The evolution of Silver Spring Networks (and what it means to the rest of us)
By: SGN Staff
By Jesse Berst
No, I don't know why Silver Spring Networks (SSN) failed to go public last year as widely expected. And yes, I asked during my latest briefing. And no, Executive Vice President Eric Dresselhuys wouldn't answer my IPO questions.
But I do know that the delay could end up for the best. In that intervening year, SSN has matured its vision in a way that could increase its valuation. And it all comes down to one word: Platform.
The evolution of a vision
Take a look at SSN's self description circa 2005:
Silver Spring Networks connects utilities with their customers over a two-way, real-time network...
And how it described itself a year ago at the height of the IPO speculation:
Silver Spring Networks is a leading smart grid solution provider...
Now look at how it describes itself today:
Silver Spring Networks is a leading smart grid platform provider...
You can see the evolution visually as well. Look at the nearby drawing taken from SSN's Web site. In its early days, SSN thought of itself as a communications provider -- the blue layer at the bottom. Today, its vision embraces the blue layer plus the platform in the middle. It even reaches up into the green applications layer with the help of more than 40 companies now certified as SSN partners.
So what's the big deal about platforms?
Smart Grid News has been preaching about the value of platforms for years. I think they are essential to smart grid progress. (For a primer, review our survival guide to the smart grid platform by professor Geoffrey Parker, Director of the Tulane Energy Institute). Done right, platforms are good for the provider and good for customers too.
And they're really good if you want to go public. IPO underwriters and investors love the word "platform." To them it stands for high growth and high barriers to competition. Microsoft has a computing platform. Cisco has a network platform. Qualcomm has a cellular platform. Google has a search platform.
If I were going public, that's the kind of company I would want to keep. Smart grid platform has a very nice ring.
There's another aspect to SSN's evolution: It has moved away from an over-reliance on smart metering. Look back at SSN's platform drawing. It now shows five applications. Not just metering, but also distribution automation, demand response, smart home and electric vehicles. Of those five, metering is nearing a plateau but the other four are growing, especially DA and DR.
By expanding its vision, SSN has inserted itself into those growth paths. Most market researchers expect smart meter sales to plateau in 2012. But they expect both OT (operational technology including distribution automation) and IT (information technology) to surge, with each one climbing to tens of billions in annual sales worldwide. They have equally cheerful predictions for the demand response sector.
Challenges to SSN's platform play
SSN is still a long ways from being the Windows of the smart grid. Here are just a few of the hurdles it must still overcome.
De facto acceptance. The smart grid is not going to evolve like computing or cell phones, with one or two dominant platforms and a few others. Although SSN is (depending on who you ask) #1 or #2 in market share in communications, it still has less than a third of the market. It would need more than two thirds to become the de facto standard. As a result, we're likely to see a dozen or more competing platform concepts and a dilution of the power.
Meter data management as a platform. At some utilities, the meter data management (MDM) function is evolving into a quasi-platform. The MDM system grabs the meter data, massages it, and then feeds it out to the various applications. SSN has an MDM offering, but it does not have the traction of market leaders eMeter, Itron and others.
Go to market issues. I'm not sure SSN has figured out just how to market its platform and its applications in the distribution automation and demand response sectors. Or just how to attack Europe and Asia. To be fair, only the multinationals have a handle on those questions. Which brings up the spectre of...
Competition from big players, especially Cisco. On one hand, SSN has historical ties to Cisco. On the other hand, "bad blood exists between the two companies" according to a story in greentechgrid. Whether or not that is true, Cisco did ink an alliance last fall with SSN rival Itron. One result of that deal could be an acceleration of Itron's move into the Internet Protocol world currently dominated by Silver Spring. Cisco also bought tiny mesh networking specialist Arch Rock, leading to speculation that the networking giant may move into SSN's communications territory. And speaking of smaller companies, what about...
Competition from innovative small companies. Other innovative companies have their eyes on the platform play. San Francisco-based Grid Net, for instance, has far less visibility but at least as much ambition. It touts its Grid Net PolicyNet as a "software platform" and a "grid operating system." And Grid Net is not locked into any one communications technology. In fact, it just announced support for the cellular LTE platform -- a technology that, once widespread in 2012, could become a smart grid contender. Which brings up the challenge of...
Competition from different communications technologies. SSN is the clear leader in RF mesh, which is the clear favorite with large, investor-owned utilities in the U.S. But some analysts believe public cellular networks could catch on, especially when 4G arrives. Meanwhile, parts of Europe seem set on powerline carrier and parts of Australia are using WiMax. If other transports catch on, SSN will have to be quick about supporting them. And if one or more new protocols do become prevalent, it increases the issue of...
Communications interoperability. SSN communications modules are compatible with most major meters, so utilities feel they are not locked in to any one meter manufacturer. But they are locked in to Silver Spring Networks. Sure, they can swap in a different meter. But they can't swap in a different communications module. Most of SSN's competitors use a similar strategy and they are all getting away with it. Perhaps utilities haven't noticed. Perhaps they've noticed and they don't care. But if utilities band together and demand an interoperable communications solution, we could see a lot of companies scrambling, SSN included.
And now for some pure speculation
Since I couldn't get any IPO revelations from Dresselhuys, I'll use my imagination instead. Barring any wild cards (oil shock, double dip recession, war in the Middle East, etc.), I believe the economy will continue to grow slowly through the spring and summer.
During that same period, I think SSN will announce additional deals, including some in areas other than metering, such as the recent expansion of the partnership with Oklahoma Gas & Electric for customer engagement and demand response. As a result, investors will come to believe that SSN will not be negatively impacted by the metering plateau -- that revenues from other areas will fill in any slowdowns in metering.
I think that positions SSN well for a public offering this fall. Presuming they make progress on the issues explained above. And presuming they remember to stress the word "platform" with conviction. Have I got it right? Please use the Talk Back form below to add your comments. Or your own speculations.
Jesse Berst is founding editor and chief analyst of Smart Grid News.
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