Proprietary, or “closed,” systems were once rare…

…because industrial systems were relatively uncomplicated. Proprietary systems rose in popularity as advancing technology made it difficult to replicate a system without assistance or encroaching on patents. The creators of a closed system made a nice living. When the information economy was first launched several decades ago, the dream was to own and operate a proprietary system–one that no one else could copy–and then let the money roll in. To a degree that can still be done, at least for short period, if the system is significantly superior. Bloomberg terminals in Wall Street traders’ offices is one current example. But the network economy rewards the plentitude of open systems more than the scarcity of closed systems. It is a bit of a cliche now to blame Apple’s misfortunes on its insistence that its operating systems be treated as a scarce resource but it’s true. Apple had more than one opportunity to license its particularly wonderful interface–the now familiar desktop and windows design–but backed off each time, thereby guaranteeing its eventual eclipse by the relatively more open DOS and Windows systems.

There is a place for isolation in the infancy of systems, but openness is needed for growth because it taps into a larger wealth. Citibank pioneered the use of 24-hour instant cash at ATMs in the 1970s. They blanketed New York City with their proprietary machines, and at first this strategy was highly successful. Smaller competing banks started their own tiny and proprietary ATM networks, but they couldn’t compete against the high penetration of Citibank machines. Then, led by Chemical Bank, these smaller banks banded together to form an open ATM network called Plus. The power of n2 kicked in. Suddenly any ATM was your ATM. Citibank was invited to join the open Plus network but declined. Following the principle of increasing returns, the handy Plus system attracted more and more customers, and soon overwhelmed the once dominant Citibank. Eventually the open factor forced Citibank to forgo their proprietary ways and join.



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This is a blog version of a book of mine first published in 1998. I am re-issuing it (two posts per week) unaltered on its 10th anniversary. Comments welcomed. More details here.
-- KK