provide an extra value that Internet accessed services can not offer The aim does not have to be video-on-demand

in the first market introduction The idea is to find services that can provide higher value than ordinary Internet right from the start One example would be a secure e-payment function

of services provided by different service providers The quality and secure feeling would

be experienced by the fact that the service providers co-operate together with the trustworthy energy supplier Even if the energy companies in general are known for their slow market movements, they are most regarded as a safe and trustworthy company from the customer perspective

Among the services mentioned in [3,4] possible examples are IP-telephony, fast Internet access, distance working, interactive distance education, virtual reality games, program-for-hire, e-commerce platforms, remote control of home facilities, streaming services, video conferences, public service, local information, 3D animations, video- and voicemail, music and

other entertainment There are five main market

issues:

• Demand for services that already exist in

the market but can be distributed via PLC

or by other means One example would be

music The only difference is how it is

stored and how it is consumed

• Demand for new services – these services

are difficult to market since no one has any

experience with them until a critical mass

of customer has started to use them

• The existence of infrastructure to the

households – the household penetration can

vary and the technical limitations then can

limit some service offerings, depending on

how they are distributed For example, if

the services need intermediate storage it

may not be economically feasible to offer

them to all customers if they are in areas

with lower penetration rates

• Existing knowledge within the Energy

Company – expanding knowledge about

communication services or working in

alliances together with partners while focus

is on the distribution This is an main

strategic issue to decide before making

marketing offerings

• Technique availability – what does the

current technique provide and are there any

coming upgrades that change the spectrum

for service offerings

The service types are not only connected to a

given capacity minimum, they also require

different payment methods Of course, all

services can be offered in a package with one

total fee, but this is not what the customers

expect when they want to buy They prefer the

possibility to choose and to use the services

only when needed This puts pressure on the

Energy Company to log the consumption by

different parameters When working with

service development or bundling it is vital to

know what the company can invest and handle

when forming a service strategy In [4] a

discussion of how to approach such a mix is

given

IV Customer segmentation in an

interactive age

In the age of increasing usage of information

technology and interactive functions, the

tracking of customer behavior becomes easier as

well as more important The traditional mass

marketing concept is applied to reach a larger

audience in mass media The sales performance

can be seen as a function of both the number of

exposures and the precision of which of these

exposures result in actual sales If the amount of exposures is 10000 with a 2% precision/hit rate the result is 200 sales The residual 9800 exposures do not result in any actual sales Some percentage could at least remember the

ad This is a typical example of a mass marketing method where the precision is quite low Information technology has the potential to address individual consumer patterns and interests through the usage of electronic media Directly targeted offers can be sent to those consumers who really have the interest and the offer is reached with a much higher potential hit rate Today there are many buzzwords for the high precision marketing mechanisms, like one-to-one marketing, database marketing, interactive marketing and even more They all express the same idea viz to reach the consumer with a higher precision

Segmentation variables are mainly grouped into four larger categories ([5]) geographic (region, city, climate, season and more),

• demographic (age, gender, income, family, profession and so on),

• behavior (buying pattern, type of satisfaction, usage frequency, brand loyalty and more) and

• psychographic (lifestyles, social circumstances, personality and more) Demographic variables are most commonly used (Danaher & Rust 1992), but they do not give information about the individual behavior and personalities within the group Behavioral variables are most important, since they provide knowledge about the customers’ actual buying patterns[6] This is not enough however Behavioral variables give information of what the previous behavior was, but not the what the coming behavior will be The next step is trying

to understand the motives behind the actual buying action, which can help to predict a future buying pattern Also, the psychographic variables give additional information about the personality differences among customer groups

In this survey, three of the four main types of segmentation variables were used First the traditional and common demographic segmentation is done As a second base, we use the behavioral segmentation process with loyalty and satisfaction parameters Last, we explore a powerful and promising new segmentation based on a theory of the way me make decisions in our every day life both privately and in working life The decision style base belongs to the psychographic variables category and mainly reflects different personalities in different situations

V Market survey in the

Netherlands

The market survey was carried out in the

Netherlands, because the power distribution

network has the topology to introduce PLC The

number of connected households to a

transformer station is in the order of few

hundreds The distributed connectivity is via

underground connections with outage rates

resembling those of telephony Furthermore,

Dutch utility companies are known to be

innovative in developing new services and

market niches Competing infrastructures are

ubiquitous in the Netherlands in the form of

cable and POTS networks The usage of the

Internet and the prospected increase therein is

large All these factors make the survey also

representative for future developments in the

European situation

V.1 Survey method and

representativity

The survey was prepared with one pilot test to

make sure that the respondents understood the

questionnaire In the pilot test it was also

assured, that the questionnaire gives answers to

fulfil the purpose of the market study Finally, it

provided a test for validation of the style

segmentation analysis tool

V 3 Demographic segmentation

The survey was done in the Netherlands among

people drawn from a database with addresses in

the Netherlands A mail survey was conducted

with 10 000 questionnaires sent out to the Dutch

household market Persons registered as the

main inhabitant were addressed There was a

15,81% response rate A total of 67,5% of the

response group has access to Internet either only

from home, at work/school or both at home and

work/school The age group of 30-39 has

highest access rate, 70,9 %, to the Internet from

the home Of all persons within the groups from

20-59 years, more than 60% have Internet

access at home The Internet penetration is quite

high in the Dutch market and triggers the usage

of new narrow-band and broadband based

services However, the market is still expecting

everything on the Internet to be free It takes

time to change this attitude and it also pushes

the demand for good, usable services that work

better than existing substitutes distributed by

other media If video-on-demand is supposed to

be competing with existing VHS/DVD movies,

the service must beat the perceived value of the

existing media The quality may not be lower,

the price has to be compatible, the convenience

of only downloading and not go to the movie store must give this additional value

V 2 Loyalty segmentation

Four major loyalty behavior groups were found:

• Satisfied Loyal: They are highly satisfied

and have a low intention to change energy supplier The most loyal customers

• Satisfied Potential Mover: Satisfied, but

has an interest to change supplier, even if they are highly satisfied

• Unsatisfied Low Involvement/Captured:

they are not satisfied but though has low intention to move A false loyalty pattern occurs

• Unsatisfied Mover: are both unsatisfied and

have a high intention to change supplier This group show the weakest loyalty, if any, and contains the most movable customers

The loyalty segmentation showed how to prioritize loyal or non-loyal groups Working with loyalty management systems keeps the company updated with the information of how loyal each customer is

V 3 Decision style segmentation

Decision style segmentation [5,6] was found to

be a very useful segmentation tool for understanding the behavioral pattern behind the attitudinal answers Decision styles also showed clearer differences in attitude and answering patterns where demographic results failed to provide significant differences among groups The results show clearly showed a difference between the operating style and role style

VI Some conclusions

We were able to draw major conclusions from the market survey and put them in a summary of advice for energy companies when bundling and offering PLC distributed services An important implication is that the customer does not care what access technique there is behind the services that are offered! The main thing is that the distribution of the services is functioning Then, the focus is on what value the different services offered are worth to each customer Not only the household itself, but also the individual consumer The primary reason to leave the current energy supplier is the high level of the energy prices Low customer service is the second reason and too little information given is the third ranked reason to change supplier On-demand and other possible communication services were among the lowest ranked ones Basic services like energy and telephone are

most wanted Always online Internet was highly

ranked as well The lower ranked services had

one thing in common and that is that they are

not widely used in the household market of

today Customer's habits and needs are not

developed yet and this means a market push is

needed as mobile telephony had 5 years ago

People have simply no experience with more

sophisticated multimedia based services and

their substitutes are available through other

media like TV, CD’s, videos, DVD's to a

suitable market price

Even if the correlation results were not of very

high significance, a price sensitivity pattern was

found between green energy prices and

telephone/Internet prices The higher price one

is willing to pay for the telephone rates, the

higher is the probability that the customer is

willing to pay 5-10% higher, green, energy

prices A similar pattern exists for Internet rates

as well as for telephone rates The higher price

one is willing to pay for the Internet access, the

higher is the probability that the customer is

willing to pay even 15-20% higher energy

prices If the intention is to offer telephony or

Internet with a higher market price than

average, the advice is to find customer groups

where the price sensitivity for green energy is

low These customers have a high probability to

belong to the Satisfied Loyal group in our

decision style segementation, which also shows,

in general, a lower price sensitivity

PLC was least known of the mentioned access

techniques This is vital when introducing the

technique in the market The advantages PLC

has above other techniques are important to use

in marketing efforts to enlarge the market

knowledge of the technique

VII Critical factors for success of

services offered

Energy companies have, seen from a customer

perspective, some important strengths when

taking the step into the information technology

and communication business Knowledge about

them triggers the possibility to develop them

into value creators:

• Energy companies are often regarded as

trustworthy companies with financial

strengths, which is a strength compared to

many dotcom companies that now suffer

from a low level of trust due to many

bankruptcies

• Integrity and security of personal

information is weighed high generally in

the market Many customers are afraid of

giving away their personal data to an

unknown company The Energy Company

can work with its strengths as a stabile, trustworthy company and, by adding an information/integrity policy to the customer, they probably can strengthen loyalty of several movable customers However a thorough understanding of the differences between households as well as understanding differences of the individual behavior is crucial Energy companies may not have the marketing function, skills and organization required in the existing organization The market is far from mature The slow changing of consumer behavior on the market (resistance of adapting new techniques and price levels) will demand tolerant market players

References

[1] Olson, M and R Kamphuis Market survey

of last-mile communication services using PLC PALAS IST-1999-11379 ECN-C-01-092 ECN, Petten 2001

[2] Kamphuis, R and C.J Warmer Deliverable

D6 Software architecture requirements for Powerline Communication as a Last Mile Local Access (Final Version 1.0, september 2000).

PALAS IST-1999-11379 Available as ECN-report ECN-C-01-006

[3] Ottosson, H., H Akkermans, J Dickinson,

D Hines, S Host, R Kamphuis, G Lindell, P Nicholson, P Sweet and C Warmer,

Deliverable D5: State of the art and initial analysis of PLC-services PALAS

IST-1999-11379 Version 2.0, June 2000 Available as

ECN-report ECN-C-00-092

[4] Sweet, P., H Akkermans, M Olsson

Deliverable D7: PLC Service Business Model Development and Market Survey Instrument PALAS IST-1999-11379 Final Version, 29

December 2000 Available as ECN-C-01-037

[5] Peter J.P & Olson J.C (1996), Consumer

Behavior and Marketing Strategy, Irwin.

Report from Schablondelegationen (18-06-2000), Svenska Kraftnät, www.svk.se

[6] Larsson R., Schönknecht J., Sweet P., & Driver M., (1999), The Customer Side of Energy Saving Activities: Exploring Attitudes and Interest on The Karlshamn’s Energy Market In Ottosson H., & Akkermans H (Eds.), The KEES Project, Energy Efficiency in Deregulated Market Malmö, Sweden, EnerSearch AB