BLOG - Some of the Greatest Innovations are Not What You Think

By Lou Steinberg

Most of my blogs focus on cyber-security innovation, which is my current mission. In this post, I’m going to write about innovation in general and disruptive innovation in particular. My case study is Tesla.

For full disclosure, I own a Model S and shares of TSLA. You may choose to prejudge me as biased or just putting my money where my mouth is. What I will ask is that you not label me as a fan boy of Tesla; I’ve suffered through the expected challenges of a relatively new product from a relatively new company. I have concerns. It doesn’t matter. Tesla is going to win the automotive space. Here’s why:

Innovation #1: cars are a software problem

I first realized the power of “tin wrapped software” when I was the CTO of Symbol Technologies. Symbol built hardware, but was able to use software to tune how it worked in different environments. Flexible software meant that the hardware behaved one way in a hospital (long battery life for a 12-hour shift) and another way in a retail store (higher power radios to overcome dead zones).

I bought the Model S because it was the first time I had ever seen someone treat a car as a software problem. Of course, modern cars are full of computers, but their manufacturers have legacies of building and tuning hardware. It’s wired into their DNA.

While manufacturing innovations such as mass customization may change their appearance, cars have evolved to a place where the opportunity to disrupt is diminished. They all have modern engines, they all have modern suspensions, they all have modern safety systems. We’ve seen little disruption because they have all reached the same place against a current set of use cases.

Tesla is different.

We can debate the merits and disadvantages of electric motors over gasoline engines. I see issues with both. What’s disruptive is that, for the first time, an individual car can improve itself via software upgrades – rather than waiting for future generations of that car to ship. I own BMWs and a Mercedes, and have previously owned Audis, an Infinity, an Acura, a Ford, and a couple of Chryslers; most were or are reasonably good cars. Aside from navigation maps, all of my cars had features that were largely fixed on the day they left the factory.

Not my Tesla.

Every month, it gets software updates that make it better. It learned how to park. Then it learned how to do it better. It opens my garage door when I come home. It improved its self-driving. It improved the stereo. It added anti-theft features. After one year, my car is safer and better to drive than the day I bought it. My Tesla driving experience keeps improving through patches and updates.

BMW, Audi, Jaguar and others have reacted to Tesla’s success by making a big push towards electric cars. They are missing the point. Their hardware DNA will likely lead them to build cars with fixed features -- not continuously improving software. Yes, you can sometimes take a car to the dealer and update the software when you have a problem, or let them swap the “computer module” to get new firmware.

How very 1980s. I never again want to buy a car whose capabilities are frozen in time.

Innovation #2: Free up constrained resources

I’ve never used a Tesla Ranger – the roving vans that come to you for minor service items. It sounds like a great convenience to the customer…and I’m sure it is. That’s not the real innovation.

Tesla’s bigger innovation comes from a realization that the most constrained real estate at a service center is in the service bays. You can hire more technicians if demand increases, but the service bays are a big capital investment that can’t be flexed up and down.

The second most valuable real estate at a showroom is in the parking lot. You can fill it with cars to sell, but only if you don’t have a lot of cars you already sold taking up space while waiting for a service bay to become available. Cars waiting for service, especially warranty service, crowd out cars that are ready to be sold and delivered. Add to this the fact that many owners will ask for a loaner car, and you need a fleet of loaners. It all costs money.

Suddenly, the idea of a van that comes to the customer isn’t just a convenience, it’s a way to optimize constrained resources and save capital. It frees up the parking lots to sell and deliver cars. This “convenience” shows how process redesign can redefine the cost curve and let a showroom focus on where it makes money (which Elon Musk has clearly said isn’t service). I bought stock in Tesla the day I realized how smart this was.

Innovation 3: Sell the roadmap

“People don’t buy software, they buy a roadmap.”

That’s a true statement. Companies that shell out big bucks for software want to know that it will keep getting better. Since its first innovation was realizing that cars are now a software problem, Tesla isn’t limited to promoting the current features.

Tesla and Musk are either lauded for offering vision or panned for over-promising, but they offer a glimpse of what your car will be able to do in the future. Not another car you have to purchase again…the very same car you buy today.

My car knows how to park, and will someday have full autonomous driving. Why shouldn’t it drop me off in front of the store and then find a parking space on its own? There is no value in my hunting for open parking (this may kill paid-for parking garages).

If my daughter needs a ride home from school, why wouldn’t my car go and get her?

Cars have had adaptive cruise control for a while, meaning they can follow the car ahead of you. If my car uses cameras to see things, why not use them as a dash cam to record what happened if there is an accident? (Actually, a hardware limitation on my Tesla doesn’t allow this, but cars built right after mine just got that feature through a software update)? If the navigation knows that I’m moving from a highway to a dirt road, why can’t the suspension automatically raise the height of the car?

By treating cars as software, and constantly pushing updates, Tesla can command a premium price today by selling the roadmap. That’s it.

We can talk about Tesla’s financials (including their debt); the antics of a larger-than-life CEO; how powerful dealership networks seek to maintain control by lobbying to prevent car manufacturers from selling directly to the public, etc. They are all valid points and all will affect Tesla’s business. So will aggressively launching new models that consume cash as soon as a current model becomes profitable (Musk said that was his strategy when he thanked Model S buyers for funding the Model 3. Many analysts didn’t realize Tesla’s cashflow with the Model S, X, and 3 all followed the exact same pattern).

Assuming it works through the above issues, Tesla’s disruptive innovations will continue to drive value. Others manufacturers may innovate incrementally, but as the character “bored Elon Musk” once tweeted, “Incremental innovation is really just adjusting for inflation.”

I’ll back a disruptive innovator every time.

Lou Steinberg is the Founder & Managing Partner of CTM Insights, LLC and the Authoriti Network.