How Tesla Won the Standards War

I don’t believe that anyone has ever accused Elon Musk of not thinking big.

This is the man who’s in the process of launching 700 micro-satellites into orbit to provide the earth’s inhabitants with low-cost and unfettered internet access.

He wants to bore tunnels under the earth to alleviate traffic congestion. Embed computers into our brains to augment human intelligence.

He aims to take us to Mars with plans to make the human race “interplanetary.”

And Tesla - and his solar initiatives - are part of a “Master Plan” that envisions the creation of sustainable energy on Earth.

But this year has also revealed just how much of a keen business strategist he is.

CURRENT STATE

Threatened by legacy automakers like Ford and GM bringing dozens of new EV models to market, Musk has been exploiting his industry-leading margins with aggressive discounts meant to disrupt retail pricing for EVs across the category and squeezing competitors’ profits.

When you have companies like Ford already losing billions of dollars in their EV divisions, it’s scary having to compete with a highly profitable company like Tesla that can drop prices dramatically, all but eliminating any hope you have of delivering profit from selling EVs.

In China, where there is much greater supply (and demand) for EVs, Tesla has been disrupting the market by giving 50% discounts on its cars, igniting a major price war.

And, over the past month, we’ve seen evidence of a competitive lever beyond price Tesla can pull to drive adoption: effectively turning their massive Supercharger network into an additional source of competitive advantage.

SOME BACKGROUND

Let’s take a step back for a second.

When Tesla announced last year it would share its EV charging connector design to encourage automakers to adopt the technology, few predicted competitors would bite. Now, it seems that the Tesla standard - dubbed the North American Charging Standard (or NACS) – is rapidly moving towards becoming the industry standard.

It was J.D. Power that noted that 21 percent of EV owners who attempted to charge at a public charging station in the first three months of 2023 were unable to do so, up from 15 percent in 2021. The failure rate stems from a range of problems, such as broken displays, software bugs, severed power cords, or gas-guzzling drivers hogging charging spots.

Juxtapose this against the Tesla Supercharger network: Just 4 percent of Tesla owners reported a charging failure in the first three months of 2023. And there’s a reason for this. It’s the only public charging network that’s built, owned, and operated by a major automaker.

Today, the Supercharger network is one of Tesla’s greatest selling points. It’s fast, reliable, and dead simple to use.

The quality of Tesla’s charging system — from the size and weight of the charging cables, to the quality of the Supercharging stations, to the ease of payment — has been a key strategic puzzle piece that has helped propel Tesla to become the No. 1 seller of EVs.

At present, two main types of EV charging plugs exist: Tesla’s NACS standard, and the Combined Charging System (CCS), used by nearly every other automaker.

Five months ago, the U.S. was heading down the path of the CCS standard being the only one eligible for federal funding. EV chargers built with funds from the $5 billion National Electric Vehicle Infrastructure program had to have a CCS connector.

As of June 9th, the White House said that EV charging stations using Tesla’s standard plugs (NACS) would now be eligible for these billions of dollars in federal subsidies. The one stipulation? They must be reverse-compatible (by including the CCS) to qualify.

THE STANDARD EMERGES

GM, Ford, Volvo, Rivian, and Polestar have all recently announced that they’ll conform to the Tesla charging standard. Hyundai and Stellantis are currently considering embracing the standard as well. The rest of the auto industry may be forced to follow suit, providing a major victory to Tesla, which would be assured of a new revenue stream for years to come.

Piper Sandler estimates that Tesla could add upwards of $3 billion in charging revenue from non-Tesla owners alone by 2030 and $5.4 billion by 2032. Adding charging revenue will help Tesla in the same way that it brought in billions selling zero-emission regulatory credits to legacy automakers over the past decade. Increasing utilization and monetization of the existing Tesla charger network will help Tesla fund the deployment of even more infrastructure, driving even more dominance.

What about the charging infrastructure competitors? ChargePoint, Blink, EVgo, Tritium, and Wallbox have all recently announced that they’ll make their chargers compatible with Tesla’s NACS standard.

We’re witnessing a standards war in the process of being won.

TESLA HAS POSITIONED ITSELF TO WIN

All this news has got me thinking about standards: how they’re established and how standards wars have been won in the past. Is it possible that 50 years from now first-time car buyers will wonder why on earth we use this old, antiquated Tesla charging plug design from the early 21st century?

Let’s let history be our guide to see what we can learn about the strategy that Tesla has executed to position itself to win the EV charging standard wars.

NETWORK EFFECTS

When more people use a product or service, its value generally increases. The positive network effect significantly applies to digital platforms, dating all the way back to the beginning of the internet.

When only a small number of people owned a telephone, the value it provided was minimal. Over time it became more affordable for people to own a telephone. Increased usage through exponential growth led to the telephone being used by almost every household, adding more value to the network for all users.

Apple’s App Store benefits from 2-sided network effects: a large population of Apple devices means more value for app developers to concentrate on building IOS apps. A greater number of developers means more variety of better-quality apps, which increases the value of owning an IOS device.

Social networks exhibit strong network effects. The more people that use Facebook and LinkedIn, the more useful the sites are to other users.

Network effects give rise to the potential outcome of “Market Tipping,” defined as the tendency of one system to pull away from its rivals in popularity once it has gained an initial edge. Tipping results in a market in which only one good or service dominates and competition is stifled and can result in a monopoly.

QWERTY

Ever wondered how we ended up with the QWERTY keyboard standard?

The QWERTY layout became popular with the success of the Remington No. 2 typewriter back in 1878. Legend has it that the QWERTY layout reduced the likelihood of internal clashing of typebars by placing commonly used combinations of letters farther from each other inside the manual typewriter.

Several alternatives to QWERTY have been developed over the years, claimed by their designers and users to be more efficient, intuitive, and ergonomic. Nevertheless, none have seen widespread adoption, due to the sheer dominance of the QWERTY standard.

Once established, standards can be extremely hard to break.

FIRST-MOVER ADVANTAGE

First-mover advantage enables a company or firm to establish strong brand recognition and customer loyalty before other competitors enter the market segment. When competitors try to attack, first-movers already have an established market share, with a loyal customer base that proves defensible.

Tesla invested billions of dollars over the past decade to build out their dominant charging infrastructure. This ensured they were first and best positioned to establish a dominant standard.

INTEROPERABILITY

Interoperability has the effect of making the network bigger and thus increases the external value of the network to consumers. Interoperability achieves this primarily by increasing potential connections and secondarily by attracting new participants to the network.

Tesla has been open to reverse-compatibility with the CCS standard, thus ensuring interoperability and removing friction of possible adoption by competing automakers and charging companies.

STANDARDS WARS

Standards wars can take some time to play out, but typically end up in a winner-take-all situation.

The most important rule of standards wars is that, as the economist Hal Varian says, “the product that people expect to win will win.” Consumers know that if they back the loser in a standards war they’ll be stuck with an obsolete product, so convincing them that your product is a winner is essential.

Having the best product isn’t always enough. It’s essential to develop as many partnerships as possible with companies that make complementary goods. Sony’s PlayStation, for instance, became a huge success in part because there were simply so many more games available for it than for its competitors.

There’s also the benefit of being first. Once a standard is established, it’s difficult to dislodge.

Standards wars are especially bitter-and especially crucial to business success in markets with strong network effects that cause consumers to place high value on compatibility.

LOOKING BACKWARDS

History provides many examples of both winners and losers across standards wars.

THE RAILROAD WARS

As railroads began to be built in the early 19th century, tracks of varying widths (gauges) were employed in the U.S. By 1860, seven different gauges were in use in America.

For the next twenty years, railroads relied upon various imperfect reverse-compatible interconnections to accommodate the seven different standards: cars with a sliding wheelbase, hoists to lift cars from one wheelbase to another, and, most commonly, building a third rail.

Despite clear benefits, railroad gauge standardization faced three major obstacles: it was costly to change the width of existing tracks; each group wanted the others to make the move; and workers whose livelihoods depended upon the incompatibilities resisted the proposed changes, in fact to the point of rioting.

Nonetheless, standardization was gradually achieved between 1860 and 1890.

EDISON vs. WESTINGHOUSE

Another classic 19th-century standards battle concerned the distribution of electricity. Thomas Edison promoted a direct current (DC) system of electrical power generation and distribution but was challenged by the alternating current (AC) technology developed and deployed in the U.S. by George Westinghouse.

Each system had pros and cons. DC had, for practical purposes relating to voltage drop, a one-mile limit between the generating station and the user but was more efficient at generating power.

Edison went to great lengths to convince the public that the AC system was unsafe, going so far as to patent the electric chair. Edison first demonstrated the electric chair using alternating current to electrocute a large dog, and then persuaded the State of New York to execute condemned criminals "by administration of an alternating current." The Edison group even used the term "to Westinghouse" to refer to electrocution by alternating current.

Ultimately, three factors ended the battle. First, advances made it increasingly clear that AC was the superior alternative. Second, the rotary converter introduced in 1892 allowed existing DC stations to be reverse-compatible into AC systems. Third, by 1890 Edison had sold his interests, leading to the formation of the General Electric Company in 1892, which was no longer a DC-only manufacturing entity. By 1893, both General Electric and Westinghouse were offering AC systems and the battle was over.

INTERNET EXPLORER vs. NETSCAPE

In 1995, Microsoft set out to win the web browser wars with Internet Explorer (IE). Netscape, fresh from a groundbreaking IPO, was riding high. But its lead didn’t last long: IE overtook it by 1998.

While Netscape began with about 80% market share and a good deal of public goodwill, as a relatively small company deriving the great bulk of its income from what was essentially a single product (Navigator and its derivatives), it was financially vulnerable. Microsoft's vast financial resources allowed them to make Internet Explorer available as a free product, as the revenues from Windows were used to fund its development and marketing.

Microsoft bundled Internet Explorer with every copy of Windows, which had an over 90% share of the desktop operating system market, allowing the company to drive market share, as customers already had Internet Explorer installed as the default browser. At this time, many new computer purchasers had never extensively used a web browser before, and thus didn’t have anything else to compare with and little motivation to consider alternatives.

Ultimately, Microsoft won the browser war against Netscape for two simple reasons: It had deep enough pockets to offer its browser free forever, and it controlled the key supply channel: placing the browser in a prominent position on the home screens of more than 90% of the personal computers sold.

Microsoft, realizing that distribution could win standard wars, successfully applied this learning to two subsequent battles: MS Word over WordPerfect, and Excel over Lotus 123.

BLACKBERRY vs. iPHONE

"Today, we’re introducing three revolutionary products of this class. The first one: is a widescreen iPod with touch controls. The second: is a revolutionary mobile phone. And the third is a breakthrough Internet communications device. An iPod, a phone, and an internet communicator. An iPod, a phone, and an internet communicator… are you getting it? These are not three separate devices, this is one device, and we are calling it iPhone."

- Steve Jobs, co-founder and former CEO of Apple, on January 9th, 2007

At the time, Blackberry was one of the leading names in smartphones and approaching 10 percent market share, a number that would grow to 20 percent just a couple of years later. Blackberry peaked sales in 2011, with 50 million active subscribers, selling 14.6 million handsets across the globe, and topping out revenue at $19.9 billion that same year.

BlackBerry failed to embrace change in a mobile industry that was going through a major transformation: Google’s Android and Apple evolved the use of the smartphone from simple communication device to the entertainment-rich appliance we know and love today.

BlackBerry was blindsided by the boom in the ‘app economy’; while Google and Apple were monetizing developers’ ability to create apps within the Android and iOS operating systems, BlackBerry’s inefficient system posed stringent restrictions on developers which curbed many functionalities and resulted in lackluster apps.

All of Blackberry’s smartphones were built specifically for the business user. The company never anticipated that an elegant device without keyboard, that integrated the functionality of a phone, camera, iPod and superior web browser, would be the product that would ultimately win the category.

BETAMAX vs. VHS

Sony’s Betamax standard offered better picture quality than JVC’s VHS standard, and its tapes were smaller. So why did VHS win the standards war?

It turns out that those weren’t the most important selling points for consumers. When Betamax hit the market, its tapes could record only an hour’s worth of programming.

On the other hand, VHS tapes allowed people to record for two hours. Later, VHS made it possible to record for 4-6 hours. This helped the latter become the go-to format for recording and watching movies.

JVC also focused on building relationships with motion picture companies. This, more than anything else, gave VHS the edge in the format war.

It turned out that first-mover advantage mattered. By the time Sony finally expanded the length of the Betamax tapes, it was too late. VHS adoption was exploding, and Betamax would spend the next decade or so treading water. VHS would remain the dominant format until the DVD arrived on the market in 1996.

Betamax was better than VHS at basically everything. It had higher resolution, the tapes were smaller, they (eventually) had higher recording capacity, and Betamax even predated VHS by about two years.

In standards wars, it’s not always the superior technology that wins.

HISTORY’S LESSONS

Reflecting on the lessons above, what has Elon learned from history?

• Network markets tend to tip towards the leading player unless the other players coordinate to act quickly and decisively.
• Sometimes first-mover advantage matters. Tesla built the largest and most dependable network, despite the massive amount of effort and cost to do so.
• Consumer expectations can easily become self-fulfilling in standards battles.
• A large buyer (in this case the U.S. government) can have more influence than suppliers in tipping the balance.
• Those left with the less popular technology will find a way to cut their losses, either by employing adapters or by writing off existing assets and joining the bandwagon.
• Adapters can be the salvation of the losing technology and can help to ultimately defuse a standards war. By allowing cars equipped with the popular CCS standard to use an adaptor for compatibility, it dulls any resistance.

In their seminal work titled “The Art of Standard Wars”, authors Carl Shapiro and Hal Varian noted that a company’s ability to successfully wage a standards war depends on its ownership of seven key assets:

1. Control over an installed base of users
2. Intellectual property rights
3. Ability to innovate
4. First-mover advantages
5. Manufacturing capabilities
6. Strength in complements
7. Brand name and reputation

Not surprisingly, Tesla checks all 7 of these boxes.

Tesla understood the importance of a charging network earlier and more fully than incumbent manufacturers. They got in early, and they were willing to spend billions of dollars to establish the standard that ultimately won.

THE DARK SIDE OF DOMINANT STANDARDS

The challenge with selecting a dominant standard is that the consumer doesn’t always win.

Unlike many other aspects of competition where coordination among rivals would be branded as illegal collusion, declaring an early truce in a standards war can pass antitrust muster.

Dell laptops will 'throttle', or limit the processing speed available to the end-user, if genuine Dell OEM power supplies are not used with their devices (users are presented with the warning: "The AC adapter type cannot be determined. This will prevent optimal system performance").

“Embrace, Extend, and Exterminate,” was a phrase that the U.S. Department of Justice found was used internally by Microsoft to describe its strategy for entering product categories involving widely used standards, extending those standards with proprietary capabilities, and then using those differences to strongly disadvantage its competitors.

Networks can stop growing or collapse if they do not have enough capacity to handle growth. For example, an overloaded phone network that has too many customers can become congested, leading to busy signals, the inability to get a dial tone, and poor customer support. Overloaded networks risk customers defecting to rival networks because of the inadequate capacity of the existing system. After this point, each additional user decreases the value obtained by every other user.

Tesla’s charging strategy means that legacy customers will now have to share the Supercharger network with other EV drivers.

Given Tesla’s current total fleet size in the U.S., there are only about 80 cars competing for any given charging stall. That low number has meant that wait times are usually minimal to nonexistent. Tesla’s current vehicle-charger ratio is more than twice as good as its competitors combined.

Musk vowed that his chargers will not discriminate between Tesla vehicles and those of other manufacturers. How painful would it be if non-Tesla users were paying more per KWH to use exactly the same charger at the same time of day?

One last observation.

Tesla's NACS connector does not support bidirectional charging (which would allow users to either power their house or sell electricity back to the grid), so drivers who want to use that feature would need a CCS socket. Tesla has said it could add bidirectional charging, but Musk has said he doubts many EV owners would use the feature.

WRAPPING UP

Could we see a dystopian future where all chargers are Tesla chargers, and that the resulting concentration of power is misused? Envision that premium chargers are reserved for Tesla owners only? Or Ford and GM drivers pay significantly more to charge their vehicles?

Only time will tell.

This we do know: Tesla seems to have successfully orchestrated the pieces on the chess board to win this war.

Let’s never discount Elon Musk as a strategist. Clearly, he’s a keen student of history and has done his homework.

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Steve Greenfield is CEO and Founder of Automotive Ventures, an early-stage venture capital firm investing across the AutoTech and Mobility segments.

Note: This article was originally published in the July 2023 Automotive Ventures Intel Report.

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