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      Mixed Source
      15 Oct 2009Working Paper Summaries

      Mixed Source

      by Ramon Casadesus-Masanell and Gastón Llanes
      As most managers know, commercial firms may benefit from participating in open source software development by selling complementary goods or services. Open source has the potential to improve value creation because it benefits from the efforts of a large community of developers. Proprietary software, on the other hand, results in superior value capture because the intellectual property remains under the control of the original developer. While the straightforward rationale for "mixed source" (a combination of the two) is appealing, what does it mean for a business model? Under what circumstances should a profit-maximizing firm adopt a mixed source business model? How should firms respond to competitors' adoption of mixed source business models? And what are the right pricing structures under mixed source compared with the proprietary business model? In this paper the researchers analyze a model where firms with modular software must decide which modules to open and which to keep proprietary. Findings can be directly applied to the design of optimal business strategies. Key concepts include:
      • Firms may become more closed in response to competition from an outside open source (OS) project, and are more likely to use a proprietary business model.
      • Firms are more likely to open substitute, rather than complementary, modules to existing OS projects.
      • Low-quality firms are generally more prone to opening some of their technologies than firms with high-quality products.
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      Author Abstract

      We study competitive interaction between profit-maximizing firms that sell software and complementary goods or services. In addition to tactical price competition, we allow firms to compete through business model reconfigurations. We consider three business models: the proprietary model (where all software modules offered by the firm are proprietary), the open source model (where all modules are open source), and the mixed source model (where a few modules are open). When a firm opens one of its modules, users can access and improve the source code. At the same time, however, opening a module sets up an open source (free) competitor. This hampers the firm's ability to capture value. We analyze three competitive situations: monopoly, commercial firm vs. non-profit open source project, and duopoly. We show that: (i) firms may become "more closed" in response to competition from an outside open source project; (ii) firms are more likely to open substitute, rather than complementary, modules to existing open source projects; (iii) when the products of two competing firms are similar in quality, firms differentiate through choosing different business models; and (iv) low-quality firms are generally more prone to opening some of their technologies than firms with high-quality products. Keywords: Open Source, User Innovation, Business Models, Complementarity, Vertical Differentiation, Value Creation, Value Capture. 59 pages

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: September 2009
      • HBS Working Paper Number: 10-022
      • Faculty Unit(s): Strategy
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        Ramon Casadesus-Masanell
        Ramon Casadesus-Masanell
        Herman C. Krannert Professor of Business Administration
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