Strategy

Elon Musk Doesn’t

Should You? Care About Patents.
by Michael Heller and James Salzman
March 04, 2021

HBR Staff; BRITTA PEDERSEN/Getty Images; National Archives

Summary.   Businesses spend a fortune on traditional engineering, tweaking every

button and knob. But today’s most successful companies are also skilled at
ownership engineering, or creating value by managing how products and services
are owned. The authors outline... more

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.

MH
Michael Heller is the co-author of Mine! How the
Hidden Rules of Ownership Control Our Lives and
the Lawrence A. Wien Professor of Real Estate
Law at Columbia Law School. He is one of the
world’s leading authorities on ownership, on who
gets what and why.

JS
James Salzman is the co-author of Mine! How the
Hidden Rules of Ownership Control Our Lives and
the Donald Bren Distinguished Professor of
Environmental Law, with joint appointments at
the UCLA School of Law and the UCSB Bren
School of the Environment. He is one of the
world’s leading experts on environmental
protection.