A business model for open-source software targeted at firms that operate in a highly competitive environment with a high pace of technological innovation. Icepim

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Icepim

A business model for open-source software targeted at

firms that operate in a highly competitive environment

with a high pace of technological innovation.

Master Thesis Business Administration, Business Development

7 October 2012 Joris Kuipers S1609947

J.H.J. (Joris) Kuipers

Van Heemskerckstraat 11-A 9726 GB Groningen

T: 06-13455808

E: joriskuipers@hotmail.com W: www.joriskuipers.nl

First supervisor: prof. dr. H.G. (Henk) Sol University of Groningen Second assessor: dr. C. (Cees) Reezigt University of Groningen External supervisor: dr. M. (Martijn) Hoogeveen iMerge BV / Icecat NV

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Executive summary

Business to business information exchange in the supply chain is increasing. iMerge is the owner of Icecat, which is an online intermediary facilitating the exchange of product information via an open catalogue. At the back office of this open catalogue, a product information management (PIM) tool is integrated. In this thesis is investigated if and how this PIM tool can be launched as standalone open source software (OSS). This PIM tool is called Icepim.

An analysis of the literature and target group showed that it’s interesting to launch the software as OSS. Firms are getting accustomed to using OSS. Moreover, often firms prefer OSS over proprietary software, because of its cost advantage and high customizability. However small firms are less eager to customize OSS and need a ready-to-use solution without maintenance.

A challenging aspect of providing OSS is the business model and its revenue generating mechanism. The study showed that there are various opportunities to make providing OSS profitable. Besides offering a free software version, paid premium versions can be offered including the provision of the infrastructure, platform and services which can monetize the OSS.

The market of PIM software is immature and is growing very fast. There is an opportunity for iMerge to offer an industry specific PIM solution, focusing on their current customer base. They have a unique competitive advantage, because Icepim can be integrated with Icecat. Icepim does need to be modified, and some premium functionality needs to be added, which require an investment. The proposed business model includes offering three versions:

- Basic: The free open source version which can be downloaded and customized.

- SaaS: A cloud based tool which can be instantly used and configured according to the customer’s preferences.

- PaaS: A cloud based tool, however customers can make customizations to the software so they are more flexible to adjust the software according to their needs.

Next to these versions, the firm can offer complementary services for customers using any version. Setting up this infrastructure and developing the platform to enable this versioning requires an investment. Taking this into account, the market circumstances, the firm’s capabilities and the estimated profitability of the proposed solution, this project is an interesting opportunity.

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List of abbreviations

API Application Programming Interface

BO Back Office

CAD/CAM Computer Aided Design/Manufacturing CMS Content Management System

CRM Customer Relationship Management DAM Digital Asset Management

ERP Enterprise Resource Planning FTE Full-Time Equivalent

IaaS Infrastructure as a Service

ICT Information and Communication Technology IT Information Technology

OI Open Innovation

OS Open-Source

OSI Open-Source Initiative OSS Open-Source Software PaaS Platform as a Service

PIM Product Information Management SaaS Software as a Service

SKU Stock Keeping Unit URL Uniform Resource Locator USP Unique Selling Point

UTAUT Unified Theory of Acceptance and Use of Technology VESA Video Electronics Standards Association

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1. Introduction

1.1. Company description

The focal firm is iMerge, which is an investing firm focused on fast growing e-business opportunities. The firm is operating in the field of e-business and open source software (OSS) since 1998. It started as one of the pioneers as an internet shop in electronic products (TakeItNow). Although the firm still holds a participation in one top 100 NL e-tailer, the core business has switched from e-tailing towards facilitating e-tailers and their suppliers with open business infrastructures. They operate in the areas of E-Business facilities, E-business content and Online retail.

1.1.1. Online retail

In 1998 they founded the web shop in electronic goods TakeItNow, one of the first successful Dutch web shops. In 2000 they participated in the foundation of the outdoor sports web shop Futurumshop, which sells at several European countries. Both companies are in the top 100 biggest Dutch web shops.1 The former one, TakeItNow, was sold off in 2008.

1.1.2. E-business facilities Batavi e-commerce

To further facilitate e-tailers they provided their e-commerce system which is used at both TakeItNow and Futurumshop as an open-source (OS) system, which can be freely used by other parties under the GNU General Public License. In this system there are modules included that can automatically link to other services of the firm, including Icecat and Iceleads.

They also have a participation in the firm Iceshop, which builds and maintains implementations of Batavi shops for e-tailers.

Iceleads, lead management network

Iceleads generates leads from manufacturer websites to retailers. They can locate the Iceleads powered “buy now” button on the website at the products, which will display a pop-up with the merchants which are selling these products. The consumer can click through to the web shop and purchase this product.

The manufacturer pays for this application, and the merchant can implement it for free. They do however pay a provision to Iceleads for every sale.

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BinTime

iMerge also has a participation in the firm BinTime, which is a software development firm located in Ukraine. Their services are used to improve and customize code at various implementations.

1.1.3. E-business content Icecat, the open catalog.

The current flagship is the in 2001 launched online catalogue (Icecat), focused on computer products, electronics and office products. Manufacturers of these products provide rich content about their products, such as pictures, descriptions, product features, marketing folders, videos and more. This is stored in the online catalogue and distributed to parties in the distribution channel. The distribution is performed by XML and URL feeds.

About 250 brands pay to get their data distributed, and retailers can access this information for free. There is also a paid “full package” available for retailers in which about 4.000 brands are included which aren’t sponsored by manufacturers, but gathered by Icecat’s employees. This is called “Full Icecat”.

Icepim: product information management

This tool is embedded in the Icecat system. With this tool editors of Icecat and users of the manufacturers can edit product information. This OS web-based product information management (PIM) application is made available as a standalone application in 2010 under the GNU General Public License. It can be used as a data hub or editing environment. It can function as an internal data management tool, but is mainly focused on supplying data to the Icecat open catalogue. It’s developed for the internal use by editors, and was not redesigned for usage as standalone software. This system has a big potential, which will be the focus of this thesis.

1.1.4. Stakeholders

The market that the firm focuses on is the one of computer products, electronics and office supplies. Their services are intended for the manufacturers of these products. From the perspective of Icecat, there are two kinds of manufacturers. The first kinds are manufacturers who are sponsors; they pay to get their product information distributed by Icecat. The second kinds are manufacturers who aren’t sponsors, their products are gathered and entered by a remote editor team of Icecat and channel partners have to pay to get access to this information.

Other important stakeholders are the channel partners of the manufacturers, which use the services to improve their stores and attract leads. This includes the distributors of the products, resellers, retailers, and comparison websites.

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Important enablers are the information systems that are used by the editors and channel partners. Since one of the main aims of the system is to automate product information distributing, it’s highly dependent on the support of the exchange of data with these information systems. Preferably these systems have extensions which link the Icecat data to the information systems.

1.1.5. Vision and strategy

The vision of the firm is: developing and shaping the next generation e-commerce world. They pursue an e-commerce environment:

• With low-cost and state-of-the-art e-business infrastructures. • With open standards, open-source and open content.

• Where customers can experience the product in simulations, understand the advantages via digital video and understand the technicalities via interactive CAD/CAM application.

Although they have participations in various businesses, their main focus is on facilitating e-commerce. Their strategic goal is to provide services for manufacturers to the channel partners that will enable them to grow in the current digitized economy. This is driven by a belief in open models. The Icecat open catalogue has become very important for many manufacturers, which is positive for the position of Icecat. Icecat has a close relationship with the manufacturers, but the software is still positioned outside the manufacturers’ organization. From a strategic point of view it’s interesting to strengthen the position of Icecat by shifting or extending the location of the service towards inside the organizations of the manufacturers. Icepim (the focal product of this thesis) provides an opportunity to position the service closer to the manufacturer.

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1.2. Subject description

Icecat

Firms use various systems, which support in processing product information internally. Some have a centralized system, but others don’t centralize product information at all. Once products are launched, product information is available in a form which often can’t be used by external parties directly. The information that can be sent to external parties has to be exported or created manually, which is cumbersome and has the risk of human errors.

Before, this problem existed at manufacturers with distributing (this manually generated) product information to channel partners. Manufacturers sent product information to their channel partners in various kinds of formats. The channel partners received multiple manufacturers’ product information in different formats and were unable to import it efficiently. Addressing this issue, iMerge introduced the Icecat open catalogue: An open catalogue with an open standard where all manufacturers and channel partners use a uniform data format, which enables the automation of product information interchange.

Types of input

There are two types of input in the open catalogue of Icecat, namely the product information of manufacturers that pay for the service, and the product information of manufacturers that don’t pay for the service. The manufacturers that pay for the service are called ‘sponsors’. They actively provide the product information to Icecat. If this product information isn’t completely according to the Icecat standards yet, editors of Icecat modify it manually. The product information of these manufacturers is distributed for free, and can be advised by all parties easily. Consequently the rich product information of these manufacturers is widely distributed with a high quality, meaning that all the information is provided, is correct and contains rich information like photos and videos. The product information of manufacturers that don’t pay for the service is proactively collected by editors of Icecat. This product information isn’t available for free to channel partners. Parties that want to use the information have to pay for it. As a consequence the product information of these manufacturers isn’t distributed as well as the sponsors’ information.

Editors

In both cases, editors of Icecat edit product information. In order to do this efficient they’ve developed a tool especially for editing rich product information for the datasheet of Icecat. This was called Icepim, and was only used internally. This was developed in 2001, and used ever since by the editors of Icecat. It’s embedded in the Icecat open catalog back office (BO), and can also be used by

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the manufacturers when they sign in the Icecat open catalog BO to edit their product information. Since the firm’s belief is in open (source) systems, they made this PIM software available in 2010 as a standalone for free under the GNU open source license, calling it Icepim.

Icepim

Icepim was originally developed for internal usage by editors, who are using it for data-entry and content management. The system wasn’t adjusted for external usage before they made it available and its functionality is still very much focused on the Icecat open catalog. It isn’t user friendly for the intended user and the functionality isn’t complete for usage as standalone software. It’s used by a few parties, also for editing rich product information. These parties are mainly technological savvy channel partners.

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2. Research description

In this chapter the problem will be introduced including the motive to start this research, the research approach will be explained and the quality criteria will be addressed.

2.1. Problem

The main visible symptom and the motive for this research is the fact that Icepim is only limited adopted among the target group: the manufacturers. In order to find out what the problems are at Icecat, meetings are scheduled with the CEO, the sales director and the manager business development. Because the initial meetings created the impression that there are multiple causes, problems and consequences, a cause and effect tree is generated. This cause and effect tree is used during subsequent meetings and improved iteratively. See Figure 1.

On the left side the root causes are listed and on the right side the visible consequences listed. In the middle the ‘mess of problems’ is displayed, with a cause-effect relationship defined by arrows. This cause and effect tree will be used to identify the correct focal problem of this thesis, in order to solve the problems.

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The two focal problems are the ‘limited business model’ and ‘incomplete functionality’. The latter one is the focus of my other master thesis of the Master in Industrial Engineering and Management, the former one is the focus of this master thesis.

The current business model is limited. In the diagram various potential causes listed, which will be explained next.

Originally the software was only available as Software as a Service (SaaS) as part of the Icecat open catalogue. The solely goal was to support editing product information in the Icecat open catalogue. Editors and customers of Icecat could use it in the BO to edit their product information in the Icecat open catalogue. There was no possibility to use Icepim without Icecat.

When Icepim was made available as standalone OSS in 2010, it had a low priority at Icecat. This was because the Icecat Open Catalogue was growing very fast and the firm chose to focus on this business. Moreover, the firm didn´t know if there was a demand for the software as a standalone. Therefore the initial strategy was to wait and see what would happen, whether parties were going to use it or maybe even start to improve it. Since that time there was no significant attention devoted to Icepim by Icecat, until recently.

Currently, the software has been downloaded over 20.000 times2 and more and more parties start to show actively their interest in the software. Therefore the priority of Icepim has increased and iMerge wants to find out if there are any business development opportunities with it. That’s why this is relevant right now.

Despite of the fact that it isn’t suitable to be used as standalone software yet, there is an increasing interest in it. It’s developed for internal usage and for facilitating editing products in the Icecat open catalogue, and not modified to be used as a standalone at manufacturers yet. Therefore the software misses some functionality, which is addressed in my other thesis. For this thesis will be assumed that the missing functionality is going to be added and the software will become ready to be used as standalone software at the manufacturers.

As already mentioned in the introduction, the firm’s strategic intention is to position its services closer to the manufacturer. The initial strategy of ‘wait and see what happens’ has changed to ‘use Icepim to position Icecat closer to the manufacturer’. This was indicated by the CEO of Icecat. The Icecat open catalogue is for the manufacturer external software, which is located outside their organization. Icepim can be used inside the manufacturer’s organization; this will strengthen the

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position of Icecat. This strategic goal isn’t known yet at the rest of the organization. Moreover, Icecat has no approach or business model developed yet to execute this strategic goal.

Effects of the fact that there was no clear business model defined are various reasons which result in the fact that the target group doesn’t use the system. These effects are that there is no support and sales team set up for Icepim. Moreover, the employees didn’t know any benefit of promoting Icepim or found these benefits too little compared to the effort it takes to sell an Icepim implementation. Only recently a couple of implementations of Icepim led to new customers of Full Icecat, which is an interesting up-selling option. This has alerted the sales people and slowly they start to spend attention to Icepim.

2.2. Goal

The goal of this thesis is to investigate if Icepim can be used to develop new business and if so, how its business model should be designed so that it will foster the adoption among manufacturers and creates profit for iMerge. The software can also be interesting to target on other target groups, however because of the limited time available and to keep focus in this research; the choice is made to focus only on the manufacturers. This is also the most desirable target group for the firm, as described at 1.1.5 about the vision and strategy.

The result of this thesis will be a description of the opportunities to develop new business with Icepim and a set of recommendations how this can be achieved. This will include extensive reasoning about the choices to be made, based on the market research and the firm’s capabilities.

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2.3. Methodology and approach

In order investigate if there is a business development opportunity and how to utilize this, the regulative cycle of (van Strien, 1986) is used. Only the last two steps, the implementation and evaluation can’t be executed due to time limitations of this study. The methodology is considered as a set of components to solve the problem, consisting of phases, tasks, methods, techniques and tools that will be used (Irny & Rose, 2005).

The character of this research will be explorative

and practice oriented, aiming to improve this specific application and its supporting services for this specific firm. To generate this solution, there will be made use of descriptive practice oriented research. This means that no hypothesis is used. The result will be descriptive knowledge and an initial design.

In the previous section the set of problems are described and the focal problem is chosen.

In the next section a literature study will be performed, which is the basis for the diagnosis and design phase. This literature study consists of five parts. The first part is about business models. In order to design a business model for Icepim, first this concept must be defined and theories about generating a business model are discussed. Here will be specified what way is chosen to formulate the business model. The second part is about OSS in general. The third part is about adoption theories, focusing on the factors which influence the adoption of software in general. The fourth part is about adoption of OSS. The target group consists of the manufacturers who are currently customers of Icecat open catalogue. They should use the software. Therefore theory is described about using inbound OSS. The last part is about the OSS provider. Since Icecat provides an OSS application, theory about outbound OSS activities will be described.

At the diagnosis phase the current business model is explained in more detail. This will be done in a structured way, using an existing typology for defining a business model. This information is gathered using interviews with several people of Icecat:

- CEO: A wide range of issues will be discussed focusing on the strategic and commercial aspects, including the firm’s competitive advantages, threats and vision.

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- The director of sales: The focus will be on the perspective of the sales department, which is closely involved with the customers.

- Head of the editors: The focus will be on the daily tasks of editors: the users that work full-time with the software can provide detailed feedback.

After that an analysis will be performed about other for-profit firms using OSS. The main focus will be on the revenue generating mechanism of these firms. A selection of firms will be selected based on the following criteria, so including firms that are:

- First-movers that have revolutionized the open source world, - Prominent OSS suppliers,

- OSS suppliers which are often referenced to in literature, - Or firms that are comparable to Icecat.

Next, a different group of firms will be analysed, namely firms that are (potential) competitors of Icepim. These include firms that offer PIM software and/or related software. The following questions will be addressed:

- Is the software offered as SaaS or as Stand-alone software? - How are the different functionalities provided?

- Who implements the software, implementation partners or themselves?

These firms will be selected based on two sources. The first source is the magic quadrant of (Gartner, 2011), which includes the market leaders concerning PIM. The second source is Icecat: including firms that are already known at Icecat.

According to the information gathered from the literature research and the investigation of business models of other firms, semi structured interviews will be generated. These interviews will be conducted with a selection of manufacturers in order to test the feasibility of the different business methods. These manufacturers are selected based on the following criteria:

- Customers of Icecat will be selected that enter the product information themselves, and are active users of the Icecat BO. Because they are customers of Icecat (which provides a PIM service) and they are active users, it’s assumed they have a need for PIM and therefore they can also provide substantive feedback regarding the application.

- Because the interview also includes questions about the functionality of Icepim, addresses other software and is most effective when performed in person, a condition is that the

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customer is located in the Netherlands. In this way the interview can be performed in person.

- Another condition is that these customers are currently not involved in contract (renewal) negotiations. This is because it can influence their response which is bad for the research, and it can influence the process of contract negotiations, which is bad for Icecat.

Because the sample is selected based on this criteria, it also entails other limitations. These are addressed at the last chapter of this research, the evaluation. The firm characteristics and the specific environment they operate in are also taken into account at the design phase.

At the design phase the outcome of the diagnosis phase will be transformed into a design. This chapter consists of two parts. The first part is a summary about the findings form the literature study and diagnosis phase. Also the functional improvements addressed in my other master thesis are summarized and addressed. In the second part this will be transformed into a design. This proposed design will include the business opportunity by including more functionality for other processes, and will be described in business terms, including extensive reasoning why these design choices are made. Special attention will be given to the revenue earning mechanism, because this is a challenging aspect of providing OSS.

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2.4. Research methods and quality criteria

The main research method used is interviewing. Interviews are performed with several employees of the focal firm and a selection of respondents from the target group. These interviews are performed semi-structured, because on the one hand some generated questions need to be asked but on the other hand is the respondent free to provide any kind of feedback.

Another method used is observation. Information about business models of other firms and functionality of competing software is gathered by observing among others their website and software.

2.4.1. Controllability

In order to secure the controllability all the details about how and under what circumstances it’s performed are provided. The whole process is described in detail at the previous section. Also at the diagnosis stage is explained in detail the characteristics of the firms, circumstances and feedback given. At the design phase at each decision extensive reasoning is provided why these choices are made.

There was one unforeseen event that influenced the planned process. This was the fact that respondents which are in the middle of contract negotiations with Icecat weren’t allowed to be asked for an interview. This influenced the respondents which are selected.

2.4.2. Reliability

The reliability ensures that the study is independent of this specific situation and the circumstances in which the study was performed. The reliability will be described according to the four reliability sources as defined by (Aken, Berends, & Bij, 2006).

The study is performed by one researcher. To increase the reliability, the interviews are partly constructed in a structured way. Moreover, the answers from the respondents are noted with as much details and as literally as possible.

At the study multiple instruments are used; a literature study, semi-structured interviews and observations. Because of this triangulation the instrument reliability is increased.

The respondents of Icecat have no other motives than just answering the right thing, because there are no questions asked about their jobs, performances and results. However the respondents of the manufacturers might have other motives. Since they are a paying customer of Icecat, they might try to influence the development of the software or the composition of the contract fees in their favour.

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Therefore their feedback might not be completely objective all the time. This is taken into account by providing more specific details about (the situation of) the firms where the respondent works. There were no deviating circumstances such as major product launches or high-profile events at the time of the interviews. The interviews with the manufacturers are all performed within the same week, so the circumstances are as equal as possible.

2.4.3. Validity

The interviews are generated after information about the concepts is gathered from the literature study. This ensures the construct validity, because the concepts are measured in the right way and complete. All internal relations which are drawn are explained and generated according to information found, in order to ensure the internal validity.

This research focuses on a very specific situation, for this specific firm. The respondents are selected based on pragmatic grounds, because it’s an explorative practice oriented study and the firms needed to comply with some preconditions. Also, the population where the respondents are selected from is preselected because they are all customers of Icecat, who already pay for a PIM service. Therefore the external validity is lower.

At the evaluation chapter at the end of this report it will be discussed what the influence of these criteria is on the results.

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3. Theory

To be able to perform the diagnosis and design in the next chapters, first the subjects are introduced and defined using theory. The literature streams that will be addressed are:

- Business models: In order to design a business model for Icepim, first this concept must be defined and theories about generating a business model are discussed.

- OSS: The concept of OSS will be introduced and defined, including the development of the view over time and its usage by persons and organizations.

- OSS adoption: The inbound open innovation process of using OSS will be described. Attention is spent to characteristics of firms that are likely to adopt OSS, and factors that can be influenced by Icepim in order to stimulate the adoption of the software.

- OSS providing: The outbound open innovation process of offering OSS will be discussed. Advantages and risks of ‘going open’ are discussed, including possible revenue generating mechanisms.

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3.1. Business models

In order to define how Icecat can capture value from Icepim, a business model is used to position it in the value network (Rasmussen, 2007). There are multiple theories about how to define a business model and which aspects to include. Most theories use the same concepts such as defining a value chain, defining its position in the network, and defining the resource based strength of the firm. However there are also a number of other compositions of concepts used (Fisken & Rutherford, 2002) (Amit & Zott, 2001) (Porter, 2008). In this thesis the framework of (Chesbrough & Rosenbloom, 2002) will be used as a basis for the business model, because this is a comprehensive and operationalizable one to use for technology oriented firms (Rasmussen, 2007). This framework emphasizes that a business model should mediate the value creation process between the technical and economic domains. According to this framework a business model should contain the following six functions:

1. Value proposition: The (unique) value created by the offering for the users.

2. Market segment and revenue generating mechanism: To which users is the offering useful and for what purpose can they use it. Plus what is the mechanism how the revenue is generated.

3. Value chain: How does the firm create and distribute the offering, and what are potential complementary assets that can support the position in the value chain.

4. Cost structure and profit potential: What costs and what profit is possible, using the value proposition (point 1) and value chain (point 3) defined.

5. Value network: What is the firm’s position regarding suppliers, customers, complementary services providers, and competitors?

6. Competitive strategy: How the firm will hold its current and future position regarding competitors.

These last two points are also covered by the widely accepted publication of (Porter, How Competitive Forces Shape Strategy, 1979). This framework for generating a business model will be used at the next chapter to describe the current business model and at the design chapter to describe the proposed business model.

The most focus in this thesis will be on point 2: the market segment and most important the revenue generation mechanism. This latter one is often one of the most novel and challenging tasks of providing an OSS application compared to traditional proprietary software offerings.

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3.2. Open source software

OSS is computer software that is available for free including its source code. Since 1998 the Open Source Initiative (OSI) exists which promotes OSS and wants to introduce it to commercial businesses. The OSI generated the OS definition which defines when software can be qualified as OS. This definition includes the following criteria (Raymond & Perens, 2012):

1. Free redistribution

2. Source code must be included and easily accessible

3. Modifications are allowed and derived works must be distributed under the same terms 4. Integrity of the author’s source code

5. No discrimination against persons, groups, or fields of endeavour 6. License must be included in all redistributions

7. License must not be specific to a product, not restrict other software, and must be technology neutral.

There are multiple forms of Open Source licenses. Because the type of license affects potential users’ expectations about the costs and benefits of software and the perceived usefulness of the software (Stewart, Ammeter, & Maruping, 2006), it’s an important choice. A license type can range from the restrictive End User License Agreement (EULA), a partially open system with Application Programming Interfaces (API), or a fully free and open system such as the GNU General Public License (GPL). The most used OSS license is the OSI Approved Open Source GPL. 3

The general view of OSS is changing. In the beginning OSS was perceived to be a movement of hackers working on their free time to develop code and programs for the common good (Hars & Ou, 2002). Early research about OSS said that the main motivations of people to contribute was based on a moral obligation felt to give something back to the community (Lakhani & Wolf, 2003). More recent research highlighted other motivations such as self-development and reputation building (Oreg & Nov, 2008). But nowadays much of the OSS is developed and released by commercial companies (Samuelson, 2006). In 2006 (Lerner, Pathak, & Tirole, 2006) found that already 40% of the developers participating in OS development are being paid by their employers to participate in OSS projects, which indicates the professionalization of the OS industry. However, the motivations of contributing to the OS community are changing when companies are contributing. While individuals are motivated by a mixture of intrinsic and extrinsic values, companies are motivated by the technological and economic aspects of OS contribution (Anderson-Gott, Ghinea, & Bygstad, 2011).

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The distinction between commercial and communitarian software isn’t as black and white as this might look. In fact, it’s difficult to assess if a piece of software is purely communitarian or commercial. Community and commercial organizations operate interweaving and companies often profit from volunteers’ efforts (Santos, 2008).

The categorization of (Capra & Wasserman, 2008) into community OS and commercial OS (Riehle, 2012) is useful in this case to make a clear distinction. The distinction they make is the one between community OS and single vendor commercial OS, the latter one describes the situation of Icepim. The definition is:

- Community OS: Is controlled by a community of stakeholders.

- Single vendor commercial OS: Is controlled by exactly one stakeholder with the purpose of commercially exploiting it.

In this thesis the focus is on the second one: single vendor commercial OS. This is because iMerge is the stakeholder that has developed the software on its own and wants to exploit it.

In the next two sections OSS will be described from two perspectives. The first perspective is from the adopter, the firms that make use of the OSS (inbound) and the services of the provider. The second perspective is from the provider that offers the OSS (outbound) and uses it as a core business aspect. From both perspectives the basic reasoning why to make use of OSS is discussed, and factors that influence this. But first theories about the adoption and diffusion of technological innovations are described.

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3.3. Adoption of innovation

At this section theory about adoption of information technology innovations will be described. This will start with a description of two different types of models. Basically, the diffusion and adoption models of innovations can be divided in two types. The first type is a utility-oriented model, which is focused on the value of the innovation. The second type is a social influence model, which is focused on the processes in the individual’s (or the firm’s) environment.

A renowned utility oriented model is the Unified Theory of Acceptance and Use of Technology (UTAUT) of (Venkatesh, Morris, Davis, & Davis, 2003). This model is illustrated in Figure 3. This is a unification of other utility oriented models and is therefore a useful representation of these type of adoption theories.

Figure 3 Unified Theory of Acceptance and Use of Technology (Venkatesh, Morris, Davis, & Davis, 2003)

It states that the use of the software is determined by mainly four factors:

- The performance expectancy: The degree to which is expected that the software will help the person to achieve his goal, so it’s about the functionality of the software.

- Effort expectancy: The amount of effort is expected from the person to reach a certain goal using this software, so it’s related to the usability and ease of use.

- Social influence: Social influence depends on the amount of social pressure from the environment to use the software someone experiences.

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- Facilitating conditions: The believe of a person about the number of supporting facilities there are to use the software, such as others users, support and training possibilities. This is also indicated as organizational and technical infrastructure.

The effect of these factors is influenced by four moderators, which are the gender, age, experience and voluntariness of use.

Although social influence is also included in the UTAUT model, it’s also investigated as a standalone type of prediction model. A recent study that focuses on the social influence of adopting software is the one of (Wattal, Racherla, & Mandviwalla, 2010 ). The interesting result is that the use of new software is influenced by network externalities. These network externalities are divided in direct network externalities and indirect network externalities. Direct network externalities concern the fact that the more users use certain software, the more interesting is becomes for other users to use it. The indirect network externalities concerns the fact that if it’s being used more, there will become more complementary services and software available which make it more interesting to use the software.

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3.4. Adoption of OSS by manufacturers

The OSS which is provided by Icecat needs to be adopted by the target group. To increase the probability that these potential customers will use the software, their needs should be investigated. Besides their requirements concerning the functionality, attention needs to be spent to their non-functional requirements including the business model. This last point requires special attention in this case, because it concerns OSS. This involves other concerns than traditional proprietary software. Therefore, in this section factors are described about the adoption of OSS. After a general analysis, more specific characteristics of the target group will be discussed.

According to a recent survey of Gartner among 547 IT leaders, more than 50% of the firms are using OSS (Gartner, 2011). OSS has already passed the introduction stage, but has not yet reached the maturity stage (Spinellis & Giannikas, 2012). There are multiple studies performed about factors influencing the adoption of OSS. Although there are a lot of different and some contradictory findings presented, there are some factors where there is in general consensus about.

One of these general agreed factors is the cost advantage. The most recent study (which was published a few months after the start of this thesis) is among US Fortune-1000 firms. It shows that the main reason for adopting OSS is lower costs and higher operating efficiencies (Spinellis & Giannikas, 2012). This is also supported by (Forrester, 2008) which identify the purchasing cost and the total cost of ownership as the main drivers.

Another important and general agreed factor is the customizability. With OSS firms can customize the software themselves, which makes them flexible and able to respond to various specific needs. At to the survey of (Gartner, 2011) a lot of CEOs indicated that this flexibility is indeed one of the key reasons to adopt OSS. Because they can customize the software, this flexibility enables them to create a competitive advantage. They can adjust it to their own situation and modify it to create this advantage over their competitors.

However, this also has a drawback: Because OSS is often less ready-to-use and has to be modified, it requires specific IT resources to do so. A consequence is that OSS is more adopted among smarter and technological savvy people (Harison & Koski, 2010).

Because of this drawback it can also be explained why larger organizations use OSS more often than smaller organizations. Empirical research shows that most open innovation (OI) adopters are larger firms (Chesbrough, 2003) (Spinellis & Giannikas, 2012). These larger firms have more resources to hire specialists (Spanos, Prastacos, & Poulymenakou, 2002) and have more ICT related skills in their

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organization (Morgan, Colebournea, & Thomas, 2006), which are needed to adjust and implement OSS.

Although OSS is mostly adopted by bigger firms, there are also advantages to obtain for smaller firms. According to (Lee, Park, Yoon, & Park, 2010) their innovation efforts already have an external focus and OI is not new to them. Moreover, the fact that OSS doesn’t have purchase and license costs will weight heavy for them as well.

There are other factors that can have a negative influence on the organizational adoption of OSS. Among them the most important factors are knowledge barriers, integration with legacy applications, uncertainties introduced by forking, sunk costs, and technological immaturity (Nagy, Yassin, & Bhattacherjee, 2010). Forking is the situation that occurs when multiple firms are developing their own versions of the OSS and there arise two different versions. Sometimes these versions are merged together in a later stage, but they can also continue to exist in parallel: A fork. These barriers for firms have to be considered and addressed when generating the business model. Special attention needs to be given to the user friendliness of the software. Complex software with a low usability tends to be more successful as a proprietary product. Moreover, skilled users are more likely to adopt a more complex OSS application, while unskilled users incline using proprietary software (Lanzi, 2009). So in order to realize a high market throughput with OSS, the user friendliness should be sufficient.

The customers of Icecat are operating in the industry of computers, consumer electronics and office supplies. This industry is highly competitive and has a high pace of technological innovation. Therefore, specific needs of firms operating in this environment have to be considered. An important need is the one for dynamic capacities (Weerawardena & Mavondo, 2011). This implies that they should be able to quickly adjust or customize the software when needed. Furthermore, it should be possible to quickly attract new functionality or software.

Moreover, (Gassmann, 2006) finds that OI is more appropriate in industries characterized by globalization, technology intensity, technology fusion, new business models, and knowledge leveraging. This is interesting for Icecat, since most of these characteristics are applicable to their customers. However, (Keupp & Gassmann, 2009) argues that the choice to apply OIs seem to be more dependent on the business strategy of a firm than a matter of industry trends.

The finding of (Spinellis & Giannikas, 2012) who state that fast growing and volatile organizations are more likely to use proprietary software than OSS doesn’t correspond with the response of the survey of (Gartner, 2011). In this survey IT leaders of fortune 500 firms responded that factors in favour of

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using OSS are increased innovation, shorter development times and realizing faster procurement processes. Since these factors are very relevant for fast growing and volatile organizations, it suggest that these firms should use OSS and not proprietary software.

Despite of the fact that there is no general consensus about some factors, it’s important to consider these when determining the business model of Icecat. At chapter 4.3 a detailed analysis of the customer base of Icecat is performed, where the information described in this chapter will be used. Also the factors found in this literature research will be tested during the interview with some manufacturers.

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3.5. Providing OSS by iMerge

Since Icepim is OSS, iMerge is an OSS provider. In the first section the concept of OSS providing will be described, followed by a discussion about advantages and risks using an open approach instead of a proprietary one. After that, attention will be spent to revenue generating mechanisms for OSS.

3.5.1. OSS provider: Outbound open innovation

Providing OSS can be described in terms of outbound OI. According to (Dahlander & Gann, 2010) there are two forms of outbound OI, which are selling and revealing (see Table 1). The former one is pecuniary, the latter one is non-pecuniary. Advantages of selling are that it’s easy to commercialize products that are already on the shelf and outside partners may be better equipped to commercialize inventions to the mutual interest of both organizations. However when selling innovations, one can be over committed to their own product/technologies which make it difficult to license it.

Table 1 Open innovation quadrant - (Dahlander & Gann, 2010)

Advantages of revealing are that it marshals resources and support, gains more legitimacy faster from the external environment and fosters incremental and cumulative innovation (Dahlander & Gann, 2010). On the other hand, it’s more difficult to capture the benefits and resources can leak to competitors. In the case of commercial use of OSS a firm generally uses both forms.

Service oriented firms are typically more likely to supply OSS (revealing) and provide paid complementary or related services (selling) than other firms (Koski, 2005). More recently, (Harison & Koski, 2010) found that to use an innovative business strategy such as an OSS supply strategy, it’s essential to have highly educated employees. They enable a higher absorptive capacity of the firm, so that external information from the community can be absorbed and applied to create commercial benefits.

3.5.2. Benefits and risks of OSS

Using an open approach to launch software has its advantages and risks. In general, (Comino, Manenti, & Parisi, 2007) show that the less restrictive the license is, the higher the chance on success. Moreover, (Ferhtman & Gandal, 2007) show that the more restrictive the license is, the less contributions to the software are written. These findings both suggest using a less restrictive license. On the other hand, (Laursen & Salter, 2005) show that the relation between the number of sources

Inbound innovation Outbound innovation

Pecuniary Acquiring Selling

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to use for software improvements and performance is an inverted U-shape, meaning that there is an optimal number of sources. So a license type which is too permissive isn’t desirable either. The challenge is to find a balance for each specific case.

In terms of (Porter, 1985), offering OSS can have the advantage of cost leadership. Customers don’t have to buy a product to try it and bigger firms don’t have to pay heavy licensing fees to use the software in their organization. But when using OSS the risk of new entrants is higher. In order to prevent the risk of new entrants taking over a part of the business, a firm has to distinguish itself by superior knowledge and services. The perceived superior knowledge is usually the highest at the developer(s) of the OSS.

Moreover, when using an open model this can contribute to a faster adoption, a bigger community, and accelerate the establishment of a de facto standard (Dahlander & Gann, 2010). This can contribute directly and indirectly to the performance of the firm. When their OSS product is getting more users the user community grows. The software can become a dominant tool. Professional firms often have a need for premium support and professional complementary services. The developer of the OSS has in general the highest perceived service quality. Also the firm can profit in a more intangible manner by the exposure, which can result in a higher demand of their other products and services.

When opening up the phenomenon of divergence and discovery can occur (Almirall & Casadesus-Masanell, 2010). Divergence means that the goals of different parties are not aligned, which may result in the software being evolved in a way that isn’t meant by the original designer. Discovery arises because the parties can make their own contribution, the original designer can discover new features or combinations of features that would otherwise be hard to discover. Since the GNU General Public License forces the modifier to make the contributions available, the developer can get access to these new contributions. These can be used in new releases of the software, or at other implementations.

A risk related to the community concerns the compatibility of updates and contribution, the availability of supporting software from third parties and the community support (Stol, Babar, Avgeriou, & Fitzgerald, 2011). If the core software package is updated, modules and contributions developed by third parties possibly need to be modified as well. If these third parties don’t modify their additions, the community becomes flooded with modules that don’t work with the most recent version of the software. This also applies for connections with other systems and parties. When

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significant updates are performed in the software, all these parties have to update these connections. In short, the firm becomes dependent on the value network.

Another risk is that competitors can abuse the code. Since they have access to the source code, they can easily use it in their proprietary products. This isn’t allowed with the GNU General Public License, but to prevent this from happening one has to be able to discover one using the code, and have enough resources to take legal action.

3.5.3. Revenue generating mechanisms for OSS

A challenge when providing OSS is to combine an open strategy which enables the advantages of the open aspects to flourish, to control the risks as much as possible, and find a way to capture benefits. These benefits can be captured in a pecuniary way, but also for example in a more intangible way by adding value to other products and services of the firm. In this section the different mechanisms will be described in more detail, mostly focusing on tangible benefits. The intangible benefits are more situation specific and will therefore be addressed at the next chapter.

According to (Anderson-Gott, Ghinea, & Bygstad, 2011) the main driver for companies to launch their software OS is by generating revenue with complementary services. This is supported by (Daffara, 2009). He states that these mechanisms of OSS firms can be divided in two categories. The first and most popular category is by selling complementary services. The second most popular category is by using a versioning strategy. The most often applied versioning strategy is a dual licensing strategy, where there is a free and paid version.

The terminology used for these strategies isn’t very consistent. Both in literature and in practice phenomena are described with different terms and often terms mean (partly) the same. Next, the terminology used in this thesis will be described and the concepts will be explained.

Complementary services

Complementary services are services that enable the usage of the OSS. These services can be provided by the developer of the OSS, but also by business partners or independent firms. Entrance for new firms is easy. Therefore a firm has to distinguish itself by superior experience or access to premium raw material (Porter, 2008). This can be realized by contributing to the development of the project or by developing own contributions to the project. This results in experience and resources that are difficult to replicate (Riehle, 2007).

Examples of complementary services are support, consulting, certifications, customizations, training, documentation, integration, subscription models, and hosting. These services can be charged ad hoc or based on a (SLA) contract.

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Dual licensing

Dual licensing means that a firm makes two licenses of the software available: One with an OS license for non-commercial use and one with an end user agreement license or proprietary. The main advantage of this strategy that it stimulates the adoption and enables gaining a larger market share with the OS edition, but at the same time captures the benefits from more demanding parties with the proprietary or end-user license (Comino & Manenti, 2011). In fact, this can also be viewed as a form of price discrimination (Belleflamme, 2005).

Some notable examples of successful dual licensing business models are MySQL, Qt and Asterisk (Välimäki, 2005). At the next chapter these examples and more will be described in more detail. When speaking of dual licensing, some authors also mean providing multiple versions of the software. However, when not only the licenses of these versions differ but also the functionality, this is classified as a Freemium strategy in this thesis. This is described next.

Freemium

Freemium is defined as a business model where OSS is provided free of charge, but there is an optional premium charged for advanced features, functionality, or related products and services (Iglesia & Gayo, 2009). The minority of the users (the premium users) subsidize the majority (the OS users). Customers will often self-select in the right version.

The Freemium model also brings interesting up selling benefits. Interesting up sells can occur e.g. when firms grow. As they grow their demands for the software will increase and it will become interesting for them to upgrade to the premium version. Moreover, it will be a logical course of events to upgrade to a premium version of the current software, instead of switching to other software.

Also the advantages mentioned at the dual licensing section apply: the free OS version stimulates the adoption and enables a bigger market share. But also another advantage applies.

The quality of the proprietary version can easily be increased because of valuable contributions by the OS adopters. The open license permits that one uses the code for free, on the condition that he makes his contributions available and redistributable. The firm can adopt these contributions and include them in their paid version.

When using a Freemium strategy, it’s crucial to pay attention to balancing the pros of contributions of the OS community and the cons of the risk of cannibalizing the proprietary package (Comino & Manenti, 2011). Another important point of attention is the compatibility between the OS and the

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proprietary versions of the software, because this enhances the conversion from the OS to the proprietary version (Mustonen, 2005).

Cloud computing

With cloud computing a user can use hardware, software and networking infrastructure which is managed independently by an external vendor (Armbrust, et al., 2010). This enables the user to have a flexible solution, for which he can pay according to their actual usage. Cloud computing is divided in three layers (Weinhardt, et al., 2009), which is illustrated in Figure 4 and listed next.

- Software as a Service (SaaS): This is the most abstract level of cloud computing. The user can use the software as it is and only configure the settings to their own needs.

- Platform as a Service (PaaS): This is the next level of abstraction. In this situation users can use the software, but can also make modifications to the software on the platform. This enables them to add custom functionality.

- Infrastructure as a Service (IaaS): This is the lowest level of abstraction. In this situation users use the physical facilities, such as the memory and storage. The user has complete ownership of the virtual image.

Providing a SaaS or PaaS can be very interesting for the service provider because running a single instance of software can serve multiple clients. These clients make use of virtually partitioned parts of the software. The main advantage is that the troubleshooting, fixing and upgrading only have to be performed once. So a lot of clients can be served with relatively less effort (Weinhardt, et al., 2009).

Also for the users it can be very attractive. When using services from the cloud they have elastic IT services (Buyyaa, Yeoa, Venugopala, Broberg, & Brandic, 2009). This means they don’t need a software implementation phase, but can start using and expand it instantly. This flexibility can be very useful in the fast moving and dynamic industry of the target group.

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According to multiple studies (Armbrust, et al., 2010) (Buyyaa, Yeoa, Venugopala, Broberg, & Brandic, 2009) (Weinhardt, et al., 2009), the use of cloud computing is especially suitable in the following situations.

- Greenfield projects with limited budgets. They can try the new initiatives easily without up-front investments.

- In situations with high operating costs, where the maintenance and updates of the software are costly. Using a shared infrastructure, platform or software spreads these costs over multiple users.

- In situations with an unpredictable demand of the service. They can switch or extend easily and instantly when using software from the cloud. It’s also possible to have a flexible contract, which is paid for afterwards according to the actual usage.

- Non-core IT operations. These are services which don’t add value to the core competitive advantage of the users, and therefore can be commoditized.

Advertising

Advertisements can be embedded in the free OS version of the software. The user might gain a percentage of the advertisements revenue, or this can for instance be included in a free SaaS version. See also the example of Wordpress in the next section. However, advertising isn’t conventional for business software.

A note should be made that this list summarizes the most popular OSS methods in a simplified way, and therefore it isn’t exhaustive. One can use combinations of these strategies; capture other intangible benefits; or use another creative or situation specific way to capture the benefits. At the next chapter, examples can be found of uses of these strategies and others in practice.

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4. Diagnose

4.1. Current business model

In order to explain the current business model of Icepim it’s necessary to first explain the business model of Icecat. Icecat makes use of two business models: Open Icecat and Full Icecat. Next, descriptions of the business models are presented which are generated according to several interviews with the CEO, the sales director and the manager business development. The descriptions will be structured according to the framework of (Chesbrough & Roosenbloom, 2002).

4.1.1. Open Icecat

At Open Icecat the manufacturers pay for the service and channel partners can use the information for free. Icecat receives the product information from manufacturers and standardizes and completes the information. After that it’s published in the open catalogue, from which channel partners can easily download datasheets and directly feed them into their own systems such as ERP system, shop system or online shop. Because Icecat is frequently used, the presence of manufacturers’ brands in the catalogue increases the presence of their products with proper information at channel partners and on the internet. Therefore the manufacturers pay for this service.

1. Value proposition

The unique value that is created is that more resellers will sell the manufacturers’ products, more other channel partners will publish information about these products and the quality of information increases. Because Open Icecat is free for channel partners, it’s very frequently used and therefore the product information of the manufacturers is spread very well.

2. Market segment and revenue generation mechanism

The market segment that the firm mainly focuses on is the one of computers, consumer electronics and office supplies. The manufacturers use it to automate the distribution of product information, to save time and costs, and to increase the presence and marketing performance.

The channel partners use it to easily implement product information. This saves a lot of labour costs, since entering product information manually is very time consuming.

The revenue generating mechanism is a contract with the manufacturers. This is an annual contract which is composed manually. The fee is calculated mainly based on the number of SKUs and the method of providing the product information to Icecat.

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The contact details of the channel partners are used for up-selling purposes to Full Icecat. A part of the channel partners sign a contract at Full Icecat, so this creates revenue indirectly. See also the business model of Full Icecat in the next section.

3. Value chain

The unique value proposition is fulfilled in the following way. The manufacturer can enter product information in the Icecat open catalogue, or can outsource the supply of product information to Icecat editors. The information in the open catalogue is checked, standardized and improved by Icecat editors. Channel partners can use this information for free and can create a link with the Icecat open catalogue to automatically import all the product information. The demand of channel partners for product information to be available via Icecat is an important complementary asset.

4. Cost structure and profit potential

The costs of the firm consist of the maintenance of the software, the editors’ labour, sales department’s labour and other overhead costs. The revenue and costs are interdependent; the higher the revenue the higher the costs. However, all costs are increasing in a slower pace than the revenue. The expense with the highest pace is the editors’ labour: this is increasing linear with the revenue. There is a multiplier included, because the editors’ labour is performed in a low-wage country, so the slope is shallower in favour of the costs.

5. Value network

The customers of Open Icecat are:

- Manufacturers: The product information of the products of the manufacturers are distributed. Open Icecat has contracts with these manufacturers.

Important enablers of Open Icecat are:

- Channel partners: They can use the services for free. They do have to sign up using an email address and contact details. These are used for up-selling to Full Icecat (see next section). - Distributors: The distributors who distribute the products of the manufacturers have to

upload lists of products with the stock level. According to these lists the product information is composed in feeds which can be downloaded by merchants.

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- BinTime: This software development company occasionally facilitates by creating extensions for software to generate data feeds.

- Iceshop: This service provider for e-commerce implements linkages between the Icecat catalogue and internet shops.

Competitors of Open Icecat are:

- Cnet: Is the only serious competitor of Icecat. They provide the same services. The market penetration of Cnet is large, especially in the USA.

6. Competitive strategy

The firm has one main competitor, that’s Cnet. Their current position comparing to Cnet differs because for the Cnet services both the manufacturers and the channel partners have to pay for the service, at Open Icecat only the manufacturers. Therefore the usage of Icecat’s open catalogue among channel partners is higher. Icecat is working continuously to gain a wider market share. The aim is that their data format becomes the dominant one.

4.1.2. Full Icecat

In this case, manufacturers don’t pay for the services of Icecat, but the channel partners do. The editors of Icecat actively collect product information of manufacturers that aren’t willing to pay and enter it into the Icecat catalogue. Channel partners can pay a fee to get access to these datasheets, so that they can import the products in their systems using the feed. Alternatively, the channel partners have to enter product information into their systems themselves.

Although the services are almost identical to the services of Open Icecat, the business model is different.

1. Value proposition

The value of this service is the saving of time and costs for the channel partners. Channel partners don’t have to gather and enter the product information manually, but Icecat provides it.

2. Market segment and revenue generation mechanism

The market segment that the firm mainly focuses on is the one of computers, electronics and office supplies. This service isn’t focused on the manufacturers but on the channel partners. They use it to easily implement product information. This saves a lot of labour costs, since entering product information manually is very time consuming.

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The revenue generating mechanism is a contract with the channel partners. This is an annual contract which is generated manually. The fee is calculated based on the number of brands they want to use.

3. Value chain

Icecat editors actively search for product information and enter it into the Icecat Catalogue. This information can be downloaded as datasheets by channel partners, which can be used to import product information at other systems.

4. Cost structure and profit potential

The cost structure and profit potential is identical to the one of Open Icecat. 5. Value network

The customers of Full Icecat are:

- Channel partners: They make use of the services and pay for it.

Important enablers of Full Icecat are: - Distributors: Same as Open Icecat.

Complementary parties of Full Icecat are:

- BinTime and Iceshop: Same as Open Icecat.

Competitors of Full Icecat are: - Cnet: Same as Open Icecat.

6. Competitive strategy

Comparable to Open Icecat, only this is the other way around. At Cnet both parties pay, at Open Icecat only the manufacturer pays, and at Full Icecat only the channel partners pay.

4.1.3. Icepim

The business model of Icepim right now is not clearly defined. According to information gathered during several interviews the current (limited) business model of Icepim is described next.

A business model for open-source software targeted at firms that operate in a highly competitive environment with a high pace of technological innovation. Icepim

Icepim