How Tesla Wins on Elon Musk's 'Controversial' Patent Promise

Updated from 11:48 a.m. to include additional analysis in the fifth paragraph.

NEW YORK (TheStreet) –– Tesla Motors (TSLA) CEO Elon Musk delivered on his promise to bring something "controversial" to Tesla, regarding its patents, making them available to anyone "for the advancement of electric vehicle technology." While that may further Musk's promise of electric vehicles being more prevalent than they are currently, it may prove to be an even better decision for the stock.

Thursday, Tesla Elon Musk made good on a promise he made earlier this month, opening the company's patents to competitors for the betterment of the electric car market as a whole.

"Tesla Motors was created to accelerate the advent of sustainable transport," Musk said in a blog post, discussing the move. "If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology."

Shares traded down on the news initially, but after some time to think about it, analysts seem to believe that by moving to an open model, similar to what Google (GOOG) has done with its Android operating system, Tesla gains a competitive advantage not just for the Model S, but the Supercharger network as well.

Topher Morrison, Managing Director at Entrevo USA, a growth accelerator firm, believes Musk did the right thing, as times have changed. "If you think this controversial move by Musk and Tesla doesn't make sense, think again," Morrison said in an article obtained by TheStreet, discussing the matter. "We're now living in the collaboration economy and your competition is now your ally. It's time to stop competing and start collaborating. Partner with the competitors in your industry by creating key relationships with the right people who have the right skills and can properly complement your strengths. "

"We believe the opening of patents is incrementally positive as the decision could ultimately increase the adoption of electric vehicles while supporting faster development of the supercharger network," Baird analyst Ben Kallo said in a research note, following the decision. He rates Tesla "outperform" with a $275 price target. 

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Musk has been adamant in the past about the advancement of the electric vehicle market, noting that Tesla is just one company, and ultimately, he'd like to see many, many more vehicles on the road. The issue at hand isn't to challenge other electric vehicles, such as General Motors'  (GM) Chevrolet Volt (a hybrid) or the Nissan (NSANY) Leaf, but rather all internal combustion engines.

"We need all cars to go electric," Musk said during the question-and-answer portion of the company's shareholder meeting, held earlier this month. He stated there are about 2 billion cars around the world, with 100 million sold every year.

The South African-born Musk is taking on an enormous task, noting that the problem is more about the betterment of society than just selling more cars.

"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," Musk noted. Despite this altruistic view, Musk believes that Tesla's position will be strengthened, rather than hurt, by making the company's patents open source.

Though Tesla has experienced exceptional growth with its Model S sedan, which has won numerous awards, the Model S is merely a drop in the bucket for overall car sales. Last year, the company delivered 22,500 Model S vehicles around the world. This year, it hopes to deliver 35,000, a miniscule amount to the 100 million new vehicles sold every year around the globe.

The idea is that opening up Tesla's patents for competitors will spur the other auto companies, such as Ford (F), GM and others, to their own innovations and move more quickly to electric vehicles.

On the conference call, Musk noted that Tesla had recently talked to BMW about matters of cooperation. BMW confirmed this, with a spokesman telling the press, "Both companies are strongly committed to the success of electro-mobility and discussed how to further strengthen the development of electro-mobility on an international level."

This development comes after Musk has chided BMW's efforts with electric vehicles, noting that he thinks Tesla could make something better than the BMW i3 now, but the battery costs are still prohibitive to get a compelling mass market car to a cost where a good portion of the population can afford it. "We can produce something like the i3 or better than i3 right now, but it wouldn't be great. It wouldn't be amazing," he said at Tesla's shareholder meeting.

Though Tesla may not see an immediate impact to its numbers by opening up its patents to competitors, Morgan Stanley analyst Adam Jonas believes the value of one of Tesla's cars could increase, especially if the infrastructure supporting electric vehicles is given a boost. "The value of a Tesla could rise if the number of charging stations multiplied," Jonas wrote in a note.

Where the real value lies is more about Tesla's relationship with Washington, as well as the media, in shaping its story, Jonas noted. "Sharing hundreds of its patents with competitors helps Tesla defend its case as a proponent for the technology while attacking a competitor's excuse for falling short. In our view, Tesla is finding new ways to assert itself at the state and Federal level as America's most important car company."

Not everyone agrees, though.

By making all of Tesla's patents, both current and future open to anyone who wants to use them, at no charge, it may marginalize Tesla's competitive advantage, something the company has prided itself on.

"While arguably altruistic, we believe this decision could marginalize any potential competitive advantage the company might hope to gain, including that associated with its supercharger network and the planned battery gigafactory," Bank of America Merill Lynch analyst John Lovallo said in a note. "Furthermore, if Tesla's opportunity for technological differentiation is diminished, it could become increasingly difficult for the company to compete with incumbent OEMs, particularly considering its relative scale disadvantage." Lovallo rates Tesla shares "underperform" with a $75 price target.

By making Tesla's patents open source, this is an unprecedented and unorthodox move, and particularly generous, given that Musk has a fiduciary responsibility to shareholders. Despite that responsibility, by pushing the pedal down on increasing the appeal and availability of electric cars, Musk has made Tesla's value higher, as the company will be able to reap the benefits from not only the Supercharger network and increased usage, but for Tesla's ability to disrupt the energy grid as well, a much larger opportunity than simply selling cars.

--Written by Chris Ciaccia in New York

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