May 6, 2015

Tesla Wants a Parking Spot in Your House

SMITH BRAIN TRUST -- Tesla, the electric-car company and Silicon Valley darling, has announced it would be selling new battery systems for homes and businesses. Is this the first step in an energy storage revolution, as some think? Less grandly, can it help the $29-billion company eventually turn a profit?

Starting at $3,000 for a 7 kilowatt-hour unit (excluding installation) the so-called Tesla Powerwall is designed to serve as a backup during power outages, or to store energy captured by solar panels (bought separately) The 10-kilowatt-hour version ($3,500) can hold enough charge to power an average-sized home for less than a day, or crucial circuits for significantly longer, according to the Washington Post. Installing multiple batteries would extend the protection.

Homeowners can also charge the battery when electricity is cheap, drawing from it when it is expensive. And utilities can use banks of batteries to smooth the distribution of power.

The move into home batteries surprised some analysts, but it "makes perfect sense," says the Smith School professor Rajshree Agarwal, who also heads the Ed Snider Center for Enterprise and Markets. "From a strategic-innovation perspective, companies don't define themselves as much by the products they create as by the underlying technology." By those lights, Tesla is an energy-storage company.

But batteries—when decoupled from a sexy car—raise a fresh set of business model challenges for Tesla. "Right now, the question is, 'Who are Tesla's target customers?' If we're talking about electric cars, it's very clear that it is an affluent, hip demographic," Agarwal says. But does it make sense to target the same customers when it comes to home batteries? The initial product represents a step toward affordability, by today's standards for lithium-ion batteries (though it's a stretch for most consumers). Tesla says it can maintain a cost advantage for a while because of its scale and resources: It is building a lithium-iron "gigafactory" outside Reno, Nevada.

But it's inevitable that other companies will move into the home-battery market and compete mainly on price, turning home batteries into a commodity, Agarwal says. How will Tesla respond? "Tesla has to be very careful, because it might end up alienating its current high-end customers if it creates a mass-market, Home Depot, Walmart-level battery."

On the other hand, the high-end route carries the risk of turning Tesla batteries into irrelevant boutique product—think Apple computers in the 1990s. Success may hinge on Tesla creating partnerships that create a rich "ecosystem" that's simply better than what competitors can provide. "Maybe Home Depot can sell a battery for less, but that battery might not work as well," Agarwal says. "Or it doesn't integrate with the solar panels that you want to use—or with your Tesla electric car."

She concludes: "It remains to be seen if Tesla comes up with a winning business model around its core technologies, and becomes the behemoth that Apple is today, or is left on the wayside like the Apple of the nineties.  All makes for very interesting times, for Tesla, and for the rest of us!"

Charles E. Olson, a Smith professor and former president of a public-utility consulting firm, outlines some of the same pitfalls as Agarwal, but is even more skeptical. The Tesla S auto, which starts at $57,500, "is a sexy car," he says. "It says, Number One, 'I can afford this.' Number Two, 'I care about the environment.'"

A battery has no such aura. "No one is going to care if you have a backup battery in the basement."

"I don't see what their strategy is. You were a one-product company, with autos, and now you are a two-product company. But what is going to carry the higher multiple, cars or batteries? Cars, obviously."

Olson notes that you can already buy a backup generator to power the core circuits of your house for less than the new Tesla battery—and unlike the battery, it will get you through a week-long outage. A technological leap that changes the cost-benefit calculation may be required before electric batteries of this variety win over a mainstream audience.  And batteries are unlike computers in that steady progress can't simply be assumed. Says Olson: "There has been talk about improvements in battery technology for decades, and we don't seem to get very far."

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The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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