This has been expected for a few weeks now (or a few months, depending on how you look at it), but the EU is now officially getting ready to file antitrust charges against Google. The WSJ has the initial report with very few details:
Europe’s antitrust regulator has decided to file formal charges against Google Inc. for violating the bloc’s antitrust laws, a person familiar with the matter said on Tuesday, stepping up a five-year investigation that is set to become the biggest competition battle in Brussels since the European Union’s pursuit of Microsoft Corp. a decade ago.
This also happens to come out the very same day that the EU's digital commissioner, Gunther Oettinger, has announced that the EU should regulate American internet companies to provide a bigger opportunity for European companies:
The European Union should regulate Internet platforms in a way that allows a new generation of European operators to overtake the dominant U.S. players, the bloc’s digital czar said, in an unusually blunt assessment of the risks that U.S. Web giants are viewed as posing to the continent’s industrial heartland.
Speaking at a major industrial fair in Hannover, Germany, the EU’s digital commissioner, Günther Oettinger, said Europe’s online businesses were “dependent on a few non-EU players world-wide” because the region had “missed many opportunities” in the development of online platforms.
Mr. Oettinger spoke of the need to “replace today’s Web search engines, operating systems and social networks” without naming any companies.
Obviously, the details of the charges against Google matter quite a bit, but, as we've said in the past, it seems odd that technocrat regulators seem to think that they know how to better design a search engine or a social network than the companies who have actually been doing so. Furthermore, the idea that European companies are at some sort of inherent disadvantage to American startups seems disproved by the success of multiple European internet companies, including Spotify and Soundcloud. Those companies didn't succeed by having regulators kneecap their competitors, but by building a better product.
Again, the specifics here definitely matter quite a bit, but given just how "transparent" EU regulators have been lately about wanting to take down successful American internet companies solely because they're successful and American, there are serious questions about the real motives behind this particular antitrust move. And, even worse, they don't seem to realize how a misguided antitrust fight will come back around and harm European internet companies as well, limiting their ability to truly compete.
Like so many other incumbent ISPs, Time Warner Cable has grown all-too comfortable with the lack of broadband competition it enjoys across most of its territory. Some markets are worse than others, usually not-coincidentally directly tied to the level of regulatory capture in a region. In the Carolinas, the company has worked tirelessly to protect its regional monopoly and duopoly, passing a bill in North Carolina (on the fourth try) preventing towns and cities from improving regional broadband. Company execs have also downplayed the rise of gigabit broadband, proudly informing users they don't really want faster, cheaper services.
Now Time Warner Cable is facing the worst-case scenario for a government-pampered duopolist. One, the FCC has moved to pre-empt Time Warner Cable's protectionist law in North Carolina, arguing it hinders the deployment of broadband services in a reasonable and timely basis. Two, Google Fiber recently announced it will be expanding $70, gigabit services (you know, the ones users don't need or want) into Raleigh, Durham and Charlotte sometime in the next year. The one-two punch of regulators thinking independently and increased competition has to be a nightmarish hellscape for company executives.
"Starting this week, customers will receive communications from TWC outlining the first phase of the project as the company begins the process of creating a 100% digital network..."With ‘TWC Maxx,’ we’re essentially reinventing the TWC experience,” said Darrel Hegar, regional vice president of operations, Time Warner Cable. “We will boost Internet speeds for customers up to six times faster, add to our robust TWC WiFi, dramatically improve the TV product and set a high bar in our industry for differentiated, exceptional customer service."
That's on the heels of an AT&T announcement that it would be offering its own $70, gigabit service in parts of North Carolina (it's $110 or more in non Google Fiber markets). Funny how this whole competition thing works, huh? Granted the whole concept of responding to price competition is new to some of these folks, so there's obviously some initial kinks to work out as these companies figure out what the concept means.
For example, Time Warner Cable's 300 Mbps down, 20 Mbps up tier will run you $65 promotional, $108 regular price -- notably slower and more expensive than Google Fiber's symmetrical 1 Gbps, $70 a month offering. Similarly, AT&T's service is very selectively deployed (mostly high-end developments) and the company is only willing to match Google Fiber's price point if you agree to deep packet inspection snoopvertising. Meanwhile, while Google Fiber pricing is generally straightforward, both AT&T and Time Warner Cable still employ a wide variety of obnoxious fees to drive up the advertised price post sale.
That's of course the best part about real broadband competition. You actually have a choice, and can respond to slow speeds, abysmal customer service, net neutrality violations and other shenanigans by voting with your wallet. The downside? Google Fiber's only available in a handful of markets, hopefully putting the onus on other companies to follow Google Fiber's lead and start lighting a fire under the posterior of a broadband industry that's just screaming for some disruption.
Late last year, we wrote about the ridiculous situation in which the state of Utah effectively banned Zenefits, the innovative HR software service provider that tons of companies now use. As we noted, Zenefits came up with a creative way to build a real business by giving away its (really useful) HR software for free: coupling it with an insurance brokering business. You get to use its software for free, and Zenefits also makes it easy for businesses to get insurance and takes a cut of those deals. Zenefits started out by first just building the software, but then realized that it could tack on this business model after it found that most insurance brokers collect huge fees without really doing anything all that useful. So here, Zenefits could provide a more useful service, offer it to companies for free, and have a really successful business model. A win for everyone. Well, except traditional insurance brokers who found it more difficult to compete.
And thus, the Utah Insurance Department, run by former insurance broker Todd Kiser, declared that Zenefits broke a bunch of rules in Utah by daring to give out its software for free. Kiser determined that this violated rules against "inducements" or "rebates." This was from the ruling against Zenefits last year:
Zenefits' providing free software use of its electronic platform and dashboard
violates Utah's inducement and indirect rebate insurance laws. By Zenefits offering clients the
free use of its electronic platform and dashboard, by which employers can control and coordinate
payroll functions and manage tax-related elections; generate tax forms; access FSA, HSA, and
accounts; and administer 401k retirement savings plans and stock options; Zenefits has
created a significant free inducement for clients to purchase insurance products through Zenefits.
This software use is neither part of the insurance contract nor directly related to the insurance
contract. Also, Zenefits connecting of the various HR benefits and insurance together creates
advantages for customers to have a single internet access site to manage all HR and insurance
needs; however, again, because Zenefits does all of this for free, it creates an violating
inducement and indirect rebate for clients to purchase insurance through Zenefits.
Thankfully, Utah policymakers appeared to realize fairly quickly just how backwards and anti-innovation this made the state appear. A bill -- HB 141 -- was quickly produced, modifying the state insurance code to make it clear that software like Zenefits was not considered an inducement or rebate. The bill overwhelmingly passed out of both legislative houses. And, as of this morning, Utah's governor Gary Herbert signed the bill allowing Zenefits to operate freely in Utah once again.
It's good that the state reacted quickly to make this possible, but it still seems ridiculous that it had to get to this stage in the first place. Innovation shouldn't be dependent on incumbents not getting upset and/or having to convince an entire legislative body and executive branch to change the rules just to let you provide a better service that people like.
Over the past few years, we've highlighted how frightened autodealers have absolutely freaked out about the way in which Tesla sells its cars. If you don't know, rather than having a bunch of independent dealers, Tesla sells direct, where you mainly buy via its website. Rather than dealerships, Tesla has showrooms where you can go check out the cars. The pricing is clear and obvious and it's much lower pressure. Dealers have tried a variety of tricks to actually outlaw Teslas from being sold in their states, even arguing that Tesla's website is illegal. Thankfully, most states aren't falling for this, and even the FTC has supported the Tesla way of selling cars.
Apparently, some dealers are finally realizing that if you can't beat 'em by trying to make them disappear, perhaps you ought to compete. Via Jalopnik, we learn of a dealer in Seattle (who owns both a Honda and a Toyota dealership) who has decided to adopt what he thinks is the "Tesla model" for selling cars -- single price, no haggling, no separate finance department whose there to screw you over on the deal terms, and transparency about the loan rates.
What's more, the dealerships have no F&I managers. Salespeople handle the loans. Learning to do that isn't easy, so Miller and Mohammadi have hired contractors to do some paperwork and walk the salespeople through the process.
Prices are fixed, and so are interest rates. Customers who need financing can refer to a chart on the wall, tracing their finger from their credit score to the amount of the loan.
Of course, the story also notes that this shift hasn't been easy. Most of the existing sales staff left as they couldn't deal with this setup, and sales at the dealership dropped significantly -- though they've since rebounded. And, of course, there have been other dealers in the past that have adopted "one price/no haggling" setups, but studies have shown that many customers don't trust such deals, assuming that the "one price" is likely to be higher than they could get by negotiating, even if they don't like haggling.
While I think it's a smart move to try to compete, rather than ban, innovative competitors like Tesla, it feels a little bit like a cargo cult copying situation, where the focus is on copying the obvious superficial aspects of what Tesla is doing, but not the deeper hidden reasons. In Tesla's case, it's a combination of factors that are selling those cars, including the cool factor, the environmental factor and the overall prestige of the car. Hondas and Toyotas, while recognized as reliable, don't have all of those factors. Plus, since the Tesla sales model is for all Teslas, there is no other option, so no one feels that the single price offering is a rip off. That's not the case when a single dealer does something.
So I think it's good that this dealer is looking for a better model, but it's going to involve a lot of experiments and innovating, beyond just copying some of the superficial aspects of what Tesla does.
Imagine if a government put out a series of questions that the public could respond to, garnered responses from across a community, listened to them, and then actually enacted sensible tech policy. Sounds like a dream, right? Well that's exactly what the UK just did.
One major conclusion is that the UK will apply AML (anti money-laundering) regulation to digital currency exchanges, with the details to be determined by the Parliament in the forthcoming session. The US, by contrast, already imposes such requirements on exchanges plus other digital currency companies via FinCEN and the Bank Secrecy Act. The UK government will also work to ensure that law enforcement has the tools it needs to stamp out criminal uses of digital currencies.
But the even bigger part is what's missing: no licensing regime for digital currencies.[1] No arduous process for startups and small businesses. No policies that give an advantage to big institutions over up-and-coming innovators.
In fact, the British government decided that what is most appropriate is to work with the digital currency community to develop a set of best practices for consumer protection and create a voluntary, opt-in regime. This approach was chosen "in order to address the risks identified but without imposing a disproportionate regulatory burden on the industry." And because it recognizes the substantial promise that digital currency technology has to offer, the government will devote GBP 10 million (approximately US$15M) in an annual budget for research in the space, including the newly-formed Alan Turing Institute.
The report reads like a breath of fresh air, with an honest assessment of the current low likelihood of use by major criminal enterprise, and acknowledgements of the risk of regulating too much, too soon. It even summarizes the belief that New York's proposed BitLicense is an overly restrictive approach that could damage the industry.
The UK's approach differs from that of New York in several ways, including that the UK chose to analyze first and propose later. While NY did hold hearings in advance of releasing its regulations, it still to this date has failed to release a summary of its research and rationale for requiring strong digital currency regulation, despite its legal requirement to do so. And New York's regulations require permission to innovate via licensing, whereas the UK's proposal takes a different and far more innovation-friendly tack.
The UK digital currencies report acknowledged that market participants are addressing some of the risks in the space, and singled out exchanges as a special category, instead of New York's overly broad "virtual currency business activity" that encompasses everything from microtipping services to launching a protocol for a new currency. (As an aside, New York has claimed it won't regulate "software developers," but what it actually means is it won't regulate software developers as long as they aren't developing the software covered by its proposed law.)
Some London-based entrepreneurs I spoke to reacted with uncertainty about the effect that overly burdensome anti money-laundering regulations could have, and this is yet to be determined. But in the end, a regime in which one does not need permission to innovate, but instead has a reasonable set of rules to abide by, bodes far better for building the future of technology.
Basically, the UK just became the anti-NY. And the innovation will flock to the places with smart, sensible policies that allow for permissionless innovation.
Patent trolls -- sometimes known more politely as "Non-Practising Entities" (NPEs) -- probably have few fans among Techdirt readers, but there are some who try to justify their activities. Here's how the argument usually goes:
Defenders of patent trolls ... argue that they serve as business intermediaries between inventors and commercializers. While the traditional theory of the patent system is that patents encourage innovation by allowing inventors to exclude competitors from the market and therefore earn supracompetitive returns, a number of scholars have argued that the patent system can encourage commercialization of inventions once they are made by allowing the inventor to control who can develop the technology.
Based on our preliminary evidence, the theory that NPEs facilitate innovation either through the creation of new products or by delivering actual technical know-how from inventors to implementers doesn’t hold water. NPEs almost never actually provide any valuable information to their licensees, and they rarely, if ever, prompt the development of any new products. Licensees are paying for freedom to operate -- the right not to be sued for implementing technology they developed on their own but which someone has asserted will fit within their patent rights. Thus,
the
study
does not support the efficient middleman hypothesis for characterizing the role of NPEs.
That's a valuable contribution to the debate about patent trolls, but the paper offers other insights. For example, it finds that not only do patent trolls not bring about much technology transfer with their patent licensing, neither does anyone else, either:
That doesn’t mean technology transfer doesn’t happen; it does. But it may mean that technology transfer happens early in the life of a technology, and that secrets, collaborations, and informal know-how, not patents, are the primary focus of real technology licensing agreements.
That's an important point. The paper also provides yet more evidence that the 1980 Bayh-Dole Act, designed to encourage the commercialization of research results through licensing, actually turns universities into patent trolls -- something that Techdirt has discussed before. Although the authors suggest that further research is needed to confirm their results, it already seems pretty clear that both patent trolls and Bayh-Dole need to go.
A month ago, I gave a little preview of the news that we, the team behind Techdirt, were launching a new think tank and network of innovators called the Copia Institute. That launch is happening today, with our event in San Jose, and I wanted to just provide a short post on why we're doing this, and why it's so important.
The word "copia" is Latin for abundance -- and over nearly two decades of following, researching and writing about the innovation industries, over and over again, we see that it's the story of abundance. Of an abundance of information, certainly, but also of the role that abundance plays in everything that we do. Businesses, business models and government policies that were all built for a world of scarcity run into trouble when suddenly plopped into a world of abundance. And we see it happening every day. There are the obvious ones that we talk about all the time around here: music, movies, news and software. But it goes way beyond that. A switch from a world of scarcity to one of abundance is going to impact nearly every other industry as well: manufacturing, finance, healthcare, energy and education among others.
The discussions that we've had in the past about the changes that hit music, movies, news and other industries were really only the beginning. The world is changing in very profound ways, and if you view it all through the lens of scarcity, it looks very, very distorted. The arguments over new business models and copyright laws were just a warmup to what is going to impact basically every industry and every society in the next few decades.
Understanding abundance matters. You cannot understand the world we are moving towards if you continue to view it solely on the basis of scarcity.
And thus, we're building Copia -- to bring together people who think about these issues, and who actually want to get together and do something about them, hopefully preventing crazy messes and lawsuits that we've seen in other arenas. Some of this may certainly involve working on policy issues, but there are lots of groups that are already doing that. Our focus, as an organization in the heart of Silicon Valley, will be on what innovators do best: innovating -- but doing so with an awareness of the policy realities. And that means looking for creative solutions that don't always rely on convincing policymakers to make this decision or not make that decision. We expect to be involved and engaged in those debates, but we're really interested in coming up with other, more innovative solutions as well.
For example, nearly 15 years ago, as people were realizing that copyright law was just not built right to function in an internet era where people wanted to share stuff, a group of very smart individuals came up with Creative Commons. These days, as we sit around waiting for Congress to finally tackle patent reform, we see companies doing creative things like coming up with an Innovator's Patent Agreement to avoid patents becoming tools of trolls. Tech companies came together to create a Defensive Patent License, and you even have companies like Life360 offering free legal support to any startup sued by the same troll that sued it.
These are creative solutions that involve innovation. They don't solve everything, and those working on them still -- quite reasonably -- support policy changes as well. But we need more discussions about creative solutions that don't involve just sitting around and waiting for policymakers to do their thing. We need to bring together the people who understand how the world is shifting, from one where everything was scarce to one where many things are abundant -- and to look for ways to harness that abundance to create more good in the world, rather than to lock it down under rules of artificial scarcity just to make it conform to the way things used to be. That's why, at our inaugural summit, we're discussing a diverse range of things from health data & ethics to privacy to 3D printing to the blockchain to copyright, patents and freedom of expression.
That is what Copia is about. It's about looking at the world through these eyes of abundance. It's not about ignoring the policy world, but working closely with it -- to better understand the impact of the decisions those in government make, and to help guide them along more reasonable paths that embrace and (even better) enable more abundance.
Research into why Silicon Valley became Silicon Valley suggests that it is the free exchange of ideas and information -- brought about through a historical quirk of California state policy that outlawed non-compete agreements -- that resulted in all of this innovation. That sharing of information (an abundant resource) has created so much innovation already. Copia is about continuing that trend, bringing together people to share ideas and come up with creative and innovative solutions to a variety of challenges -- technology, business model and policy -- to see what we can do to help the world transition into greater abundance and less scarcity.
As we make this journey, we expect you, our loyal community at Techdirt, to come along and be a part of the process. We'll be using the discussions on Techdirt as part of this effort, to drum up interesting and unique ideas, new research, new tools and new inspiration. It will be an adventure into the world of abundance.
We'd also like to thank the sponsors that made this launch possible, starting with the MacArthur Foundation, which provided a grant that is enabling us to start this work. We're also thankful for sponsorship from four of the best, most well-respected venture capital organizations in the world today: Union Square Ventures, Andreessen Horowitz, Foundry Group and Spark Capital. Finally, four technology companies have sponsored Copia as well: Google, Automattic (Wordpress), Yelp and Namecheap. We should have additional sponsors to announce soon as well. We're especially excited about the mix of sponsors from different areas. What we're putting together is not a trade group, or an advocacy organization, but rather a group of people focused on innovating and bringing more good into the world through creative means.
* In case you don't get the title reference, click here.
California, the state that prides itself as the birthplace of modern technology and whose policies such as the unenforceability of non-competes contributed substantially to the innovation ecosystem, recently proposed a law that requires innovators to get permission from the state, or be banned.
Last week CA's State Assembly announced AB 1326, a bill that would ban any unlicensed bitcoin or cryptocurrency business activity. It would "prohibit a person from engaging in this state in the business of virtual currency, as defined, in this state unless the person is licensed by the Commissioner of Business Oversight or is exempt from the licensure requirement." Banks, financial institutions, and governments would be exempted under the law, making it even harder for a startup to compete. Worse yet, the bill doesn't even define what "the business of virtual currency'" means, making it both overly vague and counter to the very nature of the trustless, permissionless innovation that bitcoin and blockchain technology enable. So right now, if you're building multisignature technology to better enable people to secure their bitcoin, or developing an open source peer-to-peer remittance app that connects users to send each other bitcoin, the state of CA could very well ban you from operating unless you've received a license.
So for the next wave of entrepreneurs building technology in the bitcoin or blockchain space, the state is poised to say that in order to start your company or release your technology, you must pay $5000 for a license and tens or hundreds of thousands in legal and compliance fees, not to mention requirements such as informing them of your educational background and 10 years of past addresses. That might be awkward for the 21 year old college dropouts working on a cryptocurrency startup. And of course there's no guarantee the state will actually grant the license, or shall we say, permission.
I wrote last summer about the problematic approach that NY state is taking with its proposed BitLicense, an attempt to make virtual currency entrepreneurs demand permission from the state to innovate, and how the even greater danger was that other states would follow suit. I expected a more innovation-friendly approach from California, but this bill may prove me wrong.
The cryptographic technology behind bitcoin itself has tremendous potential to enable more transparency (proof of solvency, real time continuous auditing), and security (multisig, threshold encryption), providing compelling solutions to public policy concerns that licensing regimes only attempt to address. The assumption that the analog-world model of licensing must fit this new and fast-evolving space is ignorant at best and dangerous at worst.
California can and should do better. It can craft policies that enable entrepreneurs to innovate and encourage them to implement good practices on security and consumer protection without requiring licensing and permission. And if California won't do it, there are many other jurisdictions that will. Australia, UK, and Singapore, to name few, are all looking to implement policies to be the crypto Silicon Valley.
Tomorrow, I and others will be discussing the development of cryptocurrency and blockchain policy at the Copia Inaugural Summit. The future viability of this important ecosystem depends on getting it right -- so we need everyone to make themselves heard as the debate moves forward.
Like many folks, I'm dreading the seeming inevitability of a Clinton-Bush presidential campaign next year involving Hillary Clinton against Jeb Bush. I'm 40-years-old and half of my life has involved a Clinton or a Bush in the Oval Office (and it's even worse if you count Vice Presidency). Both seem completely out of touch with the real issues of today. Instead, both are so surrounded by political cronies and yes-men that it's difficult to see either candidate as being willing to actually take on the real challenges facing the world today. Clinton is currently dealing with the fallout from her decision to expose her emails to spies while shielding them from the American public. And Jeb Bush is now spouting pure nonsense on net neutrality.
Bush's comments aren't surprising, because despite Democrats and Republicans alike both strongly supporting net neutrality and those who truly understand the details favoring these rules, in Washington DC, net neutrality is a partisan issue. The reason almost certainly has to do with campaign finance. Splitting an issue down partisan lines makes it an issue that politicians can raise money around. Things that everyone agrees on aren't useful for fundraising, and since politicians these days need to spend half their time fundraising, politics gets distorted pretty quickly.
But Bush's comments are particularly clueless, trotting out both debunked talking points and clear misstatements that appear to have been fed to him by the broadband players.
“The idea of regulating access to the Internet with a 1934 law is one of the craziest ideas I’ve ever heard,” he said. It was the first time Bush had weighed in on the subject since the FCC voted.
“Just think of the logic of using a 1934 law that was designed when we did have a monopoly for wireline service as the basis to regulate the most dynamic part of life in America,” Bush said. “It’s not going to be good for consumers. It’s certainly not going to be good for innovation.”
Except, you know, that's not true. The 1934 Telecommunications Act was rewritten in 1996by Republicans, who set it up this way with a clear plan for broadband to be covered by Title II. As Tim Lee at Vox recently explained:
The awkward thing about this is that the rules were drafted by a Republican Congress in the 1996 Telecommunications Act. In that legislation, Congress created two legal categories for online services: a low-regulation category for online services (known unimaginatively as Title I) and a high-regulation category for companies that provide basic infrastructure (called Title II).
When telephone companies began offering broadband access using a then-new technology called Digital Subscriber Lines, it was widely accepted that Title II — the stricter regime designed for basic infrastructure — would apply. After all, telephone companies had been governed under Title II for decades before that. Title II rules had ensured that telephone companies didn't strangle the burgeoning market for dial-up ISPs, which provided internet access over telephone lines.
But Bush trots out the 1934 argument in a totally misleading way. And yes, in 1934 there was a monopoly for wireline service, but in 1996 when the Act was rewritten (again, by Republicans), there was actually a lot of competition in the ISP business thanks to line sharing. Yet, today, everyone knows that there's basically no competition. While not a monopoly, it's at the very least an oligopoly with very little choice for most consumers.
Furthermore, the rules are pretty clearly just basic rules to prevent anti-consumer behavior by the ISPs. How that's going to be "bad for consumers" is hard to fathom. And considering that many of the most innovative internet companies have come out strongly in favor of net neutrality, it's hard to see how it's going to be bad for innovation. You can't even argue that it's going to be bad for broadband companies either, since many independent broadband providers, like Sonic.net, have come out in favor of the rules. As we've noted in the past, it's only bad for broadband providers that want to treat customers badly.
So, does Jeb Bush really think he understands internet innovation better than all these internet companies that have pointed out how the new rule is helpful to innovation?
Is Jeb Bush giving a giant middle finger to internet innovation? That hardly seems like a good campaign move.
But, apparently, Bush not only is doing that, he's also going to totally misrepresent others to do so:
Bush said that Netflix and other backers of net neutrality are already regretting the scale the FCC’s action. “There is no support for this now,” Bush said. “The people who were concerned about this, the content providers like Netflix and others, have now disowned this.”
That's just hogwash. There's massive support for this, which Bush would have noticed if he actually paid attention to the internet, which celebrated when the rules were approved. Anti-net neutrality folks have seized upon an out-of-context statement from a Netflix exec claiming that it would have been preferable to find another route -- but that's not disowning the rules. We've been among those who have pointed out for months that reclassifying under Title II was simply the best of a bunch of not great solutions. Yes, it would have been better to have something even cleaner than reclassification, but that option was not on the table.
Restrained rules, based on Title II, are a perfectly reasonable solution to stopping broadband providers from implementing anti-consumer practices. The only "innovation" it may harm is the broadband guys innovating new ways to screw over consumers and successful internet companies. If Jeb Bush is looking for support from the most innovative sector on the planet, spewing lies and misrepresentations about key issues for the internet world seems like a piss poor way to go about it.
We've written a few times about Elon Musk and Tesla's decision to open up all of Tesla's patents, with a promise not to sue anyone for using them. We also found it funny when some reacted to it by complaining that it wasn't done for "altruistic" reasons, but to help Tesla, because of course: that's the whole point. Musk recognized that patents frequently hold back and limit innovation, especially around core infrastructure. Since then, Musk has said that, in fact, rivals are making use of his patents, even as GM insists it's not.
However, as some may recall, when Musk made the original announcement, the terms of freeing up the patents were at least a little vague. It said that Tesla "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." That "in good faith" claim had a few scratching their heads, and pointing out that still gave Tesla an out. We were a little disappointed that the company didn't make the terms entirely clear, believing that the "in good faith" line would likely scare away some companies from actually using the patents. However, recently, at the Detroit Auto Show, when questioned about this, Musk clarified that he really meant to make them completely free for anyone to use, no questions asked, no licensing discussions needed:
Around the three-minute mark someone asks how many automakers have taken Tesla up on the offer to use its patents, and Musk notes:
Musk: We actually don't require any formal discussions. So they can just go ahead and use them.
Reporter: Is there a licensing process?
Musk: No. You just use them. Which I think is better because then we don't need to get into any kind of discussions or whatever. So we don't know. I think you'll see it in the cars that come out, should they choose to use them.
In other words, Musk is saying what most of us assumed all along was the point. Hoarding the patents and blocking others doesn't help him at all. Letting others expand the market does. And licensing discussions are unnecessary friction and a waste of time.
All good, right?
Well, no. It appears that clueless Wall Street types are absolutely flipping out over this (possible registration wall). Some outfit called "Technology Equity Strategies," which doesn't seem to understand the first thing about how innovation actually works, posted an insanely long and ridiculously misguided note on how this is horrifying for anyone invested in Tesla. The descriptions are hilarious, where you can almost hear these Wall Street types pulling out their hair over this idea of *gasp* actually letting others use Tesla's patents. First, it notes that Musk called them "open source" patents, and spends way too much time detailing the "official" definition of open source, and then says that the patents are now "public domain" (apparently not recognizing that public domain and open source are not the same thing -- though in this case it might not matter). Technology Equity Strategies is very upset about this.
The restrictions in the June 12 blog of "good faith" and "we will not initiate" are over with. They are finished. These patents are either in the public domain, or they have at minimum been rendered unenforceable against all users, "good faith" or not.
Why? Because in their non-innovation minds, all they care about is how do you best value the stock, and giving up patents is giving up an asset. The note first (mistakenly) argues that many areas of the tech industry rely on patents as barriers to entry and that's where their advantage comes in (rather than execution, which is the truth). And so, it thinks now some other company will just come in and eat Tesla's lunch:
Is it possible that the massive capital and labor needed to attain leadership might not be eroded in by imitators in Asia, by large companies with resources to buy market share, by companies whose strengths are manufacturing process, global footprint and scale?
If so, the embedded option on a leader in a new niche in the auto industry and on a shift in the competitive dynamics in the auto industry might indeed be a valuable option.
But Mr. Musk was not interested in that. He is happy to give away the advantages that actually provide great profitability in some sectors of technology. He wants to compete as an auto company, in the brutal and capital intensive way that auto companies compete. More fundamentally, he is willing to eliminate the possibility in the future of competing as a technology company, which depend on the IP protections of patents, copyright, and trade secrets.
Of course, the reality is that Musk recognizes what many in this sector recognize: that sharing the ideas helps speed along innovation, creating greater and greater opportunities, which you can realize by executing well. Musk is confident in Tesla's ability to execute and (as we noted earlier) recognizes that sharing the patents actually helps Tesla by getting more electric vehicles on the market, meaning more overall infrastructure that makes Tesla cars more valuable.
This is the ridiculousness of Wall Street: sometimes it simply can't understand the nature of a non-zero sum game. Giving up any "advantage" is seen as helping others, without recognizing that helping others can also help you out tremendously. Instead, these investor types believe in the myth of intellectual property, that it's patents that make a company valuable:
Intellectual property is an important foundation for valuation technology companies. Funds that own Tesla may not be the same institutions who own GM or Ford, but many will be familiar with Qualcomm and ARM.
IP goes a long way in explaining why Qualcomm has a market cap of $110 billion, and ARM has a valuation of 23 billion (18x trailing revenues) while Nokia and Dell were sold for less than two times revenues. Nokia and Dell did fine work for a while as manufacturers and product companies. There was a time when they too looked like winners based on product execution. But they didn't own core IP, and so when product cycles shifted, they were left with little value.
Yes, ARM and Qualcomm are both patent-focused companies (that dip their toes into trolling all too often). And, yes, companies that don't execute well can lose out in the end, but cherry picking a few companies that have flopped on execution, while pointing to a few trollish companies as success stories, doesn't make a very strong argument. It's basically saying "yes, invest in the companies that don't believe in their own ability to execute, who have a fallback as a patent troll." That's not exactly a strong endorsement. Tesla believes in its own ability to innovate -- and these Wall Street guys think that's a bad thing.
And then there's the rewriting of history:
Let's look at Apple. Apple and Steve Jobs learned the hard way. Some of us will recall that an early Apple (believing that IP wasn't important) opened up its IP to the basic Mac interface with a royalty free license to Microsoft.
This resulted in Microsoft Windows taking nearly the entire PC market from Apple, and nearly bankrupting Apple. In his second chance, Steve Jobs learned about the importance of IP. This is a lesson that Mr. Musk failed to absorb.
Except, that's totally incorrect. While Apple had licensed a few aspects of its UI, that licensing agreement became meaningless by the time of Windows 2.0. Then Apple sued Microsoft and lost, because it was trying to use copyright law to claim things that could not be covered by copyright law. And that's not why the PC took over the market. So this isn't a lesson that Musk failed to absorb, because it never happened.
The Grand Gesture shows the worrisome sincerity in Musk's repeated statements that he is primarily on a mission to get other companies to sell a lot of electric vehicles, not to make money.
A worrisome sincerity? No, it's showing that Musk recognizes that if the market for electric vehicles does not grow massively, then he won't make money. He very much wants to make money, and a good way to do that is to build out the overall market for EVs, allowing Tesla to thrive. And these Wall Street folks first mock the idea that Musk might first invest to grow the market, by then... claiming that Asian makers might do the same thing:
No doubt Mr. Musk believes that if the industry embraces EVs, then Tesla will succeed as part of it. But is this plausible, that everything will just work out for the best. Is it plausible that Musk can succeed as a manufacturer in the U.S. competing against manufacturers in Asia who may take zero margins to grow a business, using Musk's proven designs? U.S. companies have learned over and over that IP is necessary to get a sustained profitable return on their innovations.
Actually, no. Plenty of tech companies don't think that IP is "necessary" to get sustained returns -- they think the opposite. Patents get in the way of profitability. They require lots of lawyer time and threats of lawsuits.
Frankly, Tesla opening up its patents seems like a move that shows how confident it is in its execution abilities, and makes the company a lot less likely to rest on its laurels and become nothing but a "licensing" company down the road. The fact that people who don't understand what a mess patents are and how they slow down innovation are now jumping in making ridiculous claims like Tesla's decision is why Apple can now jump into the EV car market just shows how little some people understand patents. The "myth" of patents as a powerful tool of innovation is still out there, and that's a shame.
