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Subject: A discussion of hybrid open source and proprietary licensing models.

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  • From: "Marshall W. Van Alstyne" <marshall AT MIT.EDU>
  • To: cc-bizcom AT lists.ibiblio.org
  • Subject: [Cc-bizcom] Optimal Licenses -- Request for Comment
  • Date: Fri, 14 Oct 2005 13:02:46 -0400

On Sept 30, a colleague and I finally completed an economic analysis of optimal licensing that compares free/open licenses to proprietary licenses. The key yardstick is the level of benefit or "welfare" provided to both consumers and to developers, while accounting for innovation over time. We also analyze the incentives of profit motivated firms to participate.

This note summarizes key findings and is a request for comment. Pls feel free to redistribute, blog, challenge, etc, We just welcome feedback.

We plan to move the modeling framework into broadly accessible free / open code both so that the model can handle additional complexity and so that anyone can examine the essential tradeoffs (or modify them). Our hope is to move discussion of optimal licenses into "open science" using a formal model rather than just formal argument.

The main question we address is:

If proprietary incentives matter for innovation, and if public access to a reusable free/open platform also matters for welfare, then what scope of protection creates the greatest good?

KEY PARAMETERS
(i) Scope of protection is measured in terms of free access or "sharing" sigma, in the range of 0-1.
(ii) Scope is also measured in terms of duration or "time" for proprietary period t, in the range of 0 - infinity.

Before time "t" profit motivated developers can sell derivative works. After "t" it becomes free / open by OSI standards. Additional parameters include:

(iii) network effects
(iv) size of consumer base
(v) size of developer base
(vi) level of reuse
(vii) developer motives (ranging from "freedom motivated" to "profit motivated")
(viii) prices
(ix) intrinsic value of a platform or code base.

KEY FINDINGS

1) HIGHEST SOCIAL WELFARE

a) The highest social welfare of any configuration is a pool of "freedom motivated" developers matched with completely free/open licenses. This is higher than a pool of "profit motivated" developers matched with proprietary licenses.
b) BUT, if any fraction of the population is profit motivated, then the socially optimal license will ALWAYS contain the offer of a proprietary period t > 0. This stimulates higher innovation.
c) Regardless of whether an institution is freedom or profit motivated, the optimal license is more open than BSD in the sense that the length of proprietary protection on derivative works should not be arbitrarily long. Multi-period innovation is thwarted by overlong protection.

2) PROFIT MOTIVATED FIRMS

The analytic framework allows us to consider stylized business models ranging from completely closed and proprietary (e.g. restrictive End-User-License-Agreements), through partially open access (e.g. allowing plug-ins and APIs), to subsidizing users and taking all profits on developer royalties (e.g. computer games), to non-profits that open all aspects of a platform. We find that:

a) Profit motivated firms rationally choose EULAs more often than is socially optimal.
b) Decentralized innovation can increase profits over going it alone. For profit motivated firms, this means it becomes privately rational to choose open licenses once reuse and network effects pass a critical threshold. This effect can even dominate subcontracts with targeted developers.
c) Even non-profits can benefit by harnessing the efforts of profit-motivated developers and giving them a brief period to charge for the value of their investments.

3) PLATFORM OWNER TENURE

One open question has been whether large projects need "sponsors." In general, we find that they do.

More specifically, we find that a platform sponsor needs to exercise a long term interest in a platform as a means to enforcing good behavior on the part of decentralized profit motivated developers. A prisoner's dilemma emerges in which anyone who likes to charge prefers to do so as long as possible but, if they do, then the whole community suffers. If a license can enforce a reasonable, i.e. short term, proprietary period then everyone, including the developer, wins over multiple periods of innovation. For this to work, the tenure of the platform sponsor must survive multiple periods of tenure for downstream developers.

4) PIRACY

Even if no reuse is possible and innovation never occurs, conditions exist where a profit motivated firm prefers to allow limited piracy, interpreted as free user access, to a portion of its products. Roughly interpreted, word-of-mouth effects on sales can dominate lost sales.


Three Points of Context:

1) Stallman has seen and commented on earlier drafts. One key observation was that only a fully open license (where sharing parameter sigma = 1) could qualify as a "free" license and not anything that kept any piece proprietary (where sharing parameter 0 <= sigma < 1). Critically, he's OK with charging 3rd parties in some cases: if a 3rd party takes free code, enhances it, and charges for their enhancement, then it's also OK to charge that 3rd party a modest fee or royalty.

2) This version is written for an academic audience. So, it can be mathematically challenging, but if you want a "proof" of certain free / open source arguments, here it is.

3) The paper is available at: <http://ssrn.com/abstract=639165>http://ssrn.com/abstract=639165




  • [Cc-bizcom] Optimal Licenses -- Request for Comment, Marshall W. Van Alstyne, 10/14/2005

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