The tradeoff between open and closed

When having the “open vs closed” debate regarding a technology platform, a number of distinctions need to be made. First, what exactly is meant by “open.” Here’s a great chart from a paper by Harvard professor Tom Eisenmann (et al).:

(Eisenmann acknlowledges the iPhone isn’t fully open to the end user – in the US you need to use AT&T, etc.  I would argue the iPhone is semi-open to the app developer and mobile app development was effectively closed prior to the iPhone. But the main point here is that platforms can be open & closed in many different ways, at different levels, etc.)

The next important distinction is whose interest you are considering when asking what and when to open or close things.  I think there are at least 3 interesting perspectives:

The company: Lots of people have written about this topic (Clay Christensen, Joel Spolsky, more Eisenmann here).   In a nutshell, there are times when a company, acting solely in its self-interest, should close things and other times they should open things.  As a rule of thumb, a company should close their core assets and open/commoditize complementary assets. Google’s search engine is their core asset and therefore Google should want to keep it closed, whereas the operating system is a complement that they should commoditize (my full analysis of what Google should want to own vs commoditize is here). Facebook’s social graph is their core asset so it’s optimal to close it and not interoperate with other graphs, whereas marking up web pages to be more social-network friendly (open graph protocol) is complementary hence optimal for FB to open.  (With respect to social graphs interoperating (e.g. Open Social), it’s generally in the interest of smaller graphs to interoperate and larger ones not to – the same is true of IM networks).  Note that I think there is absolutely nothing wrong with Google and Facebook or any other company keeping closed or trying to open things according to their own best interests.

The industry: When I say “what is good for the industry” I mean what ultimately creates the most aggregate industry-wide shareholder value.  I assume (hope?) this also yields the maximum innovation.  As an active tech entrepreneur and investor I think my personal interests and the tech industry’s interests are mostly aligned (hence you could argue I’m talking my book).  Unfortunately it’s much easier to study open vs. closed strategies at the level of the firm than at the level of an industry, because there are far more “split test” cases to study.  What would the world be like if email (SMTP) were controlled by a single company?  I would tend to think a far less innovative and wealthy one. There are a number of multibillion dollar industries built on email: email clients, webmail systems, email marketing, anti-spam, etc.  The downside of openness is that it’s very hard to upgrade SMTP since you need to get so many parties to agree and coordinate.  So, for example, it has taken forever to add basic anti-spam authentication features to SMTP.  Twitter on the other hand can unilaterally add useful new things like their recent annotations feature.

Here’s what Professor Eisenmann said when I asked him to summarize the state of economic thinking on the topic:

With respect to your question about the impact of open vs closed on the economy, the hard-core economists cited in my book chapter have a lot to say, but it all boils down to “it depends.” Closed platform provides more incentive for innovation because platform owner can collect and redistribute more rent and can ensure that there’s a manageable level of competition in any given application category. Open platform harnesses strong network effects, attracting more application developers, and  thus stimulates lots of competition. There’s some interesting recent work that suggests that markets may evolve in directions that favor the presence of one strong closed player plus one strong open player (consider: Windows + Linux; iPhone + Android). In this scenario, society/economy gets best of both approaches.

Society:  I tend to think what is good for the tech industry is generally good for society.  But others certainly have different views.  Advocates of openness are often accused of being socialist hippies.  Maybe some are.  I am not.  I care about the tech industry.  I think it’s reasonable to question whether moves by large industry players are good or bad for the industry.  Unfortunately most of the debate I’ve seen so far seems driven by ideology and name calling.

39 thoughts on “The tradeoff between open and closed

  1. Hey Chris, you might have caught Seth Godin’s what kind of open are you looking for post a while back. I just liked all the layers and nuances of what constitutes open versus closed.

    What drives my strategy curiosity is how open source platforms like WordPress from Automattic can both create a fertile bed for technological innovation and profit at the same time. I’ve made my deals with devils
    -mostly happy iPad owner, but frustrated at the lack of moving files onto and off of the device and local administrative privileges
    -added a Facebook Like button to my blog and am feeding Audrey2

    Future tech wealth coral reefs out of things like programming languages that are totally open (Ruby, Python, Scala) as well as incredible open source utilities/libs (<3 github).

  2. Nice to see some more structure around “what does Open mean,” I enjoy the academic references. There are certainly more dimensions but 4 is more than the 1 or 0 in most of these discussions :)

    In the case of FB, I think the F8 developments are exciting and oepn a lot of possibilities for value to users and the industry, so that “self-interested openness” has positives. In FB’s defense, few if any other APIs even had the ’24-hour user data’ restriction and they never got flak for it.

    On the other hand, FB really needs a Big Opt-Out Button to protect privacy now. There are simply too many tentacles out for users to reasonably manage how FB’s open-ness may impact them long term.

  3. jeffreymcmanus says:

    “mobile app development was effectively closed prior to the iPhone”

    Nope, Windows Mobile has always been open to devs and end users.

    But the fact that we’re struggling with the definition of “open” here proves what a useless term it is. The fact that we’re using the term “open” to describe about four or five different points of friction in the process of getting a technology idea to market cripples our ability to move the discussion forward. We need terms that are more specific, and we should make a differentiation between 1) full-stack openness (where every bit used to create a solution is open-sourced from end to end), 2) the openness that is fostered by the presence of a platform, and 3) an open marketplace.

  4. “mobile app development was effectively closed prior to the iPhone”
    i meant if you wanted widespread distribution. that mean going to the wireless operators and begging to get on their “deck”.

  5. I think caring about “what is good for the industry” means *not* caring about whether something is open or closed.

    “Open vs Closed” is an ideological argument, it is not about a rational analysis of aggregate shareholder value. You might as well argue about whether Christians or Muslims have contributed more shareholder value.

  6. Completely off topic here…but can you use something like dropbox or drop.io as a quick and easy way to transfer files between your iPad and other systems? (I don’t have an iPad yet so don’t really know but figured I would offer it up as a suggestion to try). :-D

  7. What makes you say Google’s core asset is their search engine? That’s just technology. I see their core asset as being the middle man on advertising. Because they have all the advertisers, their revenue per display (be it search or content) is highest, which means they can outbid anyone to get in front of the users. Which means, they get more users, which means advertisers need to be on Google ….

    This is why users spending so much time on facebook is so disruptive to them.

  8. I can and have, but if I do something like listen to audio it loses the multi-threading ability of the built in music player so I can’t write blog posts or browse source code :D.

  9. I like the back to basics approach.

    One fundamentally tricky thing about the open vs. closed debate is that for customers, monetary and behavioral impacts of closed systems seem to go in opposite directions. If a company achieves a big closed network, that company will extract extra revenue from customers similarly to a monopolist – bad from a customer POV. However, since we’re talking about standards, all the complementary firms as well as users now don’t have to build for or learn multiple competing implementations of a standard – good. So closed platforms tend to cost a lot more but are also easier to use, both for users and partners.

    That’s part of the reason why we can have endless debates about whether something like Windows or the iPhone is a net positive or negative for the industry and society. It seems obvious that a successful closed system is a huge win for a company, regardless.

  10. not nonsensical –

    Here’s how it worked:

    - step 1: line up to get “on deck” with carriers… It was ALL about carrier relationships – massive dependency (over which app developers could care less and had zero control or influence).
    - step 2: go pitch it to the Verizons, wait 9 months for them to review your app, and then even if they did, they’d take most of the cut.

    We all know what the iphone has done. removed the carrier from the equation.

    the app dev / install process was a joke under symbian and windows mobile – restrictions galore. silly to imply that it was open

  11. zato says:

    “Unfortunately most of the debate I’ve seen so far seems driven by ideology and name calling.”

    And this article won’t help.

  12. Before the iPhone’s browser the mobile web was crap for users and crap to develop for.

    Before the App Store there was no meaningful mobile app marketplace.

    Being “open”, no matter how you define it, is nothing without a platform that users love using and developers love developing for.

  13. jeffreymcmanus says:

    “Crap to develop for” is a totally different vector than “open”. Some of the most open platforms in the world are crap to develop for.

  14. jeffreymcmanus says:

    Like what, for example? You can develop and deploy a Windows Mobile app in a number of programming languages. You can deploy, install and sell your app without anyone’s permission and without paying anyone anything.

    Windows Mobile/Phone is sucking wind for a lot of reasons, but lack of openness isn’t one of them.

  15. When I said you were talking your book, I was referring specifically to my assumption that hunch, as a firm, focused on the analysis of sentiment and opinion would greatly benefit from a more open system. I suspect you guys have tech that could plug in almost directly to this kind of a dataset and produce valuable results results. No offense intended.

    Generally I think its a good idea for companies to do what is in their best interests, and I think that is what Facebook is doing here. But I do have to say it scares me. I also have to say that as a ceo of a small startup, I intend to play ball. The fact that I am going to play ball scares me too.

    In any case I dont think closed is evil or open is good (nor obviously vice versa). Having a competitive advantage is never fair. If the industry as a whole is scared enough perhaps there is some way to mute the impact of this, which would be a healthy response (i.e. openlike or something else). One thing I will say is that, as big as fb is, they are not google or MS yet, and I dont think we can *yet* view them as having the same kind of “industry responsibility” that we, I think reasonably, expect from the really big guys.

  16. I was simplifying a bit for this post. See http://cdixon.org/2009/12/30/whats-strategic-for-google/
    for a more in depth take on google. Agree their advertister base is very core, but I would argue display ads that FB is going after (and Google is starting to go after via Doubleclikc) is very different. It’s super important, but an almost entirely different market than direct response (keyword) ads. I was planning to blog about this is in a near term post.

  17. I don’t think the amount of wealth produced by an industry is determined by open vs. close. I agree with Prof. Eisenmann’s “it depends” answer.
    The main determinant is whether there is a standard. (e.g. TCP/IP, SMTP, VHS, DVD, BluRay etc…)
    Every company prefers their own proprietary standard to become the industry standard and sometimes achieves that (Windows, iPhone). Other times it is an industry consortium that creates a standard (most internet stuff, GSM, VISA).
    Until a standard is established, industries usually struggle.

  18. This is a great discussion, if for no other reason that to help make the point that the terms “open” and “closed” are gross over-generalizations.

    The subject is complex and we’re psychological creatures who can’t handle complexity very well in conversation and tend to oversimplify (black/white, gay/straight, etc.)

    Furthermore, I continuously correct people who use the word “closed” and suggest that what they are referring to is “controlled.”

    When we’re talking about Apple, for instance, we’re talking about them exerting maximum “control” over the interface, the quality of the product experience, their platforms (e.g. iTunes and AppStore), the development environment and their profits.

    How “open” or “closed” 3rd-party participation might be (those riding on Apple’s coattails and being pilot fish swimming along with Apple and sharing in their windfall) is all secondary to that.

    We need to keep talking about this and zero in on a consensus. Unfortunately, it’ll be a multi-dimensional answer with lots of competing interests and perspectives that will not roll off the tongue, even if you got everyone to understand the subject.

  19. taylorwc says:

    I like your line about assuming (hoping) that maximizing shareholder value will lead to greatest innovation, but I think hope is the right word.

    Especially with the biggest companies in the industry, their self-interest may prevent innovation, or at least slow it down.

    I think my ‘hope’ for that part of the equation is that innovation is too dynamic and powerful to slow down for too long.

  20. Chris read my blog SiliconAngle.com no ideology and name calling just the way it is re: open and closed.

    Bottom line: It’s strictly business everything else is noise. Business benefits drive the discussion and competition is a healthy element to balance the power among the players. In this market those things are in place so it’s a healthy environment at the moment.

  21. Obviously it’s strictly business. Who was saying otherwise?? Go read
    some of the books/papers I cite. You’ll learn that every tech stack
    has different configurations of open vs closed layers and some are
    better for the economy and some are worse. Then come back and we can
    have a serious discussion.

  22. Aviah Laor says:

    The issue is even deeper. We have to think what type of communication does FB encourage. It’s fun, yes, but humans are capable of more. The media is the message, the technology shapes the message. And currently it’s mostly dumb things on your wall. We must aspire for more.

  23. This quote from Eisenmann reminds me of Pharma: “Closed platform provides more incentive for innovation because platform owner can collect and redistribute more rent”.

    A patented drug is essentially a closed platform. No drug company is going to develop anything groundbreaking if they can just be copied right away. The patent is their incentive.

    But drug patents run out. What if we had a tech industry where closed platforms eventually “expired” and became open platforms? Or would the Apples and FBs just collapse when that happened?

  24. Ed Parcell says:

    Hi Chris,

    Another great post. Thanks. I particularly liked the quote from Prof., Eisenmann, that a strong closed player and strong open player is the best result for the industry. It seems very true, wherever I evaluate it – OSes, browsers, databases…

    It kicked me off thinking about the spreadsheet ecosystem, where there is one dominant closed player, Excel, and few, largely marginalized open players. I put more thoughts in a post on my blog at http://edparcell.posterous.com/the-tortoise-the-hare-and-the-problems-of-the

    All the best,
    Ed.

  25. josex says:

    >> When I say “what is good for the industry” I mean what ultimately creates the most aggregate industry-wide shareholder value. I assume (hope?) this also yields the maximum innovation.

    Since when is the goal of shareholders to maximize innovation? Their main goal, perhaps to the exclusion of all others, it so maximize profits.

    Monopolies are a very effective way to try to maximize profits. Monopolies are the antithesis of innovation because those with the power don’t need to do very much to preserve it and those without it can find the risk/reward is not worthwhile, the stronger is the monopoly.

    One example of monopolies in action is that software patents (and to a lesser extent probably all other patents) offer a way for a growing industry to be taxed as much as possible by certain players that play the patent game. The patent holder can demand a monopoly (which represents to every other vendor possibly a total loss for any past investments plus penalties on top for having made those investments). In this way they can then further try to exact monopoly profits from market buyers to the extent they can build a product buyers will want or need to some degree. Alternatively, they can threaten competitors with this maximum loss. They can then eliminate individual competitors they don’t like, while allowing others who agree to pay a high royalty by building products the market buyers will pay for in large numbers.

    Patents themselves can lead to the extremely stifling condition where only one player out of perhaps many thousands skilled, able, and willing, can legally progress along a broad path for 20 years.

    So if we are after maximum profits, the more monopoly levers the better. This allows that industry to tax society at a rate higher than is done by competitive industries. With no or with very controlled competition, these profits do not require innovation but only “good enough” status. Innovation that does happen, can be used to help build enough “good enough” products. You want to tax the golden goose of innovation but not kill it.

    In essence, you can’t force innovation anywhere you want, but where innovation will happen, smartly controlled competition can allow that industry to exact significantly higher revenues than otherwise would be possible.

    [Note that higher industry revenues through controlled competition means the revenues are not shared evenly by industry participants. Note that maximum industry leverage means worst deal for the buyers.]

  26. josex says:

    I don’t immediately see your point, but I’ll read everything more carefully later (I need to get to bed).

    In the meantime, I have a bit more criticism over something I read.

    >> The downside of openness is that it’s very hard to upgrade SMTP since you need to get so many parties to agree and coordinate. So, for example, it has taken forever to add basic anti-spam authentication features to SMTP. Twitter on the other hand can unilaterally add useful new things like their recent annotations feature.

    When various bodies of code must be changed without a large profit motive, it might not get done if the problem appears to be manageable. I think that is correct, but that is more of an issue of one controlling entity vs many. Closed source enable monopolies, but it doesn’t always result in it when it comes to an established cooperating market. Open source make it easier to fork, but open source do work in unison to a large degree — when smart solutions get introduced and prove themselves. Since it’s open source, anyone can propose a “plugin” or patch to add the new feature and then all others get it for free.

    Twitter could use open source or closed source. What makes them able to upgrade more easily is that control is much easier when you control all the servers. Control over the servers is the key and not open vs closed. Are there many “twitter” vendors? No (closed source of key parts of their offering is probably an important part of why we don’t have more twitters).

    Let’s look at where standards exist. Closed source UNIX could not adapt as fast as in various areas as closed source Windows *or* open source Linux.

    Let’s look at an open source example. In the Linux distro world, most proven new features are leveraged by most distros that want to stay cutting edge. Standards do get set and do get adopted fairly widely (even in open source, a few projects tend to dominate in any given class of software so only a few key projects need to vote for change).

    Another open source example along the lines of Twitter: The Open Office project can add things to their software suite (new version) without having to get the whole world’s approval either. They control their project (if with care about how customers will react).

    As for email.. There exist “good enough” solutions to spam today (things like spamassassin and white/black listing, I think), and some of the proposed solutions have costs and will have problems as well. [Sometimes the cost is in surrendering control. Another cost is in dealing with legacy code and processes in place. Also, the new mechanisms are not foolproof either. Is it worthwhile to trade one set of headaches you have under control for a new one? ("the devil you know" reaction)]

    An forcing “solutions” unilaterally is not all it is cracked up to be. Look at the criticisms against Windows for not being designed from the ground up with certain goals, so that dictating new features sometimes comes with a mess of bugs and shifting vulnerabilities. If Windows were open source, the community at large (the users) would not find it wise to accept everything Microsoft has pushed unto their users.

  27. josex says:

    >> “Closed platform provides more incentive for innovation because platform owner can collect and redistribute more rent and can ensure that there’s a manageable level of competition in any given application category.”

    What about when the platform owner also competes as an application vendor?

    There is a conflict of interests and a significant bias in favor of the platform vendor by being the only one with access to the platform source code (including bugs, extensions, precise semantics, ability to integrate more tightly, etc).

    What is the incentive for third parties to compete once they realize what is going on?

    If the closed source platform is a monopoly, the monopolist has few reasons to worry about destroying innovation and incentives outside of themselves.

    If there is a threat to their platform, then they may have to be a little nicer so that third party application vendors support their platform. [They can leverage other tools to help keep the other platform on the outside.]

    Many NDAs can be used to try to keep hush the thought that the platform vendor is anything but honest (despite their refusal to surrender their significant advantage). Maintaining the assumption of fairness is critical I would say, especially with an open (unbiased) platform being an option.

  28. josex says:

    I wanted to explain how I felt innovation fitted into the profit maximizing picture. I don’t think you took a position on that except to say you hoped and believed innovation is motivated as the industry grows. I think the cause and effect is closer to saying that if the industry has a lot of innovation, then opportunities exist to grow wealth. The ease by which innovation can come about is a function of where technology and know-how and some other things happen to lie at that point in time. Trying to force answers (eg, innovate) when the context is not optimal leads to inefficient allocation of resources. Software within the context of hardware that goes down in value and up in power relatively quickly and a collaborative environment that is also improving quickly is ripe for innovation.

    I should have been more clear and stated that the established larger players have tools at their disposal to fight back against smaller better innovators.

    The winners of the patent game (because it comes with such a broken set of rules) are the industry juggernauts who have accumulated large wealth and revenue generating potential as well as a large patent portfolios. Also winning are those with key patents that do not produce and are willing to put up with the costs of lawsuits if necessary in order to tax producers. The lawyers win as well.

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