March 26, 2009

IPRs and Open Source Licenses - The Increasing importance of IPR Management for Core Business Strategy

An increasing amount of talks and articles refer to new unorthodox forms of value creation beyond the hierarchical boundaries of a firm (some of the more popular books are “Here Comes Everybody” and Wikinomics). As is custom with new phenomena, there is no distinct and standardized definition for these trend(s). Some of the common and at times overlapping names are “Peer Production”, “Crowdsourcing”, “Open Innovation”, “Open Source” and etc. Articles in the area are ripe with the potential benefits and increasing impact of peer or open value creation. Few, however, discuss the importance of IPRs and IPR management.

IPR management has a lot to do with control, but the word “control” has bad or at least one-sided connotations to it. For most people “control” in the context of IPRs signify blocking others, which is the precise opposite of what is required in peer production. In the world of the hierarchical firm, the production, ownership and utilization rights to IPRs are well established. Within a firm, rights to IPRs over its employees is often clear with standardized employer/employee agreements. Within the boundaries of the firm, represented by a nexus of employer/employee agreements, the creators of intellectual properties accept that full ownership lies with the employer.

Impact on business model
For a company that wishes to tap into the benefits of peer production by issuing a new OS license or using an existing one, the situation becomes very different. Here the control of value creation lies outside the hierarchical boundaries of a firm. Value is added to a project both by internal employees (controllable with standard employer(employee agreements) and well as by external participants, with whom the only relation often is the one dictated by the OS license. With OS type of licenses, no one entity typically owns the total value created, but everyone shares the same utilization rights. This is a major difference compared to the when the company has full ownership over the value created. With full ownership, an actor can do whatever it wishes. With shared ownership, however, different actors all have the same utilization rights as stated by the license. These utilization rights will in turn affect the range of possible business models at hand for a firm since business models are affected by which utilization rights you have to the object offered to customers. Furthermore, since software copyright is shared among many actors outside of the hierarchy of the firm, changing the license terms becomes difficult. The latter signifies that not only is the range of business models at hand limited today, but that they will most likely remain that way even in the future, i.e. a question of business sustainability (this paper studies successful method to achieve long-term sustainability with respect to business models on open source). Although this is a software example, the analogies are still valid for most collaborations where there are many different actors involved in the value creation. Special care must therefore be taken whenever a firm wishes to issue or start using open source type of licenses.

Dual Licensing
There are companies that try to circumvent some of the shortcomings of OS licenses by starting a project, releasing it as open source but also add proprietary layers to the OS code (with possibilities to use the OS code with proprietary code without the proprietary code falling under the OS terms) and thus regain the benefits of proprietary code. This is called a dual licensing, split licensing or open core (there might be small differences in their exact definitions). In order to increase the level of ownership and utilization rights, these companies require that individual peer producers’ copyrights be handed over to them in order for the contributed code to be part of the next major software update. If individual peer producers do not agree, their contribution will not be included to the next software update and since they individually cannot compete with the development efforts of a company, they agree and are happy with the level of utilization rights granted to them by the OS license (or they will effectively have forked the development and over time will have to maintain it themselves).

Although dual licensing/ open core does provide additional levels of utilization rights (and therefore additional types of business models possible), experience shows that dual licensors’ flexibility in modifying their OS license is also more static than one would think. Many times the wishes of the dual licensor, the orchestrator of a peer producing community, to change the terms of the community license is not welcomed. Many times when the dual licensor has gone ahead anyway and changed the terms of the license, the community has forked the project and effectively made the project come under a single OS license over time (i.e. the updates developed by the community often are much more frequent and stable than what is possible for a company to compete with). Such examples include the popular Joomla (previously Mambo), NeoOffice (previously OpenOffice) and there are even discussions regarding the possibilities of Sun’s MySQL to meet the same fate with the development of Drizzle (e.g. here and here)

To conclude, as collaboration involving multiple actors increases (i.e. peep production / open innovation), strategic management of IPRs becomes increasingly important and should be an integrated part of core company strategy. In addition, since by nature changing licenses involving multiple and often disparate actors is hard, the strategic importance of IPR management becomes even more important as it not only impacts current but also future business options.

The author of this blog article is Sina Keshavarzi. Sina is currently finalizing a master within Intellectual Capital Management (ICM) at Chalmers University of Technology: CIP as well as working with IC matters in the agricultural biotech industry.

Other IAM/IPM capability topics will be discussed further by prominent IP thought-leaders during CIP FORUM 2009, 6-9 Sep, Gothenburg, Sweden

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