The Business of Free Software

Breaking with a largely proprietary tradition, large IT vendors have invested several billion dollars into open-source software development. What's their motivation? The observations presented in research by professor Marco Iansiti and coauthor Gregory L. Richards suggest some fundamental changes in strategy used by technology companies. Key concepts include:
  • IT vendors that traditionally have relied on proprietary-software development are increasingly turning to the open source software community to create pieces of their products.
  • Many IT vendors invest in open source projects that draw customers to a vendor's mainly proprietary, core businesses—the razor/razor blade approach.
  • This trend is changing some classic rules of strategy and forcing IT vendors to reconsider not only how they develop software but also where they derive value in their business models.
by Julia Hanna

IT vendors including Oracle, IBM, and Sun that traditionally have built offerings based on proprietary technologies are now investing billions of dollars into open source software—arrangements that are transforming in some ways the fundamental nature of technology strategy development, according to recent research at Harvard Business School.

In "The Business of Free Software: Enterprise Incentives, Investment, and Motivation in the Open Source Community," the authors—HBS professor Marco Iansiti and Gregory L. Richards of Keystone Strategy—examine what drives companies with large, proprietary software portfolios to invest in open source software (OSS) projects that can sometimes seem unrelated to their core business.

"This new reality upends the classic rules of strategy," Iansiti says, "and it's changing the way technology firms approach the development process. How much of your product do you share? Does your business model extract value from a core product or a portfolio of complementary products?"

Most academic research has focused on individual contributions to OSS, but this working paper is among the first to consider the impact of massive IT vendors like IBM and Oracle on the open source community.

Why are proprietary firms diving into open source? The answer (it's good for business) is hardly shocking. But the line from investing in OSS to profiting from a product is not as straight as one would expect.

Influencing What You Don't Own

"In a complex, sophisticated environment where so many products and services are connected, strategy has become, in large part, the art of influencing assets that you don't own," Iansiti observes. It's the old saw of the razor/razor blade business model, with many more options for profit. "For IBM, Linux is the razor, and WebSphere software and its related services are the razor blade," he says.

"The question of how you invest and extract money becomes much more interesting when you consider the different layers of the software 'stack' and how they can be leveraged," Iansiti adds. As a measure of IBM's commitment to open source, the company announced its intent to invest $1 billion to the development and promotion of the Linux operating system.

This new reality upends the classic rules of strategy and it's changing the way technology firms approach the development process.

In their paper, Iansiti and Richards divide a sampling of OSS projects into a "money-driven" or "community-driven" cluster. The former group has received over $2 billion in investment in technologies including Linux, Firefox, and OpenOffice, while support for the latter derives solely from the voluntary efforts of vendors' employees.

Not surprisingly, they find that the money-driven cluster consists mostly of high impact OSS projects that draw customers to a vendor's mainly proprietary, core businesses.

"OSS is a business tool that has been used by a variety of corporations for very logical purposes," notes Iansiti. "If you have an environment in which part of the service you provide and the product you sell can be given away for free, that changes the dynamics of the industry. As a company, you will most likely spend more time thinking about exactly what to give away and how to couple it with complementary products and services than you do anything else."

Wooing Open-source Developers

Another focus centers on determining how to make it easier for the open source community to work on projects that are consistent with your company's strategy.

"There are five or six million people in this space," Iansiti says of the open source community. "It's important to ensure they're doing something that helps your cause."

It makes sense to provide tools that help programmers develop applications that will make Linux more successful if it drives other aspects of your business. (And it doesn't hurt that you're also putting a stick in the eye of a competitor who makes money from the operating system layer of the software stack.)

"It changes the way we think about business development and alliances," Iansiti says. "Traditional alliances are formed between a business development executive and an individual company like IBM or Cisco. In the open source scenario, you could say that there's an alliance between IBM or HP and every Linux developer out there. And that alliance is being mediated by dynamics that are less investment-oriented than a traditional deal and more oriented toward indirect tools to make money."

The Payoff

Sometimes the strategies software companies employ are so complex that it isn't immediately evident why a company is investing in a particular area, Iansiti notes. There can be a significant lag time between a company's investment and extraction of a profit.

"People can be too quick to point fingers, saying that one company is stealing while another is giving something away. In fact, the whole picture is often below the surface."

It changes the way we think about business development and alliances.

In another ironic twist, some developers who were motivated toward open-source software development in rebellion against huge proprietary software vendors now find themselves being paid for work from those very same companies.

While research indicates a large majority of those who contribute to the open source community do so in order to learn and share new knowledge and skills, over half cite direct payment for their work or the chance to improve their employability as motivating factors.

Iansiti is the David Sarnoff Professor of Business Administration. He is the author, with Roy Levien, of The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability.

About the Author

Julia Hanna is Associate Editor of the HBS Alumni Bulletin.