Search term: modular

Tesla and SolarCity: Straddling the modular/integrated divide

A merger is the result of two entities in the same business joining forces. It is usually justified through “synergy”, a euphemism for removing redundancies from their unity. Arithmetically, the desired outcome is that the resulting organization should be smaller than the individual parts (which is desired if the available market is shrinking.)

An Integration is the answer to the question of “Why two companies in different businesses are better off together.” Arithmetically, it suggests that the proposed sum is greater than the individual parts.

The spin-off is the response to a situation where one company houses two unrelated businesses.

For completeness, we can define an acquisition as the purchase of an unequal entity in order to improve the value of the acquirer.

The logic of any of these is that there is a disequilibrium which offers an opportunity to those who can exploit it. What the analysis fundamentally assumes is that the status quo of firm boundaries is not optimal.

Much of the measurement of the balance in the equations assumes that the overall industry is stable and that the problems (technical or market) are largely understood and that there is no learning that needs to happen. Boundaries need to be re-drawn because they are imperfect. Boundaries may have grown imperfect for many reasons: founders/owners were separate, markets and technologies evolve at different rates, resources are inflexible, processes are entrenched and values are outdated.

However, all this arithmetic can be safely thrown out of the window if there is a new industry in the making. If there is no balance to begin with because there is an entirely new problem being posited. That is, not only do we not know the answers to technical or market questions, we don’t even know what the right questions are.

When looking at the history of industry creation, the breakthroughs were always about the discovery of the right questions to ask. The early automobile industry was a scramble for solutions to a huge number of technical and market questions: technology, business model, infrastructure, usability, customer segmentation. From 1886 until 1915 there were many grand experiments with thousands of automobile firms springing up.[1]

Early computing, internet, mobile and consumer durables industries went through similar periods of grand experimentation. But the breakthroughs occurred when someone was able to ask (and subsequently answer) a question that nobody had asked before.

Henry Ford asked, “What would enable everyone to have a car”. The result was  not a better car but a better production system.

Steve Jobs asked, “What would enable everyone to have a computer”. The result was not a faster computer, but a more approachable computer.

Akio Morita asked, “What would enable young people to have their own music”. The result was not a better audio quality but a smaller audio player.

Kiichiro Toyoda asked, “How can a car be built without faults”. The result was not a bigger factory but many smaller ones.

Jeff Bezos asked, “What would cause people to do their shopping online”. The result was not a lot of unique sites but one infinite one coupled to a logistics and computing service.

Having great taste in questions turns out to be the principal quality of the successful industrialist: The creation of economic value and power well beyond the boundary of the firm itself.

When the correct question is asked, resources can be efficiently marshaled to answer it. The wrong or incomplete question leads to inefficient resource allocation. And so the architecture of the solution can be built. If the new problem statement is a technical one then an integrated implementation is required. If the new question identifies non-consumption then a modular implementation is required. Each of these approaches suggests different customer sequencing strategies and different application of resources and processes.

There is no right architecture for industry creation. What matters is asking the right question.

So is Elon Musk, today, asking the right question?

  1. Estimated 3000 world-wide []

The Modularity Revolution. How markets are created

My presentation at Aalto University in Helsinki on The Modular Revolution. This is what you get if you give me a whole hour to talk.

Law of conservation of modularity

When I applied the modularity dichotomy to smartphone operating system there were several implications that came to light. One was the question of whether the market has reached the point where products were “good enough” and the speed of innovation became less important than price. Another was: will integrated vendors be able to hold on to a healthy share of growth against non-consumption?

Now I bring up another implication of modularity: the concept of “law of conservation of modularity”.

Significant Contribution

In my quoting of the “Cook Doctrine” I cited the primary criteria for Apple to enter a new market:

We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.

These criteria, often repeated, were certainly in force when Apple chose to enter the watch market. Apple has sought and achieved a significant market share and did so while owning and controlling the primary technologies behind the product.

I now turn to the significant contribution criterion to study the possibility of Apple’s entry into the car industry.[1]

The significance test shifts the speculation from whether Apple would build a car, to how many cars is could build. Making a few cars is easy (see first commandment of The Entrant’s Guide to the Automotive Industry). Making lots of cars is hard and hence significance in the automotive market (as in watches and phones) means achieving some degree of adoption, a higher degree of usage and a very high degree of profitability.

So what does being significant in the car business mean? Does it mean becoming the next Tesla? The next BYD or the next VW? How quickly?

Fortunately, we have something to compare an Apple entry to. Apple has made a “significant” market entry in phones and others have made entries in cars. If we contrast the rate of growth of Tesla, EVs, and Hybrids[2] to the rate of growth of iPhones in their respective US markets, we obtain a test of significance:

Screen Shot 2016-01-04 at 12.38.39 PM

The graph shows the percent of sales for the alternative car technologies (and Tesla) vs. the percent of US phone users using iPhones (comScore). Here are the conclusions:

  1. Control of the primary technologies behind the product is a topic for another post. []
  2. Of which Toyota has 70% to 80% share []

Glance: A Deep Look at Apple Watch

Bernard Desarnauts had a great idea a few weeks ago: the world needs an event to discuss Apple Watch. After recovering from the shock of not thinking of it first and then from the shock that nobody else had either, I immediately agreed and along with Ben Bajarin and Farshad Nayeri, we quickly rallied to organize and anchor this event: Glance: A Deep Look at Apple Watch.

We had some big questions to answer:

  • What is the strategy for Apple Watch? Is it an object of beauty and desire, placing Apple in the “luxury sector” or is it a computer infiltrating what is otherwise a technology-free zone with utility in an asymmetric attack?
  • How can developers discover the killer jobs to be done? Beyond tentpoles what will the primary reasons people will use the watch? What does the data tell us so far? What can be observed from interviews?
  • Given the sales performance to date, what can we expect from the product? What is the addressable market? What will be the installed base? How quickly will it grow?
  • What is the platform strategy, especially with the cadence of OS releases? Is Apple treating this as a separate platform? Will it eventually become independent of the iPhone as the iPhone cast off its dependence on the Mac/PC?
  • What is the hardware strategy? What are the constraints from manufacturing, materials, battery life and screen space? What will be the replacement schedule? What is the role of modular internal designs?

We realized that we did not have the answers. So we recruited a great cast of participants to help us:

  • Bob Moesta, the founder and developer of the theory of jobs-to-be-done marketing agreed to do a live interview to understand what jobs watches, and in particular Apple Watches, are hired to do.
  • Josh Clark, the premier UX designer who wrote Designing for Touch will explore the question of user experience in glanceable space.
  • Liza Kindred is considered the top expert on fashion tech–she’s writing the book on the future of commerce–brings keen understanding of wearables.
  • Abdel Ibrahim the most prominent blogger and writer on the topic of Apple Watch. Has forgotten more about the Apple Watch than you will ever learn.
  • Carolina Milanesi one of the most respected technology market analysts, now at Kantar and often quoted on all things Apple.
  • Greg Koenig, product designer at Atomic Delights will educate us on the atoms that make up the Watch.

Investors who will participate in panel conversations:

Special guest: Jean-Louis Gassée, former head of Apple Engineering, current VC and everything in-between will have a fireside chat with Tim Bajarin Legendary technology analyst who has been around long enough to see furthest ahead.

We will explore Apple Watch as a very curious interaction between form and function, luxury and utility, exclusivity and ubiquity, tiny screens and big audiences, short attention spans, big data.

We have developers, designers, investors, marketers and analysts contributing to what could be the biggest leap in computing since the smartphone.

If you are interesting in becoming one of the innovators on this newest of platforms or planning a strategy to invest, or even (actually especially) if you are a skeptic, you can’t miss this conference.

Join us for Glance, a deep look at Apple Watch, downtown San Francisco, December 10, 2015.

Early bird pricing is $495.

If you miss early bird, and you’re an Asymco reader, there is still a 30% discount.

Why does Apple TV deserve to exist?

Since writing Peak Cable six months ago, surveys, research and analysis have contributed to the themes of unbundling the TV package. The data under scrutiny is, as usual, the data that can be gathered. Unfortunately the data that can’t be gathered is where the insight into what is happening may lie. For instance, what matters for an entertainer is not how much you’re watched but how much you’re loved. Measuring love is done poorly with data on payment for subscriptions.

A better proxy might be time. Liam Boluk makes the point in his post that “focusing on cord cutting or even cord shaving largely misses the point.” Don’t follow the dollars, he says, follow the time or engagement. “Relevance” is what matters.

His data shows how linear TV has fallen by roughly 30% among the young (12-34) in the last five years. The trouble for the TV bundle (and advertisers) is that this is the most culturally influential group. They are also the group which will grow into the highest income group over the next decade. And this group does not love TV.

We have to remember that it was the youth who drove early radio, TV and consumer electronics markets. Those young are now the old which still cling to the old media, served by companies that grew old with them. They are the “high-end” customers with which Nielsen itself has grown. They have the most money to spend and they are the targets for the ads[1]

Paying $150/month to watch incontinence and erectile dysfunction ads—at a time not of your choosing—is preposterous for the young. They may like the programs but not the way they are packaged, delivered or interrupted. They are not smarter than their parents. They, like their parents, took to new technology more quickly. What makes the technology new is also what lets its makers separate the content from its delivery. These new technologies allow “modularizing” or unbundling that which was was integrated/bundled and thus allow their developers to focus on the customer’s real jobs-to-be-done.

Unsurprisingly, incumbents have responded by throttling access to original programming–an asset over which they still exert influence as distributors. Netflix and Amazon are taking the path of responding with their own blockbuster productions. Although Silicon Valley has more capital to deploy than Hollywood  this battle of attrition is by no means one that incumbents will win, and generally, it’s not going to be pretty.

Tweaking the nose of the incumbent might not be the way to establish asymmetry. The better tactic may be to help the system survive but offer a “short-term alternative”. This is how iTunes took on and won Music. When Napster and file sharing created a clear and present danger to the industry, Apple’s approach of a controlled alternative allowed the industry to finally move to a digital download model.

  1. no longer the Pepsi generation, they are the Depend and Viagra and pharmaceuticals generation []

Meaningful Contribution

What if Apple did make a car? How significant could their products be? What would it take to influence the industry’s architecture?

The global market is forecast to reach 88.6 million vehicles in 2015 and there are many ways to segment it. One could look at geography or at product configurations or the emergence of new powertrain technologies.

One could also look at the participants.

In 2014 Toyota was the top selling automaker with a total sales volume of 10.23 million vehicles. The following graph shows the leading 15 producers and the percent of total production.

Screen Shot 2015-09-25 at 9-25-2.19.47 PM


Soft Underbelly

Executives at car companies have suddenly had to answer questions about potential entrants into their business. This is a big change. I don’t recall a time when this was necessary for over 30 years. For decades the questions have been about labor relations, health care costs, regulation, recalls and competition from other car makers. To ask questions about facing challengers posing existential questions must seem terribly impertinent.

For this reason, Bob Lutz, in his dismissal of Apple’s entry, is not alone. The industry has a century of history and has seen little disruption in the classic sense. I wrote a long piece on the fundamentals of the industry titled “The Entrant’s Guide to the Automobile Industry” which explained why this industry has been so resistant to disruptive change. At best a massive effort over multiple decades usually leads in a small shift in market share.

However, one should read that post as a thinly veiled threat. Just because disruption seems hard does not mean it isn’t possible. Indeed, the better you understand the industry the more easily you can observe its vulnerability and the more rigid the industry seems the more vulnerable it may be to dramatic change.

The formula for successful entry is the same for all industries: compete asymmetrically. This means introduce products which change the basis of competition and deter competitive responses by making your goals dissimilar from those of the incumbents. This is classic “ju-jitsu” of disruptive competition.

Here’s how it would work.

Bob Lutz suggests that there is no profit to be gained from selling cars on the premise that costs are very high while pricing will be held down by competition. That may be true but entrants could deploy new processes that lower the costs of production. Traditional car making is capital intensive due to the processes and materials used. There are however alternatives on the shelf. iStream from Gordon Murray Design proposed switching to tubular frames and low cost composites.  BMW has an approach using carbon fiber and other composites. 3D printing is waiting in the wings. All offer a departure from sheet metal stamping.

With new materials, costs for new plants can be reduced by as much as 80% and since amortizing the tooling is as much as 40% of the cost of a new car, the margins on new production methods could result in significant boosts in margin.

There is a downside however. What is usually compromised when using these new methods is volume and scale of production. So that becomes the real question: how many cars can Apple target? 10k, 50k, 100k per year? Could they target 500k? That would be 10 times Tesla’s current volumes but only a bit more than the output of the Mini brand.

Now consider that the total market is 85 million vehicles per year. For Apple to get 10% share would imply 8.5 million cars a year, a feat that is hard to contemplate right now with any of the new production systems. On the other hand selling 80 million iPhones and iPads in a single quarter has become routine for Apple and that was considered orders of magnitude beyond what they could deliver. Amazing what 8 years of production ramping can offer.

So the answer to the operating margin might be in a combination of new processes and new ramp strategies.

But there are more levers of change.

The Critical Path #156

Horace and Anders discuss Uber’s transportation business and discuss how software modularizes the world. In the second half of the show, they take listener questions posted to Twitter using the hashtag #CriticalQuestion.

Source: The Critical Path #156

The Critical Path #142: The Great Insufficiency

Horace discusses his latest work at the Christensen Institute and considers why the educational system works the way it does. Can large scale education be modularized? In the second half of the show, Anders and Horace discuss the rumors about the possibility that Apple might be working on a car.

via 5by5 | The Critical Path #142: The Great Insufficiency.