|An Economic Basis for Open Standards, by Rishab Aiyer Gosh
Wednesday, December 14 2005 @ 09:56 AM EST
Rishab Ghosh created the term FLOSS in 2000 as the acronym for an EU-funded
project at the University of Maastricht, the Netherlands. He leads FLOSSPOLS,
a follow-on project at the University's MERIT institute, which has included
the world's largest survey of government use of free software and a paper on
the economics of technology, arguing for a definition of open standards based
on their economic effect, "Free/Libre and Open Source Software: Policy Support - FLOSSPOLS, Open Standards and Interoperability Report."
The paper explains why open standards matter to competition, why standards must allow all possible competitors to operate on a basis of equal access to the ability to implement the standard and states that in most software markets, where FLOSS provides significant competition, open standards are only open if they allow equal access to FLOSS products. The study looked at the economic effects of procurement policies and how they can get in the way of competition, and the paper provides some guidelines for effective policy.
When Rishab told me about the paper, I asked if he'd be willing to collect some highlights from it for Groklaw. What follows is the executive summary of this paper,
and the excerpts he prepared for Groklaw. The full report is available on the
FLOSSPOLS website at http://flosspols.org/deliverables.php
Basis for Open Standards
~ by Rishab
Aiyer Ghosh (email@example.com)
This paper provides an overview of standards and standard-setting processes.
It describes the economic effect of technology standards - de facto
as well as de jure - and differentiates between the impact
on competition and welfare that various levels of standards have. It argues
that most of what is claimed for "open standards" in recent policy
debates was already well encompassed by the term "standards"; a
different term is needed only if it is defined clearly in order to provide a
distinct economic effect.
This paper argues that open standards, properly defined, can have the particular
economic effect of allowing "natural" monopolies to form in a given
technology, while ensuring full competition among suppliers of that technology.
This is a distinct economic effect that deserves to be distinguished by the
use of a separate term, hence "open" rather than "ordinary"
standards - referred to as "semi-open" in this paper.
The paper explains why open standards must allow all possible competitors to
operate on a basis of equal access to the ability to implement the standard,
and why this means that the economic effect of open standards may require different
conditions for different markets. In most software markets, where Free/Libre/Open
Source Software (FLOSS) provides significant competition, open standards can
only be those that allow equal access to FLOSS producers.
A case is made for public procurement to support open standards, and empirical
evidence provided from an analysis of actual tenders as well as from the FLOSSPOLS
survey of government authorities to demonstrate how procurement policies in
practice come in the way of competitive markets for software products. Finally,
some guidelines are provided for effective policy in relation to open standards
open standards should be defined in terms of a desired economic effect:
supporting full competition in the market for suppliers of a technology
and related products and services, even when a natural monopoly arises in
the technology itself.
open standards for software markets should be defined in order to be compatible
with FLOSS licenses, to achieve this economic effect
compatibility with proprietary technologies should be explicitly excluded
from public procurement criteria and replaced by interoperability with products
from multiple vendors;
open standards should be mandatory for eGovernment services and preferred
for all other public procurement of software and software services.
of technology in the Information Society are subject to network effects:
the benefits to a single user are significantly enhanced if there are many
other users of the same technology. The value to a user of an e-mail system,
for instance, is limited unless the system can be used to send e-mails to
many others, and increases enormously with the number of other users. This
value, which is over and above the value of a single copy of the technology,
is the network externality, i.e. the additional value provided by the
Network effects can go hand in hand with entry barriers for new technologies.
A new technology may be adopted if it provides recognised benefits over a
previous technology. However, since the value of a widely used system is,
due to network externalities, much higher than the value inherent to a single
user's copy of the technology, any new technology is seriously hampered by
its lack of an existing user base. A new e-mail system must be far superior
to an old system in order for its inherent benefits to outweigh the severe
disadvantage caused by the lack of a pre-existing network. In applications
highly susceptible to network effects, where the network externalities account
for a large share of the total value of the system - such as e-mail
- this hurdle may be impossible to cross. Indeed, the e-mail system
most widely used today has remained more or less unchanged for over 20 years.
The self-enhancing feedback loop caused by network effects together with the
barriers posed to alternative technologies results in the dominance of particular
products in their application areas, as natural monopolies. Monopolies
are not obviously good for consumers, but the presumption of natural monopolies
in many areas has often been thought to provide a better value for overall
welfare than, say, having various incompatible systems leading to a Balkanised
network of groups of users unable to talk to each other. However, monopolies
are in a position to capture (or internalise) the value of network externalities
- although this value is by definition not an attribute of an individual
user's product or service, a monopoly or dominant player is in a position
to raise the price of an individual user's access beyond its inherent value,
based on the external value of the network effect. An e-mail system that allowed
you to communicate with millions of others may be priced higher than a more
sophisticated system that was limited to only a few thousand others. Thus,
while monopolies have long been tolerated in the telecoms sector, they are
usually subject to regulation to limit their natural tendency to work against
Another approach to network effects, however, is to try to abstract the network
externalities from specific products. This is achieved by identifying the
feature of the technology that provides the network effect, and ensuring that
its use is not limited to a specific product or service. Rather, products
and services from different producers are made interoperable by agreeing
on standards for the basic technology components that provide the network
externalities. This way, in theory at least, a natural monopoly arises in
terms of the technology, but competition can thrive in terms of actual products
and services that interoperate.
The problem arises that the natural monopoly on the technology for interoperability
may have rights associated with it, and these rights may be owned by one market
player (or a consortium). Such rights may be exploited to generate monopoly
rents, which may counteract the competition in interoperable products and
services that are enabled through the use of the standard. E.g. if the holder
of rights to the standard seeks monopoly rents from all use of the standard,
it has an anti-competitive advantage over other users of the standard.
If the holder of rights covering a standard is also a supplier of products
and services based on the standard, it has strong incentives to set licensing
conditions that disadvantage the strongest potential competing suppliers.
Thus, the natural monopoly that the standard creates in terms of technology
may come along with competition in the market for products and services, but
this competition may be limited by the control by rights-holders of the access
to the standard technology.
Alternatively, standards can be de jure, where a natural monopoly on
technology is agreed upon by a body that may be an association (perhaps, but
not necessarily, with a public interest mandate) of some combination of technology
users and suppliers. Bodies with some level of formal process for defining
such standards include ITU, ETSI, IEEE, W3C, IETF. While owners of rights
over de facto standards clearly have the interest and ability to exploit
their monopoly over the standard technology to control or dominate the market
in products and services based on the standard, it is quite possible for owners
of rights over de jure standards to do this as well.
Based on the above discussion, one could define three broad classes of technology
frameworks based on the three broad classes of economic effect that they achieve:
Proprietary technologies: a natural monopoly in a technology results
in a natural monopoly in the market for services and products based
on the technology. These often become de facto standards, in
which case they are properly referred to as "proprietary standards".
This occurs when the rights to the technology are available only to
the rights holders, and results in a dominant position for the owner
of the technology.
Standards: a natural monopoly in a technology arises (de facto)
or is defined and agreed upon (de jure), but some competition
in the market for products and services based on the technology is
provided for, although potentially dominated by rights holders of
the technology. Unlike most of the literature, we distinguish such
standards from the next category and therefore refer to them as "semi-open
standards", encompassing most standards set by most industry
and international standards bodies. This occurs when the rights to
the standard are made available to economic actors other than the
rights holders, possibly under terms that provide an advantage to
the rights holders over other competing economic actors.
- Open standards: a natural monopoly arises (de facto) or a monopoly
is defined and agreed upon (de jure) in a technology, but the
monopoly in the technology is accompanied by full competition in
the market for products and services based on the technology, with
no a priori advantage based the ownership of the rights for the
rights holder. This occurs when access to the technology is available
to all (potential) economic actors on equal terms providing
no advantages for the rights holders. In particular, rights to
the standard are made available to economic actors other than the
rights holders under terms that allow all potential competitors
using all potential business models to compete with the same
degree of access to the technology as the rights holders themselves.
When no competitive advantage is held by some players solely
by virtue of owning rights over a standard, then a unique economic
effect is achieved of separating the natural monopoly of the technology
itself from any possible monopoly among suppliers of the technology
Public procurement and competition
Software buyers' preference for interoperability can conflict with implicit
or explicit criteria for software purchasing, in particular whether new software
is compatible with previously purchased software. Buyers who use the latter
criterion rather than a general requirement for open standards or vendor-independent
interoperability in effect remain locked in to their previously purchased
may even violate public procurement principles, since a preference -
explicit or implicit - for "compatibility with previously installed
software" favours the single supplier of that software, if it is based
on proprietary or semi-open standards. An explicit preference, instead, for
interoperability with open standards as defined in this paper does not favour a single supplier of technology and is therefore far more in keeping
with public procurement principles. This may also be more in keeping with
public procurement law. The European Commission found in 2004 that
public procurement requirements to supply hardware based on "Intel or
equivalent" microprocessors, or even requiring clock-rates specific
to Intel processors without mentioning Intel was not compatible with EU law.
[...] What applies to public procurement of hardware could reasonably be thought
to apply to software procurement too, especially as the use of tenders with
explicit requirements for compatibility with proprietary software standards
appears to be quite common.
While this subject clearly needs empirical research beyond the scope of this
paper, a quick keyword search for tenders on TED, the EU's public procurement
portal identified 149 recent tenders including the term "Microsoft".
A brief analysis below, of six calls for tender, identifies the strong anti-competitive
effects of public procurement that favours "compatibility" with
proprietary standards over "interoperability" with open standards.
effect starts with the procurement process itself, which may require bidders
to purchase software from specific vendors. For instance, a tender from
Scottish Enterprise, 2005, states that "All expressions of interest
shall be provided either on paper or both on paper and in electronic format
(via floppy disk using Microsoft Office compatible products)". While
not as bad as requiring citizens to purchase software from a single vendor
for access to essential government services, such procurement procedure
requirements are clearly detrimental to competition in the market for
software even among private consumers.
A typical case of explicit preference to bidders using technologies from
favoured providers is a tender from Fife Council, 2005, which is for additional
services to be built around "an interactive site provisioned through
the use of Macromedia Cold Fusion and Microsoft SQL". Such anti-competitive
preferences are quite common even when they are not explicitly stated
- tenders for the provision of websites for the European Commission,
for instance, may require compatibility with the europa.eu.int EU portal.
As Europa is based on proprietary technologies (including ColdFusion),
a specific vendor preference is introduced into the market even without
mentioning brand names. This perfectly illustrates vendor lock-in, and
how the anti-competitive effect goes beyond the public sector alone when
public bodies are locked in. The original procurement of technology for
Europa may have indeed been truly competitive in nature. Since it obviously
did not require the use of open standards, all future procurement related
to Europa is anti-competitive in nature and favours the single vendor
owning rights to the original technology chosen, directly (through purchase
of the same vendors' software) and indirectly (through the requirement
that suppliers of additional websites compatible with Europa purchase
these vendors' software).
An example of
how past purchase of software based on proprietary technology ensures
a preference for the same proprietary technology (and thus favouring its
sole vendor directly, or bidders who are customers of that sole vendor)
is in this tender from Eurojust, 2005, a European international organisation,
for a library automation system. In this tender, the preference for compatibility
with previously purchased proprietary technology is explicitly stated:
"Eurojust employs Intel-based servers running Windows 2003 and workstations
running Windows XP . The network protocol in use is TCP/IP. Any proposed
software must be able to function efficiently in this environment. Eurojust
has a strong preference for Microsoft SQL as the database to minimise
the variety of software to be supported in-house. It must be possible
to integrate the system with Microsoft's Active Directory for user information
and access control." Clearly, Microsoft and its customers are favoured
in this tender. If the previously purchased software was based on open
standards, the new system could have been required to be interoperable
with those open standards, thus giving no preference to individual vendors.
individual vendors can get explicit: a tender from Consip, Ministry of
Economy and Finance, Italy, 2005 is representative of the several tenders
found for "software licences". It requires "licenze
d'uso di programmi software Microsoft Office" (i.e. usage licences
for Microsoft Office). It is supposedly a competitive tender, yet the
only competition possible is among resellers of Microsoft.
for individual vendors can be extreme. In a procurement process that was
"negotiated without a call for competition" (i.e. explicitly
without competitive bidding but an offer invited from a single vendor),
Hessische Zentrale für Datenverarbeitung, 2005, signed a contract
with Microsoft Ireland for "software licences" worth Euro
2.69 million over three years. The justification provided for this negotiated
procedure is a concise statement of the argument presented previously
in this document: "The works/goods/services can be provided only
by a particular tenderer for reasons that are: Connected with protection
of exclusive rights." Clearly, if proprietary technology is specified
as part of the requirements, as explained in section 2 above, only the
rights holder can provide the technology, due to the "protection
of exclusive rights" around the technology.
According to the European Commission, "Under European law on public
procurement, a brand may be specified only if it is otherwise impossible to
describe the product sufficiently precisely and intelligibly" (European
Commission, 2004). True, the only way to describe proprietary software products
such as Microsoft Office or Macromedia ColdFusion is through their brand names.
But specifying these products in public procurement, rather than product-independent
technical requirements, is surely anti-competitive. Just as the EC argued
that microprocessors can be selected on performance criteria rather than specific
clock rates (which favour a single vendor), software and software services
should be selected on the basis of technology rather than products.
|Authored by: Fractalman on Wednesday, December 14 2005 @ 10:30 AM EST|
|So PJ can find them. :)|
[ Reply to This | # ]
|Authored by: Fractalman on Wednesday, December 14 2005 @ 10:35 AM EST|
Please make links clickable as per the instructions in red at the bottom of
the post a comment form and please don't forget to post in HTML mode and preview
if you have links to make sure that they work properly. A little bit of text
explaining what the link is for is also helpful and appreciated. If it is a
news article, the title would also help so we don't click an article we've
[ Reply to This | # ]
- Quatermass - Authored by: Anonymous on Wednesday, December 14 2005 @ 11:05 AM EST
- FSF wins over Wallace! - Authored by: Anonymous on Wednesday, December 14 2005 @ 02:23 PM EST
|Authored by: grouch on Wednesday, December 14 2005 @ 07:45 PM EST|
|The maddening preference of governments for MS junk shows up so often most|
people don't even notice it as an incentive to perpetuate the monopoly. My state
government routinely calls for "competitive" bids for educational
software while actually specifying Microsoft. When called on it, they offer lame
excuses of compatibility instead of specifying what they need the software to
accomplish. No telling how many boatloads of tax dollars are shipped to Ireland
(to avoid U.S. income tax) to feed the Redmond beast.
[ Reply to This | # ]
|Authored by: Anonymous on Thursday, December 15 2005 @ 12:43 AM EST|
|Maybe I'm way off here but isn't it already a well established fact that (open)|
standards are *needed* and things just run smoother with them?
e.g. look at the history of a the screw or nuts&bolts. Prior to them being
standardized, there were hundreds of different kinds all incompatible with each
other. aka Vendor lock in.
I guess it is true that those that don't learn their history force the rest of
us to repeat it.
[ Reply to This | # ]