The Host’s Dilemma:  Voluntary Forfeiture  in Platform Markets for Informational Goods Jonathan Barnett USC School of Law ...
Main Propositions <ul><li>Easy proposition: Open organizational models for information production are not new. </li></ul><...
Caricatures of Open Innovation <ul><li>(Some academic) Lawyers; (Many) Policy Advocates: Open source is revolutionary and ...
Open Innovation Is  Neither New Nor Exceptional <ul><li>Bell Labs (AT&T): “Open” licensing (nominal royalty subject to cro...
Transaction Paths in ICT Platform Markets End-Users End-Users Developer-Users Developer-Users Platform: Software, Hardware...
Host’s Dilemma (I) <ul><li>Platform only has value over non-mediated transactions if it achieves scale, which implies netw...
Windows Releases (Desktop Systems) 32 & 64-bit Oct. 2009 Windows 7  32 & 64-bit Jan. 2007 Windows Vista (Desktop Versions)...
Host’s Dilemma (II) <ul><li>Platform is a theoretically durable good.  But host maximizes long-term profits by constrainin...
Non-Exclusive Imperfect Solutions   <ul><li>Contract: Not all forms of hold up are perfectly contractible (not anticipated...
Forfeiture/Control Tradeoff <ul><li>Complete forfeiture resolves the credible commitment problem.  But it destroys any dir...
Old Models: Closed to Semi-Open <ul><li>The Mainframe Model (IBM):  </li></ul><ul><ul><li>Customized software “given away”...
Old Software Model: Semi-Closed Platform Holder (OS) APIs+ support Independent Developers OEMs/ Users OS $ $ Software Appl...
New Software Model I: Community  (Pure Open Source) Core Contributors Users Bug reports, patches Code releases subject to ...
New Software Model II: “Community Lite” (Hybrid Open Source) Foundation Entity Core Contributors User-Contributors Proprie...
Selected Open Source Foundations Advisory Board with representatives from sponsor entities.  Members are exceptional contr...
Linux Platform (OS Kernel) Linux Foundation (subject to Board of 15 sponsor plus 2 independent reps) Core Contributors Spo...
Leading Sponsors of Linux General microprocessor; Linux-based operating system platform for mobile devices. Sponsor >$500K...
New Software Model III: Market Altruism  (Sun Microsystems) <ul><ul><li>2005: Releases Solaris operating system source cod...
Non-Profit Strategies in the Mobile OS Wars <ul><li>Nokia (Symbian OS)  (47% worldwide smartphones):  </li></ul><ul><ul><l...
Organizational Competition: Mobile OS Market   2.8% Open Handset Alliance (open source) Android 12.4% Microsoft Windows Mo...
Main Points; Implication <ul><li>Both for-profit and not-for-profit entities regularly forfeit knowledge assets in order t...
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The Host's Dilemma: Voluntary Forfeiture in Platform Markets ...

  1. 1. The Host’s Dilemma: Voluntary Forfeiture in Platform Markets for Informational Goods Jonathan Barnett USC School of Law March 5, 2010
  2. 2. Main Propositions <ul><li>Easy proposition: Open organizational models for information production are not new. </li></ul><ul><li>A little harder proposition: Open organizational models for information production are not really open. </li></ul><ul><li>A somewhat harder proposition: The welfare implications of open models for information production are ambiguous, even for users. </li></ul>
  3. 3. Caricatures of Open Innovation <ul><li>(Some academic) Lawyers; (Many) Policy Advocates: Open source is revolutionary and really good. Let’s subsidize open “anything”. </li></ul><ul><li>Economists: Open source appears to deviate from rational choice behavior. Let’s figure it out . . . Reputation effects; warm glow; intrinsic utility. </li></ul><ul><li>Management scholars: Open source is the innovation engine of the future. Here’s a link to my book. </li></ul>
  4. 4. Open Innovation Is Neither New Nor Exceptional <ul><li>Bell Labs (AT&T): “Open” licensing (nominal royalty subject to cross-licensing), plus complementary know-how transfers </li></ul><ul><li>Research disclosures, sometimes at “academic”-level volume and quality (IBM Technical Disclosure Bulletin; AT&T; IBM; Xerox) </li></ul><ul><li>Open Software Foundation (1988): Not-for-profit organization founded by AT&T rivals to standardize Unix operating system. </li></ul><ul><li>Microsoft: API disclosure with no revenue sharing. Result: > 70,000 applications for Windows (cf. 12,000 applications for Mac). </li></ul><ul><li>Free software: Adobe Reader, Internet Explorer, Google, etc. </li></ul>
  5. 5. Transaction Paths in ICT Platform Markets End-Users End-Users Developer-Users Developer-Users Platform: Software, Hardware, Operating System
  6. 6. Host’s Dilemma (I) <ul><li>Platform only has value over non-mediated transactions if it achieves scale, which implies network effects. Host must credibly commit to achieve scale. </li></ul><ul><li>Users must make nonsalvageable learning and adaptation investments to use the platform or any other platform. Host must credibly commit against hold-up behavior after achieving scale. </li></ul><ul><li>Hold-up opportunities are abundant. </li></ul><ul><ul><li>Change price for access </li></ul></ul><ul><ul><li>Change level of access </li></ul></ul><ul><ul><li>Withdraw or constrain support </li></ul></ul><ul><ul><li>Planned obsolescence </li></ul></ul><ul><li>So long as host expropriates value < switching costs, users will capitulate. By anticipation, users decline to adopt (or “underadopt”). </li></ul>
  7. 7. Windows Releases (Desktop Systems) 32 & 64-bit Oct. 2009 Windows 7 32 & 64-bit Jan. 2007 Windows Vista (Desktop Versions) 32 & 64-bit Nov. 2006 Windows Vista (Business Versions) 64-bit Apr. 2005 Windows XP Professional x64 Edition 32-bit Oct. 2004 Windows XP Media Center Edition 2005 32-bit Dec. 2003 Windows XP Media Center Edition 2003 32-bit Oct. 2001 Windows XP Home & Professional 32 & 64-bit Sept. 2000 Windows Me 32-bit Feb. 2000 Windows 2000 Prof. & Server 16 & 32-bit May 1999 Windows 98 SE 16 & 32-bit June 1998 Windows 98 16 & 32-bit Aug. 1995 Windows 95 16-bit Apr. 1992 Windows 3.1 16-bit May 1990 Windows 3.0 16-bit Dec.1987 Windows 2.0 16-bit Nov. 1985 Windows 1.0/1.01 Type Release Date Release
  8. 8. Host’s Dilemma (II) <ul><li>Platform is a theoretically durable good. But host maximizes long-term profits by constraining durability through upgrades and extensions. </li></ul><ul><li>In multi-period setting, reputation effects constrain hold-up behavior as platform achieves scale. But reputation is not a complete solution if host can not credibly commit against end-period behavior. </li></ul><ul><li>Result: Host’s dilemma persists at every release. This is true even assuming (i) end-user myopia, and/or (ii) developer myopia. </li></ul>
  9. 9. Non-Exclusive Imperfect Solutions <ul><li>Contract: Not all forms of hold up are perfectly contractible (not anticipated or not verifiable). E.g.: extent/quality of support or backwards compatibility. </li></ul><ul><li>Integration: </li></ul><ul><ul><li>Not all users can be integrated (e.g., end-users) </li></ul></ul><ul><ul><li>Integration costs can be exorbitant </li></ul></ul><ul><li>Forfeiture: </li></ul><ul><ul><li>Set price below short-term profit maximizing price </li></ul></ul><ul><ul><li>Disclosure of trade secrets (e.g., source code, specifications) </li></ul></ul><ul><ul><li>Disclaim control rights or transfer ownership over platform </li></ul></ul>
  10. 10. Forfeiture/Control Tradeoff <ul><li>Complete forfeiture resolves the credible commitment problem. But it destroys any direct funding stream. </li></ul><ul><li>Long-term profit maximization requires that the host select some intermediate combination of incomplete forfeiture and incomplete control over the consumption bundle. </li></ul><ul><li>Control can be asserted in three non-exclusive ways: </li></ul><ul><ul><li>Assert control over some portion of the platform </li></ul></ul><ul><ul><li>Assert control over platform with respect to some users </li></ul></ul><ul><ul><li>Give away platform and assert control over complementary goods </li></ul></ul>
  11. 11. Old Models: Closed to Semi-Open <ul><li>The Mainframe Model (IBM): </li></ul><ul><ul><li>Customized software “given away” with hardware and support </li></ul></ul><ul><ul><li>Hardware usually leased </li></ul></ul><ul><li>The Unix Model (AT&T): </li></ul><ul><ul><li>OS developed at Bell Labs </li></ul></ul><ul><ul><li>Widely licensed at nominal fee until AT&T breakup (1983) </li></ul></ul><ul><ul><li>Funded by implicit user tax through AT&T monopoly </li></ul></ul><ul><li>The Windows Model (Microsoft): </li></ul><ul><ul><li>OS licensed broadly to OEMs (Dell, etc.) </li></ul></ul><ul><ul><li>Widely releases APIs and beta versions to third-party developers </li></ul></ul><ul><li>The Mac Model (Apple): </li></ul><ul><ul><li>OS preinstalled as part of hardware; not available for license </li></ul></ul><ul><ul><li>Limited cultivation of third-party developers </li></ul></ul>
  12. 12. Old Software Model: Semi-Closed Platform Holder (OS) APIs+ support Independent Developers OEMs/ Users OS $ $ Software Applications
  13. 13. New Software Model I: Community (Pure Open Source) Core Contributors Users Bug reports, patches Code releases subject to license at no fee <ul><li>Obstacles </li></ul><ul><li>No support/warranty </li></ul><ul><li>“ Forking” (multiple versions) </li></ul><ul><li>Privatization (depending on “reciprocity” term) </li></ul>User-Contributors
  14. 14. New Software Model II: “Community Lite” (Hybrid Open Source) Foundation Entity Core Contributors User-Contributors Proprietary Sponsors “ Distributions”; Services; Hardware Users $ $ Reports, patches Code subject to license at no fee $
  15. 15. Selected Open Source Foundations Advisory Board with representatives from sponsor entities. Members are exceptional contributors as determined by Board. 40% cap on board representation by single entity. GNOME Foundation GNOME GUI desktop No members. Self-appointing Community Council. Public commitment to zero royalty. Ubuntu Foundation “ Ubuntu” Linux distribution Individual members (300). Self-appointing board; almost no corporate representation. No members. Self-appointing board. No corporate representation. Derives 88% of funding from Google “royalty” contract. Membership entity. Classes based on increasing dues with increasing representation rights on board. Max. 2 reps/member. Governance Structure Foundation Application (market share) Apache Foundation Apache server application (47%) Mozilla Foundation Firefox Browser (20%) Linux Foundation Linux kernel (8% server market)
  16. 16. Linux Platform (OS Kernel) Linux Foundation (subject to Board of 15 sponsor plus 2 independent reps) Core Contributors Sponsors/Members : IBM Novell Intel Red Hat Oracle Fujitsu HP Bank of America Hitachi NetApp AMD NEC Texas Instruments Motorola $500K/yr/p.c $ Staff (>50% total) Contributors-Users Users Code Reports, etc. >1/3 code changes, >1/2 signoffs Distributions; other goods and services $ Patent Invention Network Patents
  17. 17. Leading Sponsors of Linux General microprocessor; Linux-based operating system platform for mobile devices. Sponsor >$500K/yr. Responsible for 6% of code changes and 6.4% of signoffs. Intel Sponsor >$500K/yr. Responsible for 6% of code changes and 8.2% of signoffs. Sponsor >$100K/yr. Responsible for 12% of code changes; 36.4% of signoffs. Sponsor >$500K/yr. $1B commitment announced in 1999. 10,000 Linux-related positions. Responsible for 6% of code changes and 5.3% of signoffs. Level of Involvement SUSE Linux Enterprise distribution; related support and warranty services. Second leading seller of supported Linux operating systems. Novell Red Hat Enterprise Linux distribution; related support and warranty services. Top seller of supported Linux operating systems. Red Hat Linux-compatible hardware (servers), middleware, client applications; related consulting services. IBM Related Products Sponsor
  18. 18. New Software Model III: Market Altruism (Sun Microsystems) <ul><ul><li>2005: Releases Solaris operating system source code; establishes independent OpenSolaris Governing Board, which sets forth Open Solaris Constitution </li></ul></ul>Sun Inc. Hardware, Supported Software (Paying) Users OS Code subject to no-fee license Governing Board, subject to Charter, Constitution “ Core Contributors” (Members) Approved Community Groups Nominate members
  19. 19. Non-Profit Strategies in the Mobile OS Wars <ul><li>Nokia (Symbian OS) (47% worldwide smartphones): </li></ul><ul><ul><li>1998: Symbian established by Nokia, Motorola and Ericsson to hold acquired Psion OS. </li></ul></ul><ul><ul><li>2008: Nokia pays $410M for OS and transfers it to non-profit Symbian Foundation </li></ul></ul><ul><ul><li>Feb 2010: Foundation “open sources” OS. </li></ul></ul><ul><ul><li>Foundation founders: AT&T, Fujitsu, Nokia, NTT Docomo, Qualcomm, Samsung, Sony Ericsson, TI, Vodafone </li></ul></ul><ul><li>Competing Initiatives </li></ul><ul><ul><li>Google (Android OS): Open Handset Alliance, sponsored by Google and various chip, telecom and handset providers. </li></ul></ul><ul><ul><li>Linux Mobile OS: LiMo Foundation, sponsored by various telecom and handset providers. </li></ul></ul><ul><ul><li>Intel/Nokia (MeeGo OS): Linux Foundation hosts open source software platform for mobile devices, developed by Intel, Nokia </li></ul></ul>
  20. 20. Organizational Competition: Mobile OS Market 2.8% Open Handset Alliance (open source) Android 12.4% Microsoft Windows Mobile 13.7% Apple Apple iPhone 20% RIM Blackberry 47% Symbian Foundation (open source) Symbian -- LiMo Foundation (qualified open source) LiMo -- Palm Palm WebOS -- Intel, Nokia (open source) MeeGo Global market share (2009) Foundation/Parent Operating System
  21. 21. Main Points; Implication <ul><li>Both for-profit and not-for-profit entities regularly forfeit knowledge assets in order to resolve the “host’s dilemma” and elicit user adoption. </li></ul><ul><li>Voluntary forfeiture is a strategic, not ideological, choice. Relaxing access at any point in the consumption bundle requires access restrictions at some other point. </li></ul><ul><li>Welfare implications of “open” over “closed” are indeterminate a priori. Open platforms may be welfare-neutral, welfare-improving or welfare-detrimental relative to closed platforms. </li></ul>

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