I regularly argue with my partners about how amazing Tesla is or isn’t. We all agree Tesla’s technology and product are a leap forward, but the question is whether the company will become a significant or even dominant worldwide auto player (and justify its orbital valuation). Despite its buzz, Tesla has only a bit more than 1% of the US auto market, though ~40% of the US electric car market. It is easy to analogize Tesla to Apple with the latter’s incredible iPhone tech and product, which consistently holds a 30% to 40% market share after initially creating the smart phone market (and killing the feature phone market). To perfect the analog, the story would play out like this: most of the 98% of the US market that is now gas or hybrid will become electric in 10 years, and Tesla will continue to be a dominant player. Suddenly Tesla’s 51B market cap looks like a pittance!
Both Tesla and Apple have a superior technology, better products, better user experience and better buying experiences. So how could this not be a “fait accompli”?
Before I answer that, some background: I’ve recently been reading about genetics and its effects on human physical and social evolution. Why? Because I didn’t know crap about genetics, and it seemed a rather gaping hole in my collection of the lots of things I know just a tiny bit about (life of a VC). If you are interested, read Violinist Thumb and Before the Dawn, in either order.
There is a lot of similarity between genetic evolution and technology evolution – perhaps not a surprise, as genetics is in the broadest sense the most natural of all technologies. So here are a few definitions in lay terms and their analog to technology evolution. Then we’ll get back to Tesla.
Natural selection: Some genes help people live longer or increase fertility, thereby increasing the chance that said gene gets passed on through carriers yielding more offspring than non-carriers.
Sexual selection: A certain type of natural selection where a gene creates a physical (phenotype) or social characteristic in the host making them more attractive to mates, leading to more offspring than for non-carriers.
Genetic drift: The natural fluctuation of versions of a gene in a population through generations when no version (called an allele) provides significant natural or sexual selection benefit over the other. It turns out that with time, genes within a small population and with a set of initial gene variations will tend to converge through generations to a single version because of the effect of early deaths and non-procreation. For finance geeks, the analog in finance is the “random walk”.
Genetic sweep: The rapid dominance of a gene version across a population over just a few generations because of very strong positive natural or sexual selection.
The analog: Technology evolution is like genetic evolution in that customers/consumers make choices between technologies and companies in moments of truth akin to sexual selection. Meanwhile certain technologies and accompanying business models may be more likely to survive longer (less capital intensive, stickier network effects, etc), a natural selection that allows longer survival to then be selected by more customers – a harmonious cycle. When technologies and business models are truly superior, they can literally “sweep” through a population of users, like the iPhone. This is increasingly likely when there are network effects, as the iPhone had with its app store, and virality, which the iPhone had as a fashion and status accessory (admit it).
In this analog, however, we must also account for the role of chance. Even when there isn’t a particularly better functioning or serving technology, certain conditions (last mover advantage, first mover advantage, influential customer, etc) and path dependency can lead to dominance of one technology from a small set of technology choices, a la genetic drift or a random walk.
The big difference between genetic and technology evolution is the time scale. Genetic changes are measured over millennia and across thousands of generations, whereas technology evolution is measured in years or decades. While gene variations can wait for eons to dominate, companies and especially startups don’t have that luxury. A consumer might make a choice about a new phone every two years, a business about an ERP every ten years, and a human being about a mate once in a generation (or so). Modern technology moves much faster than genetics, or at least natural genetics.
The key insight with regard to Apple and Tesla is that the longer decision cycles and product life cycles are, the more time competition has to compete and catch up between consumer decisions. When Apple introduced the smartphone, it was so superior to feature phones that smartphones in the form of the iPhone “swept” through the US phone market in only a few years and ultimately maintained a large 30 to 40% share for Apple itself. I’m an Android guy, but even I can admit that Apple kept a technology lead for almost 10 years – 6 or 7 “generations” of one to two year phone decision cycles. The speed of the market allowed Apple’s initial technology advantage to buoy it in the lead through a number of generations because it was too hard for competition to catch up quickly both with its technology and viral and network-based business model.
The auto market is different. I drive a fourteen year old Subaru, but I’ve purchased at least six phones in that same period. Granted, that is a long hold for a car, but even assuming the national 6.5 year average, that is simply a long time for competitors to have between consumer decisions to catch up. This is true both for consumer decisions between gas/hybrid/electric and for consumer decisions on brand within electric.
Gas and hybrid technologies continue to improve, and even if total cost of ownership for electric is reaching or surpassing parity, most of these calculations don’t account for unnaturally high human discount rates in decision making when considering electric’s higher upfront cost. This effectively slows the growth of Tesla’s electric market sandbox within the overall auto category, giving yet more time for competitors to catch up. By the time electric is a significant portion of the auto market, Tesla may well find itself in a state of “genetic drift” doing the same random walk for a few points of market share here and there – much as Ford, Chrysler and GM did for decades – and likely against those same brands.
What could change this? As far as I can tell, while there is some virality in Tesla’s business model as a fashion and status accessory (admit it), the network effects are more nuanced. So far, your Tesla does not make my Tesla or Tesla experience that much better. While it’s true that the more Teslas on the road, the better self driving features get with additional driving data, but I don’t think Tesla’s current autopilot features are the main buying reasons versus 100% electric, awesome design, status, etc. Tesla’s charging network is its strongest claim on network effects so far, but I would expect this to be fleeting as gas stations, c-stores and QSRs implement their own open networks in the coming decades given the clear opportunity to sell sugar and salt to waiting consumers. Major market share is still possible for Tesla, however, if it truly delivers on the promise of driverless autonomy and establishes a proprietary self-driving network that drives “sweeping” adoption through network effects. We haven’t heard as much talk of this lately.