Tesla founder Elon Musk shocked the world with his latest convention-wisdom defying move this week. In a blog post, he announced that the company would open up its patents and other intellectual property to competitors. “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology,” he wrote.
This generally just isn’t done. Upon inventing the light bulb, Thomas Edison didn’t then turn over the design to any glassmaker. Nor did Microsoft transform its proprietary operating system into open-source code. Patents provide a vital protection for innovation and breakthroughs. They give inventors time and space to build out their ideas into businesses, and force others wishing to piggyback on insights to pay up for the privilege. And today, intellectual property enjoys a kind of cult status. Google, Apple, Facebook—companies that sport thirteen-figure market capitalizations—don’t mine natural resources or produce physical goods. They mine the ideas they developed and have protected with patents.
If there were 50 manufacturers of electric vehicles instead of two or three, battery manufacturers would be falling over themselves to innovate.
But as is often the case with Musk, there is a method to the madness. And it borrows from a powerful idea in technology: network effects. The more people that are connected to a network—
the internet, television, radio—the more valuable it becomes to people who do business on it. Musk wants to portray his move as a selfless act. The company wants to bring about a new era in transportation. “If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal,” Musk wrote. But there’s a healthy amount of self-interest at work here, too.
With Tesla, Musk isn’t just trying to build an electric sports car. He’s trying to build a network that relies on electricity for transport: cars, batteries, supplies and components, charging stations and equipment. That’s an enormously expensive undertaking, and one that Musk and Tesla have largely shouldered alone.
Despite the company’s supreme self-confidence and demonstrated competency, Tesla is coming to realize that it can’t take on the world by itself. Take the political realm. Rather than work through dealers, Tesla owns its stores. But influential dealers have spurred state legislatures to erect obstacles to Tesla’s expansions in states like Texas, North Carolina, and Ohio. Even with its large market capitalization, Tesla on its own is no match for entrenched political lobbies.
But Tesla also needs help in the nuts and bolts of development and operation. Unable to attack Apple on its own, Google created Android and then invited others to use the platform to innovate and create rival apps. In attempting to compete against the internal combustion engine, Tesla may have to do something similar.
While U.S. companies have made noises about electric vehicles, there are really only a few all-electric models out there. The Nissan Leaf sells a couple of thousand units per month. As Tesla noted, electric cars just aren’t a thing yet. The big manufacturers haven’t jumped in.
And so Tesla is a niche product; it makes about 35,000 vehicles per year. And as a result, it’s more expensive and less profitable than Musk would like to be. In manufacturing, whether you are making cars or candy, scale and volume drive down cost. The more production rises, the better deal a manufacturer gets on raw materials and components. McDonald’s pays far less per pound of potato than a mom-and-pop diner. The higher the volume at a factory, the more productive it is, which lowers costs. The more Model T’s Henry Ford pushed through his ever-more efficient River Rouge plant in the 1920s, the more the price of a Model T came down.
Right now, none of these dynamics is taking place in the electric vehicle space. Teslas are expensive in large part because the batteries that power them—produced in small lots by a single supplier—are very expensive. Electric charging stations are nowhere near as ubiquitous as gas stations, which gives rise to range anxiety. Charging the vehicle at home requires the purchase and installation of expensive equipment.
If there were more infrastructure supporting the production and operation of electric cars, Tesla would find less customer resistance. But because there isn’t much competition, Tesla is shouldering much of the expensive cost of building out infrastructure on its own. It has spent hundreds of millions of dollars building out a network of Tesla-branded charging stations around the country, which it offers to Tesla owners for free. The company plans to spend several billion dollars to build its own battery factory as a way of ensuring reliable supply.
On each of these counts, having more people manufacture electric cars would change the game. If there were 50 manufacturers of electric vehicles instead of two or three, battery manufacturers would be falling over themselves to build new capacity, innovate, and offer good deals to end users. Lured by the higher volumes, auto suppliers would also develop new parts, components and systems —software, brakes, charging devices—that would make Teslas run more effectively and lower production costs. Gas stations, start-ups, office buildings would build many more charging stations to accommodate the larger number of electric vehicles on the road. Utilities and real estate developers would start making home-charging stations standard rather than expensive extras. All of this would be a boon to Tesla. And the company might find it could start charging drivers of other electric vehicles for access to the super-charging network it has already built. And if electric vehicles were to rise in popularity, the government would likely offer increased support. Imagine if every rest stop on an interstate housed a rapid-charging station.
Each of these developments would be good news for Tesla and would relieve the company of billions of dollars in annual costs. Sure, opening up the patents would be inviting more competition. But Tesla has spent years and vast sums of money building up a solid brand image and market position. And by allowing other people to use its patents, it will establish Tesla’s technology as the industry standard. The competition will be taking place on Tesla’s home field.