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.
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.
Last June, Elon Musk and Tesla made some news in freeing up Tesla's patents, hoping to jumpstart the market for electric cars. As we pointed out at the time, this highlighted how patents can, and often do, hold back innovation -- and we hoped that others might take notice. It's taken a while, but at CES this week, Toyota also announced plans to free patents, focusing on the 5,680 patents (including pending patents) it has on fuel cell drive systems. The details still matter, but Toyota says that the patents are all available, "royalty free." The patents seem to cover the whole stack of things necessary to develop hydrogen fuel cell cars -- including the patents for hydrogen stations.
Of course, the idea, as with Tesla, is that the market needs to be jumpstarted, and that means a lot of companies working together to help build the infrastructure and educate the market. That's done best by sharing the information and letting everyone compete on the actual execution. But, of course, that's what we've been arguing should be the case for lots of technology areas as well. The patents are only serving to hold back so many markets, not allowing companies to build the best possible products they can, and thus limiting overall innovation and adoption.
Hopefully more companies -- and not just automakers -- will start to recognize why this is such a good idea, not just for their own business, but for innovation in general.
Electric vehicles are gaining some increasing acceptance on the roads, as some drivers realize that the vast majority of their trips are less than a 40-mile roundtrip. The "range anxiety" factor is still a concern for a lot of people, but there might be some alternatives to the existing rechargeable batteries in use today. Here are just a few examples of possible solutions to improve the energy storage capacity in electric cars.
Phinergy and Alcoa have an aluminum-air battery that could power a small EV for 1,000 miles. The catch is that when your aluminum-air battery is depleted, you'd have to replace an aluminum-containing cartridge at a special service station (so you couldn't just recharge the aluminum-air battery by plugging it into a standard wall outlet). Still, it would could be a nice way to extend the range of an all-electric vehicle significantly with an energy storage technology that has a not-so-complex, closed-loop life cycle. [url]
If you'd like to read more awesome and interesting stuff, check out this unrelated (but not entirely random!) Techdirt post via StumbleUpon.
The petition is a little misguided but is an understandable response to state after state protecting incumbent car dealerships by attempting to force Tesla to sell through an established middleman. The amount of tax revenue generated by successful dealerships makes it very hard for state politicians to say "no." It's become so common over the past few years that the introduction of Tesla-targeting legislation is a fairly accurate barometer of political corruption.
The petition is simple: force states to allow Tesla to sell directly to consumers. The problem is that the Administration can't rewrite state laws on the fly.
Thanks for your We the People petition. We're excited about the next generation of transportation choices, including the kind of electric vehicles that Tesla and others have developed. These companies are taking steps to help spur innovation in the promising area of advanced batteries and electric automobiles. Vehicle electrification and other advanced technologies are vital components of President Obama's Climate Action Plan, and his commitment to addressing climate change and reducing carbon pollution, in addition to reducing our dependence on oil.
But as you know, laws regulating auto sales are issues that have traditionally sat with lawmakers at the state level.
We believe in the goal of improving consumer choice for American families, including more vehicles that provide savings at the pump for consumers. However, we understand that pre-empting current state laws on direct-to-consumer auto sales would require an act of Congress.
So, the problem must be handled through our nation's legislators or at state level in each individual state. Neither option is very palatable. State legislators are in no hurry to lose revenue by obliging an upstart (no matter how much its constituents may desire another option) and legislators in DC are no less likely to cater to established entities and their tax dollars/contributions.
But let's not waste too much more time discussing the low-level corruption that prevents new entrants into markets. Let's hear some more about the administration's exciting Climate Action Plan, because that's cleary what Dan Utech, "Special Assistant to the President for Energy and Climate Change," really wants to talk about. (Questions concerning the administration's decision to send an energy/climate change advisor to answer an auto sales regulation petition will also presumably go unanswered.)
We are already making significant progress in promoting vehicle efficiency: new vehicle fuel economy has increased by 12% since 2008 and consumers now can choose from five times more car models with a combined city/highway fuel economy of 30 mpg or more, compared to just five years ago. In December 2013, the Environmental Protection Agency (EPA) announced that model year 2012 vehicles achieved an all-time high fuel economy, after increasing seven of the last eight years...
Thanks, Dan, but we were hoping you could address consumers' interests being ignored by government—
The President has taken historic action to spur more consumer choice -- saving consumers money at the pump and reducing our dependence on oil. Here are some of the ways we're helping to encourage the future generation of energy-efficient cars…
…and so on for another three paragraphs. Five out of seven paragraphs are nothing more than the administration very sincerely congratulating itself for being so awesome and forward-thinking. Very little deals with the actual petition, but I guess we should be grateful it was acknowledged at all.
The final paragraph attempts to portray the government as innovation's best friend:
As these initiatives show, the Administration is in favor of fostering competition in the market to help spur the kinds of innovation needed to support ongoing U.S. leadership in vehicle manufacturing and a potential range of new technologies.
Maybe the administration (or at least Dan Utech) is truly "in favor of fostering competition in the market," but the government is the government is the government. Consumers want more options, established businesses want consumers to have fewer, and all too frequently the "government," whether it's local, state or national, sides with those on the established side. The administration can't force states to change laws, but it could at least offer something better in response than a press release masquerading as an "answer."
We, like many in the media, already wrote up the story about Elon Musk's announcement that Tesla was opening up all of Tesla's patents, promising not to bring any lawsuits against anyone who uses them in good faith. The "good faith" caveat has resulted in some head scratching and reasonable questions -- and we hope that Musk clarifies this position with a clearer explanation. Some have pointed out that with such vague language, it may really be more of an invitation to negotiate a licensing deal, rather than truly opening up the patents (though, I'd imagine anyone looking to challenge that has lawyers boning up on promissory estoppel). However, I wanted to address one of the "criticisms" that seemed to come out repeatedly about this move: that it wasn't a big deal because it's "not altruistic." That line was used over and over and over again in the press, almost always suggesting that people shouldn't be celebrating this move.
LA Times: "Even if other competitors copy Tesla’s design, Tesla still gets to sell them batteries, and that’s pretty awesome. Tesla’s decision isn’t entirely altruistic."
Seeking Alpha: "The general thinking is that somehow this move is altruistic for the benefit of the EV industry or that this has something to do with parallels like Mac OS X, Wikipedia, and crowdfunding. We disagree. This is simply a strategic move to rapidly expand and monetize the EV market. This move is hard-core strategy and really has nothing to do with altruism."
NASDAQ: Elon Musk and Tesla: Altruistic or Ulterior Motive?
Forbes: "Of course, Musk may have an ulterior motive in addition to his altruistic one."
ValueWalk: "Tesla Motors Inc's open source approach is far from altruistic."
Harvard Business Review: "In sum, Elon Musk’s opening up of Tesla’s patent portfolio might be motivated as much by strategic necessity rather than by altruism."
Market News Call: "Musk may not be successful running two industrial firms like online social media or cloud-focused firms, but he’s also not making decisions entirely out of altruism; he’s just using a non-traditional approach to creating value for his shareholders."
Engineering.com: "I think he [Nikola Tesla] would approve of Tesla Motors’ decision to open its technology to the world, even if the motivation was more business than altruism."
I recognize why everyone feels the need to do this -- especially those sites that claim to be focused on "investors," but it's also somewhat frustrating. Perhaps it's just because we've been writing about this issue for well over a decade, but of course this move is being done because it's good for business: but that's the point. We've become so stupidly brainwashed into believing that locking up and protecting everything is good for business that people seem positively shocked when a company does something that shows that's simply not true. Everyone feels the need to explain what a "crazy" idea it is that not hoarding information to yourself might actually be good for business.
And the worst may be in that first link up there, in which analyst giant Gartner completely destroys what little credibility it may have had when one of its analysts, Thilo Koslowski, pans the decision: "If you open up all your books to everyone, it means you all are fighting a war with the same weapons." Talk about someone admitting their own ignorance of how business and innovation actually works. Opening up your patents hardly means fighting a war with all the same weapons. Everyone still gets to innovate, and many of those innovations are not in the patents themselves.
A further Musk quote in a Business Week piece further outlines what's happening here:
"You want to be innovating so fast that you invalidate your prior patents, in terms of what really matters. It’s the velocity of innovation that matters."
This is a point that we've been trying to make for years: innovation is an ongoing process, and what matters most is not the single burst of inspiration, but the pace of that process -- which Musk more eloquently calls "the velocity of innovation." Patents on pieces of that ongoing process act as friction or toll booths in that process, slowing it down. Truly innovative companies know that they're going to keep innovating, and others copying what they're doing is the least of their worries.
Of course this move is about innovation and business and will be good for Tesla. But it's depressing that so many people automatically think that needs to be explained. We live in a dangerous world for innovation when a concept as simple as this seems so foreign to so many people. Even the fact that the idea that "doing good" and "building a good business" seem to be contradictory terms is troubling. Whether or not Musk is personally "altruistic" is beyond the point. Increasing the velocity of innovation for electric vehicles can be both good for Tesla and for the world, and that shouldn't be such a crazy idea.
Oh, and in case you haven't seen it yet, go check out what Tesla did to the wall where they used to hang their patents:
Because, perhaps even worse than everyone trying to explain why this isn't "altruistic" are all the people still confused about Musk's All Our Patents Are Belong To You language...
Earlier this week, we wrote about rumors that Elon Musk was going to free up some of Tesla's patents to encourage more people to adopt the company's Supercharger system. As we noted this shouldn't be controversial, but it was still considered as such. Elon Musk has now made the official announcement and it actually goes way beyond what was originally rumored. It's not just about the Superchargers, it's all of Tesla's patents. But, better than that, Musk explains why he no longer thinks patents make sense and even demolishes the one argument that even many patent skeptics make: that they're "still needed to stop big companies from copying your innovations."
As we've explained in the past big companies almost never recognize truly disruptive innovation when it happens. This is for a variety of reasons, including the basic innovator's dilemma, but also just because companies are so focused on their own things, it's tough to get them to realize outside innovation. Furthermore, even when they do copy, it's actually pretty rare for them to get it right. That's because, from the outside, they only copy the superficial stuff, and have no idea why something is really successful. And thus, even if they have the "exact plans" for the competitor's technology or process, they don't understand the little things that make customers love them. Similarly, innovators are constantly innovating, so by the time the copycat catches up, they're still behind.
But, an even bigger issue, as we explained before, is that having more viable competitors can also enlarge the overall market. So if a company like Tesla has no viable competitors, they're left educating the market and building all the infrastructure themselves -- and that's pure cost. Opening up their patents actually helps Tesla in the long run by (hopefully) spreading out some of those costs, and increasing the size of the overall market. This is what many patent system supporters just don't get -- but Musk clearly understands deeply.
He talks about how he used to be a patent system believer, but he's been converted in the other direction. And while he avoided patents at some of his companies, with Tesla he was convinced they were necessary, because "the big car companies" might just copy everything he's done. Now, he says, he knows that's not true, and he actually would prefer they do copy Tesla's work.
At Tesla, however, we felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla. We couldn’t have been more wrong. The unfortunate reality is the opposite: electric car programs (or programs for any vehicle that doesn’t burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than 1% of their total vehicle sales.
At best, the large automakers are producing electric cars with limited range in limited volume. Some produce no zero emission cars at all.
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. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day.
We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform.
This is absolutely true and it's great to see it stated so directly. If only other companies were willing to do so. As for the actual way this will work, Tesla has announced that it "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." That's not entirely putting the work into the public domain, but it's a good step. Years ago, I had hopes that Google and others would do something similar, but it has not come to pass. Google had made a similar pledge, but only for open source projects, and Twitter has basically given its own engineers the ability to veto any offensive patent litigation efforts by issuing their own license. But Tesla has now gone even further than both of them by basically telling any competitor to feel free to make use of its patents without worrying about getting sued.
Unlike so many other companies and company leaders, Musk appears to recognize the simple fact that innovation is not in how many patents you get, it's in how you actually build amazing products and services that people want -- and patents can often get in the way of that, rather than help it. It's nice to see him declare that so directly. He even took the symbolic gesture of removing the framed patents from Tesla's lobby wall. This is great to see and hopefully it will inspire others in the tech industry to put down similar stakes as well.
While the details aren't entirely clear yet, there are reports that the company is likely to "open up" or "give away" some of its patents on its Supercharger system in an effort to create a standard that other electric car makers can use. Elon Musk has been hinting at doing something "fairly controversial" with the company's patents for a little while now. The really tragic thing is that this should not be controversial. Anyone who's studied the history of innovation knows how badly patents get in the way of standardization. There often is long and involved fights over how patents fit into standards, with debates about fees and "RAND" pricing. Fights break out over whose patents get included, and then giant bureaucracies spring up around who gets to manage various patent pools, and how money gets distributed. And all of it slows down the actual innovation process.
And this is a problem.
Hopefully, the rumors are accurate, and Tesla really is freeing up its patents, because Musk has always been a more visionary sort. He must realize that the business is selling the cars, and any advance that makes the cars themselves more useful makes them more valuable, and widespread infrastructure that helps his cars and which he doesn't have to pay for is only a good thing in the long run. For too long, the "typical" business wisdom from those who are too focused on permission-driven innovation is that you have to lock up everything. But toll booths create friction and slow down the opportunities for real innovation. It would be great to see Musk do "something controversial" like this, even if it's ridiculously depressing that this idea is considered even remotely controversial.
Monetizing each step of the process, even if it limits the overall market is what should be seen as controversial -- rather than sharing knowledge and encouraging others to build upon a shared standard that increases opportunities for the entire market.
We've pointed out how states banning Tesla's direct sales model seems like a perfect indicator of how corrupt a state is. State laws that require that only independent dealers can sell cars have no legitimate purpose whatsoever -- other than to make life better for dealers, who have tremendous influence over local politics. However, it looks like the FTC may be stepping in to tell states who go in this direction that they may be crossing the line in a way that will make the federal government unhappy. In a surprise blog post, some FTC officials have made it pretty clear that states shouldn't be blocking Tesla direct sales.
In buying cars, however, these new ways to shop may not be available to consumers. For decades, local laws in many states have required consumers to purchase their cars solely from local, independent auto dealers. Removing these regulatory impediments may be essential to allow consumers access to new ways of shopping that have become available in many other industries.
This very question has been raised across the country, as a still-young car manufacturer, Tesla, pursues a direct-to-consumer sales strategy that does not rely on local, independent dealers.
In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy for a number of reasons.
Later on the FTC fires the real warning shot:
Instead of “protecting,” these state laws became “protectionist,” perpetuating one way of selling cars—the independent car dealer.
The FTC completely dismisses the bogus claim from dealers that these laws "prevent abuses" by noting "this rationale appears unsupported." It's not clear if the FTC will actually step in and do anything here, but just making it clear that these kinds of laws blocking things like Tesla's sales model are a serious problem that is more protectionist than good for consumers, is a good step.
A year ago, NPR's Planet Money podcast had a show detailing one of the most horrific consumer experiences around: buying a car. The main reason it was deemed that the process was so ridiculous and unpleasant was a variety of state laws that ban car makers from selling directly, and instead require a network of dealerships. A research paper highlighted how these state laws have been a massive boon to the owners of dealerships, but have seriously harmed automakers themselves. It has also shown how these laws are open to significant corruption issues, since dealers generate tremendous local tax revenue:
States earn about 20 percent of all state sales taxes from auto dealers, and auto dealerships can easily account for 7-8 percent of all retail employment.... The bulk of these taxes (89 percent) are generated by new car dealerships, those with whom manufacturers deal directly. As a result, car dealerships, and especially local or state car dealership associations, have been able to exert influence over local legislatures. This has resulted in a set of state laws that almost guarantee dealership profitability and survival--albeit at the expense of manufacturer profits. Given these laws, manufacturers do have a financial interest in closing down new car dealerships, and in choosing which ones wil close. Additionally, available evidence and theory suggests that as a result of these laws, distribution costs and retail prices are higher than they otherwise would be; and this is particularly true for Detroit's Big Three car manufacturers--which is likely another factor contributing to their losses in market share vis-a-vis other manufacturers.
There is basically no valid reason for such laws. They serve no purpose other than to enrich local car dealership owners and state tax coffers at the expense of everyone else -- especially the public.
And yet, because these laws benefit both the politicians in charge and local dealerships, which tend to have strong lobbying power, they stay in place. That fight has been getting more notice lately, in large part because of Tesla, the innovative electric car company that has wowed nearly everyone who's driven one. A few years ago, we wrote about dealerships starting to complain about Tesla and it's plan to sell direct via the web, but with company-owned "showrooms." Tesla reasonably argued that these are not dealerships, and such laws didn't apply. Car dealers have flexed their political muscle to get various states to basically make it illegal to buy Teslas. This has even reached insane levels, with dealerships claiming that Tesla's website violates California DMV rules.
This is insane on any number of levels. Not only is the car better for the environment, reviewers write about the car and talk about how it may be the best car ever built.
In response to this, entrepreneur/investor Paul Graham put it succinctly that banning Tesla "is an index of the corruptness of state governments" in the same manner as cities banning Uber or other disruptive new services. As in nearly all of those cases, the dealers are (laughingly) trying to argue that this is a "consumer protection issue." Again, the research linked above notes there's basically nothing to that argument, and safety reviews of the Tesla have suggested the car is incredibly safe. Besides, what does the safety of a car have to do with dealerships? Dealers try to claim that local dealers are "more committed to taking care of that area's customers." And yet they provide no evidence to support that -- mainly because there is none.
What's particularly hilarious, is that this move comes just days after New Jersey Governor Chris Christie talked up the power of the free market and against government intervention in business:
“We need to talk about the fact that we are for a free-market society that allows your effort and ingenuity to determine your success, not the cold, hard hand of the government.”
Right up and until the biggest supporters of state taxes demand your own government kills off sales of an innovative new competitor. Then, the "cold, hard hand of government" smacks you down.
The facts here are pretty simple: Tesla has built an innovative car, and gone with a pretty standard way of selling almost every non-automobile product: sell direct to a public who wants it. Dealers and state politicians, on the other hand, are basically teaming up in a corrupt manner to harm everyone (especially the car buying public) but themselves, and then having the gall to claim that they're doing so for the sake of "consumer protection"? No one's buying that excuse. Beyond the research above, plenty of others have pointed out the absurdity of this argument. Last year, professor Dan Crane debunked that basic claim:
A second argument is that having local dealers is necessary to ensure that customers are adequately served. For example, Bob Glaser of the North Carolina Automobile Dealer’s Association has asserted that the restrictions are a form of “consumer protection,” since “a dealer who has invested a significant amount of capital in a community is more committed to taking care of that area’s customers.” The obvious rejoinder is that Tesla has as much or more of an interest as the dealers in seeing that customers get the level of service they’re willing to pay for. If Tesla gets a bad reputation for quality, it will fail. I suppose that one might worry if Tesla were a fly-by-night operation selling customers an expensive durable good at a high price and then fleeing with its profits and leaving customers without support. But that’s obviously unlikely of a company that’s pouring billions of dollars into the creation of a new product and a recharging and battery swapping infrastructure. Car manufacturers make considerably larger fixed capital investments than do dealers and I’m sure that the dealer failure and exit rate is considerably higher than that of manufacturers.
A related argument is that dealers play an important role in complying with local laws regarding titling and safety inspection. But this argument doesn’t work either. First, observe that at present most states only prohibit manufacturers from opening their own dealerships—they don’t prohibit online sales from outside the state. (North Carolina recently passed a statute banning online sales as well). There’s no reason why a manufacturer-owned dealership should be less capable of complying with local laws than an independent dealer. Second, why should Internet sales involve evasion of state titling and safety inspection laws? Internet sales can just as easily be subject to the same titling and inspection requirements as dealer-initiated sales.
Furthermore, if it were true that consumers were harmed by letting companies sell directly, you'd think consumer advocates would be supporting the dealers. But they're not. They're supporting Tesla:
Jack Gillis, with the Consumer Federation of America, disagrees. Customers actually don't like haggling over prices, as evidenced by the fact that we haggle over almost nothing else except cars. A one-price system, like Tesla's, is fairer, Gillis said, because it's more transparent and doesn't put less belligerent shoppers at a disadvantage. If the price is too high, customers just won't buy the product.
In the end, New Jersey's actions just confirm what lots of people already knew, that New Jersey is hopelessly corrupt. But, this is nothing new. As Dan O'Connor points out in his story about all of this, a century ago, people did the same thing against the automobile, and in favor of horses. The (I'm not joking) Horse Association of America was created more or less to fight back against those evil cars, and presented talking points like the following:
If the extended displacement of horses and mules by motors resulted in economic gain to the nation as a whole, the campaign of the Horse Association of America to increase the production and use of horses and mules would not be warranted. The Association states that ample evidence has already been secured to prove that in many instances, such displacement is economically unsound, resulting in less reliable, less efficient service at greater cost. Consumers, grain dealers and grain producers alike suffer from such substitution, which, according to a leading traffic manager in New York City, is due chiefly to ignorance on the part of business men regarding the actual cost of operating horse drawn and motorized equipment.
That sounds mighty familiar. A century ago, politicians mostly saw through the insanity of it. But there wasn't so much money at stake back then. Today is different, and we all suffer because of it.