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The Logic Of Open Business Models - Ahmad Sufian Bayram
31Dec

The Logic Of Open Business Models

Business try to open it up what they think it’s the best for them in order to gain cooperation and compete rapidly in this digital age, many companies have been thinking openness, and this is beginning to challenge conventional business wisdom and transform a number of important function including human resources, innovation, industry standards, and communication.

The quadrant developed by Steve Bosserman gives particular insight into the competitive dynamics that result from the drastic reduction in the cost of information reproduction and distribution, and why the maintenance of classic proprietary approaches is problematic in the long run.

 

Bosserman’s quadrant is divided in four sections according to two axes. The first axis highlights the polarity between strategies using on the one hand defensive intellectual property, i.e. “closed proprietary IP” ; and on the other hand strategies based on the open sharing of innovation, i.e. ‘open’ IP using non-proprietary licenses such as copyleft or the Creative Commons. The second focuses on strategies that require either payment for the intellectual product (which can be extended to physical products in some cases), or by contrast, strategies based on giving away the immaterial value (or even the physical product) for ‘free’. This gives four quadrants highlighting four main business strategies:

  1. top right: closed IP, with products/services sold for payment.
  2. bottom right: Closed IP, but with freemium strategy, i.e. the product/service is given away for free.
  3. top left: open IP, i.e. the knowledge/code/design is shared; but the work is done for payment.
  4. bottom left: open IP, with services given away for free.

1. Top right quadrant: Closed and Paid

The first quadrant, on the top right, combines closed IP, resulting in products that are sold for payment, and whose price typically includes a premium for the protected IP. This is the traditional proprietary strategy and in theory guarantees a premium based on the intellectual property rents. In our new digital context, even if the production costs of a ‘first product’ may be costly, requiring substantial investment, the cost of its reproduction will be marginal. This means piracy becomes attractive, either through not-for-profit communities of sharers, or through illegal commercial operators who can sell the products are substantial discounts. A way to avoid this, is for companies to pre-empt this through a freemium strategy, which brings us to the second quadrant.

2. Bottom right quadrant: Closed and Free

The freemium strategy, exemplified in the bottom right quadrant, consists of giving the primary

intellectual value away for free, and to built a commercial strategies on secondary or derivative value streams. The commercial rationale for such strategies has been discussed by Chris Anderson in his book, Free28. The important point is that a freemium strategy, even with closed intellectual property, will undercut the pricing strategies of firms that are not giving their primary immaterial assets away for free. For example, this dynamic played out in the market for real-time stock information, which in the nineties saw the emergence of companies giving away stock information with a certain delay, but still requesting fees for real-time access. Very soon after, companies started giving away real-time stock information, but requesting money for added value services. In this context, the high premiums for real-time stock information ebbed away. With internet software, it is now quite customary to give basic versions of a software out for free, but to have premium services available for payment.

3. Top Left: Open and Paid

On the top left we see see strategies that combine paid strategies, but with open content. This is the strategy of the free and open source software sector, where the code itself is available for download, (though ‘premium’ paid packages are also often available), but labor and development, and all kinds of derivative value services, are only obtainable through payment. However, because the code itself is free, open source businesses can generally operate with lower pricing structures than their pure play proprietary counterparts. Open source companies following this strategy, forgo the intellectual rent that they could get from proprietary IP, but gain competitive advantage through their lower pricing.

4. Bottom Left: Open and Free

Finally, we have the bottom left quadrant, which combines open IP and free services. A paradigmatic example would be the Couchsurfing economy, based on the free sharing of lodging. Obviously, such strategies would definitely impact closed proprietary ‘for pay’ strategies, but, such demonetized core can still generate economic value. For example, in the case of couchsurfing, it may enable travel by those who would not be able to afford for-pay hospitality services, but because of their travel, would still spend money on transport, food and cultural services in the region that they visit.

In conclusion:

The general point however, is that faced with 3 possible counter-strategies that take into account the free reproduction of immaterial value, pure play strategies based on closed IP, and sold for-pay, face unfavorable competitive dynamics. This makes their continued dominance very problematic, and perhaps, not appropriate for the digital age. The only way to maintain the state-enforced IP monopolies intact are through the criminalization of the sharing practices of the user communities, or through technological disablement of the networks (DRM, Trusted Computing and other software or hardware models). Both methods create serious problems of legitimacy and hold back on the very innovation that is the mainstay of market processes.

 

Interpreting an important point insight from Steve that entities in the open and paid quadrant live from their Practices; 2) entities in the closed and paid live from their intellectual Assets; 3) and entities in the closed and free quadrant live from their Portfolio of secondary services.

photo credit: http://www.cio.com/

Source: Collaborative Economy, p2p Foundation

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