Ex Ante

For decades, standard setting organizations (SSOs) have largely been considered to be an arcane area limited to a select group of manufacturers and technologists. However, with the rise of truly global markets and the significant switching costs inherent in many technologies, SSOs are now gaining increased public prominence.

If you are someone who hasn’t considered the importance of SSOs in your life, think about this basic example. What if lighting manufacturers each used a different size base for light bulbs? It would result in chaos for consumers, distributors and resellers of lighting products. The cost of lighting would also increase because manufacturers would have a more limited market in which to allocate their R&D costs. Instead, most lighting companies build products conforming to industry standards set by an SSO. The result is that rather than differentiating their offerings based on the size of a light bulb socket, manufacturers are competing on the implementation – the things that really matter to consumers (lumens, energy efficiency, cost/watt).

For a standard to succeed, the members of the SSO must operate with transparency. To effect this, the rules of most SSOs require disclosure of any patents that implicate a proposed standard and agreement to license them on a “FRAND” (fair, reasonable and non-discriminatory) basis. Absent these requirements, an SSO member and patent holder could wait for a standard to be widely adopted and then assert its patents to extract higher royalties than it would be able to absent the standard. In the standards world, this is what is commonly referred to as a “patent hold-up”. In this situation, companies that have invested resources in developing products based on one standard frequently find it too expensive to shift to another standard. Instead, they are left with the choice of litigating or paying the higher royalties (the cost of which is ultimately borne by the consumer or end user).

To me, it’s reminiscent of a game we played as children called “UNO” . In it, players make certain assumptions only to unexpectedly be faced with a “wild card” from another player. Of course, the consequences in the world of SSOs are significantly more severe for companies, consumers and shareholders. When a SSO member fails to adequately disclose the existence of patents or refuses to license on FRAND terms, the viability of standard is called into question. The result is that adoption is frozen until the courts have removed the uncertainty. And, it’s no surprise given the accelerated growth of computing that many disputes have arisen in connection with standards in the IT industry – In the Matter of Dell Computer Corp. (computer bus), In the Matter of Rambus, Inc. (computer memory), Broadcom Corporation v. Qualcomm, Inc. (cellular telephony) – are just a few examples.

In order to avoid the problems inherent with FRAND licensing, an increasing number of companies (including Sun) are advocating for the adoption of an “ex ante” standards model. Under this model, standard setting policies require that members disclose applicable patents and specific license royalties and provide sample licenses (or agree to prescribed terms) at the beginning (thus, “ex ante”) of the process of developing a new standard. This permits the members of the SSO to make more informed and efficient decisions as to what technology should be used as the basis for a standard. It also results in better predictability in licensing fees, instead of the “wild card” of litigation that results under many FRAND policies.

VITA , a SSO creating standards for real time modular embedded computing systems, and the IEEE are examples of organizations that have both adopted policies in support of the ex ante licensing model. And, the United States Department of Justice has recognized these policies as pro-competitive.

Increased adoption of ex ante policies by other SSOs will help drive better transparency, openness and efficiency in the standards setting process. As a result, it will make it easier for companies to focus on innovation in the market instead of the courtroom.

5 Comments

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5 responses to “Ex Ante

  1. Terry Schmid

    Don’t markets standardize on their own? In your lightbulb example, wouldn’t the market drive toward a standard base size? Didn’t it? By the way, an increased cost of light bulbs would have been temporary, not permanent. As the market settled on a standard, scale would drive costs down.
    For example, no standards body dictated VHS as the standard for video tapes rather than Beta. The market, through the individual choices of millions of agents, coalesced around VHS. Is there some reason to believe that this is an inherently messier process than a SSO?
    Isn’t the so-called "network effect" another example of standardization via market forces rather than the dictates of a limited group of actors whose primary responsibility is to their own organizations?
    The expected riposte here is that the "standard" is in fact a monopoly position for the owner of the standard and we all know that monopolies are antithetical to innovation. This is when those who’ve lost to the winner seek legal redress to bust up the monopoly. But, it is inevitably some newcomer with a compelling innovation that unseats the alledged monopolist, not those who would sue the "monopolist" into playing "fair". Standards bodies make this even harder.
    I view standards bodies as less a vehicle for allowing a flowering of innovation than as a vehicle for limiting competition and entrenching the interests of those already positioned to benefit from the standard (hence, the jockeying within these bodies to have one’s own innovation made a "standard"). I think they are more akin to medieval trade guilds in that they primarily act as deterents to those who would innovate beyond the entrenched players.
    You could argue that anyone can participate in the standards setting process so it is an open and competitive process, and this, on its face, is true. However, I know that from watching this sausage being made, the large companies dominate. And, indeed, until a company like Cisco in the networking space backs a standard like 802.11n, the standard stalls and innovation and consumers suffer in the interim. In fact, 802.11n is a fascinating case for how these SSOs can retard market growth by freezing innovation as manufacturers dither over minutia.
    I believe that the market left to its own devices is a stronger force for innovation.
    Lastly, the DoJ is hardly the ultimate source of what is competitive and what isn’t. This is the same bunch that tried to block the Ben & Jerry’s and Dreyers merger because they would dominate the "super premium ice cream market", never mind the fact that the two combined had less than 2% of the ice cream market.

  2. As an adjunct to SSOs, there exist patent pools such
    as MPEGLA, also recognized by DOJ as exempt from antitrust considerations.
    The work of Aoki, et. al., showcased in
    http://www.26econ.com/pdf/IPAccessSystems060407.pdf
    discusses these IP systems, alongside game-theoretic
    analysis of royalty collection strategy.
    However, all it takes is for one major patent holder
    not participating in the SSO or the patent pool to
    upset all the carefully-considered licensing models.
    This is wonderfully exemplified by the Alcatel-Lucent
    battle against Microsoft over MPEG patents, which
    makes the MPEGLA effort incomplete:
    http://seattletimes.nwsource.com/html/businesstechnology/2003920825_alcatel03.html?syndication=rss
    SSO licensing doesn’t address these tactics.

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