Spin-outs are projects, which have been initially an in-house product of firms, but are consequentially released in the open-source environment in the form of a visible-to-all open source code. Such was the case of Mozilla, when its parent company, reached a conclusion its web browser technology is no longer of strategic value for the firm and future investments would be pointless, thus deciding to donate it to the open-source community. Nonetheless, spin-outs can be beneficial not only when drastic changes are needed due to threats on business strategy. Releasing valuable technology in the external realm and maintaining close corporate ties with its advancements can capture significant value for firms.

Java is a general-purpose programming language, which was widely adopted by many direct competitors of Microsoft in web-based technology. Thus, as Java become more and more embraced, IBM would generate increased revenue from selling its own hardware and supporting services. Due to this interest of IBM in Java, two IBM researchers came up with an experimental Java compiler in 1996 by the name of “Jikes”, which was released in the open-source community. Thus, the increase in the popularity of Jikes led to larger demands for products and services of IBM, related to the respective spin-out.

In another effort to popularize the Java programming language in 2001 IBM released its open-source SDK for Java applications, called “Eclipse”, which was intended to be a major rival to Microsoft’s Visual Studio SDK. As various other software companies, such as SuSE, Red Hat, SAP, as well as hardware titans like Fujitsu, HP and Intel joined in the further development of the project the non-profit Eclipse Foundation was established as one of the most successful IBM spin-outs.

A similar effort was put by BEA – a major rival of IBM in Java applications servers. In avoidance to the Eclipse partnership, BEA created “Beehive” – an open-source project, aimed at creating a new IDE for developing Java projects, equipped with key application libraries owned by the donator. Nonetheless, in 2005 BEA finally joined the Eclipse project.

Maximizing Returns of Internal Innovation

Spin-outs seed non-commercial technology in order to support internal innovation goals. The cases of Jikes, Eclipse and Beehive indicate that spin-outs make sense when related to technology which is either not yet commercialized (Jikes, promoting Java), or will become commoditized and thus of limited commercial value (as for the growing number of Java development tools). Donating essential innovation to the open-source community boosts the adoption of both the donated technology and of various other accompanying products (as Eclipse boosted Java). Firms use this chain effect in order to increase the sales of their own products or to popularize their services, as well as to undermine competitors. On the other hand, “shelfed” products, which are not creating any value for the company may still be of benefit if granted to the open-source community – since they could i.e. establish trust and sympathy in the firm’s image and thus increase potential customers.

Role of External Innovation

The external innovation produced by spin-outs may have different strategic value for firms. Some of those roles include:

  • Spin-outs might become de facto standards for whole industries, giving the donating firms the advantage of familiarity with the emerging standard and eliminating the need to re-implement or tinker their products in order to conform with it;
  • Spin-outs might evolve into complements and improvements to the firm’s internal innovations and thus supplant it and ensure ongoing innovation;
  • Spin-outs can lower or even eliminate the costs for supporting a product. This aspect is of considerable significance when a firm no longer has the ability to maintain a service and delegates the ongoing support to the open-source community, thus elongating the life of the orphaned product.

    Motivating Participation

    The motivation behind spin-outs can be the desire to capture value from a “dusty” company product, building a foundation for the wider adoption of a specific technology up to the level of a standard or just enough to trigger the chain increase in sales of related products, etc. Sometimes, a spin-out is the only alternative as was in the case of Netscape’s exit through the creation of the Mozilla project.

    A major motivational hurdle for participating in spin-outs is the idea of relinquishing control over valuable IP in order to reap future and uncertain rewards.

    For individuals the main motive for participating is the instant access to valuable in-house technology, which has been unavailable for a preceding long period of time.

    Related Risks

    Risks include the impossibility to predict whether the spin-out will catch momentum and become successful. The number of cases in which a “foundling” project has gradually become self-sufficient and has reached its intended goals seems to be relatively small, compared to spin-outs that have waned off with time despite the amount of resources and technology invested. Hence, sustaining third party interests remains the main challenge in terms of spin-outs.