Visions of Sugar Plums....and Apple Rockets: Why Some Innovations Fail and Others Transform Entire Industries

The concept of a an adoption curve is credited to Everett Rogers in his 1962 paper on the

Diffusion of Innovations

Despite the obvious benefits of increase yields and disease resistance, farmers tend to be a conservative group and their adoption of such new fangled ideas was a little slow on the uptake in the late 1950's and early 1960's.

The adoption curve was actually more evident later with the introduction of NEW technology based product introductions such as cell phones, flat screen televisions, the personal computer, the Internet, personal printers, spreadsheets, and word processors.

We claim no great mystical prescience in predicting several years ago that the adoption of Lithium powered magnetic drive in automobiles would follow this standard adoption curve. Starting with near zero participants, and assuming that it might eventually reach a mass market, that is the only route really to get there.

But we've seen a LOT of obvious mistakes lead to an extraordinary number of bankrupties and product failures that would appear to be committed by those apparently totally OBLIVIOUS to this by now pretty much accepted hypothesis.

I read recently on DIYelectric that one of our more socially graceless but talented component designers didn't think the adoption curve applied to electric automobiles. It does, but it brings up the point, the adoption curve only describes products that are eventually adopted. Actually it applies to those who don't as well but some products just don't make the cut. They reach a certain point post early adopter where they hit the vein of consumers - a pragmatic consumer. And the entire marketing message has to change to appeal to these more pragmatic "show me" consumers. If a company fails to make this message transition, they pretty much fail.

Geoffrey Moore describes this most ably in his 1991 book

Crossing the Chasm - Marketing and Selling High-tech Products to Mainstream Customers

I have to say that I'm strongly affected by adoption curve theory AND Moore's proviso noting a chasm where products FAIL to reach full adoption. If you pay careful attention, this pretty much explains the EXISTENCE of EVtv.

Pragmatists require validation and evidence from OTHER pragmatists who have actually adopted the product before they will likewise adopt it. This is the chasm. How do you get ANY of the pragmatists to adopt the product at all. It's a glitch in the adoption curve. A point of inflection where if you do not bridge this, the product fails.

As to the adoption curve itself, it starts with tinkerers and innovators. These guys will play with ANYTHING if it catches their interest. That is YOU technically. You'll ride a lawn mower if it is electric drive.

And of course you want to upgrade it to Lithium batteries so it will mow longer.

That group is followed by the early adopters. These are people who don't likely alter the products or even technically understand them completely, but have the resources and interest to be the first in their neighborhood with a PC, or a cell phone, or an Internet connection. Gadget guys. They like the position of being able to show their products to others and gain status by having the neat new toy that nobody else in their area is sufficiently knowledgable about or can afford.

To go past the tinkerer and innovator stage, you have to appeal to the early adopter. They provide revenues through early sales to fund the continued development and refinement of the product, and eventually launch you into the volume numbers to either bring costs down organically, or convince you to invest in that refinement yourself with some assurance that there will BE a mass market for the product. Failure at the early adopter market is rather total failure. You have to succeed in the early adopter market to even get TO the CHASM.

Fisker. Brightspeed. Phoenix. Aptera. Azure Dynamics. THINK. Coda. The list of failed automotive startups in the electric vehicles space is already almost universal. The perception is that the automotive industry is very competitive and it is very HARD to succeed in this mature industry.

Actually, while it is non trivial to build an automotive manufactory, it is not particularly hard to succeed there. An extraordinary percentage of humankind's resource is spent on cars and personal transportation. And the players extant have become very inefficient and encumbered by regulation to the point that the U.S. Federal Government spewed $80 BILLION dollars to prop up a totally bankrupt General Motors Corporation. This industry is BEGGING to be knocked off by innovative disruptive technology. And unlike the 1980's, our cultural and political environment is almost nurturing to anything that can get us off of oil and exhaust emissions.

The problem with all these companies is not that they failed because the auto industry is so hard They failed by not identifying and appealing to this early adopter segment. And while they haven't failed yet, I would throw the Nissan Leaf and Chevy Volt right in on top of the evident failures. They are being held in the air in an act of gravity defiance supported by massive investments from the large corporations who have introduced them. If they depended on government grants and investment funds, they would be gone as well at this point. Unfortunately for them, simply spewing BILLIONS at the problem has never actually been a success technique in dealing with the adoption curve. It's just a quick way to burn off billions of dollars.

Coda, with total sales of 78 cars, can be a poster child for this. The car is actually pretty well designed. The drive train uses the UQM AC drive system that is comically overpriced for individuals at about $34,000. But UQM received $43 million or so to build a volume plant to produce these and sold them to CODA for much less than that. They used a substantial LiFePo4 pack to achieve a range in the 120-130 mile area actually. But they basically built all this into a Chinese roller that looked like a very inexpensive 2000 era Toyota economy car.

The early adopter market for electric cars looks a little bit like me. Late career. Age 40-60. Male. And with personal resources to drive any car they might want to.

If you are already enamored with the concept of electric vehicles as a solution, it is still hard for me, at age 58, to picture myself in a $19,000 economy hatchback targeted at a 24 year-old working on his first job out of college and with a new baby. That's just not where I am in life. Nor where ANY of the early adopters that might fuel the uptake of electric cars is. A 10 year out of date Toyota economy car really doesn't scratch the itch either. A small delivery van designed for flower shops doesn't quite do it either. No kudos for a $59,000 price tag on a commonly available $23,000 vehicle. I don't mind being an early adopter, but you can't make me look stupid in public while I'm doing it. If I can pick one up for $6,100 at the liquidation auction, ok. But I'll make the shop rats drive it. I won't actually drive it much myself.

The Leaf is an electric version of the $19,000 Versa. And the Volt is a range extended electric version of the $17,000 Chevy Cruze. And so you have the kind of wierd scenario of selling 25,000 Chevy Cruze's per month to 24 year olds, and 2000 Volts per month at $42,000 into the latent demand of the remnants of the tinkerers and innovators.

Tesla has had the dubious distinction of being the most shorted stock in NASDAQ history for essentially the entire period since it's Initial Public Offering - IPO. Currently 42% of the 74.8 million tradeable shares (the float) are sold short. That is they are sold by people who don't own them, by being borrowed from people who do. The expectation of course, is that since ALL the electric car introductions have failed thus far, that when this one does and is trading at $0.20 per share, you can buy them back and cover your loan of the shares, which you sold at $27.00. You get to pocket the difference. At one point, the short was more like 46%. Technically, you can't quite go over 50% because you would have to have the same shares borrowed TWICE to pull this off and it just isn't allowed.

The whole concept of Tesla is a bit different from the other players. Originally they were a conversion shop converting Lotus Elise rollers to electric drive and selling them purportedly for $109K and more often $130K. The initial units cost them about $146K to build, which was somewhat problematical. But they survived it and basically sold all the rollers they had contracted for and in the interim, Lotus simply stopped the Elise production line. So there are no more Tesla Roadsters. But it strongly appealed to the early adopters I describe.

The Model S was designed from a clean sheet of paper. The original car body "designer" was ironically Henrik Fisker of FIsker Kharma - soon to announce their bankruptcy. But he had been a designer for the Aston Martin marque in the UK. A very high end, very European sedan. The Rapide starts at $197,500 and we may have been the first to line up a photo of the MOdel S and a photo of the Rapide side by side. You can't really pick one from another without a pretty high zoom setting on your Photoshop.

Fisker and Tesla fell out of bed rather quickly and actually lawsuits resulted. Tesla sued Fisker and lost. They actually had to pay Fiskers legal costs of over a million dollars. Apparently that didn't help the Karma.

Fisker was a coach designer. Not an engineer. And the Karma was just an engineering mess. One problem after another. Pretty on the outside. Rotten right down to the overengineered battery packs from A123, now ALSO bankrupt. I'd like to get one of these very pretty car bodies, and gut it to build a BEV out of it. That would be kind of a first for us. Converting an electric car to electric drive.

Meanwhile the Tesla was supposed to be a $55,000 European look sedan with a 300 mile range. I am confident that car would have absolutely busted the game wide open and early adopters would flock to it. But even then I found that an ambitious target and predicted a fully equipped price of $77,500 and even put down a deposit. Alas, the "fully equipped" price is more like $110,000. And in many ways I associate it now with Steve Jobs NeXTCube computer. Impossibly sexy and simply not obtainable at the price of $10,000 when introduced in the early 1990's.

Apparently not. Tesla appears to have sold 6000-7000 of the units. There IS something odd going on with Elon Musk apparently nearing some sort of melt-down as he makes one impossibly trivial and bizarre announcement after another, usually signaled by a TWEET and followed by a conference call. In any event, it has brought up the stock price to $56 and those who had shorted at $27 are a little grim around the mouth this morning. There are so MANY of them, that if they head for the exits, it will drive this stock price higher yet and quickly. That increases the pressure on the remaining shorts, and some will even start to get automatic sales and margin calls. That could lead to a stampede. At that point it's a scramble to cover and NOT be the last one out the door and the resulting stock price will be entirely out of proportion to the value of the company. I've been predicting THAT for over a year and a half now as well.

But despite missing the $55,000 price point, the Model S is already ESTABLISHED as the status symbol in Silicon Valley. They are everywhere there. And spreading across the country. So the NeXTcube analogy did not pan out and it would appear Tesla is going to thoroughly appeal to the early adopter market. If they reach their 20,000 vehicle goal for 2013, it will absolutely set the automotive industry on its head - changing it forever.

The trick is, there IS no economy ICE version of the car available at $30,000 to bring the value proposition to a point. And the car IS sexy. Lots of gadgets, including a 17 inch display, wireless connectivity, and stunning handling qualities coupled with a REAL range well over 200 miles and with careful driving, potentially the promised 300 miles. It has already gained the panache and status of gadget du jour. And so if you are wealthy, environmentally conscious, and a technocrat, and don't drive a Tesla this year, you are actually a bit out of position. This could set off a stamped to "cover" coinciding with the short sellers.

The potential is there for TSUNAMI.

I'm picturing CODA's alternate universe if they had targeted smaller numbers of Aston Martin Rapide conversions instead of cheap Chinese Toyota knockoffs.

I will openly PREDICT that GM's introduction of a much higher priced Cadillac ELR will end in the embarrassing result that it will have higher UNIT sales than the Volt month by month for the entire period both are on sale.

And Apple computer is about to miss their moment of opportunity.

I was bemused to view this week an Apple Shareholder on BLOOMBERG WEST proposing as his own brilliantly original idea that Apple should acquire Tesla Motors. The logic was pretty good, though he didn't quite get the need to take out Solar City and SpaceX as well as we did in JULY of 2012. Without those two companies, Elon would not likely serve as CEO, nor really perhaps even condoning the merger.

Tesla has a bit of a problem of course with development funds and has actually pushed out the Model X for a year or so. Model X is more the kind of vehicle that would appeal to ME, not being much of a sedan driver.

But much more to the point, Apple is staggering under the weight of about $150 billion in cash - held overseas. It is too large to keep here and pay taxes on. Oddly, they recently sold $17 billion in BONDS to raise capital to do what? Apparently htey plan on propping their stock up with dividends. Good idea. But in technology, dividends imply that you haven't a clue how to deploy the capital in product development more ably than your shareholders. That's kind of a weird admission coming from Steve Jobs.

Of course, it isn't coming from Steve Jobs. It's coming from Tim Cooke. Mr. Cooke may be an able administrator. But he is decidedly NOT Steve Jobs. And he faces a daunting challenge. A company that has always commanded a premium as a technology GROWTH play, with rapidly accelerating revenues and profits, they are hard pressed where to find a place to increase revenues on the scale necessary. They have almost no culture of acquisition or competent acquisition team at work. Their acquisitions have been so trivial that you hardly hear of them. Small technology companies with scraps and pieces of technology they might find useful at the moment.

And anywhere in their space where they might fancy a significant acquisition, almost certainly lands them in anti-trust or at least anti-competitive scrutiny. Ask Bill Gates how debilitating THAT can be.

But Tesla, Solar CIty, and SpaceX offer entre into THREE potentially HUGE industries with almost unlimited potential.

SpaceX, to INFINITY AND BEYOND with Buzz Lightyear, actually is cash flow positive with outstanding contracts including a $1.6 billion 12-flight NASA cargo delivery contract to the International Space Station and as of December 2012, has broken into the military launch business previously totally owned by Boeing and Lockheed with several hundred millions in Air Force contracts. They are emerging as the low cost provider in the orbital lift space and already have a backlog of over 20 OTHER contracts totaling nearly $4 billion in pending launches. Started with an investment of $100 million by Elon Musk in 2006, this may be the most promising egg in the basket.

Solar City. Musk's participation is not so widely known. SolarCity was founded in July 2006 by brothers Peter and Lyndon Rive, based on a suggestion for a solar company concept from Elon Musk. As of 2011, it was the largest Solar installation company in the world. Musk has a large investment in the company and serves as Chairman of the Board. In 2008 SolarCity introduced a new solar lease option for homeowners that significantly reduces or eliminates the upfront cost of installing solar power. SolarCity's solar lease can allow some homeowners to pay less each month by adopting solar power than they previously paid for electricity from the utility company.

What you may also not know, SolarCity entered the electric car charging business by buying the SolSource Energy business of Clean Fuel Connections, Inc., which was reported to be finalized in 2009 and has also announced a partnership with Rabobank to make electric car charging available for free to owners of Tesla Motors' vehicles traveling on U.S. Route 101 in California between San Francisco and Los Angeles. In 2011, the company announced it would install electric car chargers that could charge a wide range of EVs in all of its service territories.

And so you see my Tesla Supercharger/Solar City link that I think is a little pregnant. A national grid of Solar City solar/battery fast charging stations could be fairly easily financed using the convenience store model of the existing gasoline stations. I would upscale that concept a bit to a more California style vitamin water bar with Starbucks coffee and the obligatory alfalfa sprout pita pocket, but it might also work with Ho'Ho's and Ding Dongs and the world famous 192 ounce Bloomberg NYC Big Gulp Cola Slurpee sugar coma.

For maybe $20-$22 billion, Apple could acquire the whole shooting match. They would gain entre to the $80 billion automotive market, pickup the largest and most successful Solar installation company, the whole nationwide convenience store charging network, and a heavy lift Space company that owns $4 billion in contracts and is currently the low-cost go to for orbital lift, actually shaming giants such as Boeing and Lockheed.

In ALL of these UNLMITED markets, they get the current prince of the field, where the deployment of cash only accelerates market share and dominance. Best of all, Apple is UNASSAILABLE on the anti-competitive front. No blathering idiot, even in the Obama administration, can possibly emit the THOUGHT that Apple would be dominant in automobiles, convenience stores, Solar power, or Space Exploration. It is laughable.

Better, they could probably pull it off WITHOUT paying a cent. This thing begs for a stock swap. I'm picturing the guy who sold his Tesla shares short at $27, and suddenly has to cover an Apple share at $452 for each Tesla share he sold. Or a 5 Tesla share for 1 Apple share valuing Tesla at a preposterous $80 per share. Either way you would have short investors jumping off of long buildings in a rain of terror.

This leaves Elon Musk as CEO of Apple Solar Exploration Electric Car Company and Convenience Store. iEverything iCar. iPhone. iRoof. iTv. iComputer. iPad. iRocket. iBigGulp. iPower. And $150 billion or so to make it all happen. Along with all the existing Apple engineers and employees who wander the halls wondering what it would have been like if Jobs hadn't passed untimely.

Tim Cooke, once again COO OR Chairman, is the brilliant guy who actually DID figure out how to replace Steve Jobs.

And Buzz Musk goes to Infinity and Beyond. Albeit stuttering and stammering his way to Mars. I love it.

Oh. EVtv. Well not quite so glorious. But recall the chasm. After the early adopters, there are the pragmatists. They need reference from other pragmatists who have already adopted. Which of course don't exist. Can 100,000 tinkers and innovators take 500,000 pragmatists for a ride? And if a homebuilt electric car rides THAT well and causes all that grinning, what would a shiny new Tesla Model X be like? Or maybe a 1967 VW microbus....in Teal and Lime Green....

They might just reject the concept of the electric car. But they likely will NOT be able to resist the allure that the American car can be fun again. Some will build. Some will buy. Some will do both.

Jack Rickard