How Nest and Opower quietly morphed into competitors

Energy startups Nest and Opower are members of an elite club: venture capital-backed companies that have managed to find some success building software and hardware around managing home energy consumption. Several years ago when the companies launched, they focused on very different products and business models. However, over the years the companies have moved ever closer to becoming direct competitors, and now stand in the interesting position of being two of the leading startups competing in a variety of ways to reduce consumers’ home energy use.

Evolution of the home energy market

That Nest and Opower have emerged as the leading companies fighting over this business says something about the small and slow-moving industry. Over the years the market for devices, websites and services that attempt to get consumers to reduce their energy use — a largely unsexy and unappreciated task — has been riddled with struggling startups and failed clunky product launches.

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Home energy dashboards never made a dent with consumers. Various startups from Tendril to EnergyHub realized early on that high-end energy dasboards were not the way to go. People don’t care enough about energy and didn’t want to spend money on an energy-specific device.

At the same time, residential-focused energy efficiency services from utilities have taken years to roll out in any meaningful way. Utilities are notoriously slow moving and cautious. Companies that tried to work in these markets got frustrated, too. Google and Microsoft both shut down their energy efficiency web tools after failing to gain much interest or develop any partnerships.

Opower’s entrance

When Opower launched almost six years ago, it found early success with an energy efficiency product that provided immediate value to utilities: mailed energy reports. While Opower has always been an energy software and data company, it were these mailed reports that were initially valuable to utilities that (particularly back then) had unsophisticated digital presences.

Honeywell & Opower’s iPad smart thermostat app

The Opower reports came in envelopes that looked like bills (so were almost always opened) and they used behavioral techniques (smiley faces, peer competition) to gently convince the utility customer to reduce consumption. The mailed reports were also relatively inexpensive compared to home energy devices and dashboards.

But over the years Opower has had to morph into a company that largely sells digital energy data products to utilities. There’s only so much business — and so much effect on consumer behavior — that paper reports can have.

Opower now largely interacts with utility customers through email, text messages, and websites. Its newer digital products include a Facebook app and more recently software for connected thermostats, in partnership with thermostat giant Honeywell.

Opower’s work with Honeywell and its connected thermostat product was one of the first indicators of how competitive Opower and Nest could become. The thermostat has emerged as the great hope for creating a gateway into home energy efficiency following the demise of the energy dashboard. In addition, Honeywell saw Nest as a pretty direct threat, having previously sued Nest over patent infringement around the learning thermostat.

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It’s unclear how much success the Honeywell/Opower thermostat is having, given that it’s such a new product. PG&E was the first utility that piloted it and some early results suggested that customers liked using the smart thermostats and particularly liked being able to remotely control the thermostat using their iPhone.

But one of the key differences between Opower and Nest’s business models is clear through that partnership. Opower’s utility products are almost always white-labelled for utilities, so, for example, if it creates a website and system of emails and texts for PG&E customers, then Opower’s alerts are branded with PG&E’s logo. In contrast, Nest has long been focused on selling directly to consumers and building a consumer brand.

Nest emerges

Nest was officially launched toward the end of 2011, though the company had been building its technology for a year and half before that. Its core business philosophy involves the production of a well-designed thermostat that users would covet and that could also collect data about the user and learn their behavior. The thermostat can use that knowledge to shave off between 20 and 30 percent of the user’s monthly heating and cooling, and Nest has mostly focused on selling the thermostat directly to consumers.

But Nest has more recently started to move into offering utilities and energy service providers energy efficiency services. Last month Nest launched a variety of energy services, including demand response, and also this week acquired a startup, MyEnergy, that aggregates and analyzes utility data. It’s clear that one of the most important aspects of the Nest thermostat is the services that can be run based on both the consumer’s individual and the collective Nest users’ data.

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Nest appears to want to maintain its brand and its ability to connect directly with customers. When it launched its energy services last month, the company told me that its services sit between the consumer and the utility. It also approves eligible customers and monitors how the services are performing and how the customers are reacting.

This direct-to-consumer approach could also prove useful if (and when) Nest launched any more connected home products in the future.

Power in the data

Essentially, both Nest and Opower are cloud-based data analytics companies that are using various — and increasingly competitive — ways to access home energy data. Nest calls its cloud-based big data algorithms Auto-Tune, and the data that is collected is from its increasingly large amount of thermostats being installed throughout the world.

Opower has built out its big data platform, Opower 4, which collects data from at least 75 utilities, processes data from more than 50 million homes, and has 15 million homes fully connected into the Opower platform. Opower is analyzing 16 percent of all of the smart meters in the U.S.

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Each company’s approach has unique benefits and hurdles. Opower has been widely successful with utilities using the approach of starting out with a basic data analytics service, and adding on more complexity and control over time. Utilities are hard customers to win over, so the benefits of winning their business early is invaluable. Nest, with its direct to consumer approach, could be slightly threatening to some of the more conservative utilities.

Nest, on the other hand, has the capacity to build a consumer brand that can make money from direct consumer electronics sales as well as working with energy service providers. Opower has little consumer brand presence and mostly subverts its brand to its utility customers.

Which method will prove more successful over time? It’ll be interesting to see, but in reality there will be room for both. It’s also refreshing to see different types of innovation and execution in the home energy efficiency space — an industry that has been neglected for quite a long time.