Collaborative Open Source Software Utilization in Competitive Advantage Creation Author: Erkko Anttila Supervisor: Heikki Hämmäinen, Professor Instructor: Valtteri Halla, M. Sc. Engineering & B.Sc. Economics

Index Introduction & Background Research Structure & Objective Research Methods Software Product Competition Industry Disruption and OSS Maturity Firm Level Collaboration Model Collaborative Product Framework Validating Case Studies Conclusions

Introduction & Background Open Source Software (OSS) = source code is distributed with the executable binary, the software is free to use and anyone is free to modify and redistribute it Increasingly adopted as a part of the software industry even though fundamental change to traditional development approach Free licensing vs. Commercial licensing Unclear for commercial parties how collaboration with community can create competitive advantages Informal relationship Openness of software Benefiting competition Research Question: How can collaborative OSS utilization create a competitive advantage for product companies? Significant companies involved with Open Source Software : Nokia Apple IBM Motorola Palm/Access Samsung Hewlett-Packard Sun Microsystems Yahoo Google Microsoft Red Hat Ericsson Trolltech Montavista ……

Research Structure & Objective Objective: Identify collaborative OSS utilization strategies, that create competitive advantages and form a framework that in detail describes the implementation Scope: Product companies including both pure licensing companies and software products for consumption with complementary goods e.g. hardware. Substantial utilization: Product software consists of at least e.g. 50% or more OSS.

Research Methods Literature Review  Theoretical understanding, OSS Impact and Collaboration Framework Two Descriptive Case Studies  Validation of Collaboration Framework Nokia Oyj (ITSE 2005) Apple Computers Inc (Mac OS X & Server) Interviews with key people in organizations Active participant observation Source code analysis  Initial and continuous cost structure COCOMO model software value estimation Industry comparison to key competitors Initial Development Cost Structure (Nokia) Continuous Development Cost Structure (Nokia)

Software Product Competition Special Characteristics: Information Goods High Fixed costs Minimal marginal costs Knowledge intensive production Easy Duplication Intellectual property rights (IPR), Strong Competitive Factor Systems Competition and Network Externalities Competitive issues Cost of Software Time to Market Low quality of Products Commoditization impacting value of software Software common across competition Marginal Costs of Software Production Software Development Value Chain

Industry Disruption & OSS Maturity FactorDefinition Impact Community Growth The community has reached 1.5 million developers The resource pool is substantially large to impact the industry Commercial Investment Continuous diffusion of commercial investment to the OSS asset Substantial growth of the value in the OSS asset and proof of changing development approach Software Maturity Part of the OSS asset has reached commercial quality Directly usable for product companies and continuous devaluation Development Concentratio n Concentrated to the lower layers of the software stacks and generic technologies Opportunity for commercial value to reside in higher layers or specific implementations Commercial Value Commodity software due to openness and relatively low innovativeness Does not create product differentiation but cost reductions and matched quality OSS is a growing industry wide disruption Software product industries have moved to a transition phase  Heterogeneous collaboration Closed Source, Dual Licensing, Direct utilization, Collaboration OSS Maturity Factors

Firm Level Collaboration Model Differentiating software moves to small part of products Competition Commoditization Model defined based on: Technology differentiation Level of collaboration Three main strategies Closed Gated community Open development Strategies exhibit different advantages and disadvantages!

Firm Level Collaboration Model Internal Development Gated Community Development Open Development Advantage - IPR - Lock-In - Systems competition -High entry barriers - Reduced maintenance cost -Impact on value of software - Interaction with competent resources - Reduced initial and continuous investment - Faster time-to-market - Direct relationship with OSS asset - Impact on industry software value - De facto standardization Disadvantage - Cost of software - Time to market - Risk - Commoditization - Reduced impact of IPR - Collaboration includes uncertainty and issues - Challenges in legal domain - Reduced impact of IPR - Collaboration is not trivial Advantages and Disadvantages relative to Firm Level Collaboration Strategy

Collaborative Product Framework Firm level strategy Define value of software in relation to environment Reconfigure development value chain to match internal and external environment Integrating and reconfiguring the external development resources by utilizing collaborative R&D in the non- differentiating software asset Continuously managing the interface of non-differentiating and differentiating software. Create relative advantages during transition phase of industry Concentration on value Expand scope of competencies Impact external software and competence value First-mover Advantage in collaboration Firm level strategies & relative advantages  Impact industry competition & redefine industry competitive forces

Collaborative Product Framework Three Firm Level Strategies

Collaborative Product Framework Industry Transition from Previous  Transition  Resulting

Validation Case Studies Initial Development Cost Structure (Nokia) Continuous Development Cost Structure (Nokia) Initial Development Cost Structure (Apple) Continuous Development Cost Structure (Apple) Reconfigured development value chain Proven reduction of transaction costs Substantial amount of software maintained in collaborative effort Closed software and investment concentrated to areas that create the most value

Validation Case Studies Empirical FactorNokiaApple OSS Originated Code (SLOC)8.9M13.6M Company Created OSS Code (SLOC)0.8M3.4M Duration of Collaborative Development 4-5 years ~10 years Value of Utilized OSS$228M$350M Share of Collaborative development (Kernel)~100%~0% Share of Collaborative development (System) ~88%~60 Share of Collaborative development (UI Toolkit) ~46%0% Developer amount (Existing Communities)~2500~700 Commercial parties (Existing Communities)> Created Community Duration1 year4 years Created Community Size~10~150 Created Community Contribution (Code contributions) ~5-10 ~ Substantial amount of utilized OSS Enormous value of utilized OSS based on COCOMO model Large community contribution to continuous development Commercial parties investing to same communities

Conclusions OSS is an industry wide disruption with continuously growing impact Firm Level Strategies During transition phase of the industry, collaboration can lead to relative advantages Strategic split of software manages disadvantages and enables different firm level strategies Value chain can be reconfigured to best match internal competencies and external environment Value creation possible in addition to substantial collaboration First-mover advantage in collaboration Industry Competition Outlook is increasing movement to collaborative R&D  Gradual converging of collaboration and redefining industry Further increases the value of the OSS asset through network externalities and positive cycle First-mover advantage from transition phase results in absolute advantage Mature collaboration processes Social Capital with prevailing communities Bound to company and community resources and processes

The Future is Open? Questions? Comments?