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

Voluntary forfeiture of intellectual assets--often, exceptionally valuable assets--is surprisingly widespread in information technology markets. A simple economic rationale can account for these practices. By giving away access to core technologies, a platform holder commits against expropriating (and thereby induces) user investments that support platform value. To generate revenues that cover development and maintenance costs, the platform holder must regulate access to other goods and services within the total consumption bundle. The. trade-off between forfeiting access (to induce adoption) and regulating access (to recover costs) anticipates the substantial convergence of open and closed innovation models. Organizational patterns in certain software and operating system markets are consistent with this hypothesis: open and closed structures substantially converge across a broad range of historical and contemporary settings and commercial and noncommercial environments. In particular, this Article shows that (i) contrary to standard characterizations in the legal literature, leading "open source" software projects are now primarily funded and substantially governed and staffed by corporate sponsors, and (ii) proprietary firms have formed nonprofit consortia and other cooperative arrangements and adopted "open source" licensing strategies in order to develop operating systems for the smartphone market. In June 2008, Nokia paid $410 million to buy out all other ownership interests in the Symbian operating system, (1) which was then the most widely used operating system in smartphone devices (2) worldwide. (3) That would be a fairly mundane corporate acquisition if it were not for the fact that Nokia immediately transferred responsibilities for managing, developing, and distributing the operating system to the Symbian Foundation, a nonprofit entity. (4) Even that transfer might be construed as a large but similarly unexceptional act of corporate largesse if it were not for the fact that Nokia, the world's leading handset maker, (5) invited telecommunications providers, handset makers, and other firms that compete with it to serve on the Foundation's board and other governing entities. (6) To cap off what was an exceptional sequence of events, the Foundation then spent two years clearing all third-party rights in the Symbian source code, (7) which it made publicly available in February 2010 without charge under an "open source" license. (8) Even more surprisingly, however, this exceptional giveaway ultimately turns out to be fairly unexceptional. From the inception of the information and communication technology (ICT) industry, some of the most dominant firms have regularly ceded--that is, given away or distributed at nominal or below-market fees--some of their most valuable innovations to all interested parties, including customers and rivals. Examples include some of the industry's most important innovations: to name just a few, AT&T's forfeiture of transistor technology in the 1950s, (9) Xerox's forfeiture of Ethernet local area network technology in 1979. (10) and Intel's release of the Universal Serial Bus (USB) standard in 1995. (11) Dominant firms have developed some of the most fundamental building blocks of the digital economy at great cost and then have given away or distributed those innovations at a nominal or below-market fee, often accompanied by complementary support services and tools. The substantial incidence and magnitude of giveaway practices in certain ICT markets challenge conventional assumptions that firms will always elect to exert maximal legal and technological control over intellectual assets, subject solely to enforcement costs.12 Even--or rather, especially--the most dominant firms' self-interest will often compel downward adjustments from the level of control that is available as a matter of law or technology. Even more remarkably, this self-interested rationale most strongly recommends forfeiture in the case of a firm's most valuable intellectual assets. …