As Elon Musk prepares to try and beam SolarCity into the Tesla mothership, he may want to lean back in his captain's chair for a moment and think about what happened to Barry Cinnamon.
In 2006, the same year that SolarCity was born, Cinnamon had built a company called Akeena Solar into a nationwide solar installer, with more than 10,000 customers in states from New Jersey to Hawaii. By 2010, he had inked a deal to sell his panels at Lowe's big-box stores and made a deal with Westinghouse Electric Co., the manufacturing giant, to sell the product under its name.
Today, Westinghouse Solar is no more -- it went bankrupt two years ago -- but Cinnamon has found a different kind of success in the rooftop-solar installation business. He's doing it on a much smaller scale, in San Jose, Calif., with a small outfit called Cinnamon Solar that has 10 people and three trucks.
What he learned, he said, is that the rooftop-solar installation business is by nature difficult to inflate to national-scale proportions. "The bigger I got," he said in an interview, "the more money I lost."
A question of this decade is whether the top tier of solar installers -- companies like SolarCity, Sunrun, Sungevity and Vivint Solar with operations in multiple states, large staffs and budgets in the multimillions -- will prevail in their drive to become the Amazon.com or Best Buy of the rooftop, or whether they will go the way of Akeena Solar as examples of a business model that doesn't work.
It has become a particularly important question for Tesla, the electric automaker and battery company of seemingly unlimited ambition.
On Tuesday, Tesla announced a plan to acquire SolarCity, the nation's largest rooftop-solar installer, for about $2.8 billion in an all-stock deal. By bringing SolarCity under Tesla's hood, CEO Musk wants Tesla to become "the world's only vertically integrated energy company," as Tesla wrote on its website Tuesday. Together, he imagines, Tesla and SolarCity could provide a homeowner with an electric car, the battery in the garage, the solar panels on the roof and the technology platform to knit them all together in an elegant and carbon-free package.
But in order for that to happen, SolarCity will have to prove its ability to continue to grow everywhere and at the torrid pace that Musk demands of his car, battery and rocket enterprises. And as recent figures show, that is far from certain.
One-upped by regional installers
GTM Research's latest scorecard for the solar photovoltaic (PV) industry showed an interesting trend: The top three solar nationwide installers, including SolarCity, are seeing their growth slow, while regional installers' growth is gaining steam.
"This highlights a trend that has flipped in the past year -- and which could lead to a less consolidated national market," the authors concluded.
In the fall of 2014, the top three installers owned 53 percent of the market. In the latest quarter, that fell to 47 percent. Meanwhile, individual states are seeing a few installers consolidate into leaders, and those leaders are often specialists in that region. Examples include Direct Energy Solar (active in the Northeast), PetersenDean (predominantly in California) and Baker Electric (in Southern California), all of which have found robust growth and broken into the nationwide top 10 list.
Musk can take heart that SolarCity is, at least for now, the overwhelmingly dominant player.
SolarCity had a national market share of over 31 percent in the second quarter of this year, and it has been over 30 percent in every quarter for the last two years, according to Nicole Litvak, a senior solar analyst at GTM. It is the No. 1 provider in the major solar states of California, New York, Massachusetts and Arizona (though it's fifth in New Jersey). The company is active in 20 states and the District of Columbia, and on Monday it announced a new beachhead in Houston, the heart of the traditional energy industry.
In making its takeover offer, Tesla painted a scenario where Tesla and SolarCity combine to create something greater than their parts. Visitors to Tesla's auto showrooms could be wooed to buy SolarCity solar panels. SolarCity, with its benign but unsexy green image, could be aided by Tesla designers to make its panels into objects of desire. SolarCity's customer acquisition and financing expertise could help Tesla, whose customers also need financing.
In a conference call Tuesday night, Musk described the prospect of a Tesla-SolarCity matchup as "blindingly obvious." But that may ignore facts of the rooftop-solar business that may make it a frustratingly slow and small partner for a go-go car company.
Think roofers, not race cars
Cinnamon learned, he said, that while the solar panel has the cachet of a new technology, it is fundamentally different from other retail electrical devices sold by the millions, like desktop computers or refrigerators. If the maker of your dishwasher goes belly-up, you go buy a new one. That's not the case with a solar power system, which is meant to last decades and is part of a home's embedded physical infrastructure, like the plumbing; the roof; or the heating, ventilation and air conditioning system.
That may be a reason, he said, that there's not a nationwide plumber, and why businesses like roofing and HVAC remain the domain of local contractors. For a product that is essential to the functioning of the home, customers want a provider that will be in business for decades and are nearby in case something goes haywire.
And there is another reason. "There's an inverse economy of scale when you're talking about contracting work," Cinnamon said.
Prices for photovoltaic modules and other parts of a solar system are going the way of faucets and air-conditioning units -- in other words, they're getting relatively cheap. If solar modules are cheap, then a large company buying a thousand of them commands only a slight price advantage over a local contractor that is buying a dozen. Meanwhile, the little guy avoids a lot of big-ticket expenses that the big guys must pay. "You don't need a second or third layer of management, logistics, a fancy computer system, multiple warehouses," he said. "All those add up to overhead."
Cinnamon pointed out another advantage of contracting locally: finding customers.
SolarCity and its large-scale brethren are finding that the cost of finding new customers is crimping growth. A blog post by Woodlawn Associates, a corporate strategy firm, pointed out the problem: Solar installers make thin profit margins, like other residential contractors. But they are selling an expensive product that there is no urgent need to buy.
"Customers have to be found and sold to. They have to be convinced to act now instead of later. It's a complicated sale and often requires making a 20 year commitment," the company wrote.
Late last year, SolarCity slashed its growth targets from 80 percent a year to a lesser, but still torrid, 40 percent. One of the main reasons, the company said, was that it simply couldn't afford the sales and support manpower to acquire new customers, according to a Greentech Media story.
Finding customers is not such an expensive proposition for a local contractor, which has a book of customers, interacts with them through repeat business and generates word of mouth. Some solar contractors -- for example, Baker Electric in Southern California -- started as an outgrowth of electrical contractors with a strong footing in the community.
"I'm not going to say [the customers] fall into their laps, but they're naturally there," Cinnamon said.
Profitability has been a challenge for the biggest solar installers. SolarCity, Sunrun and Vivint Solar, firms of national scope that are often in the top three in terms of market share, have between them never had a profitable quarter until just now, when Sunrun posted its first quarter in the black. SolarCity has lost money in every quarter since its initial public stock offering four years ago, and part of slashing its growth targets was to achieve profitability by the end of this year.
"I think people are scratching their heads and saying, 'Why aren't they getting more profitable as they get bigger?'" Cinnamon said.