When to make proprietary software open source

Abstract

Software can be distributed closed source (proprietary) or open source (developed collaboratively). While a firm cannot sell open source software, and so loses potential sales revenue, the open source software development process can have a substantial positive impact on the quality of a software, its diffusion, and, consequently, the demand for a complementary product from which the firm does profit. Previous papers have considered the firm's option to release software under a closed or open source license as a simple once and for all binary choice. We extend this research by allowing for the possibility of keeping software proprietary for some optimally determined finite time period before making it open source. Furthermore, we study the impact of switching costs.

We show that in case of high in-house R&D costs, the firm always makes the software open source at some point (unless switching itself is too expensive). The timing, however, depends on the initial software quality. On the other hand, when R&D is inexpensive, the firm opens the source code only when the initial level of software quality is low. For intermediate R&D costs, the firm might have the choice between opening the code immediately, opening it at some subsequent and optimally determined time, or keeping it closed forever. Finally we find that whereas high switching costs might prevent firms from adopting an open source business model, low switching costs mainly affect the timing of the opening of the source code.