GE and The Value Destruction That Comes With Digitization.

Digital Goods Are Less Valued Than Physical Goods

In their research on customer perceptions of physical vs digital goods, Ozgun Atasoy (Postdoctoral research associate at Basel University) and Carey K. Morewedge (Professor of Marketing at Boston University) suggest that

‘in five experiments, people ascribed less value to digital than to physical versions of the same good…even though digital goods are, in many cases, substantive innovations relative to their physical counterparts’

In experiments run by the authors, tourists were unwilling to pay more for a digital copy of a holiday picture than for a physical version of the same picture. Even though the digital picture could be shared, was perceived to be of higher quality and would degrade less quickly than the physical version. The conclusion is that, for the consumer, there is a greater sense of psychological ownership with the physical product. While their research ‘Digital Goods Are Valued Less Than Physical Goods (Nov 2017)’, focused on the digitization of consumer products like photos, music and books, this destruction of financial value, because that is what it truly means to the provider of the good, can also be applied to physical products in the enterprise.

And that’s where the agreement that was signed between New York Power Authority in October, and the elimination of 12k jobs at GE comes in.

Virtual Power Plants as Disruption Insurance

On the 25th of October, just a few short weeks ago, GE and New York Power Authority (NYPA) announced a partnership to launch the first digital utility building Virtual Power Plants. It didn’t get much press, we’ve had a lot going on this year, but, for those paying attention, it was signs of how much is fundamentally and quickly changing with the utility industry. It was an announcement of NYPA’s attempt to manage the future, while also indicating the direction GE has chosen to go.

NYPA is committed to the further build-out of our vision to become the first digital utility, creating a real-time digital replica of our assets and automating many back-office processes,” said, Gil C. Quiniones, president and chief executive officer of the New York Power Authority,

Without getting too technical, Virtual Power Plants (VPPs) simply enable the utility (or the provider) to configure and aggregate customers, similar or not, under the same pricing or distributed energy resource without the constraints of physical location. You and I had to be physically close to be under a similar generation/pricing arrangement but the VPP takes away this need. Sidenote: this is a gross simplification that nonetheless explains the underlying thinking. The VPP digitizes the operational requirements of managing disparate assets and optimizing the performance of those assets to generate the best returns. But any utility that moves from buying physical turbines from GE to purchasing VPPs enters the same customer mode as the tourists in the research mentioned above; VPPs cost less and value is destroyed for GE, fewer new turbines built, and a new set of skills are required from the employees that will deliver this new product/service.

For the nation's largest state-owned utility, with 16 generating facilities and 1,400 miles of electricity transmission lines, to decide to defer further asset purchases — a 440k Horsepower Gas Turbine that can light up 500M homes by generating 1000MW costs ~$125M!- and focus on digitization, was a huge dent in the future revenue possibilities for GE, one of the top turbine manufacturers in the world.

Now 12k People Need To Adjust To The Future

Something that was generally missed when the last administration decided to enact the Clean Power Plan was that it provided an excuse for the traditional (and oftentimes incumbent) utility to claim that they had to build new assets because ‘the EPA says so’. As the requirements to comply with the Clean Power Plan become less stringent under the current administration, the utilities no longer have that excuse nor the need green the current grid. But they still have to invest somewhere. This was the perspective I gained on this during a conversation with Douglas Ferguson who suggested that NYPA was buying ‘Disruption Insurance’ by partnering with GE.

But what happens to the 12k GE employees who thought they would be part of this future of greening the grid? Unfortunately, they are also GE’s attempt at buying disruption insurance and GE is doing this ahead of the rest of the market. The GE ‘Molly Ad’ is not just a cute ad, it’s a fundamental shift in GE’s business model because the world is digitizing quicker than they expected.

The GE layoffs provide two lessons, one good and one bad;

1. There will be more layoffs in this industry because GE was not the only company to misjudge the pace and extent of the ongoing transition. As the industry digitizes value erosion happens and, consequently, the companies in this space will need to cut their cost base to balance out the revenue erosion that research shows will happen here. ‘automating many back-office processes’ from the NYPA president’s quote above is business speak for ‘we will have to change how we do business and some people might have to go’.
2. The expertise that the current employees, who are experts in this industry, bring to the table will be invaluable to companies that are causing the digital disruption. As competitors move into the space there will be a need to understand the underlying levers and drivers of the industry, to disrupt a thing you have to understand it thoroughly. That understanding will come from laid-off industry experts who are willing to be flexible enough to lend their expertise to the disruption. This’ll be their own form of ‘disruption insurance’.

There will be a lot more layoffs in this industry. But on the backend of this will be a new more customer-centric and much nimbler industry. I hope so.

Find more microanalysis on tech disruption in the utility industry at Utility Radar. Please share, like, and tweet and sign up for the Polymathic Monthly Newsletter — if you’ve read this far, I’m betting you’ll love it.