Elon Musk inhabits a particularly influential space in the world of innovation by proving himself as a masterful entrepreneur in the 21st Century. He helped to establish the digital payment system known as PayPal; in the second quarter of 2011, this online service processed $28.7 billion USD in transactions. He was involved in the development of SpaceX, a space transit services company which has earned nearly $5 billion in contracts, including at least $1.6 billion from NASA for International Space Station resupply missions. His many other ventures, including solar energy technology manufacturing company SolarCity and electric vehicle manufacturer Tesla Motors, brand Musk as a new kind of corporate capitalist who can thrive by developing sustainable technologies.
In the patent world, Musk has been creating some waves in his role as CEO of Tesla Motors. In a self-authored blog post published on the official Tesla Motors blog, Musk announced that the company was trying to make the company ‘open source’ by allowing other people to infringe on their patent portfolio with the supposed intent of encouraging the development of electric vehicle technologies. Interestingly to us, his comments in the post, titled “All Our Patent Are Belong To You” and published on June 12, explain: ” Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” But who is to decide if one is acting in “good faith”?
Also interesting was the caustic language about the nature of patents:
“When I started out with my first company, Zip2, I thought patents were a good thing and worked hard to obtain them. And maybe they were good long ago, but too often these days they serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors. After Zip2, when I realized that receiving a patent really just meant that you bought a lottery ticket to a lawsuit, I avoided them whenever possible.”
Musk left the Zip2 web software venture in 1999 when the company was sold to Compaq for more than $300 million in cash and stock options. Since then, plenty of patents have been assigned to PayPal and SolarCity, although there are no instances where Musk has been listed as an inventor. However, both SolarCity and Tesla Motors have filed patent applications with the U.S. Patent and Trademark Office as recently as February 2014.
The question begs to be asked whether Elon Musk is truly avoiding filing for patents whenever possible, and if his rhetoric implies something other than its face value. He insists that the patents have been dismantled from the wall of the Tesla Motors headquarters in Palo Alto and that this represents the “spirit of the open source movement, for the advancement of electric vehicle technology.” But why does the company continue to file patent applications with the USPTO?
Open Source Tesla Technologies
The decision to make Tesla Motors patents ‘open source’ stems from a desire to encourage the development of electric and hybrid vehicle technologies among car manufacturers, according to Musk. Of course, it is hard to ignore the reality that several weeks before this allegedly altruistic proclamation by Musk, Toyota announced that it would be phasing out its deal with Tesla Motors. Not surprisingly, a little more than a week after the Musk announcement Toyota unveiled its hydrogen car. Time is reporting that the car will be introduced first in Japan in 2015 and eventually in the U.S. market during the summer of 2015, likely at a price tag of $70,000.
The Toyota hydrogen car does not need the Tesla lithium ion battery technology. Musk says he had hoped that patenting Tesla’s lithium ion battery technologies would increase competition from major carmakers, thus improving development in this field. Instead, he argues, mainstream development of electric vehicles has stagnated. Musk wrote:
“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… Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. 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.”
One has to question whether the technology has stagnated as Musk alleges, or whether Toyota has found paradigm shifting innovation, moving toward a hydrogen energy economy. Given the Toyota announcement and 2015 hydrogen car it looks like Musk may be opening up his patent portfolio in a last ditch effort to retain market share.
More than 200 U.S. patents have been assigned to Tesla Motors, and these patents represent a wide degree of innovation in the field of electric vehicle fueling and energy storage. One of the inventions which had been protected by Tesla is the company’s Supercharger technology, which can add 170 miles of range to Tesla’s Model S in 30 minutes. Based on Musk’s remarks, companies could build cars incorporating this technology without the threat of legal action for patent infringement, but will companies want to pursue this path or the promise of hydrogen?
Some media outlets have already reported Musk meeting with executives from companies like BMW to discuss collaborative efforts in utilizing Tesla’s intellectual property. That discussion has centered around the use of Tesla’s Supercharger infrastructure, which at the time of this writing includes about 98 Supercharger stations strewn across the United States owned by Tesla. These stations only cater to Tesla Model S vehicles currently.
The market success of Android and other open source business models are quickly cited by most media analysts discussing this story. In the eyes of many, Musk’s move is a courageous Silicon Valley-style stab at taking on a major sustainability concern in the automobile market. It is important to remember that, because Tesla Motors retains these patents even if they’re not symbolically displayed at the company headquarters, Elon Musk remains the final arbiter as to what constitutes a ‘goodwill’ use of Tesla’s patented technologies.
How Tesla Motors Can Profit
Elon Musk has doubtless had to have made many shrewd business decisions to amass a multi-billion dollar personal net worth. At first glance, the decision to let others infringe on patented technologies makes little sense from a business standpoint, and has led to the demise of some businesses in the past. However, if Musk doesn’t think that he can convince major car manufacturers to license Tesla’s patented technologies, there are other ways that he benefits financially from the decision to make his patents ‘open source.’
Musk may doubt the ability of Tesla to build enough cars to address issues posed by fossil fuel use, but he surely cannot doubt Tesla’s ability to manufacture enough lithium ion batteries to power that many vehicles. Indeed, the Gigafactory being developed by Tesla Motors is designed to support the development of mass-produced electric vehicles by driving down manufacturing costs for lithium ion batteries by 30 percent. Tesla Motors has announced that they expect the Gigafactory to be fully operational by 2020. But again, the timing of the patent announcement in the wake of Toyota phasing out Tesla and unveiling its own hydrogen car makes one wonder whether the patent altruism has more to do with an attempt to stave off other technologies so that the Tesla battery technology will be used royalty free. With Tesla making the batteries if other car companies use the Tesla technology and buy the batteries from Tesla that could result in a lot of money.
Although electric vehicles are the most recognizable product of Tesla Motors business activities, both the Gigafactory and the Supercharger network represent significant ways that Tesla can capitalize on the decision to let others copy its technologies. The Gigafactory would certainly produce more batteries than could be sold in Tesla vehicles, but the company could simply sell those batteries to Ford, GM or other carmakers who wanted to incorporate lithium ion batteries into their vehicles. Those vehicles would then be charged at Tesla Supercharger stations, improving the return on Elon Musk’s open source investment. As one writer hypothesizes in an article published by Seeking Alpha:
“Tesla could generate upwards of $1.8B in operating profit annually from the resale of its batteries. Tesla could offer their supercharger networks to Chevy and Ford vehicles, charging them for around $15, which is also a value proposition compared to gasoline vehicles… If Tesla were, by 2020, to sell 100,000 cars, 400,000 battery packs for other car makers, and operate 500 superchargers (to mostly non-Tesla electric vehicles), the company could generate nearly $5.5B in operating profit.”
Therefore, it will be interesting to see how “open” Tesla makes its intellectual property portfolio. Will that extent do allowing others to manufacture the batteries as well, or does Musk’s altruism stop at the manufacturing floor.
Elon Musk says that his true competitor is the massive worldwide fleet of gasoline vehicles, but he may be understating a threat posed by development of hydrogen-powered vehicles, considered by many to be a viable alternative to lithium ion electric vehicles. Toyota plans to release a hydrogen-powered sedan in 2015 in Japan which can be refueled in three minutes, providing a 430-mile range. The sedan, which will likely be priced at about $70,000, offers a quicker charge time and a further driving range than Tesla’s Model S and only produces water vapor as exhaust. By encouraging the implementation of lithium ion technologies by American car manufacturers, Tesla may be attempting to secure a stake in alternative energy industries against hydrogen fuel cell energy storage.
Within five days of Elon Musk’s blog post announcing Tesla’s open source philosophy, the company’s stock price improved by almost $30 per share. There’s little doubt that Musk’s announcement contributed to an increase in Tesla’s short-term value, or at least didn’t hinder stock value. As well, Musk has positioned himself as the open source provider of electric vehicle technologies, at least for the American market. The proliferation of electric and electric-hybrid vehicles on our streets may be a noble goal, but Musk’s comments on patents don’t exactly align with the patent filing activities of Tesla Motors, and it seems clear that he has a financial interest in encouraging lithium ion battery use in vehicles. We encourage any company considering to take up Elon Musk on this offer to be cautious, as the infringement that Tesla allows today may become a sticky legal situation later should the corporation reverse its stance and decide to enforce its patents.
There’s another slight touch of irony to this situation that deserves to be pointed out. By refusing to enforce these patents, Musk’s actions hearken back to the Serbian-American inventor Nikola Tesla, the company’s namesake. Tesla owned many patents in his lifetime, but his decisions not to patent certain technologies led to financial hardships in his life. It’s possible that, by focusing on the wealth to be generated by lithium ion battery production, Tesla might give itself a powerful position in the electric vehicle industry, or it could founder through the loss of its intellectual property protections. Time will tell.