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HOW OPEN SHOULD AN OPEN SYSTEM BE? Essays on Mobile Computing by Kevin J. Boudreau B.A.Sc., University of Waterloo M.A. Economics, University of Toronto Submitted to the Sloan School of Management in partial fulfillment of the requirements for the degree of MASSACHUBMMIBE OF TECHNOLOGY Doctor of Philosophy at the AUG 2 5 2006 MASSACHUSETTS INSTITUTE OF TECHNOLOGY LIBRARIES June 2006 @ 2006 Massachusetts Institute of Technology. All Rights Reserved. The author hereby grn Institute of Technology permission to and to distribute olo whole or in part. 1 Signature ot Author.. Sloan School of Management 3 May 2006 Certified by. .............................. ............................................ Rebecca Henderson Eastman Kodak LFM Professor of Management Thesis Supervisor Certified by ............. ................ .V . .-.. ' . ................ .... ...... Michael Cusumano Sloan Management Review Professor of Management Thesis Supervisor Certified by ................ Marc Rysman Assistant Professor of Economics, Boston University Thesis Supervisor A ccepted by ........................................... •: °/ Birger Wernerfelt J. C. Penney Professor of Management Science and Chair of PhD Committee ARCHIVES HOW OPEN SHOULD AN OPEN SYSTEM BE? Essays on Mobile Computing by Kevin J. Boudreau Submitted to the Sloan School of Management on 3 May 2006, in partial fulfillment of the requirements for the degree of Doctor of Philosophy Abstract "Systems" goods-such as computers, telecom networks, and automobiles-are made up of mul- tiple components. This dissertation comprises three esssays that study the decisions of system innovators in mobile computing to "open" development of their systems to outside suppliers and the implications of doing so. The first essay considers this issue from the perspective of which components are retained under the control of the original innovator to act as a "platform" in the system. Based on detailed review of leading systems in this industry in data spanning 1984-2004, I find that platform boundaries expand and contract over time as a means for platform suppliers to promote the adoption of the platform (by end-customers, downstream manufacturers, and suppliers of complements) and simultaneously to ensure the continuing innovation of the system. The second essay provides a systematic empirical investigation of how the extent of openness chosen by the platform supplier affected the rate of innovation of mobile computing devices. I measure openness in relation to both the boundaries of the platform and the extent to which actions were taken by platform suppliers to promote entry by hardware device manufacturers. I find regular relationships across multiple measures of innovation that suggest that the whether openness increases or decreases innovation depends on the nature of innovation and the intensity of competition between device makers. The third essay moves from device hardware to the applications software developer networks that form around opened platforms. I investigate the effect of platform suppliers' aggressive promotion of entry of software developers around their platforms. I find that while large devel- oper networks are associated with a wide selection of software titles, that very large developer networks in fact lead to less software output. I interpret this result as revealing the importance of maintaining investment incentives-even in a context with network effects. Thesis Supervisor: Rebecca Henderson Title: Eastman Kodak LFM Professor of Management Thesis Supervisor: Michael Cusumano Title: Sloan Management Review Professor of Management Thesis Supervisor: Marc Rysman Title: Assistant Professor of Economics, Boston University Contents Acknowledgments 9 1 Introduction 13 1.1 Open Questions on "Openness" ................... ........ 14 1.2 Dissertation Overview .................. .............. 16 2 The Boundaries of the Platform 21 2.1 Introduction ......... .. ... ........ ... ........ 21 2.2 Are Platform Boundaries Different from Firm Boundaries? . ............ 24 2.2.1 Platform Boundaries and Solving Coordination Problems . ........ 24 2.2.2 Setting Platform Boundaries to Allocate Investment Incentives ...... 26 2.2.3 Platform Boundaries and the "Power" to Regulate Other Suppliers . .. 27 2.2.4 Modular Systems, Specialization and "Best of Breed" Component Suppliers 29 2.2.5 "Opening" a System, Appropriability, and Interactions with Systems Competition .............. .................. 30 2.2.6 Summary .................. ................ 31 2.3 Empirical Context and Data . .................. .. ....... 32 2.4 Psion & Symbian ........ ........ .......... ........ 35 2.4.1 Integrated Development and Quantum Leaps in Design . ......... 37 2.4.2 Integration Extension of the System to New "Layers" ........... 40 2.4.3 Tapered Disintegration & Opening the System . .............. 41 2.4.4 Shared Control over the Platform . .................. .... 45 2.5 Palm ............ ......................... 47 2.5.1 Palm Pre-History: Failures in "Modular" Development .......... 2.5.2 Integrated Early Development-Despite Lack of Experience ......... 2.5.3 Tapered Disintegration & Opening the System ............... 2.5.4 The Separation of Platform from Hardware Businesses ........... 2.6 Microsoft ........................................ 2.6.1 Early Autonomous Innovation on a Small, Standard Operating System . 2.6.2 Failed Attempts to Adapt Existing Technologies to Ambitious Visions . 2.6.3 Integrated Development to Produce a Highly (Overly) Modularized System 2.6.4 Increasing Integration, Tightening Specifications and Increasingly Suc- cessful Products ................................ 2.7 MontaVista's Mobilinux ................................ 2.7.1 Serving Disparate Applications by Porting to Multiple Board-Level Plat- form s ......... ......... .... ... ....... .. 66 2.7.2 A Mobile Computing Platform Created with a Coalition of Specialized Partners ...................... 2.7.3 Creating Forbearance and Coordination Among Interdependent Suppliers 2.8 Discussion .. ... ... .... ... .. .... .... ... 73 2.9 Conclusions ............... .. ...... ... 76 2.10 Appendix . .... ...................... 83 3 The Effect of Openness on Innovation 85 3.1 Introduction ........... .. ........... .. .. .. 85 3.2 Conceptual Framework & Hypotheses Development .. ....... ....... 88 3.2.1 Diversity ....... .... ....... ...... ... 89 3.2.2 Investment Incentives ............... .... ... 89 3.2.3 Coordination and Governance . ......... ..... .... 91 3.3 Competition and Industry Dynamics in Handheld Com puters and Smartphones . 93 3.4 Data Set.............................. .. .. .. 97 3.4.1 Measuring Innovation . ...... ....... .. .... 97 3.4.2 Measuring Openness as Granting Access and Devolving Control .. ... 99 3.4.3 Other Data and Variables . .. .. ...................... .100 3.5 Empirical Strategy and Model ............................ S100 3.5.1 Identification Issues ....... ........ ............ .104 3.6 Analysis and Results . ...... .......... ................ S106 3.6.1 The Response of Low-Coordination Innovations to Openness ...... 106 3.6.2 The Response of High-Coordination Innovations to Openness ...... 110 3.7 Key Underlying Mechanisms ............................ 112 3.8 Summary and Conclusions .......... .................... .118 3.9 Appendix A: Reduced-Form Characterization of Response to Exogenous Changes in Openness .......................... .. ....... .129 3.10 Appendix B: Variables ................................ S131 4 Schumpeterian versus Network Effects in Systems Industries 135 4.1 Introduction ......... ... .. ............ ..... ...... 135 4.2 Why Promote the Entry of Component Suppliers to a System? .... ..... .139 4.3 "Networks" of Applications Software Developers in Mobile Computing ..... .142 4.4 D ata Set . ..... ... .. 147 4.5 Descriptive Analysis ............... ................ .148 4.5.1 An Industry Structure Conducive to Network Effects ........ ... 148 4.5.2 A Large Scope for Discretionary Investment Decisions in Determining Overall Software Selection .......................... 153 4.5.3 Do Larger Developer Networks Produce a Better Selection of Software? . 157 4.6 Discussion and Interpretation: The Role of Incentives in a Network of Comple- mentors ........ .. .. ... ....... .......... .164 4.7 Conclusion ....... ... .. ........ ....... .166 List of Figures 2-1 Trends in Market Size and Shares .......................... 33 2-2 Key Component Distinctions in Mobile Computing Systems . ......... 34 2-3 Vertical Integration Trends of Psion and Symbian ........ ......... 36 2-4 Vertical Integration Trends of Palm ................ .......... 48 2-5 Vertical Integration Trends of Microsoft (in Mobile Computing) ......... 58 2-6 Vertical Integration Trends of Montavista . ........... ......... 67 2-7 List of Interviewees .......... ...... .. ..... .......... 84 3-1 Industry Sales, Product Releases and Market Shares ...... ......... 93 3-2 Innovation of Products in the Leading Systems . ........ ......... 95 3-3 Variable Definitions and Descriptions . .............. .......... 101 3-4 Two Way Correlations Between Main Variables . ........ .......... 102 3-5 Restatement of Hypotheses in Terms of the Empirical Strategy .......... 103 3-6 Low-Coordination Innovations Regressd on Openness, System-Level Data . .. 111 3-7 High Coordination Innovations Regressed on Openness, System-Level Data . 113 3-8 Within-System Entry Regressed on System Openness . ........... ... 115 3-9 Individual Supplier