Creating Value by Sharing Intellectual Property
Creating Value by Sharing Intellectual Property
Open-sourcing IP, under the right conditions, can lead to increased value creation, as exemplified by Tesla, Toyota, and Levi.
“Open-source intellectual property” might sound like an oxymoron, but it refers to legally protected, proprietary technologies, trademarks, and other intangible assets being offered to the public for use without the threat of suit. Because companies spend significant resources to develop their intellectual assets, they traditionally protect these assets from the public and competitors to ensure a healthy return on their investments. Common forms of intellectual property (IP) protection include patents, trademarks, and copyrights. Furthermore, companies often use internal security measures to prevent public access to their trade secrets. In recent years, however, several companies have broken tradition by making their IP available to the public and, interestingly, to their competitors. Tesla, Toyota, Levi Strauss & Co., and Nike are among the more prominent companies to open-source their patents and trade secret processes.
This article investigates reasons why these companies have open-sourced their IP and explains how open-sourcing, under the right conditions, can lead to increased value creation.
The Automobile Industry
Automotive companies are now sharing some of their patents with competitors. For example, in 2014, Tesla announced that it would not seek damages for infringement of its patents relating to proprietary electric car battery designs. In a blog post, Tesla CEO Elon Musk explained, “We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.”1
Two years later, Musk still claims that sharing patents will foster further innovation and progress, and generally advance electric vehicle design and adoption. In fact, it is widely believed that Tesla’s open-source initiative — which provides free access to the company’s patented technologies — is a move to standardize and expand the electric vehicle industry. By creating battery design standards and sharing its technologies, Tesla is demonstrating its confidence that electric vehicles will gain the traction necessary to compete on a wider scale with vehicles that run on fossil fuels. Tesla is banking on this combination of early innovation, commercialization, and open-sourcing in order to secure a competitive advantage in the automotive industry. With increased competition in the market, the infrastructure (e.g., charging stations, battery trade/replacement centers) to support electric vehicles will expand, thereby relieving Tesla of its role as the sole bearer of the infrastructure burden.
In 2015, Toyota followed Tesla’s example, open-sourcing its own patents pertaining to hydrogen fuel cell technology. Toyota executive Bob Carter shared sentiments similar to Musk’s: “At Toyota, we believe that when good ideas are shared, great things can happen.”2 Like Tesla, Toyota seeks to sell alternative fuel vehicles. For example, some of Toyota’s patents are designs for hydrogen fuel cells that produce zero emissions. By making these designs available to other auto manufacturers, Toyota lowers the barrier to entry to the hydrogen-powered vehicle industry, essentially promoting the industry’s expansion. Like Tesla, Toyota is open-sourcing its technologies to establish itself as a technology leader for hydrogen-powered vehicles.
The sharing of technologies is not unprecedented in the automotive industry. More than 50 years ago, Volvo shared its design for the three-point seat belt, which soon became a standard safety feature in all passenger vehicles.3 Volvo claims that more than 1 million lives have been saved because the company waived its patent rights.4 As a result, the Volvo brand has become synonymous with safety.
The automobile industry is an interesting case study in understanding the motivations and resulting effects of open-sourcing IP. Generally, the auto industry is considered “extremely competitive,” with “highly differentiated” products.5 Companies protect their competitive advantages through patent filings that exclude competitors from adding certain features to their vehicles. In essence, IP protection measures are pivotal to auto manufacturers’ ability to differentiate their products. As Volvo proved — and as Tesla and Toyota may end up proving — innovative companies can gain advantages by making certain key technologies and products available to all players in the market.
Tesla’s and Toyota’s open-source patents cover early-stage technologies in relatively small segments of the broader automotive market. Tesla’s electric vehicle battery technologies and Toyota’s hydrogen fuel cell have not been developed to the point that they can be considered commercially viable alternatives to gasoline for the large majority of consumers. As a result, the market shares for these nascent segments in the auto industry are at an inflection point where, without additional investments, these alternatives might never be fully developed. Both Tesla and Toyota want to ensure that their technologies reach their full potential, so they have lowered the barrier to entry by removing the monopolies they have in the electric and hydrogen segments, respectively. As competition — and therefore innovation — increases, these companies believe their technologies will be more likely to experience widespread adoption. Such first movers in the alternative energy auto segment, by virtue of their innovation, are well-positioned to reap a larger share of the growing market than are any competitors that use these open-source technologies.
Tesla and Toyota hope to gain the goodwill, positive publicity, and brand loyalty that innovative automakers, such as Volvo, have enjoyed. These two companies hope to realize such benefits by proving they are pioneering, eco-friendly automakers. If the electric and hydrogen-powered vehicle industries expand to the extent that Tesla and Toyota anticipate, these companies, simply by open-sourcing their IP to competitors, will firmly cement themselves as leaders within their respective markets and unlock otherwise-unrealized value.
The Apparel Industry
Like the automotive industry, the apparel industry has recently open-sourced IP to competitors. The apparel industry, however, is not sharing patented technologies as a way to stimulate market growth. Instead, several apparel companies are sharing their trade secrets and proprietary operating tools in an effort to improve their manufacturing processes and decrease their environmental impact.
Earlier this year, Levi Strauss & Co. (“Levi Strauss”) began sharing its manufacturing trade secrets for a high-efficiency denim treatment that saves a significant amount of water during production of the denim used to make jeans and other apparel.6 These trade secrets have enabled Levi Strauss — an established first mover in the denim industry, thanks to its environmentally conscious practices — to save more than 1 billion liters of water by reducing by up to 96% the amount of water it uses in garment finishing.7 Although Levi Strauss has a significant competitive advantage over other denim and clothing manufacturers, it has chosen to share its trade secrets for the greater good of the industry. Not only do Levi Strauss competitors save on costs, but the industry’s overall environmental impact is lessened. So while Levi Strauss enjoys the savings realized through its trade secrets and continues to market its products as environmentally friendly, its competitors are simply catching up by changing their processes.
In general, trade secrets are considered valuable only when they are kept secret, so companies such as Levi Strauss do not typically share their proprietary manufacturing techniques and processes. By open-sourcing its trade secrets and making them publicly available, however, Levi Strauss has generated value from a marketing perspective, which is realized through the goodwill associated with selling environmentally friendly products.
Sustainability efforts have benefited other apparel companies too. In 2010, Nike launched its Open Innovation initiative through its Environmental Apparel Design Tool.8 According to a press release from Nike, the tool “aims to accelerate collaboration between companies, fast-track sustainable innovation and decrease the use of natural resources like oil and water.”9 The Environmental Apparel Design Tool was created to enable designers to predict, in real time, the amount of resources required to manufacture clothing styles and designs. It links the design process directly to operations, allowing for the creation of optimal, sustainable designs. Nike welcomed its competitors to improve on the tool, clearly demonstrating the company’s commitment to the open-source aspect of its Open Innovation initiative. Following the success of the open-sourcing of its Environmental Apparel Design Tool, Nike announced in 2011 that it would share its Footwear Design Tool, Material Assessment Tool, and Water Assessment Tool.
By open-sourcing these tools, Nike is sharing valuable assets it developed internally to improve its own manufacturing processes, much like Levi Strauss has done. Nike is willing to back an altruistic mission in order to generate goodwill with its customers, despite the fact that this mission benefits competitors. It comes as no surprise that Nike, whose marketing campaigns have contributed a great deal to the company’s growth, is converting its IP into valuable marketing. By doing so, Nike is further differentiating itself and its products from its competitors and their products.
By positioning themselves as innovators of environmentally conscious apparel, Levi Strauss and Nike are elevating their images, even though their competitors are benefiting directly from these companies’ trade secrets. Because Levi Strauss and Nike have made sustainability a priority, they are enjoying increased overall market share in their respective apparel segments.
Major players in both the automotive and the apparel industries have made the rational, intentional decision to open-source their patents and trade secrets. Companies that operate in evolving, technology-based industries, such as the automotive industry, are lowering the barrier to entry as a means to inspire growth. In the apparel industry, companies are open-sourcing their environmental sustainability initiatives in order to increase goodwill and bolster their consumer reputation. As Tesla, Toyota, Levi Strauss, and Nike have shown, open-sourcing IP, under the right conditions, can be a viable IP strategy that can unlock value that would otherwise not be realized.
- “All Our Patent Are Belong To You,” Tesla Motors, June 12, 2014. https://www.teslamotors.com/blog/all-our-patent-are-belong-you. See Tesla Motors Patent Pledge for a list of IP covered in Tesla’s open-source initiative: https://www.teslamotors.com/about/legal#patent-pledge.
- “Like Tesla, Toyota Is Now Giving Away Its Patents,” Business Insider, Jan. 5, 2015. http://www.businessinsider.com/like-tesla-toyota-is-now-giving-away-its-....
- Volvo website, accessed July 2016; http://www.volvocars.com/intl/about/our-company/heritage/innovations.
- “Car & Automobile Manufacturing in the US,” IBISWorld Industry Report, March 2016, p. 8.
- Huffington Post, “Why Levi’s Is Giving Away Its Trade Secrets,” March 23, 2016.
- Levi Strauss & Co. press release, March 22, 2016.
- “Nike’s Open (Green) Innovation,” Harvard Business Review, June 23, 2010; Nike news release, November 29, 2010: http://news.nike.com/news/nike-releases-environmental-design-tool-to-industry.
- Nike news release, November 29, 2010: http://news.nike.com/news/nike-releases-environmental-design-tool-to-ind....
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