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Summary

  • Musk recently announced that he is opening Tesla's patent portfolio.
  • The electric car market has remained barely a niche.
  • Tesla may well need broad industry support if it is to flourish.

When Tesla Motors (NASDAQ:TSLA) CEO Elon Musk announced that he was opening the company's entire patent portfolio to anyone who asks, it was difficult to fathom such a bold move making any sense from a business perspective. During a period when patent litigation has become standard operating procedure for most technology firms, this decision is a significant departure - the one condition of using Tesla's patents is that the recipient agrees to forgo any courtroom battles. Others, however, see the genius in the decision and have said as much; even the New Yorker spoke up in defense of the open source mentality. The question now for investors is to determine how the move will impact the near and long term position of the stock.

So What's He Thinking?

Musk boils down the decision into a fair straightforward proposition, "If we can do things that don't hurt us and help the U.S. industry, than we should do that." The idea is that by opening up the electric car market, and allowing other companies to participate, that market can grow and support Tesla's efforts. The most obvious support needed is in terms of charging stations across the country. While the Tesla Model S is capable of traveling 265 miles on a single charge, it is still limited. Overall growth in the industry is more likely to lead to such charging stations, particularly if some of the larger automakers get behind the trend.

The Nissan (OTCPK:NSANY) Leaf, for example, has a range of only 84 miles. With companies like Ford (NYSE:F), and Chevrolet,which has the Volt, and others working on electric car technology, if Tesla can benefit the entire industry, electric cars can become more than an odd alternative. In Musk's words, "If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." Musk is taking a gamble that support for a potentially huge industry is the right call.

But Is It Insanity?

In the same blog in which he announced the move, Musk further explains why Tesla secured its 203 patents (280 additional patents are pending), and why this move makes sense to address the carbon emissions issue and encourage others to follow:

We felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla. We couldn't have been more wrong. The unfortunate reality is the opposite: electric car programs (or programs for any vehicle that doesn't burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than 1% of their total vehicle sales.

With such a negligible percentage of the market going to electric vehicles, Musk recognizes that the industry needs to take hold if Tesla is to survive.

TSLA Chart

TSLA data by YCharts

Investors should keep in mind that while Tesla may be willing to open its technology, those patents are still in place, meaning that licensing agreements will still be required. Tesla is likely to put some limits in these licensing agreements that will give it a measure of protection. It is too early to see how the move will impact the long run development of the market, but it is evidence that Musk is aware of the challenges electric vehicles face. By showing an unusual big picture sensibility, the move should be seen as a positive by shareholders.

It would be naïve to not recognize that the move ultimately weakens Tesla's competitive advantage and dilutes its first-mover status, but being the king of an irrelevant industry is not as favorable as being a major player in one with explosive growth. If Musk can push an electric car revolution that sticks, the move should prove to be the right one.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Elon Musk Releases Tesla Motors Patents: Madness Or Genius?