Tesla's New Patent Strategy Makes Sense

For a large number of people to replace their gasoline-powered cars with electric- vehicles, many automakers need to make electric cars.

learn more about Scott Shane

By Scott Shane

Opinions expressed by Entrepreneur contributors are their own.

The high-flying electric-car startup, Tesla Motors, changed its technology strategy recently. Rather than seeking additional patent protection on its electric-car technology, the company made its portfolio of patents available to anyone who wants to use them, its CEO, Elon Musk, announced in a recent blog post.

The move surprised observers who view the startup's patents as a competitive advantage, particularly since the offer included access to Tesla's patents on rapidly recharging batteries, a core component of the company's electric vehicles. But the decision was wise. The benefits of spurring customer adoption of electric cars outweigh the costs of strengthening competitors.

The traditional argument for patents is that startups can protect their technology against imitation by large incumbents, who have many advantages over them. Existing firms have the advantage of controlling complementary assets – things like manufacturing plants operating at high-scale economies or widespread distribution networks – that are used alongside an innovation to compete in the marketplace. Against this formidable obstacle, the standard strategy for a tech startup is to build a patent portfolio as an offsetting basis of competition.

Related: Would a Higher Accredited-Investor Threshold Clip Angels' Wings?

As Musk himself explained, the traditional view was what he was thinking when he founded his electric-vehicle company. Startups like Tesla need patents to defend themselves against imitation by existing firms who "would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla," he wrote on his blog.

The patent-based strategy makes sense in many industries. No biotech startup would make its drug patents freely available. Big pharmaceutical companies and generic drug makers would simply copy those drugs and use their better sales forces to defeat the startups in the marketplace.

But Musk faces a different problem from your typical biotech company founder. He doesn't just have to win against existing automobile companies. He also has to get the market to adopt electric-vehicle technology. Unfortunately, customers aren't likely to do that in large numbers until a key complementary technology – widespread battery recharging stations – have been deployed.

If Musk could build all the charging stations customers need to feel comfortable replacing their gasoline-powered cars with Tesla vehicles, he would do it. But he can't. No one company can. For a large number of people to replace their gasoline-powered cars with electric- vehicles, many automakers need to make electric cars.

Related: Entrepreneurs are Weakening as Job Creators, But Don't Blame DC

Giving Tesla's battery technology to other automakers will make them more likely to produce electric vehicles. More electric vehicle production will spur the development of recharging stations, which, in turn, will lead more customers to swap gasoline-powered vehicles for electric ones.

Musk's knows that his move will weaken Tesla's competitive position. Once existing car makers have access to the technology for rapidly recharging batteries, they will use their scale economies in manufacturing and widespread dealer networks to challenge Tesla's position in the electric-vehicle market. Tesla's share of the electric-vehicle niche will almost certainly shrink as a result.

Musk is betting that broader customer adoption of electric vehicles will offset this greater competition. In 2013, electric vehicles accounted for only 0.6 percent of all the cars sold, with Tesla providing roughly one-fourth of the electric vehicles purchased. Tesla would be better off selling a smaller fraction of the electric vehicles if battery-powered cars accounted for a larger slice of the total car market.

While it will be years before we know if Tesla's strategy worked, investors like the decision. Between June 12th when the company announced the move and June 17th, the electric vehicle maker's stock price jumped nearly 14 percent.

Related: Congress Is Right to Challenge the SBA's Program Expansion

Scott Shane

Professor at Case Western Reserve University

Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Business News

A Mississippi News Anchor Is Under Fire for Quoting Snoop Dogg

WLBT's Barbara Bassett used the rapper's "fo shizzle" phrase during a live broadcast, causing the station to let her go.

Thought Leaders

Facing a Tough Problem? Try These Hacks to Find the Solution You Need

Not every problem has easy answers, and that's okay. Here are four ways you can free yourself from gridlock when you're stuck.

Buying / Investing in Business

The 19 Covenants of a Standard Franchise Agreement

A quick look at the promises, rights or duties that the franchisee or franchisor owes to the other.

Thought Leaders

The Collapse of Credit Suisse: A Cautionary Tale of Resistance to Hybrid Work

This cautionary tale serves as a reminder for business leaders to adapt to the changing world of work and prioritize their workforce's needs and preferences.

Career

Thinking of a Career Change? Here Are 4 Steps You Can Take To Get There.

Author Joanne Lipman on what experience and science tell us about successful job pivots.