Capturing Value From Free Digital Goods
Companies can improve productivity by tapping into the market of free digital goods, such as open source software, and by paying their own employees to contribute.
Scientists refer to portions of the universe that they know exist but can’t easily measure as “dark matter.” As direct measurement is difficult, they study the indirect gravitational effects or galaxy rotation speeds to understand the phenomenon. Similarly, in the digital economy a broad range of “dark” elements are free and essentially limitless, and traditional tools can’t measure them.
One of the best-known examples of this phenomenon is Wikipedia. People use Wikipedia at no charge, and the content is created primarily by contributions from volunteers. Because no money changes hands (except for donations to help pay for technical infrastructure and office staff), Wikipedia has almost no direct impact on gross domestic product (GDP). Moreover, because Wikipedia has replaced physical and digital encyclopedias that people paid for, it has likely had a negative impact on GDP. Nevertheless, Wikipedia provides significant value for consumers, even if its economic worth is difficult to measure.
For companies, tapping into a faceless crowd for contributions to their innovation or production process can be daunting. Managers worry about the quality and availability of product support, and about security and intellectual property issues. And there are serious questions about who’s responsible if or when something goes wrong. However, in my research I’ve found that companies have opportunities to capture substantial value by using digital goods created by external communities and even greater value by paying their employees to give back and help build such goods, even if competitors are able to use them for free.
Consider open source software (OSS), which is produced through crowdsourcing, is generally free, and is critical to the digital economy. Over the past decade, OSS, long considered the purview of geeks, has played an increasingly important role at companies. More than 60% of web servers run OSS, and many of the technologies used for big data analytics are open source. In recent studies, I have found that using OSS and contributing to its creation allows companies to capture value more efficiently.
Effects on Productivity
There has been a long-running debate about whether OSS truly saves companies money. Although the software is free, it has limited official support and can require specialized technical knowledge to implement. However, until this point, the productivity impact independent of any cost savings has gone unexplored. For my forthcoming article in Management Science titled “Open Source Software and Firm Productivity,” I measured the productivity impact of managers’ decisions to use free and open source software by examining data on technology usage from 2000 to 2009 at more than 1,500 U.S. companies in industries such as manufacturing, technology, and retail.
The results showed an important dichotomy: Companies that were heavy IT users or in IT-producing industries (such as computer manufacturing, software publishing, and data processing) saw an immediate positive impact on productivity; other companies showed no productivity increases in the year of adoption and only small increases later. For IT producers, an increase in the amount of free OSS used at the company led to a moderate, but significant, increase in value-added productivity. The results were similar for heavy IT users. The positive impact on productivity from using OSS was larger for smaller companies, for which capital availability was apt to be an issue. In the paper, I argue that these benefits arise from both the cost savings associated with OSS and the ability of the company to tap into the collective wisdom of the crowd.
Related Research
• F. Nagle, “Open Source Software and Firm Productivity,” Management Science, forthcoming, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2559957.
• F. Nagle, “Learning by Contributing: Gaining Competitive Advantage Through Contribution to Crowdsourced Public Goods,” Organization Science, forthcoming, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3091831.
• S. Greenstein and F. Nagle, “Digital Dark Matter and the Economic Contribution of Apache,” Research Policy 43, No. 4 (2014): 623-631, https://www.sciencedirect.com/science/article/pii/S0048733314000055.
Learning by Contributing
In addition to being consumers of OSS, some companies support its creation — even paying employees to contribute to it. In another forthcoming article (in Organization Science) titled “Learning by Contributing: Gaining Competitive Advantage Through Contribution to Crowdsourced Public Goods,” I look at the impact of this type of support in practice. Although it has long been argued (by Michael Porter, Jay Barney, and others) that a company’s competitive advantage is tied to its unique resources or capabilities, as the economy becomes more information-based, companies need to take greater advantage of free digital goods. Given that such goods are available to anyone, it’s incumbent upon companies to find ways to use them strategically as inputs into their innovation and production processes.
Although paying one’s employees to create a good that competitors can use for free might seem counterintuitive, evidence suggests that contributing to public goods teaches companies how to capture value by using them more effectively than those competitors that don’t contribute. This is especially likely with regard to OSS, where contributors receive feedback from the crowd, much of it from people who have expertise in that piece of OSS.
To explore how this works, I paired the technology usage data from a subset of companies in the Management Science study with data from the Linux Foundation on code contributions to Linux, the world’s largest OSS project. The results show that contributing companies were able to capture up to 100% more value from usage of OSS than their noncontributing peers, and that higher levels of employee contribution led to greater productivity. The benefits came primarily from content contributions, where contributors wrote the code, as opposed to editorial contributions, where contributors approved code written by others. This seems logical: Editorial contributions tend to come from more-senior members who already have a great deal of experience and have less to learn than newcomers.
These findings have important implications for managers making technology-related decisions within their enterprises. It’s likely that companies in IT-producing industries and companies that are heavy IT users already have assets, such as an IT labor force and IT infrastructure, that will allow them to realize productive value from implementing OSS. Other companies may benefit as well, but their productivity boost will depend on how quickly they can develop the ability to extract value. Given that small companies appear to derive bigger benefits from using OSS, large companies may want to evaluate the potential benefits carefully before changing existing IT infrastructure.
The advantages of contributing to the creation of OSS are clear. Odd as it may seem to pay employees to create software that competitors can use for free, doing so enables companies to add to their technological capabilities and gain an advantage. Companies that support crowdsourcing activities are likely to benefit from using crowdsourcing communities to promote innovative ideas that feed into the production process, potentially leading to further competitive advantage over their rivals. In addition, supporting crowdsourcing activities also contributes to societal welfare and helps society progress to the next stage of the digital revolution.
Frank Nagle (@frank_nagle) is an assistant professor of strategy at the University of Southern California’s Marshall School of Business.
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