User Communities and Hybrid Innovation Processes - DIME

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User Communities and Hybrid Innovation Processes – Theoretical Foundations and Implications for Policy and Research Dietmar Harhoff* University of Munich and CEPR

Philip Mayrhofer University of Munich and CDTM June 2008 Abstract Based on the notion of heterogeneity and skill differentiation among users, we develop a typology of interactions between user communities and firms producing a product or service around which the community is centered. Hybrid innovation models are described as stable arrangements in which part of the innovation function is relegated to the user community, but the commercially oriented firm is capable of systematically and repeatedly appropriating monetary returns to the community-generated innovations. This is distinct from pure need-voicing and user-help communities (where little innovative problem-solving is undertaken by the community) and from open-source communities where direct commercialization does not occur. We argue that highly sophisticated users will tend to solve their problems in an open-source or hybrid mode, while many less sophisticated users will not innovate, but may still deliver important need information to the firm. We also propose that there will be important behavioral differences between these communities. In our analysis of the hybrid innovation mode, we focus in particular on the question why the combination of a community and a commercially oriented firm can maintain stability over an extended period of time. We derive implications for firm conduct and user community management, as well as for public policies and further theoretical and empirical research.

Acknowledgements This version of the paper was prepared for review for the 2008 DIME/DRUID fundamental "Opportunities and limitations of the open source model of innovation and the role of intellectual property rights", Copenhagen. We appreciate the comments and discussions on an earlier version of this paper with the participants of the 2nd Annual Conference on Institutional Mechanisms for Industry SelfRegulation (2007) at Harvard Business School. Detailed comments by Marina Fiedler, Nikolaus Franke and Eric von Hippel were particulalarly helpful. The usual disclaimer applies. *Corresponding author: Dietmar Harhoff, Institute for Innovation Research, Technology Management and Entrepreneurship (INNO-tec), Ludwig Maximilian University Munich, Kaulbachstr. 45, D-80569 Munich. E-mail: [email protected].

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Content 1

Introduction.................................................................................................... 3

1.1

Motivation....................................................................................................3

1.2

Defining Hybrid Innovation Processes..........................................................4

1.3

Approach and Methodology .........................................................................5

2

The Market for Statistics Software Packages................................................ 7

3

Community-Firm Collaboration as a Source of Innovation ......................... 9

4

User Heterogeneity and Self-Selection into Communities .......................... 13

5

Hybrid Innovation: Emergence, Stability and Competition....................... 18

5.1

Emergence of Hybrid Innovation Processes ................................................ 18

5.2

Stability of Hybrid Innovation Processes .................................................... 22

5.3

Competition................................................................................................ 29

6

Conclusions ................................................................................................... 32

6.1

Summary of Results ................................................................................... 32

6.2

Implications for Firm Conduct and Community Management..................... 34

6.3

Public Policy Implications .......................................................................... 35

6.4

Future Research.......................................................................................... 36

7

References..................................................................................................... 38

3

1 1.1

Introduction Motivation

Over the last twenty years, an intriguing set of innovation studies has focused on the role of users in innovation processes. Starting with Eric von Hippel’s observation that major innovations frequently come from users rather than manufacturers, the fundamental understanding of innovation processes has been reframed (von Hippel 1988, 2005). Moreover, with the advent of internet-based user communities, more and more users have been empowered to contribute to innovation processes. Free revealing of innovations has been described as a basic characteristic of these processes, and innovation processes have become more open for user involvement. There have been numerous studies that focus on the motivational forces that lead users to contribute to the overall innovation process without insisting on property rights and direct quid pro quo monetary rewards. In particular, the analysis of open source software development processes has generated valuable insights into the decision-making of contributing individuals (Kollock 1999, Hars and Ou 2001, Ghosh et al. 2002, Lerner and Tirole 2002, Hertel et al. 2003, Lakhani and Wolf 2003). This type of innovation processes has been described as private-collective activity (von Hippel and von Krogh 2003) where both private incentives and collective mechanisms are at work. The role of a separate manufacturer entity in this context is often a marginal one – at best, it is the bundling and the distribution that will be undertaken by a manufacturing function. Classical manufacturer activities such as debugging and documentation have been taken over by the software-generating open source communities (Lakhani and von Hippel 2002). There is little doubt that the relationship between firms and user communities is of increasing importance. Firms now seek to actively build user communities or to build linkages to existing ones. The purpose of such interactions is not always clear, but motives like improving engineering efficiency and innovation output as well as recruiting may play an important role (Schmidt 2006). Furthermore, some companies have started to view communities as a vehicle of enhancing customer loyalty. Currently, there is no generally accepted framework that would guide managerial interaction with communities. While scholars have started to examine the interaction between firms and user communities in more detail (Sharma et al. 2002, Bonaccorsi et al. 2003, Dahlander and Magnusson 2005, Dahlander and Wallin 2006, Jeppesen and Frederiksen 2006, Shah 2006), our understanding of the phenomenon is still in its infancy. Several important questions have not been answered satisfactorily. For example, how can we account for the fact that we observe very different

4 forms of communities? In some communities the extent of problem-solving is limited to answering questions on how to use the product. In others, novel features of the product are being invented by users. Given that user communities are fairly different, would any firm (irrespective of its position and strategy in the market) be able to link to any kind of user community, or does the choice of product and strategy impose restrictions? Moreover, in a world of competing firms which cooperate in some way with particular communities, how do these entities compete with other firms or with stand-alone open source communities? Finally, we ask why hybrid innovation arrangements in which user communities operate under a free-revealing regime and cooperate with a firm are apparently stable? These questions are largely unanswered at this point, and our paper seeks to contribute to the development of a theoretical framework that would be helpful in answering them. 1.2

Defining Hybrid Innovation Processes

The present paper starts by suggesting a simple typology of innovation arrangements. The polar cases are the ones presented by von Hippel and von Krogh (2003), but we extend their classification by arrangements which we call hybrid innovation processes. Von Hippel and von Krogh (2003) describe one classical innovation mode in which a manufacturer relies on secrecy and exclusion rights to appropriate a return to innovation which in turn justifies investments in innovation. The other polar mode is called private-collective action innovation – here a community operates under a free-revealing regime. The incentive problem for the contributing agents is resolved by giving them access to some private benefits which can consist of reputational advantages, reciprocal exchange patterns and so forth. In this mode, communities may deliver innovations on a stand-alone basis. In the pure case, no manufacturer is required to deliver the product or service. In open-source communities which are the leading example provided by von Hippel and von Krogh (2003) the “hijacking” (appropriation) of an innovation by a manufacturer is a much-feared development. These communities actively limit the commercial appropriation of benefits from the innovations generated by the community, e.g., by choosing a license which puts strict limits on commercial appropriation. In these cases, commercial activity may not even exist. The product may have been created de novo by the community members. We point out in this paper that there is a vast middle ground between these polar cases. Commercially operating firms may collaborate with communities in various ways. One form of collaboration entails the bundling of open-source software and the commercial offer of services centered around the open source product. But in many cases, a community may even tolerate the direct, private appropriation of community-based innovation by the firm. We call

5 these cases hybrid innovation processes since they are similar to the open source model in some regards, but also show characteristics of the classical model in which property rights play an important role. To be more precise, in a hybrid innovation process one entity systematically and repeatedly capitalizes commercially on freely revealed innovations generated by a user community. We attempt to show conceptually under which conditions this occurs without undermining the community members’ incentives to engage in innovation and to reveal innovations freely. We also provide explorative, empirical evidence. Our approach and method chosen is described next. 1.3

Approach and Methodology

Our contribution is to develop and structure the field and propose a framework for future studies. It is a first step in developing testable hypotheses and preparing the ground for empirical studies. This research, thus, is of explorative nature. We discuss different aspects of hybrid innovation processes from a conceptual point of view by employing a wide array of theory from economics, management and sociology literature. These concepts are illustrated and strengthened by empirical evidence that we present in form of an industry-wide case study of the market for statistics software packages. We chose this market because it exhibits the full range of innovation modes. In section 2, we provide a brief survey of the industry, including a description of the major players and products. To best of our knowledge, this is the first study that chooses this industry-wide approach. It allows us to come to a fuller appraisal of user communities as contributors to innovation than approaches of previous studies in the field can (Dahlander and Magnusson 2005, Dahlander and Wallin 2006, Jeppesen and Frederiksen 2006, Shah 2006), since those studies focus on single companies and communities or on entities in similar innovation regimes. Our case study research design (Eisenhardt 1989, Yin 1993) uses different sources of data to contribute to an understanding of different innovation and incentive modes within the market for statistics software packages. Employing multiple sources of data is used by several studies on innovation in user communities (e.g. Jeppesen and Frederiksen 2006) and allows examining and understanding a novel phenomenon from different angles, i.e., through triangulation (Denzin 1978, Wimmer and Dominick 1994). Our propositions and conclusions are based on industry and technical reports, information from company web pages, excerpts from user discussion boards and mailing lists as well as previously unpublished comments to an online survey among almost half of the contributors of add-on modules to the Stata statistics package. We describe these sources in more detail below. (1) We have identified several review articles, technical notes and analyses that examine the

6 market for statistics software packages. We predominantly focused on the different players’ openness to user customization and availability of infrastructure to facilitate open innovation models. These studies were augmented by unstructured interviews with individual users that have experience with one or several of the statistics packages studied. We also analyzed the software vendors’ web pages in order to get an understanding of their communication towards any form of integration of user contributions. With this data, we were able to classify the different packages and come up with an “industry map” according to the dimensions important for this study. (2) We utilize Netnography methodology (Kozinets 1998) in order to understand the motives and determinants of individuals to use and contribute to the different statistics packages. Netnography is described as the textual output of Internet-related fieldwork and is in essence an interpretive methodology. Our fieldwork included constant observation of mailing lists and discussion forums from February 2006-April 2006. We spend about 5 hours per week following both technical and general discussions. This enabled us to develop an intuitive understanding of the language used and the problems incurred by users of the packages. Throughout this period, we performed a number of dedicated searches in order to identify discussions that directly relate to motives to use and experiences concerning the contribution to the particular package. In this search we found several discussion threads that directly compared the different packages (discussion threads up to April 2006 were considered). Since we did not actively participate in the discussion but rather observed and collected comments made by users, we were able to utilize data that is arguably unbiased in terms of response bias within interviews. (3) We finally utilize free-text comments to a survey of contributors to the statistics software package Stata that was conducted by Mayrhofer (2005). This study obtained responses from 53 contributors (i.e., 48% of all contributors whose email address could be identified at the time of the survey). These respondents were asked to comment on their assessment of Stata’s strategy towards user integration in the product development process. Without having been asked directly, several individuals compared Stata’s approach to other firms in the market. These comments have not been used in previous papers and add some valuable insight to our case at hand. The remainder of the paper proceeds as follows. We first provide an overview of the industry for statistics software packages (section 2). In section 3, we discuss the role of user communities within this spectrum of innovation arrangements. We present examples of hybrid innovation which involve both a firm acting on proprietary incentives as well as a user

7 community following the usual logic of collective organizations. We also introduce hybrid innovation processes as an innovation mode in its own right and document its increasing importance. In section 4, we begin to develop a model which focuses on the question how different linkages between user communities and firms emerge. We argue that the heterogeneity of users and of firms (or products) is likely to generate idiosyncratic linkages which can be characterized quite sharply. In section 5, we consider the stability of the hybrid arrangement in more detail and derive propositions regarding the success of this innovation mode. We also study the question as to how different innovation entities will compete with each other, with classical manufacturer innovators or with classical open source-distribution and service arrangements. Section 6 concludes with implications for firm conduct and public policy and puts forth a number of suggestions for further research.

2

The Market for Statistics Software Packages

Throughout this article, we draw on various examples from software development and commercialization in order to illustrate our model and show its practical significance. We specifically report evidence from the market for statistical software packages. This section briefly introduces the main players in the market. The important dimensions for distinguishing between the statistical software packages studied are the openness to customization as well as the user-contribution infrastructure.1 Mitchell (2005) finds in his analysis of the strategic use of Stata, SAS and SPSS as well as a note on the R-project that those dimensions differ significantly among the statistics packages. On the one extreme, the open source R-project is rather a statistical language than a package and allows, due to its license and programming language, complete adaptability of functionalities and statistical procedures. At the other extreme, SPSS is primarily point-andclick oriented and uncomfortable in its command-line use. SAS and Stata take the middleground, having added point-and-click capability in recent releases. In terms of infrastructure and processes, the R-project resembles other open source projects. It provides a central web appearance with documentation, downloads, mailing lists as well as a CVS for code development. To the best of our knowledge, there is no manufacturing entity that bundles or sells R code. Rather, the R Foundation has been founded by the R Development Core Team as a non-profit organization with the objective to provide support 1

More details are presented by Mitchell (2005).

8 for the R project and other innovation in statistical computing. It also holds and administers the copyright of R software and documentation. Historically and at a technical level, it is very close to the S language and environment which was developed at Bell Laboratories (formerly AT&T, now Lucent Technologies) by John Chambers and colleagues. R can be considered as a specific implementation of S. While there are some important differences, much code written for S runs unaltered under R. S-plus is a commercial implementation of the S language. The closest to our model of hybrid innovation is the collaboration between StataCorp and the Stata community which is organized around a central repository for code as well as a highlyfrequented mailing list. Even though these initiatives are independently run by users,2 there is a close collaboration with the core product and its vendor, StataCorp. The community is given their dedicated space at the company’s web site. User-written command programs can be easily accessed to from within the program. This infrastructure is absent in the case of SAS. Even though SAS allows adaptation of user written-commands, of which plenty exist, there is no standard mean of finding, downloading and installing SAS macros. The interaction with users is mainly focused during user group meetings which are held very frequently and at different locations. Furthermore, SAS offers, what the company calls, “communities” on its web presence. However, these are primarily uni-directional. The web site is used to broadcast information for specialized user groups. A quote from Paul Kent, VP SAS Platform Research and Development and the moderator of the main group “base”illustrates the understanding of the level of input provided by SAS users. “We have tried to build on the successful interactions observed between SAS Institute R&D Staff and our customers when they mingle at SUGI and other user group functions. Demo Rooms, Formal Demo Theaters, Mixers and plain old "chats in a hallway in between papers." Even when there are no libations in hand, good interchanges between folks who work for SAS Institute and our customers are almost universally characterized by the friendly, low-key way ideas are bantered back and forth. We want this part of the Web site to be a continuation of this. Frankly, we get great ideas for our software this way. Please don't hesitate to send in your comments.”3

SPSS’s acknowledgement of user-integration has been up to recently minimal. As a consequence, few user-written macros exist which are difficult to find and install by users. It is worthwhile to note that SPSS has just undertaken an effort of allowing a higher degree of

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3

The repository by a econometric researcher of Boston University and the mailing list by a medical researcher from Harvard University. http://support.sas.com/rnd/base/index-tone.html

9 customization and integration of user-written commands. Starting with version 14, SPSS includes a programmability package which allows integration of third-party language commands. The company complements this new option with a company-controlled SPSS Developers Center, centralizing support and user-written commands. Due to the novelty of this reorientation, one cannot foresee the adoption of this capability by SPSS users and, hence, the success of the community. When studying this industry, we will distinguish between different types of user communities. First, in its simplest manifestation, a user community may be built around a list server to post questions (and solutions) that relate to particular problems encountered in the actual use of the product. Such lists may be maintained by the manufacturer of the product, or by the community itself. 4 The lists can be used in various ways by the manufacturer – to announce new product releases, to coordinate user conferences (supported by the manufacturer), to support users who encounter problems using the software, and by allowing users to post innovative solutions to problems which are deemed important.

3

Community-Firm Collaboration as a Source of Innovation

User communities are generally understood to be “nodes consisting of individuals or firms interconnected by information transfer links which may involve face-to-face, electronic, or other communication” (von Hippel 2005, p. 96). User communities often exhibit qualities of communities of a more traditional definition, i.e., networks of “interpersonal ties that provide sociability, support, information, a sense of belonging, and social identity” (Wellman et al. 2002, p.4). Generally, studies have reported on communities with different emphases such as on branding (Muniz and O’Guinn 2001), supporting product use (Moon and Sproul 2001) and collecting feedback and ideas (Williams and Cothrel 2000). Also, community-based innovation has taken place both online (Lerner and Tirole 2002, Lakhani and von Hippel 2003, O’Mahony 2003, von Hippel and von Krogh 2003) and off-line (Shah 2000, Franke and Shah 2003).

4

The latter is the case of the R (open source) statistics package. The community operates an FAQ services as well as a wiki for R users. See http://www.r-project.org/ for details. In the case of SPSS, a user-operated FAQ service is available (inter alia) under http://listserv.uga.edu/archives/spssx-l.html, but SPSS does not offer a similar platform. Stata offers a platform to user input on its home page, but in addition, user-operated services exist as well. In the case of SAS, user group conferences are offered by SAS which also operates web sites with FAQ services. The service does not allow for personal identification of the information seekers, and the responses come from SAS staff. S-Plus questions can be discussed in an independent forum at http://www.biostat.wustl.edu/s-news/s-news-intro.html.

10 User communities have enjoyed increasing importance with the advent of the internet, and commercial interest in how to manage the relationships between firms and user communities is surging.5 Moreover, user communities are increasingly exposed to commercial interest. Several recent examples illustrate this. Sun Microsystems' President Jonathan Schwarz, in his own words, plans to build a “more durable, higher-integrity community than anybody else” (Shankland 2004) for his company's former proprietary operating system Solaris. The company aims at profiting through the sale of complementary products and services. The web browser Firefox, whose development is coordinated by the Mozilla Foundation, is another example. Just because the increasingly popular browser is free and has been developed in an open source process “doesn't mean developers aren't cashing in” (Festa 2004). Mozdev Group, for example, develops proprietary solutions based on Mozilla's platform. This is enabled by a relatively unrestrictive and pragmatic Mozilla Public License which allows for some commercialization of open source efforts. Yet, it is also clear that the relationship between user communities and commercial firms can be controversial and tetchy. A company that has lost its vibrant user community for good is Miro Inc. In August 2005, the Australian firm Miro, which had initially developed the popular CMS (content management system) software Mambo, got entangled in a fight with the user community, which had preformed most development tasks in the preceding years. The fight was based upon diverging views as to how a foundation for administering and controlling the project should be set up. While the core developers of the project were planning to initiate a foundation and had already founded a company to offer commercial support, Miro proactively set up a foundation itself. However, Miro did not transfer copyrights and trademarks of the CMS Mambo to the foundation and established a board in which the core developers in their opinion were not adequately represented. As a consequence, the core developers decided to take the code, which was licensed under the GPL, and initiate a separate (forking) project, called Joomla.6 The example clearly illustrates 5

There are some studies at the intersection of proprietary and open source software development. Some studies investigate dual licensing by commercial software firms (Bonaccorsi et al. 2003; Välimäki 2003). West (2003) examines in several case studies, how open and proprietary platforms were integrated by companies such as Apple and IBM. Sharma et al. (2002) provide a conceptual framework of how to manage an open source project within an organization.

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One summary of this intriguing story is given at http://source.mambo-foundation.org/content/view/22/39/ . The development appears to involve almost tragic elements, but is instructive: “Upon learning of JamboWorks and the developers' seemingly nefarious plans, Lamont immediately modified the terms of the proposal to start the Mambo Foundation, fearing that the open source project that he had fostered for five years would be hijacked by rogue developers. The developers, in turn, saw this as a corporate hijacking of the software that they had worked hard on. Both the Mambo developers and Peter Lamont felt that they "owned" Mambo and, from different points of view, both were correct. Both parties felt that they were being cheated by the other side, communication -- if it had been at all open and honest up until that point -- broke down, assumptions were made, and flame wars started on various Mambo-related forums around the Internet. Egos and personalities on both sides of the disagreement prevented either from backing down. And

11 that cooperation between commercial firms and user communities need not always be as harmonious and problem-free as imagined by some executives. While difficult to set up properly, community-firm collaboration will become common in practice and, thus, theory needs to develop (conceptual) frameworks to deal with this phenomenon. As a point of departure, this paper aims at introducing the notion of hybrid innovation, which we understand to be a process in which one entity systematically and repeatedly capitalizes commercially on freely revealed innovations generated by a user community. In a stable hybrid innovation model, this effect occurs without undermining the community members’ incentives to engage in innovation and to reveal innovations freely. Hybrid innovation may span a spectrum of organizational modes. A weak form of cooperation between a user community and a commercial entity involves the bundling of OS contributions and the sale (not licensing) of the software bundle and related services. These models are followed, for example, by SuSe and RedHat. In another case, the collaboration goes even further: the primary product of MySQL AB, a database program, is co-developed by a user community. At the same time, the company generates revenues by selling commercial licenses of the software to businesses.7 Similarly, in the case of the statistics software offered by StataCorp, users have regularly developed new code (ado files) which was then turned into a part of the proprietary kernel of the statistics software while giving credit to the contributing users. A fourth example, the Mambo content management system, was discussed above. It is particularly interesting as it underscores the necessity of finding governance mechanisms for supporting collaboration between firms and user communities, possibly in the form of foundations which serve to collect advertising revenues as well as directing these cash flows back into the development effort. Hybrid innovation models have not found much attention so far. Von Hippel and von Krogh (2003) have introduced a private-collective model that shows how open source projects became a prominent example of the collective provision of public goods (von Hippel and von Krogh 2003).8 First, the private investment model's assumption that free-revealing (as an extreme form of spillovers) imposes competitive disadvantages to the innovator, is eliminated. Harhoff et al. (2003) show for conditions of moderate competition that freefinally, not long after the Mambo Foundation was solidified by Miro, the Mambo core team forked the project into Joomla.” A more detailed account is given by Schmidt (2006) who notes that there exist not one but many stories on the reasons for the fork. She finds that the company representatives’ inexperience with the norms of open source projects may have been a strong driver for the failure of the collaboration. 7

MySQL's CEO, Marten Mickos, refers to his company with the statement: “We're as greedy as anyone else” (Best 2004).

8

For a detailed distinction of the private-collective model from the two traditional models of innovation, see von Hippel and von Krogh (2003).

12 revealing becomes a likely equilibrium outcome in a game in which multiple users interact and develop improvements to the manufacturer’s commercial product. Considering that a majority of open source contributors are users as opposed to manufacturers of the selfprogrammed software (von Hippel and von Krogh 2003), the condition of low competition in open source projects holds. Consequently, very low benefits suffice to motivate innovators to contribute to a user community. Secondly, and relaxing one assumption of the collective action model, software programs, in fact, are not perfectly pure public goods (von Hippel and von Krogh 2003). Both during the development and after the free-revealing of the innovation, the innovator appropriates benefits that free-riding members of the community cannot realize to the same extent. Theoretical papers and empirical studies of open source projects show that those benefits can be both extrinsic and intrinsic.9 The authors describe a stable privatecollective model, but do not consider the interaction with a commercial entity in these projects. Addressing this phenomenon explicitly, Dahlander and Magnusson (2005) indeed examine four open source projects from Nordic countries in which communities and firms co-exist. They argue that the relationship that firms have with communities directly influences their way of doing business. Based on their selected case studies, they develop a typology of different relationships primarily based on the degree of control that a firm may exercise upon the community. The authors also derive first implications, but do not develop the theoretical foundations of the interaction between firms and user communities further. For example, they do not consider specific benefits that may be realized by both parties. Jeppesen and Frederiksen (2006) do focus on individual motives and key personal attributes of contributing users in firm-established user communities. The study concludes that users are likely to be hobbyists who are responsive to recognition by the hosting firm. They are also lead users in the sense of von Hippel (1986). While these are important findings, the study does not consider circumstances that may be demotivating and lead to instability of the cooperation. Stability in the notion that firms need to establish mechanisms in order to appropriate benefits from a community-firm collaboration, Dahlander and Wallin (2006) point out that it is beneficial for firms to devote internal human resources, “a man on the inside”, to be engaged in the community. This allows firms to get access to the developments and exert influence on the direction of the community. 9

A common categorization of motivational determinants is to distinguish between extrinsic and intrinsic motivation (Osterloh and Frey 2000). Agents are extrinsically motivated, if the activity allows for direct or indirect compensation (primarily through monetary rewards). If an agent acts due to his immediate need satisfaction and the activity is valued for its own sake, one speaks of intrinsic motivation (Lakhani and Wolf 2003). See Brügge et al. (2004) for a detailed overview of empirical studies on the determinants of motivation of contributors to open source projects.

13 Gambardella and Hall (2006) show that conflicts arise when private and public contributions coexist in the production of knowledge. They present a discussion based on the open source software license GPL (general public license) as well as a case study of econometric software packages. The authors show that better outcomes can be achieved if there is a ‘lead’ inventor or contributor who establishes norms of contribution. These studies provide interesting insights into the relationships between communities and firms. However, more comprehensive theoretical frameworks are still missing. We address this research gap in the following sections. We first develop the idea that user communities are likely to be quite heterogeneous, and that particular matches between firms and communities will emerge.

4

User Heterogeneity and Self-Selection into Communities

While there are many studies that have generated interesting insights into the organization, incentives and outcomes related to community-based innovation, very little is known about the emergence of communities. Instead, communities are taken to be exogenously existent. That assumption assures that one crucial aspect is neglected by design – the fact that users are heterogeneous, that they self-select into communities of like-minded and (along certain dimensions) relatively similar individuals, and that this self-selection process generates user communities with very different properties, capabilities and cultures.10 It is a useful starting point to reiterate that user contributions can have a major impact on how the product is being perceived in the market. The impact of user contributions is assessed in this statement: The main argument in my opinion for Stata or S-plus is the growth in statistical capabilities over recent years whereas SPSS and SAS have been more complacent. Both make it easy to write user-written programs and Stata and R (and I assume Splus) have a wide range of user-written programs online. (John Hendrickx, 2004) – SPSSX archives.

The challenge for research and management is to understand how such improvements can come about, and how the respective processes should be managed. In the context of our case study, corporations are apparently not equally successful in allowing for innovation as this statement shows: “I don't find R less uniform than SAS or SPSS, particularly in the way that statistical models are handled. Moreover, trying to do something innovative or 10

See section 3 for a discussion of studies who have paid attention to heterogeneity, in particular Franke and von Hippel (2003).

14 non-standard in SAS is relatively difficult (in my experience), and even harder in SPSS. I'm less familiar with Stata, but uniformity seems one of its strengths. (The Stata scripting language puts me off, however.)” (John Fox, Jan 4, 2006)

We develop in the following paragraphs a highly stylized conceptual framework in which the heterogeneity of users is central. We argue that at any point in time, user needs as well as user skills (appropriate to find solutions satisfying the needs) display considerable heterogeneity.11 Even if we were to focus on a particular segment of a market – e.g., in our case the personal computer statistics software market – we would encounter among the users typically present in this segment different degrees of technical sophistication and need specialization. At a given point in time, a large share of users will be content with the functionality of a standard software package or – if they use a more sophisticated one – with a set of capabilities that is more reduced than the software’s full capability. Other users may frequently be confronted with problems for which there are no or almost no convenient solutions at hand. Franke and von Hippel (2003) summarize different sources of heterogeneity of user needs and propose the concept of toolkits for user innovation (von Hippel and Katz 2002) to support users in developing solutions that satisfy these needs. It is important to realize that our notion of a lack of readily available solutions may be less a statement about user needs than about the product strategy of the manufacturer(s). After all, the design of products is endogenous. A software producer entering a market is likely to offer an initial package with features which a large number or even the majority of customers appreciate. Other users with highly specialized needs may be served by niche products or will have to generate their own software and subsequent innovations. The users initially attracted to a package that offers a broad range of solutions to a broad group of customers are likely to be less sophisticated technically than customers with highly specialized or advanced needs. We hypothesize that the heterogeneity of user needs will be a major determinant of community evolution. Communities may emerge across the full spectrum of users, but they are likely to differ with respect to a number of dimensions. One is the extent of user sophistication, i.e., the degree to which users can produce, manipulate, extend or modify a product in pursuit of specialized solutions. In the case of statistics packages, some users will only utilize packages which offer a limited functionality in combination with a convenient interface which avoids command line editors. Users of these products may make use of the helpline of the manufacturer, and they may even contribute to a community in which questions and support are contributed by users. But the focus of such a community will be on 11

We disregard for now the dynamic processes which drive these needs. Even if tastes change over time, it is unlikely that heterogeneity would at any point become a minor aspect.

15 solving application problems within the given (and unmodified) context of the existing software. Other users may revert to basic matrix language packages (like MatLab or Gauss) and program particular routines for data analysis from basic modules supplied in such packages. In extreme cases, users may simply use a programming language such as C++ in order to implement their own functionalities or – as in the case of R – a statistical problem-solving environment “from scratch”. These “expert users” are unlikely to contend themselves with participating in a simple help function – they are more likely to contribute new solutions to a group of peers who appreciate the innovative contributions. We also argue that these communities will maintain a separate identity. Expert users are unlikely to engage in the “simple” question and answer routines of the larger, but less sophisticated user groups focusing on standard products. Users may very well differ along other dimensions than sophistication: among these are fairness needs, commercial orientation, extrinsic vs. intrinsic motivations, etc. For the purpose of our analysis, the existence of a segmentation based on sophistication is sufficient. Differentiation between different types of communities may also mean that the rewards that are acceptable to members of these communities may differ. In particular, technically sophisticated users are more likely to appreciate positive feedback from a corporation which itself has a strong reputation for technical excellence. We will use this presumed natural affinity between certain types of communities and firms to argue that hybrid innovation models may not be feasible for all manufacturers. The collaborating firm will have to be an acceptable partner for the members of the respective community. In order to strengthen our claim that the technical sophistication of users is a key element in community evolution, we use again statements collected from community communications which are openly accessible in web archives. In these communications, we find ample evidence that the level of user sophistication matters for the selection of particular communities. Consider the following comments in which community members characterize the R community. On Jan 2, 2006 a user posted an excerpt of Mitchell (2005) where the author comments on R as an alternative to Stata/SPSS/SAS. One has to note that Michael Mitchell is on of the maintainers of the statistics portal of UCLA, thus very knowledgeable. (…) I regret to say that I have had enormous difficulties learning and using R. (…) However, I feel like R is not so much of a statistical package as much as it is a statistical programming environment that has many new and cutting edge features. (…) Since the R community tends to be composed of experts deeply enmeshed in R, I often felt that I was missing half of the pieces of the puzzle when reading information about the use of R – it often feels like there is an assumption that

16 readers are also experts in R. (Mitchell 2005, p. 25)

As pointed out before, an important feature frequently present in user innovation communities are helplists. Helplists allow us to characterize communities in terms of the code of conduct among members. In sophisticated and technically expert communities, apparent fools are not suffered easily while communication is less harsh in the Stata community. “This list is impressive. People are knowledgeable, opinionated, ready to help and to flame you for asking elementary question or asking how to use type III SSQ. So, speak softly and carry a beagle. Seriously, sometimes it would be quicker just to give an answer, than to flame a poor soul.” (Milos Zarkovic, Jan 05, 2006) “Some people on the R list have been extremely generous with their time and knowledge, and I have much appreciated this assistance. At other times I see responses met with something like arrogance. With the sophistication of R, there is also an elitism. This is a barrier to R being more widely accepted and used.” (Bob Green, Jan 4, 2006) “Finally, I have been on the Statalist for close to six years and we do get our fair share of “homework type” questions and people get told off (though not with the frequency and “harshness” of this list). In fact some one once whined about a rude reply he got from his posting and someone wrote to inform him that there were much harsher lists adding that R-Help list is not for the faint hearted (two reasons, one being that the typical posting may sound like rocket science to most, the other being that there is very little tolerance for those who fail to adhere to the posting guide).” (Ronnie Babigumira, Jan 5, 2006)

We argue here that the harsh treatment of non-expert users may serve as an important and highly functional barrier to entry. In order to facilitate highly efficient communication, it might be necessary to deter non-expert users from participation. The “faint hearted” are not the ones who are likely to immerse themselves in the technical complexities addressed by the community. They might as well stay out. And as the next statement shows, to be popular with users is not necessarily the objective of the open-source community running the R project: What can be done about it? I guess the only answer is investing time from the user which implies that R will probably never become the language of choice for “casual users”. But popularity is probably not the main goal of the R-Project (it would be rather a nice side-effect).” (Roland Rau, Jan, 2006)

The stylized fact that emerges here is that the sophistication of particular user types is mirrored in characteristics of the product at hand. “R is definitively not for casual user. Learning curve is very steep and previous experience in programming essential. Therefore, some kind of menu system is extremely useful.” (Milos Zarkovic, Jan 05, 2006) In my experience people who like R also like Stata, though clearly the reverse is not necessarily true. (...) Stata, like R, is readily programmable. Users can – and do – write and distribute programs that look just like the built-in routines. There is an active and helpful mailing list. (…) Stata is also easier to learn: it has a very consisten syntax and even better documentation than R. (Thomas Lumley, Jan 4, 2006)

Our notion of skill differentiation is also supported by the following statements.

17 “In addition, I think the distinction between 'casual user' and serious user is something of a false dichotomy. It's really a continuum, or, probably, several continua, that make R harder or easier for people to learn. I like R. I like it a lot. I like that it's free. I like that it's cutting edge. I like that it can do amazing graphics. I like that the code is open. I like that I can write my own functions in the same language. And, again, I am amazed at the amount of time and effort people put into it. But I do think that the link in the original post made some good points, and the writer of that post is not the only one who has found R difficult to learn.” (Peter Flom, Jan 3 2006)

Particular user types will flock to particular products. But the openness of the product is an important aspect of that choice. Moreover, the high-powered users have some flexibility in their choices and may even use multiple products. Another fairly typical statement follows. “Maybe 3-4 years ago I made the choice between Stata 7 and R 1.X. At that time, I made the right choice. Documentation of R was very poor for the non-statistician. Between Stata 9 and R 2.X, I made the same choice. Stata has a wide array of commands, has unsurpassed documentation (Stata manuals) and online help (either in the form of Stata Net Courses or the UCLA ATS Stata pages), has a more responsive listserv for beginner and intermediate questions. R 2.X now has good and growing documentation for the non-statistician (books that you can buy). I think if you are an MS or PhD statistician with no money, R is a fine choice. Of course, if you are an MS/PhD statistician, you probably have money & access to many statistical tools, so this is not a useful point. I use Stata for most of my stuff and R for those times something is in R that is not in Stata that is beyond my programming & statistical expertise (some gene microarray tools, shape statistics & nonlinear mixed models). I also tend to use both when I don't trust something I don't understand and I want to see if I've got roughly the same answer going.” (David Airey, Jul 28, 2005)

We summarize some of our observations about user heterogeneity and self-selection in the following set of propositions. Proposition 1: Heterogeneity of user needs and skills drives self-selection into differentiated user communities. Leaving aside the technical sophistication of users other dimensions of differentiation may very well exist, i.e., fairness needs, commercial orientation, motivation, etc. But the degree of technical problem solving taking place in communities will be largely determined by the selfselection according to technical skills.

Proposition 2: User communities exhibit relative homogeneity of user needs among members of the community when compared to members of other communities. Communities will seek to maintain their homogeneity by rejecting member candidates with highly different skills and need sets. Our discussion also points to another important aspect of community management. Highly sophisticated commercial entities (with a suitable reputation) may be able to attract

18 community types that are infeasible to recruit and maintain for firms with lesser capabilities. However, as was pointed out in some of the statements listed above, these communities are also difficult to “manage” – which may explain the observation why in some cases, the standalone community is observed to “own” all design activities while the commercial function degenerates to mere bundling – without interference in design issues.

5

Hybrid Innovation: Emergence, Stability and Competition

In the previous section we have argued that user heterogeneity may lead to the self-selection into different organizational forms of innovative activity in user communities. We now turn in more detail to the hybrid model itself in which firms systematically and repeatedly appropriate returns from their collaboration with user communities. So far we have treated the hybrid innovation model as a stable arrangement in its own right. We now consider in more detail (1) conditions under which hybrid innovation processes are most likely to emerge, and (2) how the apparent stability of this organizational mode may be explained. 5.1

Emergence of Hybrid Innovation Processes

We defined the term “hybrid innovation process” in section 3 of the paper. We interpret the emergence of such modes of innovation as a response to an organizational failure – hybrid innovation emerges whenever stand-alone communities or individual firms cannot generate innovation outcomes as efficiently as the hybrid mode. In that regard, hybrid innovation is a particular form of cooperation. However, the very different nature of the cooperating institutions creates a rather special relationship that deserves attention. In particular, we need to explore under which conditions community innovation emerges in the immediate neighborhood of firms, and under which conditions a cooperation between the commercial entity and the community will be stable. Most of our earlier and subsequent examples focus on software products. The prevalence of such examples is not an accident or chance event, we argue in this section. The software and information technology sector is well-suited for community-based innovation for a number of reasons. But even though we believe that hybrid models will be primarily found in the production of information products (and in their most prominent manifestation: software), they are not limited to these. First, note that in the design phase of any type of product, the central activity is the processing of information (von Hippel 2005, p.13). Consequently, hybrid innovation processes might emerge at the development stage of a large variety of products.User communities have been found to be innovative in various other settings such as

19 the sporting industry (Franke and Shah 2003). Commercial firms may very well systematically benefit in these settings as well. Further known examples (that have not been studied in detail so far) are modifications to both the software and the hardware of game consoles such as Sony’s PlayStation and Microsoft’s Xbox. In these cases, individuals and communities have produced innovations that significantly expand the functionality originally intended by the manufacturers; despite the fact that the firms have not provided convenient tools for user innovation. Instead, in an attempt to protect their business model manufacturers have applied protective measures to keep the firmware (the core for adding complementary products and services) closed and proprietary, but innovative user activities have not been completely prevented from innovating by these restrictions. Our rationale why software products are the most likely domain in which hybrid models can be found lies in two of their characteristics, their variety of features and their complexity. As we have argued above and as Bessen (2004) shows, software programs are highly complex to design because customers have differing preferences for each of the program's features and thus, use it in various combinations. This results in a high risk of unanticipated flaws (bugs) in the software.12 As a consequence, firms may limit the number of features in their programs. However, this leaves many users dissatisfied and provides them with higher incentives to innovate by themselves. It also provides manufacturers with the incentive to provide tools that enable users to innovate according to their needs and to establish processes to acquire the innovations in order to make them available to all customers. In the subsequent paragraphs, we focus on some determinants which we believe to be essential for the emergence of hybrid innovation processes. First, we argue that the lower the opportunity costs for users to enter a hybrid model of innovation, the more likely users are to join. Osterloh et al. (2002) distinguish between two aspects of opportunity costs: those costs that occur in the production and those that are caused by the free-revealing of the innovation. In the case of software production, production costs in form of infrastructure (computers, software engineering environment) are steadily decreasing. Furthermore, free-revealing typically occurs in a low-cost situation because the diffusion of software via the Internet is essentially costless (von Hippel 2001). Especially in the case of open source software, the opportunity costs of sharing intellectual property rights freely are quite low relative to the benefits that can be derived from free-revealing (Osterloh et al. 2002, Harhoff et al. 2003).

12

A 1994 study at Carnegie Melon University (by the Software Engineering Institute) found that there are, on average, 100 to 150 bugs per 1,000 lines of code (Humphrey 1994).

20 Second, benefits of collaborative innovation between users are more likely to be utilized if communication and coordination costs are relatively low. Within the user community, several internet-based technologies such as version control systems, mailing lists and online repositories enable users to coordinate their innovative efforts. These information and communication tools facilitate customer integration in the product development process (Dahan and Hauser 2002). More specifically, the internet is an important enabling factor for the growth of open source projects as without it, distributed development could be more difficult to manage. Electronic networks can reduce the costs of coordination and facilitate more collaborative social and work structures, as has been shown in the case of Linux and the open source development model in general (Malone and Laubacher, 1998; Malone, 1997; Malone, Yates, and Benjamin, 1987). Third, the integration of innovations from a user community may depend critically on standards used by both the user community and the manufacturer. In software engineering and especially in open source projects, the tools used to produce innovation, namely the programming languages, are not specific for single projects but generally used (von Hippel 2005). Furthermore, these tools are often freely accessible via the internet. Thus, software innovations generated in the user community follow certain standards. The manufacturer will be able to include user-generated solutions more easily because of the standardized interfaces between user inputs and his own product. Fourth, a weak intellectual property regime will tend to facilitate hybrid models of innovation in two important ways. First note that property rights to information goods may impede innovation within the user community itself, since access to these rights may have to be negotiated. The larger the number of rights-holders with complementary, potentially blocking rights, the higher the transactions costs would be. Eisenberg and Heller (1998) argue that such settings may generate relatively little innovation due to an anti-commons problem. Thus, the lack of formal intellectual property rights may actually promote creativity and innovativeness due to the general availability of contributions. This will be true as long as the incentives for producing ideas and innovations in the first place can be kept up (Benkler 2002). Fifth, a manufacturer can only achieve a high degree of integration of user innovation into his proprietary system if he is able to acquire the innovation without infringing the users' property rights. While manufacturers can negotiate and sign contracts with single user innovators in order to gain access to their intellectual property, this is not easily done within large user communities. In the case of software, licenses perform the task of determining the

21 intellectual property regime. Whereas commercial software firms distribute their products under proprietary licenses, the open source movement has developed licenses that are much less restrictive in terms of granting public access to the source code.13 By allowing everybody to access the source code, other programmers can improve the code. Kogut and Metiu (2001) argue that this approach avoids the inefficiencies described in the private investment model because it enables innovators to build sequentially on previous inventions (Bessen and Maskin 2002). However, some of these licenses (especially the General Public License GPL) in turn prevent firms from keeping adaptations of open source software proprietary. As a consequence, manufacturers face two challenges in a hybrid model of innovation. Either, they need to convince their users to reveal their innovations without invoking copyright protection or under the use of a license that allows for the commercial integration of the innovation. Alternatively, they may need to establish modes of appropriation that allow them to privately appropriate returns via the sale of complementary services or products.14 Again, we summarize our observations in the following proposition. Proposition 3: Hybrid models of innovations are most likely to emerge under the following conditions: •

low opportunity costs for user innovators in the production and free-revealing of the innovation,



low communication and coordination costs among innovating users,



standardization, i.e. ease of integration of user innovations in the manufacturer’s innovation process,



weak intellectual property regime.

13

Note that software can be distributed in two ways. If the source code of software is made accessible, it is relatively easy to interpret and adapt the software program. Thus, if the author does not retain any rights to himself, the intellectual property regime is very weak. On the contrary, if software has been compiled, the program code is in binary form which is very to interpret. However, the functionality may be “inventedaround” by writing source code that produces the same results. Consequently, the inherent characteristics of software make it relatively easy to assimilate the intellectual property. Open source communities have adopted different licensing policies in order to determine the extent to which manufacturers can actually integrate OSS into their products. See the web pages of the Free Software Foundation for a categorization of different software licenses: http://www.gnu.org/philosophy/categories.html; last accessed: 2007/10/27.

14

See Teece (1986) for a discussion on the importance of complementary assets (such as distribution, competitive manufacturing) to appropriate returns on R&D in regimes of weak legal protection. Harabi (1995) finds in an empirical study of selected R&D executives of Swiss firms that the three most important means of appropriating returns on innovation are “lead time”, “superior sales or service efforts” and “moving quickly down the learning curve”. “Patents” are seen in most industries to be least effective.

22 As an implication, innovation processes in information goods and services are particularly likely to be become the focus of hybrid innovation models, since this sector satisfies the above conditions rather well. 5.2

Stability of Hybrid Innovation Processes

It has been argued that hybrid forms of innovation exist and that they form a fertile middle ground between the classical extremes, the private investment model and the private collective action models of innovation. It has also been argued that communities represent a new type of organization which is neither a hierarchy (though it has hierarchical features), nor a market (although it has features of a market) nor a network. Our attention is directed at an arrangement which includes combinations of hierarchy (the manufacturer’s organization) and a community. The stability of this institutional arrangement may be addressed using a host of theoretical approaches. Transaction cost theory is a classical approach, but scholars have also integrated informal norms with this institutional theory (Coase 1937, Williamson 1975) to explain the emergence and stability of novel organizational forms (Husted and Folger 2004). In the following sections, we also want to draw upon different theories of informal norms and other work that complement economic contractual analysis with sociological perspectives (Simon 1957; Granovetter 1985). Which of the theoretical underpinnings is more appropriate will have to be decided in more empirical work. Our current intention is to provide a broad foundation for such work, not to single out a particularly promising candidate on the theoretical side. From our discussion, we derive a set of propositions that lend themselves to explain why and under which conditions hybrid innovation processes are stable arrangements. We also provide some exemplary evidence (mostly from our case, statistical software, as well as from other areas). Distributive Justice and Fairness. Our central argument is that a hybrid innovation arrangement will be stable if there are mutual benefits from engaging in such a relationship, and if the benefits to the contributing members of the community are sufficiently large to balance the efforts undertaken by these members. Economic theory states that cooperation relies on equitable benefit distributions between agents. Fehr and Schmidt (1999) assume that agents measure and perceive fairness based on a neutral reference outcome. This reference outcome is derived from a complicated “social comparison process” (Fehr and Schmidt 1999, 821). The authors review a variety of experimental and empirical studies and conclude that an individual's well-being and behavior clearly is affected by a relative material payoff. That is, individuals worry about how much they get in comparison to others. Takahashi (2000) comes

23 to a similar conclusion. In his model of generalized exchange15, an agent selects recipients based on his individual notion of fairness. Fairness according to Takahashi (2000) is determined by the amount which this agent gives relative to the amount given by the potential recipient. The agent evaluates the potential recipient's past giving pattern and decides whether it meets his notion of fairness. In a computer simulation exercise Takahashi (2000) shows that pure generalized exchange can emerge and be maintained by selective giving. In the context of hybrid models of innovation, the findings of these two theoretical models have the following implications. We expect each contributing user innovator to compare his individual input with the manufacturer's contribution given to him or the community.16 If the user innovator perceives the manufacturer's input-output ratio to be fair, he will tend to contribute to the effort of innovation. If the user innovator believes that he suffers from an inequitable distribution of benefits, he will be reluctant to commit effort. The model of Takahashi (2000) further provides the insight that user innovators have a “memory” of past contributions of the manufacturer to other users or the community in general. Thus, the manufacturer needs to maintain a relationship which is perceived as fair by the contributing user innovators in the community. Procedural Justice. In cases that benefits are (perceived to be) unequally distributed, i.e., distributive justice is low, procedural justice may nonetheless help to stabilize the exchange relationships (Brockner et al. 1996). Central to procedural justice theory (Cobb et al. 1995; Korsgaard et al. 2002) is the assumption that habits and interactions among cooperating actors are mutually monitored on whether they comply with an individual understanding of adequate and fair behavior. Factors such as the opportunity for voice in the procedure, judgment based on evidence, correctability of decisions and consistent application of procedures contribute to the perception of procedural justice (Thibaut et al. 1975; Leventhal 1980; Kim et al. 1991; Kim et al. 1993). These factors are also found to have a positive effect on attitude and behavior (Lind 2001). People are more willing to accept and even positively support unfavorable decision outcomes when they perceive decision procedures as just. In hybrid innovation processes this implies that criteria determining the distribution of 15

There are two predominant versions of social exchange (Takahashi 2000). In restricted or direct exchange, two agents exchange resources directly and (almost) synchronously. In contrast, in generalized or indirect exchange, there is no direct reciprocity, nor is there synchronicity. There are inherently more than two agents involved in the group. Each agent provides resources at one time and eventually receives some benefit in return - not necessarily from the same agent, but potentially from a different one.

16

Obviously, the user innovator is likely to receive the majority of his output, i.e. his benefit, from the innovations by other user innovators or the benefits derived from his membership to the community. However, those benefits are not point of focus at this time. Rather, the direct comparison between the user innovator and the manufacturer is of importance.

24 benefits need to be transparent and perceived to be just and fair. Commercial firms need to find ways of integrating the user community in their innovation processes. One way may be the establishment of regular user conferences, interaction with a board of user representatives or the intensive use of bulletin boards and mailing lists. In some instances, particularly in arrangements leaning towards full-fledged open source development, foundations as an intermediary may be a valid option (O’Mahoney 2005). We expect that marketing and PR directed at the own user community may very well become a discipline software development firms need to excel in. The above discussion results in proposition 4, for which we will provide some first exemplary evidence.

Proposition 4: Hybrid innovation processes will be sustainable if the relationship is balanced, i.e. if the i) the actual distribution of benefits is actually being perceived as fair (distributional fairness), or ii) if the procedures and criteria by which benefits are being divided are being perceived as fair (procedural fairness).

While the sustainability of such an arrangement has not been studied in a larger survey, Mayrhofer (2005) examined the relationship between perception of (distributive) fairness and level of contribution in a survey of contributors of specialized modules to the statistics software Stata. The author finds that there exists a significant, positive relationship. He also presents a number of comments that were given in text fields of their survey instrument. These show that a balanced relationship in terms of actual benefits as well distribution rules is an important determinant of user contributions. 17 For example, one respondent stated that StataCorp benefits from the users' free labor which allows the company to grow more quickly. This, he believes, in turn benefits the community. “StataCorp benefits from a lot of free labor. This allows Stata to grow more quickly than it would otherwise, which benefits the community. The publication of Stata Journal benefits academic users who contribute ado files that lead to publications in this Journal. In short, everybody wins. StataCorp is very skilled at maintaining a very high level of support from their user community. They go out of their way to help users, which makes us grateful and willing to give our time to help this company.” The notion of a quid pro quo is unmistakable in these comments. Moreover, one respondent 17

Note that in this version of the paper, we will present for all exemplary evidence the complete statements retrieved from surveys and publications such as discussion forums and reports. Note also that we have cleared the statements of orthography mistakes such as minor typos and that all statements taken from the Harhoff et al. (2006) survey are anonymous. Documentation is available upon request.

25 states an implicit fairness requirement, i.e., that StataCorp may incorporate ado-files as long as the price of the package remains unaffected by user written add-ons. “Stata can incorporate ados, but the price of the package should remain unaffected by user add ons.”

Issues of pricing are also apparent in the following comment which implies that keeping the reputation of not being “money-grubbing” might be important. “As a Stata user who's recently started using SPSS as well, I've been surprised by the money-grubbing nature of the company. Stata has everything in one package-no need to purchase add on modules for every special type of analysis you want to do--and provides free between-version upgrades downloadable from the web--no need to purchase "service" agreements. Yes, it takes longer to learn (though version 8 is now menu driven), but might be worth the investment of time given the much more user-friendly nature of the company. (Sorry for the heresy on the SPSS listserve).” (STEVEN HARVEY, Nov 12, 2003

Trust. Particularly for the perceived fairness of processes, trust between the cooperating parties is of high importance. In a broad definition, trust is seen as the subjective probability with which an agent assesses that another agent or group of agents will perform a particular action, both before she or he can monitor such action (or independently of his or her capacity ever to be able to monitor it) and in a context in which it affects his or her own action (Gambetta 1988). Procedural justice theory sees trust as varying with decision procedures, independent of exchange outcomes. As a consequence, opportunism or defection are directly influenced by the quality of decision-making processes (Sapienza et al. 2000). Adler (2001) argues that trust is the central coordinating mechanism for communities and has discussed different dimensions and components of the construct. The implications for hybrid innovation processes are apparent. Particularly for inexperienced firms and firm-community arrangements without an established relationship, the risk of a break-down of cooperation is high. Conversely, hybrid models will become more stable the more familiar the parties become with each other, and the clearer norms are communicated that create predictability and trustworthiness. Firms that aim at systematically and repeatedly benefiting from the innovative activity of their community need to act and communicate consistently, competently and openly about their goals and decisions. Mechanisms that may be put to work are the introduction of a spokesperson of the firm who will uphold personal contact with important community members, a reputation for fair behavior and an institutional context that takes into account the other party’s norms and behavior. These mechanisms are complementary and need to be mixed according to specific needs (Adler 2001). As a consequence of these theoretical considerations, we specify as proposition 5:

26 Proposition 5: Hybrid innovation processes will become more stable over time as the parties accumulate experience and build trust in each other.

Psychological Contracts. Whereas some of the rules and norms of the interaction between a firm and its user community can be written down and possibly communicated via a forum or webpage, the larger part remains implicit. The concept of psychological contracts, which particularly looks at firm-employee relationships, helps to describe and understand these informal aspects. It is the implicit component of the relationship which may contribute strongly to disappointments, e.g., when expectations are not met (Rousseau 1989). This concept can also be generalized to a broad variety of exchange relationships between (i) individuals, (ii) individuals and organizations, and (iii) between organizations (Roehling 1997). It is thus applicable to our research setting. Psychological contracts strongly relate to the above mentioned concepts of fairness, since they constitute a set of expectations about reciprocal obligations and establish an exchange relationship between two parties (Levinson et al. 1962; Sels et al. 2004). Since these contracts are subjective and idiosyncratic, i.e., expectations held by one party may or may not be shared by the other, and individual perceptions may diverge from what is written in explicit contracts. As a consequence, Rousseau and Tijoriwala (1998) state that not mutuality as such, but the individual perception of mutuality lies at the core of the concept. Thus, firms need to be aware that there is a mutually shared understanding of the exchange relationship with the community at all times. This understanding may to some extent be codified in a license or publicly available conditions of use. However, every member of the community as well as every firm representative makes his individual implicit contract that defines his effort put in the shared cause as well as the output and benefit that he expects to receive from it. If these expectations are disappointed, the parties may decide to abandon the cooperation. Since contributing users are - in most cases - not bound via employment contracts to the manufacturer firm, the fragility of hybrid innovation processes become apparent. Thus, we come to the following two propositions and present first evidence.

Proposition 6: Hybrid innovation processes will be sustainable only as long as the informal norms of the community and the individuals’ implicit expectation are not being violated. Proposition 7: Since user heterogeneity is an important aspect of communities and since different users may have diverging valuations over benefit types, we expect hybrid innovation processes to be the more stable the richer and more varied the reward structures are that

27 firms use to award benefits to communities and their members.

Above, the comment by a Stata contributor was presented suggesting that StataCorp is “permitted” to take the users’ contributions as long as this does not affect the price of the commercial package. This opinion is both implicit and subjective. A simple, commercially motivated move such as a price increase can be perceived and interpreted in many different ways by the contributors in a community. The following statement, also taken from the survey responses obtained by Mayrhofer (2005) shows some dimensions and potentials for disappointment that are inherent in the psychological contract between contributor and firm. “I think that StataCorp offers a very fair licensing policy, unlike SAS or SPSS. They are a relatively small company and seem to care very personally about their product. Therefore, I think most users are happy to contribute code and have it utilized by StataCorp. I would feel differently about a large, impersonal company that appeared mainly profit driven and left its scientific roots behind. It seems to me that both SAS and SPSS have betrayed their respective communities by losing their focus on statistics and moving into the area of "business intelligence.” The “fight” against commercial and exploiting firms may be a unifying force that motivates individual users to contribute to Stata. Furthermore, the theory of psychological contracts lends insights in another potential source of awarding contributors but also for their defection. It shows that firms are facing a great challenge in meeting the varying expectations of what elements are perceived to be beneficial in the eyes of an individual contributor. In the following we will provide some evidence that exemplifies the variety of benefits that may be perceived to be valuable to users in a community. The returns that community members enjoy may in many cases not be monetary or in the form of innovative code generated by the commercial firm. Mayrhofer (2005) emphasizes that non-monetary compensation might be very important. In their study of Stata contributors, community members clearly expect that the manufacturer of the core functionality should ensure speed and stability of the software. The same is true for userwritten ado-files which are incorporated in Stata, often after considerable rewriting and improvement.18 Second, software users may benefit considerably from fast and effective support. “Stata has had such good tech support and has been so open to suggestions that I figure they are not exploiting the users – it’s just that the users come 18

Note that StataCorp offers the statistics package Stata, the “core” functionality, to a quite low price and deliberately aims at allowing users to adapt the package to their needs. According to respondents of the questionnaire, this is not true for StataCorp's competitors SAS and SPSS.

28 up with ideas from their particular realms.” The authors also show that recognition by the commercial firm is appreciated by contributing users. This result confirms work by Jeppesen and Magnusson (2006). Mayrhofer (2005) shows that there is a significant positive correlation between the extent of a user’s contribution and two survey items which ask respondents to what extent Stata provides “acknowledgment of the users' work” and how strongly it displays (the inverse of) “lack of appreciation”. The evidence is further exemplified by the following statement of a Stata contributor: “When my efforts on cf were incorporated into official Stata, I was honored that they considered my work worthy of their standards. I was not disturbed that they "took" my work and sold it. I did the work because it seemed to be the right thing to do -- to improve the way the program worked. And sharing it was also the right thing to do.” We can find further evidence in the R-archives19, which have been used above to show the variety of needs that users may have. Here, the comments in this forum show particularly well, how a firm can add value to a product and to contributions by users. For example, documentation may be superior due to common understandability as well as more complete. ”SAS documentation is much lengthier than R’s. Some people like the terseness of R’s help. Some like the verboseness of SAS’s. Some of this difference is doubtless due to the fact that SAS is commercial, and pays people to write the documentation.” (Peter Flom, Jan 3 2006) If user contributions are bundled by a commercial firm that also guarantees its quality by checking and acknowledging the contributions, users may benefit in different ways. Users are being notified about new modules and know where to find them. The contributions’ applicability may increase as well, if the commercial firm generalizes the solutions to fit more applications. The following statement demonstrates potential consequences of a lack of hierarchical control and bundling by a firm. ”As to how they are improved, the fact that R is extended (in part) by packages written by many many different people is good, because it means that the latest techniques can be written up, often by the people who invent the techniques (...), but it does mean that a) it is hard to know what is out there at any given time; b) the styles of packages differ somewhat.” (Peter Flom, Jan 3 2006) For users who are employed in firms and who use the software at the workplace, a commercial entity may add the legitimacy needed in order for the software to qualify for corporate purchasing decisions: 19

Cf. http://tolstoy.newcastle.edu.au/R/.

29 “I am not sure how relevant this comment is, but there is something about a product being free that makes it appear less valuable. At the company I used to work for a group of people tried to persuade the managers to buy S+ licenses for them all. Whenever I would tell them that they could download R right now for free I would just get blank stares.” (Roger Bos, Jan 4, 2006) ”For me using Stata (...), has the advantage of using a high quality code written & tested by an organization & their clients.” (Naji, Jan 5, 2006) We do not want to argue that monetary incentives never play a role. Clearly, there are some reports that point to contributors that offer their expertise and experience commercially. In the Stata case, others may have developed a strategy of bundling their software contributions with books which can be sold commercially or to sell software directly. 20 In our earlier survey results, the aspect of monetary remuneration has played a minor role. We neglect the point here as additional monetary rewards would probably stabilize the relationship between community and commercial entity. However, we would expect that in cases where money flows back to the community, this would probably not take the form of direct payments to contributors. 5.3

Competition

The issues discussed in the previous subsections on emergence and stability of hybrid arrangements are directly relevant to our discussion of competition. Competitive forces will already be present at the inception of a community-firm relationship, since users may choose to join a particular community. Currently, we do not observe an explicit competitor to the hybrid model of Stata in our industry example. However, we pointed out in the market overview that other firms are moving in the direction of hybrid innovation. Again, this is likely to foster competition for particularly productive contributors. The endowment of users with heterogeneous needs and capabilities has a number of consequences. In the previous section we have argued that user heterogeneity will lead to distinct self-selection mechanisms. Users with high sophistication and/or strongly specific needs will be drawn into expert user communities as encountered in open source projects. Less sophisticated users who share needs with a large number of other users are likely to purchase standard products. They might engage in community interaction focusing on how to handle the existing product best, but are unlikely to engage in own innovative activities. The hybrid innovation mode is likely to play an intermediate role – it offers the flexibility of 20

See http://www.stata.com/statalist/archive/2004-09/msg00123.html. “In this connection, I once came across a user who had written some Stata ados and was selling copies of them. I regret that I have never met this person or otherwise found out how many purchasers there were. As far as I can see, there could be no real objection to this if it was all original work, but it didn't ever catch on as a way of interacting with other users. Nick”

30 adjusting the product to own needs, and it requires some sophistication. Moreover, the needed sophistication is likely to concern the need domain (e.g., econometric methods than programming per se). Thus, we hypothesize that this group of users might be particularly amenable to the adoption of “user toolkits” as described by von Hippel (2005). Moreover, even the most sophisticated users flocking to the hybrid mode will share an appreciation for having a product which incorporates user contributions, albeit in a more robust, faster or safer implementation than in the original user contribution. At the margin between the three modes, there is likely to be some competition for particular user types. A highly productive and sophisticated user of the expert type could make an outstanding contribution to the hybrid innovation mode community, but may himself be opposed to the commercialization aspects of the model (Raymond 1998). A creative contributor to the hybrid innovation mode may very well have important suggestions for the classical manufacturer innovation mode, but may not want to use the product due to its lesser sophistication or flexibility. Boundary-spanning may occur, for example, when a sophisticated user is forced to utilize the lesser sophisticated product for the purpose of teaching statistics or econometrics to a beginner’s class while he prefers the more sophisticated product for use in his or her own research. 21 Aside from ex ante selection into particular innovation modes and community types, there might be some migration of contributors from one community type and innovation mode to another. The following cites from the R-archives describes the reasoning that is likely to occur at this boundary. For example, on Febr.25, 2001, Thomas Lumly, a regular contributor to the R community notes: “Stata and R are different for very good reasons. “Stata is fast, reasonably memory-efficient, has a fairly constrained model for its data (…) and a macro language that, I think, can be fairly described as “surprisingly useful. R is relatively slow, memory-hungry, and has a very flexible programming language and data model. It would be nice if R were faster or Stata more flexible, but it isn’t at all easy.”

Users of statistics packages have also commented that the transition from one package to another is affected by the characteristics of the packages. “Remembering my first contact with R after using SPSS for some years (and having some experience with Stata and SAS) was that your mental 21

We were surprised about the frequent comparative assessment of statistics packages that were performed on the R, Stata and SPSS discussion forums. Moreover, we discovered a number of contributors who appeared to be involved in the discussions of several of these. “Switching packages” was openly discussed in some cases when users urged the manufacturer to adopt particular software features.

31 framework is different. You think in “SPSS-terms” (...) This is why “jumping” from SPSS to Stata is relatively easy. But to jump from any of the three to R is much more difficult.” (Roland Rau, Jan, 2006) “Going from SPSS to SAS (which I once did) is like going from Spanish to French. Going from SAS to R (which I am trying to do) is like going from English to Chinese.” (Peter Flom, Jan 3, 2006) This provides an important insight – when switching costs are high, mobility across platforms will be limited. Users will then be (to some degree) captive to the community, and vice versa, the commercial firm may become captive to the community. Yet, expert users are probably the least deterred from switching since they are the most flexible. Expert users are likely to be “fluent” in more than one of the packages. The extent of migration moves of individuals between communities is unknown, to the best of our knowledge. Multiple participation (possibly with shifting emphasis) may be common, but again we have little empirical data on this. The survey results presented by Mayrhofer (2005) imply that about 13% of the contributors to Stata software development have contributed to other packages like R, SPSS, SAS before. We expect that the more productive community members are likely to be more mobile. Proposition 8: Productivity and mobility of contributing users will be positively correlated. Proposition 9: Competition will involve active recruiting by firms and communities of particularly productive contributors from other platforms.

The collaboration between commercial firms and communities – irrespective of its organization – has become popular over the last decade. As arrangements of this type appear profitable for both sides, the model is imitated and proliferates. The last two propositions will therefore become more interesting as competition for productive users will heat up.

32

6 6.1

Conclusions Summary of Results

This paper seeks to contribute to our understanding of how user communities and firms can collaborate in innovation processes. There is ample reason for asking this question. The classical model of industrial innovation processes which are driven by researchers working alone or in small groups and by regimes of formal intellectual property appears to be under pressure. We do not contend that these aspects are disappearing rapidly, but we take as a starting point of our work that new forms of organizing innovation have become available, and that the new world of innovation is more complex and multifaceted than the old bifurcation model with a separation line in science and in industry. Our research questions are not merely academic. The question as to how private agents and communities should interact is gaining in relevance and has been discussed controversially. There are serious concerns that the proprietary exploitation of innovation results achieved in user communities may be self-defeating in the long run, as it may undermine the willingness of community members to contribute to the commons. Moreover, commercialization may direct the efforts of a community away from a desirable course. Ultimately, our research is tied to the question how the relationships between a user community and a cooperating firm should be managed in order to make the collaboration effective and to avoid a breakdown of the relationship. First, we ask how the different community-firm linkages or any extreme arrangements without involvement of any community or firm in innovation may emerge. Earlier contributions have considered firms and communities as well as the linkages between them largely exogenously given. We propose a view of communities and firms which is driven by the specificity of matches between individual users, communities and, subsequently, firms. We start out by noting the tremendous heterogeneity of users within a given industry or technical field. We hypothesize that heterogeneity in skills and needs leads to early matching between products and users in many industries. Technically sophisticated users will prefer to interact with products and services which allow them to apply their skills. We argue that this matching process gives rise to a natural distinction between user communities in which little or no technical problem-solving takes place, communities in which users demand control over the full technology (such as in open source communities), and communities which contribute to innovation processes without aspiring to have full control over the ways in which the producer of a product absorbs and exploits the ideas and contributions generated in the community. We also propose that some of these very different types of users will not mix

33 well. For the technically sophisticated users, exchanges with technically less refined individuals may not generate large benefits. Moreover, in order to maintain the quality level of technical discussions, highly sophisticated user communities may decide to build barriers which only those can overcome who are themselves well-versed in the technology at hand. “Flaming” and other aggressive forms of behavior may not be regrettable examples of bad behavior, but very effective barriers to entry, directed at those who ask naïve questions in communication spaces dominated by experts. This does not imply that technically less sophisticated users may not be of value to a firm. Users of this type may nonetheless share with the manufacturer information about their own needs. The exchange within a community of such users may improve the quality of marketing information for the manufacturer, even if the community members do not engage in innovation. But there is little need to involve these users in active problem-solving of a technical nature. In short, characteristics of users attracted to a product and characteristics of a product may be related in a systematic way. We show in the paper that this observation may have far-ranging implications for entry strategies and product design. Second, we ask how a hybrid innovation (community-firm) arrangement can be maintained over time as a stable entity. How is it possible that – in apparently stable arrangements – communities and commercial firms cooperate, given that commercialization of a community’s innovation output is anathema in some open-source communities? We argue that such hybrid forms will be sustainable only if the parties involved receive a sufficiently high benefit from the relationship and as long as the norms of the community, in particular w.r.t. sentiments of fair treatment, are not violated. We argue that under these conditions a user community will not view appropriation by the manufacturer as a negative outcome or a breach of trust. We suggest that the relationship between the community and manufacturer must display some fairness in that users receive a return in kind from the manufacturer’s appropriation of the innovation. Similarly, the community will have to generate some longterm contributions to innovation at the firm in order to create incentives for keeping the flow of benefits for community members going. We develop a set of propositions on these aspects. Third, we consider which implications the matching between users and communities has for competition. The potential of an instable community-firm relationship provides one source of competition, since the players involved might decide to break up and select new partners. But competition may not only ensue among particular firm-community “alliances”. There may also be competition between “classical” manufacturers who do not employ communities and firms which actively seek to involve communities in some fashion. These may again compete with open source communities which eschew a manufacturing firm completely. This new

34 interplay between different innovation modes has barely been discussed in the literature. We propose that in hybrid and open-source models, competition for particularly productive or influential community members will increase, and that migration of important users will be an important phenomenon in community-driven innovation. We also argue there is an important tradeoff between having a docile and peaceful community and the vigor of technical problem-solving in a community. Again, we develop a number of propositions to summarize our results. Our research has put forth a number of examples where such a collaboration is functional, even in the absence of strong contractual safeguards. But the afore-mentioned Mambo/Joomla! example shows that even such safeguards (in the form of the GPL) cannot fully eradicate the risk of failure. We summarize some implications of our paper below. 6.2

Implications for Firm Conduct and Community Management

We have emphasized the need for firms to assess the potential and dangers of collaborating with communities with great caution. While user contributions to the innovation process have been studied for more than two decades, user communities are a reasonably new phenomenon. On the one hand, such communities are capable of reinforcing the positive impact of user contributions on a firm’s innovation efforts. On the other hand, as the Mambo/Jomla! example showed, firms have to be aware of the difficulties of communicating with communities whose culture is vastly different from the usual professional conduct. The community, or at least a significant part of it, may be capable of “firing” the commercial entity. While stable relationships can be attained, their management is likely to involve constant attention. Firms will need to develop a comprehensive understanding of the community’s ecosystem; treating the collaboration as another form of business relationship is likely to lead to failure. Moreover, competition between and within innovation modes is likely to increase as the new innovation models become more broadly applied. We are skeptical that one set of recommendations for community management will emerge as organizational scholars study the phenomenon in more depth. We have argued that user communities will be heterogeneous, and that they are likely to span a full spectrum from technically very sophisticated communities to less technically oriented ones. This orientation is likely to coincide with the nature of the product in question. Sophistication of the product is likely to attract sophisticated users, and vice versa. Technical sophistication may be highly correlated with aversion to commercialization. This form of self-selection has to be taken into account when firms attempt to engage in managing the relationship to their user communities.

35 While collaborating with communities obviously entails risks, there is also great potential. Community input into a firm’s innovation process can substantially improve engineering effectiveness. Obviously, the potential is particularly high for firms willing to engage in collaboration with highly sophisticated users. Firms which focus on products that foster the building of communities comprised of such individuals will be able to gain more from this form of collaboration than firms who have entered a market with a strong focus on the usually large segment of customers with bread-and-butter needs. We argue that the emergence of communities as supporters of firm-level innovation may well have an impact on entry strategies. Going for a large segment of users (who have little problem-solving capacity) has been a time-honored approach in many industries. With communities delivering a sizeable competitive advantage in product development speed, we foresee that niche entry strategies might become more attractive. A firm may decide to enter a market space with highly sophisticated (and possibly specialized) users first and to expand into the broader market with the support of the technically educated community then. This would constitute a first-order effect for strategic choices which has not been considered in the literature. 6.3

Public Policy Implications

As of yet, we do not have a full understanding of the welfare implications of user communities. One can be optimistic that the aggregate welfare effects are likely to be positive as Henkel and von Hippel (2005) suggest. But the danger of crowding out the open-source model exists, for example via strong legally enforceable exclusion rights, just as some user communities might crowd out private commercial activities, e.g., in the example of the kite industry as described by von Hippel (2005). It seems clear, however, that public policy will have to reconsider a number of issues in any case. The delineation of intellectual property rights has mostly occurred in a time period when the new models (open-source and hybrid innovation) were not available. The separating line between the two has become an important topic for public policy. It is likely that the principle investment problem (the undersupply of innovation in the presence of ex post externalities) has not been resolved, maybe even exacerbated. But the existence of user communities might provide a new lever for public policies, e.g. in the form of public subsidies for the formation of such communities. The welfare effects of such a support scheme are fully unknown at this point, but should be explored. After all, the new innovation modes are likely to provide room for new approaches in public policies as well as in corporate strategies.

36 6.4

Future Research

In this paper we have tried to provide theoretical foundations for the segmentation of innovation modes into classical manufacturer innovation, (by now classical) open source development with some bundling activities from manufacturers, and the new model of hybrid innovation. The concepts laid out in this paper are a first step in the direction of an improved understanding of these heterogeneous forms of innovation in which users of the product play an increasingly important role. Many related phenomena still need further exploration, modeling and empirical testing. We briefly discuss three of them. First, the process of ex ante community selection by users is obviously a relevant source of community initiation and growth. The research questions in this realm concern in particular the criteria by which users make decisions and the extent to which product characteristics and community characteristics are being traded off. As community-rendered services become an integral part of the overall utility received by consumers, the nature and extent of communitydelivered services should become an important aspect of consumer choices. The impact of this criterion needs to be explored. The ex post mobility decisions that community members make are also relevant. To the best of our knowledge, migration across communities has not been studied extensively as of yet. We have proposed here that such migration processes are likely to be a second force (aside the ex ante joining decisions) that will determine the comparative strength of competing product-community pairs. Which of the two forces dominates is an open question. The phenomenon of the user community that “fires” its manufacturer (in the Mambo case) is an extreme variant of user mobility. This complete breakdown of a particular community-firm collaboration exemplifies how careful firms need to assess options and dangers that emerge in the new innovation modes. Third, the extent to which the modes of innovation depend on contributions by star-users may very well differ across technical fields or industries. In the classical case of manufacturer innovation, possibly with a user community that maintains supportive services such as helplists, it is unlikely that the manufacturer will encounter the same degree of performance skewness as in the technically most sophisticated classical open source environments. In the hybrid innovation and in the open source mode, the management and attraction of highly skilled individuals becomes a key issue for management. The values and assessment criteria of these individuals can be highly relevant in shaping the community’s culture and in community decision-making. Future research should address the question what kind of impact the departure of a star performer from a community has, and whether such events can trigger the exodus of larger numbers of users from one platform to another.

37 It is likely that in a few years, markets with differentiated products will not be comparable to today’s textbook examples in which consumers choose products based on product characteristics and the reputation of the firm. As community-rendered services may become an important ingredient of the overall package of benefits which consumers receive, the management of user communities becomes an important aspect of the overall innovation process. Interestingly, our logic suggests that it is the technically leading and most sophisticated firms which have particularly risky decisions to make. The opportunities coming with user communities are particularly large for these corporations – and so are the dangers from disastrous breakdowns in the communication and collaboration between the firm and its new partner.

38

7

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