Recently, Google posted a much publicised memo called the Meaning of Open in which Jonathan Rosenberg, Senior Vice President, Product Management attempted to define Open. Attempting to define ‘Open’ is a complex task with many contradictions, and it is good that Jonathan has attempted this. Having attempted to define a Taxonomy of open, it is quickly apparent that the word ‘Open’ has contradictions – for example companies who are keen on ‘Open standards’ are not always keen on ‘Open Source’; Open source governance models are not so ‘open’ as open source licensing models and so on.
Defining ‘Open’ is one thing, Defining ‘Open Business models’ is more complex and sometimes contradictory. So, the challenge is to think of Open business models on the basis of the ‘Open memo’. Let’s consider the example of Vinton Cerf referenced in the memo who defined the TCP/IP protocols that are the foundation of the Internet. TCP/IP is a textbook case of Network effects. However, note that in this case, there was a complete separation of the network effect and it’s business model. In contrast, there is a subtle but important difference when an organization creates a network effect through the Open philosophy (which Google has done), but at the same time seeks to ‘harness’ the benefits from that network effect (which is different from TCP/IP approach). The above point is the main reason for the contradictions that we see in the memo which others have also pointed out.
Gartner has a very interesting take on this in a blog called the Truth of Open in response to the memo. Gartner says:
Openness is by and large a strategy to reduce operating costs and remove supply chain dependencies. Open is not a revenue engine in its own right. In that regard, Rosenberg’s observation about sustaining competitive advantage through closed system are still valid. The only real change is that organizations are increasingly understanding how to balance both closed and open systems.
The truth is that closed systems still win. Open systems, practically speaking, are basically good for making others lose. The art of business in the 21st century is figuring out how to open up your suppliers’ and competitors’ business while keeping yours tightly sealed. And in that endeavour Google has proven highly successful.
In my view, the crux of creating a business model based on the Open philosophy lies in maintaining a leverage of control or in creating a barrier to entry. So, how many ways can we create a business model based on ‘Open’? Here is my list. Happy if you can suggest more.
a) Open source governance models: I have said this before Open is the new closed? – Bringing transparency to Open source by separating Open source licensing models i.e. Open source governance models are quite different from Open source development models and governance models are often ‘closed’.
b) Making others lose: As the Gartner link refers above, Open systems are a competitive strategy to reduce costs. In an extreme case, that involves making costs equal to zero. Better still if someone else is charging money for the same (software) product (Note that the model cannot work with hardware i.e. the incremental production costs of software are zero. Which helps leverage the model)
c) Abstraction: This is the classic business model for network effects i.e. create the value at a higher level of abstraction (in this case advertising). However, note that this model has two parts: First you must create the network effect and more importantly, you must then maintain a leverage of control. In this case, the leverage of control is through the search algorithms so as to lead the Google dance and make your partners follow. It is interesting that the memo says that the search algorithm is closed because it could be ‘gamed’, which is a direct contradiction on the Open (source) philosophy i.e. Linus’s law “given enough eyeballs, all bugs are shallow.”
d) Contradictions: Often you have to live with contradictions if you want a business model for Open. For instance, I would have loved the ability to tweet from Google reader. But I don’t think that this feature is forthcoming since Google and Twitter are competitors … unless Google acquires Twitter…
e) Scale: can be a competitive advantage. The Internet was supposed to ‘get rid of the middleman’, in reality, after the dust of the last decade has settled, there are only one or two massive intermediaries in each sector (Google/Amazon/Ebay etc)
f) Speed of execution for users (not customers): Like scale, speed of execution also offers a competitive advantage especially if the products are accepted by customers. In many ways, acceptance by the customer is the real evidence of success as the memo also implies i.e. the ability to create products that are accepted by the customer. However, there is a caveat here; in reality, we have ‘users’ and not ‘customers’ since most people do not pay for the services. Since the service is free, it creates users and not customers leading to greater speed of execution and a platform that helps to reinforce other products creating a competitive advantage
g) Metadata: Metadata (and not data) is the real driver to the business model. Thus, there is a lot of data flowing through in street view, scanned books, maps and mobile but it is the metadata (derived from the data) which is the foundation of the business model.
So, that’s all I could think of.
Last week, I visited India and my tech-savvy six year old was on Google maps showing his grandparents his ‘route to school’ on Google maps. He is very familiar with Google maps and can navigate it far better than I can. This indicates that: In the end, customers will neither know nor care about most of the above if they like the product/service.
This is both good and bad; the privacy implications of Cloud, Metadata etc are only now being realised. Altruism aside, it will be interesting to see how Open systems business models evolve from Open systems themselves. Comments welcome!
