Tesla's Patent Gambit
In chess, a gambit is a strategy where a player sacrifices a piece in order to gain an advantage in position. Tesla CEO Elon Musk just announced that the company was sacrificing its entire patent portfolio in order to grow the market for electric cars. Tesla will no longer enforce its patents against competitors: "Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology."
Why is Tesla making its intellectual property available for free? Because Tesla needs for others to invest in the future of electric cars. Tesla needs thousands of individuals to seek to make their fortune by servicing, improving and recharging electric cars. Without an ancillary support, the Tesla is a very impractical, unreliable and expensive mode of transportation.
If You Give It Away, They Will Come
Right now, if an American consumer buys a normal car with an internal combustion engine, he knows that he can drive that car anyplace in the United States and get fuel. Except during the aftermath of Hurricane Sandy, Americans never worry about being able to find a gasoline service station. Car owners expect to find a service station that can handle emergency repairs wherever they might drive. For Tesla owners, there are only 96 recharging stations across all 50 states. For them, every long distance trip requires advance planning of where and when the car will recharge and it is always one week after Hurricane Sandy. That is quite a burden to voluntarily take on, particularly for people purchasing a $70,000 luxury automobile.
Right now, the electric car market is a tiny slice of overall car sales. Tesla has sold approximately 30,000 cars during its first two years. By comparison, Musk estimated that100 million cars are sold annually worldwide, with 2 billion cars on the road. Dominating the current electric car market is not a pathway to financial success.
Dedicating Tesla's patent portfolio to the public will aid in the growth of electric car infrastructure in two ways. First, it will allow entrepreneurs to use Tesla's patented technology to build service stations, applications and after-market modifications for the fleet of Tesla vehicles already on the road. Second, it will encourage rival car makers to build cars - like the Tesla - with 200+ mile range. Without having to pay royalties to Tesla, it is feasible for rival car makers to build low-cost cars that will have mass appeal. Electric recharging stations and service stations will sprout like mushrooms if there are millions of electric cars to service.
Fighting Google For The Electric Car Business Model
Tesla's patent gambit will also help his electric car face the challenge from Google's electric driverless car. The tiny Google-car threatens to disrupt the entire model of private car ownership, in favor of taxi service. In his press release, Musk said, "Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day." That statement is not entirely true. If the Google-car becomes the model for electric car, it will choke off the development of the constellation of consumer-facing service providers that Tesla needs to emerge.
The Challenge For Tesla: Execute Better Than The Established Car Companies
In his press release, Musk acknowledged the risk "that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla." If Tesla's gambit works and the market for electric car grows into millions of units per year, Tesla's patents will not provide any barrier against entry by the established car companies. Toyota, Honda, Mercedes, GM and Ford are extremely efficient world-wide manufacturers who could build a Tesla-S for less than it costs Tesla. Tesla might suffer the fate that befell IBM's personal computers, where Dell and the other "clones" undercut the IBM and drove it out of the market.
Bottom Line:
Time will tell whether Musk's Gambit was wise strategy or a foolish waste.