IS IT A FAD OR BUSINESS? According to a recent SmartMoney %n1%n article, about 3 million customers traded $120 million in securities on the Internet last year, generating $700 million in commissions for online trading firms.

While this sum marks just 5 percent of total commissions for securities trading, it accounts for a healthy 30 percent of commissions for discount brokerage. Online trading firms, nonexistent several years ago, now total more than 50. Evidence for this explosion can be seen in the recent advertising campaign for DLJ Direct and in the growth of Discover Brokerage Direct, both offshoots of full-service brokerage houses. All the same, in some businesses it can appear difficult to figure out how the new online ventures are planning to make money.

Consider telecommunications, for example, which has seen a certain degree of deregulation. Why have local and long-distance telephone carriers acted so slowly in utilizing the Internet? Given the nature of the customer base, technology and in-house capability common to a telecommunications carrier, one would have expected that sector to lead the way in capitalizing the power of the "information super highway."

This reluctance shows that until we see meaningful levels of customer acceptance, large companies will feel hard-pressed to commit much capital or resources to the Internet. Perhaps this reason also explains why, in the energy business, early forays in Internet commerce have come from smaller companies and entrepreneurs.

Moreover, energy firms doing business online face several additional questions: (1) What products and services will customers find appealing? (2) Which products and services should they bundle or aggregate? and (3) How will the Internet tip the balance on that age-old question (em is it cheaper to "purchase" customers via a merger and acquisition, or simply to form a marketing organization to rob them from others?

Households: 26 Million and Growing

According to the Yankee Group, the number of U.S. households using the World Wide Web will grow to 26 million by the end of 1998, up from 20 million in 1997. Others estimate total "Web-friendly" households at more than 40 million.

Price Waterhouse, in its Technology Survey, discovered that many people are turning to the Web as a substitute for traditional media. Of the households surveyed, two-thirds use the Web instead of watching TV or reading.

But are people spending money online? Based on Forrester Research data %n2%N, 1997 web sales were about $2.4 billion and are projected to approach $12 billion by 2000.

So we have a business expected to grow to $12 billion over the next several years. It's driving markets. It's spawning hundreds of start-up businesses. Yet when we discuss the Internet and utility opportunities, many people yawn. This reaction is hard to understand considering annual energy sales top $250 billion and opportunities to cross-sell customers abound.

Major outsourcing companies, local and long-distance telephone companies and many Internet providers are now beginning to focus on customer systems and sales opportunities. It seems obvious utilities should shadow developments in this sector. Enron's recent foray into the retail energy market, the backing of RCN Corp. by Peter Kiewit to aggregate customer telecom services and the recent investment of Metromedia Co. in CPM Energy show major players are prepared to commit capital and resources.

Customers: Worth Only $116?

One question always hot for debate is the value of customers. Do you need them? Should you bundle services to keep them? What's the cost to win them back if you lose them?

We all remember AT&T and MCI offering $50 checks to get consumers to switch long-distance service. A recent research report on web sites and user values shows that a customer's value is about $116 (see Table 1).

Recently, utilities have begun to consider customer valuations as they try to evaluate where future business opportunities lie. The debate continues over whether it makes sense to purchase customers via acquisition or to form a marketing organization to steal them from others.

In January, RCN Corp., a firm offering competitive local access for telecommunications, announced it acquired the largest Internet service providers in Boston and Washington (em UltraNet Communications and Erol's Internet Inc. (em for $27 million and $83.5 million, respectively. These takeover prices, when compared with overall market capitalization, indicate a per-customer value of $844 for UltraNet and $285 for Erol's. These figures show that much more goes into valuation; clearly, premiums can be justified for market entry and growth.

Many energy utilities today are experimenting with different products and services. There's fear that deregulation will make the generation side a low-margin business and that loss of customers to new competitors will reduce revenues. This, in turn, will devalue existing rate-base assets. Deregulation's uncertainty and its impact is forcing companies to reevaluate who their customers are and how they can make money from them. Products and services considered include telecom, meter reading, home security, appliance sales and repairs, gas and water services, and the sale of non-regulated power. Of all the above, the two areas of greatest activity have been non-regulated power and telecom services.

The sale of non-regulated power is attracting the most interest because of the size of the market and utilities' belief that it is their core business. Unfortunately, as new entrants gain market share, much of the profit potential is lost in the short term. In addition, as the need to market multiple commodities becomes reality, many pure electric players will be at a disadvantage. Based on the 14 Internet-based companies in Table 2, only one offers oil, gas, propane and electric; five handle gas and electric; five sell electric only; one sells natural gas only; and two offer telecommunications. The reality is that major power marketers/brokers will have to handle natural gas and electric (em at a minimum.

In the energy sales group, the focus will be on California, as it is the first to deregulate, and with 11 million households and 1.2 billion businesses %n3%n, it presents a huge opportunity. These initial attempts to build new businesses will be incubators for many initiatives. Many will make money from utility customers and the changing business environment.

The other area where much is going on is the telecom sector. Most utilities have communication systems and fiber loops that can be used to provide extensive telecom services. Many utilities have set up telecom subsidiaries, in many cases entering joint ventures with telecom companies. Two local access providers in Table 2 are utilizing the Internet (em RCN, an aggregator trying to rob customers from telephone companies, and Utilicom Networks Inc., a company seeking utility partners to jointly develop systems.

There's so much going on in the telecom sector that it's a topic by itself. But in considering the Internet and customer service, it must be mentioned as a key component. As for the other services mentioned, it seems highly likely that they will have a place in the customer service driven utility of the future.

Marketing Plans: Still Uncertain

Will the industry turn to a customer-focused model?

The long-distance telephone companies have had a terrible time trying to enter the local phone market. Mike Armstrong, the CEO of AT&T, recently halted the company's expansion into providing local service after spending more than $3 billion. The reason cited: The high cost of attracting new customers. Armstrong recently refocused efforts to upgrade AT&T's Internet, wireless and cable technologies, areas where he sees future profit potential in local service several years out %n4%n.

Just like in the electric sector, there's as much uncertainty in telecom of the value of marketing to different customer classes. The reality is, due to the sheer size of the electric market, there will be customer service-focused companies, as well as wholesalers, generators and distributors. In addition, niche players in many of the service-related areas will grab market share.

There will be a large contingent of customer-focused organizations. It's probable that in the future there may be little differentiation between an electric and telephone customer organization. This is one reason it will be important over the next few years for electric, gas and water utilities, as well as propane companies, to monitor both electric deregulation and telecom developments: How will developments in each affect their business? If RCN can pay $285 to $844 for customers accessing the Internet, how much should electric utilities pay for customers to form such a business?

Table 2 lists more than a dozen firms and web sites for online energy marketing. The aggregators, consumer bulletin boards, brokers and telecom companies working in this business are all good examples of companies to watch, and thanks to the Internet, are as easily accessible. Dozens of companies are in early-stage development, raising private capital. There are many more companies pursuing related strategies, a good number in start up. Venture capitalists are assisting some of the start ups, such as Automated Power Exchange. It will be important to monitor what services are being bundled to be re-offered to customers and how customers respond to Internet-based commerce.

Utilities, too, are actively pursuing power marketing. Regulated utilities today are expending substantial sums of money and time to enter this sector. With traders commanding six-figure salaries and the demand for experienced individuals outstripping supply, it's worth considering if the Internet model presents an opportunity.

Ed Meehan is a consultant and private utility investor. He has 20 years experience on Wall Street as a financial officer and investment banker, 17 years of it at Merrill Lynch. He has spoken at industry conferences on utility deregulation and new business opportunities and can be reached at emeehan268@aol.com.

1 "The new e-vangelists," SmartMoney, February 1998.

2 "The Virtual Mall Gets Real," Business Week, Jan. 25, 1998.

3 "Electricitychoice LLC Web site.

4 "New Boss New Plan," Business Week, Feb. 2, 1998.

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