The Rise of Open Source Licensing Mikko Välimäki A Challenge to the Use of Intellectual Property in the So ware Industry Mikko Välimäki The Rise of Open Source Licensing Op — from Linux to Firefox and MySQL database — has changed so ware business as we knew it. New start-ups have challenged industry heavyweights from Microso to Oracle with inno- vative copyright licensing strategies and courageous anti-patent policies. Almost every major so ware company has been forced to react to the commodifi cation trend. Drawing from detailed case studies, historical narrative and the ap- plication of economic theory, this book shows how open source licensing is used for strategic advantage. So ware developers enter open source to distribute their work more effi ciently and increase innovation. So ware is no longer property, they say. Interestingly, everything has worked despite — rather than because of — ever-expanding intellectual property rights. Is there a limit? In the United States, the headline cases by SCO against Linux supporters and users opened the surface of intellectual property infringement risks. In Europe, there is ongoing public debate about the impact of so ware patents on open source. This book goes beyond fear and doubt arguing that such legal risks are in the end just necessary but man- ageable uncertainties, which always come with a new business model. M V teaches technology law at the Helsinki University of Technology. He has consulted extensively on open source licensing. ISBN 952-91-8769-6 T P h p://pub.turre.com/ Cover photo: Ville Oksanen 9 789529 187690 225581_Valimaki_kansi2.indd 1225581_Valimaki_kansi2.indd 1 18.5.2005 16:56:3918.5.2005 16:56:39 PUBLISHED BY TURRE PUBLISHING, A DIVISION OF TURRE LEGAL LTD. Aleksanterinkatu 17, 6th floor, Helsinki, FI-00100, Finland, http://pub.turre.com/ Copyright © 2005 Mikko Välimäki First Edition. Some Rights Reserved. This book is licensed under the terms of Creative Commons Attribution-NonCommercial- NoDerivs 2.0 license available from http://www.creativecommons.org/. Accordingly, you are free to copy, distribute, display, and perform the work under the following conditions: (1) you must give the original author credit, (2) you may not use this work for commercial purposes, and (3) you may not alter, transform, or build upon this work. ISBN: 952-91-8769-6 (printed) 952-91-8779-3 (PDF) Printed in the Helsinki University Printing House. Mikko Välimäki THE RISE OF OPEN SOURCE LICENSING ACHALLENGE TO THE USE OF INTELLECTUAL PROPERTY IN THE SOFTWARE INDUSTRY III FOREWORD This book is the result of my PhD studies at the Helsinki University of Technology. I started working towards a doctoral degree right after graduation from the University of Helsinki in 1999. I was supposed to write a thesis in law. Now I need to apologize my then-supervisors profes- sor Niklas Bruun and docent Pekka Timonen not to complete the thesis at the law faculty in four years as was once planned. What happened was that I met my future academic mentor, professor Jukka Kemppinen, who had just started his professorship at the Helsinki University of Technology. He convinced me to change my plans and my university in the late 1999. The actual theme of this thesis started to emerge during my year at UC Berkeley from 2000 to 2001. At that time I was working with Olli Pitkänen and we were supposed to study digital rights management. But I went on and spotted open source. I was lucky to participate at some of the first business and technology conferences ever that were arranged on the topic in California. I concluded that this is the area I have the best knowledge of and, besides, it doesn’t seem to be a fad that disappears in the next two years. So why not write about it? The main creative writing periods of this book were in October 2003 in Berkeley libraries and cafes, and August 2004 in the Starbuckses of Santiago de Chile. In addition, there were also those numerable nights when I com- pleted separate articles, which form considerable subparts of this thesis. I fin- ished the work by completing all the open and missing parts under the su- pervision of professor Juha Laine. Dissertation examiners professor Jukka Heikkilä and Dr. Ilkka Rahnasto made a number of substantial comments to a draft version of this book. I have taken most of them into account. Professor Thomas Riis from Copenha- gen Business School kindly accepted the invitation to act as the academic op- ponent. My understanding of open source has greatly benefited from discussions with those who practice software business. As the public interest in open source has grown, I have found myself lecturing and consulting open source licensing to different organization from Finnish software companies to Inter- IV American Development Bank. Special mention goes to Antti Halonen who introduced me to MySQL before there was a company for that particular pro- ject. Mårten Mickos, MySQL’s CEO since 2001, has also been of help by giv- ing constructive feedback and kindly sharing his connections. Another bunch of special thanks go to my research colleagues Ville Ok- sanen and Herkko Hietanen. In addition to several co-authored research pa- pers, the founding of Electronic Frontier Finland in 2001 has definitely sharp- ened my argumentation and overall writing skills. Through the association, I have had the opportunity to participate into the public policy discussion on copyright and patents from the inside. I want to also thank Olga ja Kaarle Oskari Laitisen Säätiö, Jenny and Antti Wihuri Foundation, Helsingin Sanomain 100-vuotissäätiö, Soneran tutki- mussäätiö, Ella and Georg Ehrnrooth foundation and the Research Founda- tion of Helsinki University of Technology for their grants supporting my re- search work when that support was most needed. Finally, thanks to my family, friends and colleagues not especially men- tioned. There are just too many people I’ve met at universities, conferences, business meetings and bars all around the world who have given their sup- port and contribution in one way or other to this project. It makes me no sense to list you all. “Meet the new boss – same as the old boss.” * Lauttasaari, Helsinki, 30 th March 2005 Mikko Välimäki * Final verse from The Who song Won’t Get Fooled Again (1971). Lyrics by Pete Townshend. V TABLE OF CONTENTS FOREWORD III TABLE OF CONTENTS V ABBREVIATIONS IX 1 INTRODUCTION 1 1.1 P ROBLEM 1 1.2 T ERMINOLOGY,PERSPECTIVE AND LIMITATIONS 3 1.3 M ETHOD 5 1.3.1 Rationale for Different Methods Used 5 1.3.2 Continuing Patterns in Business History 6 1.3.3 An Economic Perspective 7 1.3.4 Comparative Law and Social Norms 8 1.4 A CADEMIC CONTEXT AND SOURCES 10 1.5 OVERVIEW OF THE STUDY 11 2 FROM PROPRIETARY TO OPEN: EVOLVING LICENSING MODELS IN SOFTWARE INDUSTRY 13 2.1 S OFTWARE INDUSTRY 13 2.1.1 A Short Historical Overview 13 2.1.2 Market Size and Regions 15 2.1.3 Emergence of Open Source 16 2.1.4 Open Source and Software Business Models 19 2.2 P ROPRIETARY LICENSING 21 2.2.1 IBM’s Unbundling Decision and Corporate Licensing 21 2.2.2 Mass Markets Licensing and Shareware 24 2.2.3 Proprietary Licensing Today 26 2.3 F REE SOFTWARE AND OPEN SOURCE LICENSING 30 2.3.1 BSD License and Unix Copyrights 30 2.3.2 GNU General Public License, Linux and SCO 33 2.3.3 Open Source Enters Vocabulary 36 2.4 S OCIAL AND POLICY DIMENSIONS OF OPEN SOURCE 40 2.4.1 Open Source and Individual Empowerment 40 2.4.2 Community and Its Camps 42 2.4.3 Ethical or Technical Goals? 44 2.4.4 Influencing Political Institutions 45 2.4.5 Practical Public Policy Initiatives 46 2.5 C ONCLUSION:EXPLAINING THE INCREASING ROLE OF OPENNESS 48 VI 3 ECONOMIC PRINCIPLES OF SOFTWARE PRODUCTS 50 3.1 E CONOMIC CHARACTERIZATION OF SOFTWARE PRODUCTS 50 3.1.1 A Network Economics Approach 50 3.1.2 Software as an Economic Good 51 3.1.3 Components and Systems 54 3.1.4 Path Dependence, Lock-In and Network Effects 56 3.2 E CONOMICS OF SOFTWARE COPYRIGHT 58 3.2.1 Motivation of Developers 58 3.2.2 Investors and Incentives 59 3.2.3 Costs of Copying 61 3.2.4 Optimal Limits of Copyright 62 3.2.5 Compensation Mechanisms 65 3.2.6 Is Software Copyright Inefficient? 67 3.3 E CONOMICS OF SOFTWARE INNOVATION AND PATENTS 69 3.3.1 Innovation in the Software Industry 69 3.3.2 Difficult Relationship Between Innovation and Patents 71 3.3.3 Patents as Strategic Assets 73 3.3.4 Different Means to Appropriate Innovation 74 3.3.5 An Open Innovation Model 75 3.4 C OMPETITION POLICY AND THE LIMITS OF EXCLUSIVE RIGHTS 78 3.5 S UMMARY:ECONOMIC RATIONALE OF OPEN LICENSING 80 4 INTELLECTUAL PROPERTY AND ITS DISCONTENTS 82 4.1 C HALLENGE OF SOFTWARE PROTECTION 82 4.1.1 Early Discussion and Practice 82 4.1.2 WIPO’s Proposal 85 4.2 C OPYRIGHT AND ITS LIMITS 86 4.2.1 Software Enters Copyright Law 86 4.2.2 Interoperability Debate 87 4.2.3 Current Extent of Software Copyright 91 4.3 T HE RETURN OF PATENTS 94 4.3.1 United States Leads 94 4.3.2 Europe Follows 95 4.3.3 International Policy 98 4.3.4 Current Extent of Software Patents 99 4.4 T ECHNICAL PROTECTION 101 4.4.1 Early Copy Protection Systems 101 4.4.2 Anti-Circumvention Legislation 102 4.4.3 Is Technical Protection Effective? 103 4.4.4 The Promise of Trusted Systems 104 4.5 A RE INTELLECTUAL PROPERTY LAWS OUT OF BALANCE? 105 4.5.1 Balancing Principle 105 VII 4.5.2 Expansion Trend 106 4.5.3 Open Source as a Balancing Force? 109 4.6 C ONCLUDING REMARKS:AN OPEN PERSPECTIVE ON INTELLECTUAL PROPERTY 111 5 OPEN SOURCE LICENSES AS ALTERNATIVE GOVERNANCE MECHANISMS 113 5.1 B ARGAINING IN THE SHADOW OF INTELLECTUAL PROPERTY LAW 113 5.1.1 What Makes a License Open Source? 113 5.1.2 What Is Not Required? 114 5.1.3 Enforcing an Open Source Bargain 116 5.1.4 Licenses Catego rized 117 5.1.5 Popularity of Open Source Licenses 121 5.1.6 A Framework for License Analysis 123 5.2 GNU GPL AND STRONG RECIPROCITY 124 5.2.1 Derivative Works in Copyright Law 124 5.2.2 Derivative Works and GPL 130 5.2.3 Patents and GPL 139 5.2.4 GPL and License Compatibility 140 5.2.5 Other Licenses with Strong Reciprocity 142 5.3 GNU LGPL AND STANDARD RECIPROCITY 146 5.3.1 LGPL Functionality 146 5.3.2 Other Licenses with Standard Reciprocity 148 5.4 BSD AND PERMISSIVE LICENSES 151 5.4.1 BSD Functionality 151 5.4.2 Other Permissive Licenses 152 5.5 E XCURSION:CREATIVE COMMONS OPEN CONTENT LICENSES 154 5.5.1 Background 154 5.5.2 Creative Commons Functionality 155 5.5.3 Risk Allocation and Warranties 158 5.5.4 Internationalization and Formalities 159 5.5.5 Concluding Remarks 161 5.6 S UMMARY:COMPETITION BETWEEN EVOLVING LICENSING STANDARDS 161 6 DEFENSE WITH OPEN SOURCE: INFRINGEMENT RISK MANAGEMENT AND PATENTS 164 6.1 H OW TO MANAGE IPR INFRINGEMENT RISKS? 164 6.1.1 Background 164 6.1.2 Nature of Third Party IPR Infringements 166 6.1.3 Alternatives to Manage Risks 169 6.1.4 Actual Management Practices 174 6.1.5 Concluding Remarks 178 VIII 6.2 PATENTING PROBLEM AND POSSIBLE POLICY SOLUTIONS 179 6.2.1 Background 179 6.2.2 Open Source Licenses and Infringement Risk 180 6.2.3 Development Process from Patenting Perspective 182 6.2.4 Policy Debate on Open Source and Patents 183 6.2.5 Liability Exceptions for Open Source? 185 6.3 C ONCLUSION:IPRLAWS CAN BE TUNED 186 7 OFFENSE WITH OPEN SOURCE: CASE STUDIES ON LICENSING 188 7.1 L ICENSING OPEN SOURCE FOR PROFIT 188 7.1.1 Product Pricing Possibilities 188 7.1.2 Problem of Development Control 189 7.2 C ASE STUDY 1: FREE LICENSES AND OPERATING SYSTEM SOFTWARE 192 7.2.1 Introduction 192 7.2.2 Market Overview 194 7.2.3 Study Framework 195 7.2.4 Microsoft Windows 196 7.2.5 Apple OS X 200 7.2.6 GNU/Linux Distributions 202 7.2.7 Concluding Remarks 204 7.3 C ASE STUDY 2: DUAL LICENSING AND EMBEDDED SOFTWARE 206 7.3.1 How Dual Licensing Works? 206 7.3.2 Study Framework 208 7.3.3 Sleepycat Software Inc 209 7.3.4 MySQL AB 211 7.3.5 TrollTech AS 212 7.3.6 When Does Dual Licensing Make Sense? 214 7.4 C ONCLUDING REMARKS 216 8 CONCLUSIONS 218 8.1 T HE RISE OF OPEN SOURCE 218 8.2 IMPACT ON LICENSING PRACTICES 219 8.3 I MPACT ON INTELLECTUAL PROPERTY MANAGEMENT 221 8.4 I MPACT ON COMMERCIAL REGULATION AND LEGAL STUDY 222 FIGURES AND TABLES 225 REFERENCES 227 A RTICLES,BOOKS AND REPORTS 227 N EWS,INTERVIEWS AND ONLINE-SOURCES 237 C OURT CASES,OFFICIAL DOCUMENTS AND LICENSES 245 INDEX 249 IX ABBREVIATIONS BSA Business Software Alliance BSD Berkeley Software Distribution CC Creative Commons CPL Common Public License CP/M Control Program for Microcomputers EPO European Patent Office EU European Union FLOSS Free/Libre and Open Source Software FSF Free Software Foundation GNU GNU’s Not Unix * GPL GNU General Public License IP Intellectual Property IPR Intellectual Property Rights IT Information Technology LGPL GNU Lesser General Public License MIT Massachusetts Institute of Technology MPL Mozilla Public License MS-DOS Microsoft Disk Operating System OSD Open Source Definition OSI Open Source Initiative OSL Open Software License OSS Open Source Software PC Personal Computer TC Trusted Computing US United States USPTO United States Patents and Trademark Office W3C World Wide Web Consortium WIPO World Intellectual Property Organisation WTO World Trade Organisation * GNU is a recursive acronym. [...]... account of all the events, which combined lead to particular outcomes There are many alternative and convincing ways to tell the history of open source within the context of software industry The author has used here a kind of bottom-up approach: for instance the history of software licensing is seen from the perspective of individual developers and license authors In the end, open source licensing. .. already from the 1960s Also the legal issues regarding software protection aren’t new; the roots of modern software copyright and patents discussion are also in the 1960s And as noted, during the last few years, the academic literature of open source has taken off 1.5 Overview of the Study The second chapter of the book describes the growth, size and segmentation of the international software industry... remain, the core asset of the software industry, and almost every other industry Preserving that capital—and investing in its constant renewal—benefits everyone.”2 This book is a study on how open source has challenged the thinking and actual use of intellectual property in the software industry The emergence of open source software and the rapid expansion of the Internet have brought new software licensing. .. that going open source can indeed be a viable business decision This draws us to the main questions of this study: - Has open source changed licensing practices in the software industry from a historical perspective? (chapter 2) - Do the economic theories on software, copyright, and innovation work with the principles of open source? (chapter 3) - Does open source challenge the development of software... the most successful of the new entrants to grow to the heights of the corporate software companies The focus of this study is on software producers Since the late 1990s the boundaries between the corporate and mass-market software producers have started to some degree melt Both the growth of Internet and the emergence of open source products have catalyzed a process of building the bridge between corporate... Are there interesting industry cases where open source licensing models have been used as competitive tools? (chapter 7) The overall argument of the book is that open source licensing has indeed changed the ways the software industry thinks of and actually uses intellectual property Almost all major software companies in the world have since 1998 started to adopt open source licensing models as part of. .. into the whole range of the open source licensing phenomena While the aim can be criticized as broad, the book does have a focus The main academic tradition where this book can be connected to is the law and economics of intellectual property rights Historical and legal analyses ultimately support the task of explaining how the growing popularity of open source licensing affects (if it does) the industry... the effects should be clearly visible in the United States markets 2.1.3 Emergence of Open Source It is even more difficult to estimate the size of open source software industry” Pure open source companies are tiny and many of them are privately held However, the popularity of open source is significant and practically all big IT companies have today open source products and serv26 27 28 European... of the operative functions of any software company, it is natural to discuss how open source impacts licensing practices Further, the developer perspective often fits well with the views of small or medium sized companies, or other independent ventures, whose entire business somehow depends on the licensing decisions - Second is that of a public policy maker The general implications from changing licensing. .. previous software licensing and development practices - More in-depth analysis of the key intellectual property issues in open source licenses and their impact to software business - New real world case studies on intellectual property risk management and licensing practices in open source development Main sources of the study are academic literature in the software industry history, economics of software . The Rise of Open Source Licensing Mikko Välimäki A Challenge to the Use of Intellectual Property in the So ware Industry Mikko Välimäki The Rise of Open. how open source has challenged the thinking and actual use of intellectual property in the software industry. The emer- genceofopensourcesoftwareandtherapidexpansionoftheInternet have