"If you’re one of those people who
bought Bitcoin or another cryptocurrency near its peak last fall, you’ve lost a
lot of money. Is it any consolation to know that
you would have lost a similar amount if you had bought Tesla stock instead?
OK, probably not. Still, Tesla
stock’s plunge is an opportunity to talk about what makes businesses successful
in the information age. And in the end, Tesla and Bitcoin may have more in
common than you think.
It’s natural to attribute Tesla’s
recent decline — which is, to be sure, part of a general fall in tech stocks, but an exceptionally steep
example — to Elon Musk’s purchase of Twitter and the reputational
self-immolation that followed. Indeed, given what we’ve seen of Musk’s
behavior, I wouldn’t trust him to feed my cat, let alone run a major corporation.
Furthermore, Tesla sales have surely depended at least in part on the
perception that Musk himself is a cool guy. Who, aside from MAGA types who
probably wouldn’t have bought Teslas anyway, sees him that way now?
On the other hand, as someone who has
spent much of his professional life in academia, I’m familiar with the
phenomenon of people who are genuinely brilliant in some areas but utter fools
in other domains. For all I know, Musk is or was a highly effective leader at
Tesla and SpaceX.
Even if that’s the case, though,
it’s hard to explain the huge valuation the market put on Tesla before the
drop, or even its current value. After all, to be that valuable Tesla would
have to generate huge profits, not just for a few years but in a way that could
be expected to continue for many years to come.
Now, some technology companies have
indeed been long-term moneymaking machines. Apple and Microsoft still top the
list of the most profitable U.S.
corporations some four decades after the rise of personal computers.
But we more or less understand the
durability of the dominance of Apple and Microsoft, and it’s hard to see how
Tesla could ever achieve something similar, no matter how brilliant its
leadership. Both Apple and Microsoft benefit from strong network externalities
— loosely speaking, everyone uses their products because everyone else uses
their products.
In the case of Microsoft, the
traditional story has been that businesses continued to buy the company’s
software, even when it was panned by many people in the tech world, because it
was what they were already set up to use: Products like Word and Excel may not
have been great, but everyone within a given company and in others it did
business with was set up to use them, had I.T. departments that knew how to
deal with them, and so on. These days Microsoft has a better reputation than it
used to, but as far as I can tell its market strength still reflects comfort
and corporate habit rather than a perception of excellence.
Apple’s story is different in the
details — more about individual users than institutions, more about physical
products than about software alone. And Apple was widely considered cool, which
I don’t think Microsoft ever was. But at an economic level it’s similar. I can
attest from personal experience that once you’re in the iPhone/iPad/MacBook
ecosystem, you won’t give up on its convenience unless offered something a lot
better.
Similar stories can be told about a
few other companies, such as Amazon, with its distribution infrastructure.
The question is: Where are the
powerful network externalities in the electric vehicle business?
Electric cars may well be the future
of personal transportation. In fact, they had better be, since electrification
of everything, powered by renewable energy, is the only plausible way to avoid
climate catastrophe. But it’s hard to see what would give Tesla a long-term
lock on the electric vehicle business.
I’m not talking about how great
Teslas are or aren’t right now; I’m not a car enthusiast (I should have one of
those bumper stickers
that say, “My other car is also junk”), so I can’t judge. But the lesson from
Apple and Microsoft is that to be extremely profitable in the long run a tech
company needs to establish a market position that holds up even when the time
comes, as it always does, that people aren’t all that excited about its
products.
So what would make that happen for
Tesla? You could imagine a world in which dedicated Tesla hookups were the only
widely available charging stations, or in which Teslas were the only electric
cars mechanics knew how to fix. But with major auto manufacturers moving into
the electric vehicle business, the possibility of such a world has already
vanished. In fact, I’d argue that the Inflation Reduction Act, with its strong
incentives for electrification, will actually hurt Tesla. Why? Because it will
quickly make electric cars so common that Teslas no longer seem special.
In short, electric vehicle
production just doesn’t look like a network externality business. Actually, you
know what does? Twitter, a platform many of us still use because so many other
people use it. But Twitter usage is apparently hard to monetize, not to mention
the fact that Musk appears set on finding out just how much degradation of the
user experience it will take to break its network externalities and drive away
the clientele.
Which brings us back to the question
of why Tesla was ever worth so much. The answer, as best as I can tell, is that
investors fell in love with a story line about a brilliant, cool innovator,
despite the absence of a good argument about how this guy, even if he really
was who he appeared to be, could found a long-lived money machine.
And as I said, there’s a parallel
here with Bitcoin. Despite years of effort, nobody has yet managed to find any
serious use for cryptocurrency other than money laundering. But prices
nonetheless soared on the hype, and are still being sustained by a hard-core
group of true believers. Something similar surely happened with Tesla, even
though the company does actually make useful things.
I guess we’ll eventually see what
happens. But I definitely won’t trust Elon Musk with my cat."
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