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The Japanese SW industry in the PC era

• Japanese PCs in the 1980s are largely produced by dominant mainframe firms (NEC, Toshiba, Fujitsu)– Each firm bundles its own operating system, applications.– No indigenous “dominant platform” emerges during the

1980s, slowing diffusion and SW development.

• Fragmented HW architecture, other factors discourage Japanese packaged SW industry.– Little entry by new firms, independent SW producers.– Telecom regulation has stunted Internet growth.

• “SW factories” were created by major Japanese HW firms. “Factories” produce high-quality code, but are less effective in packaged SW.

2/27/03 2SW investment’s share in Japan is low and declining (1990-99).

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Japan’s packaged SW market is small % of domestic ICT market.

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Why have US firms dominated business computing HW & SW?

• US firms not always first-to-invent (LEO, packet switching, HTTP, HTML).

• US advantages support rapid commercialization:– Huge, monoglot domestic market of demanding users, who

contribute to “co-invention.”– Public investment (defense & civilian sources) in “R&D

infrastructure.” Pluralism and diversity in funding sources is useful in the face of uncertainty.

– Public procurement of computers and components was open to new, as well as established, firms.

– Tough competition policy and (in the early years of the computing industry) relatively weak IP policy.

– Universities play an important role as sources of talent, new inventions, new firms.

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US v. Microsoft• Microsoft dominance is threatened by Internet-based

competing (non-Windows) “platform.”– Cheap, non-PC “network computer” could substitute for the

PC and weaken MS dominance in operating system and related apps.

– A competing “bandwagon” could attract developers.

• US gov’t alleges that Microsoft exploited its position as supplier of dominant PC operating system to cripple Netscape’s ability to gain access to The Desktop Screen, limiting consumer choice.

• Consistent with longstanding hostility by gov’t toward efforts by firms to use market power in one product line to establish or strengthen market power in another.

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Assessing alternative outcomes of US v. Microsoft

• Basis for the case is not novel, but the pace of proceedings means that the outcome may have little consequence for Microsoft v. Netscape.– Netscape has largely lost the “browser wars.”– Will Microsoft be more cautious in the future?

• Settlement: Breakup or behavior monitoring?– Breakup prevents Microsoft from exploiting its dominance in

operating systems to extend market power in other spheres, creates an apps firm that will develop for other operating systems.

– Breakup may degrade product performance because of complexities of coordinating innovation in complements by separate firms.

– Behavior monitoring: More costly, requires vigilance and cooperation by Microsoft.

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SW and “platforms” in the post-PC era• Where will the next platforms emerge?

– Open-source operating systems and server SW (Linux; Apache).

– “Personal devices”: advanced cellphones, PDAs, etc.– Others??

• Can a “whole” MS extend its dominance from Wintel to other platforms?– Very uneven track record thus far.– Can a new proprietary standard be established, thereby

giving the owner of the standard market power?

• How does the outcome of US v. Microsoft affect the answer to these questions?

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Open-source software (OSS)

• What is it?• Is OSS a new phenomenon?• Why has OSS grown in importance during the

past decade?• What are the strengths and weaknesses of OSS?• What are the strategic implications of OSS for the

long-run evolution of the software industry?• Where & how are entrepreneurs finding profitable

opportunities in “free” software?

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What is OSS?

• Users receive the source code, the “guts” of the SW.• Users can modify the source code.

– In some types of OSS, such as Linux, users must share modifications with all others under the terms of the GNU “copyleft” license.

– Other types of OSS, such as Apache, do not require sharing of modifications to source code.

• OSS is classic “user-driven” innovation. But it involves 1000s of users pursuing autonomous, but organized, problem-solving.

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What is new about OSS?• “Shareware” is nearly as old as computing—users

have freely shared programs since at least the 1950s.– Motives have always been a combination of “signalling”

technical prowess, altruism, interest in new technical challenges.

• OSS operates on a much larger scale and in the case of Linux, Apache, and others has avoided “forking.”

• The Internet is crucial to the ability of this distributed problem-solving/bug fix process to operate without forking.

• Compare the evolution of UNIX, a Linux forerunner developed at Bell Labs in the late 1960s, before the Internet’s wide adoption.

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“Forking” in UNIX, 1969-98

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Where has OSS grown and why?

• Operating systems (Linux)• Web backbone SW (Apache)• Other SW “tools” (Perl). • OSS development process may be less effective in

applications.– User base for applications tends to be larger & includes

smaller share of technically sophisticated users.– Technically sophisticated users also may not develop

“user-friendly” modifications of applications used by large base of less computer-savvy users.

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Web “backbone” OS market share, 2000 - 2003

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Strengths & weaknesses of OSS• Strengths:

– Low cost of acquisition for users.– Users have greater power to modify the SW to meet

specific operating needs.• “Lock-in” less likely and less costly.

– Some evidence suggests that OSS has fewer bugs at release and that debugging occurs more rapidly.

• Weaknesses– Risk of “forking” remains significant.– Installation is difficult; new releases are frequent.– Applications are growing but remain limited.– “Copyleft” and similar licensing requirements have yet to

be tested in court.– Cost savings may be illusory.

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Bug Counts - Web Servers

0

500

1000

1500

2000

2500

3000

7 8 9 10 11 12 13 14 15 16 17 18 19 20

Age of Program (in quarters)

Closed

Open

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Bug Counts - Operating Systems

0

100

200

300

400

500

600

Quarter

ClosedOpen

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Linux development/debug processes• “Informal” hierarchy oversees “bug fixes,”

improvements submitted by 1000s of users.– Changes to the source code must be approved by experienced

developers.– “Experimental” versions avoid instability in architecture of the

working version.

• Internet and “copyleft” make possible the unified development of the source code.

• Modular structure of the Linux OS means that problem-solving can be decomposed and “delegated” more easily.

• Performance may suffer somewhat because of inability to optimize overall package.

• Modular structure facilitates frequent releases.– But users have to work hard to “keep up.”

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Strategic implications of OSS• OSS likely to remain strongest in smaller segments (e.g.,

Net servers) populated primarily by SW developers.– Switching costs: desktop remains in Microsoft control.

• Strength of the Linux competitive challenge to Microsoft depends on the ability of Linux to attract a “bandwagon.”– IBM, Oracle, other firms support Linux.– Will other established SW firms “port” their apps to

Linux?• “Open” operating systems now being promoted for

handheld devices by Nokia, other promoters of “platforms” that compete with Microsoft’s desktop.– But apps remain central.

• SW patent litigation another potential threat to OSS.

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OSS: Vertical specialization and “co-invention”

• Large group of autonomous developers and problem-solvers.– Advantages of high levels of specialization.– Org. scale is irrelevant or a negative factor.

• Requires modularity, relative stable “interfaces” among components.– Similar to the enabling factors in semiconductor vertical

specialization.

• IT advances (Internet) are crucial to facilitating the growth of distributed problem-solving without losing overall architectural integrity.– IT is an important enabling technology in semiconductor,

other industries’ move to specialized structures.

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Red Hat case: Business models in open-source SW (OSS)

• Fundamental issue: How can one make a profit without controlling & protecting the source code?

• What strategy has Red Hat been following (up to the time the case is written) to profit from OSS?

• Who are Red Hat’s competitors?• What role does Red Hat’s own intellectual

property play in the firm’s strategy?• What are Red Hat’s future strategic alternatives in

product or services development?• What strategy do you recommend for Red Hat and

why?

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Conclusions • Japan: the importance of “dominant design” to vertical

specialization in SW.– Vertical specialization is not inevitable.

• US factors contributing to competitiveness in HW, SW: How portable are these? PRC?

• US v. Microsoft: Antitrust is still relevant, but markets may move faster.

• OSS: Users as innovators, an old theme in IT; the Internet as a key facilitator.

• Where are the limits of OSS? Will OSS “commoditize” Bill Gates’s products? Will Bill Gates use IPR litigation to cripple OSS?

• Red Hat: services as a counter to “commoditization,” lack of strong IPR.– But imitation is (relatively) easy.

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5 years price chart

                                                                           

Red Hat stock performance since 1999 IPO