Open Sources | Rodrigues & Urlocker » Opening up...to prosperity

January 25, 2007 | Comments: (0)

Opening up...to prosperity

TAGS: Open Source

On my flight home from Boston today, I read an interesting article in the MIT Sloan Management Review. It's called "The Case for Open Business Models" by Henry Chesbrough. Though the title looks ready-made for open source (and this blog ;-), the article is actually much broader, though it does address IBM's use of Linux.

The basic argument is that

Open business models enable an organization to be more effective in creating as well as capturing value. They help create value by leveraging many more ideas because of their inclusion of a variety of external concepts. They also allow greater value capture by utilizing a firm's key asset, resource or position not only in that organization's own operations but also in other companies' businesses.

Fine, but what does Chesbrough mean by an "open" business model? Basically, one that invites a company to use resources that it doesn't produce, and to produce resources that others, and only sometimes it, consumes.

Chesbrough uses IBM as an example:

IBM...rethought its whole approach to managing intellectual property, especially with respect to patents and technology. Shifting from a defensive approach (focused on preventing the leakage of IP) to an offensive one (focused on licensing IP to outside parties), the company was able to generate significant new revenues.

If your first name is "Bill" and your last name is "Hilf," you're probably wondering why I don't automatically deadpan: "And this is just what Microsoft did with its patents." :-)

Unfortunately, while this may be in part true, it misses out on the rest of the IBM story (and hence, makes it harder to believe benevolent, or even neutral, Microsoft motives).

As Chesbrough elaborates, part of IBM's open approach was also to invest in Linux (roughly $100 million each year) while lowering its investment in Unix, thereby saving hundreds of millions of dollars each year. It shares the Linux development load with other companies like Red Hat and HP, allowing it to refocus investment dollars while still having an exceptional operating system for its hardware.

IBM has gone even further, however, by donating 500 of its software patents to the open source community. Not merely agreeing not to sue companies and individuals that use this or that product, but actually creating an "intellectual commons" from which the community can draw. This is the sort of patent agreement that evidences an open business model, even more than the willingness to license technology does (which both IBM and Microsoft do).

But this isn't about Microsoft or any particular company's shortcomings as an open company. It's about the benefits that accrue to those companies that open up. And while Chesbrough doesn't focus much on open source software, I believe the arguments he advances for open business models are amplified and improved by truly open, open source business models.

As Chesbrough points out, the developer of technology is not always the best entity to monetize that technology (as I recently wrote). "With innovation markets, ideas can flow out of places where they do not fit and find homes in companies where they do" (23).

You could let technology flow out of your company by licensing that technology, but I would venture a guess that the "information market" for most technology is pretty inefficient. Put simply, it's hard to know just what technology a given company has (especially if you believe Chesbrough and others who argue that "between 75% and 95% of patented technologies are simply dormant," unused by the companies that own them (23)).

Now imagine that you open sourced that technology under a free source-style license like the GPL. Suddenly, your code is much more discoverable, making the market for it more efficient. The licensing opportunity is also more efficient because it's easier to value the technology in question.

Yes, but why would someone buy what they can simply take for free under the GPL? Some may not, but most enterprises (i.e., those with the money to buy a license, anyway) will pay their way into a commercial license, anyway. Just ask MySQL.

So, with the right open source license, the market for one's technology increases, both in terms of usage and in terms of monetary value. What's not to love?

Amplifying this benefit is the fact that it is becoming more expensive to develop innovative products and harder to monetize them (due to ever-decreasing product life cycles), as Chesbrough notes (24). Put baldly, those patents companies spend so much time developing then hoarding are a massive waste of money in most cases. Far better to open up the innovations to others, and borrow from theirs.

Open business models enable companies to "leverag[e] external research-and-development resources to save time and money in the innovation process. It also means you can make more money, because you can license others' technology and build a business on it. Witness Red Hat.

For Alfresco, that meant investing in and using exceptional open source technology like Spring, Hibernate, Lucene, etc. For IBM it involved using and investing in Linux, Geronimo, the Apache web server, etc.

What it means for you is up to you.

Software really does want to be free, and software vendors should want to encourage this. There is a massive market waiting to be born...and it starts with open source. Hoarding makes the market artificially small, and limited to a select few. Open sourcing makes the market organically huge, and unlimited to potential participants.

I know which software industry I'd rather live in.

Posted by Matt Asay on January 25, 2007 08:25 PM

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