Iconoclast: Tesla’s Elon Musk

tesla-model-s-redWarning: this is not typical light and frothy Hampton Party Girl fare but sometimes it’s okay to mix it up. Right?
Regular readers know that I recently took a test drive in a Tesla and that I was really, really impressed with the car. I had been curious about this type of locomotion for some time prior to getting behind the wheel, as there were a few years a long, long time ago–early 90s–when electric drive technology was very present in my life, and I’ve been fascinated by it ever since. Anyway, since driving the car I’ve been researching the Tesla and it’s founder, Elon Musk, who was Robert Downey Jr.’s template for Tony Stark in the “Iron Man” movie series. Here’s an interesting article on him that I found this morning. If the link doesn’t work, I’ve cut and pasted the body copy below. Vroom vroom.

http://www.wealthx.com/articles/minisite-post/elon-musk-takes-tesla-back-to-the-future/?utm_source=ZohoCampaigns&utm_campaign=Wealth-X+News+Daily+Email+8+July+2014_2014-07-08&utm_medium=email

Elon Musk Takes Tesla Back To The Future
By Dr Chris Donegan, Managing Director, Fraserburgh
July 4, 2014
Electric cars have been with us since the end of the 19th century and initially made good headway competing against hand cranked petrol engines. However, the invention of the electric starter-motor, Henry Ford’s mass production techniques and cheap petrol killed the first wave in the early 20th century.

Notwithstanding the Lunar Rover developed by Boeing in 1971, it took until the 1990’s until commercial interest in electric cars restarted in earnest, driven by California clean air legislation and the pioneering research of General Motors and Toyota. The hybrid has since become commonplace and it was the Prius that established the look and feel of eco-friendly electricity cars, like low-tech science fiction.

Although the market share of electric or hybrid cars is minuscule, the rate of growth is not. The implication of this growth rate is that todays minuscule level of market penetration does not rule out multibillion-dollar revenues within this decade. A good analogy here is the human genome project (HGP). Observers called HGP a failure halfway through its 13 year life (when approximately only 1% of the genome had been sequenced). However, growth thereafter was exponential as technical solutions generated in the first five years were rolled out and scaled up. The R&D effort moved from “R” to “D”.

As an indicator of this, the rate of patent filings in electric vehicles started to look exponential in 2006. Perhaps unsurprisingly, Toyota dominates the area with more than 40% of all patents, as well as some less well-known companies such as Paice, which holds four of the top 10 patents in hybrid technology (now licensed to Toyota and others). These patents define the fundamental inventions that underpin electric vehicles and provide the technical platform for an industry to grow.

Which brings me to Tesla.

Founded in 2003 by Elon Musk, (the man that Robert Downey Jr modelled his portrayal of Tony Stark on), Tesla has made electric cars sexy. Musk has noted like Steve Jobs before him that design is critically important to build a new market, changing the imperative to buy an electric vehicle from “save the world” to “be cool”. The Tesla X-type even has gull wing doors, in homage to the DeLorean that powered time travel in Back to the Future. Lacking a flux capacitor Tesla is an innovator in battery technology and its beautiful performance cars charge quickly. However, to put this innovation in perspective, in 2010 Tesla filed 11 patents against Toyota’s 97. While number is not an indicator of quality, there were 483 patents filed in 2010, so Tesla were approximately 2% of the market.

Armed with its small but valuable (160) patent portfolio, on June 13 2014, a few months after its first profitable year, Tesla made all of its patents available to competitors . This move had several effects, notably the stock traded up as the market applauded the chutzpah of the move (while simultaneously trying to understand it), and a number of major manufacturers such as BMW and Nissan instantly proposed “talks” to form partnerships. Musk’s genius was to present this as an altruistic move for the benefit of mankind, while obscuring the land grab that his astute patent strategy enabled.

Simply put, Tesla is sub-scale compared to its competition and while it produces really beautiful performance electric vehicles, its reach is limited. By making its technology – particularly the innovative supercharging stations – widely available, however, Tesla has an opportunity to become the market standard in areas where it has real leadership. If other manufacturers adopt Tesla technology, the addressable and executable market for Tesla itself is multiplied manifold. Or, in other words, a rising tide raises all boats – and Tesla’s more than others. If other manufacturers do choose to adopt Tesla battery technology, its much-hyped “Gigafactory” may ultimately become the supplier to the entire industry.

As one of the first to recognise the value of PayPal (he merged his company Xcom with its parent), it is not surprising that Musk is bringing the business and IP strategy of the tech world to play in an automotive industry that does not understand these rules. The “application programming interface” strategy of creating a platform that catalyses others to innovate around your technology by giving them unfettered access is well trodden in the tech world. Pioneered by Salesforce.com, Apple and Facebook, it is now the holy grail for tech companies: how to excite the long tail of developers to build an ecosystem around your core technology.

The stock market has traditionally struggled to grasp the value of patents in market value or earnings per share terms. Since 2009, there have been a number of landmark events that have highlighted the value of patents, notably the buy-out of the Nortel patents, acquisition of Motorola Mobility, collapse of Research in Motion, the smartphone wars and and the pharmaceutical patent cliff wiping billions of market capitalisations. This has taught Wall Street that patents matter. However, Musk is now revealing a subtler aspect of IP strategy for the market to figure out.

By making Tesla’s patents available to the industry, Musk has made a powerful, risk-all strategic play – a play that he would not have been able to make without carefully and methodically building the IP portfolio brick by brick in the first place. The position for any would-be competitor in the electric vehicle space is now clear – why invest millions of R&D dollars and waste valuable, over-stretched resources developing alternative technologies when a viable, working solution is available off the IP shelf?

At a stroke Musk has turned his patent portfolio from being a legal problem (how to defend it) into a commercial advantage, potentially far more valuable in the long run than any enforcement program. Strategically, the future of Tesla now rests on whether the industry adopts and adapts their technology platform, and how much of that platform actually still resides as confidential know-how and/or trade-secrets not found in any of the patents.

Musk’s strategy is a beautiful case study in why intellectual property matters, but why IP strategy matters more.

If you have questions or comments on this article, please email the writer at chris.donegan@fraserburgh.uk.com

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