Thursday, August 28, 2014

Tesla is freeing all of its patents. Here's why that's not crazy.

A Tesla car recharging Ambient Images/UIG via Getty Images

The electric car-maker Tesla has announced it's setting its patent portfolio free, saying that it "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." CEO Elon Musk says he's become less worried about competitors stealing his technology than about electric cars not being adopted at all:

Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.

The standard economic argument for patents assumes that without them, new inventions will be quickly imitated by competitors, destroying the ability of the original inventor to turn a profit. But if you look at the history of actual inventions, this is often not how things work out.

In practice, the biggest challenge many inventors face isn't fending off copycats, it's developing a market for the product in the first place. For major inventions, the potential market is usually much larger than the first few firms can hope to serve. The challenge is converting all those potential customers into actual customers. In a new industry, competitors can actually help with this by helping spread news about the invention, pioneering better sales techniques, and developing improvements that make the product more attractive.

For example, Alexander Graham Bell got his telephone patent in 1877, but the telephone was still a niche product when the patent expired in 1894. What brought the telephone into the mainstream was a proliferation of independent telephone companies that entered the market after 1894. AT&T focused on selling the telephone to businesses in big cities like New York. Independent phone companies helped bring the telephone to home customers and people in smaller cities.

Similarly, the modern movie industry wasn't really created by Thomas Edison, who tried to use his early motion picture patents to create a movie monopoly. Rather, it was pioneered by renegades who fled to the West Coast to escape Edison's lawyers. Edison's company focused on showing short films as novelty items. It was the independents in Hollywood who realized that the technology's real potential was for feature-length films.

Patents also hindered the development of the early airplane market in the United States. After the Wright brothers got a broad airplane patent, they began threatening their leading competitors with patent lawsuits. This litigation was a huge distraction that limited the development of the industry. The situation that was only resolved in 1917 when the federal government pressured the rivals to enter into a patent-sharing agreement so they could focus on developing airplanes for military use.

This isn't to say patents are always counterproductive. There are some categories of innovation, such as pharmaceuticals, where it really is easy to quickly copy a new product and undermine the market for the original. But in many industries, patents slow technological progress without even providing much benefit to their owners.

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