SELASTURKIYE Open Source Research Report by Sari Viskari

Jarno Huurinainen, Marko Torkkeli,
Sari Viskari & Pekka Salmi
Motives, Circumstances and

Driving Forces for Open Innovation:
Using Open Source to run profitable business
CASE: Nokia 770 (analysis at product level)

CASE: IBM (analysis at company level)
LAPPEENRANNAN LAPPEENRANTA
TEKNILLINEN YLIOPISTO UNIVERSITY OF TECHNOLOGY
Lappeenrannan teknillinen yliopisto TEKNISTALOUDELLINEN TIEDEKUNTA TUTKIMUSRAPORTTI 174

Digipaino 2007 TUOTANTOTALOUDEN OSASTO RESEARCH REPORT
ISBN 978-952-214- 280-8 (paperback)
ISBN 978-952-214-281-6 (PDF) FACULTY OF TECHNOLOGY MANAGEMENT
DEPARTMENT OF INDUSTRIAL MANAGEMENT
ISSN 1459-3173
TUTKIMUSRAPORTTI –RESEARCH REPORT 174
Jarno Huurinainen, Marko Torkkeli, Sari Viskari & Pekka Salmi


Tuotantotalouden osasto
Department of Industrial Engineering and Management
Lappeenrannan teknillinen yliopisto

Lappeenranta University of Technology
FI-53851 Lappeenranta, Box 20, Finland
ISBN 952 214-280-8 (paperback)

ISBN 952-214-281-6 (pdf)
ISSN 1459-3173
Lappeenranta 2006
Abstract
The open innovation model highlights the importance of using a wide range of sources of
knowledge for a company’s innovation activities, including customers, collaborative firms, rivals
and academics. Research stresses the significance of balancing the use of internal and external
knowledge in R&D-processes, because critical knowledge can come from different sources.
Commercial companies have to invest in basic research (exploration) to understand external
information better, and exploit this knowledge better in their business (exploitation). This ability is
called the company’s absorptive capacity. Today’s companies need this capacity because there are
several tied factors which erode the viability of the old closed innovation model.
For many years now, the dominant business approach employed by the commercial software
industry has been proprietary software. Now this traditional approach is changing and a new way to
develop software is appearing. Open source development is the most prominent example of using
external sources in R&D. Companies are encouraging this new way of development more and more,
when simultaneously building profitable business models around it. The study introduces two
companies (Nokia, IBM), which use the open source in their business. Short design-build-test
cycles, low costs of new releases, and a great number of ideas are common motives that push
commercial companies near to open source communities. There are also some market factors,
including technological convergence, growing product complexity, and interoperability of the
software, which push companies to consider the open innovation model and the open source as a
part of this new approach.
Open source development is also an interesting territory from the business point of view. Building a
competitive advantage around open source business is very challenging, but possible. According to
venture capitalist, the most famous model is the open architecture (standards) model, where the
open source is used to build a mature software platform, and in-house development to build
proprietary parts to new products (IBM). But this is not the only possible option. Nokia has
developed a whole new product (770 Internet Tablet) for new markets, which uses the Linux
operating system. 770 is based mainly on open source software and represents the original idea of
open source development.
Keywords: Open innovation, innovation management, open source

Tiivistelmä
Avoimen innovaation malli korostaa erilaisten ulkoisten tiedonlähteiden, kuten asiakkaiden,

kilpailijoiden, yliopistojen ja yhteistyöyritysten käyttöä yrityksen innovaatioprosesseissa. Tutkimus
korostaa sisäisten ja ulkoisten tiedonlähteiden käytön tasapainottamisen merkitystä
innovaatiotoiminnassa, koska kriittinen tietopääoma voidaan saavuttaa eri tietolähteistä. Yritysten
tulee investoida edelleen perustutkimukseen ymmärtääkseen paremmin yritysrajojen ulkopuolisen
tietopääoman merkityksen. Hyödyntääkseen ulkopuolista tietoa omassa liiketoiminnassaan, täytyy
yrityksen kehittää omaa absorptiokykyään. Yritykset tarvitsevat tätä kykyä, koska suljetun
innovaatiomallin elinkelpoisuutta heikentävät tekijät korostuvat entisestään.
Suljettuun lähdekoodiin perustuvat ohjelmistot ovat hallinneet kaupallista ohjelmistoteollisuutta

useiden vuosien ajan. Nyt perinteinen lähestymistapa on muuttumassa. Avoimeen lähdekoodiin
perustuva kehittäminen on tunnetuin esimerkki ulkoisten tietolähteiden hyväksikäytöstä
ohjelmistojen kehitystyössä. Yritykset ovat edistämässä tätä lähestymistapaa yhä enemmän,
rakentaen samalla tuottavia liiketoimintamalleja avoimen lähdekoodin ympärille. Tutkimus esittelee
kaksi yritystä (Nokia, IBM), jotka käyttävät avointa lähdekoodia omassa liiketoiminnassaan.
Lyhyemmät tuotekehityssyklit, alhaisemmat kustannukset ja monipuolisemmat idealähteet ovat
yleisiä syitä siirtyä kohti avoimen lähdekoodin yhteisöjä. Näiden hyötyjen lisäksi on olemassa
markkinatekijöitä, kuten teknologinen konvergenssi, kasvavat tuotevaatimukset (monimutkaisuuden
lisääntyminen) ja ohjelmistojen yhteensopivuusvaatimukset, jotka kannustavat yrityksiä
harkitsemaan avoimen innovaation mallia ja avoimen lähdekoodin käyttöä osana tätä uutta
lähestymistapaa. Avoimen lähdekoodin käyttö on kiinnostava tutkimusalue myös kaupallisesta
näkökulmasta. Kilpailuedun rakentaminen avoimeen lähdekoodiin perustuvan liiketoiminnan
ympärille on haastavaa, muttei mahdotonta. Riskipääomasijoittajien mukaan tällä hetkellä suosituin
kehittämismalli on avoimeen arkkitehtuuriin ja standardeihin perustuva malli, missä avointa
lähdekoodia käytetään rakennettaessa kypsä ja avoin ohjelmistoalusta ja sisäistä tuotekehitystä
kehitettäessä uuteen tuotteeseen ns. kilpailuetua kasvattava suljettu osa (IBM). Tämän
toimintamallin lisäksi mm. Nokia on kehittänyt kokonaan uudenlaisen tuotteen uusille markkinoille,
joka pohjautuu Linux-käyttöjärjestelmään (770 Internet Tablet). 770 perustuu pääosin avoimeen
lähdekoodiin ja edustaa alkuperäistä avoimen lähdekoodin kehittämisideaa.
Avainsanat: Avoin innovaatio, innovaatiojohtaminen, avoin lähdekoodi

TABLE OF CONTENTS
1 INTRODUCTION ................................................................................................................. 1
1.1 Motives and background.................................................................................................. 1
1.2 Research strategy............................................................................................................. 2
1.3 Key concepts of the study ................................................................................................ 4
1.3.1 Closed and open innovation paradigms .................................................................... 4
1.3.2 Open source and open architecture........................................................................... 5
2 MOTIVES FOR OPEN INNOVATION STRATEGY ........................................................ 8
2.1 Balance between internal and external knowledge ........................................................... 8
2.2 Viability of the closed innovation paradigm................................................................... 10
2.3 Benefits and risks of open innovation ............................................................................ 12
2.4 Motives for open source development............................................................................ 13
3 MARKET FACTORS IN THE ICT-INDUSTRY.............................................................. 15
3.1 The evolution of the ICT-industry.................................................................................. 15
3.2 Driving forces................................................................................................................ 16
4 GUIDING MODEL OF OS DEVELOPMENT ................................................................. 18
4.1 Guiding model for creating an effective OS environment............................................... 18
4.2 Significance of the OS platform group........................................................................... 19
5 THE INFLUENCE OF OS DEVELOPMENT ON BUSINESS MODEL RENEWAL.... 21
5.1 Definitions of the business model .................................................................................. 21
5.2 Components of the business model ................................................................................ 22
5.3 How openness affects the business model ...................................................................... 24
5.4 Types of OS initiatives .................................................................................................. 27
6 CASE: NOKIA 770 INTERNET TABLET........................................................................ 29
6.1 The influence of OI-paradigm in Nokia ......................................................................... 30
6.2 Technology review: Maemo.org & 770’s software architecture...................................... 31
6.3 Nokia’s motives for OS development............................................................................. 33
6.4 Nokia’s OS strategy in the 770 project ........................................................................... 35
6.5 Business review: maximal customer value with low R&D costs..................................... 37
7 CASE: IBM.......................................................................................................................... 39
7.1 The influence of the OI paradigm in IBM ...................................................................... 40
7.2 Motives, principles & market factors pushing IBM to OS-business................................ 41
7.3 New “schizophrenic”strategy........................................................................................ 43
7.4 Benefits and drawbacks for IBM.................................................................................... 43
7.5 How IBM profits from the open source? ........................................................................ 45
8 CONCLUSIONS ................................................................................................................. 46
REFERENCES
List of abbreviations
770 Nokia 770 Internet Tablet (www.nokia.com)
ICT Information and Communication Technologies
IP Intellectual Property
IPR Intellectual Property Right
OI Open Innovation
OS Open Source
OSS Open Source Software
R&D Research and Development
VC Venture Capital
Acknowledgements
Funding for this research project was provided by the Finnish Funding Agency for Technology and
Innovation and Nokia Corporation. The authors would like to thank the following persons for their
contribution in the research: Ari Jaaksi from Nokia and Olli-Pekka Hilmola and Pekka Salmi from
the Kouvola Research Unit of Lappeenranta University of Technology. All errors are the authors’
responsibility.
1
1 INTRODUCTION
1.1 Motives and background
Due to the increased competition in the market and the complex technologies with a great amount
of uncertainty, the development process for innovations has been challenged to utilize knowledge
outside the firm’s boundaries. Several studies have touched this issue from different angles since
the 90’s, e.g. Hagedoorn and Shekenraad (1994) from the strategic alliance perspectives, and Miller
and Morris (1999) by presenting the transition to new ways of doing business in a knowledge-based
economy that offers new learning opportunities for individuals and new ways to achieve more agile
resource deployment throughout society, i.e. the fourth generation R&D management, as the
authors call it. Christensen (1997) found out that established, innovative, and customer sensitive
companies may ignore or attend belatedly to technological innovations with great strategic
importance. Established companies are aggressive in their activities to sustain innovations, but the
problem lies in their ability to confront downward vision and mobility, in terms of technological
trajectory. Companies that were once good at finding new applications and markets, have later
become unable to cope with new emerging technologies. March's learning theory (1991), and in
particular his concepts of exploration and exploitation give a perspective to understand the
challenge. Organizations are constantly engaged in conflicting processes that balance flexibility and
efficiency. Exploration (dynamic) is about searching for new options, experimenting, and
conducting research. Exploitation (static) is about refining existing procedures, doing the same
things, only better, and reaping value from what is already known. Both the dynamic and static
parts of learning are needed for knowledge, but they must be handled in an efficient way. If
knowledge is transferred within organizational boundaries, the organization learns directly from its
own experience. If, however, knowledge is transferred across organizational boundaries, the
organization learns also indirectly from the experience of other organizations (Levitt and March,
1988).
This research field became popular among scholars after Chesbrough (2003) launched his seminal
book on Open Innovation (OI). Today, different models of OI exist. These models offer the promise
that companies can achieve a greater return on their innovative activities and their resulting
intellectual property (West & Gallagher, 2006). The new approach highlights the importance of
using a wide range of sources of knowledge for a company’s innovation activities, including
2
customers, rivals, academics, and collaborative firms in unrelated industries, while simultaneously
using creative methods to exploit a company’s resulting intellectual property (Chesbrough, 2003a).
For many years the dominant business approach employed by commercial software industry has
been proprietary software. Now the traditional approach is changing and a new way to develop
software is appearing. The industrial giants Nokia and IBM have changed their way to manage
proprietary rights and launched major projects to develop and use open source software. The growth
of the open source communities has raised many essential questions.
1.2 Research strategy
This study concerns the motives, circumstances, and driving forces for OI in the light of two case
studies. We take a detailed look at the open innovation model, where we examine the open source
as way to create value from new innovations. Our goal is to clarify the impacts of open innovation
on the corporation in the light of the open source and the business models embedded in. This
research answers these questions by using literature analysis and the case study approach. Most of
our data is from public sources, such as academic and other literature, business journals, companies’
websites, and other web-sources.
Sosiology Business
Open
Innovation SCOPE
Open Source Software Management
Technology
Figure 1: Scope of the research
At first we take a theoretical approach to the theme of openness. Our purpose is to eye the open
source (and open architecture) as a possibility to use external elements of innovations to create new
solutions in a dynamic environment. The scope of the study is presented in figure 1. Second, we
contemplate two corporations, Nokia and IBM by case studies. The purpose is to describe how
3
these two giants use the open source to create new business opportunities, and how their open
innovation policy fits into the proposed theoretical framework. We examine the open theme on
different levels in the case studies. First, we study Nokia’s new Internet Tablet on the product level,
and second, IBM at the corporate level, focusing on its software business. Looking at these
corporations on the general level, we can state that IBM is a progressive user of open innovation
whereas Nokia is just an upward newbie.
Chapter two outlines the motives for open innovation and open source development. We also
consider the balance between a company’s in-house R&D functions and knowledge outside the
firm’s boundaries. In chapter three we take a detailed look at market factors in the ICT industry and
identify critical driving forces which press companies towards (more) open borders in R&D
activities. Chapter four describes underlying factors for creating an effective open source
developing environment. Chapter five shows, with case studies and literature how the open source
affects companies’business models.
The research questions are:

1. What are the motives to use the open innovation model in innovation strategy?
a. Why do companies consider the open source as an option for a new innovation
model?
2. Which market factors force companies to the OI model and the direction of OS?
3. How to create an open source development environment that operates as the main resource
of the open source code?
4. How does the open source model affect the corporate business model?
a. What are the main components of the business model and how do these components
change?
The empirical part of the paper deals with two giant companies, which have taken steps into a more
open direction. Nokia has published its 770 Internet Tablet based on the Linux operating system.
The company made a public development environment for 770, where everyone can share the code
by the give-and-take approach. IBM has released 500 software patents to markets to ensure that the
industry can maintain its innovativeness and the company can benefit from open source developers
in its own business areas. “Big Blue”has changed its IP-strategy radically and tries to operate as a
pioneer of the new way of development. The research strategy is illustrated in figure 2.
4
F Empiric Studies
Closed R Nokia
Innovation A at
M product level
Innovation Research E
Conclusions
Questions W IBM
O at
Open R corporate level
Innovation K
Open Source
Figure 2. Research strategy
1.3 Key concepts of the study
1.3.1 Closed and open innovation paradigms
The closed innovation paradigm is a traditional, fundamentally inwardly focused approach. The
model assumes that ideas (invented inside) flow into the firm’s innovation funnel on the left and
flow out to the market on the right. Projects are filtered during research and development processes,
and survived ideas are transferred into development and then taken to the market (Chesbrough,
2003a, xxi). Firms that use the closed innovation model do not rely on external sources of
innovations. Everything is developed inside the corporate boundaries and innovations are protected
by intellectual property (IP) rights. The approach is illustrated in figure 3.
Boundary of the Firm
Research
Projects Current
Market
Research Development
Figure 3. Closed Innovation model. (Chesbrough, 2003a, xxii)

5
Open innovation encourages the use of and explores systematically a wide range of internal and
external sources of knowledge for innovation opportunities, consciously integrating this exploration
with the company’s capabilities and resources, and exploiting broadly these opportunities through
multiple channels (Chesbrough, 2003b). Open innovation brings in external ideas, hands out
internal ones and uses external business models. It opens new possibilities to the new markets. The
basic idea is described in figure 4.
Boundary of the Firm
New
Market
Research
Projects
Current
Market
Research Development
Figure 4. Open innovation model (Chesbrough, 2003a, xxv)
Figure 4 shows that ideas can still come from the company’s research process but they can also
come from outside the firm’s boundaries. In addition, projects can seep out of the firm, either in the
research stage or later in the development stage. (Chesbrough, 2003a, xxiv)
1.3.2 Open source and open architecture
When discussing open innovation, it is also essential to define what the open source is and why it is
not the same as the free code. The open source is about sharing your software code with others
under fair terms. When you take the code you will benefit from the work of others and when you
share the code, they benefit from your work. The rules are the same for all: individuals,
corporations and academics. The users of open source software are (generally) able to view the
6
source code, alter and re-distribute it. In some cases commercial companies are able to develop
proprietary products based on open source ones.
There are many important terms in the field of the open source. First we will clarify the term “open
source development”, which means developing an environment where everything is open. Open
source development eliminates the ability of vendors to compete with the implementation because
the details of implementation are visible to all (West, 2003). The basic idea is to share everything
(code) in order to ensure maximum effectiveness and innovativeness by the give-and-take approach.
Open source development is based on communities, which are used to generate maximum resources
for new software creation, and to improve mature versions. The best known example of open source
development is Linux, which has been a contender to proprietary software products for a long
period of time.
Corp.
Patent
Portfolio
Corp. Corp.
Patent Patent
Portfolio Open Portfolio
architecture
- Standards
- Platforms
Corp. Corp.
Patent Patent
Portfolio Portfolio
Figure 5. The idea of open architecture
Next we will take a look at the term “open architecture”, which is very close to the open source. It
means a way of development, where part of the code is open to create platforms, and the other part
of the code is closed and developed inside the company. The open part is important because the
industry needs open and mature standards to maintain innovativeness to create universal platforms.
The idea is shown in figure 5. The difference between open architecture (open standards) and open
source is described in figure 6.
7
Open architecture: Open source –rate (appropriate ratio)
Open source code (X%) Proprietary code (100-X%)

- standards, platform - base of competitive advantage
Open source:
Open source code (100%)

- full access to source code, no proprietary rights
Figure 6. The difference between open architecture and open source.

8
2 MOTIVES FOR OPEN INNOVATION STRATEGY
Chapter two focuses on the meaning of internal and external knowledge to companies’innovation
processes, and the significance of exploration and exploitation. Then some factors eroding the
viability of closed innovation paradigm are discussed. Finally the main motives to use open source
development for new business opportunity creation are examined.
2.1 Balance between internal and external knowledge
The R&D process needs input from a wide range of sources to ensure the innovativeness of the
firm. Critical knowledge can come from very different sources and key players. Cohen and
Levinthal (1990) argue that the ability of a company to recognize the value of new, external
knowledge, assimilate it, and apply it to commercial ends is critical to its innovative capabilities.
They label capability as a firm’s absorptive capacity, and suggest that it is largely a function of the
firm’s level of prior related knowledge and diversity of background.
According to March (1991), it is important to achieve a balance between exploration and

exploitation. Exploration includes things captured by terms such as search, variation, risk taking,
experimentation, play, flexibility, discovery and innovation. Exploitation includes such things as
refinement, choice, production, efficiency, selection, implementation and execution. Companies
that lean to exploration instead of exploitation are likely to suffer the costs of experimentation
without gaining many of its benefits. March (1991) also argues that firms which have adaptive
processes, by refining exploitation more rapidly than exploration, are likely to become effective in
the short run but self-destructive in the long term. According to these arguments, maintaining an
appropriate balance between exploration and exploitation as well as developing in-house R&D-
processes and the company’s absorptive capacity are critical functions for survival in a changing,
uncertain environment.
The open innovation paradigm emphasizes balancing the use of external and internal knowledge in
R&D. Outside sources of knowledge are often critical for the innovation processes. The sources
may be external (competitors, universities, etc.) or internal units outside of the formal innovative
unit (marketing, manufacturing, etc.). Cohen and Levinthal (1990) stress that the ability to exploit
9
this information is a critical component of innovative capabilities. Companies that conduct their
own R&D are typically better in using the available external information. In addition, the absorptive
capacity may be a by-product of the manufacturing operations. The sources of technical knowledge
are described in figure 7. The figure illustrates the linkages between absorptive capacity and the
major sources of technological knowledge: own R&D, spillovers from competitors, and outside
industry.
Absorptive Capacity
Own R&D Technical

knowledge
Spillovers of competitors’knowledge
Extraindustry knowledge
Figure 7. Sources of technical knowledge (Cohen & Levinthal, 1990)
In the model, the absorptive capacity determines the extent to which the extramural knowledge can
be utilized, and the absorptive capability itself depends on the company’s own R&D capability. The
exploitation of competitors’ research findings is realized through the interaction of the firm’s
absorptive capacity with rivals’spillovers. Interaction signifies that a firm is unable to assimilate
external information passively. Rather, to utilize the accessible R&D output of its competitors, the
company invests its absorptive capacity by conducting R&D. The learning incentives (ease of
learning, quantity of available knowledge) influence the effects of appropriability and technological
opportunity conditions on R&D.
It has been argued by many scholars that external and internal sources of knowledge have to be in
balance (Cohen & Levinthal, 1990; Chesbrough, 2003a; March, 1991). If the smart workers inside
the firm are connected to, and informed by the efforts of smart people outside the corporate
boundaries, then the company’s innovation process will reinvent fewer wheels, which can be
understood as a transformation of “not invented here” syndrome. In the period of ascendancy of
the closed innovation paradigm, the not invented here -syndrome meant a mindset that everything
had to be developed inside the company. If a technology was not produced by own R&D, the
company could not be sure of the quality, performance and availability of the particular technology
10
(not invented here). Today the problem is that you are not re-inventing the wheel. (Chesbrough,
2003a, 30, 49, 177)
Internal efforts will be multiplied many times through embracing of other ideas and inspiration.
This can be called a powerful value creation engine. But the engine does not guarantee that the
company is capable of capturing value. Internal R&D activities are needed to connect this valuable
information together and to exploit the company’s core capabilities when resolving complex
interdependencies in nascent technologies to create architectures and to advance them later on.
From a commercial point of view, the company’s business model will define what portions of the
value chain the firm will need to provide internally, and it will link those portions to the
surrounding value network that creates and delivers that value to the customers. (Chesbrough,
2003a, 177-178)
The above way of thinking can also be transferred to software industry. To create a maximal value
for the customers, the company will need mature platforms on which it can build its own
commercial products. Companies use external sources of knowledge to ensure effective
development and a strong platform, and their own R&D to create valuable software architectures
around these standards. Internal R&D is still very important, only its role has been changed. Using
external sources of knowledge on software development ensures that you use mature building
blocks and you are not re-inventing any wheels.
2.2 Viability of the closed innovation paradigm
What differentiates the closed innovation paradigm from the open one is basically that companies
implementing the latter interact with external entities in terms of the efficiency and effectiveness of
their innovation process. But because the environment is becoming more complex, the need to use
external sources of innovation is increasing.
Chesbrough (2003a, xii-xxiv, 34-41) mentions four erosion factors that compel companies to
change their innovation strategy into a more flexible open innovation approach. Skilled workers’
increasing availability and mobility as well as external suppliers’increasing capability have caused
a shift in innovation paradigms. In addition, the external options available for unused ideas and the
venture capital market have created new opportunities for companies (Chesbrough, 2003b,
11
Cusumano, 2004; Greenemeier, 2005). Several closely tied factors that erode the viability of the
closed innovation paradigm are described in table 1.
Table 1. Four main factors eroding the viability of the closed innovation paradigm. (Chesbrough,
2003a, xii-xxiv, 34-41)
Universities produce talented
professionals around the world
Increasing availability and mobility of
Availability of talent Learning by hiring
skilled workers
Cannot count on the best talents to be
around
Venture capital -funded start-ups are a Start-ups offer attractive risk/reward

Venture Capital
significant source of innovation schemes for top talents
Faster product cycles and external

options for commercialization are
Getting ideas Talented professionals find VC funding
driving innovations to the market faster
off the shelf to commercialize ideas on the shelf
Ideas put on the shelf lose their value
faster
On one hand, drives focusing on R&D

External suppliers can increasingly offer
Capability of investment
solutions of equal or superior quality to
external suppliers On the other hand, drives competition by
in-house development
leveling the playing field
We can say that open innovation is a phenomenon which has become more important in the past
few years. Shorter innovation cycles, industrial research and escalating costs of development, as
well as the dearth of resources are motives that change companies’innovation strategy towards a
more open direction (Gassman & Enkel, 2004). Only firms which wish to commercialize their own
ideas as well as others’innovations, and find ways to bring their results of in-house innovation to
the market by deploying outside processes, can start a new era of innovation management in their
current businesses. (West & Gallagher, 2006).
12
2.3 Benefits and risks of open innovation
The open innovation model offers wider sources of innovation to a company’s R&D processes.
Chesbrough (2003a, 2003b) presents the key benefits of open innovation:
- Greater effectiveness of R&D
- Cost and time savings in R&D by using external sources of innovation
- Capitalizing on technologies sitting on the shelf, extra revenues
- Wider source of innovations for new products
- Decreased risk of missing market opportunities
The new method exploits the diffusion of knowledge by external research, uses multiple paths to
markets for a company’s own technologies and manages IP proactively. There are, however, some
considerable risks and issues in open innovation that will have to be mitigated. (Chesbrough,
2003a). Open innovation requires strategic changes in R&D and business models; new incentives,
reward system and recruiting. Usually, the change towards openness is not possible without a
“shock to the system”, when the fact that the business as usual is no longer effective way to
function is noticed (Chesbrough, 2006, 188).
As an example, while alliances are important source of external knowledge, they could also be
complex to manage (Harrigan, 1985; Kogut et al., 1992; Uzzi, 1997; Gomes-Casseres, 1996). The
complexity of relationships, ideas and projects increases significantly when turning to open
innovation. That requires new capabilities and competences in R&D.
As the role of R&D is changed, it may become short-sighted and the long-term view may be
jeopardized. Due to strict and short cycle times of products R&D projects are short and the project
managers try to minimize risks. External sources of innovation are much riskier than internal ones.
The other thing is what happens when external project turns out to be successful. The executives
might decide that so many internal employees are not needed in the next R&D projects and short
term success may damage the long-term internal staffing and research funding. (Chesbrough, 2006,
23-24)
The new logic of OI business model and R&D could cause a huge resistance among personnel.
Chesbrough (2006, 24, 32) discusses about “Not Invented Here” –syndrome and “Not Sold Here” –
virus. Employees might understand that their jobs are in danger, if the utilization of external
13
technologies is increased, even if it is not the case. On the other hand, if the company’s own
technologies are commercialized externally, the fear is that someone else will win with our
technology and it means automatically that we have lost.
When companies cooperate with each other in R&D, it usually requires sharing the intellectual
property and business secrets. Collaboration always contains IPR risks. In the cases of selling and
licensing technologies and IP, there is the risk of contamination. The customer needs to know about
the technology/IP before buying it, but if the seller tells about the technology, it transfers the
technology/IP to customer without any compensation. The emergence of effective secondary
markets of IP (intermediaries) will help to reduce these risks. (Chesbrough, 2006, 68)
Even if the Open Innovation has gained a lot of attention lately and many scholars have written
about it, it is still very new phenomena and implementations of the Open Innovation are recent.
Many researches have been made about the subject, but the proofs of benefits are still largely
anecdotal.
2.4 Motives for open source development
Open source development is the most prominent example of the revolutionizing of the conventional
innovation process. The open source approach is a rapidly growing phenomenon of co-operative
software development by independent software programmers. Programmers belong to communities
where they develop lines of code to add to the initial source code in order to increase the value and
applicability of a program, or completely new applications. The basic idea of the approach is to
develop software outside company boundaries. The code is available to outsiders and everyone can
fix bugs or bring new features, as well as create new code to the open software (Gassman & Enkel,
2004; West & Gallagher, 2006; West 2003). The open source approach has been broadly discussed
and it has helped companies open up their internal innovation processes.
What are the main motives behind a new approach? The literature gives many explanations, but
there are also common motives to use open source development. According to Gassman & Enkel
(2004) the enabling factors of the open source are short design-build-test cycles (rapid change of
generations), new releases with low transaction costs, and a great number of ideas that are enabled
by the number of programmers involved. Other success factors are a stable structure that entails an
14
accepted system architecture and language, the communication of which is a combination of ideas
and technological solutions, as well as the strong incentive to beat proprietary software like
Microsoft’s products.
In other words, open source development means that a company has to open its boundaries by
opening gateways to the external resources, to let valuable knowledge and expertise flow in from
the outside in order to create opportunities for co-operative innovation processes (Chesbrough,
2003b; Gassman and Enkel, 2004). The whole approach is based on exploitation of ideas in order to
bring new innovations to the markets faster than the competitors.
Open source communities have been studied with survey instruments in prior literature. In terms of
technical problems that developers seek to address, Ghosh et al. (2002) argue that three major
functions (of their sample) are: trying to improve the products of other developers (40%), realizing
a good product idea (27%) and solving problem that could not be solved by proprietary software
(30%).
15
3 MARKET FACTORS IN THE ICT-INDUSTRY
After we have defined the key concepts and main motives of open innovation it is essential to find
the factors which push companies to an open innovation strategy. In this section we analyze these
forces in the ICT industry and also outside the industry boundaries.
3.1 The evolution of the ICT-industry
The trend towards open source software is an example of a bigger development in the technology
dependent industries. It is an emerging approach towards collaboration and open innovation that at
times seems to work around the traditional intellectual property system, and at times is directly
fostered by it.
Some key players in the IT-industry fear that patent rights have swung so far towards protection that
they risk undermining innovation. In the whole industry, there can be seen some actions which
indicate that many of the key players in the industry want to move to a more open direction to
ensure innovativeness and restore the balance between openness and proprietary rights. If the
balance goes too far in one direction, the whole industry begins to wither, which will mean the end
of many companies.
However some factors can be identified that affect the open source -paradigm in the ICT-sector.
First it is essential to clarify the term interoperability. Interoperability means compatibility of
systems and software in the market (Forelle, 2006; Mamudi, 2005). According to Mamudi (2005)
companies are forced to develop wide standards to ensure maximum value to customers and thus
the companies as well. He sees that companies in the same industry will have to cooperate more
closely to establish universal platforms on which all players can build. The best way to ensure this
unfettered interoperability is simply to release parts of the company’s (software) patents freely to
markets and competitors, with the promise that no proprietary rights will be asserted.
The second factor is scattering into niche firms in the leading edge of the ICT-sector, and
specialization that is economically efficient (Greenemeier, 2005; Cusumano, 2004). Because this
phenomenon is multiplied, software and components are becoming more modular and
16
interchangeable. Scattering is increasing all the time because of VC-funding, and it forces firms to
create open platforms (Cusumano, 2004). Universal platform is needed that key players and niche
companies, with small resources, can collaborate and develop universal products and services,
which create greater value to customers.
3.2 Driving forces
There are also other factors, which push companies to open development. These factors have an
effect also outside the industry boundaries. These driving forces shape companies and press them to
change their innovation strategy.
First, it is essential to step into technological convergence, which affects many industries.
Customers want services and products as a package deal with maximum features, pressing
companies to develop products and services with multiple technologies (The Economist, 2006).
These package deals contain also convergence between hardware and software (prominent
examples are iPod and iTunes). Technological convergence demands common platforms and
standards, and the key for many firms is open development and collaboration with rivals,
academics, suppliers and customers. What will this demand? One possible answer is that companies
in different sectors have to change their innovation strategies and develop open architecture to new
products in potential markets.
Another significance force is the growing complexity (The Economist, 2006). As firms add more
features in their products and services to maintain their competitive advantage, they need to make
use of innovations developed by other companies. And when different companies have to work
together to make their systems work together, open source and open architecture are needed,
because the different kinds of software have to interact seamlessly.
The importance of intellectual property has increased extensively. According to Thumm (2003)
companies patent now inventions that they would not even thought to patent ten years ago.
Different standards and rules guide patenting in different counties. Software patents are a good
example of that. While software is patentable in US and Japan, the line of the European Union is
that software “as such”is not patentable. (Mamudi, 2002) Since the debate about the patentability
17
of software is intense, big companies have received a lot of negative publicity for their large patent
portfolios. To combat this, many companies have released software patents to be freely available.
18
4 GUIDING MODEL OF OS DEVELOPMENT
In this part, we take a look at the critical parts of open source development. We introduce different
interest groups which have a significant meaning in the open source product development. We also
examine the significance of the platform group around OS development.
4.1 Guiding model for creating an effective OS environment
Communities are the core of new innovations, when discussing open source development (Onetti &
Capobianco, 2005). When we look at open source development historically, it can be seen that open
source initiatives have mainly focused on the developing community, while companies have
sponsored the open source initiatives and the open source products developed by communities.
Nowadays there can be seen also other interest groups. When we combine and define all these
significant groups together, we end up with an integrated framework, described in figure 8.
Open Source Technology

Community Gurus
Customer
Group
(Products &
Solutions) Domain
Experts
Commercial
Organization
Test & Validation
Intellectual Property
Figure 8. Interest groups driving the open source initiative (Pal & Madanmohan, 2001)
19
The framework described in figure 8 is meant as a basic guiding model for implementing a business
practice within a commercial organization, based on open source. The main idea of the framework
is that it describes the various interactions which take place between commercial company,
customers, community, domain experts and technology gurus, and ensure they are taken into
account when formulating a successful open source –strategy with the help of the open source
communities. Domain experts are industry experts with a remarkable experience, and help bring in
the perspective of the end user and customer. Their target is to maximize the value in terms of
developing a high level design of the software. Gurus are technology stalwarts, who have spent
considerable amount of time working with technology, and have remarkable experience in it. The
significance of technology gurus is emphasized when fixing a critical bug in software or designing
new features over an existing code base. (Pal & Madanmohan, 2001)
4.2 Significance of the OS platform group
The most interesting part of the basic guiding model (figure 8) is the interaction between the
commercial company and the open source community. The interface is shown more detailed in
figure 9.
Group working on OS platform component
Commercial
Part of the Group within the Products Group
Open Source Organization
Community working on
working on Open Source Commercial
the platform platform Solutions Group
component component
Commercial
Services Group
Open Source Commercial Organization with

Community Open Source Business Model
Figure 9. Interface between commercial company and OS community

20
Figure 9 describes the boundaries of the platform component working group, which is partly
divided inside and outside the commercial company. The most important thing is that these two
groups (OS platform group/proprietary end-user group) use the same tools and development
environment. When the community and the commercial company use the same tools in the same
environment it is possible to develop coding standards and then more effective processes (fixing
bugs). Complex models and common development tools raise naturally an essential question: how
is it possible to manage open source platform group effectively? The answer lies in these web-based
developing environments. The project management systems provide discussion boards, mailing
lists, file download systems, bug tracking systems and news posting systems.
When creating an open source strategy and business model, it is fundamental to put eye on the
significance of communities. In open source development, the company’s size is not essential. The
thing that matters more is the community size and the popularity of the open source software
(Onetti & Capobianco, 2005). A significant part of the activities are actually managed and created
inside the community, lowering the cost of producing the software and increasing its quality. The
larger community ensures more ideas and resources, which means more business opportunities. But
still the community has to be managed effectively, so the benefits do not rise linearly, when the size
of the community increases. However, wide open source communities will give an opportunity to
build lean companies, which are quicker to improve and adapt with market share increases.
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5 THE INFLUENCE OF OS DEVELOPMENT ON BUSINESS

MODEL RENEWAL
The open source is an evolving model of development in many commercial organizations. The new
model requires a viewpoint that is different from the proprietary one. The new point of development
affects also the company’s business model. First we have to clarify what we mean when we talk
about the modern business model and then we can examine the effects of OS development.
5.1 Definitions of the business model
In the literature the concept of a business the model is often vaguely defined. Some scholars use for
example the terms ‘strategy’and ‘business model’ interchangeably to refer to everything they
believe gives them a competitive advantage. One can also often see descriptions of business models
focusing on cash flows, but forgetting the simple fact of how cash enters the system in the first
place - from paying customers. One possible explanation for the lack of ‘good’descriptions of
business models is that the business model is very much an intrinsic feature of a firm or business
organization, and hence hard to perceive as separate from the business operations and organization
(Gaarder 2003).
There have been many attempts to define the business model. According to Pateli (2002), there are
basically two kinds of definitions: 1) definitions that explain what the purpose of the business
model is in simple but quite comprehensive words, and 2) definitions that specify the primary
elements of the model, and possibly their interrelationships. Table 2 below gives a few examples of
frequently quoted definitions. In general, all business models seek to address the simple equation:
profits = revenues –costs.
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Table 2. Some definitions of the business model.

Timmers (1998) An architecture for the product, service and information flows, including a
description of the various business actors and their roles, a description of the
potential benefits for the various business actors, and descriptions of sources of
revenues.
Magretta (1998, 2002) The business model tells a logical story, explaining who the customers are, what
they value, and how to make money by providing them that value. A good business
model also has to pass the number test: a business model's story holds up only if
assumptions about customers are tied to sound economics.
Rappa (2001) The business model is the method of doing business by which a company can
sustain itself –that is, generate revenue. The business model spells out how a
company makes money by specifying where it is positioned in the value chain.
Amit and Zott (2001) The business model depicts the content, structure, and governance of transactions
designed to create value through the exploitation of business opportunities. A
business model includes the design of:
• Transaction content: goods/ services; resources/ capabilities
• Transaction structure: parties involved; linkages; sequencing; exchange
mechanisms
• Transaction governance; flow control.
The business model describes the steps that are performed in order to complete
transactions.
5.2 Components of the business model
Researchers have recently started to decompose business models into their components. These
components have also been referred to as ‘elements’, ‘functions’, ‘attributes’, or ‘pillars’ of
business models. Perhaps the best known framework for discussing the components of a business
concept (or a model) is that of Hamel (2001). Hamel's framework comprises four main components,
each of which is decomposed into several subcomponents. The four major components are further
linked together by three ‘bridge’components. The framework is illustrated by the following figure:
23
CUSTOMER BENEFITS CONFIGURATION COMPANY BOUNDARIES
CUSTOMER CORE STRATEGY STRATEGIC VALUE NETWORK

INTERFACE RESOURCES
Fulfillment & Support Business Mission Core Competencies Suppliers

Information & Insight Product / Market Scope Strategic Assets Partners
Relationship Dynamics Basis for Differentiation Core Processes Coalitions
Pricing Structure
Figure 10. Hamel's business model framework
According to Hamel (2001), new business concepts are used to generate new wealth compared to
existing business models. “Business concept innovation is the capacity to reconceive existing
business models in ways that create new value for customers, rude surprises for competitors, and
new wealth for investors”. Firm's boundaries function as a bridge between a company's strategic
resources and its value network. This intermediating component refers to the decisions that have
been made about what the firm does and what it contracts out to the value network.
Some authors decompose the business model in a quite a similar way. For example, Afuah and
Tucci (2000) define four vertical dimensions of the business model (mission, structure, processes
and revenues) and two horizontal dimensions (technology and legal issues). Alt and Zimmermann
(2001) in turn specify the following components of the business model: 1) customer value, 2) scope,
3) pricing, 4) revenue source, 5) connected activities, 6) implementation, 7) capabilities and 8)
sustainability. Chesbrough and Rosenbloom (2002), on the other hand, specify a set of components
through their operational definition of a business model’s functions. The functions of the business
model are to (Chesbrough and Rosenbloom 2002, pp. 533-534):
• articulate the value preposition, i.e. the value created for users by the offering based on the
technology
• identify a market segment, i.e. for users to whom the technology is useful and for what
purpose, and specify the revenue generation mechanism(s) for the firm
• define the structure of the value chain within the firm required to create and distribute the
offering, and determine the complementary assets needed to support the firm's position in
this chain
• estimate the cost structure and profit potential of producing the offering, given the value
proposition and value chain structure chosen
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• describe the position of the firm within the value network linking the suppliers and
customers, including identification of potential complementors and competitors
• formulate the competitive strategy by which the innovating firm will gain and hold
advantage over rivals
The above decompositions show that even though each researcher uses his/her own approach for
bundling the components (differentiating levels, using sub-models, defining horizontal and vertical
dimensions etc.), they still have many similarities. In particular, these (usually fixed) sets of
components usually include some the following elements:
• market structure (actors, roles, objectives, capabilities, assets)
• value proposition (for customers and partners)
• scope (market segment)
• activities and processes
• core competences (capabilities, assets)
• pricing policy and revenue streams,
• strategy (alliances, competitive advantage, position in the value chain/net)
• regulation
• technology
5.3 How openness affects the business model
Companies need to change their business models to create value from open source software, since
the actual product (code) is free and does not create direct value to a company. Companies have
several ways to build a business model around open source software. Chesbrough (2006, 45) lists
these alternatives to profit from open source:
• Selling installations, services, and support with the software

• Creation of many version of the software. There is a free version available to anybody and
more advanced version for sale.
• Integrating the software with other parts of the customer’s IT infrastructure
• Providing proprietary products or services to open source software, that complement the
software
25
Companies’competitive advantage in the software business is often based on the proprietary part of
the end-product. From the business point of view, open architecture is the most famous developing
model if we use venture capitalists as an indicator (Cusumano, 2004; Greenemeier, 2005). Some
may call it mixed-source developing, where the “free” part of the code is shared to create open
standards/platforms and the proprietary code is generated to make the end-product unique to the
customer, and thus, profitable to the company.
The open architecture model is not only a way to profit from the open source code. When we look
at commercial software based on the open source code (100%) with no proprietary parts, the
business is often built around complementary goods and supporting services. Because pure open
source software is based on a shared source code and does not offer competitive advantage, the
company has to invest in complementary goods and supporting services. The business model is
quite simple: the company has to support the existing developing communities as much as it can
and develop in-house goods and services around this popular software product to make profit.
It is difficult to build a profitable business model in long run, if the shared software (no proprietary
add-ons) itself is a profit centre. This is because imitation is very easy and there are not significant
entries in the market. Instead, the open source activity has to be complementary with something that
remains proprietary. West & Gallagher (2006) see that the economical success of the open source
underlies in the “pooled R&D”, which can be understood as open architecture. Companies share the
code to test the software, fix bugs, and to get improvements, feedback, and extensions (Rossi and
Bonaccorsi, 2005). In this case, firms can together develop strong and mature software platform and
build proprietary parts, services and features around this OS-platform, gathering revenues from
them.
There can be seen a clear trend in business models from the view of external funding. In these days,
venture capitalists do not like the “services only” model, because the margins on service are
invariably lower than those for proprietary software. According to Koch (2006), financiers are
much more interested in companies having more sustainable competitive advantage (open
architecture/mixed source -firms).
26
Although building the business model around open source is challenging, this new way of
development and gaining revenues is still increasing its favor. When novice companies build
business based on open source, they have to notice some recommendations (table 3).
Table 3. Four important recommendations for building a new OS business model and strategy.
(adapted from Pal & Madanmohan, 2001)
It is important that the firm devise multi-usage
Multiple alliances &
alliances. Each of the partners should find the OS
External Sources communities are the key
complementary and offer network externalities. Extend
your resources by supporting developing communities.
OS firms should be able to move rapidly into new

product areas, be flexible enough to give way when
Flexibility Adapt flexible strategies
conflicting with a superior firm and avoid wrestling
competition
OS projects that are owned and supported by

commercial organizations are equally susceptible to
Simple Business OS is not a solution for troubled economic downturns (the parent company can easily
for OS business kill an OS project). If the basic business model of a
company is flawed, having an OS-project will not help
improve the cash flow
Building sustainable competitive advantage is difficult

Building a It is very difficult to build a
in open source business. The key to success is
business model is strong revenue model based on
differentiation. Do not build commercial products too
complex OS.
close to open ones (value to customers)
Koch (2006) argues that successful OS-products have certain things in common: they are broadly
applicable across many types of companies and industries, and they tend to be in areas that
companies do not believe provide competitive advantage, because everyone, including rivals, will
have access to the source code. Although building a profitable business model around OS-
development is challenging, it is estimated by Research Company Gartner that by 2010 global 2000
IT organizations (an annual ranking of the top 2000 corporations in the world by Forbes magazine)
will see open source as a viable option for 80 percent of their infrastructure software investments. In
27
the past few years the phenomenon of moving to use open source has concerned mainly small niche
firms. Now these start-up software companies relying on open source business models are moving
into the largest business computing segments, and the movement forces large companies also to
more open direction (Greenemeier, 2005; Koch, 2006; Cusumano 2004).
5.4 Types of OS initiatives
According to Pal & Madanmohan (2001), there are four ways a commercial organization can
constitute its open source practice. These four different ways are illustrated in figure 11.
Single OSS Multiple OSS

Initiative Initiative
Multiple
markets 2 3
Multiple Market Multiple Market
operation operation

Single Initiative Initiative
market 1 4
Single Market Single Market
operation operation

Figure 11. Different ways to constitute OS practice (Pal & Madanmohan 2001)
In box no 1, the company focuses on one market space only, and uses only one OS technology as
the platform for building new solutions. These kinds of companies are often single-product
companies, or companies having portfolio-related products for a single vertical market. This is a
typical model for start-up companies because it is simplest to operate and it does not demand large
resources. Once the OS software matures, the community starts looking at the other market/domains
where the software can be used.
Box no 2 is more complex. Companies using this model leverage a single OS technology across
multiple vertical markets. The model effectively leverages the investment made in the OS initiative
across multiple products for different vertical market segments or domains. In this model, the output
of the OS initiative will provide a platform, which can be used to build various commercial
products for different market needs, based on common standards. To succeed the model requires
28
large resources (manpower) and intensive collaboration with the OS community. Large
organizations that have a portfolio of products for multiple markets, with a single technology focus,
are likely to adopt this model.
In the third box the companies are typically large companies that can sustain multiple OS initiatives,
and leverage them across multiple markets. These can also be firms that have been involved with
other OS initiatives for historical reasons, and now want to constitute additional OS initiatives that
can provide technology and platforms for building products to service multiple markets.
In the last box (4), the company spends considerable bandwidth and resources to initiate and
manage multiple OS initiatives, and leverages them for its products for only one domain/vertical
market. Companies that are likely to adopt this model are world leaders in a particular
product/technology, and dominate the markets.
Choosing the appropriate quadrant is a strategic decision, since it determines the rest of the OS
strategy of the firm. It also changes the evolution of the company and affects its environment.
Hence there will be shift from one quadrant to another in a long term. A typical transition is from
the first quadrant to the second and then to the third one, when the size and business of the company
is growing. The fourth quadrant will remain as a special case, and will be appropriate for a
particular type of companies, as described in the previous sections. (Pal & Madanmohan, 2001)
29
6 CASE: NOKIA 770 INTERNET TABLET
Nokia Corporation is a public limited liability company incorporated under the laws of the Republic
of Finland. It is the world largest cell-phone maker, measured by total sales. The company has
divided its business into four major business groups, which are mobile phones, multimedia,
networks and enterprise solutions. There is some general information about Nokia in table 5.
(Nokia, 2006)
Table 5. Key parameters of Nokia. (Nokia, 2006)
Net Sales 34 191 EURm

Mobile Phones 20 811 EURm
Networks 6 557 EURm
Multimedia 5 981 EURm
Enterprise Solutions 861 EURm
Net profit 3 616 EURm
R&D 3 825 EURm
R&D Personnel 28 882 person
Personnel 58 874 person
This case discusses a large company's experience in creating a consumer electronics device based
on Linux and open source software. Nokia encourages external development for a device called
Nokia 770 Internet Tablet. It is the first open source and Linux-based consumer handheld from
Nokia. The company has published open development environment for 770 (maemo.org), where
open source developers can share the code around 770 by the give-and-take approach. The product
places itself on the market between cellular phones and notebooks. The basic idea of the use of 770
Internet tablet is described in figure 13.
Browsing
Email
File Sharing
770 Wi-Fi
Browsing
Email
File Sharing
Internet
Bluetooth
Modem
(phone)
Cellular
Figure 13. The new 770 Internet Tablet is used for web-browsing, emailing and file sharing
through Wi-Fi or Bluetooth. It does not contain straight cellular connectivity. (Jaaksi, 2006a)
30
6.1 The influence of OI-paradigm in Nokia
This new way of developing a device in the new market is an interesting territory. It is part of
Nokia’s major strategy shift that began in 2004, when Nokia rejiggered its product organizations
into four business groups to gain new markets. Ari Jaaksi (2006b), Nokia’s director for open
software platforms, has said that “company believes that open source is changing the way software
is created, with the new model a community –based peer production, where cost and results are
shared”.
Historically Nokia has relied on Symbian as the operating system for smartphones, and now it has
used a Linux-based operating system for a browser type device, such as the 770 Internet Tablet
(McCourtney, 2005). Normally Nokia has developed the company’s main products (smartphones)
through in-house-development and Symbian, because the market place in smartphones is mature,
with strict operator and server requirements (Correia, 2005). In the wide range, 770 is not Nokia’s
first move to use the open source, but it has historically limited its open source efforts to its server-
based networking products and internal development tools. In the market of handsets, this is the
first major action to open source development. In the end of the 2005, Nokia also launched some
minor open source projects around smartphones (portal: opensource.nokia.com), for example an
OS-browser for the S60-platform. But these projects are not at the same level of openness as the
770 Internet Tablet.
The new tablet is placed on new markets. Using Linux as an operating system, Nokia has chosen a
flexible and mature technology, which will give access to PC technologies, such as internet
protocols. To speed up the development of the open source product, Nokia has published an open
development platform, which is a Linux software toolset available to developers. The new
development platform is targeted to open source developers and innovation houses to ensure the
most effective way to develop a product and applications around it. The main idea is that developers
have a good opportunity to develop and share their own applications for Nokia 770 (enable
application and technology development for OSS & the commercial community).
Nokia has also got many Debian developers on their payroll, sharing code with these technology
stalwarts. The company’s target is to work as close as it can with these technology gurus and OS
communities. These actions signal strongly that Nokia is actively embracing the open source
31
movement and the Linux operating system for future non-phone products. Many analysts have
argued that the device itself is not very interesting, but the way of development is a tacit indicator of
a broader internal interest in the utility of Linux and open source –development (Smith, 2005).
6.2 Technology review: Maemo.org & 770’s software architecture
Maemo.org is a platform where application user interface, application engines and core software are
developed. The platform is composed of mainstream Linux and open source software widely
deployed in the most popular Linux distributions. At its core is the Hildon Application framework,
which is based on GNOME technology. GNOME provides an intuitive and attractive PC desktop
for end-users based on Linux, and a powerful framework for building applications that integrate
into the rest of the PC desktop. Maemo adapts this desktop technology to handheld devices with
extensions and modifications. It provides an easy-to-use development, build and test environment
on Linux workstations. The host development environment runs the same software as the one
available on the target device, Nokia 770, eliminating the need of target hardware emulation on the
host and providing a more accurate test environment (Maemo.org, 2006). Figure 14 describes the
development environment around Nokia 770 Internet Tablet.
Development Technology
platform: Gurus: Debian
MAEMO.ORG developers
Customer
Group
(Products &
Solutions) Domain
Experts
NOKIA
Intellectual Property
Figure 14. The development environment around Nokia 770 Internet Tablet
32
GNOME technologies are the base for the device user interface. The user interface is further
enhanced and combined to include Nokia’s long-term experience with end user interface interaction
and mobile user interface design. The core non-UI middleware is composed almost entirely of the
mainstream open source components (expat XML parser, D-BUS, Xserver, standard Linux
networking, glibc etc.) Some of these components have been modified from mainstream versions to
meet better the resource constraints of 770. Above all this, there is a Linux kernel (from kernel.org),
which is the core of all activity. (Maemo.org, 2006)
Except for the hardware adaptation layer, certain user interface elements, and third party software,
the 770 Internet Tablet is based entirely on open source software (figure 15). The open source
software component of Nokia 770 can be downloaded from maemo.org website as a complete
filesystem, or managed as a collection of Debian source and binary packages. This enables
enterprise developers and consumers to easily create and test software for the device.
Application user interfaces
Application and user

interface framework
Maemo
development
Application engines platform
Core software Nokia software
3rd party software
Open source software

Hardware adaptation
Figure 15. Nokia 770 is based largely on open source software. (Jaaksi, 2005)
The major parts of the software are developed outside the corporate boundaries. This does not mean
that development around 770 would be free. It is more like getting the first floor free when building
a house. In the case of Nokia 770, the use of the open source has decreased the costs and the cycle
of development (Jaaksi, 2006a).
33
Nokia works directly with OS communities to develop parts of the software. 770 is its first major
attempt to connect a commercial company and non-commercial communities in the handset-side.
This consolidation is very challenging, but possible. The main problems are how to control updates
and how to settle the publications of new versions. If the company can meet these challenges like
Nokia in the case of 770, the result will be positive. In the best cases this collaboration will generate
diversified products of good quality without need to go short of orderliness.
6.3 Nokia’s motives for OS development
It is clear that Nokia wants to follow the path of IBM. The company has taken the open innovation
model seriously and wants to use external sources also in its software development in the handset
markets. All of Nokia’s activities in the open software development are focused on the following
issues (Jaaksi, 2006a):
• Not re-inventing the wheel
• Working constructively with the open source community with a give-and-take approach
• Solving critical issues in the areas of:
o User interface & usability
o Power management
o Performance
o Memory management
o Application functionality
o Cross-development tools
o Integration
o Testing
Using the open source, Nokia tries to exploit mature technologies and external resources to avoid
overlapping in the software development. The company has supported developing communities by
sharing their own intellectual property and hiring key developers of Linux to ensure maximal
effectiveness of group work outside the company’s boundaries. 770-project signals a wider interest
in Nokia to move to the OS-business. New 770 Internet Tablet is only a first step to a different level
of development.
34
From the technology view, 770 is a good project to learn more from open source development and
Linux. Using Linux as a pilot experiment, Nokia can understand its possibilities and limitations
better for further development. It is also building a successful development environment for a
general software platform. If we look at the motives from the business point of view, Nokia is
opening a path to new markets. Their product is new and it makes possible to build a new product
family based on open source in the future.
This new way of development offers some concrete benefits for Nokia. Obvious benefits are the
availability of a good quality code and well-thought architecture and integrated subsystems. But
there are also more positive results: (Jaaksi, 2006a)
• Licensing rules have been decided by the licensee
o No need to execute complex licensing negotiations
o Saving can be up to 6 - 12 months in projects
• The work and credentials of a developer or a subcontractor are open for analysis
o The quality of the people and the components can be analyzed from the source code
o Their willingness to help is easy to verify –just ask
o The activity and direction of the component or product can be analyzed through the
project discussions
• When everything goes wrong –it is possible to take the code and run with it
o Even branch to meet the deadlines
o Worry about the consequences later
Open source enables also the interoperability of devices and software far more readily than the
proprietary one (McCourtney, 2005). Interoperability improves the usability of the devices and then
speeds up the diffusion of the new commercial handset. Open source development offers also
greater flexibility and should make it easier to move towards producing converged rather than
multiple devices (McCourtney, 2005). Convergence has been one of the buzzwords of the
telecommunications (Smith, 2005). These converged products need mature operating systems with
wide and mature platforms. The open source is one solution for this problem.
35
6.4 Nokia’s OS strategy in the 770 project
When we examine the models introduced by Pal & Madanmohan (2001), we can take a detailed
look at Nokia’s OS strategy. Nokia’s basic strategy can be understood by studying figure 16.

Initiative Initiatives
Multiple
2. 3.
markets Multiple Markets Multiple Markets
operation operation

Single Initiative Initiatives
market 1. 4.
Single Market Single Market
operation operation
Figure 16. Nokia is using multiple OSS sources to single market operations in the case of 770
(Quadrant 4).
Nokia uses model 4 in its open source business around 770. It uses multiple open source initiatives
to add value to a product, such as 770 for the Telecom market. Why does this fourth quadrant suit to
Nokia? Nokia’s Internet Tablet has some requirements for multiple modular components and Linux
is a best solution to support modular environment.
A module means a self-contained component of a system. Modularity has likewise been very
important for the development of efficient software. Linux is a highly modular operating system,
which means that it is composed of a relatively small kernel (the core of an operating system)
together with a number of separate but connected programs, rather than a large, highly inclusive
kernel. Open source development supports this modularity. Nokia has to collaborate with many OS
communities to ensure its part in developing new modular components which affect its commercial
product. When the company is part of the solution, it will have a better chance to guide the wider
development.
If we look deeper, we have to ask how this differs from rivals and what makes these actions unique?
Nokia does not use any commercial Linux distributions (“distros”) or integrators; they rather work
36
directly with open source communities. We can examine these different possibilities to use the open
source with the help of Nokia’s director of open source software operations. Ari Jaaksi (2006b)
considers this open source business from two different angles (two dimensions). There are different
options, but first a decision-maker has to answer some questions:
1. Company’s own involvement –“proxies”vs. own involvement
a. Do you as a device manufacturer use commercial Linux distributions and
integrators, or do you rather work directly with open source communities?
b. Do you get your components from “proxies” such as MontaVistas, Red Hats,
Trolltechs, and such, or do you grab them yourself from Debian, Kernel.org,
GNOME etc.?
c. Do you rather make a business deal with a commercial company that would take
care of the details of open source on your behalf, or do you prefer participating in
open source work yourself to get what you want?
2. Development environment –closed vs. open native development
a. Do you want to open your software for hacking and native application
development, or do you want to keep it closed and support only application
sandboxes, such as Java, on top of your software?
After studying questions, there can be seen four different options to a company that is considering
the use of the open source. These options can be described with the assistance of figure 17.
Development
environment Openness
Use commercial Linux Operate directly in open

distros & integrators, source communities,
Open & native
enable native application enable native application
development
development and system development and system
hacking hacking
Nokia 770
X-ratio
increases
(OS-rate)
Use commercial Linux Operate directly in open
distros & integrators, no source communities, no
Closed & sandbox
native application native application
development
development development
Motorola Linux phones
Company’s
own
involvement
Utilizing distros and Go to the source
companies as proxies
Figure 17. Strategy options for companies using OS. (adapted from Jaaksi 2006b)
37
The differences can be examined by two examples: Nokia 770 and Motorola’s Linux phones.
Motorola uses the MontaVista kernel and Trolltech’s Qt embedded in its products and Java as the
developer platform. Nokia does not use any commercial Linux distributions (distros) or middleware
packages, but it has gone directly to GNOME and Kernel.org. They also allow native application
development. The reason behind these actions is that Nokia wants to use the latest versions of
components as soon they can. This goal is much more difficult to achieve by “proxy companies”.
(Jaaksi 2006b)
Proxy solutions are chosen when companies do not want to worry too much about open source
stuff. The proxy companies hide the open source aspect of the work and the customers deal with
simple old component vendors. If you consider the openness of your developing environment, the
choice depends on your goals and targets. Supporting a sandbox as an application development
environment may be a good idea in cases where you need more control, portability, and other such
things. There are no right and wrong options, but it is essential to know where the company is on
the map. (Jaaksi 2006b)
Why is it important to present the different options? The catch is that by putting a penguin logo
(Linux logo) on the commercial software does not always mean pure open source product. The final
product can be based on open source stuff, but the development process can be far away from “real”
open source development. Nokia is moving now to the direction the original open source visions
and pioneers like Richard Stallman have pointed out.
6.5 Business review: maximal customer value with low R&D costs
The study has shown how Nokia uses communities and gatekeepers to create new products and give
back contributions and improvement to feed the cycle of development. The last essential question is
how Nokia runs a profitable business around 770 Internet Tablet.
There can be found some differences when 770 is compared to Nokia’s normal handset business.
Nokia highlights the value of OS products for customers (value proposition). In the handset side
Nokia’s products are mainly based on closed software. The OS code enables wider development
and more possibilities to update the systems. It means that the OS-system is developing better and
better all the time, thanks to the communities. A good example of this kind of development is the
38
new OS 2006 –upgrade for 770, which includes new firmware but also new features, including
VoIP and Google Talk. The value of the new product increases after buying the new product. And
increasing value often means increasing speed of diffusion as well.
Nokia has also found a new market segment. The 770 Internet Tablet is designed for different
purposes than the company’s cellular phones. The markets are quite new and offer possibilities to
develop a new product family based on the mature platform. The strong software platform is based
on flexibility in software sourcing, architecture and features as well as improved development
processes. The open source affects also the value chain, because of the more flexible software
sourcing. Nokia has a wider access to available technology providers and subcontractors.
The last essential aspect is the cost structure. The OS offers larger resources to develop new
products and features. Nokia can get “free” components, which it can use in its software and
product development. The maintenance costs are shared with the industry.
For a commercial product, such as Nokia’s 770, it is vital that open source licences allow also
mixing of open source and commercial components. It is important that the company is allowed to
use the open source for any purpose with no restrictions. Flexibility in R&D means faster
introduction of new technologies and features, as well as architectural clarity to support the
company’s future needs.
There is no reason to believe, however that the open development model is superior. Open solutions
will eventually replace many closed ones, but these closed solutions are still needed in special
cases. Reduced costs and new business opportunities will make the open software more agile and
adaptive for change and new business challenges.
39
7 CASE: IBM
International Business Machine Corporation is the world’s largest IT-company and has been in the
industry since its birth (IBM 2006a). It has 329 000 employees in 75 countries. IBM’s revenue in
2005 was $91 billion and the total assets were $105.7 billion (IBM, 2006b). In its annual report
2005 (IBM, 2006c, 14, 17) IBM announces that it has two ultimate goals: to create long-term value
to the shareholders and help customers to become more efficient through IT solutions. IBM
operates in three segments: systems and financing (28 % from pre-tax income), software (37 %) and
services (35 %) (IBM, 2006c, 5).
Table 6. Key parameters of IBM (EUR). (IBM, 2006c, used exchange rate 1.245)
Net Sales 73 193 EURm
Systems & Financing 22 416 EURm
Software 12 694 EURm
Services 38 083 EURm
Net profit 6 347 EURm
R&D 4 660 EURm
R&D Personnel person
Personnel 329 000 person
IBM tries to maintain its business leader position by focusing on high-value and innovation-based
solutions and services. As the implementation of this strategy, IBM sold its Personal Computing
Business to Levano Group Limited, the largest manufacturer of personal computers in China in
2005, and acquired 16 software and service companies in the same year (IBM, 2006c, 22, 63). IBM
is moving strongly from hardware to software, towards more sophisticated products and services.
To support this innovation strategy IBM has the world’s largest IT research organization. More than
3000 scientists and engineers work in eight laboratories in the USA, Japan, China, Israel,
Switzerland and India (IBM Research, 2006, 12). IBM invests $5-$6 billion in research and
development every year. In 2005 the expenditure of R&D was $5.8 billion. With this massive input
in R&D they have received more patents than any other company in the world. Over the past four
years IBM has received about 13 000 patents, which is 5 400 more than the second highest result
and 8000 more than the second in the IT sector (IBM Research, 2006, 24).
40
7.1 The influence of the OI paradigm in IBM
IBM has made a huge change from the closed company to the company with open business model.
Before 1993, IBM functioned with a very different business model. It invented, developed,
manufactured, sold, serviced and financed everything through its own organization. In 60s and 70s
this strategy brought enormous success and nearly monopoly position to the Big Blue. However,
this business model caused a financial crisis to IBM in 1992. The new rise of IBM has been based
on hunting new revenues from semiconductor business, IP licensing and management business and
IBM’s open source software initiative. ( Chesbrough, 2006, 189-190)
IBM is a good example of exploiting open innovation in practice, when simultaneously profiting
from its intellectual property rights. IBM is now one of the leading corporations benefiting from the
open innovation paradigm. IBM is famous also from receiving revenue from its IP licensing. In
2001 it received $1.9 billion in royalty payments for its licensing actions (IBM, 2006c). The value
of licensing is even bigger considered also the cross-licensing the company practises, because this
does not show in the income statement. One reason for this good result is that IBM is a patent
leader. It has more patents than any other company in the world. So it is able to license its
technologies widely. Besides patents IBM licenses its know-how, trade secrets and other forms of
technology. (IBM, 2006c, 20)
IBM supports the patenting culture widely. Strong patenting protects IBM’s leadership technology,
gives the company freedom of action and drives innovativeness. IBM practices the strong IP
licensing strategy on purpose. It includes aggressive patent licensing with increased royalties,
manufacturing joint ventures, strategic joint development alliances and leverage and return on
technology (Ehrlickman, 2006). To speed up its licensing strategy, IBM started a “Ventures in
Collaboration” –licensing program in the end of 2005. The company offers 40 000 patents for
licensing and promises to help entrepreneurs to adopt the technology behind the patents. Start-ups
with less than $10 million in sales will pay $25,000 for a standard cross-licensing agreement. Later-
stage venture-backed companies with more than $10 million in sales will pay 1% of their royalties
in five-year contracts (York, 2006). The biggest reason for IBM to do this is that by opening up its
IP vault the company hopes that its hardware and software brands will be used in the new
commercial products developed by its partners. In the IT and computing industry it is extremely
important to get as many users of one’s own technology as possible. (York, 2006)
41
The company is changing the way it handles its IP, opening up a large part of its patent portfolio.
At the same time the company warns that its rivals have to adapt to this change or die. On the basis
of recent interviews and research, IBM’s new IP strategy is changing the innovation policy quite in
a wide sector. IBM has received attention by releasing 500 patents for free and the company says
that this was only the first step in the new IP-strategy. Never before has a company that puts so
much on its patents willingly released so many patents at one time. They think that some parts of
the portfolio are best served as open technology. The idea behind this is to achieve better
technological foundations that will bring ultimate benefits to consumers. (Merrit, 2005; Mamudi,
2005)
Simultaneously, IBM tries to accelerate the diffusion of its software. The company moves more
deeply to the software business by using open source. IBM devotes more internal employees to
supporting Linux than any other organization in the world. By linking Linux (the open operating
system, which code is available to anybody) to own business model, IBM could take again the
leading position in software operating systems, which it had lost to Unix and Windows. It required
the whole new business model, though. Since Linux is based on freely available code, it is unable to
generate direct profits to IBM. (Chesbrough, 2006, 45, 192-195)
7.2 Motives, principles & market factors pushing IBM to OS-business
IBM thinks that this “patent pledge”will repeat itself in the future. The reason behind this is not to
cause a commotion in the market. The company announces that it was very thought-out movement
and that it all centred on this open, flexible architecture that the customers are asking for, and the
open standards that make that happen. The logic behind this is that as the technology progresses,
companies in the same industry will need to cooperate more closely to establish universal platforms
on which all players can build. IBM calls this interoperability. They say that the best way to ensure
this interoperability is for companies simply to release parts of their patent portfolios freely to their
competitors, with the promise that no proprietary right will be asserted. (Forelle, 2006; Merrit,
2005; Mamudi, 2005)
42
The crux of IBM’s new strategy is the idea that when the basic technologies of an industry are open
and shared, there will be an increased innovation rate. The argument is that by sharing the basic
technology (source code) companies will have more time to devote to innovating at the far reaches
of technology. David Kappos from IBM (Vice President & Assistant General Counsel for IP Law)
has said that “What will happen is that by having a base that provides less need to spend time on the
basic rudiments of getting systems connected, more opportunities will be created for innovation on
top of that, therefore more licensing opportunities and of course more business opportunities.”
(Mamudi, 2005)
If we gather these comments in the form of a figure, the result would be like figure 18. When
technological capability rises in the whole industry, it also develops the basic platform and brings
the border between common technologies and unique innovation higher. Then all companies can
exploit the knowledge of the basic platform and focus on developing new, better technology. The
company’s competitive advantage is based on the upper levels (skill to exploit basic technology and
create new).
Technological cabability
New & Unique

innovations
IBM
New & Unique
innovations New & Unique
innovations
Corporation 2
Corporation 3
Basic Technology –Common Platform (architecture)

-
Treshold Competencies, Treshold Recources
Figure 18. Crux of the new strategy
Although IBM underlines the significance of interoperability there can be found some other forces,
which push the Big Blue to the open world. Venture Capitalists are funding more and more small
niche firms in the software industry (Greenemeier, 2005; Cusumano, 2004). One of the main
purposes of IBM is to create open standards in the software industry, which would be used also by
niche firms. When VC-companies build on the same platform as IBM, synergy exists.
43
7.3 New “schizophrenic”strategy
Although basic technology with open standards will be non-proprietary innovation that does not
mean an end to IBM’s patenting efforts. The company argues that the new IP-strategy doesn’t mean
any deceleration in the company’s innovativeness. In fact, this new strategy aims at raising these
effort rates (Forelle, 2006; Merrit, 2005; Mamudi 2005). According to Jim Stallings in IBM (Vice
President for IP and standards), the company is opening itself up to participating in the open market,
but it is also accelerating the companies’activities on the proprietary side. IBM thinks that both will
coexist. “We’re going to be really good at managing both communities together because we think
the thing that comes from both will allow us to innovate in the market (developing) really, really
interesting things for customers. That’s really what we are describing.”(Mamudi, 2005)
The above comment raises a question: Where is the line between the technology that company
decides to give away and the innovations that it hopes will make it money? The answer lies in
picture 18. The boundary is moving all the time, so there is no common line to be drawn.
Innovations that years ago were maybe at the level of getting basic components to work together,
and getting basic infrastructure stabilized in computers, is now mundane, and everyone has the
same kind of function in their products, so that function is no more differentiated. Innovation has
moved up the technology stack to a higher level (technological capability has risen) (Merrit, 2005;
Mamudi, 2005). What can be seen, and what we expect to happen, is that this will continue, and the
boundary will continue to move up the stack.
The bottom line in the new policy is to try to raise the line between IP-property and base platforms
to accelerate the innovation rate and then develop the industry. The development is based on
focusing resources. Companies can direct their research to higher levels on the stack (picture 18).
IBM is the company setting the path for others to follow.
7.4 Benefits and drawbacks for IBM
It is essential to gather together the benefits and drawbacks the OS movement has given and caused
to IBM. The benefits are listed in table 7.
44
Table 7. Common benefits of OS for IBM.

Interoperability
Increasing interoperability of IBM's software products
Small niche firms (VC) are capable to join the game: they are
also developing the open platform and researching high risk
possibilities, which IBM can later adopt (absorptive capacity)
Industry development
More mature platform (based on own products) where to build
commercial products
Resource allocation
More resources can be focused on the new opportunities: less
need to spend time on the basic rudiments (there is no need to
spend time to re-invent the wheel)
More valuable solutions

More valuable products for customers: “the more people use it,
the more valuable the product is”(meaning of diffusion)
Customers can participate in the development process more

deeply, because there is a more open environment (customer
needs)
The biggest problem in OS development is creating a sustainable competitive advantage. To ensure

maximal contribution margin the company should create a product based on differentiation. The
open platform has to offer a great value compared to full in-house development. To maintain the
value of the platform, companies have to give up their in-house innovations (which means losing
their competitive advantage) to develop the open platform and then ensure further development
based on these publications. This cycle has to be continuous for OS-platform to compete with the
proprietary software. The crux of the new competitive advantage has to be based on mature
platforms, where IBM can build agile solutions.
Another problem is defining the appropriate rate to OS products. OS players have to give up their
patents to ensure the development of OS platforms. If commercial products are based mainly on the
open platform, the contribution margin is quite small because of imitation. OS development
demands absorptive capacity from IBM’s researchers to be capable to integrate the competencies of
the organisation and the possibilities of the platforms to commercial products, which differ from
45
rivals’products. The competitive advantage has to be based also on leveraging the discoveries of
other key players.
There is also a small risk that IBM will create respectable rivals by supporting VC-funded
companies and sharing code with them. New VC companies gather talented professionals with a
tempting risk/reward-rate to develop software solutions in new areas. Only some of these
companies are capable to create potential business models, but when they succeed in this, they are
potential entries in the industry.
7.5 How IBM profits from the open source?
IBM profits from the open source business in two ways. First, open source software is by some
measures less expensive than proprietary software, so using it lowers the overall cost a customer
pays for IBM’s solutions (although smaller contribution margin, wider use/sell). Second, it provides
a common and universal platform, on top of which IBM can build and sell special applications and
services.
Because the open source is non-proprietary, the customers are much less locked into the firm
supplying the IT systems. Its interfaces are open. Opening up the interface means that new software
can easily be written to plug into it, increasing its value to customers. By giving up proprietary
lock-in, companies can reap the advantages of open source that accrue not to just one company but
to all firms in the industry. They can sell software that works for example on Linux, and they can
count on a far wider ecosystem of developers and service companies to improve the software that
benefits both IBM and their customers. Opening some parts of the patent portfolio is a way to
attract independent developers to the platform, which opens it up to innovation from a broader
community. Without this kind of movement IBM would be itself responsible for all enhancements
to new products. This might mean slower and more costly actions and fewer innovations.
46
8 CONCLUSIONS
The open innovation –model has increased its role in the world of innovation management. There
are eroding factors to a closed innovation approach, like the availability of talents, increasing VC
funding, too many ideas sitting on the shelf, and increasing capability of external suppliers, which
force companies to the open approach. In our study we have considered open source business as a
one way to exploit open innovation principle. According to the literature, open source development
offers shorter development cycles, more resources and lower costs. It also enables a stable structure
that entails an accepted system architecture and language, the communication which is a
combination of ideas and technological solutions. In our case studies we have shown that open
source development is a flexible option in software development. In the Nokia case, it has offered
more effective R&D processes, as well as strong software architecture on which to build further
projects. In the IBM case, the basic idea of using the open source has been to create a mature
software platform to increase the diffusion and value of the company’s own software products and
interoperability, because of wide and common standards. The motives from case studies are listed in
table 8.
Table 8. The motives of OS at Nokia and IBM

Nokia, at product level Variable/motive/outcome IBM, at firm level
Strategic flexibility Agility
Effective R&D Effiency Effective R&D
Not re-inventing wheels

(the significance of basic
Strong software architecture technology) Mature platform
Increasing customer value after

buying OS product
Interoperability Value Interoperability
More resources (communities) Resources More effective use of resources

More players on the game of
the development (VC
companies)
Besides the noted benefits and motives there are some driving forces which favor open source
development. The first significant driving factor is convergence. Customers want services and
products as a package deal, with maximum features, which presses companies to develop products
47
and services with multiple technologies. Convergence demands common platforms and standards,
and the key for many firms is open development and collaboration with rivals, academics, suppliers
and customers. Convergence affects especially the handset side where Nokia plays. Another
remarkable force is the increasing complexity. Firms add more and more features in their products
and services to maintain their competitive advantage. The increasing amount of attributes needs
strong architecture and platforms as well as wide resources.
Increasing VC money in the software industry also encourages companies to specialize and play
niche markets, because of good risk/reward -rate. When this phenomenon multiplies, software and
components will become more modular and interchangeable, which speeds the use of open source
software (Linux). The other factor is the interoperability of software. Because of the increasing
significance of interoperability, companies are forced to develop common standards to ensure
maximum value to customers and thus to companies as well. It can be seen that companies in the
same industry will have to cooperate more closely to establish universal platforms on which all
players can build. A strong architecture and platform as well as wide usability are common factors
that speed the interest to open source business. It has pushed IBM to release its software patents to
ensure the use of its software products in the future.
Open source development needs a mature development environment, where OS developers can
develop the code by the give-and-take approach. A good example of a commercial initiative is the
maemo.org development site launched by Nokia. Our study has illustrated mainly how the
maemo.org environment works. The most important factor is the interface between commercial
organization’s and the community’s platform groups. If this group work is seamless and both use
the same development tools, in the best case this collaboration will generate diversified products of
good quality without a need to go short of orderliness. It is also important that the host development
environment runs the same software as the one available on the target device, eliminating the need
of target hardware emulation on the host and providing a more accurate test environment (Nokia
770).
Building a business model around open source development is very challenging but possible. In this
study, we have gathered the main components of a business model from different sources and
studied them. While examining these critical components of a business model, we have found some
differences in the open source -business models, compared to proprietary ones.
48
By using open source -oriented business models, companies can create more usable universal
standards and platforms, which can be developed in co-operation with open source communities.
This increases the interoperability of software and speeds up innovations inside the industry
boundaries. When an innovative platform is reached, the value proposition will change. The open
platform will provide open standards, which increase the value of basic technology and finally the
value of the end-product (IBM’s principle). And when the value is higher to the customer, more
profit will be earned through the end-products. The revenue generation mechanism is based on
both: the common platform and the company’s ability to develop end-products using these valuable
standards. The platform also helps commercial companies to allocate their R&D resources better,
and focus more deeply on new technology (not re-inventing wheels).
There are some differences also in the cost structure between the open source and proprietary
products. According to West & Gallagher (2006), open source development is much more effective
than the proprietary one because of wide range of resources (communities). When the innovation
cycles are shorter, the developing costs will decrease and the products can be launched earlier,
which is one of the Nokia’s main targets in the 770 OS project.
Open source development demands different kinds of capabilities and competencies. The open
development environment is based partly on using external sources of innovations and using this
knowledge on the company’s own business. These actions demand absorptive capacity. To develop
this capacity, engineers and R&D personnel have to be encouraged to look outside the firm’s
boundaries. In the field of open source, R&D processes have to focus on new technological and
architectural solutions in the software products, not re-invent wheels and wrestle with basic
technology rudiments (platform). It is also important to abandon the old not-invented –here
syndrome. There are also other successful players building your platform, which you can count on
from technology point of view (this can be seen in both cases). However you have to share your
own foundations and solutions to ensure that the platform will serve your targets in the future. Free-
riding is not a smart option in a long run, because the open platform will serve only the
technologies, which are shared inside it.
49
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Jarno Huurinainen, Marko Torkkeli,
Sari Viskari & Pekka Salmi


LAPPEENRANNAN LAPPEENRANTA
TEKNILLINEN YLIOPISTO UNIVERSITY OF TECHNOLOGY
Lappeenrannan teknillinen yliopisto TEKNISTALOUDELLINEN TIEDEKUNTA TUTKIMUSRAPORTTI 174

Digipaino 2007 TUOTANTOTALOUDEN OSASTO RESEARCH REPORT
ISBN 978-952-214- 280-8 (paperback)
ISBN 978-952-214-281-6 (PDF) FACULTY OF TECHNOLOGY MANAGEMENT
DEPARTMENT OF INDUSTRIAL MANAGEMENT
ISSN 1459-3173

SELASTURKIYE Open Source Research Report by Sari Viskari

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SELASTURKIYE Open Source Research Report by Sari Viskari

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Jarno Huurinainen, Marko Torkkeli,

Sari Viskari & Pekka Salmi

Motives, Circumstances and

CASE: Nokia 770 (analysis at product level)

Lappeenrannan teknillinen yliopisto TEKNISTALOUDELLINEN TIEDEKUNTA TUTKIMUSRAPORTTI 174

Jarno Huurinainen, Marko Torkkeli, Sari Viskari & Pekka Salmi

Motives, Circumstances and

CASE: Nokia 770 (analysis at product level)

Lappeenrannan teknillinen yliopisto

FI-53851 Lappeenranta, Box 20, Finland

ISBN 952 214-280-8 (paperback)

Keywords: Open innovation, innovation management, open source

Avoimen innovaation malli korostaa erilaisten ulkoisten tiedonlähteiden, kuten asiakkaiden,

Suljettuun lähdekoodiin perustuvat ohjelmistot ovat hallinneet kaupallista ohjelmistoteollisuutta

Avainsanat: Avoin innovaatio, innovaatiojohtaminen, avoin lähdekoodi

1.1 Motives and background

1.2 Research strategy

Figure 1: Scope of the research

The research questions are:

Figure 2. Research strategy

1.3 Key concepts of the study

1.3.1 Closed and open innovation paradigms

Figure 3. Closed Innovation model. (Chesbrough, 2003a, xxii)

Boundary of the Firm

Figure 4. Open innovation model (Chesbrough, 2003a, xxv)

1.3.2 Open source and open architecture

Figure 5. The idea of open architecture

Open architecture: Open source –rate (appropriate ratio)

Open source code (X%) Proprietary code (100-X%)

Open source code (100%)

Figure 6. The difference between open architecture and open source.

2 MOTIVES FOR OPEN INNOVATION STRATEGY

2.1 Balance between internal and external knowledge

According to March (1991), it is important to achieve a balance between exploration and

Own R&D Technical

Figure 7. Sources of technical knowledge (Cohen & Levinthal, 1990)

2.2 Viability of the closed innovation paradigm

Venture capital -funded start-ups are a Start-ups offer attractive risk/reward

Faster product cycles and external

On one hand, drives focusing on R&D

2.3 Benefits and risks of open innovation

2.4 Motives for open source development

3 MARKET FACTORS IN THE ICT-INDUSTRY

3.1 The evolution of the ICT-industry

3.2 Driving forces

4 GUIDING MODEL OF OS DEVELOPMENT

4.1 Guiding model for creating an effective OS environment

Open Source Technology

Test & Validation

4.2 Significance of the OS platform group

Group working on OS platform component

Open Source Commercial Organization with

Figure 9. Interface between commercial company and OS community

5 THE INFLUENCE OF OS DEVELOPMENT ON BUSINESS

5.1 Definitions of the business model

Table 2. Some definitions of the business model.

5.2 Components of the business model

CUSTOMER BENEFITS CONFIGURATION COMPANY BOUNDARIES

CUSTOMER CORE STRATEGY STRATEGIC VALUE NETWORK

Fulfillment & Support Business Mission Core Competencies Suppliers

Figure 10. Hamel's business model framework

5.3 How openness affects the business model

• Selling installations, services, and support with the software

OS firms should be able to move rapidly into new