The Host's Dilemma: Strategic Forfeiture in Platform Markets for Informational Goods

Abstract

Voluntary forfeiture of intellectual assets – often, exceptionally valuable assets – is surprisingly widespread in information technology markets. A simple economic rationale can account for these practices. By giving away access to core technologies, a platform holder commits against expropriating (and thereby induces) user investments that support platform value. To generate revenues that cover development and maintenance costs, the platform holder must regulate access to other goods and services within the total consumption bundle. The tradeoff between forfeiting access (to induce adoption) and regulating access (to recover costs) anticipates the substantial convergence of open and closed innovation models. Organizational patterns in the software and operating system markets are consistent with this hypothesis: open and closed structures substantially converge across a broad range of historical and contemporary settings and commercial and noncommercial environments. In particular, I show that (i) proprietary firms have formed nonprofit consortia and adopted open licensing strategies in order to develop and promote operating systems for the smartphone market, and (ii) leading “open source” software projects are now primarily funded and substantially governed and staffed by corporate sponsors.