If you are one of those people who bought
bitcoin or another cryptocurrency near its peak last fall, you have 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?
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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 is 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 have seen of
Musk’s behavior, I would not 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 would not have bought Teslas anyway, sees him that way now?
We more or less understand the durability of the dominance of Apple and Microsoft, and it is hard to see how Tesla could ever achieve something similar, no matter how brilliant its leadership.
On the other hand, as someone who has spent
much of his professional life in academia, I am 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 is the case, though, it is
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 US 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 is hard to see how
Tesla could ever achieve something similar, no matter how brilliant its
leadership. 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 IT 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.
The question is: Where are the powerful network externalities in the electric vehicle business?
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 do not
think Microsoft ever was. But at an economic level it is similar. I can attest
from personal experience that once you are in the iPhone/iPad/MacBook
ecosystem, you will not 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 is hard to see what would give Tesla a long-term
lock on the electric vehicle business.
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, Iwouldd 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.
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 found a long-lived money machine.
In short, electric vehicle production just
does not look like a network externality business. But what does is Twitter, a
platform many of us still use because so many other people use it. However,
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 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 found a long-lived money machine.
And as I said, there is 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 will eventually see what
happens. But I definitely will not trust Elon Musk with my cat.
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