The Case for Giving It Away

Elon Musk, the head of Tesla Motors, announced today that his company will not sue others who use Tesla’s technology. Rather than continuing to protect its inventions, Tesla is giving them away.

This isn’t as daft as it sounds. In fact, I wrote about a similar situation in my book on containerization, The Box. One of the factors that limited the growth of container shipping, in the 1950s and early 1960s, is that there was no standard way to move containers. Some had slots at the bottom, so they could be lifted by forklifts. Others had eyes on the top, to be picked up by hooks dangling from a crane. Most had steel fittings at the corners, so that a crane could lower a steel frame, called a spreader, that could grab the container at all four corners and lift it. But the corner fittings and spreaders were patented, and no two companies’ designs were alike. What this meant was that a crane capable of handling a Grace Line container couldn’t lift a container belonging to Sea-Land Service or United States Lines.

Everyone connected with the container shipping recognized that a standard design was essential if the industry was to grow. But each company thought its design should become the standard. Finally, in 1963, Malcom McLean, who had started the modern container shipping industry in 1956 with the ship line that became Sea-Land, agreed that his company would allow anyone to use its patents for the corner fitting and the twist-lock, a nifty little device that connects the corner fittings of two containers with the turn of a handle. The Sea-Land corner fitting became the basis for a worldwide standard. Once any crane in any port could lift any container, the container shipping industry burgeoned. Sea-Land became far bigger and more profitable by giving away its technology than it would have been had it kept its innovations to itself.

This seems to be what Mr. Musk has in mind. Tesla, its stratospheric market capitalization notwithstanding, is a small manufacturer of what is very much a niche product. The company’s long-run prospects are limited unless electric cars go mainstream, but this won’t happen unless they become far cheaper than they are today.  Cost saving is likely to require standardization of many components in electric vehicles. By giving away Tesla’s technology, Mr. Musk may be encouraging suppliers to develop components that can be sold to many electric vehicle assemblers, creating economies of scale. If that happens, costs and prices should fall, boosting sales of electric cars and accelerating the installation of charging stations. Down the road, Tesla could have an important role in a far larger industry, with profits to match.

 

2 thoughts on “The Case for Giving It Away

  1. Priya

    I wonder how this analysis would or would not apply to the ebook industry. Amazon has a proprietary format for ebooks that can only be used on the Kindle, but despite jealously guarding their software and their devices, they’ve managed to create their own ebook “economy of scale” single-handedly. Would they have done better had they used open software? Worse? Why?

    Reply
    1. Marc Levinson Post author

      You make an interesting point. I have no numbers to support the point, but I get the sense that some potential customers shun Kindle precisely because it is proprietary; they prefer to do their reading on a tablet computer or a smartphone, because that leaves them greater flexibility to purchase ebooks wherever they choose. An example more in line with my argument might be Adobe, which gives away one form of its software — a document reader — in order to promote sales of software that creates documents that can be read by that reader. Adobe’s software is ubiquitous, and while I’ve never knowingly paid the company a cent, it seems to make a profit as a result of having created a standard.

      Reply

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