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An Open Secret: Sharing Intellectual Property Can Be More Profitable Than Keeping It To Yourself

ON JANUARY 11th this year, America's patent office reported that IBM had earned the top spot in its annual patent ranking for the 12th time in succession, earning 3,248 patents in 2004. On the same day, at the firm's headquarters in Armonk, New York, IBM did something unusual: it pledged 500 of its existing software patents to the open-source community, to be placed into a patent "commons" that allows open-source software developers to use the innovations and build upon them without risk of infringement. Why would a firm that cares so much about intellectual property want to give it away?

"It isn't because we are nice guys," explains Mr Kelly, the head of the company's intellectual-property division. The company's motive, he says, is fear that patent rights have swung so far towards protection that they risk undermining innovation. The patent commons is meant to help restore the balance. "If this balance goes too far in one direction or another, this industry will not survive and our company will not survive. It is really that fundamental to us," Mr Kelly says.

Since then, some other companies have taken similar initiatives. In May, Nokia said it would not assert its patents against the inner code of Linux, a popular open-source computer operating system. In June, Red Hat, a big Linux distributor, said that it, too, would contribute to a patent commons. In September, Computer Associates donated 14 patents for free use by the open-source community. Open Source Development Labs, an industry forum, has offered to act as a repository for patent-commons projects.

Even Sun Microsystems, for years the epitome of a proprietary company, with specially designed semiconductors and software that work on its machines, announced a change in approach. Threatened by the pincer movement of commodity computer chips inside machines and Linux software running on them, it made its Solaris operating system open-source.

The trend towards open software code is an example of a bigger development in the technology industry: a new approach towards collaboration and "open innovation" that at times seems to work around the traditional intellectual-property system, and at times is directly fostered by it. "People think this is all a sort of flaky, radical, pinko strategy not related to the competitive marketplace. AU CONTRAIRE! This is about how to kill your competitor," says Don Tapscott, a management expert who studies innovation. "And you kill your competitor these days by identifying the need to innovate yourself, but also opening up that innovation; by owning IP, but also sharing IP."

How do IBM, Sun and others make money on open-source? The answer varies from company to company, but has to do with standards, interfaces and something the techies call "ecosystems" (that is, a community of third-party developers and service businesses that contribute to, and enhance the value of, the underlying product). "Instead of having a closed proprietary system, this is a way of opening the development environment to a larger community," says Auli Luukkanen-Laaperi, who heads Nokia's intellectual-property strategy. She says this benefits the company's R&D efforts and translates into more sales, because the firm's mobile phones become more useful to customers.

IBM profits from open-source (and particularly Linux) in two ways. First, open-source software is by some measures less expensive than proprietary software, so using it lowers the overall cost a customer pays for IBM's computers, applications or services. Second, it provides a common platform on top of which IBM can build and sell special applications and services.

Because open-source is non-proprietary, customers are much less locked into the firm supplying the IT systems. Its interfaces are open. Software interfaces are the digital equivalent of plugs and sockets. They require little intellectual endeavour, but are treated as intellectual property to keep rivals out. Opening up an interface means new software can easily be written to plug into it, increasing its value to users.

By giving up proprietary lock-in, firms can reap the advantages of open-source that accrue not just to one company but to all firms industry-wide. They can sell software that works on Linux, and they can count on a far wider ecosystem of developers and service companies to improve the software that benefits both them and their customers. For example, Apache, an open-source application, dominates the market for web-server software.

For Sun, opening Solaris was a way to attract independent developers to the platform, which opens it up to innovation from a broader community. Without this sort of ecosystem, the firm itself would be responsible for all enhancements to the product. That would make it not only slower and more costly but probably also less innovative than Linux, with which it competes in certain areas.

The best analogy is the internet. As late as the mid-1990s, a number of different networking standards were vying to become the world's infrastructure for data communications. One, called X.25, was used by most telecoms operators and many businesses, including France Telecom with its 9m Minitel terminals. The internet won out because its underlying standards are open and non-proprietary. This kept the cost low, made the system open to improvements and attracted a large development community. And once it was established, it benefited from network effects: the more people that use it, the more valuable it becomes to everyone, and the more others want to use it too.

The internet's ecosystem includes everyone from Cisco and Dell to eBay and Amazon. For instance, Cisco, which makes communications equipment, forgoes royalties on the use of any patent that relates to an industry standard, so as to foster the industry's overall growth, explains Mark Chandler, its general counsel. In return, it hopes to get more sales. Firms such as Cisco, Juniper, Alcatel and others can compete and innovate on top of the internet's open standards, just as two companies making toasters can compete in myriad ways but not on the size of the electrical plug or the voltage, which are based on well-established interfaces and standards.

Open-source software takes a novel approach to intellectual property. Although much is made of it being "free", in fact it relies heavily on intellectual-property rights, but through copyright and strict licensing terms. The terms generally stipulate that any improvements must be made available to all--though there is no reliable way to enforce this, other than fostering the right kind of culture.

The patent system can be deadly to open-source. It could even block techniques that try to work around a patent, making users legally liable if they use open-source. Indeed, this is precisely why big IT firms are pledging their patents to the open-source community. It is to provide open-source developers with a war chest to fend off patent disputes, by giving them rights of their own to assert (though nobody is sure whether this will work).

Some members of the open-source community are vehemently opposed to the current system of intellectual property. This movement traces its origins to Richard Stallman, a software engineer who in the 1980s championed a concept called "copyleft", in protest at the copyrighting of software. He believes software should be as free to use as the Bible, and free to modify, too. This does not mean it should necessarily come without a cost--"free as in free speech, not free beer," Mr Stallman is fond of saying--but it should be open to developers to tinker with.

Today, a small army of activists is carrying the torch, with names such as Electronic Frontier Foundation, Creative Commons, IP Watch, Public Patent Foundation, Centre for the Public Domain, the Open Knowledge Foundation and the Foundation for a Free Information Infrastructure, which was instrumental in blocking a European Union directive to harmonise software-patent policy this summer.

But the companies that sell open-source software have a different take. "We don't subscribe to the view of some of our friends in the open-source world that IP is bad and hamstrings innovation. The patent system is very necessary," explains Mr LaSala of Novell, a large Linux distributor that sells its own proprietary software riding on top of the operating system. Still, the company is well aware of the problem: last December Novell paid over $15m to buy a handful of important e-commerce patents in a dotcom bankruptcy auction, simply to make certain that they are not used against the firm or indeed the industry at large.

For some proprietary technology companies, on the other hand, open-source poses a serious threat. Sun, for instance, essentially opened up to save its business, and the outcome remains uncertain. Novell realised that its long-standing proprietary applications would be more valuable atop Linux, so it overhauled its strategy around open-source.

But the biggest threat posed by open-source is to Microsoft. That company has been successful not only because its software is on almost every personal computer in the world, but also because it has brilliantly nurtured a vast community of developers who write applications on top of the firm's Windows platform. This ecosystem enhances its value. Open-source is offering an alternative, common platform for developers to write applications.

Microsoft has responded with a two-pronged strategy. First, it tries to block open-source by using intellectual property. It refuses to license its "protocols," the interfaces that let open-source products interact with Microsoft; it suggests that open-source software may violate patents and copyrights; and it makes sure everyone knows that its own products, being from a single, known supplier, are entirely above suspicion. Second, Microsoft has adopted some open-source practices, disclosing its source code to large customers. It also opens the programming code of operating systems in which it does not have a dominant position (such as for hand-held
devices) to third-party developers.

Open-source software is not just a new way of treating intellectual property in the IT industry, but a new way of working together as well. Among its most distinctive traits, says Mark Blaxill of the Boston Consulting Group, is its decentralised form of collaboration. It breaks complex tasks down into modular bits, which are worked on by specialists through a clever form of self-organisation (made possible by the internet), and are then reassembled.

Steven Weber, a political scientist at Berkeley and author of "The Success of Open Source", published last year, thinks this form of economic production has a promising future. The rise of open-source is coming at a time when companies are already managing their intellectual property in ways that are more amenable to sharing than they used to be.

One reason is growing complexity. As firms add more features to their products to keep them competitive, they often need to make use of innovations developed by other companies. And as different companies need to make their IT systems work together to take part in global supply chains, the different kinds of software they are using have to interact seamlessly.

Another reason is convergence. When France Telecom decided to work on multimedia applications with a view to offering television over phone lines, Microsoft was interested too, because it wanted to understand the needs of that market. In May the two firms announced they would develop products jointly and share the intellectual property they would create.

A third reason is the disaggregation into niche firms at the leading edge of the IT sector, and a specialisation that is economically efficient. As this happens, software and components are becoming more modular and interchangeable.

"You see people innovating and creating new ideas and technologies, but not taking them all the way through to the market. They carry it to a certain stage and then hand the baton on to others who bring it on to commercialisation," says Henry Chesbrough of the Haas School of Business at the University of California, Berkeley. "The patent system is key to engaging in this kind of innovative division of labour."

This explains the paradox that as today's technology firms acquire more rights to exclude others, in the form of patents, they also feel a greater need to share. They are not doing this for philanthropic reasons, but because intellectual property is so fundamental to their business. As Mr Kelly of IBM puts it: "IP will still be the cornerstone of the successful companies in our industry." Many more patent pledges, he says, are on the way.

Reprinted by OSDL with permission from The Economist Newspaper Group Limited.
(c) 2005 The Economist Newspaper Group Limited. All rights reserved.