Elon Musk Doesn’t Care About Patents. Should You?

Ownership seems straightforward in business: Get a patent or copyright when you create something. Charge for its use. Avoid ambiguity about who owns what.

But much of this wisdom is wrong.

The world’s savviest businesses already know this. HBO tolerates theft of its core product. SpaceX forgoes patents. Airbnb opened for business before cities decided whether short-term rentals were legal.

These successful companies are skilled at ownership engineering – a term we define to mean creating value by managing how products and services are owned. Businesses spend a fortune on traditional engineering, tweaking every button and knob. But they ignore ownership engineering, assuming it is fixed and unchangeable. This oversight is a costly mistake.

Here, we introduce three of the most successful — and least known — ownership engineering strategies. These approaches aren’t taught in business schools, and you won’t learn them from company lawyers. But those who know how ownership really works are already profiting from these strategies.

1. Tolerating Theft

When we poll audiences, most readily admit using other people’s passwords illegally to stream HBO’s hit shows. What’s surprising is that, for years, HBO tolerated this theft. The company could easily identify who’s stealing its content, but chose not to, seeing a consumer acquisition opportunity. As HBO’s former chairman and CEO Richard Plepler candidly explained in 2014, illegal password sharing “presents the brand to more and more people, and gives them an opportunity hopefully to become addicted to it.”

Knowing its software would be pirated, Microsoft followed the same strategy to build its presence in China. “As long as they’re going to steal it, we want them to steal ours,” said Bill Gates, back in 1998. Echoing Plepler, he added. “They get sort of addicted, and then we’ll somehow figure out how to collect sometime in the next decade.” And indeed, China now accounts for up to 10% of Microsoft’s annual revenue of $125 billion.

Even Disney strategically tolerates theft. For decades, the company was known for aggressively defending its copyrights and trademarks. But now Disney often looks away, tolerating super-fan pirates who create innovative products. For example, when online vendor “Bibbidi Bobbidi Brooke” came out with a hugely popular line of rose-gold sequined Mickey ears in 2016, Disney did not shut her down, as was its legal right. Instead, it simply copied her design. After Disney’s official version hit the stores, the new Mickey ears sold out immediately. Brooke was gracious, posting “always excited to see new merch offerings.”

Everyone wins: Brooke stays in business and Disney benefits from low-cost product development.

Tolerating theft can even benefit makers of luxury goods. The tourists buying fake Rolex watches in Times Square don’t decrease legitimate sales. Fakes can be the best free advertising, teaching consumers what they should aspire to. One study found that 40% of people who bought counterfeit luxury goods later bought the genuine version.

2. Forgoing Ownership

Business leaders, and their lawyers, have a bias — an unjustified faith, really — that legal ownership matters. Surprisingly often, it doesn’t, and some businesses today voluntarily forgo ownership altogether, even when the law makes protection available.

The key is to know when and how to deploy effective substitutes for legal ownership. For example, some cutting-edge entrepreneurs value secrecy over patents. Elon Musk, founder of SpaceX says, “We have essentially no patents. Our primary long-term competition is China. If we published patents, it would be farcical, because the Chinese would just use them as a recipe book.”

Another strategy is to build on top of another platform that everyone else is already using, what economists call “network externalities.” IBM, said to be the world’s largest patent holder, now earns less from licensing its patent portfolio than from revenues related to Linux, an “open source” software language created and maintained by volunteers. The software is free for anyone to use, including IBM, which sells hardware and services that work atop a Linux platform. Linux became so valuable to IBM that it even contributed $1 billion in engineering services to support the free platform’s development.

First-mover advantage” can be another valuable strategy. For example, coaches find it worthwhile to develop new plays each season, even without any ownership. UNLV football coach Chris Ault took his Nevada team to the top of its conference with his novel “pistol offense” — a shotgun, but with a running back lined up behind the QB. No one saw it coming, and many later copied it, including NFL teams. In the sports world, in addition to winning games, innovators can get hired by another team at a higher salary. Or they’re paid more to stay put. Being first is often reward enough, even without any additional ownership incentives.

3. Leaning In To Ambiguity

Business leaders may hesitate to invest when the ownership environment for their product or service is unsettled. Many assume clear ownership rules are a prerequisite for entering markets. But legal clarity is not always that important.

Millions of people own their cars and apartments, but can they charge people for short term rides or stays? Until recently, the law was unclear about the scope of owners’ rights. That ambiguity didn’t hold back Uber and Airbnb from pressing ahead into new markets.

Nor does it stop the hundreds of startups built on the tech-world motto, “It’s better to ask for forgiveness, than permission.”

This motto is emphatically not a call to break the law. Just the opposite. It’s a recognition that ownership rules are always less complete than people assume — and that ownership ambiguity can provide legitimate and valuable business opportunities.

This is nothing new. Ownership ambiguity was just as prevalent during the nineteenth century when homesteaders were settling the American West. It’s how Sooners claimed land in Oklahoma and 49ers staked gold mining claims in California. Only later did the law arrive and, when it did, states often recognized the early-bird claims.

Today, information lies at the frontier of jump-the-gun ownership battles. Facebook claims our clicks; 23andMe claims our genome. These data are worth billions of dollars. But who actually owns them? The law is not yet clear. By jumping ahead and staking their claim first, though, savvy businesses are shaping who owns what.

Ownership may seem natural and uncontested. But that couldn’t be further from the truth. Choosing who gets what is always up for grabs. And this means businesses can always gain a competitive edge by finding novel ways to engineer ownership — just like they engineer every other feature of their goods and services.

Tolerating theft, forgoing ownership, and leaning into ambiguity are three of the top strategies that the world’s most successful companies are already using to shape who gets what.

In our work with business leaders, we find that the hardest step is asking the first question: “Can I really profit by engineering ownership?” The answer is an emphatic yes. Once you see how ownership really works, you can’t un-see it.

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