Dear SPAN, join Tesla or build a bigger moat!
SPAN complements Tesla's hardware and software products, and SPAN's moat is ineffective against Tesla. SPAN should either build a bigger moat, or get acquired.
Questions
What is the biggest threat to SPAN’s business model?
Why is SPAN’s market a natural extension of Tesla’s product strategy?
How should SPAN react to this threat from Tesla?
Tesla is the biggest threat to SPAN’s business model
SPAN builds smart electrical panels that help homeowners monitor the production, storage, and consumption of electricity at their homes. They have raised $230M from top-tier climate VCs, like Congruent and Capricorn, and they are by far the most visible brand in this category.
In a previous post, I argued that SPAN does not have a “technology moat,” as other companies can quickly copy its technology and build a lower-cost alternative. I observed that it instead has a powerful “business moat,” through its luxury brand, great design, and ease of operation. I noted that Apple has pursued a similar business moat across its different product lines, and it has succeeded in that effort.
Tesla is another example of a company with a luxury brand and great design. SPAN is highly susceptible to its market being taken over by Tesla. SPAN’s business moat is ineffective against this potential competitor (Fig. 1). In addition, SPAN has now proven the existence of a significant market for a smart electrical panel, which is adjacent to several of Tesla’s core product lines. Tesla would find this complementary market a natural area to gain additional revenue and a way to further strengthen the position of its core business.
SPAN complements Tesla’s hardware and software products
In his interview with the MCJ podcast, Arch Rao, the founder and CEO of SPAN, observed that,
Where we are seeing the most amount of traction and demand today is retrofitting into existing homes like yours and mine that have been around for a few decades or are getting solar and battery and EV charging or some combination thereof.
The purchase of a SPAN electrical panel is triggered when homeowners integrate solar, battery, or EV charging into their homes, which are all products made by Tesla (Fig. 2). SPAN is building a complementary product to Tesla’s core product offerings, and customers make this purchasing decision simultaneously. Building a smart electrical panel would be a natural extension of Tesla’s product portfolio.
Such a move for Tesla is not just offensive, but also defensive. In the same podcast, when describing the origin story of SPAN, Arch recalled his time working at Tesla,
And as you think about the rate at which we were beginning to deploy solar and EV charging in batteries, it became more and more common that the electrical panel either had to be upgraded or replaced… You kind of had to be the person either responsible for or very close to the deployment of thousands of these systems to then see that the electrical panel was a bottleneck.
Every successful company must control as much of its path to user adoption as possible. Tesla deployed a national network of Superchargers when it realized that the availability of charging stations would play a major role in the adoption of EVs. If the electrical panel is a major bottleneck to the adoption of Tesla’s other products at home, then the company must do everything in its power to remove this bottleneck without relying on a third party.
The real market is much bigger than the hardware. The real market is about the data and the granular control of every circuit in the house. In the same MCJ interview, Arch noted that,
Within our panel, we've integrated the ability for us to monitor the grid and determine when it's safe to disconnect and when it's safe for the join. We have the ability to measure every circuit… We have the ability to control every circuit and also control some subset of major appliances in your home, and it's got… a computer built into it that is purpose-built to optimize the power flow in your home.
There is an enormous market for this data and the ability to control circuit-level electricity flow, both on the consumer side and the utility side. On the consumer side, products like the Google Nest Learning Thermostat monitor the performance of the heating furnace and offer to send a handyman if the furnace is malfunctioning. This service is a source of revenue. On the utility side, companies like OhmConnect monitor the electricity usage of homeowners and pay them to reduce their usage during peak hours to reduce demand on the utility. For a utility, this demand management has the same effect as adding more generation capacity.
The electric panel produces highly granular data about electricity generation, storage, and usage in the home, and it has the means to control those features. Tesla already offers software products for this purpose in the commercial sector. Tesla’s “Autobidder provides independent power producers, utilities and capital partners the ability to autonomously monetize battery assets.” In addition, Tesla’s “Powerhub provides a single interface for managing many combinations of energy assets including solar, storage and select non-Tesla assets.” Tesla can provide the same services on the residential side as an extension of its commercial strategy.
Even though SPAN is a very well-funded startup, it can never win a head-to-head battle against Tesla. Tesla is not only one of the largest companies in the world ($730B market cap) but also it is a highly dynamic and innovative company. Old behemoths like Intel or Cisco that used to be great can be disrupted, but not Tesla. Tesla’s hardware expertise means that it can produce an excellent electrical panel, and use its balance sheet to undercut SPAN on price until the young startup runs out of cash. Knowing this, SPAN should either build a bigger moat or try to get acquired by Tesla.
SPAN should build a bigger moat or get acquired
SPAN does not have the resources of Tesla, but it has the benefit of having deployed units that are generating data. SPAN can potentially build a powerful moat with this data. Google, Meta, and Amazon often capture up to three-quarters of all digital advertising dollars. Their granular user data allows them to deploy the most targeted ads to their users. Competitors that lack this data have fallen behind for years. SPAN should be creative about the services that it provides using this data. Monitoring the electricity usage of appliances can not only lead to predictive maintenance services or virtual power plants but also potentially advertising!!! 🙂 For example, if the electricity usage of a washing machine becomes irregular, the homeowner may receive advertising for a new one. These kinds of high-margin services increase the profitability of the product, and they give consumers and partners additional reasons to work with SPAN instead of Tesla.
The other potential solution is to get acquired by Tesla. Gaining a great new product, brand, and team can also benefit that company. In the past, Tesla has acquired companies that either strengthen its technological edge (e.g. Maxwell Technologies) or complement its product portfolio (e.g. SolarCity). For a venture-backed startup, a good rule of thumb for a successful exit is one valued at 10X the total funding raised. At its current market cap, Tesla can easily acquire SPAN for $2.3B. In 2016, when Tesla was valued at ~$30B, it acquired SolarCity for $2.6B. For SPAN, the door to an acquisition will not remain open forever. Most companies cannot handle a multi-billion-dollar acquisition, and Tesla’s appetite will wane if the acquisition price increases significantly.
Conclusion
SPAN’s main moat, around the function and design of its luxury product, is ineffective against Tesla, which has a similar product and branding strategy. SPAN’s smart electrical panel naturally complements Tesla’s hardware and software product offerings. In addition, helping to increase the adoption of such a product will remove one of the main bottlenecks in the adoption of Tesla’s solar, battery, and EV product lines. SPAN’s only options are to build a bigger moat or get acquired. SPAN has a head start in generating data from its panels. It can use this data to build a data moat and add more high-margin services. Alternatively, SPAN can be a great acquisition target for Tesla, where it can fetch a price that would constitute a successful exit.
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A scene I like
Tony Soprano: “Well you know what they say, ‘Be careful what you wish for, you might just get it.’”