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 monetise, 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 storyline 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 have 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.
This article originally appeared in The New York Times.
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