Technical Compatibility Standards and

1. Technical Compatibility Standards and Co-Ordination of the Industrial and International Division of Labour W. Edward Steinmueller SPRU – Science and Technology Policy Research University of Sussex, United Kingdom Prepared for the Conference: Advancing Knowledge and the Knowledge Economy Sponsored by: U.S. National Science Foundation Organisation for Economic Cooperation and Development Research Directorate-General, European Commission Information Society Directorate-General, European Commission U.S. Interagency Working Group on IT R&D University of Michigan

2. Platforms – What are they? Platforms are systems comprised of component products and/or services that must be integrated to become useful. Platform integrators are companies that have the knowledge to perform the integration when the final user is not willing or able to do so. Component suppliers are the companies with the knowledge to produce the components integrated into the system. Knowledge is required to integrate components into platforms – in particular, reliable knowledge of the interface between components

3. Technical Compatibility Standards Technical compatibility standards are the specifications for the integration of components into a platform – they are a form of knowledge These standards may be the familiar standards published by standards organisations (IEEE, ISO, CCITT, SAE, etc.) organisations that generally insist on non-discriminatory access Second, these standards may be controlled by individual companies (a kind of sponsored standard) Or these standards may be negotiated between a platform producer and related component suppliers Published, sponsored, and negotiated standards define possible technical divisions of labour between companies (that may be located in different countries)

4. Examples

5. The Generic Personal Computer Platform Source: Microsoft Encarta

6. A Leading Food Processor Platform Source: Cuisinart

7. Multi-Supplier Stereo Component Platform Source: Tampa Cabinets

8. Creating a Platform • Platforms are a kind of innovation • Their acceptance by the market is uncertain • First implementations will later appear crude • Their success often involves adoption network externalities • Each type of standardisation process has advantages and disadvantages in the design of a platform • Sponsored – faster to market • Negotiated – greater commitment of suppliers • Emergent or published – more likely to engage adoption • externalities • Ideally, one might move in the ‘early years’ from sponsored to emergent/published standards, but ‘breaking up’ is hard to do

9. Why is system ‘decomposition’ becoming easier? • Information and communication technologies help in two ways: • Organisational interfaces for co-ordination are facilitated by the spread of ERP (enterprise resource planning systems) and related software • Technical specification and communication are aided by computer aided design and engineering • These technologies have, however, not proven to be a panacea. • Problems of representation and negotiation of knowledge still limit their technological potential

10. In essence, the question is… What prevents this jet engine from being based on published standards? Source: Aircraft Magazine, 1958

11. Individual sub-assemblies can certainly be represented precisely by computer aided design and engineering… Source: Northern Ireland Technology Centre MSc Computer Aide Design Project

12. Physical prototyping is rapidly advancing… Source: Roland Modela Example: Toto

13. However, a series of problems remain… • Uncertainties of platform ‘take off’ means designs start as proprietary and controlled – breaking up is then harder to do • In distributing design, interfaces have to work or finger pointing occurs – knowledge is not easily distributed or agreed • Product liability matters • Technologies for modelling and simulating the platform are still being developed • There are difficult problems of market power between the platform producer and the component supplier

14. Standards can be sticky due to user adoption • With this platform, the industry is still trying to get rid of the • Centronics parallel printer and RS-232 serial ports. • Old standards ‘stick’ to platforms… And we all know how easy it is to integrate new pieces of kit to this platform… Right!

15. The Economic Issues Successful platforms create market power In the first instance, this is more of a problem for component producers than for social welfare Producing a commodity product is not the most desirable of careers Ultimately, however, market power can become a social welfare problem In both Europe and the US, we are trying to grapple with the limits of Microsoft’s platform control The traditional approach to these issues is platform competition…

16. Every attachment for this platform is controlled by Cuisinart We think this is ok because there are several food processor platform producers and competition between them has created substantial variety in both quality and price Not all platforms may support this amount of platform variety Adoption externalities may favour design convergence or a ‘dominant design’ This has value because it allows the reuse of knowledge

17. Is competition between platforms becoming less effective? Business strategy is adapting to the platform idea Platform producers attempt to recruit families of companies supplying components for the platform to increase adoption externalities (or, more prosaically, ‘buy-in’ to the platform) Adoption externalities may be increasing due to improvements in information (e.g. trade promotion) As markets become larger through internationalisation, the ability of buyers to co-ordinate pro-active efforts to increase platform competition becomes more difficult

18. The attainability and value of ‘open standards’ • Attainable when market growth aligns incentives of both • components and platform producers • Alternatively, buyers may resist ‘closed standards’ • Note, however, open standards can still be controlled by a dominant platform or component producers whose next generation design choices define the standard… • Value stems from • Increase long run competition among component producers • Possibility of enabling competition in platforms • Platform components can be individually improved (division of labour in knowledge production) • International division of labour supporting growth and income distribution

19. When ‘open standards’ can’t be achieved or maintained • --Market power issues may create social welfare loss • --Intellectual property seems to have an indefinite lifetime • --Market power can be extended • Remedy: We don’t have one. • ‘Essential facility’ arguments have not been able to generate political consensus. • Antitrust rules often encounter market definition problems, particularly when markets for unbundled components exist • Only user-activism seems effective – and this requires difficult mobilisation issues • We need better tools for analysing the nature and extent of market power in distributed or networked knowledge industries

20. Pro-competitive policies • are not straightforward… • Interventions can • 1. Support research to improve ‘anticipation’ to reduce • the need for competitive search for best implementation • [This allows users to be pro-active.] • 2. Provide a strong market (government procurement) for more ‘open’ standards (with risks of premature standards) • Support research on modelling and simulation that • would reduce co-ordination costs of making more • open or ‘modular’ systems

21. Signs of progress… Europe, and then the US, have made it possible to ‘reverse engineer’ software interfaces to achieve more ‘open’ systems Companies attempting to do this may still be discouraged by litigation related to strong IPR Internationalisation of markets has followed the rule, ‘the division of labour is limited by the extent of the market’ making more components available for constructing competing platforms However, branding and the maintenance and support services available from incumbent platform producers (e.g. Otis Elevator) have countered this tendency The ‘open source’ movement is encouraging – its limits and problems are worth even more research

22. Frontiers Service platforms involving ‘soft interfaces’ are expanding and need a ‘standards process’ – XML discussions are a symptom Mixed platforms involving both physical components and service bundles are a major business opportunity Many specialised system solutions involve building on open source software and open standard framework Solving cognitive and co-ordination problems in research is a lead-user activity with potential spill-overs to other activities Learning activities (in training and education) similarly provide a lead-user context for exploring co-ordination and negotiation of cognitive problems

23. Conclusions Regulation of platform dominance needs policy innovation –so far policy has been a blunt instrument Reducing dependence on proprietary standards (and intellectual property protection) as a source of ‘wealth creation’ would create a more competitive and perhaps a more innovative economy Pro-competitive policies are available and can be implemented (many involve improving quality of information to users) Research tracing the contribution of ‘open standards’ and their value to the economy is a partial antidote to claims about the innovative contribution of IPR-based proprietary standards