Musky patents

A journalist I know asked me about Elon Musk’s patent ‘strategy’. He wanted a call on the subject but I gave him an email instead and it is below.

“Hiya Brad

I will save you a phone call. Here is my summary

Elon Musk didn’t ‘give away’ any patents. What he said was very legally crafted, namely ‘Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.’

How this works is:

1. He did not define ‘good faith’ – it could mean a company must pay Tesla a reasonable license fee or else. Or it could mean not sue Tesla and give them a free cross-license. or many other things.

2. This statement is not a legal pledge – there is no such thing. That is anyone infringing a Tesla patent could NOT use this statement to reduce their risks of patent enforcement by Tesla against them. That is Tesla, the company, retains the right to enforce its patents. Imagine Musk leaves for example – the next CEO will just say ‘that guy…’

As to why he would do it:

1. Tesla is probably infringing thousands of patents from other automakers without paying any license fees. Because of Tesla’s low sales volumes and potential poor publicity none of them have sued Tesla yet. This will give them another reason not to. Nice move

2. There is a fair bit of ‘patent troll’ activity emerging in the auto space and Tesla is fairly exposed to this as a small company without too many legal and financial resources. Musk’s patent play might be seeking the public goodwill in this regard but it won’t make any difference to the trolls. If Tesla’s cars infringe a patent then they should pay a license fee or settle (end of story).

3. I feel that Tesla Motors is a daft company anyway. Car technology is over 100 years old. It is one of the most complex and expensive areas of technology to get into that one could imagine. Doing a start-up in this space and trying to get the company to scale is Quixotic on a grand scale…my guess is that they just cannot get volumes and profitability to where they need to be in order to get scale and thus get costs under control. So they either stay as a low volume exotic niche player whereupon the industry, when it sees fit, will just roll over them. Or they try and promote an ‘open-source’ play where competitors get ‘free’ access.The big guys aren’t going to fall for this – they will just take their time and do it right, their way. However there may be little car companies in say China who pick up the opportunity – who knows if Musk can get a handful of niche companies using his technology then he may be able to get his supply chain up to volume and down the cost-curve.

4. Which brings me to batteries. The batteries cost way too much. The only way to solve this problem is to build the battery Gigafactory that Musk is pitching to investors. This gets production to scale and brings the costs of batteries down. The trouble here is that Musk probably can’t build a viable business plan on even the most optimistic version of growth in Tesla’s sales. So he has needed to pull a rabbit out of the hat and say there will emerge another dozen or so manufacturers of similar cars due to his ‘open source’ plan and all them will buy batteries from the Gigafactory.

Where this ends nobody knows. Tesla’s survival seems quite improbable and my guess is that it will get picked up by one of the larger automakers at some point probably at a medium loss to its initial investors, if they haven’t already bailed. Musk may be planning to sell Tesla motors but hang onto the battery business if he can get it financed. The battery business is a much better business – the key component that one can focus on and corner the world market rather than the horribly complex business of building a whole car in a terribly competitive environment – it takes at least $1b to develop a new car model – you need a lot of sales to justify this.

So in summary I think the play here for Musk is to get the battery adopted as the ‘standard’ for all electric cars so he can milk that. I think the guys that run the large auto companies are some of the smartest people on the planet and they will only let this happen if there is no opportunity for someone to gouge that opportunity, i.e. Musk has no chance to do this.

Another aspect of all this that I found interesting is the emergence of the ‘anti-patent’ types – I read the blog on Tesla’s website after he made his announcement. It was mostly supportive and rabidly so.

1. There were some that were simply anti-establishment and also hate fiat currency, gun control, all government controls, etc – these guys would hate anything.

2. Then there were all the ‘open source’ techies that have this belief that patents block innovation. This attitude could only emerge amongst software engineers where there is virtually no requirement for R&D. They have never had to struggle to get funding to do the R&D so they don’t understand the ROI offered by patents that allows their R&D to get funded. Their views are like those of selfish children who don’t like being told ‘no’ – they want to be able to write any code regardless of third party patent rights.

3. Then I suppose there were bunch of people that read magazines on the web that do not have a clue what patents are and on balance and without any insight whatsoever have decided we would be better off without them. Simply deluded and ignorant.

What this did point out to me is that there are no ‘lobby groups’ for the patent industry trying to take control of the uninformed and mostly misinformed public discourse on the subject. Which is why Musk can get away with his banalities.

cheers
Ian”