Mixing Open Source and Proprietary Strategies

When Oracle bought Sun last year, many analysts proclaimed the death of open source as a business model. After all, CEO Jonathan Schwartz set Sun on a direction giving away technology such as MySQL and Java in order to sell related products and services. Oracle, meanwhile, was the world's largest supplier of proprietary database software -- nothing free here.

In truth, open source and proprietary software have for awhile been moving away from being competing business strategies. Companies are mixing them together to get the best of both worlds and generate the profit that seemed elusive to pure play open-source firms.

Recent research from Harvard Business School looks at decisions made by companies including Microsoft -- the king of proprietary software -- that are pursuing so-called mixed source strategies. The researchers asked, When should a profit-maximizing firm adopt a mixed-source business model and what might that model look like under different circumstances?

Some findings offered up by professor Ramon Casadesus-Masanell and postdoctoral fellow Gaston Llanes:

• Companies facing an open source competitor are more likely to follow a proprietary business strategy.
• Firms are more likely to offer substitute, rather than complementary, modules to existing open source projects.
• When competing firms have products with similar quality, they use business models to differentiate.
• Low-quality firms are generally more prone to opening some of their technologies than firms with high-quality products.

"If anything, our research plainly shows that value creation doesn't necessarily lead to value capture. Instead, for-profit firms should choose a business model to capture as much value as possible, taking into account the likely strategic and tactical reactions of other firms. It's impossible to give a unique recipe for all software firms -- it really depends on the industry's configuration and the placement of your product with respect to competitors."