Disruptive Disintermediation: Tesla Takes on the Auto Dealers - and the Rest of the Physical Economy

You thought maybe this was about cars? I mean, sure, that is the proximate cause, the excuse, the trigger. But this is a much bigger battle. This is the final showdown, long promised, between those who view the  net as the only answer and those who still think the physical economy has a rightful place in public life.

The back story is that Elon Musk, an accomplished tech guy with lots of wins to his credit - most notably PayPal - has always had a car thing. He is also, per the zeitgeist, appropriately transnational: South African by birth, of Hungarian descent, but Canadian-American by choice. His passport? Whatever.

He started a company called Tesla to produce a new kind of car that is speedy, sexily designed, environmentally-conscious and, at $65,000 a pop, way beyond the reach of the proletariat.

But he also has a thing about one of the original promises of the internet economy - disintermediation - or taking the middle man out of the equation. This was supposed to make commerce easier, cleaner and maybe even cheaper. It hasnt necessarily worked out that way in every aspect for a host of reasons, but it has changed how we live and it has certainly made things more convenient, at least for the buyer.

As we have seen, much of the profit has gone from the middle to the top, not to the bottom or to whoever is left in the middle. So as far as broader social movements go, this process has destroyed a lot of what used to be pretty good middle class jobs and a lot of wealth generated exactly by those in that fat middle. And no one is fatter or wealthier than the auto dealers. There is a reason why so many professional sports franchises are owned by people from this profession. And no, not because they are such great athletes themselves. It's because they can afford those huge prices. They make a lot of money selling product, but they make their real money selling the services wrapped around that product, from financing to repairs.

That, Musk, claims, is what pisses him off. He is trying to get a better deal for the consumers. But he is also a true believer, someone who wants to realize the original internet dream. PayPal took some financial institutions out of the process. Now he is working the product end.

There is, however, a problem. Auto dealers also happen to be among the most politically connected - and generous - of the business owning class. They see his ploy for what it is: the end of their gravy train. And they are not going quietly. Laws have been passed in myriad US states - most notably, of late, New Jersey, home of Governor Chris Christie, of punitive bridge closings and of other cash-based politics  - outlawing the Tesla model.

This is Amazon 2.0. When entrenched interested are threatened, they react. And given that neither the net's moguls like Musk, nor its financiers have done a particularly good job of providing a useful solution for all those who have been disintermediated, the presumed victor is not yet clear. Amazon, for instance, has finally had to concede on paying local sales taxes.

The betting here is that Musk, too, may have to compromise, though neither side will call it that. The auto dealers will have to prove this actually threatens thousands of jobs or that it will have any impact at all. Tesla, in order to survive, will have to demonstrate that it is not killing thousands more good jobs and that someone other than Musk will share in the rewards. Could be pretty interesting. JL

Den Howlett reports in Diginomica:

          When Tesla came along as a new company with no existing franchises, the auto dealers, who
           possess vastly more resources and influence, sought to force it to sell through them.

Elon Musk, CEO Tesla is taking on the state of New Jersey which has outlawed Tesla’s direct distribution model with effect from 1st April. By any standard, this takes big balls but more to the point, Musk’s argument is not only eloquent, it is brilliantly constructed in a manner that shines light on the nature of disruption.
Now – before going on, I have mixed feelings about the Tesla. For a start I’m not a car person but even so, the Tesla is one heck of a beast. On the one hand I see it as a fantastic example of innovation I both understand and appreciate. Having sat in Ray Wang, CEO Constellation Research’s tricked out Tesla S, it is hard to be anything other than impressed with the technology Tesla has brought to bear on the concept of the car as a mode of transport. Taking Wang’s economic analysis, it is even harder to argue the economics – at least in California.
On the other hand, a base price of $63,750 puts it well out of reach of the man in the street although leasing might work. That will change as volumes increase and as the company develops other models.

Radical disruption

Returning to Musk’s argument, he points out that the protective legislation was introduced as a counterweight to past sins by motor companies, keen to put pressure on dealers. He argues:

The intent was simply to prevent a fair and longstanding deal between an existing auto company and its dealers from being broken, not to prevent a new company that has no franchisees from selling directly to consumers…
…In a handful of states, the laws were written in an overzealous or ambiguous manner. When all auto companies sold through franchises, this didn’t really matter. However, when Tesla came along as a new company with no existing franchisees, the auto dealers, who possess vastly more resources and influence than Tesla, nonetheless sought to force us to sell through them.

So far so good. But it is in Tesla’s logic that we see innovation that is the most difficult to argue against:

1. Auto dealers have a fundamental conflict of interest and that it is hard for them to sell the new when people are used to the old.
2. No American car maker has successfully launched via a dealership.
3. Most dealership profits come from after market sales and services – a concept with which Tesla fundamentally disagrees.

It is the last point that intrigues me. Musk says:

I have made it a principle within Tesla that we should never attempt to make servicing a profit center. It does not seem right to me that companies try to make a profit off customers when their product breaks. Overcharging people for unneeded servicing (often not even fixing the original problem) is rampant within the industry and happened to me personally on several occasions when I drove gasoline cars. I resolved that we would endeavor never to do such a thing at Tesla, as described in the Tesla service blog post I wrote last year.

The Tesla model is intriguing in the context of how we are seeing enterprise software business and delivery models changing over time. I am reminded of Marc Benioff, CEO Salesforce.com’s claim that when he founded the company, it was with the idea that business software should be as easy to acquire and use as it is for consumers who use Amazon.
We are a long way from that nirvana but there is little doubt this is how things are moving directionally. In the process, companies are recognizing there are tangible benefits from simplifying their landscapes a la Tesla as Frank Scavo recently discovered in a deep dive customer survey.

What have we learned?

Contrast that with what Leo Apotheker, then CEO SAP said at his first TechEd in 2008. At the time, the message was ‘no more upgrades’ something that 100% of my developer colleagues thought laughable at best and risible at worst.
The company had become a victim of its own success in selling a Lego set that allows myriad customizations. Apotheker was attempting to steer a course where SAP moves towards much simpler landscapes and delivery via the cloud while attempting to shore up a maintenance model which even then was delivering dubious value in the minds of customers.
On the SI side of the equation, SAP had inadvertently created a monster where, according to some estimates, the software became subsumed in a package of services and hardware that some claim leaves SAP with the highest fully weighted per user cost of any business software. Others will argue value delivered but as we see buyers quietly turning away or shunning the vendors’ captive maintenance model one has to ask…where’s the upside for customers?
It is easy to pick on SAP – they’re the big dog in the room and the same goes for every other vendor that has a strong partner ecosystem. Put bluntly, Accenture, Deloitte, PwC, EY, CSC and many others would not exist in their present form or even be vaguely relevant without the ‘gift that keeps giving’ in the form of malleable software that often claims wonders yet is a beast to assemble and keep together.
Fast forward to the present and what is changing?
Phil Wainewright proclaims a ‘change or die‘ message in his piece earlier this week:

Vendors are beginning to realize that if their customers remain too long on out-of-date software versions, they become more amenable to considering cloud-based alternatives from competing vendors. Getting the installed base to upgrade is becoming a survival imperative, as customers left on older versions compare what they have to what’s available from the cloud and find it wanting.

Nothing is quite that black and white yet it is hard to argue against the double digit growth our partners Salesforce, FinancialForce and Workday proclaim in the public domain while others yet to go public talk aggressive growth. And especially so when compared with lackluster growth elsewhere.

Old dogs and new tricks?

My concern remains that while the established vendors struggle to find relevance among the new order, I wonder whether they should simply bite the bullet and return to sacrificing profit for growth based upon entirely new streams of business.
They have the developer fire power to establish baseline functionality, but without that fundamental switch of the kind Tesla invokes, their long term future looks increasingly bleak. How can that be when we see the likes of Accenture and SAP inking a deal that ostensibly combines Accenture’s deep vertical market IP expertise with SAP’s HANA firepower?
Holger Mueller gives the deal a cautiously optimistic thumbs up but I am less certain. The big SIs have hung back on newer technologies until they see markets that can soak up their massive consulting benches. That sounds like a recipe for ‘rinse and repeat’ of the old models to me and shy of incredibly strong relationships with CIOs who still have clout, I will reserve judgment for seeing outcomes.

Mad Valley anyone?

Elsewhere, I am fascinated by initiatives like Mad Valley which hosts a clutch of startups you’ve never heard of but some of which already count giants like AT&T, Sony, Land Rover, Unilever, Clavin Klein, Charles Schwab, Wells Fargo, Starbucks…the list goes on and on…as customers driving value.
This is in sharp contrast to the past where small vendors could not get a toe in the door let alone win business at major brands. But then Mad Valley is fostering a community of interest in solving some very big, hairy marketing problems in a world where traditional advertising has been finally exposed for the ‘Emperor’s new clothes’ model it always was but which no-one could adequately prove.
And that is only one tiny slice of a new set of markets that are evolving rapidly to come into the buyers’ line of vision.