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Posted on <span class="postdate">April 23, 2018</span> by steve blank </div> <div class="entry"> <p><strong><a href="https://hbr.org/2018/04/to-understand-the-future-of-tesla-look-to-the-history-of-gm"><img data-recalc-dims="1" decoding="async" data-attachment-id="23506" data-permalink="https://steveblank.com/2017/06/27/why-you-cant-tell-a-company-be-more-like-a-startup/hbr-logo/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/hbr-logo.jpeg?fit=288%2C168&ssl=1" data-orig-size="288,168" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="HBR logo" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/hbr-logo.jpeg?fit=288%2C168&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/hbr-logo.jpeg?fit=288%2C168&ssl=1" class="alignleft wp-image-23506" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/hbr-logo.jpeg?resize=203%2C118&ssl=1" alt="" width="203" height="118" /></a>A version of this article appeared in the <a href="https://hbr.org/2018/04/to-understand-the-future-of-tesla-look-to-the-history-of-gm" target="_blank" rel="noopener">Harvard Business Review</a></strong></p> <p><i>Elon Musk, Alfred Sloan, and entrepreneurship in the automobile industry.</i></p> <p>The entrepreneur who founded and grew the largest startup in the world to $10 billion in revenue and got fired is someone you have probably never heard of. The guy who replaced him invented the idea of the modern corporation. If you want to understand the future of Tesla and Elon Musk’s role – something many want to do, given the constant stream of headlines about the company — you should start with a bit of automotive history from the 20<sup>th </sup>Century.</p> <p><strong>Alfred P. Sloan and the Modern Corporation<br /> </strong>By the middle of the 20th century, Alfred P. Sloan had become the most famous businessman in the world. Known as the “Inventor of the Modern Corporation,” Sloan was president of General Motors from 1923 to 1956 when the U.S. automotive industry grew to become one of the drivers of the U.S. economy.<a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/sloan-on-time-cover.png?ssl=1"><img data-recalc-dims="1" fetchpriority="high" decoding="async" data-attachment-id="24115" data-permalink="https://steveblank.com/2018/04/23/why-the-future-of-tesla-may-depend-on-knowing-what-happened-to-billy-durant/sloan-on-time-cover/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/sloan-on-time-cover.png?fit=290%2C400&ssl=1" data-orig-size="290,400" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="sloan on time cover" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/sloan-on-time-cover.png?fit=218%2C300&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/sloan-on-time-cover.png?fit=290%2C400&ssl=1" class="alignright wp-image-24115" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/sloan-on-time-cover.png?resize=225%2C310&ssl=1" alt="" width="225" height="310" /></a></p> <p>Today, if you look around the United States it’s hard to avoid Sloan. There’s the <a href="http://www.sloan.org/" target="_blank" rel="noopener">Alfred P. Sloan Foundation</a>, the <a href="http://mitsloan.mit.edu/" target="_blank" rel="noopener">Sloan School of Management at MIT</a>, the <a href="http://www.gsb.stanford.edu/sloan/" target="_blank" rel="noopener">Sloan program at Stanford</a>, and the <a href="http://www.mskcc.org/mskcc" target="_blank" rel="noopener">Sloan/Kettering Memorial Cancer Center </a>in New York. Sloan’s book <a href="http://www.amazon.com/Years-General-Motors-Alfred-Sloan/dp/0385042353" target="_blank" rel="noopener">My Years with General Motors</a><u>, </u>written half a century ago, is still a readable business classic.<strong><br /> </strong><br /> <a href="http://www.amazon.com/Concept-Corporation-Peter-Drucker/dp/1560006250" target="_blank" rel="noopener">Peter Drucker </a>wrote that Sloan was “the first to work out how to systematically organize a big company. When Sloan became president of GM in 1923 he put in place planning and strategy, measurements, and most importantly, the principles of decentralization.”</p> <p>When Sloan arrived at GM in 1920 he realized that the traditional centralized management structures organized by function (sales, manufacturing, distribution, and marketing) were a poor fit for managing GM’s diverse product lines. That year, as management tried to coordinate all the operating details across all the divisions, the company almost went bankrupt when poor planning led to excess inventory, with unsold cars piling up at dealers and the company running out of cash.</p> <p>Borrowing from organizational experiments pioneered at DuPont (run by his board chair), Sloan organized the company by division rather than function and transferred responsibility down from corporate into each of the operating divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). Each of these GM divisions focused on its own day-to-day operations with each division general manager responsible for the division’s profit and loss. Sloan kept the corporate staff small and focused on policymaking, corporate finance, and planning. Sloan had each of the divisions start systematic strategic planning. Today, we take for granted divisionalization as a form of corporate organization, but in 1920, other than DuPont, almost every large corporation was organized by function.</p> <p>Sloan put in place <a href="http://www.jstor.org/stable/3113416?origin=JSTOR-pdf" target="_blank" rel="noopener">GM’s management accounting system </a>(also borrowed from DuPont) that for the first time allowed the company to: 1) produce an annual operating forecast that compared each division’s forecast (revenue, costs, capital requirements and return on investment) with the company’s financial goals. 2) Provide corporate management with near real-time divisional sales reports and budgets that indicated when they deviated from plan. 3) Allowed management to allocate resources and compensation among divisions based on a standard set of corporate-wide performance criteria.</p> <p><strong>Modern Corporation Marketing<br /> </strong>When Sloan took over as president of GM in 1923, Ford was the dominant player in the U.S. auto market. Ford’s Model T cost just $260 ($3,700 in today’s dollars) and Ford held 60% of the U.S. car market. General Motors had 20%. Sloan realized that GM couldn’t compete on price, so GM created multiple <em>brands of cars, </em>each with its own identity targeted at a specific economic bracket of American customers. The company set the prices for each of these brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac). Within each brand there were several models at different price points.</p> <p>The idea was to keep customers coming back to General Motors over time to upgrade to a better brand as they became wealthier. Finally, GM created the notion of perpetual demand within brands by continually <a href="http://en.wikipedia.org/wiki/Planned_obsolescence" target="_blank" rel="noopener">obsoleting their own products</a> with new models rolled out every year. (Think of the iPhone and its yearly new models.)</p> <p>By 1931, with the combination of superior financial management and an astute brand and product line strategy, GM had 43% market share to Ford’s 20% – a lead it never relinquished.</p> <p>Sloan transformed corporate management into a real profession, and its stellar example was the continuous and relentless execution of the GM business model (until its collapse 50 years later).</p> <p><strong>What Does GM Have to Do with Tesla And Elon Musk?<br /> </strong>Well, thanks for the history lesson but why should I care?</p> <p>If you’re following Tesla, you might be interested to know that Sloan wasn’t the founder of GM. Sloan was president of a small company that made ball bearings that GM acquired in 1918. When Sloan became President of General Motors in 1923, it was already a $700 million company (about $10.2 <em>billion </em>in sales in today’s dollars).</p> <p>Yet, you never hear who built GM to that size. Who was the entrepreneur who founded what would become General Motors 16 years earlier, in 1904? Where are the charitable foundations, business schools, and hospitals named after the founder of GM? What happened to him?</p> <p>The founder of what became General Motors was <a href="http://www.amazon.com/Deal-Maker-William-Durant-General/dp/0471395234"><em>William (Billy) Durant</em></a>. At the turn of the 20<sup>th </sup>century, Durant was one of the largest makers of horse-drawn carriages, building 150,000 a year. But in 1904, after his first time seeing a car in Flint, Michigan, he was one of the first to see that the future was going to be in a radically new form of transportation powered by internal combustion engines.</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/03/durant.png?ssl=1"><img data-recalc-dims="1" decoding="async" data-attachment-id="24113" data-permalink="https://steveblank.com/2018/04/23/why-the-future-of-tesla-may-depend-on-knowing-what-happened-to-billy-durant/durant/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/03/durant.png?fit=215%2C234&ssl=1" data-orig-size="215,234" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Durant" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/03/durant.png?fit=215%2C234&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/03/durant.png?fit=215%2C234&ssl=1" class="alignleft size-full wp-image-24113" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/03/durant.png?resize=215%2C234&ssl=1" alt="" width="215" height="234" /></a>Durant took his money from his carriage company and bought a struggling automobile startup called Buick. Durant was a great promoter and visionary, and by 1909 he had turned Buick into the best-selling car in the U.S. Searching for a business model in a new industry, and with the prescient vision that a car company should offer multiple brands, that year he bought three other small car companies — Cadillac, Oldsmobile, and Pontiac — and merged them with Buick, renaming the combined company General Motors. He also believed that to succeed the company needed to be vertically integrated and bought up 29 parts manufacturers and suppliers.</p> <p>The next year, 1910, trouble hit. While Durant was a great entrepreneur, the integration of the companies and suppliers was difficult, a recession had just hit, and GM was overextended with $20 million in debt ($250 million in 2018 dollars) from all the acquisitions and was about to run out of cash. Durant’s bankers and board fired him from the company he had founded.</p> <p>For most people the story might have ended there. But not for Durant. The next year Durant co-founded another automobile startup, this one started with Louis Chevrolet. Over the next five years Durant built Chevrolet into a competitor to GM. And in one of the greatest corporate comeback stories, in 1916 Durant used Chevrolet to buy back control of GM with the backing of <a href="https://en.wikipedia.org/wiki/Pierre_S._du_Pont" target="_blank" rel="noopener">Pierre duPont</a>. He once again took over General Motors, merged Chevrolet into GM, bought Fisher Body and Frigidaire, created <a href="https://history.gmheritagecenter.com/wiki/index.php/General_Motors_Acceptance_Corporation_(GMAC)" target="_blank" rel="noopener">GMAC</a> GM’s financing arm and threw out the bankers who six years earlier had fired him.</p> <p>Durant had another great four years at the helm of GM. At the time he was not only running GM but was a major Wall Street speculator (even on GM stock) and was big in the New York social scene. But trouble was on the horizon. Durant was at his best when there was money to indulge his indiscriminate expansion. (He bought two car companies – Sheridan and the Scripps-Booth – that competed with his existing products.) But by 1920, a post-World War I recession had hit, and car sales has slowed. Durant kept building for a future assuming the flow of cash and customers would continue.</p> <p>Meanwhile, inventory was piling up, the stock was cratering, and the company was running out of cash. In the spring of 1920 with company had to go to the banks and he got an $80 million loan (about a billion dollars in 2018) to finance operations. While everyone around him acknowledged he was a visionary and a world-class fund raiser, Durant’s one-man show was damaging the company. He couldn’t prioritize, couldn’t find time to meet with his direct reports, fired them when they complained about the chaos, and the company had no financial controls other than Durant’s ability to manage to raise more money. When the stock collapsed Durant’s personal shares were underwater and were exposed to being called by bankers who would then own a good part of GM. The board decided that the company had enough vision — they bought out Durant’s shares and realized it was now time for someone who could execute at scale.</p> <p>Once again, his board (this time led by the DuPont family) tossed him out of General Motors (when GM sales were $10 <em>billion </em>in today’s dollars.)</p> <p>Alfred Sloan became the President of GM and ran it for the next three decades.</p> <p><a href="http://www.amazon.com/Billy-Alfred-General-Motors-Remarkable/dp/0814408699">William Durant </a>tried to build his third car company, Durant Motors, but he was still speculating on stocks, and got wiped out in the Depression in 1929. The company closed in 1931. Durant died managing a bowling alley in Flint, Michigan, in 1947.</p> <p>From the day Durant was fired in 1920, and for the next half a century, American commerce would be led by an army of “Sloan-style managers” who managed and executed existing business models.</p> <p>But the spirit of Billy Durant would rise again in what would become Silicon Valley. And 100 years later Elon Musk would see that the future of transportation was no longer in internal combustion engines and build the next great automobile company.</p> <p><strong>Days of Futures Past for Tesla<br /> </strong>In all of his companies, Elon Musk has used his compelling vision of a future transformed to capture the imagination of customers and, equally important, of Wall Street, raising the billions of dollars to make his vision a reality.</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/musk-tesla.png?ssl=1"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="24118" data-permalink="https://steveblank.com/2018/04/23/why-the-future-of-tesla-may-depend-on-knowing-what-happened-to-billy-durant/musk-tesla/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/musk-tesla.png?fit=640%2C306&ssl=1" data-orig-size="640,306" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="musk tesla" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/musk-tesla.png?fit=300%2C143&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/musk-tesla.png?fit=468%2C224&ssl=1" class="alignleft wp-image-24118" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2018/04/musk-tesla.png?resize=305%2C146&ssl=1" alt="" width="305" height="146" /></a>Yet, as Durant’s story typifies, one of the challenges for visionary founders is that they often have a hard time staying focused on the present when the company needs to transition into relentless execution and scale. Just as Durant had multiple interests, Musk is not only Tesla’s CEO and Product Architect, overseeing all product development, engineering, and design. At SpaceX (his rocket company) he’s CEO and lead designer overseeing the development and manufacturing of advanced rockets and spacecraft. He’s also the founder at The Boring Company (the tunneling company) and co-founder and chairman of OpenAI. And a founder of Neuralink a brain-computer interface startup.</p> <p>All of these companies are doing groundbreaking innovations but even Musk only has 24 hours in a day and 7 days in a week. Others have noted that diving in and out of your current passion makes you a dilettante, not a CEO.</p> <p>One of the common traits of a visionary founder is that <em>once you have proven the naysayers wrong, you convince yourself that all your pronouncements have the same prescience</em>.</p> <p>For example, after the success of the Model S sedan, Tesla’s next car was an SUV, the Model X. By most <a href="https://insideevs.com/consumer-reports-declares-tesla-model-x-fast-and-flawed/" target="_blank" rel="noopener">accounts</a>, Musk’s insistence on adding bells and whistles (like the Falcon Wing doors and other accoutrements) to what should have been simple execution of the next product made manufacturing the car in volume a nightmare. Executives who disagreed (and had a hand in making the Model S a success) ended up leaving the company. The company <a href="https://www.washingtonpost.com/news/the-switch/wp/2016/02/10/elon-musk-admits-the-first-model-x-was-too-ambitious/?utm_term=.1b72d8e39210" target="_blank" rel="noopener">later admitted that the lesson learned was hubris</a>.</p> <p>The Tesla Model 3 was designed to be simple to manufacture, but instead of using the existing assembly line Musk said, “<em>the true problem, the true difficulty, and where the greatest potential is – is <a href="https://electrek.co/2016/06/01/elon-musk-machines-making-machines-rant-about-tesla-manufacturing/" target="_blank" rel="noopener">building the machine that makes the machine</a>. In other words, it’s building the factory. I’m really thinking of the factory like a product.” </em>Fast forward two years and it turns out that the Model 3 assembly line was a great example of over-automation. “<em>Excessive automation at Tesla was a mistake. To be precise, my mistake” <a href="https://twitter.com/elonmusk/status/984882630947753984" target="_blank" rel="noopener">Musk recently tweeted,</a></em></p> <p>Sleeping on the factory floor to solve self-inflicted problems is not a formula for success at scale, and while it’s great PR, it’s not management. It is in fact a symptom of a visionary founder imposing chaos just at the time where execution is required. Tesla now has a pipeline of newly announced products, a new Roadster (a sports car), a Semi Truck, and a hinted crossover called the Model Y. All of them will require massive execution at scale, not just vision.</p> <p>Unlike Durant, Musk has engineered his extended tenure and this year got his shareholders to give him a new $2.6 billion compensation plan (and it could potentially <a href="https://www.nytimes.com/2018/01/23/business/dealbook/tesla-elon-musk-pay.html" target="_blank" rel="noopener">be worth as much as $55 billion</a>) if he can grow the company’s market cap in $50 billion increments to $650 billion. The board said that it “believes that the Award will continue to incentivize and motivate Elon to lead Tesla over the long-term, particularly in <em>light of his other business interests</em>.”</p> <p>Elon Musk has done what Steve Jobs and Jeff Bezos did – disrupt a series of stagnant businesses controlled by rent seekers, permanently changing the trajectory of multiple industries – while capturing the imagination of consumers and the financial community. Just a handful of people with these skills emerge every century. However, fewer combine the talent for creating an industry with the very different skills needed for scale. Each of Tesla’s stumbles has begun to squander the very advantage that Musks vision gave the company. And what was once an insurmountable lead by having an <a href="https://themarketmogul.com/buffetts-economic-castles-and-moats/" target="_blank" rel="noopener">economic castle surrounded by a defensible moat</a> (battery technology, superchargers, autonomous driving, over the air updates, etc.) is closing rapidly.</p> <p>One wonders if $2.6 billion in executive compensation would be better spent finding someone to lead Tesla to becoming a reliable producer of cars in high volume – without the drama in each new model.</p> <p>Perhaps Tesla now needs its Alfred P. Sloan.</p> <p><strong>Lesson Learned</strong></p> <blockquote> <ul> <li>Founders/visionaries see things other don’t and the extraordinary ones create new industries</li> <li>When technology changes are rapid you want the founder to continue to run the company</li> <li>However, when success depends on exploitation and execution at scale their impatience for continuous innovation and invention often gets in the way of day-to-day execution</li> <li>The best ones know when it’s time to let go</li> </ul> </blockquote> <iframe loading="lazy" width="100%" height="66" scrolling="no" frameborder="no" src="https://w.soundcloud.com/player/?url=https%3A%2F%2Fapi.soundcloud.com%2Ftracks%2F438857850&width=false&auto_play=false&hide_related=false&visual=false&show_comments=false&color=false&show_user=false&show_reposts=false"></iframe> <div class="sharedaddy sd-sharing-enabled"><div class="robots-nocontent sd-block sd-social sd-social-official sd-sharing"><h3 class="sd-title">Share this:</h3><div class="sd-content"><ul><li class="share-print"><a rel="nofollow noopener noreferrer" data-shared="" class="share-print sd-button" href="https://steveblank.com/2018/04/23/why-the-future-of-tesla-may-depend-on-knowing-what-happened-to-billy-durant/" target="_blank" title="Click to print" ><span>Print</span></a></li><li class="share-email"><a rel="nofollow noopener noreferrer" data-shared="" class="share-email sd-button" href="mailto:?subject=%5BShared%20Post%5D%20Why%20the%20Future%20of%20Tesla%20May%20Depend%20on%20Knowing%20What%20Happened%20to%20Billy%20Durant&body=https%3A%2F%2Fsteveblank.com%2F2018%2F04%2F23%2Fwhy-the-future-of-tesla-may-depend-on-knowing-what-happened-to-billy-durant%2F&share=email" target="_blank" title="Click to email a link to a friend" data-email-share-error-title="Do you have email set up?" data-email-share-error-text="If you're having problems sharing via email, you might not have email set up for your browser. 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id="post-23419"> <h2><a href="https://steveblank.com/2017/06/14/tesla-lost-700-million-last-year-so-why-is-teslas-valuation-60-billion/" rel="bookmark">Tesla Lost $700 Million Last Year, So Why Is Tesla’s Valuation $60 Billion?</a></h2> <div class="postinfo"> Posted on <span class="postdate">June 14, 2017</span> by steve blank </div> <div class="entry"> <p>Automobile manufacturers shipped<a href="http://www.businessinsider.com/2016-was-a-record-breaking-year-for-global-car-sales-and-it-was-almost-entirely-driven-by-china-2017-1" target="_blank" rel="noopener"> 88 million </a>cars in 2016. <a href="https://www.tesla.com" target="_blank" rel="noopener">Tesla</a> shipped <a href="http://ir.tesla.com/releasedetail.cfm?releaseid=1006161" target="_blank" rel="noopener">76,000</a>. Yet Wall Street values Tesla higher than any other U.S. car manufacturer. What explains this more than 1,000 to 1 discrepancy in valuation?<img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="23423" data-permalink="https://steveblank.com/2017/06/14/tesla-lost-700-million-last-year-so-why-is-teslas-valuation-60-billion/tesla/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/tesla.png?fit=267%2C189&ssl=1" data-orig-size="267,189" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="tesla" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/tesla.png?fit=267%2C189&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/tesla.png?fit=267%2C189&ssl=1" class="alignright wp-image-23423 size-full" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2017/06/tesla.png?resize=267%2C189&ssl=1" alt="" width="267" height="189" /></p> <p>The future.</p> <p>—</p> <p>Too many people compare Tesla to what already exists and that’s a mistake. Tesla is not another car company.</p> <p>At the turn of the 20<sup>th</sup> century most people compared existing buggy and carriage manufacturers to the new automobile companies. They were both transportation, and they looked vaguely similar, with the only apparent difference that one was moved by horses attached to the front while the other had an unreliable and very noisy internal combustion engine.</p> <p>They were different. And one is now only found in museums. Companies with business models built around internal combustion engines disrupted those built around horses. That’s the likely outcome for <u>every one</u> of today’s automobile manufacturers. Tesla is a <u>new</u> form of transportation disrupting the incumbents.</p> <p>Here are four reasons why.</p> <p>Electric cars pollute less, have fewer moving parts, are quieter and faster than existing cars. Today, the technology necessary (affordable batteries with sufficient range) for them to be a viable business have all just come together. Most observers agree that autonomous electric cars will be the dominate form of transportation by mid-century. That’s bad news for existing car companies.</p> <p>First, car companies have over a century of expertise in designing and building efficient <em>mechanical</em> propulsion systems – internal combustion engines for motive power and transmissions to drive the wheels. If existing car manufacturers want to build electric vehicles, all those design skills and most of the supply chain and manufacturing expertise are useless. And not only useless but they become this legacy of capital equipment and headcount that is now a burden to a company. <em>In a few years, the only thing useful in existing factories building traditional cars will be the walls and roof</em>.</p> <p>Second, while the automotive industry might be 1000 times larger than Tesla, Tesla may actually have more expertise and dollars committed to the electric car ecosystem than any legacy car company. Tesla’s investment in Lithium/Ion battery factory (the <a href="https://www.tesla.com/gigafactory" target="_blank" rel="noopener">Gigafactory</a>), its electric drive train design and manufacturing output exceed the sum of the entire automotive industry.</p> <p>Third, the future of transportation is not only electric, it’s autonomous and connected. A lot has been written about self-driving cars and as a reminder, <a href="https://en.wikipedia.org/wiki/Automated_driving_system" target="_blank" rel="noopener">automated driving comes in multiple levels</a>:</p> <ul> <li><em>Level 0</em>: the car gives you warnings but driver maintains control of the car. For example, blind spot warning.</li> <li><em>Level 1</em>: the driver and the car share control. For example, Adaptive Cruise Control (ACC) where the driver controls steering and the automated system controls speed.</li> <li><em>Level 2</em>: The automated system takes full control of the vehicle (accelerating, braking, and steering). The driver monitors and intervenes if the automated system fails to respond.</li> <li><em>Level 3</em>: The driver can text or watch a movie. The vehicle will handle situations that call for an immediate response, like emergency braking. The driver must be prepared to intervene within some limited time, when called upon by the vehicle.</li> <li><em>Level 4:</em> No driver attention is ever required for safety, i.e. the driver may safely go to sleep or leave the driver’s seat.</li> <li><em>Level 5</em>: No human intervention is required. For example, a robotic taxi</li> </ul> <p>Each level of autonomy requires an exponential amount of software engineering design and innovation. While cars have had an ever-increasing amount of software content, the next generation of transportation are literally computers on wheels. Much like in electric vehicle drive trains, autonomy and connectivity are not core competencies of existing car companies.</p> <p>Fourth, large, existing companies are executing a known business model and have built processes, procedures and key performance indicators to measure progress to a known set of goals. But when technology disruption happens (electric drive trains, autonomous vehicles, etc.) changing a business model is extremely difficult. Very few companies manage to make the transition from one business model to another.</p> <p>And while Tesla might be the first mover in disrupting transportation there is no guarantee they will be the ultimate leader. However, the question shouldn’t be why Tesla has such a high valuation.</p> <p>The question should be why the existing automobile companies aren’t valued like horse and buggy companies.</p> <p><strong>Lesson Learned</strong></p> <blockquote> <ul> <li>Few market leaders in an industry being disrupted make the transition to the new industry</li> <li>The assets, expertise, and mindset that made them leaders in the past are usually the baggage that prevents them from seeing the future</li> </ul> </blockquote> <iframe loading="lazy" width="100%" height="66" scrolling="no" frameborder="no" src="https://w.soundcloud.com/player/?url=https%3A%2F%2Fapi.soundcloud.com%2Ftracks%2F329047368&width=false&auto_play=false&hide_related=false&visual=false&show_comments=false&color=false&show_user=false&show_reposts=false"></iframe> <div class="sharedaddy sd-sharing-enabled"><div class="robots-nocontent sd-block sd-social sd-social-official sd-sharing"><h3 class="sd-title">Share this:</h3><div class="sd-content"><ul><li class="share-print"><a rel="nofollow noopener noreferrer" data-shared="" class="share-print sd-button" href="https://steveblank.com/2017/06/14/tesla-lost-700-million-last-year-so-why-is-teslas-valuation-60-billion/" target="_blank" title="Click to print" ><span>Print</span></a></li><li class="share-email"><a rel="nofollow noopener noreferrer" data-shared="" class="share-email sd-button" href="mailto:?subject=%5BShared%20Post%5D%20Tesla%20Lost%20%24700%20Million%20Last%20Year%2C%20So%20Why%20Is%20Tesla%E2%80%99s%20Valuation%20%2460%20Billion%3F&body=https%3A%2F%2Fsteveblank.com%2F2017%2F06%2F14%2Ftesla-lost-700-million-last-year-so-why-is-teslas-valuation-60-billion%2F&share=email" target="_blank" title="Click to email a link to a friend" data-email-share-error-title="Do you have email set up?" data-email-share-error-text="If you're having problems sharing via email, you might not have email set up for your browser. 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data-name='like-post-frame-6599589-23419-6747b14ec9c48' data-title='Like or Reblog'><h3 class="sd-title">Like this:</h3><div class='likes-widget-placeholder post-likes-widget-placeholder' style='height: 55px;'><span class='button'><span>Like</span></span> <span class="loading">Loading...</span></div><span class='sd-text-color'></span><a class='sd-link-color'></a></div> <p class="postinfo"> Filed under: <a href="https://steveblank.com/category/technology/" rel="category tag">Technology</a>, <a href="https://steveblank.com/category/tesla/" rel="category tag">Tesla</a> | <a href="https://steveblank.com/2017/06/14/tesla-lost-700-million-last-year-so-why-is-teslas-valuation-60-billion/#comments">28 Comments »</a> </p> </div> </div> <div class="post-15756 post type-post status-publish format-standard hentry category-customer-development category-marketing category-tesla" id="post-15756"> <h2><a href="https://steveblank.com/2014/01/06/15756/" rel="bookmark">Tesla and Adobe: Why Continuous Deployment May Mean Continuous Customer Disappointment</a></h2> <div class="postinfo"> Posted on <span class="postdate">January 6, 2014</span> by steve blank </div> <div class="entry"> <p>For the last 75 years products (both <a href="http://en.wikipedia.org/wiki/Durable_good" target="_blank">durable goods</a> and software) were built via Waterfall development. This process forced companies to release and launch products by model years, and market new and “improved” versions.</p> <p>In the last few years Agile and “Continuous Deployment” has replaced Waterfall and transformed how companies big and small build products. Agile is a tremendous advance in reducing time, money and wasted product development effort – and in having products better match customer needs.</p> <p>But businesses are finding that Continuous Deployment not only changes engineering but has ripple effects on the rest of its business model. And these changes may have unintended consequences leading to customer dissatisfaction and confusion.</p> <p>Smart companies will figure out how to educate their customers and communicate these changes.</p> <p><span style="line-height:1.5em;">—-</span></p> <p><b style="line-height:1.5em;">The Old Days – Waterfall Product Development<br /> </b>(skip this part of you’re conversant in Waterfall and Lean.)</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15759" data-permalink="https://steveblank.com/2014/01/06/15756/waterfall/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall.jpg?fit=1472%2C1129&ssl=1" data-orig-size="1472,1129" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Waterfall" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall.jpg?fit=300%2C230&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall.jpg?fit=468%2C359&ssl=1" class="aligncenter size-medium wp-image-15759" alt="Waterfall" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall.jpg?resize=300%2C230" width="300" height="230" /></a></p> <p>In the past both hardware and software were engineered using Waterfall development, a process that moves through new product development one-step-at-a-time.</p> <ul> <li>Marketing delivers a “requirements” document to engineering.</li> <li>Then engineering develops a functional specification and designs the product.</li> <li>Next comes the work of actually building the product – implementation.</li> <li>Then validation ensures the product was built to spec.</li> <li>After the product ships, it’s maintained by fixing flaws/bugs.</li> </ul> <p>Customers would get their hands on a product only after it had gone through a lengthy cycle that could take years – enterprise software 1-2 years, <a href="http://seminarisempresa.fib.upc.edu/aulesempresa/2011/programes/INTEL/Llista-documents/00/document/01%20Microprocessors.pdf">new microprocessors</a> 2-4 years, automobiles 3-5 years, aircraft a decade.</p> <p><b></b><b>Waterfall – The Customer View<br /> </b>When customers purchased a product they understood that they were buying this year’s model. When next year’s model arrived, they did not expect that the Ford station wagon or Maytag washer they purchased last year would be updated to match all the features in the new model. (Software at times had an upgrade path, often it required a new purchase.)</p> <p>Waterfall allowed marketers to sell incremental upgrades to products as new models. First starting in the fashion business, then adopted by General Motors in the 1920’s annual model year changeovers turned into national events. (The same strategy would be embraced 75 years later by Microsoft for Windows and then <a href="http://steveblank.com/2011/10/20/how-the-iphone-got-tail-fins-%E2%80%93-part-2-of-2/">Apple for the iPhone</a>.)</p> <p>As the press speculated about new features, companies added to the mystique by guarding the new designs with military secrecy. Consumers counted the days until the new models were “unveiled”.</p> <p><iframe loading="lazy" title="1955 (October) Chevrolet TV Ad for the 1956 Model" width="468" height="351" src="https://www.youtube.com/embed/O-F0XueRVJk?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share" referrerpolicy="strict-origin-when-cross-origin" allowfullscreen></iframe></p> <p>With its punctuated and delineated release cycles, waterfall development led consumers to understand the limited rights they had to future product upgrades and enhancements (typically none.) In other words, <i>consumer expectations were bounded.</i></p> <p><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15760" data-permalink="https://steveblank.com/2014/01/06/15756/waterfall-releases/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall-releases.jpg?fit=1414%2C1129&ssl=1" data-orig-size="1414,1129" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Waterfall Releases" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall-releases.jpg?fit=300%2C240&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall-releases.jpg?fit=468%2C374&ssl=1" class="aligncenter size-medium wp-image-15760" alt="Waterfall Releases" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/waterfall-releases.jpg?resize=300%2C239" width="300" height="239" /></p> <p>At the same time, manufacturers used new model changeovers to generate excitement over new features/versions convincing consumers to obsolete perfectly functional products and buy new ones<span style="line-height:1.5em;">.</span></p> <p><b style="line-height:1.5em;">Agile Development: Continuous Delivery and Deployment<br /> </b>In contrast to Waterfall development, Agile Development delivers incremental and iterative changes on an ongoing basis.</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/agile-dev.png"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15761" data-permalink="https://steveblank.com/2014/01/06/15756/agile-dev/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/agile-dev.png?fit=627%2C876&ssl=1" data-orig-size="627,876" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Agile Dev" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/agile-dev.png?fit=215%2C300&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/agile-dev.png?fit=468%2C654&ssl=1" class="aligncenter size-medium wp-image-15761" alt="Agile Dev" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/agile-dev.png?resize=214%2C300" width="214" height="300" /></a></p> <p>Agile development has upended the familiar consumer expectations and company revenue models designed around the release cycles of Waterfall engineering. In a startup this enables deployment of Minimum Viable products at a rapid pace. For companies already in production, Continuous Deployment can eliminate months or years in between major releases or models. Companies can deliver product improvements via the cloud so that all customers get a better product over time.</p> <p>While continuous delivery is truly a better development process for engineering, it has profound impacts on a company’s business model and customer expectations.</p> <p><b>Continuous Delivery/Deployment </b><b>– The Marketers View<br /> </b>Cloud based products has offered companies an opportunity to rethink how new business models would work. Adobe and Tesla offer two examples.</p> <p><i>Tesla<br /> </i><span style="line-height:1.5em;">While most of the literature talks about continuous Delivery/Deployment</span><b style="line-height:1.5em;"> </b><span style="line-height:1.5em;">as a software innovation for web/mobile/cloud apps, Tesla is using it for durable goods – $100,000 cars – in both hardware and software.</span></p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/tesla-model-s-on-the-road.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15763" data-permalink="https://steveblank.com/2014/01/06/15756/tesla-model-s-on-the-road/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/tesla-model-s-on-the-road.jpg?fit=1201%2C577&ssl=1" data-orig-size="1201,577" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Tesla Model S on the road" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/tesla-model-s-on-the-road.jpg?fit=300%2C144&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/tesla-model-s-on-the-road.jpg?fit=468%2C225&ssl=1" class="aligncenter size-medium wp-image-15763" alt="Tesla Model S on the road" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/tesla-model-s-on-the-road.jpg?resize=300%2C144" width="300" height="144" /></a></p> <p>First, Tesla’s Model S sedan downloads firmware updates on a regular basis. These software changes go much further than simply changing user interface elements on the dashboard. Instead, they may modify major elements of the car from its suspension to its acceleration and handling characteristics.</p> <p>Secondly, in a break from traditional automobile practices, rather than waiting a year to roll out annual improvements to its Model S, Tesla has been continuously improving its product <i>each quarter</i> <i>on the assembly line</i>. There are no model years to differentiate a Tesla Model S built in 2012 from one built this year. (The last time this happened in auto manufacturing was the Ford Model T.)</p> <p><i>Adobe<br /> </i>Adobe, which for decades sold newer versions of its products – Photoshop, Illustrator, etc. – has now moved all those products to the cloud and labeled them the <a href="http://www.adobe.com/products/creativecloud.html?promoid=JQPEQ">Adobe Creative Cloud</a>. Instead of paying for new products, customers now buy an annual <a href="http://www.adobe.com/products/photoshop/buying-guide.html">subscription</a>.</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/photoshop-package.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15764" data-permalink="https://steveblank.com/2014/01/06/15756/photoshop-package/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/photoshop-package.jpg?fit=1052%2C589&ssl=1" data-orig-size="1052,589" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Photoshop package" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/photoshop-package.jpg?fit=300%2C168&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/photoshop-package.jpg?fit=468%2C262&ssl=1" class="aligncenter size-medium wp-image-15764" alt="Photoshop package" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2014/01/photoshop-package.jpg?resize=300%2C167" width="300" height="167" /></a></p> <p>The move to the cloud allowed Adobe to implement continuous delivery and deployment. But more importantly the change from a product sale into a subscription turned their revenue model into a predictable annuity. From an accounting/Wall Street perspective it was a seemingly smart move.</p> <p><b>Continuous Delivery/Deployment – The Customer View<br /> </b>But this shift had some surprises for consumers, not all of them good.</p> <p>As many companies are discovering, incremental improvement doesn’t have the same cachet to a consumer as new and better. While it may seem irrational, inefficient and illogical, the reality is that people like shiny new toys. They want newer things. Often. And they want to be the ones who own them, control them and decide when <i>they</i> want to change them.</p> <p><i>Adobe<br /> </i>While creating a predictable revenue stream from high-end users, Adobe has created two problems. First, n<a href="http://www.change.org/petitions/adobe-systems-incorporated-eliminate-the-mandatory-creative-cloud-subscription-model">ot all Adobe customers</a> believe that Adobe’s new subscription business model is an improvement for them. If customers stop paying their monthly subscription they don’t just lose access to the Adobe Creative Suite software (Photoshop, Illustrator, etc.) used to create their work, they may <a href="http://forums.adobe.com/message/5308370">lose access to the work they created</a><i>.</i></p> <p>Second, they unintentionally overshot the needs of students, small business and casual users, driving them to “<a href="http://mac.appstorm.net/roundups/graphics-roundups/the-best-alternative-apps-to-everything-in-adobe-creative-cloud/">good-enough</a>” replacements like <a href="http://www.pixelmator.com">Pixelmator</a>, <a href="http://www.flyingmeat.com/acorn/">Acorn</a>, <a href="http://www.gimp.org">GIMP</a> for PhotoShop and <a href="http://www.bohemiancoding.com/sketch/">Sketch</a>, <a href="http://www.indeeo.com/idraw/">iDraw</a>, and <a href="http://www.mapdiva.com/artboard/">ArtBoard</a> for Illustrator.</p> <p>The consequence of discarding low margin customers and optimizing revenue and margin in the short-term, Adobe risks enabling future competitors. In fact, this revenue model feels awfully close to the <a href="http://www.bizjournals.com/seattle/blog/techflash/2010/05/harvards_clayton_christensen_on_the_economics_of_disruption.html?page=all">strategy of the U.S. integrated steel</a> business when they abandoned their low margin business to the mini-mills.</p> <p><i>Tesla<br /> </i>What could go wrong with making a car incrementally better over time? First, Tesla’s <a href="http://steveblank.com/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers/" target="_blank">unilateral elimination of features already paid for without consumers consent</a> is a troubling precedent for cloud connected durable goods.</p> <p>Second, Telsa’s elimination of model years and its aggressive marketing of the benefits of continuous development of hardware and software have set its current customers expectations unreasonably high. Some feel entitled to every new hardware feature rolled into manufacturing, even if the feature (i.e. <a href="http://www.teslamotorsclub.com/showthread.php/24799-Older-Tesla-s-limited-to-90kW-super-charging">faster charging</a>, new <a href="http://www.teslamotors.com/forum/forums/letter-george-blankenship">parking sensors</a>,) was not available when they bought their cars – and even if their car isn’t backwards compatible.</p> <p>Model years gave consumers an explicit bound of what to expect. This lack of boundaries results in some customer disappointment.</p> <p><b>Lessons Learned</b></p> <blockquote> <ul> <li>Continuous Delivery/Deployment is a major engineering advance</li> <li>It enables new business models</li> <li>Customers don’t care about your business model, just it’s effect on them</li> <li>While irrational, inefficient and illogical, people like shiny new toys</li> <li><span style="line-height:1.5em;">Subscription revenue models versus new purchases require consumer education</span></li> <li><span style="line-height:1.5em;">If your subscription revenue model “fires” a portion of your customers, i</span>t may enable new competitors</li> <li>Companies need to clearly communicate customer entitlements to future features</li> </ul> </blockquote> <p>Listen to the blog post here <br /> Download the podcast <a href="http://www.clearshore.net/2014/01/06/tesla-and-adobe-why-continuous-deployment-may-mean-continuous-customer-disappointment/" target="_blank">here</a></p> <div class="sharedaddy sd-sharing-enabled"><div class="robots-nocontent sd-block sd-social sd-social-official sd-sharing"><h3 class="sd-title">Share this:</h3><div class="sd-content"><ul><li class="share-print"><a rel="nofollow noopener noreferrer" data-shared="" class="share-print sd-button" href="https://steveblank.com/2014/01/06/15756/" target="_blank" title="Click to print" ><span>Print</span></a></li><li class="share-email"><a rel="nofollow noopener noreferrer" data-shared="" class="share-email sd-button" href="mailto:?subject=%5BShared%20Post%5D%20Tesla%20and%20Adobe%3A%20Why%20Continuous%20Deployment%20May%20Mean%20Continuous%20Customer%20Disappointment&body=https%3A%2F%2Fsteveblank.com%2F2014%2F01%2F06%2F15756%2F&share=email" target="_blank" title="Click to email a link to a friend" data-email-share-error-title="Do you have email set up?" data-email-share-error-text="If you're having problems sharing via email, you might not have email set up for your browser. 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For</span> software, gone are the days of having to buy a new version of physical media (disks or CD’s.) For hardware it’s the magical ability to have a product get better over time as new features are automatically added.</p> </div> <p>The downside is when companies unilaterally remove features from their products without asking their customers permission and/or remove consumers’ ability to use the previous versions. Products can just as easily be <i>downgraded</i> as upgraded.</p> <p>It was a wake up call when Amazon did it with books, disappointing when Google did it with Google Maps, annoying when Apple did it to their office applications – but Tesla just did it on a $100,000 car.</p> <p>It’s time to think about a 21st Century Bill of Consumer Product Rights.</p> <p>——</p> <p><strong>Amazon – Down the <a href="http://en.wikipedia.org/wiki/Memory_hole" target="_blank" rel="noopener noreferrer">Memory Hole</a><br /> </strong>In July 2009 facing a copyright lawsuit <a href="http://www.nytimes.com/2009/07/18/technology/companies/18amazon.html?_r=0" target="_blank" rel="noopener noreferrer">Amazon remotely deleted two books users had already downloaded and paid for</a> on their Kindles. Amazon did so without notifying the users let alone asking their permission. It was a chilling reminder that when books and content are bits instead of atoms, someone can change the content – or simply disappear a book – all without users’ permission. (The irony was the two books Amazon deleted were <a href="http://en.wikipedia.org/wiki/Animal_Farm" target="_blank" rel="noopener noreferrer">Animal Farm</a> and <a href="http://en.wikipedia.org/wiki/Nineteen_Eighty-Four" target="_blank" rel="noopener noreferrer">1984</a>.)</p> <p><b>Google – Well It Looks Better<br /> </b><span style="line-height:1.5;">In July 2013 Google completely redesigned Google Maps – and users discovered that on their desktop/laptop, the new product was slower than the one it replaced and features that were previously available disappeared. The new Google Maps was worse then one it replaced – except for one key thing – its User Interface was prettier and was unified across platforms. If design was the goal, then Google succeeded. If usability and functionality was a goal, then the new version was a step backwards.</span></p> <p><b>Apple – Our Code Base is More Important than Your Features<br /> </b>In November 2013 Apple updated its operating system and cajoled its customers to update their copies of Apple’s iWork office applications – Pages (Apple’s equivalent to Microsoft Word), Keynote (its PowerPoint equivalent), and Numbers (an attempt to match Excel). To get users to migrate from Microsoft Office and Google Docs, Apple offered these iWorks products <i>for free</i>.<a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/iwork.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15192" data-permalink="https://steveblank.com/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers/iwork/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/iwork.jpg?fit=789%2C785&ssl=1" data-orig-size="789,785" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="iwork" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/iwork.jpg?fit=300%2C298&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/iwork.jpg?fit=468%2C466&ssl=1" class="alignright size-thumbnail wp-image-15192" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/iwork.jpg?resize=150%2C150" alt="iwork" width="150" height="150" /></a></p> <p>Sounds great– who wouldn’t want the newest version of iWorks with the new OS especially at zero cost? But that’s because you would assume the new versions would have more features. Or perhaps given its new fancy user interface, the same features? The last thing you would assume is that it had fewer features. Apple released new versions of these applications with key features missing, features that some users had previously paid for, used, and needed. (Had they bothered to talk to customers, Apple would have heard these missing features were critical.)</p> <p>But the release notes for the new version of the product had no notice that these features were removed.</p> <p>Their customers weren’t amused.</p> <p>Apple’s explanation? “These applications were rewritten from the ground up, <a href="http://support.apple.com/kb/HT6049?viewlocale=en_US&locale=en_US" target="_blank" rel="noopener noreferrer">to be fully 64-bit and to support a unified file format between OS X and iOS 7 versions</a>.”</p> <p>Translated into English this meant that Apple engineering recoding the products ran out of time to put all the old features back into the new versions. Apple said, “… some features from iWork ’09 were not available for the initial release. We plan to reintroduce some of these features in the next few releases and will continue to add brand new features on an ongoing basis.</p> <p>Did they think anyone wouldn’t notice?</p> <p>Decisions like this make you wonder if anyone on the Apple executive staff actually understood that a “unified file format” is not a customer feature.</p> <p>While these examples are troubling, up until now they’ve been limited to content or software products.</p> <p><b>Tesla – Our Problems are Now Your Problems<br /> </b>In November 2013 Tesla, a manufacturer of ~$70,000 to $120,000 electric cars, used a software “update” to disable a hardware option customers had bought and paid for – without telling them or asking their permission.</p> <p><a href="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/tesla-model-s2.jpg"><img data-recalc-dims="1" loading="lazy" decoding="async" data-attachment-id="15208" data-permalink="https://steveblank.com/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers/tesla-model-s-2/" data-orig-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/tesla-model-s2.jpg?fit=4127%2C1546&ssl=1" data-orig-size="4127,1546" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":""}" data-image-title="Tesla Model S" data-image-description="" data-image-caption="" data-medium-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/tesla-model-s2.jpg?fit=300%2C112&ssl=1" data-large-file="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/tesla-model-s2.jpg?fit=468%2C175&ssl=1" class="alignleft size-thumbnail wp-image-15208" src="https://i0.wp.com/steveblank.com/wp-content/uploads/2013/11/tesla-model-s2.jpg?resize=150%2C56" alt="Tesla Model S" width="150" height="56" /></a>One of Tesla features is a $2,250 “smart air suspension” option that automatically lowers the car at highway speeds for better mileage and stability. Over a period of 5 weeks, <a href="http://www.nytimes.com/2013/11/20/business/us-safety-agency-opens-inquiry-into-tesla-fires.html">three Tesla Model S cars had caught fire</a> after severe accidents – two of them apparently from running over road debris that may have punctured the battery pack that made up the floor pan of the car. After the car fires Tesla pushed a software release out to its users. While the release notice highlighted new features in the release, nowhere did it describe that <em>Tesla had unilaterally disabled</em> a key part of the smart air suspension feature customers had purchased. <b></b></p> <p>Only <i><span style="text-decoration:underline;">after</span></i> most of Telsa customers installed the downgrade did Tesla’s CEO admit in a <a href="http://www.teslamotors.com/blog/mission-tesla" target="_blank" rel="noopener noreferrer">blog post</a>, “…we have rolled out an over-the-air update to the air suspension that will result in greater ground clearance at highway speed.”</p> <p>Translation – we disabled one of the features you thought you bought. (The CEO went on to say that another software update in January will give drivers back control of the feature.) The explanation of the nearly overnight removal of this feature was vague “…reducing the chances of underbody impact damage, not improving safety.” If it wasn’t about safety, why wasn’t it offered as a user-selected option? One could only guess the no notice and immediacy of the release had to do with the <a href="http://www.washingtonpost.com/business/us-safety-agency-opens-investigation-into-tesla-model-s-electric-car-fires/2013/11/19/c9191858-5108-11e3-9ee6-2580086d8254_story.html" target="_blank" rel="noopener noreferrer">National Highway Safety Administration investigation</a> of the Tesla Model S car fires.</p> <p>This raises the question: when Tesla is faced with future legal or regulatory issues, what other hardware features might Tesla remove or limit in cars in another software release? Adding speed limits? Acceleration limits? Turning off the Web browser when driving? The list of potential downgrades to the car is endless with the precedent now set of no obligation to notify their owners or ask their permission.</p> <p>In the 20<sup>th</sup> century if someone had snuck into your garage and attempted to remove a feature from your car, you’d call the police. In the 21<sup>st</sup> century it’s starting to look like the normal course of business.</p> <p><b>What to Do<br /> </b>While these Amazon, Google, Apple and Tesla examples may appear disconnected, taken together they are the harbinger of the future for 21st century consumers. <span style="line-height:1.5;">Cloud-based updates and products have changed the landscape for consumers. <em>The product you bought today may not be the product you own later</em>.</span></p> <p>Given there’s no corporate obligation that consumers permanently own their content or features, coupled with the lack of any regulatory oversight of cloud-based products, Apple’s and Tesla’s behavior tells us what other companies will do when faced with engineering constraints, litigation or regulation. In each of these cases they took the most expedient point of view; <em>they acted as if their customers had no guaranteed rights to features they had purchased</em>. So problem solving in the corporate board room has started with “lets change the feature set” rather than “the features we sold are inviolate so lets solve the problem elsewhere.”</p> <p>There’s a new set of assumptions about who owns your product. All these companies have crafted the legal <a href="http://en.wikipedia.org/wiki/Terms_of_service" target="_blank" rel="noopener noreferrer">terms of use </a>for their product to include their ability to modify or remove features. Manufacturers not only have the means to change or delete previously purchased products at will, there’s no legal barrier to stop them from doing so.</p> <p>The result is that consumers in the 21st century have less protection then they did in the 20th.</p> <p><span style="line-height:1.5;">What we can hope for is that smart companies will agree to a 21</span><sup>st</sup><span style="line-height:1.5;"> Century Bill of Consumer Product Rights. What will likely have to happen first is a class-action lawsuit establishing consumers’ permanent rights to retain features they have already purchased.</span></p> <p><i>Some smart startups might find a competitive advantage by offering customer-centric products with an option of “no changes” and “perpetual feature rights” guarantee.</i></p> <p><b>A 21<sup>st</sup> Century Bill of Consumer Product Rights</b></p> <ul> <li>For books/texts/video/music: <ul> <li>No changes to content paid for (whether on a user’s device or accessed in the cloud)</li> </ul> </li> <li><span style="line-height:1.5;">For software/hardware:</span> <ul style="line-height:1.5;"> <li>Notify users if an update downgrades or removes a feature</li> <li>Give users the option of not installing an update</li> <li>Provide users an ability to rollback (go back to a previous release) of the software</li> </ul> </li> </ul> <p><b>Lessons Learned</b></p> <blockquote> <ul> <li>The product you bought today may not be the product you have later</li> <li>Manufacturers can downgrade your product as well as upgrade it</li> <li>You have no legal protection</li> </ul> </blockquote> <p><strong>Update</strong>: a shorter version of the post was removed from the Tesla website forum</p> <p>Listen to the post here [audio <a href="https://www.google.com/url?q=http://traffic.libsyn.com/albedrio/steveblank_clearshore_131121.mp3&usd=2&usg=ALhdy2-CjP8czhtnuC1HCvJbxWIHVX4Wiw" target="_blank" rel="noopener noreferrer">http://traffic.libsyn.com/albedrio/steveblank_clearshore_131121.mp3</a>]</p> <p>Download the podcast <a href="http://www.clearshore.net/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-the-troubled-future-for-21st-century-consumers/" target="_blank" rel="noopener noreferrer">here</a></p> <div class="sharedaddy sd-sharing-enabled"><div class="robots-nocontent sd-block sd-social sd-social-official sd-sharing"><h3 class="sd-title">Share this:</h3><div class="sd-content"><ul><li class="share-print"><a rel="nofollow noopener noreferrer" data-shared="" class="share-print sd-button" href="https://steveblank.com/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers/" target="_blank" title="Click to print" ><span>Print</span></a></li><li class="share-email"><a rel="nofollow noopener noreferrer" data-shared="" class="share-email sd-button" href="mailto:?subject=%5BShared%20Post%5D%20When%20Product%20Features%20Disappear%20%E2%80%93%20Amazon%2C%20Apple%20and%20Tesla%20and%20the%20Troubled%20Future%20for%2021st%20Century%20Consumers&body=https%3A%2F%2Fsteveblank.com%2F2013%2F11%2F21%2Fwhen-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers%2F&share=email" target="_blank" title="Click to email a link to a friend" data-email-share-error-title="Do you have email set up?" data-email-share-error-text="If you're having problems sharing via email, you might not have email set up for your browser. 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id='like-post-wrapper-6599589-15189-6747b14ed3358' data-src='https://widgets.wp.com/likes/?ver=14.1-a.7#blog_id=6599589&post_id=15189&origin=steveblank.com&obj_id=6599589-15189-6747b14ed3358&n=1' data-name='like-post-frame-6599589-15189-6747b14ed3358' data-title='Like or Reblog'><h3 class="sd-title">Like this:</h3><div class='likes-widget-placeholder post-likes-widget-placeholder' style='height: 55px;'><span class='button'><span>Like</span></span> <span class="loading">Loading...</span></div><span class='sd-text-color'></span><a class='sd-link-color'></a></div> <p class="postinfo"> Filed under: <a href="https://steveblank.com/category/corporate-govt-innovation/" rel="category tag">Corporate/Gov't Innovation</a>, <a href="https://steveblank.com/category/marketing/" rel="category tag">Marketing</a>, <a href="https://steveblank.com/category/technology/" rel="category tag">Technology</a>, <a href="https://steveblank.com/category/tesla/" rel="category tag">Tesla</a> | <a href="https://steveblank.com/2013/11/21/when-product-features-disappear-amazon-apple-and-tesla-and-troubled-future-of-21st-century-consumers/#comments">32 Comments »</a> </p> </div> </div> <div class="post-14018 post type-post status-publish format-standard hentry category-corporate-govt-innovation category-marketing category-science-and-industrial-policy category-tesla" id="post-14018"> <h2><a href="https://steveblank.com/2013/06/24/tesla-versus-rent-seekers/" rel="bookmark">Strangling Innovation: Tesla versus “Rent Seekers”</a></h2> <div class="postinfo"> Posted on <span class="postdate">June 24, 2013</span> by steve blank </div> <div class="entry"> <p>The greatest number of jobs is created when startups create a new market – one where the product or service never existed before or is radically more convenient. Yet this is where startups will run into <i>anti-innovation</i> opponents they may not expect. These opponents have their own name – “rent seekers” – the landlords of the status-quo.</p> <p>Smart startups prepare to face off against rent seekers and map out creative strategies for doing so…. First, however, they need to understand what a rent seeker is and how they operate…</p> <p>———-</p> <p>Recently, the New York and North Carolina legislatures considered a new law written by <a href="http://www.opensecrets.org/orgs/totals.php?id=D000000080&cycle=2012" target="_blank" rel="noopener noreferrer">Auto Dealer lobbyists</a> that would make it illegal for <a href="http://www.teslamotors.com">Tesla</a> to sell cars directly to consumers. This got me thinking about the legal obstacles that face innovators with new business models.</p> <p>Examples of startups challenging the status quo include: <a href="http://www.lyft.me">Lyft</a>, <a href="https://squareup.com" target="_blank" rel="noopener noreferrer">Square</a>, <a href="https://www.uber.com">Uber</a>, <a href="https://www.airbnb.com">Airbnb</a>, <a href="http://www.spacex.com">SpaceX</a>, <a href="http://www.zillow.com/">Zillow</a>, <a href="http://bitcoin.org/en/" target="_blank" rel="noopener noreferrer">Bitcoin</a>, <a href="http://www.legalzoom.com" target="_blank" rel="noopener noreferrer">LegalZoom</a>, food trucks, <a href="http://www.publiccharters.org/About-Charter-Schools/What-are-Charter-Schools003F.aspx">charter schools</a>, and <a href="http://en.wikipedia.org/wiki/Massive_open_online_course">massively open online courses</a>. Past examples of startups that succeeded in redefining current industries include <a href="http://www.craigslist.org/about/sites">Craigslist,</a> <a href="https://signup.netflix.com">Netflix</a>, Amazon, <a href="http://www.ebay.com">Ebay</a> and <a href="https://www.paypal.com">Paypal</a>.</p> <p>While <a href="http://www.teslamotors.com">Tesla</a>, <a href="http://www.lyft.me">Lyft</a>, <a href="https://www.uber.com">Uber</a>, <a href="https://www.airbnb.com">Airbnb</a>, et al are in very different industries, they have two things in common: 1) they’re disruptive business models creating new markets and upsetting the status quo and 2) the legal obstacles confronting them <i>weren’t from direct competitors</i>, but from groups commonly referred to as “rent seekers.”</p> <p><b>Rent Seekers<br /> </b><a href="http://blog.bearing-consulting.com/wp-content/uploads/2012/09/The.Political.Economy.of_.the_.Rent-Seeking.Society.pdf" target="_blank" rel="noopener noreferrer"><i>Rent seekers </i></a>are individuals or organizations that have succeeded with existing business models and look to the government and regulators as their first line of defense against innovative competition. They use government regulation and lawsuits to keep out new entrants with more innovative business models. They use every argument from public safety to lack of quality or loss of jobs to lobby against the new entrants. Rent seekers spend money to increase their share of an existing market instead of creating new products or markets. The key idea is that rent seeking behavior creates <i>nothing of value</i>.</p> <p>These barriers to new innovative entrants are called <i>economic rent. </i>Examples of economic rent include state automobile franchise laws, taxi medallion laws, limits on charter schools, auto, steel or sugar tariffs, patent trolls, bribery of government officials, corruption and regulatory capture. They’re all part of the same pattern – they add no value to the economy and prevent innovation from reaching the consumer.</p> <p><strong>No regulation?<br /> </strong>Not all government regulation is rent or rent seeking. Not all economic rents are bad. Patents for example, provide protection for a limited time only, to allow businesses to recoup R&D expenses as well as make a profit that would often not be possible if completely free competition were allowed immediately upon a products’ release. But <a href="https://www.eff.org/issues/resources-patent-troll-victims" target="_blank" rel="noopener noreferrer">patent trolls</a> emerged as rent seekers by using patents as legalized extortion of companies.</p> <p><b>How do Rent Seekers win?<br /> </b>Instead of offering better products or better service at lower prices, rent seekers <a href="http://www.opensecrets.org/lobby/" target="_blank" rel="noopener noreferrer">hire lawyers and lobbyists</a> to influence politicians and regulators to pass laws, write regulations and collect taxes that block competition. The process of getting the government to give out these favors is <em>rent-seeking</em>.</p> <p>Rent seeking lobbyists go directly to legislative bodies (Congress, State Legislatures, City Councils) to persuade government officials to enact laws and regulations in exchange for campaign <a href="http://www.opensecrets.org/industries/" target="_blank" rel="noopener noreferrer">contributions</a>, appeasing influential voting blocks or <a href="http://www.opensecrets.org/revolving/" target="_blank" rel="noopener noreferrer">future jobs in the regulated industry</a>. They also <a href="http://www.whitehouse.gov/blog/2013/06/04/taking-patent-trolls-protect-american-innovation" target="_blank" rel="noopener noreferrer">use the courts to tie up and exhaust a startups</a> limited financial resources.</p> <p>Lobbyists also work through regulatory bodies like <a href="http://www.newyorker.com/online/blogs/johncassidy/2013/05/tom--wheeler-federal-communications-commission.html" target="_blank" rel="noopener noreferrer">FCC</a>, <a href="http://www.thenation.com/blog/172147/secret-money-lobbyists-fight-sec-disclosure-rule" target="_blank" rel="noopener noreferrer">SEC</a>, <a href="http://www.ftc.gov" target="_blank" rel="noopener noreferrer">FTC</a>, Public Utility, Taxi, or Insurance Commissions, School Boards, etc. Although most regulatory bodies are initially set up to protect the public’s health and safety, or to provide an equal playing field, <a href="http://www.jstor.org/discover/10.2307/2566926?uid=3739256&uid=2129&uid=2&uid=70&uid=4&sid=21102323655501" target="_blank" rel="noopener noreferrer">o</a><a href="http://www.jstor.org/discover/10.2307/2566926?uid=3739256&uid=2129&uid=2&uid=70&uid=4&sid=21102323655501" target="_blank" rel="noopener noreferrer">ver time</a> the very people they’re supposed to regulate <a href="http://qje.oxfordjournals.org/content/106/4/1089.short" target="_blank" rel="noopener noreferrer">capture the regulatory agencies</a>. Rent Seekers take advantage of <a href="http://en.wikipedia.org/wiki/Regulatory_capture" target="_blank" rel="noopener noreferrer">regulatory capture</a> to protect their interests against the new innovators.</p> <p><strong>PayPal – Dodging Bullets<br /> </strong>PayPal consistently walked a fine line with regulators. Early on the company shutdown their commercial banking operation to avoid being labeled as a commercial bank and <a href="http://www.business.auburn.edu/~barthjr/publications/Bank%20Regulation%20in%20the%20United%20States.pdf" target="_blank" rel="noopener noreferrer">burdened by banks’ federal regulations</a>. PayPal worried that complying with state-by-state laws for <a href="http://www.moneytransmitterlaw.com" target="_blank" rel="noopener noreferrer">money transmission</a> would also be too burdensome for a startup so they first tried to be classified as a <a href="http://corporate.findlaw.com/law-library/trust-companies.html" target="_blank" rel="noopener noreferrer">chartered trust company</a> to provide a benign regulatory cover, but failed. As the company grew larger, incumbent banks forced PayPal to register in each state. The banks lobbied <a href="http://articles.latimes.com/2002/feb/12/business/fi-paypal12" target="_blank" rel="noopener noreferrer">regulators in Louisiana</a>, <a href="http://news.cnet.com/N.Y.-subpoenas-PayPal-over-gambling/2100-1017_3-943533.html" target="_blank" rel="noopener noreferrer">New York</a>, California, and Idaho and soon they were issuing injunctions forcing PayPal to delay their IPO. Ironically, once PayPal complied with state regulations by registering as a “<a href="http://en.wikipedia.org/wiki/Money_transmitter" target="_blank" rel="noopener noreferrer">money transmitter</a>” on a state-by-state basis, it created a barrier to entry for future new entrants.</p> <p><b>U.S. Auto Makers – Death by Rent Seeking<br /> </b>The U.S. auto industry is a textbook case of rent seeking behavior. In 1981 unable to compete with the quality and price of Japanese cars, the domestic car companies convinced the U.S. government to restrict the import of “foreign” cars. The result? Americans paid <a href="http://www.jstor.org/discover/10.2307/2534518?uid=3739256&uid=2129&uid=2&uid=70&uid=4&sid=21102323655501" target="_blank" rel="noopener noreferrer">an extra $5 billion for cars</a>. Japan overcame these barriers by using their import quotas to ship high-end, high-margin luxury cars, establishing manufacturing plants in the U.S. for high-volume lower cost cars and by continuing to innovate. In contrast, U.S. car manufacturers raised prices, pocketed the profits, bought off the unions with unsustainable contracts, ran inefficient factories and stopped innovating. The bill came due two decades later as the American auto industry spiraled into bankruptcy and its market share plummeted from 75% in 1981 to 45% in 2012.</p> <p><b>Innovation in the Auto Industry<br /> </b>According to the Gallup Poll American consumers view <a href="http://www.gallup.com/poll/1654/honesty-ethics-professions.aspx" target="_blank" rel="noopener noreferrer">car salesman as dead last in honesty and ethics</a>. Yet when Tesla provided consumers with a direct sales alternative, the rent seekers – the <a href="http://www.nada.org" target="_blank" rel="noopener noreferrer">National Auto Dealers Association</a> turned its lobbyists loose on State Legislatures robbing consumers in North Carolina, New York and Texas of choice in the marketplace.</p> <p>In these states it appears innovation be damned if it gets in the way of a rent seeker with a good lobbyist.</p> <p>Much like Paypal, it’s likely that after forcing Tesla to win these state-by-state battles, the auto dealers will have found that they dealt themselves the losing hand.</p> <p><b>Rent seeking is bad for the economy<br /> </b>Rent seeking strangles innovation in its crib. When companies are protected from competition, they have little incentive to cut costs or to pay attention to changing customer needs. The resources invested in rent seeking are a form of economic waste and reduce the wealth of the overall economy.</p> <p><a href="http://www.econlib.org/library/Enc/bios/Schumpeter.html" target="_blank" rel="noopener noreferrer">Schumpeter’s</a> theory of <a href="http://en.wikipedia.org/wiki/Creative_destruction" target="_blank" rel="noopener noreferrer">creative destruction</a> – that entry by entrepreneurs was the <a href="http://www.nber.org/papers/w3223" target="_blank" rel="noopener noreferrer">disruptive force that sustained economic growth</a> even as it destroyed the value of established companies – didn’t take into account that countries with lots of rent-seeking activity (pick your favorite nation where bribes and corruption are the cost of doing business) or dominated by organized interest groups tend to be the economic losers. <em>As rent-seeking becomes more attractive than innovation, <a href="http://www.vietfin.net/wp-content/uploads/Why-is-rent-seeking-so-costly-to-society-1993.pdf" target="_blank" rel="noopener noreferrer">the economy falls into decline</a></em>.</p> <p>Startups, investors and the public have done a poor job of calling out the politicians and regulators who use the words “innovation means jobs” while supporting rent seekers.</p> <p><b>What does this mean for startups?<br /> </b>In an existing market it’s clear who your competitors are. You compete for customers on performance, ease of use, or price. However, for startups creating a new market – one where either the product or service never existed before or the new option is radically more convenient for customers – the idea that rent seekers even exist may come as a shock. “Why would anyone not want a better x, y or z?” The answer is that if your startup threatens their jobs or profits, it doesn’t matter how much better life will be for consumers, students, etc. Well organized incumbents will fight if they perceive a threat to the status quo<i>.</i></p> <p>As a result disrupting the status quo in regulated market can be costly. On the other hand, being a private and small startup means you have less to lose when you challenge the incumbents.</p> <p>If you’re a startup with a disruptive business model here’s what you need to do:</p> <p><i>Map the order of battle</i></p> <ul> <li>Laughing at the dinosaurs and saying, “They don’t get it” may put you out of business. Expect that existing organizations will defend their turf ferociously i.e. movie studios, telecom providers, teachers unions, etc.</li> <li>Understand who has political and regulator influence and where they operate</li> <li>Figure out an “under the radar” strategy which doesn’t attract incumbents lawsuits, regulations or laws when you have limited resources to fight back</li> </ul> <p><i>Pick early markets where the rent seekers are weakest and scale</i></p> <ul> <li>For example, pick target markets with no national or state lobbying influence. i.e. Craigslist versus newspapers, Netflix versus video rental chains, Amazon versus bookstores, etc.</li> <li>Go after rapid scale of passionate consumers who value the disruption i.e. Uber and Airbnb, Tesla</li> <li>Ally with some larger partners who see you as a way to break the incumbents lock on the market. i.e. <a href="http://www.palantir.com">Palantir</a> and the intelligence agencies <a href="http://www.wired.com/dangerroom/2012/08/palantir/" target="_blank" rel="noopener noreferrer">versus the Army</a> and <a href="http://www-01.ibm.com/software/city-operations/defense-national-security/index.html">IBM’s i2</a>, / Textron Systems <a href="http://www.overwatch.com">Overwatch</a></li> </ul> <p><strong>AirBnb – Damn the torpedoes full speed ahead</strong><br /> For example, Airbnb, thrives even though almost all of its “hosts” are not paying local motel/hotel taxes nor paying tax on their income, and many hosts are violating local zoning laws. Some investors and competitors may be concerned about regulatory risk and liability. AirBNB’s attitude seems to be “build the business until someone stops me, and change or comply with regulations later.” This is the same approach that allowed Amazon to ignore local sales taxes for the last two decades.</p> <p><i>When you get customer scale and raise a large financing round</i>, take the battle to the incumbents. Strategies at this stage include:</p> <ul> <li>Hire your own lobbyists</li> <li>Begin to build your own influence and <a href="http://en.wikipedia.org/wiki/Political_action_committee">political action groups</a></li> <li>Publicly shame the incumbents as rent seekers</li> <li>Use competition among governments to your advantage, eg, if New York or North Carolina doesn’t want Tesla, put the store in New Jersey, across the river from Manhattan, increasing New Jersey’s tax revenue</li> <li>Cut deals with the rent seekers. i.e. revenue/profit sharing, two-tier hiring, etc.</li> <li>Buy them out i.e. guaranteed lifetime employment</li> </ul> <p><b>Lessons Learned</b></p> <blockquote> <ul> <li><i>Rent seekers </i>are organizations that have lost the ability to innovate</li> <li>They<i> </i>look to the government to provide their defense against innovation</li> <li>Map the order of battle</li> <li>Pick early markets and scale</li> <li>With cash, take the battle to the incumbent</li> </ul> </blockquote> <p>Listen to the post here: or download the Podcast <a href="http://clearshore.net" target="_blank" rel="noopener noreferrer">here</a></p> <div class="sharedaddy sd-sharing-enabled"><div class="robots-nocontent sd-block sd-social sd-social-official sd-sharing"><h3 class="sd-title">Share this:</h3><div class="sd-content"><ul><li class="share-print"><a rel="nofollow noopener noreferrer" data-shared="" class="share-print sd-button" href="https://steveblank.com/2013/06/24/tesla-versus-rent-seekers/" target="_blank" title="Click to print" ><span>Print</span></a></li><li class="share-email"><a rel="nofollow noopener noreferrer" data-shared="" class="share-email sd-button" href="mailto:?subject=%5BShared%20Post%5D%20Strangling%20Innovation%3A%20Tesla%20versus%20%22Rent%20Seekers%22&body=https%3A%2F%2Fsteveblank.com%2F2013%2F06%2F24%2Ftesla-versus-rent-seekers%2F&share=email" target="_blank" title="Click to email a link to a friend" data-email-share-error-title="Do you have email set up?" data-email-share-error-text="If you're having problems sharing via email, you might not have email set up for your browser. 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