Wednesday, September 8, 2010

Are Closed Systems Winning After All?

Ever since the networked PCs started replacing mainframes, openness became the mantra of information technology. Indeed, for years we have been taught and we kept repeating that open systems give customers the ultimate benefit of deriving value from solutions while keeping our options open and prices low. But now, after three decades of pushing open systems, we may be proven wrong by Apple, the company with the overall highest market capitalization and tremendous success.

Back in the 80s, IBM was able to quickly gain huge market share with the open system-based PC in which components from many vendors could be added and swapped. The PC has quickly obliterated all players in the market, including Atari, Commodore, Sinclair, and for the most part Apple. It was apparent, that open system was the winning formula. Or was it?

While killing off existing competitors, IBM quickly faced a new set of competitors such as Compaq, Dell, HP, and hundreds of other clone manufacturers who took away IBM’s market share and who eroded the pricing down to unattractive margins. IBM also learned that giving up the operating system to Microsoft was a huge mistake, even though this move has promoted the success of the PC. In the end, IBM struggled to keep the business profitable and eventually exited it by selling out to Lenovo. Even though IBM made a ton of money initially, the open concept of the PC has failed to make it commercially viable for IBM in the long run.

Apple on the other hand, has held on to its completely closed system. Sure, it took Apple two decades to figure out all elements of the system to make it a success – computer, mobile devices, and content – but they are in an incredibly strong position today. Apple is piling up cash while running circles around any potential competitor.

So is a closed system the way to go? Well, there are skeptics who are already predicting trouble for Apple due to an attack from Google. But while Google is also bursting with cash as it created its own money tree based on advertising revenue, it is easy to see how the various Android phone vendors will kill each other quickly as they drive down prices and margins. That price war may put pressure on Apple but Apple demonstrated an amazing pricing resilience over more than three decades and they have a lock on the customers that Google does not have – content. In the end, the choices may be cheap devices with little content but plenty of advertising or expensive devices with a lot of great content.

While I don’t know the outcome of the iPhone versus Android battle, I keep wondering about the original question. Is an open system commercially viable or is it better to keep the system closed or at least some parts of it? That question is particularly interesting given the current open source movement which is the ultimate embodiment of openness. Is open source as a model commercially viable in the long run? Or is closed or a mixed model the right approach? Well, the time will show. What I do know is that to be commercially viable, both sides of a transaction need to benefit. If one side doesn’t benefit, the long term viability is in question.


  1. Apple has and continues to define what a smartphone should be. They are now very much like what Microsoft was years ago when they were defining what a PC was. But I haven't run a Microsoft OS at home for years (with the exception of the XP box I had to play WoW)

    My personal opinion is that the open (source) model is like a tortoise. It is slow and steady, but if the race is long enough (and unchanging) it will always win.

    Closed models tend to be more dexterous and able to adapt and innovate more easily than their open competitors. And they must continue to innovate (redefine the race) or else the open competition will catch them and destroy them.

  2. It depends how you define commercially viable. That open system gave rise to some big businesses such as Dell and countless others. It may be that your point is that open doesn't benefit the company that originally created that technology, but it leads to a huge economic eco-system that creates many other successful off-shoot businesses. Sure, IBM could have made more money if they created a controlled environment for the PC, but I doubt very much the PC would have proliferated as it did if they had, and we wouldn't even be having this conversation now. I think Apple is a unique situation and openness still trumps closed systems in most cases.

    Ron Miller

  3. Thanks for your comment, Ron. Yes, I agree that Apple's case is unique. That said, I am trying to suggest that too much openness too quickly make commoditize a market and destroy the vendors which is in the end not good for customers.