NRG Energy Considers Entering Telecommunications Market

Case Type: new business; business competition.
Consulting Firm: A.T. Kearney final round job interview.
Industry Coverage: energy industry; utilities; telecommunications.

Case Interview Question #00352: Our client NRG Energy Inc. (NYSE: NRG) is an American energy company and utilities provider headquartered in Princeton, New Jersey. NRG Energy offers gas and electricity services to New Jersey and some surrounding areas. The company owns and operates one of the industry’s most diverse generation portfolios (including nuclear, wind and solar power) that provides nearly 26,000 megawatts of electric generating capacity, or enough to support nearly 21 million homes. NRG’s retail businesses, Reliant Energy and Green Mountain Energy Company, combined serve more than 1.8 million residential, business, commercial and industrial customers.

With recent deregulation, our client NRG Energy is considering getting into the lucrative telecommunications market. You have been hired by the senior management of NRG to advise them on their planned market expansion. Should the client do it or not? Why?

Possible Solution:

My approach to this “start a new business” type of cases was a basic industry analysis of the telecommunications market (size and growth), and then a four C’s analysis: our competitors, our competencies and how they would apply to this market, the cost of playing in this market, and finally, the different customers and their needs.

Basic Industry Analysis: What is the telecommunications market like today, in terms of market size and growth trend?

As I had expected, this market is huge and growing very rapidly. With convergence everyone wants to compete in this industry, but no one really knows where it is going.

I then went to first of the 4 C’s — Competition: What does the competitive landscape look like?

I note that telecommunications is certainly a global market and we are currently only a regional player, which will certainly affect our strategies if we plan to enter this market. This becomes apparent as we analyze the competition. The big players: AT&T, Verizon, Sprint, T-Mobile, the Regional Bell Operating Companies are all either global or becoming global.

I also note the emergence of non-traditional players in this market: satellite providers who are attempting to provide all of these services wire free. Although I recognize their presence, I note that it will probably be some time before this becomes a cost effective option for most customers. I at this point hypothesize that we may not have the resources to go head to head against the big boys, but there may be a profitable niche.

I then switched to the 2nd “C” — Company Competencies (Competitive Advantage): What are our core competencies, that would provide the client with a competitive advantage?

Before asking this, however, I noted that we already have wires (electricity) running to the houses in our regions and thus have an infrastructure advantage that we should be able to leverage. In addition, we have significant contact with our market and thus have some consumer knowledge that global players may not have.

There may be another advantage for our client. Another important player in the value chain is the CAPs (Competitive Access Providers, some type of telecommunications provider company that competes with other, already established carriers), and these small companies are the link between the global players (AT&T, Verizon, Sprint, etc.) and the local market. Our client might have the capability to bypass the CAPs in our region because they can provide the same services that the CAPs do.

I also propose some other potential alternatives: we could be a lender to some of these CAPs, as they are small players who often do not have access to capital. We could also potentially have joint ventures with some CAPs.

I switched to the 3rd “C” — Customers

My analysis of the customers points to some potentially profitable niches for our client. I confirm that there are two distinctly different segments of customers in this market. There are the business customers and the residential customers, each with very different needs. I confirm that business customers would be more profitable (less price elastic) than residential customers.

I also note that there are a number of different services that telecommunications companies provide: cable, local phone service, long distance phone service, internet access, etc., and that the demand for these services would differ for each of the two customer segments.

Finally, I switched to the 4th “C” — Costs

From a cost perspective, I note that the cost of becoming a global player, and investing in the necessary infrastructure will probably not be a profitable endeavor. The industry is highly capital-intensive, and this would put us at a large disadvantage relative to larger, global players like AT&T, Verizon, Sprint, etc.

Recommendations for Client:

To summarize, I recommended the following for our client:

Although more rigorous analysis needs to be performed, at first glance it seems that if our client avoids going head-to-head with the big, global players, they could potentially leverage its internal capabilities in order to compete in a profitable niche in this large, rapidly growing market of telecommunications.