February 28, 2024

Tesla's Disruptive Force: The Platform Business Model that Snuffed Out Apple

Apple's failed attempt to invent an EV is a caution flag for investors and a lesson in strategy failure

Tesla's Disruptive Force: The Platform Business Model that Snuffed Out Apple
The author's imagination of how discussions between Tesla and Apple unfolded in 2017

In the annals of corporate history, certain missed opportunities stand out as monumental "what-ifs." Among these, Apple's failure to acquire Tesla in 2017 will likely be regarded as one of the most significant missteps of the Tim Cook era. This decision, or lack thereof, provides a stark example of the "Not Invented Here" (NIH) syndrome and its potential consequences for innovation and corporate strategy.

Apple, a colossus in the technology sector, already commanded a vast empire that included smartphones, computers, tablets, and a burgeoning services sector by 2017. Meanwhile, Tesla was disrupting the automotive industry with its cutting-edge technology and vision for a sustainable future. Despite its innovative streak, Tesla was facing skepticism from Wall Street, which failed to grasp the full scope of the margin upside presented by the electric vehicle (EV) revolution.

Confidential reports, reinforced by comments from Elon Musk, indicate that acquisition talks occurred, with Apple considering a Tesla purchase to jumpstart "Project Titan," its secretive EV initiative. Such an acquisition would have marked a significant expansion of Apple's business model into automotive manufacturing and energy.

However, Apple chose not to pursue Tesla, doubling down on developing its own EV technology—a decision emblematic of the NIH syndrome. This strategic choice may have been a direct descendant of the philosophy that propelled Apple to the zenith of innovation under Steve Jobs. Jobs' insistence on internal innovation led to iconic products like the iPhone and iPad, fostering a culture of self-reliance and the creation of unique products that deeply integrated hardware and software.

While this approach brought unparalleled success in consumer electronics, applying the same philosophy to the automotive sector—a field where Apple had no established expertise—could be seen as a critical miscalculation. Tim Cook's adherence to this inward-looking ethos may have blinded Apple to the benefits of acquiring Tesla, such as instant access to established automotive technology and a head start in the EV market.

In stark contrast, Elon Musk's Tesla embraced both internal innovation and strategic acquisitions. This dual strategy allowed Tesla to buy companies that added value to their core offerings, enhancing their competitiveness. Musk's pioneering spirit, akin to America's homesteading mentality that I have previously described, gambled on the supercharger network and the concept of the car as a platform, fundamentally shifting the automotive landscape.

The concept of a "car as a platform" is at the heart of Tesla's business model disruption. Unlike traditional automakers that viewed cars merely as products, Tesla approached the vehicle as a platform - a foundation upon which services can be built and delivered. This platform business model is characterized by creating value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.

For Tesla, the car became a platform for a multitude of services that extend beyond just transportation. From software updates that improve the car's performance and features over time to a network of charging stations that serve the needs of Tesla drivers, the company has created an ecosystem that enhances customer value. Tesla's vehicles are equipped with advanced sensors and software that allow for data collection and analytics, enabling features like autopilot and eventually paving the way for full autonomy.

Furthermore, Tesla's platform extends into energy storage and generation, with products like the Powerwall and solar panels integrating with their cars to offer a comprehensive energy solution. This holistic approach positions Tesla not just as an automobile manufacturer but as an energy company, which has been pivotal in distinguishing it from its competitors.

The platform business model has also allowed Tesla to leverage network effects, where the value of the product or service increases as more people use it. Each new Tesla vehicle on the road contributes data that can be used to improve the system, and each new charging station makes the network more valuable to Tesla drivers.

In the post-mortem analysis, this is why Apple lost. The NIH syndrome is a mutation of Jobs's approach to innovation—where once it was a strength, in the context of electric vehicles, it was its downfall. It's a reminder that while a core philosophy can be a company's greatest asset, adaptability and openness to external ideas are also crucial, especially when venturing into uncharted territories.

Had Apple acquired Tesla, the merger of their respective expertise in design, software, user experience, and electric vehicle technology could have positioned them as leaders in the EV market, accelerating the global adoption of electric vehicles. For Apple, such diversification would have been a perfect hedge against the maturing smartphone market. The combined innovation and brand loyalty of both companies might have led to a new era of products and services.

Despite the missed acquisition, Tesla's value soared, cementing the viability of EVs and prompting the automotive industry to hasten its transition to electrification. Apple's independent EV project, meanwhile, faced challenges and leadership changes, ultimately conceding defeat—a stark contrast to what could have been a transformative partnership.

Tesla's strategic utilization of the platform business model was not just a disruption to the automobile industry; it was an upheaval. By considering the car as a platform, Tesla unlocked new streams of revenue and brand loyalty. Over-the-air updates, an approach more akin to smartphones than cars, enabled Tesla to continuously refine and add new features to their vehicles, creating an enduring relationship with customers.

The platform model thrives on the premise of constant improvement and scalability. Tesla's cars, designed to be updated and improved through software, have a longer lifespan of relevance and innovation compared to traditional vehicles, which become outdated as soon as a new model is released. This is a stark contrast to the traditional auto industry's model of annual incremental updates and the planned obsolescence of older models.

The integration of energy products, such as Powerwall and Solar Roof, extends its platform beyond transportation and into home energy management, further embedding itself into the daily lives of its customers. This strategy has not only diversified Tesla's product offerings but has also contributed to the building of a more sustainable brand image, a factor increasingly important to consumers.

Tesla's disruption is also evident in its direct sales model. By bypassing traditional dealership networks, Tesla maintains greater control over the customer experience and avoids the markup that dealerships add. This direct-to-consumer approach aligns with the platform business model's emphasis on direct interactions and feedback loops between the company and its users, further strengthening the platform's value.

Apple's potential acquisition of Tesla could have combined Apple's user-centric design philosophy and Tesla's platform model to create a formidable force in the EV market. Apple's global brand and financial resources, coupled with Tesla's innovative platform, could have significantly accelerated the adoption of EVs and renewable energy solutions.

The Aftermath

Since the failed acquisition, Tesla has continued its meteoric rise, becoming the most valuable carmaker in the world by market capitalization. Its success has proven the viability of electric vehicles and has forced the entire automotive industry to accelerate its shift towards electrification.

Apple's project faced various challenges and leadership changes, reflecting the difficulties of breaking into the automotive industry, leading to an admission of defeat as the project is now dead.

The failed acquisition of Tesla by Apple in 2017 is a tantalizing "what-if" scenario that offers lessons on the importance of timing, vision, and strategic boldness in the corporate world. For Apple, it represents a missed opportunity to redefine itself and the automotive industry. For the tech and automotive sectors, it's a reminder of how quickly fortunes can change and how today's missed opportunities can become tomorrow's pivotal moments.

As an investor, I will be looking for more NIH signals as Apple enters the AI and Augmented Reality markets. Will Apple learn from its past and adapt its strategy to embrace outside innovation, or will it continue to follow the inward-looking approach that may have cost it a significant lead in the EV market? The tech giant's future maneuvers in new domains should be closely scrutinized for signs of evolution or stagnation in its innovation philosophy.

Apple's journey post-Tesla will be a case study in corporate strategy for years to come. The lessons drawn from this episode will shape not only the future of Apple but potentially the direction of technological innovation at large. It raises a fundamental question for all companies looking to innovate: when to build, when to buy, and when to partner. In a rapidly changing technological landscape, the right choice can mean the difference between leading the charge or being left behind.