Open Standards Open Source Software and Open Innovation

Open Standards, Open Source Software and Open Innovation The developing case for openness FDIS July 19 th, 2005

Four Pieces of Conventional Wisdom • The creator (inventor, lone genius) must be the focus of any inquiry about innovation • Intellectual property protection is justified by the substantial costs incurred by the creator and distributor of new works • Consumers and partners play a passive role in innovation • Restricting access to creative works is the only sustainable way to create incentives for the creation of additional works

Intellectual Property Law Today • As an incentive to stimulate innovation, intellectual property law conveys a “bundle” of rights to creators allowing them to control their works • Provides a limited-term “monopoly” • Creative works ultimately enter the public domain for use by all • The Economic View of Information – Society benefits from the fullest availability of information for all, particularly where there is little or no cost involved in its production and distribution – In the absence of other compelling interests, monopolies, such as these intellectual property monopolies, are detrimental to society

Intellectual Property Law Today • Assumes that the incentives lead to the creation of works that otherwise would not have appeared • Reflects the historical concern with the creation of physical products that are costly to produce and distribute • Little empirical evidence to show the levels of creation that would occur under different conditions (shorter time periods, more limited rights)

Two Broad Categories of Innovators • First innovators who are granted rights – Almost always followon innovators to prior first innovators – Standing on the shoulders of giants (Newton) • Follow-on innovators who build upon earlier work – Outnumber the first creators of the work – Every artist is a cannibal, every poet is a thief (U 2)

Intellectual Property Rights • Serve as a form of tax on innovation by one of these categories – If the rights of first innovators are increased, follow on innovation will be under-produced • Extending terms • Stronger tools to combat infringement • Failure to disclose – If the rights of first innovators are reduced, innovation by first innovators will be underproduced – The “Goldilocks” solution

Three trends that challenge the • Digitization • Increase in the relative value of intangibles versus tangible goods • Licensing rather than selling digital goods • The Digital Dilemma – Same technologies that allow virtually free copying and distribution of digital information products allow control of distribution (NAS)

What is Openness • Data and information accessible by anyone • Subject to modification by anyone • Wide range – Open standards including proprietary material – W 3 C standards – Linux – Wikipedia • The Internet as laboratory

Open Standards • Advantages – Facilitate competition – Reduce threat of lockin – Encourage innovation “further up the stack” – Foster interoperability • Issues – Openly arrived at? – Timeliness? – Proprietary? • What the market can bear? • RAND or royalty-free? – Standards strategies • Embrace and extend • Sloth • Seeding the market

Policy Issues • Government procurement requiring open standards • Mandating interoperability

Open Source Software • Uses intellectual property law as basis for license • Mirror image of standard licenses – Rather than controlling access to limit production and raise prices, encourages the widest possible distribution • Open source software success depends on encouraging further distribution

Open Source Software • The larger the number and the more heterogeneous the group with access, the more likely the exposure to someone with appropriate experience, skills, and interest – Depends on self-identification for tasking • Problems are broken into small pieces lowering cost of participating – Certain incentives greater with larger audience • Reputation • Access to venture capitalists, potential employers – 50% of cost of software development cost in testing and maintenance • More likely to get help in “non-creative” work – Larger the group, the more likely to find the 20 in the 80/20 rule – “With enough eyes all bugs are shallow”

Policy Issues • Many calls for governments to mandate open source eg. Peru, California Resources Board • Interoperability may be the answer (Perens) – For critical governmental functions interoperability should be required – Bumper sticker—“You shouldn’t need to buy software from a particular company to communicate with your government” • US Government objections based on TRIPS and WTO government procurement rules

Open Innovation • Known by many names—collective, distributed, cumulative, reactive innovation • As old as Adam Smith and the Yankee tinkerer • Von Hippel—customer driven innovation – Leading edge customers with skills and resources – Identify market needs before the market develops • Customers know their needs best—tacit, sticky knowledge • Manufacturers know their solution set best – Don’t know all solution sets – Have economic incentive to provide most generalized solution – Have economic incentive to provide their existing, proprietary solutions • Hagel and Brown – Only sustainable competitive advantage based on productive friction with partners • Henry Chesbrough–Firms should leverage internal and external ideas

Open Innovation • Open innovation– from customers, partners, employees—collective wisdom – Toyota production line versus General Motors – Digital information goods—increasingly important – Not limited to information goods--design and production of physical goods is increasingly digital – “Long tail” demonstrates heterogeneity of customer needs

Policy Issues • Need to measure—much open innovation occurs outside formal innovation system • Potential incentives – R&D tax credit? – Innovation impact statement – Manufacturing Extension Program helping SMEs • Removing disincentives – P&G web warning on customer suggestions

Four Pieces of Unconventional Wisdom • The focus should be on the process of innovation and the many potential participants • The low cost of the creation and distribution of digital goods requires a different view of intellectual property • Consumers, partners and others are playing an active role in innovation • There are many sustainable reasons to create and to share, rather than to create and restrict

Conclusions • There is increasing evidence of the effectiveness of openness in creating and distributing digital information products and in many other economic processes • Utilizing the collective wisdom of people around the world is more than just intuitively appealing, it is being validated as a coherent and sustainable basis for a different view of innovation and intellectual property • A through review of public policy to increase “openness” is likely to be fruitful for the 21 st Century economy