Faculty Q&A: When More Competition Is Better

The Sanity Behind Tesla’s Giveaway of Patented Technology

Tesla Motors CEO Elon Musk recently shook up the auto industry with a pledge to give away the company’s electric car patents for free. Rajshree Agarwal, the Rudolph P. Lamone Chair and professor in Entrepreneurship at the Robert H. Smith School of Business, calls the move a win for both the company and industry. Already, Indian automaker Mahindra has announced plans to pursue Tesla’s now-open secrets to advance its own electric vehicles. So what does Tesla gain? In the following Q&A, Agarwal details factors motivating the move and its implications. 

Q. What prompted Elon Musk to open source Tesla patents?

A. Musk is smartly choosing to penetrate the automobile market ahead of further distancing his company from rival automakers. Tesla, with a superior product, is leading an industry stalled in a pre-sales stage. To achieve takeoff, Tesla now is focusing on strengthening, instead of staying ahead of, its field of competitors. The end game is to attract new consumers and make the electric car a mainstream product. 

More, rather than less, competition will enable such a shift. And, the rate of innovation, both in the final product and manufacturing process, will increase as more players enter the market. 

Such movement will finally draw consumers en-masse to the value proposition -- significantly the financial (avoiding gas prices) and environmental (reducing gas emissions) considerations -- of owning and driving an electric car 

Q. How can the patent pledge spur the industry? How can Tesla capitalize? 

A. Musk opening Tesla’s secrets significantly will speed the diffusion of the electric car technology to widespread adoption and industry growth that will fuel Tesla’s growth, too. This will occur for multiple reasons. 

1. In a growing industry, there is more than enough room for multiple firms. In the early 1900s, there were hundreds of automobile makers. All of them were quite profitable and reflective of how every firm entering an industry can collectively fuel that industry’s growth. 

2. Already positioned as a first-mover in its industry, Tesla can capitalize on its brand name, innovation and resources to gain higher market share. Moreover, the company is positioned to get a big slice of an ever-increasing pie. 

3. By providing its own intellectual property as open-source, Tesla can set, and build on, the standard across many dimensions of the technology and through follow-on, innovations. This creates a virtuous loop for Tesla, because it strengthens the company’s position in terms of brand name and innovation. This also positions Tesla to take advantage of a razor-razorblade model (named for Gillette separately selling razors and replacement blades) by potentially mass-selling vehicles at an affordable price while drawing a separate stream of revenue from an accessory product. Tesla has revealed plans to launch, by 2020, the world’s largest lithium-ion battery factory that will likely supply other car makers. The company also can profitably leverage its large network of charging stations, plus its organizational practices, capital, and marketing and manufacturing resources. 

Q. What does the Tesla case signal about patent function? 

A. From an intellectual property point of view, a patent only provides the right to sue in court. There are two reasons why this factor is less important to Tesla in this pre-take-off stage of its industry. 

First, the rate of product innovation is very high. So, the pace of change makes earlier innovations obsolete when it comes to staying at the frontier of technology development. In the time it takes to patent an innovation, other firms have already moved ahead to a new level. 

Secondly, even if the innovation is protected, it would take years of litigation -- often messy and costly -- to figure out issues of patent infringement. 

Apple and Google recently agreed to drop all their lawsuits related to smartphones, where the technology is much more advanced. Furthermore, the scope of the patent is questioned in courts, so there is no guarantee of a win.   

Q. What can history tell us concerning automobiles and patents? 

A. Consider the landmark Selden v. Ford patent lawsuit. Creating a portfolio of patents around the Selden road engine patent, the Association of Licensed Automobile Manufacturers claimed royalty from all automobile manufacturers seeking to produce gasoline cars. Ford, in 1903, contested these patent rights, and ultimately prevailed after a decade-long, drawn out battle. 

The result liberated Ford and a fledgling auto industry from a licensing monopoly and also led to industry-wide standardization and technology sharing. Tesla’s move away from patent protection can similarly position its industry..

Ultimately, Musk recognizes lots of win-win opportunity for Tesla, whose biggest threat is not from competitors, but from failing to pave the road for mass-producing and selling affordable electric cars.

Photo by: Thomas Doerfer