Last week, Silver Spring Networks filed an S-1 for its long anticipated IPO. It was so long anticipated that many had about given up, but through a series of smart grid acquisitions, including Toshiba’s pending payout for Landis+Gyr, we had renewed speculation.
Expected pricing for the IPO was not announced, but the $3 billion target valuation rumored at the beginning of 2010 would seem rich given the $2.3 billion price for the more diverse Landis+Gyr, and the current $1.8-2 billion valuations for Elster (who IPO’ed last fall) and for industry powerhouse Itron. It could be argued that these valuations are not really comparable, since Silver Spring Networks is focused on the “smart” part of smart metering, namely the communications infrastructure and associated software, while Landis+Gyr, Elster, and Itron have significant legacy metering businesses. Certainly, Silver Spring Networks impressive revenue growth rate exceeds these competitors, and it has maintained the number one position in our U.S. Advanced Metering Infrastructure (AMI) utility vendor selection tracking since we started. Still, each Silver Spring Networks AMI module is ultimately housed in a smart meter (typically from Landis+Gyr or General Electric) with roughly twice the value, something that Itron, Landis+Gyr, and Sensus are able to harvest.
Silver Spring Networks’ undisputed lead in U.S. utility AMI was built by its strong commitment to the IP communications protocol at a time when competitor’s products were universally proprietary. This success drove a dramatic change in the industry, where virtually all AMI vendors have now adopted the IP protocol in one way or another. This has not yet approached the goal of multi-vendor interoperability for smart meters, as key parts of even the Silver Spring Networks implementation, such as the “meshing” protocols, are “pre-standard” (i.e. proprietary). Itron, leveraging its existing Automated Meter Reading (AMR) dominance, established an early AMI lead with its OpenWay system, but was especially hurt by the strength of Silver Spring Networks’ IP story. This was the catalyst for the Itron/Cisco partnership that may yet position Itron to ultimately “out IP” Silver Spring. Certainly, the competition is getting fiercer, but it remains a game of catch-up to Silver Spring Networks.
All the smart meter and AMI vendors are faced with some daunting challenges. The U.S. AMI market is currently in full deployment mode, initiated by regulatory mandates in Texas, California, Pennsylvania, and elsewhere, and fueled by $3.5 billion in stimulus funding. But we have long forecasted that this party will subside in the not-too-distant future, as smart meters approach their terminal penetration rate of the overall electric meter installed base, which in itself is not growing much. Continued growth will require diversification in target markets (i.e. beyond electric AMI), products (software and services), and/or geography (i.e. Europe, Latin America, Asia).
Perhaps herein is Silver Spring Networks’ greatest opportunity. They pioneered and preached the ability of an IP-based networking platform to unleash all kinds of high-value applications that will bring life to the smart grid, paralleling how open IP networking is the foundation for today’s internet culture. Who better to deliver on that promise by leveraging the infrastructure that they themselves are building for their customers? Demand response, distribution automation, electric vehicle integration, and managed services are among the smart grid applications that are in their sights. No doubt, these are different businesses and technologies, but it would seem Silver Spring Networks is reasonably well positioned to benefit, even if more than 90% of current revenues are AMI hardware and software based.
So whether Silver Spring Networks ultimately IPOs or gets scooped up in the current acquisition frenzy, it promises to be an interesting journey.