1. The Mysteries of Technology Sharing: Open Source Josh Lerner Harvard Business School and National Bureau of Economic Research

2. Agenda The shadowy realm of open source: What is it? Why do people contribute? Why is licensing a critical issue? What are the consequences for corporate strategy?

3. 1. What is open source? Software source code that is available to the general public and that does not have licensing restrictions that limit use, modification, or redistribution. Developers at many locations and organizations sharing code to develop and refine computer programs. Linux (operating system), but also Apache (web server software). Sendmail (e-mail processes). Perl (scripting language). Substantial investment and success.

4. Market Share for Top Web Servers Across All Domains, 1995 - 2004 Source: Netcraft

5. Source: Evans Research Market share of embedded operating systems, 2004

7. Background Phase 1 (‘60s-’70s): Academic (Berkeley; MIT) or semi- academic (Bell Labs; Xerox PARC) environment. Frequent sharing. Few defined property rights.

9. Phase 2 (‘80s) Reaction to AT&T’s Unix moves. Free Software Foundation. General Public License (  public- domain software).

11. Phase 3 (‘90s) Recent acceleration in activity. Challenges: Forking Products for high-end users  Documentation, support, GUIs, backward compatibility,... Commercial activity.

13. Focus on key actors Many interesting questions: How good is open source anyway? How should governments react? What is impact of patents? But here will focus on key actors: Programmers. Legal system. Corporations.

14. 2. What motivates programmers? Problems with altruism hypothesis. Unclear why would benefit corporations. Why not in other industries? Individual's net benefit = immediate payoff (current benefit-current cost) + delayed payoff (signaling incentives) Immediate payoff: (+)fix bug, (+)interaction, (  )opportunity cost of time.

15. Also delayed payoff Career concerns: Future job offers. Access to VC:  Stepping stone for founders of Sun, Netscape, Red Hat,... Shares in OS companies? Ego gratification/peer recognition.

16. Two incentives similar Incentives are stronger when: Performance more visible. Performance more informative about talent. Note: Implies multiple equilibria (similar to fads in academia). Cost of forking.

17. Some supporting evidence Haan, Roberts, Slaughter, and Fielding [2003] examine Apache project: One of largest open source projects:  Dominates market for web servers. Meritocracy:  Multiple level of rank.

18. The analysis Open source projects have extensive records: Allows them to assemble:  Contributions to projects, 1998-2002.  Changing rank over over the period. Surveyed in 2001 and 2003 regarding employment history earnings. Little impact of contributions. But higher rank have 14-29% greater pay.

19. 3. How does the legal system impact? Intense controversy around use of different licenses: Claims that permissive BSD license can be “hijacked” by commercial firms. Claims that restrictive General Public License can be socially detrimental. While much scrutiny of what licenses require, little writing about license choice.

20. Our essential argument Jean Tirole and I argue project founders likely to prefer less restrictions than programmers: Founders get more commercial benefits:  Job offers.  Venture financing. Programmers more cautious:  Danger of hijacking: Contributions won’t be recognized.

21. Our essential argument (2) If project very attractive to programmers, sponsor can choose whatever license he prefers: Likely to opt for unrestrictive. If less so, sponsor must choose license that satisfies programmers.

22. What motivates programmers? Problems with altruism argument. Instead, combination of immediate benefits: “Itch scratching.” Cost saving. … and long-range ones: Impress peers. Job offers, venture financing, etc.

23. What projects are less attractive? Projects oriented to individual end users: Fewer signaling incentives, due to low visibility of contributions. No/low benefits from tailoring code to own use.  Video games, desk-top applications, etc..  More likely to have restrictive license.

24. Basic facts All software development projects listed on SourceForge.net. Sample is dominated by projects: With the GPL. In the early stages. Oriented to end-users or developers. Operating on POSIX (Linux, Solaris, etc.) or Microsoft operating systems, or operating system- independent.

25. Most common licenses

26. Key findings Less restrictive licenses when: Oriented towards developers. When English is primary language. When topic is software development, multimedia, etc.

27. 4. What are the consequences for corporate strategy? Highly visible marketing campaigns. How are corporations addressing? Can develop a typology of responses:  Duplicate open source incentives.  Reactive strategies.  Proactive approaches.

28. Corporate open source products

29. Corporate response #1 Duplicate open source incentives: Hard:  Modification and customization of code conflict with IP rights. Can:  List contributors.  Share code within company.

30. Corporate response #2 Reactive strategies: Provision of complementary services/products not efficiently supplied by open source community (Red Hat,...). Contribute to the open source. Patent related inventions:  Possibility of hold-ups.  Issues of patent quality.

31. Corporate response #3 More proactive role: Release proprietary code and create governance structure. Why do this?  Profitable complementary segment (razor / razor blade model).  Primary segment would not have been very profitable (more incentive if laggard,...).  Proper governance structure (Mozilla, Collab.Net,...).

32. One note Corporations have long struggled with these issues: Committing to low prices. Allowing low-cost combinations of intellectual property. Getting certification for new technologies. Open source is just one possible solution: Patent pools. Standard-setting organizations. Self-imposed constraints:  E.g., Microsoft’s Shared Source Initiative. Issue well beyond software industry!

33. Wrapping up License choice is an important issue in open source. Despite emotional discussions, license choice has rational elements. Evidence appears consistent with framework.

34. Josh Lerner Jacob H. Schiff Professor Harvard Business School Rock Center, Room 214 Boston, MA 02163 USA josh@hbs.edu http://www.people.hbs.edu/jlerner