![[Value Network]](ValueNetwork.png)
While “open” normally has connotations of public goods, the idea of “open”-ness has been used for decades as a competitive strategy by firms in the computers and communications industries. Phrases like “open standard,” “open source” and more recently “open innovation” have been used to refer to these strategies.
What do they have in common? Which ones really are “open”? What does “open” mean, anyway?
Here I contrast firm strategies for these three types of “open”-ness in the context of their respective business models. Any firm needs a business model if it hopes to profit from innovation (Chesbrough 2003). Across disparate research on business models, the three common elements of a business model are value creation, value capture and a value network.
I focus on the issues related to systems-based industries (as with computers or mobile phones) where multiple firms within a value network work together to create and capture value. The model I presented in an earlier paper is shown below:
Source: Open Innovation: Researching a New Paradigm, p. 112
The term “open” has been used for standards since at least the 1960s. For some — as in the U.S. computer industry — “open” merely meant “not IBM” and later “not Microsoft.” For others — such as in the European telecommunications industry — “open standard” was redundant, because if it wasn’t an “open” standard, produced using “open” procedures (e.g. the ITU or ISO), then it wasn’t really a “standard.”
As in the research on organizational fairness, an “open” standard usually has two justifications: open in the process, or open in the outcome (cf. Greenberg 1990). The open process is the perspective of the standards creators, and is normally associated a particular type of standards-setting organization (SSO) — a formal standards development organization rather than a standards consortium or private firm. The process fairness is achieved through the structure of the SSO. For example, Ken Krechmer lists open meetings, due process in voting, and transparency of meeting outcomes.
The other form of openness of outcomes. Buyers seek an open enough outcome to assure competing implementations of the standard, in hopes of providing price competition and thus lower prices. However, no standardization activity that is economically self-supporting can be perfectly open. From an economic perspective, there are limits to openness, as I argued in “The Economic Realities of Open Standards.”
Tim Simcoe observes that in standardization, firms face an inherent conflict between value creation and value capture. A completely open standard creates lots of value, none of which can be captured; a completely closed standard captures 100% of no value created. So a profit-maximizing firm must seek an intermediate point that partially accomplishes both goals.
Thus to pay the bills, there has to be value capture somewhere: everything has some level of openness and some level of proprietary-ness.1 Typically, standards that are open in one area are often not open in another. An “open” standard may use the copyright on the standard to charge to view or use the standard. As Rudi Bekkers has found, even a process that is nominally open may be dominated by a few big companies that steer the technical definitions to overlap their own intellectual property and competencies.
In the narrowest sense, open source software is defined by a particular form of software license approved by the non-profit Open Source Initiative. In practical terms, the concept of open source has three dimensions: an IP license, a virtual development process and a system of shared governance.
Compared to open standards, open source has one huge advantage: you can use the technology without bearing the cost of implementing it. If it’s licensed under a permissive (non-viral) license, a firm can even use it to build its own technology for sale. But there is no guarantee that an open source package will be produced using the process fairness of, say, the ISO — even if you ignore the effect of founder privilege (“benevolent dictator for life”). And while a standards setting organization such as the IETF requires multiple implementations as a core value, open source (or particularly “free software”) partisans decry multiple implementations as “forking” (a cardinal sin in the open source cathedral).
Certainly there is open source software that is developed for shared benefit by altruistic volunteers. However, the provision of labor and other resources for major open source projects has been increasingly driven by contributors working to advance the goals of their employers, i.e. corporate interests. When firms sponsor open source projects, they have an easier time providing transparency to outsiders than sharing control with them.
Given an open source IP license makes it difficult to capture value, how do firms create profitable business models around open source? Typically, they give away the open source to create value, but capture value through the sale of related products or services.
A lot of open source and open standards participants wonder what’s “open” about “open innovation.” After all, both of the former have a shared or public goods element to them, whereas a prime goal of Open Innovation (as defined by Henry Chesbrough’s 2003 book) is that firms have a way to capture a private return. In fact, my own chapter with Scott Gallagher argues that the purest forms of open source or free software (such as Project GNU) are specifically not open innovation.
Still, open innovation can incorporate a public goods aspect. In the aforementioned chapter, we note that the pooled R&D of an open source consortium (such as the IBM-led Project Eclipse) inherently creates spillovers outside the consortium, no matter how much the consortium partners might want to appropriate the returns for their own. Eclipse, the Globus Alliance and other such projects offer a new paradigm for collaboration between for-profit actor to support both public gain and private value capture, in particularly by generating generating compatible implementations of essential industry technologies.
Even without such public goods, the practice of open innovation is inherently open in other ways. Innovation occurs across the boundaries of the firm, and both the value creation and value capture activities are spread across the value network, rather than controlling them within the scope of a single firm. It is for these reasons that shifting from closed to open innovation is often traumatic for a large firm that was previously successful in its vertical integration.
For open standards, open source and open innovation, the “open” part refers to collaboration by firms in producing some form of shared output. While sometimes openness is forced by buyers or regulators, today many firms voluntarily favor openness for those problems that require coordination and cooperation.
Openness can can be deliberately used to attract user adopters, as well as others in the value network. It also can be used to align the interests of firms across the value network. Systems industries (such as in the IT sector) inherently require a value network in which the suppliers, customers, competitors and complementors collaborate to create value. If anything, being open only cements these relationships as it more closely aligns the interests of the various firms in the network.
At the same time, in even the most open business ecosystem, firms will pursue their own (inherently competing) private interests. Siobhán O’Mahony refers to this as “competing on a common platform.” Such private interests require that firms ultimately capture value.
Thus for all three forms of cooperation, openness makes it easier to create value and assure cooperation across the value network, but harder to capture value.
Open innovation is not “open” like the other two. If anything, open innovation brings a note of realism to the discussion of open standards and open source, by putting the profit motive front and center. Both open standards and open source must serve the interests of those stakeholders that provide the essential resources. If firms choose not to participate (or not participate seriously) in a standards effort, that is a signal from the market about how well they feel that effort fits with their business model. While standardization cannot be held hostage to the private interests of any one firm, SSOs have long known that a standard not endorsed by major vendors is the tree that falls in the forest — and thus incorporate such market signals into their decisions.
Conversely, open standards and open source provide existence proofs for building effective institutions that align and coordinate the interests of potential competitors. For example, the open source license provides a “credible commitment” to make it less likely that commercial interests will underinvest in specific technologies.
There are some key questions about openness in infrastructure
Research on open standards, open source and open innovation offer suggestions for policy experimentation and empirical research.
Bekkers, Rudi, “Patent drag and stacking IPR fees,” paper presented at the Tilburg Law and Economics Center High-level Workshop on Standardization, IP Licensing and Antitrust, Brussels, January 18, 2007.
Chesbrough, Henry, Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston: Harvard Business School Press, 2003.
Hars, Alexander and Shaosong Ou, “Working for Free? – Motivations of Participating in Open Source Projects,” Proceedings of the 34th Hawai‘i International Conference on System Sciences, January 2001.
Iansiti, Marco and Roy Levien. The Keystone Advantage: What The New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability. Boston: Harvard Business School Press, 2004.
Krechmer, Ken, “Open Standards Requirements,” International Journal of IT Standards and Standardization Research, 4, 1 (Jan. 2006), 43-61.
Greenberg, Jerald, “Organizational Justice: Yesterday, Today, and Tomorrow,” Journal of Management, 16, 2 (June 1990), 399-432.
O’Mahony, Siobhán, “Competing on a Common Platform,” working paper, Harvard Business School, 2005.
O’Mahony, Siobhán & Joel West, “What Makes a Project Open Source? Migrating from Organic to Synthetic Communities.” Paper presented at the Academy of Management Annual Meeting, Honolulu, Hawaii, August 2005.
Rosen, Lawrence, “Open Source Licensing: Software Freedom and Intellectual Property Law,” Upper Saddle River, NJ: Prentice Hall PTR, 2005.
Simcoe, Tim, “Open Standards and Intellectual Property Rights,” in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press, 2006, pp. 161-183.
Vanhaverbeke, Wim and Myriam Cloodt, “Open Innovation in Value Networks,” in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press, 200, pp. 258-281.
West, Joel, “How Open is Open Enough? Melding Proprietary and Open Source Platform Strategies,” Research Policy 32, 7 (July 2003): 1259-1285. DOI: 10.1016/S0048-7333(03)00052-0
West, Joel, “Does Appropriability Enable or Retard Open Innovation?,” in Henry Chesbrough, Wim Vanhaverbeke, and Joel West, eds., Open Innovation: Researching a New Paradigm. Oxford: Oxford University Press, 2006, pp. 109-133.
West, Joel, “The Economic Realities of Open Standards: Black, White and Many Shades of Gray,” in Shane Greenstein and Victor Stango, eds., Standards and Public Policy, Cambridge: Cambridge University Press, 2006, pp. 87-122.
West, Joel, “Value Capture and Value Networks in Open Source Vendor Strategies,” Proceedings of the 40th Annual Hawai‘i International Conference on System Sciences, Waikoloa, Hawai‘i (Jan. 2007). DOI: 10.1109/HICSS.2007.600
West, Joel and Scott Gallagher, “Patterns of Open Innovation in Open Source Software,” in Henry Chesbrough, Wim Vanhaverbeke and Joel West, eds., Open Innovation: Researching a New Paradigm, Oxford: Oxford University Press, 2006, pp. 82-106.
Williamson, Oliver E., “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” Administrative Science Quarterly, 36, 2. (June 1991), pp. 269-296.
Joel West, “Contrasting Firm Strategies for Open Standards, Open Source and Open Innovation,” Designing Cyberinfrastructure for Collaboration and Innovation conference, National Academies, Washington, DC, January 29, 2007.