Electric cars have been with us since the end of the 19th century and for a while made good headway competing against gasoline-driven monsters that required hand cranking to start – much like a World War One fighter plane. However, the invention of the electric starter motor, Henry Ford’s mass production techniques and advent of cheap petrol killed the first wave in the early 20th century.

Setting aside the spectacular use of an electric car on the moon in 1971 (the Lunar Rover developed by Boeing), it took until the 1990s for commercial interest in the sector restarted in earnest.

Driven by California clean air legislation and the pioneering research dollars of General Motors and Toyota, the hybrid has become commonplace and the Prius that framed our expectations of how such vehicles should look – much like the hover car from Woody Allen’s classic comedy The Sleeper.

Although the market share of electric or hybrid cars is minuscule, the rate of growth is beginning to look exponential. In much the same way as observers of the human genome project (HGP) called it a failure halfway through (when approximately 1% of the genome had been sequenced), the reality of exponential growth is that this miniscule level of market penetration is actually an indication of success with the real prospect of multibillion-dollar revenues this decade.

If the frequency, number and momentum of patent filings in electric vehicles is any indicator, then this hypothesis feels right as the rate of patent filings reached near exponential status in 2006. 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.

Which brings me to Tesla. Founded in 2003 by Elon Musk, the man who many believe Robert Downey Junior modelled Iron Man’s alter ego Tony Stark on, Tesla made electric cars sexy. The X-type even has gull wing doors, reminiscent of the DeLorean that powered time travel in Back to the Future. In short, Tesla is an innovator and knows how to make beautiful performance cars. However, to put this in perspective, in 2010 Tesla filed 11 patents against Toyota’s 97. While number is not an indicator of quality, it is worth noting that 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, in a beautiful piece of grandstanding that wrongfooted the industry, Tesla made all of its patents available to competitors (www.bloomberg.com/news/2014-06-13/tesla-domingo-schlumberger-intellectual-property.html). 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 (www.ft.com/cms/s/0/3471a06c-f491-11e3-a143-00144feabdc0.html?siteedition=intl). 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 (www.economist.com/blogs/schumpeter/2014/03/teslas-gigafactory).

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 to a commercial advantage, potentially far more valuable in the long run than any enforcement of Tesla’s legal monopoly could hope to generate. Strategically, the future of Tesla now rests on whether the industry adopts and adapts the 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 – the oldest, cheapest and arguably most commercially effective form of IP protection known to man.

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

Chris Donegan

This article first appeared in IAM magazine. For further information please visit www.iam-magazine.com