Giving up IP

What is the role of IP as a competitive differentiator in a world of data and platforms — the interesting case of Tesla.

The information age is often associated with the “knowledge economy” or a “marketplace of ideas.” It can be counterintuitive that intellectual property (IP) is less a source of competitive advantage now than it was in the industrial age, but the information age is characterized by an abundance and free flow of information (as capital), not hoarding and protection.

Consider Tesla: In June of 2014, CEO Elon Musk announced in a blog post (“All Our Patent Are Belong To You”) that the company was taking a new approach to IP, “in the spirit of the open source movement”:

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.

Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world’s most talented engineers.

Even if Tesla’s flagship products are automobiles—emblems of the industrial age—its value is predicated upon principles of the information age. In this mode, power is exercised not through vertical or horizontal integration—as in the industrial mode—but by nurturing and leading new ecosystems. It’s in Tesla’s interest to facilitate an open flow of information regarding the core technology, to encourage new entrants and bring about the popular adoption of electric vehicles. Tesla is hoping that these new entrants rely upon their R&D to make EVs of their own, thus reinforcing Tesla’s position as a leader in the field. This drives the enthusiasm of investors and talent, perpetuating the cycle.

Tesla is approaching this emerging industry as a synthesis of vehicles and their energy infrastructure. This informs the strategy around their “Gigafactory”—a lithium-ion battery manufacturing plant with a greater capacity than all those that currently exist—and their network of roadside supercharger stations, to say nothing of the alignment with Musk’s SolarCity, or adjacent developments in autonomous fleet vehicles. Musk discussed some details of this strategy during a press conference in September 2015

Our Supercharger network is not intended to be a walled garden… It’s intended to be available to other manufacturers if they’d like to use it. The only requirements are that the cars must be able to take the power output of our Superchargers, and then just pay whatever their proportion their usage is of the system. We’re actually in talks with some manufacturers about doing just that, and it will be exciting to share that news.

This grand ambition beyond EVs sustains the enthusiasm of investors and talent and, in turn, such rapid development that IP becomes irrelevant. Ben Thompson, in his Stratechery blog, refers to this strategy as “commoditizing your complements.” He provides several Silicon-Valley examples, including the Open Compute Project, a Facebook-initiated independent trade group for the design of data-center hardware:

One of the many areas where Google leads the entire industry is in its back-end infrastructure, the vast majority of which Google has custom-built for its purposes. Facebook, instead of trying to directly compete with Google in a space where they were at a massive disadvantage, instead open-sourced the problem of building data centers at scale, a move that has paid off with innovations contributed from companies like Microsoft, Apple, and HP, along with a significant decrease in prices for core components thanks to increased competition on the manufacturing side.

Facebook's biggest differentiator, particularly relative to Google, is its data. Competing on any other vector is both a direct waste of time and resources and an opportunity cost in time and resources not spent in exploiting Facebook's data advantage.

Thompson draws parallels to recent moves from Google (open-sourcing TensorFlow, their machine learning software library and, previously, the Android OS source code), Apple (doing the same with their Swift programming language), and Microsoft (with Chakra, an important component of their web-browser technology). These companies must develop an expertise that is deep as their intended market is wide. When that market is so vast as to include the entire global population—as in the case of Google and Facebook—they must be ruthless in the degree to which they reclassify, commoditize, and shed complementary functions.

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