Why Apple Should Use Tesla’s Patents

Automotive media is awash with the news that Apple has a team of “several hundred employees working on Project Titan” which is believed to be an all-electric car and that they are actively poaching Tesla employees. Originally this struck me as very un-Apple. Steve Jobs famously maintained:

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying ‘no’ to 1,000 things.” -Steve Jobs

It becomes clear when you look at their lineup that what they said “no” to was always things that were not in line with their core-competency: computers. The Apple II. The Mac. The iPod, which was the infusion of their design and computing expertise into the music player product category. The smartphone which was the same infusion into the cellphone category. But all of Apple’s products are fundamentally computers. Even the iWatch is just a small computer with a wristband.

A car is not a computer. CPU, RAM, and memory are a tiny percentage of a car’s components. Entering an entirely new sector is extremely out of character for Apple and for good reason. As long as Apple is building a computer (no matter what shape or form it takes on) it still can draw from its experience and expertise in the field. When building a smartwatch the amount of new knowledge they have to acquire is relatively small because they already have so much experience dealing with, acquiring, and manufacturing with the vast majority of the components. But electric cars have battery packs, electric motors, drivetrains, transmissions, air bags, door handles, etc. I wouldn’t hold it against anyone for observing this reality and accusing Apple of hubris stemming from it’s current (and likely temporary) dominance.

But it starts making more sense when one realizes that all of these decisions are economic decisions. The reason why Apple doesn’t pursue dramatically different products is because the costs are too high. This is basically tautological: if it was sufficiently cheap for Apple to make a product, it would obviously make the product. The real question is, “What is ‘sufficiently cheap?’” As long as their products are roughly the same, they can have roughly the same supply chain. The more materials and parts their products share, and the more units they ship, the more economies of scale they enjoy, thus making these products “sufficiently cheap” to justify their production. The increased profits that result allow Apple to invest more in the design, hardware, and software of their products which further enables them to make products that their customers love. The more divergence between products, the fewer economies of scale they have and the harder it is to make great products. The proof is in the pudding: the iPhone is the most popular smartphone in the world by a lot. It doesn’t just outsell the most popular Android handset, it outsells all Android handsets combined. Does this mean the iPhone really is the best smartphone? Of course it depends on your definition but if you take the view that people vote with their dollars, then obviously more people have voted for Apple.

But if economies of scale and the selective application of their narrow expertise is the key to Apple’s success, why take such a risk on a foreign and notoriously expensive new product? Well, what if events transpired to dramatically reduce the costs associated with making this divergence? What if much of the really expensive stuff associated with making an electric car — mainly the engineering of all the electric propulsion-related components including battery packs — were done for them? Enter Tesla’s opensourcing of all their patents.

When Musk met with Apple execs last year it was generally assumed that the discussion centered around a potential acquisition of Tesla by Apple. At the time I dismissed this speculation as without merit. The company was so expensive that I couldn’t see Apple being able to justify such a costly purchase of such an unprofitable company and few people with intimate knowledge of the company can imagine Musk selling. As more information comes out about Apple’s plans such discussions and rebuttals have emerged once again. But what if something else was discussed at the meeting? Perhaps Musk mentioned his plans to opensource his patents? Maybe this is why on the day Musk made the official announcement, news mysteriously leaked that Apple had begun work on its own electric car. Perhaps Apple had been waiting for public confirmation that Musk was going to live up to his word before allowing the world to learn of its plans.

Musk has made it clear for years that he wants competition. One could dismiss this as mere puffery, but with the benefit of hindsight — and the knowledge that he actually did make the unprecedented decision to make their intellectual property public — we can now safely say that he likely did mean what he said. Armed with that knowledge we can further posit that if he was having conversations with Apple, and the people at Apple mentioned potential plans to build their own electric car, then it is entirely reasonable to imagine that he would bring up his plans to open up his patents. Unless one wants to believe that the opensourcing of Tesla’s patents wasn’t a carefully thought out and planned decision Musk had been pondering for a long time.

To date no manufacturer has actually taken advantage of Tesla’s patents and I wouldn’t be surprised if none of them do. Massive corporations love intellectual property — it allows them to monopolize their discoveries and discourage competition through litigation. Using opensource patents negates that benefit. In the long run I do believe that they are making a poor business decision that is the product of the antiquated and bloated bureaucracies which dominate these institutions, however, that they make this bad decision should come as a surprise to no one. They have invested billions in R&D over the course of many decades to develop the products they currently make, the overwhelming majority of which are internal combustion cars. Switching to the manufacture of products based on Tesla’s technology would be throwing that investment out the window and without proprietary technology (intellectual property) these manufacturers would be left with simply their product: cars that are barely distinguishable from one producer to the another. There is no meaningful distinction between a car made by GM and Toyota. They all return shockingly similar miles per gallon, acceleration, handling, etc.

Enter Apple. Apple hasn’t invested anything in cars, let alone internal combustion engines. Like Tesla, Apple is betting on the future, not milking the past. Think about it this way: if Apple were to build a car based completely on Tesla’s electric drivetrain technology, it will have effectively outsourced the research and development of said technology for free. Sure, this means that Apple might not be able to leverage its intellectual property to stifle competition, but it will be able to focus on design and user experience, the two things I would argue are Apple’s real specialty and the true source of Apple’s massive profits. These are also the types of intellectual property Apple has sued over. Their most prominent suit is with Samsung over the iPhone design (basically a rectangular touchscreen slab with rounded edges) not over the internal components (some of which are actually made by Samsung).

By the time Apple is actually ready to start producing a car Tesla’s gigafactory will be churning out staggering quantities of low cost cells. In other words Apple will be able to produce a car that combines its expertise with Tesla’s without acquiring Tesla. It will be able to make a Tesla without forming any relationship with Tesla! In all likelihood a relationship will be formed though. If you’re building a car using Tesla’s technology, and Tesla sells the necessary components (battery cells and packs), why not just buy directly from Tesla assuming the price is right? If Musk really wants electric cars to succeed (which I believe he obviously does) then he will figure out a way to sell those components at a lower price than anyone else (e.g. the gigafactory), and for less than it would cost anyone else (like Apple) to manufacture themselves.

How long will it take for Apple to start selling a car? Maybe not as long as you think. 9 years elapsed from the time Tesla Motors was formed to when the Model S first went on sale (yes, I’m ignoring the Roadster for the sake of brevity). But Tesla was a brand new company with relatively little cash. Apple has tons of cash and plenty of experience with mass production. It has also demonstrated its ability to transition between industries. That alone should enable them to outpace Tesla’s development schedule by a few years. If on top of that they make heavy use of Tesla’s technology, that might enable them to reduce the development timeline to 5 years (how long it took to develop the iPhone).

What all of this means to me is that Apple and Tesla are a match made in heaven. Maybe this is why people are so eager to talk about an acquisition. But they are such a strong match precisely because they don’t have to merge. After all, Apple doesn’t have to merge with Samsung to take advantage of their low cost hardware. Using Tesla’s patents allows Apple to dramatically reduce the cost and time required for product development. 9 years is a long time for Apple to spend on a product, and likely far too long a time horizon for Apple to even consider spending on a product. Apple’s time is worth a lot of money, so if using Tesla’s patents allows them to bring their product to market a few years early that translates directly into a lot of cost savings and profits because they can start selling the product sooner too. All Apple needs to do to make this equation work well is to produce an electric car that doesn’t directly compete with Tesla’s, which is a very small order for the company. Apple will, of course, make a dinstinctly “Apple” car, and I’m sure many will ask disparagingly, “Why should I buy that when it’s 20% more than the Tesla and everything inside is the same?” But of course there is no meaningful distinction between what’s inside an iPhone and many Androids (aside from the fact that many android handsets have technically superior hardware) but that doesn’t stop them from selling a whole lot of phones.

In short, there’s a reason no company has demonstrated any kind of potential or willingness to compete with Tesla, despite its dramatic growth and willingness to share its technology. Apple is perfectly situated to take advantage of this gap in the market since it has none of the legacy investments, contracts, obligations, and antiquated business management/philosophy handicaps that will likely prevent anyone else from seriously challenging Tesla for a number of years. Despite Tesla’s rapid growth, Musk himself has noted repeatedly that even if the “plan” goes perfectly Tesla will still be a niche manufacturer for many, many years. That doesn’t make it weak, it just means that there is plenty of room in the market. Building a product based on another company’s technology is certainly risky, but this is precisely the kind of risk that has the potential for massive rewards. If one faithfully adheres to economics and argues from first principles, what this relationship would actually mean is that Apple could spend far less than it otherwise would to create a great product with high margins in a rapidly growing industry with very little competition.

Update: 3/18/15

It has come to light that one of Apple’s subsidiaries believed to be in charge of developing their electric vehicle had a 1957 Fiat 600 (pictured below) delivered.

Weirdly, this is kind of exactly the type of car I imagined Apple building. Obviously the design would be updated, but the basic conceit makes sense. This is partly based on my assumption that Apple will be using Tesla’s technology, and so they would not compete in the “sexy and fast” market. Instead the term “people mover” comes to mind. As is the case with all their products we shouldn’t expect to see stellar specifications. We shouldn’t expect a high top speed (the equivalent with a smartphone might be the CPU clock speed) or the fastest acceleration (the smartphone equivalent here might be RAM). What we should expect is the best experience. Comfort. Space. Aesthetics. We can expect a healthy amount of touch screens. But as far as the overall shape is concerned, we should also expect something like the Fiat 600. Apple likes to wrap its products inside simple and streamlined geometric shapes with few protrusuions. The shape of the Fiat even resembles a stretched out version of Apple’s old iMac:

While we don’t even know if the purchase of the Fiat 600 has anything to do with Apple’s electric car, it does cooperate with my overall theory regarding Apple’s use of Tesla’s patents. While the Fiat 600 might not look as sexy as one of Tesla’s offerings, it is perfectly in line with Apple’s design language and overall strategy. While Apple is seen as somewhat high end, the truth is that Apple seeks large markets. The iPhone might be higher priced than most other phones, but they still sell a ton of them. It makes sense for Apple to leave the true high end to Tesla and compete more directly with companies like Nissan who are trying to offer electric cars for the masses. A new age Volkswagon Beetle or Microbus (one of which was owned by Steve Jobs and bares a striking resemblence to the Fiat 600) might be the perfect approach for them to take.

This type of car might also be very well suited for a future in which crowd-sourced taxi services like Uber and Lyft and ride-sharing are growing in popularity. Self-driving technology, quick-charging, and battery swapping will make electric cars a much more economical choice for cars that are shared by more than one person since the cars will be able to “refueled” without much, if any, direct involvement of the owner or user. This will enable the owners of the vehicles to capitalize on the lower fuel and maintenance costs of electric vehicles without suffering any of the potential downsides of electric mobility. All of these technologies are being developed by Tesla and Apple could take advantage of them if its car was built on the same technology. For example, if a taxi company wants to own cars which can drive themselves to a battery swap station or supercharger why would Apple try to develop and sell its own stations and compete with Tesla when it could build a car that simply makes use of Tesla’s existing infrastructure? This makes even less sense when we consider that Apple will be playing catch up. Tesla already has an established network of superchargers, and even a couple of battery swapping stations, and one can expect the numbers of these to keep going up so that by the time Apple brings a car to market they will be at a significant disadvantage.

All of the news regarding the battery swapping stations seems to indicate to me that Musk et al believe that the benefit of swapping over quick charging will be minimal, which explains why the company hasn’t promoted battery swapping much since they first unveiled their battery swapping technology in a rather spectacular fashion. Personally, I’ve always viewed so-called “range anxiety” as more of a psychological obstacle than a practical one (even the base Model S covers far more than the average commute) and see the superchargers as more of a marketing gimmick aimed directly at assuaging this primarily psychological issue, so it’s no suprise to me that they might abandon the more complex and presumably expensive battery swapping option. On this particular issue we can expect to learn quite a bit in less than 24 hours as Musk has announced a press conference for tomorrow during which he will reveal an “end to range anxiety … via OTA software update.” As the solution is software based, that seems to imply that it does not involve battery swapping, and may very well completely eliminate the need for swapping, which would explain why Tesla seems to have stopped devoted significant resources to that technology. Whatever technology they have developed, I expect Apple will want to take advantage of it, not compete with it.

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