Winning marketshare by giving away your intellectual property

Suppose you start a small tech startup and invent a revolutionary device with tremendous potential. What would you expect to be most profitable – to make the device yourself, to license it to large manufacturers, or to give away licenses royalty free to anyone who wanted them?

The first two choices might seem reasonable, but why would you want to give away something you created? In the case of Zylog’s Z80, the third option turned out to be the key to success. Zylog was started in 1974 by an engineer who came up with a superior design to that of giants like Intel, HP, and DEC. Getting the tech industry to adopt an architecture controlled by a small unproven startup would be impossible, so Federico Faggin decided to give away his creation. Thirty five years later, his chipset is still in widespread use in numerous electronic devices. Even though Zilog never made more than 50% of Z80 chips, Federico used his success to found a chain or highly innovative and successful companies.

A similiar process happened with WordPress, the most popular blogging/content management software on the web.  Matt Mullenweg was 19 in 2003 when he took on an abandoned open-source blogging tool, and created a powerful content managment suite with a strong community.  By virtue of being free, his software quickly took over from (initially) technically better, but costly alternatives.  Although the software is free, the services and consulting work needed to support it proved very lucrative.  A few years later, the company he started to support his work is (rumored to be) worth hundreds of millions of dollars.

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