Many goods in the IT industry are closely related and interdependent on each other in a way that Katz and Shapiro (1985)[1] describe as the “hardware-software paradigm”. For instance, a manufacturer, specializing in the development of hardware, would face the burden of investing in additional complementary software products (drivers, operating systems, user-applications, etc.) to be integrated in the core hardware product in order to form a complete and useful product. The complements in this system architecture can sometimes overpass the value of the core technology itself, thus making the challenge of interdependencies even more complex for companies.

Open-source examples of the aforesaid are the relations between IBM’s WebSphere Commerce e-commerce software and the Apache HTTP server. Initially, customers of the WebSphere software were using standard web browsers, so IBM developed a proprietary httpd server to serve its WebSphere Commerce. Later on, IBM recognized the great potential of the open-source Apache HTTP server alternative and reached a conclusion that the company would be wasting resources in supporting its own complementary, constantly catching up to the better quality and widely adopted Apache software. Up to this date IBM is involved in a majority of Apache Software Foundation projects by allocating researchers and engineers, sharing its own innovations with the open-source community, and integrating various Apache technology into its own infrastructure[2].

In a similar manner, Apple decided to replace the bundling of Netscape’s and Microsoft’s browsers with its computer systems and create a web browser technology of its own. In 2002 Apple started building “Safari” upon the WebKit open source web browser engine. This decision was in accordance with Apple’s use of the open-source BSD Unix operating system as a foundation for its own OS X. Building upon open-source code led to the establishment of Apple’s project Darwin, intended to make the regular code-advancements of Apple contributed back to the wide open-source community. The ongoing contribution to project Darwin is continued up to this date, with the pattern of Apple releasing a Darwin version just days after disclosing its own commercial OS X, bundled, however, with some proprietary non-available code (the Graphical user interface and various applications, which are not built upon an open-source foundation).

Maximizing returns of Internal Innovation

Adopting open-source complements to core products obviously lowers production costs since the pre-existing open source code is “free” to use directly or build upon. Thus, firms target the highest value part of a whole product solution and combine the external innovation with internal technologies in order to create products which are not available through open source solely.

Role of External Innovation

In the case of open-source complements the role of external innovation is mainly subsidiary in a sense that it is always combined with “core” firm technology in order to establish a refined company product. External components provide a basis for further internal development.

Motivating Participation

The main motive behind participating in such open source initiatives is the already recognized internal need for specific complementary technology, the nature of which is rather atypical for the company’s main sphere of activity and has to be developed from ground-zero or bought. The decision to build instead of buy is made easy since a proportion of the solution is already available in a “free” open-source form.

After making the decision to participate, firms become willing to contribute back to the existing project on an ongoing basis in order to ensure the technology moves in the interest frame of the company and in order to maintain absorptive capacity.

However, the challenge on how to motivate third-party contributors remains. Hence, firms need to put relatively stronger effort in coordinating the ongoing supply of components.

Related Risks

The main risk in selling open-source complements is the successful combination of the core proprietary piece of technology with the open-source addition. Using open-source technology, which falls under an open-source license obliges the developer to share all improved works, built upon the open-source foundation. Thus, integrating open source into the company’s internal innovation poses risks of exposing firm-valuable internal knowledge to the outside environment.



[1] Katz M., Shapiro C., Network Externalities, Competition, and Compatibility, The American Economic Review, Vol. 75, No. 3 (Jun., 1985), p. 424-440

[2] https://www-03.ibm.com/press/us/en/pressrelease/47107.wss