Oracle and Opower Explain Why They Joined Forces—and What It Means for Utility Software

It's official. As of this week, Oracle now owns Opower.

So what is one of the world's largest software companies going to do after spending $532 million on one of the most innovative software providers in the utility sector?

In many ways, just let Opower be Opower.

"We bought Opower because they understand the cloud and cloud development. We're extremely happy with the development group that is there. We want to keep it intact," said Rodger Smith, the senior vice president and general manager of Oracle's global utilities business.

That doesn't mean the integration work will be an easy task, however.

Now that Opower is a wholly owned subsidiary of Oracle, the two entities need to build out a new management structure, combine their global sales teams, bring the development teams closer together, and, most critically, integrate their software seamlessly for customers. All of those efforts are well underway.

According to Opower CEO Dan Yates, integration has been smooth so far.

"In many cases, companies will squash or parcel out your business, leaving you with less than you had. Rodger and his team have been very conscientious about not doing any of those things," said Yates. "Now that we're getting over the hump of all the integration, we're going to be able to get down to business together."

Utilities only represent a small piece of Oracle's multibillion-dollar software business. But Oracle is hoping the sector will have an outsized impact when it finally combines forces with Opower.  

GTM spoke with Oracle's Rodger Smith and Opower's Dan Yates about the genesis of the acquisition, how the two companies will integrate their products, and how they plan to meet the rapidly changing needs of utilities.

Stephen Lacey: So why this deal now? What did Opower bring that Oracle didn't have, or didn't have fully developed?

Rodger Smith: The utility industry is moving to a customer-focused industry. There's no doubt about that. One of the things the industry must do to grow revenue -- which has been stagnant since about 2008 -- is to start looking beyond the meter. What additional services should they offer beyond the meter? 

If they don't do that in this industry, then future growth of revenue is going to be really tough. Oracle brings everything, frankly, from the power plants right up to the meter. The Opower acquisition gives us the reach beyond the meter, whether it's energy efficiency, whether it's offering additional services, or where they're operating call centers more efficiently. The metering component needs to be more important as we go further into the future because that's going to be the mechanism utilities use to offer those services to the customer.

So now we have a totally complete set of solutions -- from the meter all the way back to the plants, and then from the meter all the way back into the customer. Nobody offers that. That trend is new. Three or four years ago, utilities didn't talk about the fact that they got to customize their services to the customers. That's all changing. The industry is finally getting it. I think the time is perfect.

Stephen Lacey: What did Oracle offer that Opower needed?

Dan Yates: Opower is really bringing a new set of capabilities that compliment everything Oracle Utilities has been doing on the front office. It's almost a merger of equals. Of course, we're a tiny part of Oracle. But the part of the business that we're coming together with is almost the same size.

Often, you have a whole list of products and offerings that are duplicative that need to be shut down -- and that list between our two organizations is essentially zero. We really are totally complementary offerings, and yet they're so highly adjacent, and that's what I think makes it strategically interesting.

A couple of years ago, as we were evolving our strategy beyond energy efficiency and toward the broader customer service realm, an investor told me: "You are either going to have to turn into Oracle or you have to get acquired by Oracle." I think he was right.

Rodger and I were talking about deals, collaborating on potential customer relationships, and it just became more and more clear that our company was becoming more complementary and compelling to Oracle. Over time, we realized we would have either join forces or grow faster in order to compete -- and this acquisition was just a much lower-risk, higher-value way to advance our strategy and vision.

Stephen Lacey: That's a compelling point. What does this say about successful strategies in selling software like this into the utilities sector? Do you need to hit this type of scale in order to overcome this difficult sales process? 

Dan Yates: Yeah, absolutely. I think scale does matter. While the utilities business is a small part of Oracle, it has sold some of the largest deals in Oracle's history. Utilities move slowly, but when they do move, they move really big.

In thinking about Opower's history in the last couple of years, a lot of our growth has come from astonishingly large deal values of over $100 million. We were beginning to get to scale within the leading edge of the industry. But as Rodger described it, the entire industry is evolving its thinking about how to connect with the customer.

As we looked at that, we thought that trend was going to run away from us pretty fast -- and that made being part of a much larger organization like Oracle more attractive. We now have the ability to be all over the globe, with the ability to deliver an end-to-end service. Oracle is in the position to do that with Opower. And Opower on its own was not.

Rodger Smith: The industry is clearly looking to enterprise solutions -- driven by digitization, driven by customer demands, and driven by the need to replace old IT systems.

I think it takes scale to address all those solutions. Utilities don't want to have to deal with a bunch of small suppliers to do that. They'd like a integrated enterprise solution. And that is what made this combination of Opower and Oracle Utilities so attractive. We can actually offer a fully integrated solution across the entire value chain of the utilities. And we can do it in the cloud.

Stephen Lacey: What was the genesis of this acquisition? Was it Oracle looking out into the market and asking how to get deeper behind the meter, or was it Opower looking for a partner to scale? 

Rodger Smith: I would say it was both of those things. Dan and I have known each other for four or five years, and we continue to talk about the marketplace and watch each other pretty closely.

The industry is moving beyond the meter for the first time. Customers are demanding it, and utilities don't have a clear way to react to that. Opower helps us address that.

The other driver was the cloud. Opower has the best cloud solution by far. When you can go to a major utility and set something up in a matter of days and have it integrated in a matter of a few weeks -- that's true cloud. That gets speed in the equation, and that's the way the whole industry is moving. The fact that Opower got there before anybody else did was amazing. 

Stephen Lacey: How will the technical integration work? How will Opower's and Oracle's software work together?

Dan Yates: That's the big project for the next few months. It's probably best to describe the key themes we're exploring and prioritizing.

Theme one is at a foundational, technical level. Oracle Utilities is moving all of its existing products -- including customer care, billing, meter data management, the network management solution and mobile workforce management -- into the cloud. There's a joint effort to accelerate that roadmap to get the entire existing Oracle Utilities suite into the cloud.

Second, there are countless integration points and potential opportunities for us to cross-pollinate between Oracle's customer care suite and Opower's platform. There are opportunities to inject Opower interfaces into the customer care and billing suite. There are opportunities for us to build direct connections with things like meter data management or Oracle's data warehouse. Of course, both systems will still work without the other, but they would work instantly together. 

There are opportunities in the other direction as well. Oracle has a leading rate engine that can model and calculate utility rates of the most sophisticated varieties, and we have been striving for those capabilities. We don't have them, and we're looking at what the next step would be to automatically embed that kind of capability within the Opower platform. That's just the top of the list.

Stephen Lacey: It sounds, Rodger, that you are hearing utility customers who need and want those more enhanced, behind-the-meter services and customer-care options. Is the future that many software providers long envisioned finally starting to materialize?

Yes. There was a sea change this year at this Edison Electric Institute's annual conference. There was more discussion by the CEOs during the event about the demands of the customer. For the first time, executives were getting up and saying, "Listen, we may not have the regulatory mandate that says we have to go change the way we deal with our customers. But we have a customer mandate. Customers are demanding that we be treated like other industries treat customers. They want more information, they want to know what rates might be available. They want to know how they're using their energy. They want to know what they can do to reduce their energy consumption. They want more customized treatment. We know this industry is changing."

I've been around this business a long time; I've never heard them say that before. Not without a regulatory mandate.

It has finally gotten to executives that this industry is going to change -- not by regulatory mandate as much as by customer demands about how they're treated by their utilities.

Dan Yates: I was hearing the exact same thing. And these issues are the tip of the iceberg.

Underneath the surface is this enormous iceberg -- legacy technology that's not up for the task -- and we hear on the technology side that utilities want to migrate to new customer information systems. They want to enable new rates. They want to enable customer personalization.

But then they find out it's going to be a billion-dollar project to install a new version of the legacy system. A lot of folks choke at those dollar amounts and then they don't know where to go. That's how this shared strategy of migrating everything to the cloud will make the transition more digestible. Together we can solve the financial problem because you don't have to bite everything off at once.

Stephen Lacey: At a macro level, what are the geographic regions or types of utilities you're going to be targeting?

Rodger Smith: Let's start with North America. First of all, in North America, there are a lot of large, old, tired customer care and billing systems that will need to be replaced by most large utilities in order for them to move to this new world.

Many of them are on an old customer-care system from 20 years ago. To Dan's point, they can't meet the needs of the customer with those old systems. A lot of large North American utilities, and even a lot of the mid-tier, would have to move to a new environment. So North America is definitely a critical market. 

Then if you look at Europe, the U.K. market is still open. There are a lot of independent players coming to the U.K. We have larger customers like FSE moving to our customer-care and billing system, moving to the cloud.

Then when you look at the rest of Europe, there are opportunities almost all across the continent -- in places like Turkey, Italy and elsewhere. We have our eyes on Western Europe and parts of Eastern Europe as well. We think there are opportunities in the Middle East, especially in some of the places that have newer infrastructure.

Then you shift to Asia, where the regulatory changes in Japan as a result of Fukushima will create a robust market. The Australian market is obviously one that's moving well beyond the meter as well.

Stephen Lacey: A few months back, Opower scaled back its R&D spending a bit. You've spent a lot of money on R&D over the years. How important is new product development going to be versus the current product integration?

Dan Yates: With the combined group, we now have an astonishing R&D cannon with which to fire at new opportunities. It's almost a thousand people in R&D that are going to be working across the products suite.

Some meaningful portion of those folks are focused on maintaining and making incremental improvements to the existing suite. But then the big effort is going to be pushing everything to the cloud, and we have a great shared foundation of lower-level technology that will allow us to do that expeditiously. Then we can continue to forge ahead on this vision of really delivering an end-to-end customer experience.

When you look at the reduction that we made earlier this year in R&D, it is almost a rounding error compared to the size of the combined organization now. Those are the kind of tweaks companies make year in and year out. You make these adjustments based upon growth rates and near-term projections. All of that is incidental now, compared to the scale of the combined organizations.

Rodger Smith: Let me be more direct than Dan was. We're going to retain everybody in development at Opower.

We bought Opower because they understand the cloud and cloud development. They're disciplined, in terms of their processes. We're extremely happy with the development group that is there. We want to keep it intact.

Stephen Lacey: What's the next evolution in product development?

Dan Yates: I was talking to the CEO of one of the largest utilities in the country last week. He relayed to me that there's regulatory pressure now to unbundle distribution networks -- to deregulate them.

That's either a real opportunity or a terrifying threat to distribution utilities. There's a lot of work to do on the regulatory front to define those new changes, and then there's a tremendous amount of work and opportunity on the technology front. You're going to see a more open and more heterogeneous distribution network. There will be sensor technologies, monitoring and control technologies, and there will be centralized brokering technology to enable the coordination across all of these different pieces.

All of that stuff is still coming, and I feel like our combined business unit is better positioned than any company and any unit on earth to tackle those problems.

At the same time, there's a huge amount of stuff that's here and now. The utility industry needs to move out of its pre-internet customer service model to a post-internet model. That is a very well defined and prescribed path.

People know what a post-internet service model looks like. It's websites, it's alerts, it's outbound digital communications -- and then it connects back into the back office to make all of those interfaces rich and easy to use. That's a very well understood path. 

When I look back at Opower's various explorations in software development over the last five to seven years, we definitely tried our hand at a number of new things. But if I look back at our R&D development at any given time, 90 percent of our R&D dollars have been spent on domains that proved to be successful and durable -- that's energy efficiency, behavioral demand response, customer care and digital engagement. Those are big markets that are certain.

We're now in a position to leap ahead into new opportunities, while at the same time focus on the proven stuff that's critical and obvious.