Managing the Open Source vs. Proprietary Decision
In their new book, The Comingled Code, HBS professor Josh Lerner and London School of Economics professor Mark Schankerman look at the impact of open source software on economic development. Our book excerpt discusses implications for managers. Key concepts include:
- While we often view proprietary and open source software from an either/or perspective, the two actually interact quite a bit.
- Many software firms sell proprietary software, but they still contribute to open source development via standards bodies. This situation necessitates policies that can facilitate the ongoing competition between the open source and proprietary software camps, ideally in a way that promotes both efficiency and innovation.
- Companies should see the use of open source and proprietary software not as an either-or decision, but as a continuum.
Editor's note: In their new book, The Comingled Code: Open Source and Economic Development, HBS professor Josh Lerner and London School of Economics professor Mark Schankerman look at the impact of open source software on economic development, as well as the resulting policy and management implications. In this excerpt, they discuss how corporate managers should consider the interaction of open source and proprietary on software they develop and use.
Implications for Corporate Managers
Be sensitive to the lack of a ''right'' answer. There is no reason to expect different firms to make the same choices in terms of open source and proprietary software. There is no simple ranking of open source and proprietary software, either in terms of the full costs of adoption or the quality of the software. The basic reason is that open source and commercial software pose different trade-offs in terms of costs and quality, and companies are heterogeneous. These users do not all attach the same weights to the different dimensions of cost and quality.
Moreover the trade-offs regarding the various dimensions of cost and quality, and the weights that users attach to them, are likely to depend on the particular task for which software is needed, so the same user could make different choices about which software to use.
The appropriate mixture between open and proprietary software will vary with the company's circumstances.
When considering the costs and benefits of open source and proprietary software, approach the received wisdom with caution. Our survey of firms regarding the costs of different types of software suggests that some of the commonly accepted patterns about the differences in costs and benefits between these two types of software do not hold. For instance, the relative differences in the cost components are not as sharply different as we would have assumed. Therefore it is important to do a precise analysis adapted to each specific case.
The appropriate mixture between open and proprietary software will vary with the company's circumstances. Our survey suggested a number of patterns that drive firms to engage in open source development. For instance, not surprisingly, larger firms were much more likely to engage in some open source activity than either small- or medium-sized companies but less likely to specialize in open source. Similarly companies that work on customized software, bundled software, and (to a lesser extent) support services are significantly more likely to engage in some open source than pure software developers. Synergies are likely to make it more attractive to combine open source with some business models than others.
The appropriate mixture between open and proprietary software will vary with the stage of development of the nation in which the company is based.
Our survey showed that the relative importance of the initial cost of the software and what we term complementary costs—those involving the costs of switching, assuring interoperability, support and upgrades—vary with the level of national economic development. We find that the initial cost of software is relatively more important in less wealthy countries than in middle-income countries, and at the same time more important in middle-income than in high-income countries.
Meanwhile the complementary costs grow in importance in wealthier nations. Remember not to confuse vertical and horizontal differentiation. As we highlighted in chapter 5, there are really two kinds of quality differences: vertical differentiation, where one product clearly dominates the other (the BMW vs. the Yugo, in our example) and horizontal differentiation, where different consumers with different needs would choose different options (the Yugo and the pickup truck). The vast majority of instances in software involve horizontal differences, where different customers will make different choices. As a result coexistence between open source and proprietary software is the rule rather than the exception.
Managers must make choices with a keen eye to their target audience and awareness that no one product is unlikely to satisfy all users. Mixing is the rule, not the exception. We observe that users extensively mix the two types of software, and that this pattern held in all the countries we studied. Moreover the extent to which open source is used and the degree of mixing between open source and proprietary software both depend on user characteristics, in ways that are consistent with economic principles. Companies should see the use of open source and proprietary software not as an either-or decision, as it is so often depicted in the literature, but as a continuum.
Excerpted from The Comingled Code : Open Source and Economic Development by Josh Lerner and Mark Schankerman, published by MIT Press in 2010. Copyright Massachusetts Institute of Technology 2010. All rights reserved.