From Software Business Community

Shared ownership

Introduction

An edit done in Oulu Post-internet, it is becoming more common for independent entities to jointly participate in software applications. A notable example is in e-commerce, where business partners want to conditionally share information and automate their business relationships. In this case, they will have to jointly own an application that crosses organizational boundaries, and share both ownership and control. An alternative is to create a third-party platform and application, although even in this case there will be the need for appropriate hooks into the enterprise systems. An older example is sharing of infrastructure, as reflected in the internet itself, in which the network operates as a seamless infrastructure and yet it is owned by multiple service provides and end-point users. In the case of the internet, this was dealt with as a single system that was collectively designed by its suppliers through the Internet Engineering Task Force. It is unlikely that this approach will be used for e-commerce and other application-layer functionality.

In the history of the software industry, a one-to-one correspondence between the software artifact that is developed and sold by one firm to a single customer has been the dominant model. Often complementary such products have to be integrated by the customer or a third-party "integrator" to achieve a useful system solution. The coordination of the suppliers involved has often been through industry interoperability standards (often at the level of plumbing) or through the API's that one supplier offers to encourage such complements. (An API is published interface that is documented and unencumbered by intellectual property restrictions that encourage extensions of functionality by others.)

The Internet has encouraged functionality that bridges or crosses different ownership and control boundaries. The question then arises as to how the functionality crossing these boundaries is coordinated. One desirable approach is to separate these functionalities as much as possible, so that the owners can act independently, but this is not always possible. Another is to recognize the joint ownership and deal with it through mechanisms discussed in this topic.

Assuming that each customer in a shared ownership situation is to have the freedom to choose among competitive suppliers, two or more suppliers have to contribute to a given application. This implies a shared responsibility for the design and maintenance of that application. Industry coordination mechanisms (an example being the Internet Engineering Task Force) are needed to carry forth a design that is sufficiently uniform at the architectural level.

Relevance to software business

Shared ownership issues are challenging to traditional software suppliers and their existing business models. Each supplier has limited incentive to invest in interoperability with other suppliers, given that this offers little opportunity for differentiation if done on a bi-lateral or multi-lateral basis. This can be considered a market failure mechanism. On the other hand customers are going to be increasingly demanding of this functionality. This offers opportunities for those who can come up with innovative ways to deal with these challenges, for groups of firms who join in collective efforts, for intermediaries who provide the necessary hooks and translations among incompatible systems, and for end-user organizations who act collectively to define solutions.

In summary, joint ownership is a challenge faced on the administrative and operational fronts by end-user organizations, but one which presents both challenges and opportunities to software companies.

Description

There are two sides to this general issue: in economics terms, the supply side and the demand side. Here we deal with the demand side, and the shared responsibility article discusses the supply side.

No literature was found that deals with the specific set of issues anticipated in this category. However, historically there are some analogous situations that have been addressed in the literature.

In the literature, this is often dealt with as an issue of vertical integration. Assume that there is an upstream supply. How is that satisfied. One possibility is an independent supplier. Other possibilities give the downstream firms greater degrees of control over the supply. For example, they may vertically integrate (own the upstream supply), or a set of downstream firms may jointly own an upstream firm. This maps onto the issue considered in this topic as follows: Where a single capability ("supply") spans firm boundaries, vertigal integration is not an option. Then there are at least two options:

• The two firms cooperate to own and operate this capability jointly. This is not a form of co-opetition, since the two firms are usually not competitors, but are merely engaged in a business relationship.
• A third party provides this capability, possibly as a service. This third party may be an independent firm with a hands-off business relationship, or it may be jointly owned.

The literature we found focuses on the latter situation. One popular topic in the economics literature is double marginalization in vertical integration. This theory says roughly that in a supply chain with independence of action, firms choose pricing which is sub-optimum for both consumers and for suppliers. Roughly speaking, the reason is that the upstream and downstream firms both try to grab too much of the surplus, resulting in prices for the consumer that are too high and demand for the goods that is too low (relative to the overall optimum). The natural response of downstream firms is to gain control of their supply chain through ownership (vertical integration) or to form joint ownership arrangements with other downstream firms. That way, the prices for upstream services can be better controlled.

One relevant topic in the literature deals with the economics of settlements in peering relationships between internet service providers.^[1] This is a case where to firms own different pieces of a common infrastructure, and they need each other to function. They have to have an ongoing business relationship (even if no money changes hands), and there is no intermediary. In all these senses this structure is analogous to, say, an business-to-business e-commerce application. However, this paper doesnt focus much on joint operation and administration, and more on the settlements (exchange of money in return for service) and the associated contractual relationships.

The economics of ATM networks, which allow customers of a set of banks to move back and forth transparently among ATM machines, is also relevant.^[2] A peer-to-peer relationship between banks (as in the internet provider case) doesnt seem to make sense, since there would be high transaction costs in negotiating n*(n-1) relationships for n banks. It makes sense to have "one level of indirection" (as a computer scientist would say) or "intermediary" (as a business person might say). The issue addressed in this paper is whether this intermediary should be independent or jointly owned by the banks. In fact, the case is predominantly the latter, and the explanation seems to flow from double marginalization effects. The joint ownership of an ATM network seems a puzzle to the authors, although this seems obvious given the basic motivation to enable customers to move back and forth freely among ATM machines and to avoid one bank gaining control over an asset that is important to other banks. The paper purports to show that this tends to result in more monopoly power, and should be discouraged by regulatory authorities.

The economics of credit card assocations are also relevant.^[3] Downstream banks -- both acquiring banks (who deal with a merchant) and issuing banks (who issue the credit card and manage the customer relationship) -- must be interconnected. Again for reasons of transaction costs the banks have chosen to create independent intermediaries (mastercard and visa) rather than negotiate a set of pairwise relationships. This paper examines several economics issues, such as the level of access fees (and whether collusion can increase them inappropriately) and consumer behavior in the face of these fees. The emphasis seems again to inform the anti-trust regulatory framework.

This useful paper discusses the status of architectures for B2B electronic commerce in relation to business needs, and concludes that they all have shortcomings.^[4] It is optimistic about the emerging web services standards, but again cites conceptual shortcomings. The technology standards of today are sufficient, but not all the representational standards are in place. It also interjects a note of caution that not all market participants are in favor of a frictionless marketplace, as it "levels the playing field" and empowers new and small participants while reducing the competitive advantage of existing players with established EDI networks and existing business relationships.

Covisint is an example of a major effort to create an online marketplace with a collective ownership structure. It was unfortunately not a major success, and some lessons can be learned from this.

There have been other B2B market exchanges, including ANx, FreeMarket, and ChemConnect.^[5]

There is an important distinction between procurement and transportation hubs.^[6]

Research Issues

No literature has been found thus far that deals directly with the situation the software industry faces, although the internet peering example comes the closest. But research in that area focuses on the financial side,with the technical coordination handled through a standardization process (IETF). Here we are interested in not only financial relationships (allthough payments are unlikely) and technical coordination among software suppliers, but also operational and administrative coordination, the role of intermediaries, etc. This would seem to create an opportunity to study different aspects including:

• The economics of sharing.
• Business models.
• Software supplier coordination.
• The appropriate role of intermediaries.
• The role of end-user organization activism and innovation.
• Divergent interests, including incumbents vs new entrants.
• Divergent business and process models, and how to accommodate them.

References

1. ↑ J. Laffont, S. Marcus, P. Rey and J. Tirole, "Internet Peering," Am. Econ. Rev., vol. 91, pp. 287-291, May. 2001.
2. ↑ J. McAndrews and R. Rob, "Shared ownership and pricing in a network switch," International Journal of Industrial Organization, vol. 14, pp. 727-745, 1996.
3. ↑ J. Rochet and J. Tirole, "Cooperation among Competitors: Some Economics of Payment Card Associations," Rand J. Econ., vol. 33, pp. 549-570, Winter. 2002.
4. ↑ C. C. Albrecht, D. L. Dean and J. V. Hansen, "Marketplace and technology standards for B2B e-commerce: progress, challenges, and the state of the art," Information & Management, vol. 42, pp. 865, 2005.
5. ↑ M. A. Johnson and D. M. Johnson, "Integrated strategy of industrial product suppliers: Working with B2B intermediaries," Internet Research, vol. 15, pp. 471-492, 2005.
6. ↑ A. Z. Zeng and B. K. Pathak, "Achieving information integration in supply chain management through B2B e-hubs: concepts and analyses," Industrial Management & Data Systems, vol. 103, pp. 657-665, 2003.