Sell the car, not the Kool-Aid

As promised, on Thursday Tesla CEO Elon Musk posted the logs from the disastrous NY Times long-distance test drive of his Model S sedan. Late Thursday, Broder himself posted his own attempt to reconcile his experience with the data.

At first, I was puzzled by Musk’s quixotic attempt to pit his famous money-losing startup against the country’s oldest and most valuable media brand. Yes, as a former engineer-entrepreneur, I get that engineers will scream “user error” at the top of their lungs rather than even consider that there might be problems with their baby.

There’s also the common sight of the rich egomaniacal founder — in this case, the highest profile multi-industry entrepreneur since Howard Hughes — assuming that a few business successes meant that he possesses the Midas touch, papal infallibility, or genius worthy of a Nobel prize.

Then I read the comment logs on some of these stories. Yes, the polarization seems worthy of a political campaign, but what surprised me was the vituperation against the NY Times reporter, in effect accusing him of being part of the evil Big Oil conspiracy to kill little ol’ Elon. Even one of my normally rational (except on politics) former co-workers has been tweeting that with a NYT reporter “you wouldn’t think guy would lie” and that the reporter was “unethical.”

The tactics being used by Tesla are straight out of a political campaign: Musk is not trying to convince the general public, he’s trying to protect his base, the true believers who’ll pay $80k or $100k for a car that makes them feel good about saving the planet but provides transportation equivalent (or sometimes inferior) to a $30k Toyota.

Psychologists tell us such an approach works due to “confirmation bias”: if you’ve plunked down a $5k-$40k deposit to get on the Model S waiting list, you will tune out messages that might suggest you’re getting a lemon. (I wonder how these buyers of this 400+ hp car will feel reading Tesla’s advice to avoid rapid acceleration and keep the speed under 60 on long-distance trips, let alone turning off the heater in the winter).

Perhaps Tesla’s near term goal is to keep those intended buyers from demanding their deposits back, since the company has been spending that money to keep the doors open. Or (as with a political campaign), perhaps Musk really believes what fawning reporters say within the Silicon Valley echo chamber. As was Steve Jobs in the Job I era, he’s likely surrounded by a staff who drink the Kool-Aid.

As with any product failure or business dispute, the truth probably lies somewhere in between. Some more neutral parties, such as Slate, Business Insider, Wired and particularly the Atlantic attempted to reconcile the new data with the original article by John Broder. And Broder himself wonders if some of the speed data was thrown off by using smaller wheels than normal.

If this were an actual court case, then Musk would lose — and lose badly — for two reasons. First, Broder is a more credible witness. He was there when the car was being driven, has witnesses and some of his explanations (like driving around a parking lot looking for the charger) disarm Musk’ accusations. He concedes that a caption (usually written by an editor) was misleading. In the end he’s willing to admit that if his sole goal was to maximize battery life, there are things he would have done differently.

The second problem is that, as Perry Mason or Matlock would be quick to point out, there’s no motive. Why would a NYT reporter who since 2009 has been “the Washington bureau reporter responsible for coverage of energy, environment and climate change” try to destroy America’s most famous electric car company here. We’re not talking Fox News or even the Wall Street Journal here. Meanwhile, with the survival of his company riding on this one product, Musk’s motives to present the data in the best possible light are quite clear.

Under other circumstances, Musk might able to win support from pro-business conservatives who distrust the NYT after years of editorializing on its news pages. (Some have compared Musk’s war against the press to that of Richard Nixon 40 years ago). But this audience is (for once) ready to believe the NY Times over a crony capitalist who sought $700 million in Federal loan guarantees (and won $465m) to keep his cleantech startup going.

The Model S is not the first cutting-edge product to fail a product review: this sort of thing has been happening for PCs, software and smartphones for decades. Sometimes, it’s because the rough edges are still showing: Broder was clearly misled by the onboard computer’s range estimates. In other case, the reviewers (again like real customers) use the product in ways that the engineer would not or would not even imagine.

In the end, Tesla will have to recognize that they made a mistake in providing their car in the middle of winter to an independent reporter, and telling him that he could drive up the Eastern seaboard using only the company’s “Supercharger” stations. The company will need better software, an onboard charging station locator, and 7/24 tech support equipped with better scripts for dealing with range anxiety in cold weather and other adverse conditions.

As with anything else in life, we learn most from our mistakes. Tesla will have a much better product (and make Elon Musk even richer) if they make a Model S that anyone can use rather than trying to sell the Kool-Aid to true believers.

Bluster as a substitute for execution

Cross posted from the Cleantech Business blog.

In the ongoing search for electric car nirvana, the Tesla Motor Company has enjoyed an unusually charmed existence. Perhaps it’s the Silicon Valley mystique, perhaps it’s the Midas touch attributed to its co-founder Elon Musk — who became a centimillionaire from selling PayPal to eBay, and then used his funds to start a car company, a rocket company and a solar company.

After discontinuing its $100k niche toy, the Tesla Roadster, the future of the company depends on producing and selling its $60-100k Model S sedan in volume. The latter effort was dealt a major blow Sunday when the NY Times reported the very real problems in an actual test drive:

Stalled Out on Tesla’s Electric Highway
By JOHN M. BRODER

Washington — Having established a fast-charging foothold in California for its electric cars, Tesla Motors has brought its formula east, opening two ultrafast charging stations in December that would, in theory, allow a speedy electric-car road trip between here and Boston.

But as I discovered on a recent test drive of the company’s high-performance Model S sedan, theory can be trumped by reality, especially when Northeast temperatures plunge.

The problem was that — after several close calls — the car ran out of power shy of the next charging station, requiring a complex and time-consuming flatbed tow. Perhaps it was the effect of cold upon the battery life, perhaps it was the power consumed by the heater, perhaps it was bugs in the software or hardware.

Still, there’s no reason to think that the problems didn’t actually happen. In response, one would presume that Tesla would both improve its products and add additional charging stations to enable long-distance recharging.

Instead, the notoriously thin-skinned Musk tried to smear the messenger, both on a CNBC interview and on his twitter account:

@elonmusk: NYTimes article about Tesla range in cold is fake. Vehicle logs tell true story that he didn't actually charge to max & took a long detour.

In responses to major media outlets, the NYT stood by its story:

The Times's February 10 article recounting a reporter's test drive in a Tesla Model S was completely factual, describing the trip in detail exactly as it occurred. Any suggestion that the account was "fake" is, of course, flatly untrue.

Our reporter followed the instructions he was given in multiple conversations with Tesla personnel. He described the entire drive in the story; there was no unreported detour. And he was never told to plug the car in overnight in cold weather, despite repeated contact with Tesla.

Apparently the attack was an effort to prop up the stock price, which fell 4% in response to the NYT story. (That’s about $175 million in market cap — more than any of us mere mortals will ever see in a lifetime).

Despite the stress on the company and its stock, this is a textbook example of how not to handle a PR crisis. But it appears that within a NASDAQ-traded public company, no one can tell the emperor of Tesla to put his clothes on, or to listen to professional advice. As The Atlantic summarized its media report: “Elon Musk's Crusade Against The New York Times Isn't Helping Tesla.” The WSJ wonders whether this sort of concerted effort to intimidate reviewers will discourage coverage in the future.

Of course, this happened the same week that Musk — an expert in all things everywhere — was offering advice on Boeing 787 batteries. As Seeking Alpha dryly put it:

Tesla has burned through $1.25B in free cash flows in order to develop the company, and we expect that terrifying test-drives of electric vehicles from Tesla Motors will continue. We find it amusing that Elon Musk is willing to help out Boeing's Dreamliner due to the battery issue. We would like to remind Elon Musk and his team that they need to first fix their problems with their products before trying to be a superhero with the products of other companies.

Cruising range is an inherent limitation of the current generation of electric cars, and thus “range anxiety” will be a major obstacle to adoption. Musk has done himself — and the industry — no favors by helping to call attention to the article, rather than (as his employees apparently were trying to do) work with the reviewer to understand and correct the problems.

Picking winners, getting losers

One of the key tenets of the interventionist view of governance (whether socialist, fascist or communist) is the idea that the government can manage the economy better than the free market. While extreme views (NB: Cuba, Venezuela, China) make an argument based on naked power — your government will provide for you — the more moderate interventionist arguments are based on the concept of “market failure.”

Of course, the idea that the government can correct for the errors of the market assumes that the government is more intelligent and foresighted than the market, and also is not susceptible to capture, cronyism or other bias. This week provides a classic counter-example.

In between baseball and a clean sweep by Bay Area liberals to the major statewide offices, one of the big Bay Area stories this week was the announcement that one of the biggest solar companies is struggling financially, raising questions about its ability to repay its federal loan.

The latest installment in the company‘s troubles broke Wednesday in the New York Times:

Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.

Just seven weeks ago, Solyndra opened Fab 2, a $733 million factory in Fremont, Calif., to make its high-tech solar panels. The new plant was supposed to be the first phase of a rapid expansion of the company.

Instead, Solyndra has decided to shutter the old plant and postpone plans to expand Fab 2, which was built with a $535 million federal loan guarantee.

A report by Michael Kanellos of GreenTech Media suggested that the news was held until after the election to avoid embarrassing the administration.

Katie Fehrenbacher of GigaOM was even more skeptical:

Back in May, I raised the question of whether or not Solyndra’s $535 million loan guarantee from the Department of Energy — the DOE’s first and flagship loan guarantee — was a mistake. Despite the fact that Solyndra had raised around a billion dollars of its own private equity, I pointed out the company has one of the highest manufacturing costs of its thin-film solar peers. The economics just didn’t seem to work.

Since I wrote that article, Solyndra ended up ditching its IPO plans, and its founding CEO stepped down. Now this morning, the company announced it will close its first factory and will lay off dozens of workers. Wow. Things could not have turned much worse for the company the DOE held up as an example of a stimulus package that could create green jobs and a good candidate for its long-delayed loan guarantee program.

Fehrenbacher reminds us of the great symbolism of the factory’s 2009 groundbreaking, which attracted the governor, US energy secretary and a video keynote by the vice president. She leaves out that the president himself showed up to tour the factory last May.

Like Fehrenbacher, a GTM analyst quoted by the Oakland Trib thinks the investment was questionable to begin with:

"Solyndra is facing the heat," said Shyam Mehta, an analyst with GTM Research, which tracks alternative-energy markets. "Many higher-cost solar manufacturers are doing well. It's alarming for Solyndra to be cutting back when others are expanding."
…
"The company's problems raise questions about the federal government's wisdom in giving $535 million to a company with an unproven technology," Mehta said.

As with any tech company, the loan was risky — the difference is the magnitude of the risk. It’s rare that a single private investor puts up more than $50 million at once, and only someone who can print money will put up a half billion on a risky investment.

The chances are not looking good for the government — let alone private investors — to be made whole on their investment. As Kanellos concluded:

What happens next? We know what the solar industry thinks. Solyndra will collapse is the general opinion. But it still has a single factory. In some long-shot scenario, something good could, maybe, one day, come out of this.

If the deal fails, the US government owns an unprofitable solar factory and some industrial land in a high-tax state.

It’s clear that the government did inadequate due diligence on a loan guarantee that had a minimal upside and a huge downside. Apparently the assumption was that $1 billion in private money couldn’t be wrong. Has anyone heard of “escalation of commitment”? (Perhaps if they had more MBAs or psych majors they would have.)

What’s the answer? Writing in July, a professor of environmental entrepreneurship argued the answer is avoiding favoring specific individual companies:

The best investments will not come from backing individual companies but come from reshaping the competitive landscape—creating the opportunities for new business models and markets that enable the unique strengths of green technologies to emerge and develop. Consistent regulatory policies and open technology platforms will benefit all ventures and foster collective action to shape emerging market opportunities.

Meanwhile, the Heritage Foundation concludes that all the alternative energy industries are failing despite generous subsidies — and the answer is less, not more subsidies.

Everyone wants to be Silicon Valley

For decades, politicians and business leaders from the rest of the world have come to Silicon Valley, wanting to create the next Silicon Valley.

From research of people like Martin Kenney, Anna-Lee Saxenian, Tim Sturgeon and others know the relevant list of preconditions for SV"s success.

Technology from universities, good industry-university relations (as in the Terman era), entrepreneurial culture, entrepreneurial infrastructure and last (but not least) venture capital. Oft-copied, these explanations for SV’s success might be necessary, but they do not appear to be sufficient to create a high-tech cluster.

And of course the other requirement for a cluster is to, well, be clustered. Spillovers happen in a cluster due to VCs visiting companies, universities talking to companies, and workers changing jobs — limiting the size of a cluster to (roughly) a radius of a one hour commute.

Meanwhile, since the end of the dot-bomb era, Silicon Valley has struggling with its raison d’étre, with many assuming that its salvation will be “clean” technologies such as renewable energy, energy efficiency and better life cycle consideration of material use and waste.
At the InterSolar trade show Wednesday, I picked up a renewable energy industry trade magazine enerG, which devoted its closing column to adapting a speech by Obam’s commerce secretary, former Washington Governor Gary Locke:

U.S. Needs to Become the Silicon Valley of Renewable Energy
…
For the Record is an edited excerpt of a speech … in Washington D.C. in February.

Two observations about the dubious economic logic of this article:

• First, an entire country cannot be a regional cluster. Even in biotech — perhaps the most fragmented of America’s high tech clusters — leadership is concentrated in the Boston and San Francisco regions, with San Diego a distant third.
• Secondly, if some place is going to be the Silicon Valley of renewable energy, why not Silicon Valley? That’s certainly what local entrepreneurs have had in mind for the past three (or even five) years.

However, to be fair to Secretary Locke, the original speech only warned against a future in which “Shanghai became the Silicon Valley of clean energy.” So the confused clusterology of the headline is due to the magazine editors, not a politician and lawyer.

The moral hazard of cleantech hubris

Since last summer, many firms have lined up to get their share of taxpayer subsidies. It is not always clear which firms deserve such subsidies and which ones do not, but as always, it’s predictable that the undeserving firms will do their best to appear deserving.

One of the companies seeking Federal aid is electric car maker Tesla Motors. Tesla has shipped its Roadster to an affluent niche market, but hopes to find a broader (niche) market with its $57,000 Model S sedan. Plans for the Model S have been on again and off again; right now they’re said to be on again.

Tesla is personified by chairman/CEO/founder Elon Musk, a 37-year-old serial entrepreneur who appears to be simultaneously running his 3rd and 4th startups.

My coworker Randy Stross (author of Planet Google) wrote about Tesla in his New York Times column. His Nov. 30 column questioned Tesla’s suitability for Federal bailout dollars:

The Tesla Roadster is an electric car that goes fast, looks sensational and excites envy. The seductive appearance, however, obscures some inconvenient truths: its all-electric technology remains woefully immature and don’t-even-ask expensive. If enough billionaires step forward to inject additional capital to keep the doors of its manufacturer, Tesla Motors, open, I’m happy for all parties.

If investors pass up the opportunity, however, why should taxpayers fork over the capital that Tesla needs? The company is requesting $400 million in low-interest federal loans as part of the $25 billion loan package for the auto industry passed by Congress last year.

The program is intended to encourage automakers to improve fuel efficiency, but should it be used for a purpose like this, as the 2008 Bailout of Very, Very High-Net-Worth Individuals Who Invested in Tesla Motors Act? Can you conceive any way that federal dollars could be put at greater risk — and for no equity in return, keep in mind — to benefit fewer people?

Tesla Motors, a privately held company based in San Carlos, Calif., has spent almost all of the $145 million in capital it has raised to date. It says it will soon receive another round of $40 million from its private investors to sustain operations.

In the start-up ecosystem of Silicon Valley these would be respectably large numbers, but in the automotive world, fully developing an entirely new line of technology can easily run $1 billion. That is what General Motors’ first attempt at an electric vehicle, the EV1, was estimated to have cost to develop in the 1990s.

Stross had two inaccuracies in the original article. First, he confused the $109k Roadster with the “mass market” $59k Sedan (later corrected online).

Secondly, he said Tesla wanted $400m in Federal loans: today, the current estimate is $700m. The money would from the Department of Energy’s loan guarantee program instituted by President Bush. The first $250m would be funded by 2005 legislation to reduce carbon emissions, the second $450m from the 2008 program for drive-train electrification. (The loan guarantees will charge fees to cover the program’s projected default rate, estimated at 25% by the GAO.)

While Stross’ comments were harsh, they don’t seem unusually so. Silicon Valley companies are often called on their wildly optimistic predictions. And in this climate of bailout fatigue, formerly entrepreneurial companies embracing government subsidies should expect some level of public examination and accountability.

Still, this was in November: after four months, all was forgotten, right? Wrong.

In video clips posted Friday to Yahoo Tech Ticker, Musk was interviewed by Sarah Lacy. In one of the video excerpts, Lacy shows one of Tesla’s scarce Model S prototype and asks the question “Should your taxpayer dollars go towards producing it?” She then began her interview with Musk:

Lacy: The New York Times did this piece that everyone in Silicon Valley got very up in arms about…

I don’t think “everyone” in Silicon Valley got upset. Some are too busy trying to keep their own startups alive to worry about Musk’s electric cars. A few tech entrepreneurs (like Paul Allen) were even willing to be politically incorrect and oppose the bailout.

Let’s restart the hard-hitting investigative interview:

Lacy: The New York Times did this piece that everyone in Silicon Valley got very up in arms about, saying that, you know, that the government money going to Tesla, would be this, you know, huge risk of capital that would only benefit the wealthy and venture capital backers who put money in the company, and called the Roadster basically a $109,000 concept car.

What do you say to that article?

Musk: Randy Stross is a huge douchebag! [Both laugh uproariously.] And an idiot!

Wow! I’m impressed! What a command of the English language! What an ability to inspire confidence among taxpayers that their $700m will be well spent! I’m not sure which is the greater need: journalism lessons for the new-media host or PR lessons for the centimillionaire entrepreneur.

After this ad hominem attack, Musk changes the subject:

Musk: First of all, what is he doing picking on electric car company? I mean, why would he pick on the little guy who's trying to do good, when you’ve got egregious wastes of money in the tens of billions occurring in … in … in Detroit? Why?

Hmmm... So wasting nearly a billion dollars on a little car company is OK because it’s not as bad as wasting $10 billion on a big car company? Musk said the money was intended for a “mass market car,” but (since no one owns a car in Manhattan) only in Silicon Valley would $57k be “mass market.”

Musk supposedly has an undergraduate economics degree from Wharton, so I assume this is just posturing rather than a serious answer. Here is how I would explain why that answer would get an “F” in my technology strategy class:

We can look at a wide range of cutting edge technologies in the past — biotech, dot-com, PC makers, disk drive makers and semiconductors — and see that when many companies enter the market, some companies survive while other companies fail. A priori, there was no way to tell the winners from the losers: if there were, investors would not have invested in the losers.

Today, while society may want electric cars, we don’t know which companies will survive and which will fail. If Tesla fails, U.S. taxpayers could lose $0.7 billion.

A VC expects to lose its entire investment anywhere from 10% to 33% of the time. It compensates for that risk by taking equity and getting a 10x return for the big winners. Here, the government would be supplying 80% of Tesla’s invested capital, but will only earn a fixed fee should Tesla have a smash success.

If you and the current investors don’t want to put up that money — but instead want taxpayers to bear most of the risk — perhaps you know something that the public doesn’t about the riskiness of the investment.

Economist Ken Arrow calls that a moral hazard problem due to information asymmetry. Economics tells us we should be suspicious when people who know the most want others to shoulder the risk.

When funding is tight, many tech companies will grow slowly until their positive cash flow will enable further re-investment. However, in this case, Tesla wants to expand its capitalization fivefold to fuel explosive growth, in hopes of grabbing market share before GM, Nissan, Toyota and others bring their electric vehicles (or plug-in hybrids) to market.

However, by taking Federal funding, Tesla would move into the realm of a regulated government-sponsored enterprise, along with all the other companies received bailouts and subsidies. Government money means playing by government rules, however irrational those might be. The best and brightest of Wall Street are fleeing from the TARP-sponsored wards of the state, presumably a lesson that (most) cleantech entrepreneurs will learn someday, as well.

Inefficient energy efficiency

This paragraph jumped out at me in this morning’s paper:

In Nevada, lawmakers agreed that strings attached to the stimulus would require them to pay the prevailing union wage -- $46 to $57 an hour -- to construction workers who will fan out to make buildings more energy- efficient. Still under debate is whether the state should pay equally high wages to workers hired under a locally funded weatherization program, which typically pays $15 an hour.

I realize that the ruling coalition includes labor and environmentalists. I also realize that workers would rather be paid $50/hour rather than $15/hour.

But why would taxpayers want to pay 3x market prices for such work? If the government is trying to be efficient, why not leave it to local states to decide what the best use of funds are?

The definition of hubris

An IT company this week announced that it is now qualified to set energy policy for the United States:

SAN FRANCISCO--The United States government has been unable to fix the country's energy problems, Google Chief Executive Eric Schmidt said, but the Internet giant on Wednesday proposed its own 22-year solution.

"We have seen a total and complete failure of leadership in the political parties of the United States," Schmidt said in a speech at the Commonwealth Club here. "We've been working on a plan to help solve this problem."

Earlier in the day, Google unveiled that plan, which doesn't lack for chutzpah: Clean Energy 2030 aims to wean the United States from its dependence on fossil fuels within 22 years.

Schmidt said the plan requires $4.5 trillion in spending to pull it off, but it'll pay for itself with $5.5 trillion in savings. "With this plan, it's cheaper to fix global warming than it is to ignore it," Schmidt said.

Perhaps when it’s done, Google can figure out how to fix the risk/reward imbalance in the mortgage industry and more broadly on Wall Street. Lord knows, we didn’t have enough transparency and information about the risks being taken by Freddie and Fannie, even if some saw the train wreck coming.

Maybe I’m being unfair. Perhaps this is just one of the responsibilities President Schmidt feels he must address as he prepares to wield the reins of Total World Domination (without term limits). Or perhaps this is just the hubris that comes to any billionaire.

Built to Last

I was sorting through old newspapers in the pile to read and found a column from the Merc that struck a nerve. Normally, business columnists are either shallow and superficial, or opinionated with conclusions not supported by the evidence presented (let alone reality). This was definitely neither of those cases.

The May column by Chris O'Brien refers to a speech by utility executive Jim Rogers:

Rogers described how he has embraced something called “cathedral thinking” and he was calling on the Valley to join him. I cringed at first mention of the term, worried that he was going to digress into some awkward religious metaphor.

(I’m not sure why O’Brien automatically assumed a religious metaphor would be awkward. Has he not heard of The Cathedral and the Bazaar, a metaphor embraced by as irreligious a bunch of geeks as you’ll ever find?)

Fortunately, O’Brien listened long enough to get the full story.

Rogers talked about a recent visit he’d made to Europe where he visited a number of the great cathedrals. It struck him that the person who often envisioned these great buildings didn’t live to see them built. Instead, they articulated a powerful vision that galvanized people to work on something that took generations to realize.

Rogers is proving the timelessness of two well-understood principles of effective business (or military) strategy. One is a long-term vision of what needs to be done; the second is creating a strategy (or perhaps just a culture or a set of enabling competencies) that will bring that vision to fruition, even if it’s long after the strategist is gone. This latter point is the theme of the Jim Collins bestseller. Bill and Dave certainly had it, Tom Watson Jr. had it, and I suspect (in their own narrow self-interested way) Gene Kleiner and Tom Perkins had it too.

The American political system is seriously broken by the exact opposite thinking Solving a real problem (like homeless people, failed public housing, structural budget deficits, social security) is important for society but too hard for politicians – so they don’t try. Instead, they “kick the can down the road” on these problems and find some symbolic quick victory (like televised hearings) to get re-elected one more time. Duane Delacourt, Doonesbury’s fictional “secretary of symbolism” for President Carter and then Governor Moonbeam, is now no longer exceptional enough to be worth mentioning.

Similarly, today’s CEOs want to string together 10 or 15 quarters of increasing earnings by a penny each time, so they can be handsomely rewarded for sandbagging their objectives before they are sacked. And VCs want to flip a company onto some greater fool before anyone is the wiser.

The occasion of the column and Rogers’ visit was a party commemorating the birthday of a 20-year-old startup, Echelon Corporation. Echelon had an unusually patient management team and board of directors; today its Pyxos embedded control platform appears to be both technologically ripe, and to have found a timely business need —managing industrial, commercial and residential energy usage. The IRR is probably not impressive for the venture investors, but the vision of the CEO and late COO have been validated — and the world is a better place for it.

McCain's prize idea

Today John McCain unveiled a plan to spend $300 million in government money as a prize for a better battery. ($300 million = $1/American: get it?) This is part of a stampede of politicians seeking to appear to do something, whether or not it does any good (cf. Congressional investigation of energy “speculators”).

Batteries of course are for electric cars, which purported to solve two of the problems of the gasoline-powered cards: their carbon emissions, and increasingly scarce supplies of petroleum that are driving up energy costs.

IMHO this is a bad idea from a policy standpoint — not the prize, but the target. One problem is that batteries are hard and there has been billions of dollars of R&D spent over the past two decades already making batteries for cell phones and laptops; from what I’ve heard, it will be expensive to make something better than a lithium-ion battery, and the next technology will only be slightly better. Also, having the ability to run an electric car gets rid of the auto’s emissions, but it doesn’t generate the additional electricity needed to run it (which might come from coal or nuclear plants) nor deliver it across the transmission grid.

Instead, two things better to spend the money on would be cutting the production costs by 90% for either photovoltaic cells (creating more energy) or LED residential/commercial illumination (using less energies). Both are known technologies that everyone expects will achieve cost goals in the next 10-15 years, but additional funding could pull that forward by 5 years or so.

But leaving aside the goal, what about the use of a prize?

On the radio, one guy interviewed said “we should spend it with the national labs.” The radio show host suggested another Manhattan Project.

Frankly, I think throwing it at the government is about the worst thing you could do. (Other than perhaps have no-bid contracts as set-asides in a pork-laden spending bill). Frankly, while the national labs have some smart researchers, they have no where near the concentration of talent working on government research during World War II, the Manhattan Project at Los Alamos or the MIT Radiation Lab.

Instead, the government needs to do a little open innovation of its own (“Not all the smart people. in the world work for us”) and use the market to get the best answers. Today, the top scientific and engineering talent is scattered across academia, industry and government labs. You want a wide range of ideas — in terms of approaches and technologies.

It turns out that the prize idea is actually one that worked in the past — whether in conjunction with or instead of the right of exclusivity (i.e. a patent). In her book, economist Suzanne Scotchmer showed that there are cases where a prize is the optimal incentive mechanism for attracting innovation.

My co-author and friend Karim Lakhani (of Harvard Business School) has also done research on the value of prizes, and is quoted in an April Fast Company article about how prizes are effective at stimulating innovation.

One dirty little secret of prizes: the sponsor often benefits from the losers, even if the losers do not. For the X Prize for space flight, all of the finalists have an incentive to try to develop commercial businesses to earn a return on their aerospace R&D, so the donor gets not one commercial spaceflight company, but probably two or three. EBay’s $100K prize for the “best widget” has even more nake self-interest: it would get dozens (hundreds?) of widgets to make eBay more useful, but only has to pay for one.

However, prizes do have a win-win aspect: free publicity. Even if you finish #2 in the X Prize, you get a lot of publicity and (perhaps) legitimacy that you can use to launch your business. Try getting that with an SBIR award or a patent.