View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by SJSU ScholarWorks San Jose State University SJSU ScholarWorks Faculty Publications School of Management 2003 How open is open enough?: Melding proprietary and open source platform strategies Joel West San Jose State University, [email protected] Follow this and additional works at: https://scholarworks.sjsu.edu/org_mgmt_pub Recommended Citation Joel West. "How open is open enough?: Melding proprietary and open source platform strategies" Research Policy (2003): 1259-1285. doi:10.1016/S0048-7333(03)00052-0 This Article is brought to you for free and open access by the School of Management at SJSU ScholarWorks. It has been accepted for inclusion in Faculty Publications by an authorized administrator of SJSU ScholarWorks. For more information, please contact [email protected]. How Open is Open Enough? Melding Proprietary and Open Source Platform Strategies Joel West1 College of Business, San José State University, One Washington Square, San José, CA 95192-0070 USA December 31, 2002 Forthcoming in Research Policy special issue on “Open Source Software Development” (Eric von Hippel and Georg von Krogh, editors) Abstract Computer platforms provide an integrated architecture of hardware and software standards as a basis for developing complementary assets. The most successful platforms were owned by proprietary sponsors that controlled platform evolution and appropriated associated rewards. Responding to the Internet and open source systems, three traditional vendors of proprietary platforms experimented with hybrid strategies which attempted to combine the advantages of open source software while retaining control and differentiation. Such hybrid standards strategies reflect the competing imperatives for adoption and appropriability, and suggest the conditions under which such strategies may be preferable to either the purely open or purely proprietary alternatives. Keywords: open source, standards competition, computer architecture, innovation returns Acknowledgments I would like to thank Jason Dedrick, Tineke Egyedi, Scott Ensign and two anonymous reviewers for helpful suggestions and comments, as well as seminar participants at Case Western’s Weatherhead School of Management and the 2002 Academy of Management annual meeting. I am especially grateful to the special issue editors for advice and encouragement that were instrumental in developing the paper. My appreciation goes to the representatives of Apple, IBM and Sun who generously shared their time to both explain various complex technologies and also the institutional relationships behind those technologies. The remaining errors are of course my own. 1 Tel: +1-408-924-7069; fax: +1-408-924-3555. E-mail address: [email protected] prior research to suggest the theoretical 1. Introduction implications of such hybrid strategies. The evolution of the computer industry 2. Proprietary Platform Strategies has been driven by the emergence of standardized platforms which allow modular substitution of complementary assets such as 2.1 Dynamics of Proprietary Platform software and peripheral hardware. Competition The initial platforms were proprietary, in A proprietary platform consists of an which a computer systems manufacturer architecture of related standards, controlled controlled all hardware and software layers by one or more sponsoring firms. For a of the standards architecture. These computer system, the architectural standards platforms were later challenged by two typically encompass a processor, operating hardware-independent operating systems — system (OS), and associated peripherals. Unix and Windows — which reduced Some have also extended the concept of a differentiation between hardware vendors “platform” to include multiple layers of and shifted platform control to the operating software, such as applications that rely on a system vendors. The Unix operating system “middle ware” tool such as Java or a also inspired a more radical shift, the open database (Morris and Ferguson, 1993; source movement in which Linux allowed Bresnahan and Greenstein, 1999; West and users and competitors to control a platform’s Dedrick, 2000). direction. A platform is but a specific example of These various strategies reflect the the general class of technological essential tension of de facto standards innovations studied by Teece (1986), who creation: that between appropriability and links the ability of firms to profit from their adoption. To recoup the costs of developing technological innovations to the a platform, its sponsor must be able to appropriability regime for intellectual appropriate for itself some portion of the property rights (IPR) — either through economic benefits of that platform. But to formal de jure protection (e.g. patents) or obtain any returns at all, the sponsor must through de facto protection such as tacit get the platform adopted, which requires knowledge or trade secrets. Absent such IPR sharing the economic returns with buyers protection, firms selling a given technology and other members of the value chain. can be expected to adopt marginal cost The proprietary and open source pricing and drive profit margins to zero strategies correspond to the two extremes of (Katz and Shapiro, 1986; Beggs and this trade-off. In making a platform strategy Klemperer, 1992). Without appropriability, for the 21st century, leading computer Teece (1986) suggests that firms must use vendors face a dilemma of how much is some combination of speed, timing and luck open enough to attract enough buyers while if they hope to appropriate returns generated retaining adequate returns. by their innovation. First I review the theory and history of Teece (1986) also considers those proprietary computer platform strategies, innovations (such as computer systems) that contrasting that with the Unix-based open require the provision of complementary systems movement. I then examine the assets to commercialize the innovation. origins and motivations of Linux and other When additional investment is required to open source software projects. In three co-specialize the asset to be useful with a abbreviated case studies, I present the hybrid given innovation, the successful adoption of strategies of three platform vendors — the innovation and the related assets are Apple Computer, IBM and Sun mutually reinforcing, providing a positive Microsystems — that combine open source feedback cycle. Thus, to make a successful and proprietary platform strategies in hopes “whole product” solution, the owner of the of obtaining competitive advantage. Finally innovation seeks to attract such an analysis of these cases is combined with complementary assets, in part by sharing the overall returns of the innovation with the West, How Open is Open Enough? Page 2 third party supplier of such assets (Katz and market platforms displaced more specialized Shapiro, 1985; Teece, 1986; Moore, 1991). products, either by providing lower cost or The positive feedback, self-reinforcing addressing a broader range of buyer needs cycle of success between a de facto standard (Morris and Ferguson, 1993). and its co-specialized asset success has been Firms that successfully establish and termed “network externalities” (Katz and maintain a proprietary platform enjoy the Shapiro, 1985) or “demand side economies right to appropriate the returns from a of scale” (Katz and Shapiro, 1986). When success of that platform (Morris and such network effects are coupled with Ferguson, 1993). But platform success is a switching costs between standards and high necessary but not sufficient condition for up front R&D costs, Arthur (1996) predicts profiting from proprietary technology that the dominant technology will enjoy innovation. When competing firms control “increasing returns to scale” that magnify an different layers of the standards architecture, early lead in a technology contest. The platform leadership is unstable because instability and self-reinforcing nature of control of the platform can shift without such a lead has often been referred to as disrupting the buyer’s value proposition. In “tipping” of the contest (e.g. Besen and particular, a firm that can take control of Farrell, 1994). Liebowitz and Margolis access to the complementary assets has an (1999) argue that actual tipping is rare, and incentive to do so to capture the returns from that lasting success is more often explained the platform (Bresnahan and Greenstein, by production economies of scale and firm 1999; West and Dedrick, 2000). execution. In explaining platform success, In the case of computing platforms, most economic research has focused on demand research has focused on one particular type and supply side economies of scale, and the of complementary asset, that of prepackaged broad strategic choices made by sponsoring application software. A computer platform is firms. However, there is also repeated not, in itself, useful without software to evidence that operational execution is solve specific problems. During the 1960s crucial to the relative success or failure of and 1970s, large organizations buying individual platforms (Morris and Ferguson, mainframe computers typically developed 1993; Liebowitz and Margolis, 1999; West, their own custom software. However, the 2003). Also, measures of platform success advent of the mass-market personal have focused on adoption or market share. computers attracted many new users unable The more managerially relevant metric