Musk Applies Contrarian Style to Patents to Boost Tesla

Photographer: David Paul Morris/Bloomberg

Elon Musk, chief executive officer of Tesla Motors Inc. Close

Elon Musk, chief executive officer of Tesla Motors Inc.

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Photographer: David Paul Morris/Bloomberg

Elon Musk, chief executive officer of Tesla Motors Inc.

Elon Musk wants to apply the contrarian style that made him millions of dollars from PayPal and billions from rocket ships and electric cars, to revolutionize the litigious world of patents.

Tesla Motors Inc. (TSLA) became a rarity among automakers when Musk yesterday pledged that inventions on his electric cars and batteries will be free for anyone to use “in good faith.” The move may speed the adoption of technology that Musk needs to make his fledging line of cars more than a luxury niche.

Patents are a trade-off that give companies the right to block others from using a specific technology in exchange for making the idea public so others can analyze and build on it. The alternatives are to keep the technology a trade secret or, as in the case of the Linux computing system, make the information available to everyone. Tesla is adopting a third way -- continue to patent, but let the public use it at will.

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“The more people that use the technology, the more valuable the market,” said Zorina Khan, an economics professor at Bowdoin College in Brunswick, Maine, and author of “The Democratization of Invention.”

The move shows Musk positioning Palo Alto, California-based Tesla for a more open relationship with the global auto industry than the one-off projects it’s had with investors Toyota Motor Corp. (7203) and Daimler AG (DAI) to supply battery packs and motors. He met this week with executives from Bayerische Motoren Werke AG and said he recommended that BMW collaborate by using Tesla’s rapid-charge system and even build its own battery factory.

Photographer: Simon Dawson/Bloomberg

Elon Musk co-founder and chief executive officer of Tesla Motors Inc. Close

Elon Musk co-founder and chief executive officer of Tesla Motors Inc.

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Photographer: Simon Dawson/Bloomberg

Elon Musk co-founder and chief executive officer of Tesla Motors Inc.

BMW met to discuss strengthening development of electric cars, said Kenn Sparks, a spokesman for the Munich-based automaker. He declined to comment on Musk’s patent strategy.

Car Prices

Tesla has more than 160 issued U.S. patents for things like a system to protect battery packs from overcharging and an improved rotor construction in an electric motor, according to the website of the U.S. Patent and Trademark Office.

The biggest potential lies in its battery technology, said Blair Jacobs, a patent lawyer with McDermott Will & Emery in Washington who has represented automakers. The battery is about 40 percent of the overall price of the car, he said. Musk has stated that he wants to develop a Tesla that he can sell for about half the current price of a Model S sedan, and the only way he can do that is to cut the cost of the battery.

Tesla is poised to begin developing as many as three sites for what Musk has called a $5 billion battery “gigafactory.” The company is considering sites in Arizona, California, Nevada, New Mexico and Texas.

Industry Vault

Tesla is looking to have its battery technology used by utilities to help reduce electricity costs. By opening their use to others, Tesla’s inventions could become the de facto standard, and give it the upper hand in selling batteries to automakers like General Motors Co. or Toyota, Jacobs said.

“As others move in to electrical vehicles, they would rely on Tesla technology for batteries,” Jacobs said. “It could be remarkably profitable.”

While Musk’s strategy is not unique to the technology industry -- International Business Machines Corp. (IBM) employed it nine years ago -- it’s an unusual move for automakers. Car companies “traditionally lock their intellectual property in a vault and steal everyone else’s,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.

The other automakers, which have so far treated Tesla as an outsider, may actually be receptive to Musk’s plan, according to Gordon.

Open Source

“They will and should use anything that speeds development of their projects,” Gordon said by e-mail. “‘Not invented here’ makes no sense. They already get much of their innovation from outside their walls -- from their suppliers.”

Neither GM or Ford Motor Co., the two largest U.S. automakers, responded to inquiries about Musk’s announcement. Nissan Motor Co. spokesman Chris Keeffe declined to comment. BYD Co. (1211), China’s largest electric-car maker, “already has the most advanced EV technologies,” said Edward Zhou, a company spokesman.

Taking an “open source” approach can lead to others adding to the technology and cross-licensing, as well as “greater goodwill” and benefits “from the specialized skills of a competitor,” Khan, the Bowdoin professor, said.

Linus Torvalds, who created the Linux computer operating system, made it available for free to anyone. That’s led to its growth, including its role in the creation of Google Inc.’s Android operating system. Google in turn made Android free and found a way to make money from it through mobile advertising. Android is now the world’s most popular operating system for mobile devices.

Common Sense

Tesla is reserving the right to go after infringers in limited circumstances. Musk said his company would use “common sense” in deciding whether to assert its patents -- such as a carmaker that uses the inventions to confuse consumers into thinking the car is a Tesla. It also could strike back should Tesla ever be accused of using another company’s technology.

“Somebody can’t go and use a whole bunch of our patents but then sue us for using one of theirs,” Musk said “That seems like it wouldn’t be a very nice thing to do.”

The 42-year-old billionaire cited the patent battles between Apple Inc. (AAPL) and Samsung Electronics Co. over smartphones and tablet computers as something the car industry should avoid.

“Who’s really benefiting there?” he said. “You’ve got all these depositions and dirty laundry getting aired and it’s a big distraction for the management team.”

U.S. Patents

IBM, which has led the number of U.S. patents issued for the past 21 years, has made patents freely available for open source software, ecological research, and health and education standards. In 2005, it made 500 of its software patents freely available to individuals and groups working on the Open Source Initiative as part of what it said was to be the basis of a “patent commons” for information technology developers.

“The idea generally is that you hope that you will remove some barriers to other companies coming into that space. You lower their cost of operating,” said Manny Schecter, chief patent counsel for the Armonk, New York-based company. “In all cases for us, we weren’t just promoting ourselves, we were attempting to promote a technology, a very broad space.”

Tesla, which saw its stock climb fourfold last year, rose 1.4 percent to $206.42 at 4 p.m. New York time. The shares have gained 37 percent this year.

“Tesla is in the car manufacturing business, which makes them an automotive company, not a technology company,” James Albertine, an equity analyst for Stifel, Nicolaus & Co. who rates the company a hold, said in a research note.

‘Subtle Indication’

Tesla’s announcement is “a subtle indication that management realizes (a) everything related to their build-out cannot be perfect/micro-managed; and (b) if they do not get the vehicles right, then their stance on the environment, retail stores, and infrastructure will ultimately prove irrelevant,” Albertine wrote.

Musk has proven people wrong before. He helped remake online commerce as a co-founder of PayPal Inc. and has more recently shaken up the satellite-launch market with his Space Exploration Technologies Corp. business and the energy industry with SolarCity Corp. (SCTY)

His swath of businesses has given Musk a net worth of about $9.6 billion, according to the latest Bloomberg Billionaires Index ranking of the world’s wealthiest people.

‘Wide-Eyed’

Musk said that while his new patent policy drew “wide-eyed” looks from some Tesla executives, it won’t hurt the company.

While some litigation is a sign of a competitive industry, too much -- particularly by patent owners whose only business is to obtain royalties -- can hinder innovation, Catherine Tucker, a professor at Massachusetts Institute of Technology, said in a study dated May 15.

Some of Tesla’s more recent publicly available patent applications relate to computer-user interfaces and a port to allow for emergency maintenance of a high-energy battery pack. Tesla is on track to have thousands of patents, Musk said.

Business Play

While the company intends to boost deliveries of its $71,000 Model S sedan by more than 56 percent this year, it remains far from Musk’s goal of selling hundreds of thousands of vehicles annually.

Tesla sold more then 25,000 of its electric Model S sedans through the end of 2013, and is aiming to deliver at least 35,000 this year. By the end of the decade, Musk has a goal of expanding sales for the Model S, the Model X electric SUV due in 2015, a new, small sedan and other models to half a million units or more.

At Tesla’s June 3 annual meeting, Musk said too few automakers offer “serious” electric vehicles and pledged to do something about it.

“This is a business play and he also, at the same time, wants to promote the development of electric cars,” Jacobs said. “But it’s in his business interest to do so.”

(An earlier version of this story was corrected to show Musk referred to depositions.)

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net; Mark Clothier in Southfield, Michigan at mclothier@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net; Jamie Butters at jbutters@bloomberg.net Jamie Butters

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