s The technology is digital.

s The medium is cyberspace. The product is a strategic system for billing, collection and customer services (BCCS) that integrates knowledge and choice through an automated customer interface.

The impending obliteration of the business boundaries between the gas, electric and other energy industries will launch a series of convergent waves of change. Executives, regulators, legislators, investors and, naturally, consumers must ride this wave over the next 10 to 15 years. Even as the gas-electric wave turns from a freshet to an Amazon, the next convergence is beginning. This next convergence will fuse energy, telecommunications and the internal, largely retail infrastructure of consumers. However, before companies can make money by playing convergence they must master the transforming forces, anticipate the emerging value chain and position themselves to market to the convergent consumer.

One legacy of decades of regulation is an inefficient gas and electric production, transmission, distribution and control system. Annual capacity-use factors fall well below those in competitive industries. This once-hidden, excess capacity now stands visible to customers, new entrants and aggressive industry players alike.

Competition creates transparency of prices and functions. Transparency and transactions create liquidity. Customers benefit from excess capacity, market liquidity and the eagerness of competing suppliers to earn a revenue stream. Customer switching inevitably follows. The entire historical structure of the "endowed" revenue base of the incumbents collapses to be replaced by an "earned" revenue base.

The new, powerful and enormous value chain that will emerge as a consequence of convergence and competition may be rather daunting. The new value chain's vocabulary will change. Its structure and operating practices will evolve. Its response times will grow amazingly swift. The new value chain will, however, offer tremendous professional opportunity for today's energy executives (em if they can adapt.

A New Value Chain (em

Keyed to Customer Response

Convergence will create an entirely new value chain of flowing-content industries. To recognize this new value chain, a utility or energy or telecom company also must identify consumer purchases and needs. The company also must identify the customer's response to proliferating offerings, strategic choke points and the system for delivering consumer satisfaction.

Consumer purchases can be divided into at least three mega-categories: consumer nondurables (e.g., clothes, food); episodic acquisitions (e.g., home, car, boat, major vacation, wedding, large appliances), and; flowing content (e.g., telecommunications services, cable, electricity, gas, water, sewage).

In addition to an internal technological infrastructure, flowing content requires an external delivery infrastructure. The external structure takes the form of permanent or semi-permanent connections such as pipes, wires, and wired and wireless bandwidth before it can turn valuable to consumers. It is only when content is ennobled by desired features that real value is created.

The reason why suitable business models and successful marketing strategies are nascent in the flowing-content business is because these industries have been tightly regulated. The buying

decision was imposed on the consumer by regulators and monopolists. With deregulation, the buying decision becomes a combination of planned and spontaneous.

As content managers are freed creatively and conduits remain largely regulated, content will increasingly uncouple itself from conduit. Content will seek to combine with the internal infrastructure to capture the newly liberated customer. This business imperative will force flowing-content convergence with the internal infrastructure.

The internal retail infrastructure (IRI) exists to serve many human needs and requirements. These needs include shelter and storage, information and entertainment, comfort and control and work and worship, among others. In every instance, the combination of energy services, computing, communication and knowledge management services adds immeasurabley to the ability of the infrastructure to serve these needs.

Digitization (em

Voice, Data, Text and Image

Digitization accelerates the transition from the endowed to the earned revenue base. Digitization mutates the analog world by stripping information from mass and simplifying it into just four elements: voice, data, text and image. It extracts the essence from quantity (i.e., physical commerce) and presents the consumer with convenient, digestible quality. With the world in a box, the consumer's search, selection and switching decisions are simplified.

Digitization amplifies consumer drivers while empowering customers to act on those drivers. Some of the most powerful consumer drivers the energy industry must comprehend are increasing time pressure, rising discretionary income, growing quantitative saturation and increasing democratization of choice. Many people are reaching their limit of physical consumption of commodities since basic requirements have long been met. This means that while consumers cannot spend much more on the quantity of physical consumption, they can and will spend more on qualitative consumption. These qualities incorporate added features and exchanging inferior for superior experiences.

Consumers will pay for anything that liberates their time and increases intensity of experience. The ability to satisfy these needs will emerge as powerful new value propositions. Aggressive companies stand to gain a growing portion of the total consumer spending on energy, telecom, infrastructure, etc.

The delivery medium is cyberspace (see Exhibit 1). Strategic Billing, Collection and Customer Services (BCCS) System is the dominant delivery mechanism that will materialize. The Strategic BCCS System offers such items as customized transactions, help and payment.

The tactical BCCS Systems currently in use by all energy and almost all telecom companies, are supplier-focused, and organized around product information. A Strategic BCCS System is consumer-focused and organized around customer knowledge. The scale and scope of the Strategic BCCS System will compel energy and telecom industries to pool resources, talent and market research. Pooling resources will create a new and vital element of a convergent value chain.

The Strategic BCCS System will itself transform into the "product and the experience" the customer seeks. By transcending the energy, telecom, water and IRI industries, the Strategic BCCS System will subjugate and combine them because that is what the consumer demands.

The Consumer Portal (em

No Longer the Mail Box

The Strategic BCCS System and convergence with telecom are also the keys for passing through what will develop into the most formidable strategic choke point for the energy retailing industry (em the consumer portal. Currently, the energy industry transfers responsibility at the portal and is rarely welcome beyond it. Today, only the entertainment and information media have accomplished this feat to any extent. Armed with a set of appliances (e.g., radio, TV, compact disk player, telephone, pager and PC) plugged into the electromagnetic spectrum, media and entertainment are trying hard to create a new personal environment to mold consumer buying decisions.

Analog interfaces (hard copy material including invoices, and order forms) and portals are being replaced by digital ones. The struggle to win the consumer dollar spent on flowing content is intensifying. The pressure on the energy, telecom and IRI industries to converge will grow irresistible. The need for successful content merchants to gather around the Strategic BCCS System will expand into the inescapable.

The emerging energy value chain will be distinct from telecom, water and IRI the further an element of this chain falls from the consumer portal. For example, at the energy production end, GEMCOs will evolve (see Exhibit 2). In the high voltage, high-pressure Big Wires and Big Pipes segment an energy/telecom Network Delivery business will likely manifest itself. As the final physical conduits end, hundreds of limited-geography energy LDCs may be replaced by a few new, multistate entities called RLPs (Retail Logistical Platforms).

Finally, in true retailing, there will be extensive integration of the gas, electric, telecom and other flowing-content industries. This integration of retail value chains will stimulate the rise of continental merchants. These merchants will seek to control the portals of millions of consumers via the Strategic BCCS System, offering endless combinations of features stapled to a few electron, molecule, bandwidth commodities and conduits and branded interfaces. These new merchants surely will try to position themselves on top of the trillion-dollar convergent value chain by controlling the consumer portal.

Energy Marketing (em Five Pillars

With the new value chain will come a new marketing. The new marketing seeks to deliver mass customized results, not push products as traditionally understood. Companies who compete on the value proposition of customized results will embrace the new marketing. These companies will invest the substantial intellectual and financial capital to construct the five pillars essential for retail success in the convergent market.

1. Enabling Platforms: A combination of a functional capability and a web of competence;

2. Features Engine: Creates myriad applications using the enabling platform as the foundation. A features engine encompasses customer collaboration; proprietary and third-party-created features library; and a combinatorial tool for bundling features in particular ways most satisfactory to a given customer (hence the importance of customer collaboration);

3. A Strategic BCCS System: Integrates knowledge, delivery, price/performance options of various features bundles atop an enabling platform, payment method (e.g., stored value cards, cash, credit card), an information warehouse, a help center and a secure private network for cyberspace financial transactions. A gift of the Strategic BCCS System will be the capacity to provide integrated billing for any conceivable combination of services, pricing permutations and payment variables (something no energy company can even hope to do today and telecom companies can do on a rather limited basis). The integrated bill, a minor aspect of the Strategic BCCS System, alone will confer 3 marketing advantages:

(i) Enhance customer satisfaction through a single, convenient payment;

(ii) Increase the sale of ancillary or upgraded services by creating a one step umbrella; and

(iii) Create a friendly interface for expanded customer care.

By linking the BCCS System with digital printing, the billing statement can be turned into a mass, customized magazine. Thus, the bill could be transformed from an undesirable, incomprehensible mechanism to force payment into welcome marketing communications.

4. Quadbranding: The next evolutionary stop in co-branding. An example of co-branding is an affinity group credit card. With quadbranding four brands associated with a provider of consumer content, a distribution channel or conduit, a means of payment (e.g., credit card) and a cyberspace interface will be combined to trigger the customer's buying decision. Quadbranding will generate repeat business and command the price premium afforded by the various brand equities.

5. Consumer Infrastructure: The IRI necessary for delivering solutions and benefits to consumers and may be owned, co-owned, leased or financed by the merchant. By linking the IRI with the Strategic BCCS System the merchant of the future can become a part of the almost-invisible environment of the consumer.

Energy Marketing (em

Five Pervasive Errors

The new retail marketing will concentrate on delivering results not merely products. However, the transition from the old to the new marketing will be difficult and expensive. Only a fraction of the putative players will succeed. This is largely because of two

factors: (i) pervasive marketing errors by energy companies, and (ii) the need for a new business model that is consumer, not supplier, based.

Companies are making five kinds of errors as they strive to create or develop a new business model. All make some, some make all.

Myopia about the industry boundaries that define the arena of strategic struggle. With convergence, the boundaries that once separated the gas, electricity, IRI, water, telecom and cable industries are blurring. The ambit of competition is vastly greater. Coupled with boundary myopia is competitor myopia as the universe of actual and potential competition expands. Finally, there is myopia about the deep drivers of consumers and their switching behavior. The relatively low switching, for example, in retail pilots reflects both inadequate customer education and early adopter behavior. That does not mean there is low switching potential; it just means that the main body of consumers are waiting for the early adopters to provide direction. Once this direction becomes manifest switching will be explosive in the next few years.

Ambiguity about the value proposition that is being articulated and offered. If a company is hesitant or confused about its value proposition, then it is inevitable that customers will be just as baffled. Pure value propositions range from deep discounting to speed of response to high information added to customized solutions to customer pampering. Companies can try to offer more than one value proposition. But, no company can offer all or even several value propositions at the same time to the same population. This ambiguity is closely related to myopia.

Indiscipline compounds the first two errors. For companies that avoid the first two, indiscipline turns strategic clarity about boundaries and value propositions into a management failure. Indiscipline ranges from not enforcing product quality and consistency, to frequently altering marketing messages or advertising approaches. It also includes bouncing from one customer segment to another without establishing successful dominance in any one segment, and cavalier behavior about customer requests for help or complaints.

Ineptness relates to not installing the proper marketing and sales business processes. Ineptness includes poor product design, inadequate or nonexistent post sales support, failure to launch products in time or on budget. It also includes sending poorly trained people into the field, miscalculating the margin contribution or competitor response to an offering. Poor tactical execution cannot redeem a stellar strategy. Nor can it turn superb customer insight into profitable revenues. This is probably the most common error. To some extent every company is making it. Organizational ineptness makes it impossible to dive through marketing windows.

Under-investment is the second most pervasive error. Under-investment pertains to undernourishing a whole portfolio of marketing activities from market research to product design and product launches to advertising. Distribution channel management, vendor alliances and, of course, the Strategic BCCS System suffer from under-investment. Retail marketing requires money and in much greater amounts than many realize or accept.

Establishing Marketing Domains

Customers are domiciled in three marketing domains: Commodities & Staples; Products & Services; and Experiences & Fashion (see Exhibit 3).

The objective of the new marketing is to first move customers up the Commodities & Staples domain and then to the next higher domain: Products & Services. Since the domains are nested, it is possible, to turn a commodity into a product with imaginative marketing, and a product into a commodity through carelessness. The energy industry is noted for turning services into commodities.

The control and choice of the domain surprisingly often resides with the merchant. If the offering is purely or mostly a price discount then the customer is moved into the Commodities & Staples domain. If nonprice features are added to the commodity the offering becomes differentiated. These nonprice features include applying financial and intellectual capital to physical capital. By adding these features, brand equity is created. The customer is then moved into the Products & Services domain. If substantial intellectual capital is added to a product, it then becomes a highly differentiated offering. Price competition is eliminated. In these rare instances, the customer is moved into the Experience & Fashion domain.

Since the customer occupies each of the three domains simultaneously, it is largely the merchant's choosing in which domain the point of contact with the customer occurs.

The Challenge Incumbents Face

If today's retail energy companies hope to move energy consumers to the next higher level, they will have to adopt the new marketing. The need to embrace new marketing is especially critical for the incumbents, which are utility holding companies. Moreover, the current twin challenges of home-market defense and customer accumulation outside the home market will be replaced in five or so years by the even greater challenge of repeat revenues in a highly competitive environment.

A reliable way to obtain repeat revenues is to keep nudging consumers up the domain curve. However, the further up the domain curve a consumer moves, the more attractive he or she becomes to an increasing number of firms. The more the market converges, the bigger the stakes and the more ferocious the battle for consumer spending.

The struggle for consumer dollars occurs because cognate and complementary industries define the relevant portion of consumer spending. (Gas and electricity are cognate; electricity and telecom are complementary, since one needs the other to enhance its own performance.) With convergence, the historically segregated industries coalesce into one large river of opportunity. Since telecommunications (or more generally the spectrum-based industries), energy, water and internal infrastructure are either cognate or complementary, the target and contestable market is now huge. With the blurring of industry boundaries and the metamorphoses of segregated value chains the contestable market is easily in the hundreds of billions of dollars per year. Turning fragmented service delivery into a new, integrated value chain and integrated marketing pushes those dollars even higher.

The market, of course, is for satisfying the many consumer needs. The noncommodity or featured portion of the market (the bigger piece by far) is on a growth trajectory much steeper than many realize. Paradoxically, even as the market swells to a trillion dollars it will segment into even finer resolution until each consumer is reduced to one segment. Within these segments, individual micro-segments proliferate. The prize is both glittering and elusive.

Gaining access to, motivating and retaining intellectual capital will be the common and dominant characteristics of winning firms. Superior intellectual capital will create superior corporate metabolism of information and knowledge. This knowledge will impel superior financial and business performance. Anything else is a change of ownership and management waiting to happen. The world of intellectual capital is a place where a few do spectacularly well, and the many trot behind, envious, mystified and earning a solidly middle-class living.

Vinod K. Dar is managing director of the Corporate Strategy and Management Group at Hagler Bailly, Inc., based in Arlington, Va.

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