Tesla (TSLA) just gave away all its patents – and it’s a genius move. The electric carmaker has been in danger of becoming a pioneering company in a small niche of the automobile market. No matter how much anyone thinks we should all be driving electric cars, the market for these vehicle has yet to go mainstream; they make up less than 1% of total vehicle sales in the U.S.
The path to building a legendary company is to build a legendary category, and then reign as the category’s king. Tesla CEO Elon Musk realized that. Protecting his patents, he wrote in a blog post, only served “to stifle progress.” To thrive, Tesla needs a robust electric car industry buzzing around it filled with enthusiastic consumers, suppliers and even competitors.
By giving away its patents, Tesla will make it easier for others to make great electric cars. “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform,” Musk wrote.
Some believe this way is sheer insanity – tantamount to giving away the keys to the kingdom. But Tesla is inviting competition and doing what startups from Salesforce.com (CRM) to GoPro to Uber have done: It’s building a new whole new market sector in an effort to dominate it over time.
There’s a precedent in the car business. In 1983, Chrysler created the minivan with the introduction of the Dodge Caravan and Plymouth Voyager; competition exploded soon after. Many auto manufacturers were telling consumers to buy this new product, not just Chrysler. As the hype rose, car buyers could not ignore the minivan; this made more people test drive and ultimately buy these oddly shaped new vehicles (which also happen to have been perfectly timed to the Baby Boomers having kids). Then ta-da! A whole new automobile market sector was created.
And how did Chrysler fare? It still dominates the space with 49% market share a quarter century later, despite stiff competition in the U.S. from Toyota, Honda and Nissan (NSANY).
In Musk’s case, Tesla is using a technology platform shift – from gas to electric cars to build his new category. This is a similar platform that Ford Motor Company (F) founder Henry Ford evangelized with the introduction of the automobile in 1903 by shifting the market from horse and carriage transportation to motor powered vehicles. And it’s a similar approach Salesforce.com CEO Marc Benioff employed to entice customers to move from “on-premise” software to the cloud.
For a platform-shift category creation strategy to work, it takes “co-opetition,” or cooperative competition, where vendors essentially sing the praises of a new approach to convince customers to make the leap of faith required to change both their buying and consumption habits. When this strategy works, massive disruption happens. The old guard often watch in dismay as their kingdoms crumble and new innovative pirates ascend to the throne.
Other entrepreneurial innovators have proven the wisdom of opening up intellectual property to overtake lumbering incumbents. By 1980, the personal computer market was fragmented among numerous proprietary technologies and operating systems. When IBM (IBM) introduced its PC in 1981, it did something that seemed insane: It built a “clone-able” computer using technology bought from others, primarily Intel (INTC) and Microsoft (MSFT). Other companies such as Compaq, Dell and Gateway quickly made IBM knock-offs, and the industry standardized on an Intel/Microsoft platform. Then pow! The massive personal computer market category was born.
More recently, Google (GOOG) made a similar bet with Android. Now Android is swamping Apple’s iOS globally, grabbing 70% of the smart phone market. But more importantly, by open-sourcing Android and giving it away, Google helped the smartphone sector explode in a way that would’ve never been possible if the only option was Apple’s (AAPL) iPhone.
CEOs of legendary businesses take category building seriously. They understand that a bigger total addressable market means a bigger growth opportunity. As a result, they make a conscious choice to build both their company and their category. And they have the confidence that they can out-execute others as competition increases and achieve the dominant position. That’s exactly what Musk just pulled off.
Al Ramadan, Dave Peterson and Christopher Lochhead are co-founding partners at Play Bigger Advisors, a San Francisco-based firm that coaches technology executives to build market-leading companies. Follow us @playbiggeradv
