Tesla's New Patent Policy May Already Be Paying Off

In his company blog post from June 12th, Tesla Motors CEO Elon Musk dramatically wrote that "[Y]esterday, 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 (emphasis added), for the advancement of electric vehicle technology." Musk went on to say that "[I]f 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. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology (emphasis added)."

Musk's reference to Tesla's conversion to the "open source movement" begs the question: What is "open source?" According to the Open Source Initiative, a California-based public benefit corporation which touts itself as the repository for the definition, an open source license does not simply apply to access to a company's technology source code. It also allows for the free redistribution of software and for modifications and derived works (with restrictions allowed only if distribution of "patch files" with the source code for the purpose of modifying the program at build time); requires non-discrimination to access by persons, groups, fields of endeavors, and to product specificity; requires all rights accruing to all to whom the program is redistributed without the need for an additional license; and requires that the license be technology-neutral and not restrict other software.

While some commentators have suggested that Tesla will be offering its patented technology to other manufacturers at "fair, reasonable, and non-discriminatory" (FRAND) terms, a concept employed by technology standards-setting organizations that governs licensing obligations required of the company whose patented technology has been designated as the industry standard, but this approach appears not to be Musk's intention. Tesla's CEO means "open source" and all its' attendant characteristics.

So what did motivate the Tesla open source decision? That can be found later in Musk's blog: "... electric car programs (or programs for any vehicle that doesn't burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than 1% of their total vehicle sales. We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform (emphasis added)" Thus, Tesla, in open sourcing its patented technology, is willing to provide to the marketplace (minus the time consuming industry standard-setting process) de facto technology standards for a portion of this common manufacturing platform, with the intention of accelerating the growth of a largely stagnant sub-sector (electric vehicles (EV) market) of a global automobile industry now manufacturing nearly 100 million vehicles annually.

Tesla has had mixed market results as a supplier of its patented technology, with Daimler using a Tesla battery in its EV version of its urban Smart Car, and a recently ended supplier partnership signed in 2011 with Toyota for Tesla to supply the battery, gearbox, power train, and battery-management software for the company's RAV4 EV. This Tesla/Toyota partnership, entered into in 2011, initially anticipated to be worth up to $100 million for Tesla, was ended in May 2014 and no doubt had a major impact on Tesla's future business strategy as a supplier of its patented technology to other companies planning to manufacture EVs. The fundamental issue, however, is that Tesla has acquired a brand reputation for manufacturing a high quality, premium-priced EV, but that the automobile marketplace has not seen a viable competitor to its Model S vehicle yet emerge. The so-called "wall of patents" that Musk alludes to was, not surprisingly, to be used defensively (as "intellectual property landmines") to ward off the onslaught of both domestic and foreign automobile manufacturers planning to enter the same high quality, premium-priced EV market niche now occupied by Tesla. This competitor opportunism, however, never materialized.

Patents are only necessary (and potentially economically valuable) when there are competitors interested in using your technology in their commercialization activities. Thus, when there is little or no demand in the marketplace, they are unnecessary for defensive strategy purposes. Making ones patents available to a potential competitor "who, in good faith, wants to use our technology", as Musk writes, could have potential economic benefits for Tesla. How? If, for example, the open source access to its patents will encourage other automobile manufacturers to actively engage in an expansion of EV models and their production, Tesla's demand for the building of increased production capacity (to manufacture 500,000 lithium-ion packs annually) can be met due to scale demands increasing across the automobile industry.

Tesla's open access policy on its patent availability may already be showing signs of a potential payoff. On Sunday of last week, the Financial Times reported that both Nissan and BMW (which recently released its i8 model EV to compete with Tesla's Model S in Germany) are "keen on talks" to cooperate with Tesla on further developing charging networks for EVs in the U.S. - and thus potentially utilizing Tesla's open source superchargers as a universal standard Tesla currently has 97 charging stations in the U.S., with plans on more than doubling this number (including opening charging stations in Canada) by the close of 2015. This national network of EV charging stations is essential for expanding the EV market in the U.S. Is this "Open Source" decision a form of altruism - I think not. Is it a well thought through strategic decision to potentially benefit Tesla? Absolutely. We will just have to wait to see whether it is a successful strategy for Tesla.