Here is an excerpt from still another outstanding article, written by Oliver Alexy and Markus Reitzig, featured online by The McKinsey Quarterly (January 2012), and published by McKinsey & Company. To read the complete article, obtain information about the firm, access other resources, and sign up for email alerts, please click here.

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Focus on the factors that could redefine intellectual-property competition in your industry.

Several years ago, something interesting happened in the infrastructure software sector: IBM and a number of other companies pledged some of their own patents to the public to create IP-free zones in parts of the value chain. They did so when a 2004 report showed that Linux, the open-source operating system that had emerged as a viable, low-cost alternative to established operating systems, such as Microsoft Windows and Unix, was inadvertently infringing on more than 250 patents.1 By voluntarily pledging not to enforce hundreds of IBM’s own patents so long as users of the IP were pursuing only open-source purposes, the company led the creation of an alliance of patent holders dependent on (and willing to defend) open-source software against lawsuits.2 One result: IBM substantially increased the share of its new products based on Linux.

This example seems specialized and unusual; after all, who would give away patents to make more money from innovation? But as open-source innovation, “crowd sourcing,” and engaging with open communities become increasingly prevalent, could IP-free zones appear in the competitive landscape of other industries? Having studied the case of infrastructure software closely,3 we believe executives can gain some insight into this possibility by asking three questions that underpin the logic of competing by protecting the open space—open competition, as you might call it:

• Do specialized firms offer proprietary solutions within certain layers of my industry’s value chain?

• Do integrated firms seek to cut development costs in my industry by drawing on open technologies to substitute for these proprietary solutions?

Are the underlying technologies complex—consisting of so many bits and pieces that a significant number could inadvertently infringe on proprietary IP held by specialized firms?

The more affirmative the answers to these questions may be, the more likely it is that the interests of specialized vendors of proprietary solutions will collide with those of firms drawing on open innovation, which could involve any type of open good, from software to the genetic code to crowd-sourced designs for parts or tools. That’s because if the answer to question 1 were yes, specialized firms would stand to lose business if integrated firms (question 2) cut them out of parts of the business. And the more complex the technologies are (question 3), the more likely it is that competitive offerings of specialized and integrated firms will overlap and, in turn, that specialized firms will choose to defend their IP.

Article Notes

1 The report was commissioned by the consultancy Open Source Risk Management and carried out by experts in the open-source community.
2 The alliance spent several million dollars to purchase patents held by third-party developers. To reduce the risk of litigation against users of open-source software, it pledged not to enforce these patents.
3 For details, see Oliver Alexy and Markus Reitzig, “Private-collective innovation, competition, and firms’ counterintuitive appropriation strategies,” SSRN working paper, August 2011.

Sidebar

Open competition: The data behind the risk profiles

To illustrate the three-factor risk profiles—capturing the value of proprietary solutions, the viability of open-source solutions, and the complexity of technology—we used the proxies described below. For the sake of simplicity, the three risk factors in the exhibit are combined in a single profile bar for each industry. Unless otherwise indicated, the data are based on aver- age figures for 2006 and 2007 and normalized between zero and one for each risk factor across industries. These are the latest numbers available, and the structural factors they represent change only slowly over time. If anything, incentives to use open-source alternatives may be increasing, which would imply that our risk profiles have a conservative bias.

The value of proprietary solutions is a function of two variables: the presence of private investors, derived from the number of companies in an industry, and an industry’s attractiveness for private investors based on average profits per company.1
The viability of open-source solutions as alternatives is based on four variables: the importance of complementary assets, measured by the inverse of R&D expenses over profits; software’s importance to an industry, based on capital formation in software as opposed to other kinds of capital formation; the hardware assets necessary for innovation, measured by capital formation in computing, communications, and other kinds of machinery and equipment; and the heterogeneity of user demand, measured by the importance of users and consumers as sources of innovation.2

Technology complexity indicates where risk is a function of the volume and spread of new technology. It is measured by the number of patent applications multiplied by the number of unique patent applicants.3

Sidebar Notes

1 Source: UK Office for National Statistics.
2 Source: UK Office for National Statistics, the EU KLEMS project, and the 2009 UK Innovation Survey.
3 Source: Derwent Innovations Index.

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Oliver Alexy is an assistant professor of innovation and entrepreneurship at Imperial College Business School; Markus Reitzig is an assistant professor of strategic management and entrepreneurship at London Business School.

The authors are thankful for the valuable input from Peter Goodridge and Jonathan Haskel at Imperial College Business School. Oliver Alexy further acknowledges financial support from the Engineering and Physical Sciences Research Council’s Centres for Innovative Manufacturing at Imperial College London.