Closed systems make money. Open systems make money. And the two dynamics are co-exists … for a while.

I’m pondering these realities as I comb through reports in the wireless market, where Silicon Strategies has a new client. The evolution of the wireless market will soon make a shift and the smarter vendors are rapidly adapting to the inevitable.

First, a musing on closed and open markets. In closed markets, the vendor has control by virtue of either a monopoly or through customer lock-in due to the high cost customers face in switching to different technologies. The IT technology industry was a closed market for a seeming eternity until the folks at Berkeley began porting and promoting their flavor of UNIX (which could be considered the original computer virus). When Sun Micro and other vendors began using open standards (like UNIX) as a wedge into the market, the closed system protected by high switching costs began to fade. Microsoft has a virtual monopoly on desktop operating systems, and we may be seeing the first cracks in that closed system as well.

Open systems work on the principle that choice creates other competitive realities and opportunities. For example, there is not a dime’s worth of technical difference between most of the Linux distributions. Linux purchasing decisions are primarily based on other issues, such as the perceived financial soundness of the vendors or their dedication to Open Source principals (or in the case of Novell, the seeming immunity from litigation by Microsoft).

TV cable operators are another case study of closed systems. Due to the dubious nature of local franchise laws and the instituted monopolies they create, cable carriers have zero incentive to innovate. It wasn’t until home satellite came into being that there was any movement by the cable companies, and even that has been lackluster due to the limited competition created between these two closed systems (like the limited innovation that existed between VMS and MPE — and if those abbreviations don’t date me, nothing can). There have been various attempts to create an standardized set-top box for cable consumers, but higher margins are created by renting gear to couch potatoes instead of letting customer buy one of many makes at Circuit City.

Now we are about to see a fissure in the wireless market. Google started the collapse by prodding the FTC to mandate some degree of open access by whomever wins the bidding war of the soon-to-be re-purposed 700Mhz spectrum. Google’s stand (and now the FTC’s as well) is that whomever wins temporary ownership of this chunk of air must make some or all of it open to allow any application, and certified device, any wireless service and any third party services provider to tap into the 700Mhz waves.

Naturally, this raised a stink from every vendor who had designs on any piece of this space. Cisco complained. Verizon cried foul. Even Satan, who current resides in Redmond, grumbled. But as soon as the FTC put their bureaucratic foot down … well, people started changing their tunes. Verizon, who had been one of the noisier detractors to Google’s open system scheme not only turned their opinion 180 degrees, they started opening the existing network, presumably as a show of philosophical acclimation to curry FTC approval.

In other words, once the inevitable opening of cellular services were going to be mandated somewhere, Verizon decided to join the new paradigm than fight to preserve the old.

Good move on their part. Sun rode the UNIX revolution, and took a great deal of market away from competitors, and opened new markets as well. Later in life they fought the Linux revolution and lost big. Both UNIX and Linux were opening previously closed systems, and Verizon learned from Sun’s mistake.

There is a truism among market strategists that notes the best way to win in a market is to change the rules. But the same applies when the rules are changed against you. If the change is inevitable, or worse still mandated by law, then the smart people will use the new rules to their advantage, create new differentiators, and leave their competition to slowly die.