Keep in mind: Cost, Quality, and Timeliness

Harvard Business School professors Pankaj Ghemawat and Ramon Casadesus-Masanell have recently co-authored an academic paper Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows. They explore several answers to the fundamental competitive dynamics question:

Will open source software (OSS) ever displace traditional software from its market leadership position?

In their formal economical model, they structure the problem in terms of a dynamic mixed duopoly in which a profit-maximizing competitor (Microsoft) interacts with a competitor that prices at zero (Linux), with the installed base affecting their relative values over time.

They go on further to ask what conditions are needed for Linux to take over Windows:

• Is Linux's superior demand-side learning sufficient to win out?
• What is the effect of forced procurement by governments and some large corporations on the long-run equilibrium?
• How do cost asymmetries play out?
• Can Microsoft use piracy strategically to improve its market position?

Summing up their findings, the authors say:

"We believe that there is still a great deal of confusion and puzzlement on how this competitive battle will develop."

Worth pointing out are their recommendations for Microsoft to strategically to remain competitive against a product that is argued to be of better quality, is updated more frequently, and is free:

1. Increase its own demand-side learning.
1. Listen to the demands of the user community to better exploit the benefits of demand-side learning. Microsoft must facilitate communication between the user base and the company to have prompt feedback on the performance of its products.
2. Make an effort to incorporate improvements in the code (fix bugs and introduce new features) as soon as possible.
3. Reward those who propose improvements for the code. At the very least, Microsoft could publicly acknowledge those who proposed new features or discovered bugs.
2. Feed its direct and indirect network effects.
1. Support as much as possible the independent software vendor community so that the quantity and quality of complements is substantially above that of Linux.
2. Encourage competition between the different ISVs. The lower the prices of applications, the more appealing the Microsoft system will be.
3. Price discriminate. Give Windows and applications away to schools and universities so that users build their file libraries on Microsoft, not Linux.
3. Minimize the number of strategic buyers.
1. Let governments access the source code and give guarantees that sensitive data is treated confidentially
2. Price discriminate. Give binary away to organizations and individuals who are not willing to spend money on Windows but who would be willing to use Linux because it is free.
4. Reduce costs to be able to sustain long periods of time with low prices.
5. Decrease Linux's demand-side learning.
1. Because the way to do this involves some questionable (from a legal point of view) actions, we will refrain from suggesting specifics.
6. Lessen Linux's direct and indirect network effects.
1. Make it as hard as possible for Windows applications to work on Linux.
2. Same for MS Office documents.
3. "Promote" Linux's code forking.
7. Infuse fear, uncertainty, and doubt into the Linux user community. For this to work, the statements must be perceived as credible. Credibility requires some past FUD announcements to be realized.

Takeaways:

The model is structured in terms of price, quality, and frequency of updates. In Competing Against Time, George Stalk, a consultant with BCG, shows how companies that respond faster to customer needs can expect to be twice as profitable as the industry average, and to grow up to 3x quicker. Stalk arrived at his findings structuring the problem in terms of supply chain, which he described along the following parameters: cost, quality, and timeliness. Not unlike those of Ghemawat and Casadesus-Masanell.