After years of fierce war among technology superpowers we may be witnessing the first glimpse of peace in the industry. Last Thursday Elon Musk, Co-Founder and CEO of Tesla Motors –an American company that designs, manufactures, and sells electric cars and electric vehicle powertrain components- announced that his company will open its patent portfolio to help expand the market for electric cars worldwide (1). Musk tells in his blog: “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology” (2).
This decision has been described by some as “The Gettysburg Address for Entrepreneurship and Innovation” (3) and by others as an ingenuous move with lessons for Silicon Valley (4). Coincidently or intentionally, Musk’s decision coincides very timely with the new rules announced by President Obama to curtail CO2 emissions from carbon plants by 30 percent from 2005 levels by 2030.
In fact, despite the renovated excitement over electric cars, their market penetration has been reduced and, according to Musk, they currently represent less than 1% of the vehicle sales of major car manufacturers. True, there is an increasing sensitivity among customers towards the environmental impact of their traditional car's emissions. However, the relative higher prices of electric cars, costs of maintenance, lack of a wide network of electric stations to recharge batteries and lesser autonomy, among other reasons, make the option for electric vehicles still unaffordable for many.
Interestingly, one of the most salient advocates for electric cars has been LinkedIn Influencer Carlos Goshn, CEO of the Renault-Nissan Alliance, the company enjoying the largest market share in the production of electric cars with 100,000 units sold worldwide, more than the combined production of the other car manufacturers. In an earlier post in LinkedIn Pulse this year, Goshn called for a major move by all stakeholders in the automotive industry: “I believe that if we are to transform the car for a new era, we must address three major issues: safety, the environment and affordability. But the auto companies cannot do this alone. We will need to partner with one another, with governments and other industries if the car is to remain a source of prosperity, progress and freedom” .
Is Musk’s decision sound from a strategic management perspective or is he diluting the value of Tesla’s patents, a major asset of his company? It is worth mentioning here a key finding released in an academic paper of the 1980’s (6, PDF, 81 pages) and widely diffused at many business strategy courses at business schools. According to the opinions of an ample range of managers, the least effective way to benefit from new inventions or innovations in business is relying just on the protection of patents. The same study shows that the most successful way to maximize innovation is taking advantage of the lead time an exploiting the time-to-market advantage of being the pioneer in launching a new product or service. Other alternatives to protect innovation preferred by managers include climbing down the curves of experience, in order to reduce costs and offer competitive prices, as well as reinforcing sales efforts when launching a new product. Keeping secrecy and, particularly trusting in the legal shield provided by patents are the least reliable choices to defend innovation. The results of the mentioned study can be found in chart below.
Taking this into account, Musk’s decision can be considered strategically sound and may contribute to the spread of electric car’s technology and even to convert Tesla’s products in the standard adopted by other players in the industry. At the same time, it should be emphasized that Musk’s announcement does not entail that Tesla is giving away its patents. In his own words, it means that they “will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology” (7). It is thus to be determined the reach of “good faith” uses in the open source access to Tesla’s technology, and the company retains its right to litigate with those players that may compete unfairly.
Clearly, Musk’s announcement marks a decisive shift in the culture of patent protection in technology related industries. In past years, patent litigation flourished at the expense, in the opinion of many, of fostering innovation and progress and benefiting mostly lawyers. A clear case is the upsurge of patent trolls, those companies owning and enforcing patent rights against infringers, but without exploiting the full business potential of patents, thus impeding development and innovation.
Tesla’s move to open source technology is inspiring, particularly for companies operating in rapidly evolving industries where the patent protection system lags behind actual innovation and market development. At the same time, it is arguable whether it would be transferable to other industries with huge research and development costs over time, like the pharmaceutical sector, or to organizations like universities, which may need different mechanisms to promote and capitalize on their intellectual property. This may be one of the reasons why Senator Leahy recently decided to drop the patent reform bill, which aimed at reducing litigation by patent assertion entities and patent trolls. However, he declared “that If the stakeholders are able to reach a more targeted agreement that focuses on the problem of patent trolls, there will be a path for passage this year and I will bring it immediately to the (Senate Judiciary) committee” (8).
Regardless what the future legislation brings, I believe that companies will better protect and capitalize on their innovation if they engage in collaborative schemes and alliances with other players in the industry, rather than in defensive or litigation strategies. In the words of Musk: “Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard”. (9)
(5) Carlos Ghosn, LinkedIn, Feb. 19, 2014, "We Can Ensure The Car Remains a Vehicle For Progress"
Photo: Heisenberg Media / Flickr