Eight reasons for Apple to buy Tesla


VRBO

I have never been a big fan of mergers and/or acquisitions. What looks good “on paper” invariably ends in a much-less-than ideal situation. I can count on one hand the mergers I have seen or been involved in that had a semblance of success. I can’t calculate the number I have seen fail.

So, with that disclaimer, let me lay out the reasons I think it is a great time for Apple to buy Tesla.

  1. Tesla is a consumer technology company. Apple is a consumer technology company. Both companies are making high-end gear that has comparatively high profit margins. It’s a perfect fit.
  2. Tesla needs a White Knight. Elon Musk is a character and has done what no other human could, single-handedly changing the automotive industry and focusing the world’s attention on renewable energy as the future for transportation. But, as is the case with many founders, he has reached his capacity to govern. And with myriad other interests (The Boring Company, SpaceX), his attention span is spread thinly. Tim Cook knows operations. He can make Tesla work and make it work economically so that it can scale. And Apple has the deep pockets to make that happen.
  3. Speaking of Tim Cook, he needs a visionary, or at least a vision. Elon has laid it out for Tesla: to accelerate the world’s use of sustainable energy for transportation and the home and beyond. It’s simple, it’s bold, it’s brilliant, it’s do-able. Tim can get it done. And here’s the beauty of this scenario: Tim doesn’t need Elon to make it happen. Tim has already proven that. It has been 8 years since the inimitable Steve Jobs passed away. And Tim has done quite well by the vision that Jobs laid out. The problem is, that vision has reached the end of the road and Tim needs a new one. Tesla would set the company on the right path.
  4. So what is that vision? It’s all about the home. That’s right. Tesla gets Apple in the home. Tesla is much, much more than a “car” company. It’s ultimate vision, with Solar City and Powerwall and Tesla is a system of renewable energy from home to auto and beyond. Apple has been a laggard in getting into the home. Amazon has Alexa. Google has Nest. Apple is a follower in this space. No other company has the holistic view of providing these kinds of technologies to the home owner.
  5. It’s all about the car. OK, so No. 4 was a bit of a click-bait. Yes, acquiring Tesla gets Apple into the world that is rapidly heading to autonomous transportation. This is a no-brainer. It’s exactly the holistic systems approach to a whole new market that Apple needs. It’s way, way behind Uber, Google and others that have been investing heavily in this arena. Apple needs to not only catch up, but leapfrog the competition.
  6. Closed ecosystems. Apple has built the largest consumer tech company on a closed ecosystem. As much as it pains me to say so (coming from the world of Unix and open source), it is a brilliant strategy. By controlling every aspect of its hardware, software and services, Apple can provide a user experience that is unparalleled in the industry. Mind you, I have many, many complaints — as do we all — about shortcomings that Apple needs to fix (iTunes, iCloud are woefully outdated, for starters). But it is showing promise. It’s now on a run-rate with services to be over $40 billion in revenue a year. That’s something like No. 236 on the list of Fortune 400 companies if Apple Services were a stand-alone entity. Meanwhile, Tesla has built its own ecosystem with massive reams of data on users’ miles driven. It can provide over-the-air updates based on Big Data analysis of what customers want and need. It is unbeatable in the automotive market today for continuous improvement. And this gives it a long, long lead in the world of autonomous driving.
  7. Fiercely loyal customers. Ever talked to a Tesla owner?
  8. They are proud, they are excited, they are adamant. Same with most Apple users, although this has dipped as of late. But each company has locked their users into an ecosystem. And the users love it, because the highly-integrated experience it provides cannot be matched by their respective competitors.

  9. It’s all about “showing me the money.” Tesla is scrounging for funding, while Apple has a big, big problem to the tune of about $245 billion that it needs to invest wisely. How many stock buybacks can the company do? Investors want to see those funds used to increase their shareholder value. Apple could pay a super premium and purchase Tesla outright for about $100 billion and still have more money than most countries in the world. But more than that, it would be able to, pardon the pun, shine the headlights on the future.

Full disclosure: I own no shares personally in either company. My spouse is a former Apple employee and acquired shares during her tenure. I don’t know how many and don’t care to ask.

eVitamins.com

The Path of Least Resistance Has a Habit of Prevailing

For every action, Newton tells us, there is an equal and opposite reaction. True in physics. Not necessarily so in business.

In another case of a traditional industry reacting in traditional ways to an untraditional threat, we have incumbent Marriott, the largest purveyor of hotel rooms in the world, drawing a line in the sand against that pesky start-up, AirBnB. Marriott is launching its “Homes & Villas,” which is a premium home rental service, very similar to what AirBnB offers with its AirBnB Plus service.

The fact is, in just a few short years, AirBnB, which owns no properties, has turned a software platform into a network that can claim about 5 times as many rental nights as Marriott alone.

The fact is, AirBnB has turned the hotel industry upside down. And the hotel industry is trying to adjust to the new game. But is it enough?

As has been the case with myriad industries, the incumbent struggles with a major dilemma: How to protect its cash-cow-generating machine while cannibalizing that machine to combat the attacker.

It rarely works. In fact, I’m hard-pressed to come up with an example where it has worked.

Uber and Lyft can be annoying to use. But is there any comparison with taking a taxi? Does anyone enjoy a taxi more? At least with Uber and Lyft you know the price, the driver’s name, his/her ratings, the length of the trip, and you never, ever have to worry about being “taking for a ride” for an additional 45 minutes to drive up the fare.

Yes, the auto industry is swapping out internal combustion engines for batteries faster than you can say “rickety-split.” But in the meantime, Tesla has rewritten the rules by amassing millions of miles of user data to be able to provide over-the-air updates to their customers. The other guys aren’t close, at least not yet.

The reaction of Blockbuster to Netflix has become a Business 101 case study. Blockbuster’s reaction to Netflix is a beauty. Blockbuster actually thought customers would enjoy the experience of traveling to the store to pick up a USB drive, vs. clicking a few clicks on a website from the comfort of their own homes.

The list goes on, with Amazon (not only in books and everything else, but in cloud services, an industry it single-handedly created right under the noses of the biggest hardware and software companies in the world). Google did the same thing with online advertising.

The pattern for the challengers is very similar. They enter an existing market orthogonally, usually using technology to rewrite the business rules. Their strategy is to:

  1. Disrupt the market with better, faster cheaper
  2. Go for growth and scale over profits short term
  3. Use that scale to reach a critical mass
  4. Capture the market
  5. Take profits
  6. Expand into new markets
  7. Never stop

Meanwhile, the incumbents react in similar ways:

  1. Ignore the start-ups
  2. Accept the start-ups by offering some low-end solution
  3. Realize the offering isn’t working and then do some soul-searching as to how to truly protect their territory and preserve their cash-cow-machine.
  4. Struggle with their hybrid business model and their legacy infrastructure while the new guys breeze through encumbered.

This pattern has repeated itself multiple times in the past 25 years or so and is documented in the brilliant book “The Innovator’s Dilemma,” by Clay Christensen.

Having just spent the past three months traveling the world and using both AirBnB and VRBO (Vacation Rentals By Owners) for about 80 percent of my nights, I can tell, unequivocally that the value that the challengers are providing to the hotel industry is noticeable. The average nightly cost is about half of what a comparable hotel would cost, and with that you get a kitchen, washer, dryer, a living room area. A hotel’s offering would be a square room with a bathroom and a Keurig coffee maker, if you’re lucky.

Now, I’m a big fan of Clay and the book, but I had the chance to have dinner with him some time back (2006) and I posed the question to the Harvard professor: “Why isn’t your industry (higher education) vulnerable to this challenge?”

He gave me a long, unsatisfying response.

This was long before Kahn Academy, Udemy, Teachable, even YouTube had come along that provide the ability to learn just about anything for free or a small fee. Yes, it’s not perfect by a long shot. But, as with all the other cases, you can see where it is heading.


VRBO

Like it or not, this disruptive force is unstoppable in virtually every industry. If it can be disrupted, it will be disrupted.

Electricity, it is said, follows the path of least resistant. That might a more apropos “law” for business than any of Newton’s.


Luxury properties. VRBO Vacation Rentals.

Links to products are on a referral basis, which means the author receives a commission — at no cost to you — should you decide to purchase using the link. You have the ability to bypass and go directly to any online retailer of your choice or your local book store. Regardless, it’s a great book!

The Apple Has Fallen Far From the Tree

It’s all about services. That’s the message from Apple Inc. these days. It’s a good line and it should be true. It’s the perfect opportunity for the world’s most recognized consumer technology brand.

But if this is a true pivot, then the best place for the company to start is with its mission statement. This is the sentence or two that should describe what a company’s vision, goals and aspirations are. Here’s Apple’s today:

Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store, and is defining the future of mobile media and computing devices with iPad

Notice anything strange about that statement? To begin with, it’s not a mission statement. It’s about what Apple does today, not about what it wants to become. It doesn’t even mention services, at least overtly. And what’s with the bragging? Who needs that? How does that inspire any employee, customer or partner of this massive conglomerate?


Let’s look, in contrast, to the mission statement Steve Jobs put out in the 1980s:

“To make a contribution to the world by making tools for the mind that advance humankind.”

Whoa. Notice the difference? This isn’t about what they do but about what they desire to be. It’s positive, inspirational, aspirational, passionate, clear of purpose and bold.

And therein lies the difference between the “Steve Jobs” Apple and the “Tim Cook” Apple.


Tim seems to be a nice guy, a decent guy. He has done an admirable job keeping the engines running. So I wouldn’t go as far as to say Apple has lost its way since Jobs’s death; it has simply drifted aimlessly. It has no vision. It has no focus. It has no passion about making a “contribution to the world.”

Don’t get me wrong: Apple is an amazing company. It has amazing products. I use many of them every day. I am probably the best example of an Apple customer: loyal to a fault. I appreciate quality over price. I appreciate ease of use. I want everything to work seamlessly together and I’m willing to pay for that, too. (I am a musician and Apple makes the best tools for producing music today.) I have nearly every Apple product or service.

But what has the company truly done since September 2011? It has grown its user base of iPhone customers to 1.3 billion. It has launched Apple pay, the watch, Air Buds, acquired Beats, launched Apple Music. It has amassed $235 Billion in cash on hand. It’s still making money hand over fist.

With Jobs gone, Tim Cook has focused on running the company, that Jobs built. Meanwhile Jony Ive, the design genius, has gone off the deep end with form over function. Every product that Apple makes these days requires a handful of expensive dongles to make it work. But boy, are those products pretty to look at. So sleek, so simple.

What’s clear is that neither Tim Cook nor Jony Ive know where to go next.

With a closed ecosystem of 1.3 billion users, millions of app developers, and a fully integrated set of technologies, the obvious answer is services. Yes, it has built services into a $10 billion business over the past 10 years. That’s admirable. But it’s not nearly enough.

iCloud is dated, outdated even. While DropBox and Box innovate and create new offerings, iCloud still offers a measly 200 Gb of space and for that you have to pay. Every iPhone or Mac or iPad user ought to get this for free. And have you tried using Photos or iTunes and dragging and dropping files between those apps and iCloud? It’s a mess. Speaking of iTunes, it is even more of a mess. The user interface is completely unintuitive. And this is the umbrella product for TV, for apps, for music that you buy, but NOT for streaming music. Oh, no, that’s a different service.

Apple is supposedly relaunching a TV service. But Netflix, the preeminent video streaming service, isn’t playing along. Apple’s also trying to consolidate news organizations, but, again, not everyone wants to join. It has massive clout to make things happen. It is giving Spotify a run for its money, for instance. But it is still rudderless and these seem like toe-dipping exercises compared to what it could do with such a massive, locked-in user base.

And what about totally new markets? Autonomous vehicles? Virtual or augmented reality? Internet of Things? Well, they may or may not be working on these things. Apple is a very secretive company. But consider this: Right now, Amazon is spending about $23 billion in research and development. That’s about twice Apple’s budget. Twice the budget of a company that prides itself on making the “best personal computers in the world.”

Meanwhile, Amazon has launched several new products and services, including Kindle for reading and voice-activated digital assistants (Alexa). And it launched an entire new industry with Amazon Web Services for cloud computing. Love them or hate them, Amazon is focused. And guess what, they have a mission statement that reflects that focus:

“Our vision is to be earth’s most customer-centric company, to build a place where people can come to find and discover anything they might want to buy online.”


The SaaS consolidation trend

Consolidation. It’s the name of the game in the world of software. And as software manifests itself as a service (SaaS), the service companies are following the same path of consolidation.

If previous trends are any indication, we can expect the following:

Rapid innovation, which causes disruption.

Innovators battle it out with competition.

Some survive, some don’t and either get acquired or die.

History as an example

Let’s look at one example, the enterprise infrastructure software world. In 2000, there were a dozen or so companies — some startups and the big iron players such as IBM and Sun — trying to own the market. One company, BEA, starting making headway.

They acquired a smaller competitor, WebLogic, and this became the cornerstone of their revenue. They expanded and grew to be the big fish in the pond of enterprise infrastructure software with $1.5 b in revenue. (At the time, I believe they set the record for a software company reaching the $1 billion mark.) Then a bigger fish — Oracle — swallowed BEA. The enterprise infrastructure software (installed type) is now completely consolidated within the larger giants such as Oracle and Microsoft.

Or, let’s step back in further. Back to the future of the 1980s. Word processing was the killer app for PCs. Wordperfect quickly beat out competitors such as Wordstar and Multimate to be the king of the hill. Wordperfect’s stickiness was in its macros, keyboard shortcuts that, once you had learned them, you were reticent to try any other word processing app. Then along came Microsoft Word. With the inside track on DOS and then Windows APIs, Microsoft was able to displace Wordperfect as the predominant word processing app.

There were still holdouts: the legal profession in particular was dragged kicking and screaming into the new world. The killer death blow came when Microsoft cannibalized their own app and subjugated it to be part of its Office suite. And with that and a little magic known as OLE (object, linking and embedding), Microsoft could make drag and dropping from Excel, Powerpoint and Word seamless to the user.

The rest, as they say, is history. In the 2000s, search went through the same competitiveness, until Google, through a better search algorithm and little bit of luck as it stumbled upon the concept of Adwords and Adsense, beat out the competition.

Business Intelligence went through its innovation phase in the 2000s as well, and by the end of the decade, the major players were swallowed up.

What’s next?

So what can we expect to see in the world of SaaS (Software as a Service)? Mulesoft was recently acquired by Salesforce for a whopping $5.6 billion.

The interesting sidebar on this acquisition is that it came one year after Mulesoft went public. What motivated Salesforce to wait a year? Why didn’t they swoop in prior to IPO to offer a premium that would have saved them a few dollars.

Could be a few explanations. Perhaps the team at Mulesoft was more eager in testing the waters of the public offering. It could also be that Salesforce was — at least allegedly — a target of a takeover itself at the time Mulesoft went public. Perhaps Salesforce had its hands full.

Other significant acquisitions include Appdynamics scooped up by Cisco, just prior to Appdynamics IPO (the usual timing for these mergers). A study by a San Francisco firm tracked 95 software companies from 2005 onward. Seventy-eight percent — over three-fourths — of those companies have been acquired in the time period.

SaaS, I believe, is heading the same direction.

The death of a Software Salesman

I don’t know if this take on Splunk is fair or not but it does help to underscore an important point that I have been trying to get across about the proverbial pail of cold water that has been dumped on the traditional software company’s sales force.

This Alphasights article spells out in excruciating detail what challenges lie ahead for Splunk, a company that started as a “Google” for log file searches, and claims to “turn machine data into answers.”

I worked with Splunk’s CEO Doug Merritt years ago at SAP, where we were both members of the senior management team.

I was impressed by Doug’s intelligence, his drive and his zeal.

But here’s the one sure thing, sure for Splunk or any other software company making the transition to SaaS (software as a service). The change is more difficult than adhering to new GAAP revenue recognition requirements. The change is a vast cultural shift.

First and foremost the glory days of selling to IT are over.

This was an easy sell, all things considered, where renewal rates were almost a given and service and support was automatic.

The sales cycle was long, to be sure — usually 6-9 months. And often the customers started with modest pilots.

They also had to contend with selling vaporware and bloatware and dealing with the consequences of holding the customers’ hands as they awaited new features and bug fixes, which could take months and sometimes years.

But they loved this model, because it was a perpetual license where the commissions were up front. And once they had them locked in, renewal was a cakewalk.

It’s not so easy on the SaaS side. That’s because first of all, the relationships that software vendors have built with IT are only part of the story. Today, lots of people can influence what software or service they want to use, because of the rampant viral adoption.

In this world, they are competing to continually maintain the relationship with the customer, and they do so knowing the barrier to change, or the switching cost, is considerably lower for a customer than it was for that customer acquiring installed software that locked them.

The upgrades and new features are iterative and this requires constant connection with the R&D group who are spitting out bug fixes, new features etc. as they complete them, rather than bundled once a year.

The vendors acutely know their customers are not going to overpay as they did in the past, because they use Elastic Computing to subscribe to only the compute resources they need for any application.

And they know, again, that the customer can switch at any time, making it important for them to be realistic in setting expectations in the sale.

All the big guns — SAP, Oracle, Microsoft, Adobe — in the software world are well on their way to making the transition. But they have been at it a long time. Interesting that Microsoft Office 365’s revenue surpassed it’s traditional installed Office version last quarter. This is a seminal moment.

The opinions in this article are mine (George Paolini). I have no investments in Splunk and no affiliation (other than as a reader) with AlphaSights.