Tendril Networks - being smart about energy

Saturday, August 2, 2008

Over the last month, I have written several articles on smart energy. Yesterday, I also posted on the interesting parallels between cellular wireless and smart energy industries. Today, I will focus on the company that got me interested in smart energy in the first place - Tendril Networks.

Tendril Networks is a smart energy startup based out of Boulder, Colorado. Tendril was started with the intention of providing Zigbee middleware that can enable a multitude of applications. Since Adrian Tuck came on board as its CEO, Tendril has turned around and solely focused on the smart energy vertical. Smart move, I should say. Today, the company seeks to be a niche player offering a complete end-to-end solution for the utility company and the consumer.

Tendril, unlike other players in this market, has taken a customer-centric approach to the smart energy problem. The company’s philosophy is simple – give the consumer the choice. Consider the following situation -

It is peak summer and you cannot stay inside your home without the air-conditioner. It is very likely that your neighbors think the same way. The resulting peak utilization leads to capacity limitations. In a model being promoted by Tendril’s competitors such as Comverge (NASDAQ: COMV), the utility company steps in and turns off these high utility devices. This outage helps the utility company recover from this peak capacity crisis but may potentially ignore consumer inconvenience.

Tendril’s Residential Energy Ecosystem (TREE) begs to differ by passing the control and choice onto the user. The in-house display, Insight provides usage and cost details to the user. Examples of such data include variable electricity prices, current and projected usage and costs, price increase and emergency situations. So, if the utility company senses peak hours, it can send out warnings and spike the price and let the user react to it as against forcing an outage.

Besides the residential gateway that controls the devices and their usage, Tendrils’ USP comes with its backbone software portal. This portal, aptly named Vantage, allows the users to remotely control these devices and define rules for various signals from the utility company. You may, for example, decide that you want your heater turned on when you come home from office, no matter what the current rate of electricity is.

Tendril does have its share of challenges. It has to compete with existing metering and devices companies to gain foothold. Besides, it has its task cut out in terms of being able to convince the consumer of its benefits. If the device is not mandated at homes, the utility company may not see value in its solution. After all, if it can neither prevent outage nor monetize it enough if the consumer does not feel the need for TREE, then the entire model fails. Perhaps a work-around would be for the utility company to mandate TREE with subsidies for the devices.

Tendril looks to deploy its end-to-end solution in around 50000 homes by the end of this year by partnering with utility companies. The company has grown from less than 20 beginning this year to about 60 employees to match the rapid recognition and success it is gaining in the smart energy market. Adrian expects the company to grow to around 150 by the end of 2009 commensurate with the 10-folds deployment increase that it hopes to achieve during the same period.

Tendril raised $12 million recently and is looking for a much larger round of financing by the end of this year. For VCs and private equity companies looking at Tendril for an investment, I will say that Tendril is well-positioned to exploit growth in the smart energy market. This is true for the simple reason that the company has all components that have the potential to drive the value chain (read my previous article on the value chain here.) Depending on how the industry moves, the company has the ammunition to very quickly adapt, discard or outsource commodity and low-margin components to carve out a sustained revenue stream.

For me, Tendril is for smart energy what Qualcomm was for wireless twenty years ago – a bold startup with a complete, novel solution that efficiently addresses the capacity problems dogging its industry. Whether Tendril will meet with the kind of phenomenal success that Qualcomm has had will depend on the company’s understanding on the value chain drivers and also the strategic and tactical acumen of Adrian and his team.

[Note: In case this article sounds too esoteric, I would encourage you to read the previous Smart energy articles I have published here, here, here, here and here]

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Smart Energy and Cellular - a study of parallels

Friday, August 1, 2008

I recently started writing about Smart Energy as an exciting new technology frontier. There is another reason that Smart Energy was attractive for me. As I dug deeper and started thinking more about it, I found an uncanny resemblance between one of the possible smart energy business models and the cellular mobile carrier business model in the US.

The basic issue

The utility companies fear that they will be capacity limited in the future and wish to use smart metering as a way to slow the process. If, for example, the grid supported 20 users previously, they now hope that with ‘smart’ usage, 25 users can be supported. This will also guarantee a delay in the deployment of additional infrastructure. This, in turn, translates to a delay in Capacity Expenditure deployment.

This is very similar to the capacity problems that 3G network carriers will face as more users begin to extensively use their smart-phones for data. The carriers will turn to advanced transmit and receive techniques so more users can be supported for the same power expended at the base-station. This, in turn, will delay the deployment of more base-stations. Advanced receiver techniques like interference cancellation will assist the carriers to get a higher RoI as well.

The Value Chain

The cellular value chain, in my mind, comprises of four players namely the service provider, the cell-phone maker, the chipset/technology provider, and the consumer. In a model which is driven by the service providers trying to reduce CapEx, they will be driving the chain. In the US, for example, the service provider determines technology, the devices and the usage model. Until Apple changed the name of the game with its iPhone, the service providers called the shots here. Though the iPhone is tied to AT&T, it has been driving the increase in the latter’s customer base proving the power of brand and user experience.

The Smart Energy is closest to the cellular carrier-centric model. The utility company is akin to the service provider. The back-end software infrastructure and platform provider is parallel to the technology provider (e.g. end-to-end CDMA-based network for cellular). We have zigbee chipset companies such as Ember. I also like to use the cell-phone analogy to describe the two hardware components installed at the consumer site – the in-house display is parallel to the cell-phone and the gateway that controls the devices is similar to a femtocell or an in-house base-station.

The drivers

The Smart Energy value chain is slightly different in that the energy company has a monopoly. In other words, it is unlikely for the user to be able to pick the utility company. This implies that at least initially, the utility company will drive the value chain. A sound business case and monetization capabilities become imperatives. It is also the task of the technology providers (software platform makers, for example) to make their case with the utility companies. Their task is cut out – why is their system the best method for monetization? At the same time, how attractive is it to the consumer? How do they sell the devices and the services to the consumer?

These technology companies are hence in a position similar to Qualcomm’s about 15 years ago when the latter was trying to pitch CDMA to carriers world-wide. The difference, however, is that the utilities companies are more local and regional in scope. So, the technology companies will have to win over multiple utilities companies to grow market share. Hence word of mouth and deployment success become very vital.

Word of mouth will be driven by consumer feedback and user experience. So, much like the iPhone that has given 3G a big impetus in the US, devices with a great UI, look and feel become important as tools to mold consumer mindset much. The utility companies, in order to maximally monetize on ‘Smart Energy’ will go with the solutions that gain maximal consumer traction. Of course, devices/services that offer great consumer experience without much for the utility companies will automatically be sieved out of the equation.

The gateway companies will directly interface with the utilities companies to sell themselves. Gateways will be similar to the modems that Comcast installs at consumer sites. So, its capabilities will be driven by the needs of the utility company.

Clearly, while the technology and devices companies have the potential to drive the value chain at various points, I am not as optimistic about chipset companies. Though they will ride on shipment volumes, they will never be in the driver seat since the chipsets already seem to be commodity products.

A final word

So, while there are differences in the value chain between the cellular and smart energy industries, there are many similarities that cannot be ignored. On the contrary, companies should actively learn from how the cellular industry has evolved in the last fifteen to twenty years as they look to gain foothold in this promising new technology frontier. Feel free to contact me if you need additional insights along these lines. For now, let me throw in some future questions whose answers may well lie in past lessons –

How do companies protect themselves from another intellectual property war?
How about sustained consumer interest? Device churn etc.?

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Posted by Vijay Nagarajan at 3:58 PM 0 comments Links to this post  

Infineon - Valuation

Sunday, July 27, 2008

[Originally for Sramana Mitra's site]

Last month, we discussed in detail the various businesses of Infineon and also peeked into its strategy. We noted that Qimonda was the cause of most of its miseries. We also suggested acquisition and growth possibilities for the German company. Against this background, it is time for us to look at its valuation.

I value Infineon at $9.30 per share. This valuation accounts for the recent Qimonda write-offs as well as potential future losses due to the memory manufacturer. The two successive write-offs, totaling 1.411 billion euro, demonstrate Infineon’s firm commitment to leave the loss-making Qimonda behind as it creates a strategy for its future.A further upside of my valuation is the wireless communications segment. Given the competition and Infineon’s relative unpreparedness for the convergence movement, I have assumed a modest growth rate for Infineon’s communications segment. The situation can change if the company addresses the lack of connectivity solutions in its portfolio, either through long-term partnerships or acquisitions. With the company vigorously shaking off Qimonda, watch out for more activity on the wireless front.

The biggest downside is expense management. The analysis assumes that the company will execute on its promised cost-cutting measures. Its non-Qimonda operating margin of around 5% is far below the industry average. Thus, CEO Peter Bauer’s objective of reducing costs by around $300 million a year becomes a critical metric for the company’s success. It remains to be seen how successful the company will be in cutting 10% of its workforce in the face of Europe’s tough labor laws. If it continues to have low margins, Infineon’s valuation will drop to about $6 per share.

Infineon has its task cut out for it since the company has to strike a fair balance between its expenses and the need to embark on an aggressive strategy to grow its mobile wireless market share. It has the 3G iPhone now, but all bets are off for the mobile chipset supplier for next year’s refresh. It hopes to retain Apple with the newer 3G chip and reference designs it announced recently. But beyond that, Infineon may find the going tough on the baseband front. With Nokia and EMP looking away from TI in the recent years, STM and Broadcom seem poised to better exploit this situation. Infineon will have to embark on an aggressive all-inclusive platform development strategy. But this involves high development costs. With the current turmoil due to Qimonda and its string of poor quarterly results, the company will find it tough to justify such a strategy.

In summary, the $9.30 valuation assumes that Infineon will successfully get over Qimonda and execute on its expense management plans. This valuation has the potential to go up if the company overcomes competition to aggressively grow its wireless communications business. The stock is trading around $8 today after its recent quarterly results. I will perhaps not buy Infineon shares now. I would prefer to see the company deliver on its cost-cutting measures. But will I buy it at $7? Yes, since the upsides outweigh the downsides on this stock at that price.

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Posted by Vijay Nagarajan at 3:41 PM 0 comments Links to this post  

Atheros to Broadcom

Saturday, July 26, 2008

Hello readers,

I have resigned as a Systems Engineer at Atheros this week after a very fulfilling year's stint. I will be joining Broadcom Corporation as a Product Manager early August. The move is a carefully thought out career decision to progress to strategy and business development roles in the wireless/semiconductor industries.

Atheros has been a great company to work for. As a company, it is very nimble and is great at execution. I view it as a 900 person start-up replete with very friendly people. I have special respect and appreciation for Don Breslin who is a great engineer and a wonderful manager. I will treasure the positive experiences at Atheros as I progress in my career.

Moving forward, I am getting into a role that I have been carefully chiseling towards. Broadcom, with its broad portfolio and its wide brand recognition offers me the right platform to make my transition from engineering. Besides, as I have written in the past, I believe that Broadcom, with its aggressive campaign in mobile wireless and its complete platform portfolio, is positioned to be a key player in the convergence devices movement if it plays its cards right. So, I am very excited about my role and look forward to being an active contributor to its future revenue and profit growth.

If you wish to discuss this move further with me, please feel free to contact me using the email form on this site.

An unfortunate side-effect of this move will be my inability to continue coverage of most, if not all, topics in the blog. I may, from time to time, post tutorials, FAQs and white papers on various wireless topics but will abstain from wireless/semiconductor stock analysis and commentary from August.

Given this situation, I am looking to find writers/analysts who can take over my blog and continue to build on its credibility and visibility. The sizable readership and subscribers base now comprises primarily of wireless industry executives, entrepreneurs, VCs and the Wall Street community. So, well-researched and credible content guarantees great visibility. Interested readers, please contact me using the email form in this site with your professional details and why you are interested in taking over my blog.

The blog has been a personal branding vehicle for me. For the moment, I have to take this hard step away from this blog that I have so passionately maintained over the past year and a half. I will, however, try to tie up some loose ends and also address some recent reader requests over the next week.

While I will focus my wireless market insights and analytical abilities towards Broadcom’s continued success, I am still undecided on how I can channelize my passion for writing and information sharing. I am contemplating another blog covering others topics of interest to me such as product management functions, financial analysis methods, blogging as a personal branding and developmental tool, and technology career choices. I welcome other ideas from my readers as well.

Finally, I wish to thank my readers who have been a motivating factor for me to produce well-researched content. It has been a fulfilling year and a half for me. Thanks again!

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Posted by Vijay Nagarajan at 9:28 PM 1 comments Links to this post  

Inside the 3G iPhone - revisiting my predictions

Sunday, July 13, 2008

TechOnline published a very detailed teardown analysis of the 3G iPhone that can be accessed here. Their analysis went a step beyond iFixit's disassembly as they scrutinized 'under the hood' of the various iPhone components to identify them more accurately. Their extraordinary effort also lets me review my iPhone predictions that were summarized in my June 2008 post here.

Here is the photo of the iPhone 3G chipset as dissected by TechOnline -


Prediction #1: As this photo indicates, Infineon emerged the cellular chipset winner. The analysts are not sure if it is the PMB 8878 since they had no way of comparing the iPhone component with a known sample of the Infineon 3G baseband offering. They found that the baseband was a two-chip, single package solution. They further identified it as the 2G chip and a 3G accelerator.

For the moment, I have no reason to suspect that this is anything butthe PMB 8878. I don't believe that Infineon would have a chip customized for Apple. On the other hand, the company perhaps quickly cobbled together a 3G solution in the form of a two-chip PMB8878 to cater to the market needs (including those of Apple.) Given the long cellular product cycle and the tight iPhone schedules, this would have been the path of least risk as compared to spinning single chip solutions. For the record, Infineon recently announced smaller and more sophisticated 3G solutions with its own software stack. These latest chips (that are not in the iPhone) are likely the more thought out, and more optimal single chip UMTS solution.

The two-chip solution inside the iPhone 3G further brings back the question I have been asking for a while now. Does the 3G IP in Infineon partially or wholly belong to InterDigital? It could well be that the iPhone has many if not all elements of the SlimChip IP from InterDigital. Apple's license with InterDigital last year will then have deeper implications than the normal 3G license that the King of Prussia-based company seeks from handset vendors.

While the exact details will emerge in the coming days, my prediction #1, "Infineon will be at the heart of the iPhone. " has turned out to be true.

Prediction #2: "Samsung will perhaps continue to own this part. " Not much surprise here as the iFixit teardown revealed last Thursday. Prediction #2 was true too.

Prediction #3: Before we discuss WLAN and Bluetooth, here is a second picture from TechOnline -

So, as it turns out, Apple yet again went with Marvell for WLAN. Prediction #3, "For platform stability issues, I will bet on Marvell grabbing this socket again." was right.

Prediction #4: "If WLAN belongs to Marvell, CSR, which is in the current iPhone, will likely own the Bluetooth socket again." A look at the figure above will make it 4 on 4 so far.

Prediction #5: The 3G iPhone carries the Hammerhead II GPS solution co-developed by Infineon and Global Locate, the company that was bought by Broadcom last year. So, that makes my prediction #5 - "The next generation will have GPS and it will likely belong to Broadcom" - right too. I don't know the specifics of the licensing agreement between Global locate and Infineon. So, I will not be able to comment on whether BRCM will benefit from this component, if at all.

Prediction #6: The touchscreen controller belongs to Broadcom as well.

In summary, all six iPhone predictions I have recorded in this blog have come out to be true. As you can see, I based my prediction on most of these components on the rationale that Apple will not want to hamper the stability of the 3G iPhone by testing out new components in a short time span. As it turns out, most of Apple's component decisions were based on this very logic and is aptly pointed out by the TechOnline article.

[PS: For a more thorough look into the component dissection, please visit TechOnline's site]

[Disclosure: Long IDCC at the time of writing]

Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

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Infineon cellular chipset in iPhone 3G

Thursday, July 10, 2008

iFixit has dissected the iPhone 3G here. It is a well done and well documented dissection that comes a full day early for iPhone geeks in the US. I do not wish to steal the thunder from the ifixit folks. So, while I will let you look up the rest from the iFixit site, I will touch upon one component that is very close to my heart.

I am hopefully not jumping the gun but here is what I read from the photos that iFixit has posted-

While the folks who did the dissection have so far identified the Infineon Smart3i chip, I think the photo of the chipset also indicates the Infineon 608 baseband. The chip with the part number 337s3394 is very likely the PMB8878, or XGOLD 608. This is further corroborated by the 608xx labeling on that chip and also a similar part from the last iPhone that was identified as the S-GOLD2 baseband processor.

This perhaps confirms something that I have been predicting for around a year now. Infineon's chipset is in the 3G iPhone and by extension, InterDigital's 3G protocol stack is also in!

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InterDigital - Thoughts on the ITC staff report

Wednesday, July 9, 2008

The staff attorney assigned to the InterDigital-Samsung ITC dispute favored Samsung in his report. His position that there is no violation calls for rejecting InterDigital's proposal to ban disputed Samsung products in the US. InterDigital's stock took a 25% dip as the Street is now pessimistic about its prospects. As the drama unfolds, here is an attempt to even out public perception. Before you read on, however, please note that I am neither a legal expert nor a Wall Street analyst. So, take it for what it is, just an opinion.


Firstly, while the staff report is an unbiased third-party opinion on the case, it is still only one instrument for the Administrative Law Judge (ALJ) to decide. The judge is yet to hear both companies' positions. The staff report is not binding on the judge. There is precedence in the past where the ALJ has acted against the staff recommendation. So, while InterDigital has lost some positioning in this case now, the staff recommendation is certainly not the end of the road for this ITC dispute.

Secondly, contrary to what I alluded to in my last post, an unfavorable decision by the ALJ will only reject the call to ban Samsung phones in the US. Besides, one theory is that a 'no violation' decision may be the result of the staff attorney finding that this is a licensing dispute that has to be amicably resolved between the parties without warranting a ban.

Thirdly, and perhaps most importantly, InterDigital has many more things going for it beyond the ITC dispute. Most notably, the company has already licensed to Apple and RIMM, both of whom are battling it out in the smartphone market. It is also very likely to be a beneficiary of the 3G iPhone to be released shortly. Ironically enough, Samsung sources 3G chipsets for some of its designs from Infineon. These phones will hence use InterDigital's 3G protocol stack and, like the 3G iPhone, contribute per-unit royalties to the King of Prussia-based company. You can find more about InterDigital's products and strategies here and here.

Finally, for the curious minds who are wondering what will happen to InterDigital's valuation if the Samsung case goes against it, I will direct you to my February 2008 valuation post here. A nominal assumption on the total royalty money gave me a $75/share valuation then. You can look at the revenue impact of the royalty rate replete with graphs there.

In summary, I feel that the sell position taken by many investors is understandable. InterDigital is a volatile story stock and the ITC staff report did little to buttress investor confidence. On the other hand, a 25% drop seems unwarranted in the light of a) lack of enough information given that the case is still in its preliminary stages and b) many other developments to look forward to from InterDigital.

[PS: Thanks to all the readers who responded to my previous post]

[Disclosure: Long IDCC at the time of writing]

Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

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Posted by Vijay Nagarajan at 3:30 PM 1 comments Links to this post  

InterDigital - Samsung ITC case

Tuesday, July 8, 2008

If there is an award for bad blog-post timing, then I will perhaps be a front-runner this month! Just yesterday, I posted about Nokia and IDCC settling their UK disputes. I mentioned that it was a sign of more good news to come. Today, IDCC announced that the ITC staff in the Samsung case has favored Samsung. This has let to an astronomical 25% drop in IDCC's share price as people scampered to let go of their shares in anticipation of more bad news.

This is not a great development for IDCC. The downside is that if the ALJ upholds the staff's recommendation, then IDCC will lose any right to collect royalty from Samsung in the US. This will also likely percolate to its ITC case against Nokia creating a domino effect. This being said, the dispute still has a long way to go. Both parties are yet to make their respective cases.

For the moment, I am looking for more clarity in this matter. I would appreciate it if readers can provide any information that can be disseminated to educate others here. Please send me emails through the contact form. I would especially appreciate insights on the actual proceedings, court reports etc. that can go beyond what is being commonly reported.

More updates to follow as I come to know more!

[Long IDCC at the time of writing]

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InterDigital - More good news on its way?

Monday, July 7, 2008

InterDigital, the King of Prussia-based wireless company, saw its shares jump by about 5% last week when the S&P and Nasdaq were down by around 2%. The reason for this optimism was the news that InterDigital and Nokia have agreed to end two legal proceedings in the UK.

In July 2005, Nokia asked a London High Court declare InterDigital's intellectual property as non-essential to UMTS (3G standard encompassing WCDMA and HSDPA). InterDigital, in turn, filed a suit against Nokia in December 2006. The companies recently decided to drop these lawsuits. The terms of the agreement are unknown. Besides, the companies continue to be at loggerheads in front of the ITC in the US. While this settlement does not reflect a sudden friendliness or alliance between the two warring companies, it is certainly a good sign for both parties.

For Nokia, it means lesser distractions from its focus of retaining and growing its mobile market share and its fight to match new niche players like Apple. For InterDigital, ending the UK disputes quickly was becoming important. Its legal disputes with tier-one handset vendors were dragging their feet pulling down the company's intrinsic value with them.

I see the amicable end to the UK disputes also as a sign of more good news to come. For both companies, this is a good data point for their ITC-related licensing negotiations. If the companies can agree on the ITC litigation as well (which I presume will revolve around the exact 'per-unit royalty' that InterDigital will then collect from Nokia's 3G phones), the wireless IP-house will widen its 3G footprint. It will also carry this momentum forward into the ITC litigation/negotiation discussions with Samsung for more favorable results.

Like I have said before, I don't doubt that IDCC has important 3G IP. It is more a question of when and how much the industry is willing to pay for it. Maybe we will know many of these answers over the next few months. Earlier coverage on InterDigital can be found here, here and here.

For me, like for many other InterDigital investors, this week will answer some other questions to bring more good news. This Friday, I will watch out for the many 3G iPhone teardowns that will follow its world-wide release. If my analysis is right, we will see InterDigital's 3G protocol stack inside the new iPhone. IDCC is guaranteed per-unit royalty from Infineon for each of its 3G chipset sold. I will let you guesstimate what it means to InterDigital's revenue for the next few quarters!

[Long IDCC at the time of writing]

[Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.]


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Smart Energy - Business Case

Why would the energy/utility companies implement Smart Energy? What sense does it make for them? Fair questions to ask! I will attempt an answer here.

Despite the ‘green’ benefits, the most important thing to make this concept fly is for it to make business sense to the utilities companies and the slew of start-ups that have created an elaborate value chain.

The first argument is the ability of these devices to delay capacity expenses for the utility company. What does this mean? The energy companies have already invested substantial money in the infrastructure. For them, as the number of users increase, it will help them until they hit maximum usage. Once the usage hits this point, there are only two ways to go. If it has more money, and if it makes economic sense, the company will roll out infrastructure to support the load increase. If not, the user is faced with power outage.

The smart energy systems present an alternate route for the utilities companies. If the usage is controlled to a point that the capacity is reached five years later rather than today, then it delays the additional roll-out thus saving these companies billions of dollars temporarily.

Of course, the additional roll-out of capacity is inevitable. So the utilities companies should analyze what, if any, are the additional economic benefits of such a system. While I am sure there are research studies with cost-benefit analysis, the usage models and the consumer participation levels are unclear. So, the energy companies are likely to roll out minimal monitor systems to experiment and add incremental features to get a sense of what the consumer wants and what he is willing to pay.

Secondly, once implemented widely, the industry can have a sustained revenue stream. One way to accomplish this is the Software as a service (SaaS) model. The utility company can charge a nominal monthly rate per household per month for the software monitor and control platform. The company, in turn, can share this revenue with the software platform provider. Alternately, the utility company can pay a one-time fee for the platform vendor and monetize the service by itself.

To conclude, Smart Energy can make very good economic sense to the companies involved if they can combine creativity, common sense and a basic understanding of consumer behavior.

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Posted by Vijay Nagarajan at 2:22 PM 0 comments Links to this post