The technological and economic implications of proprietary and non

The technological and economic
implications of proprietary and
non-proprietary standards –
friends or foes?
Dr Meir Perez Pugatch, Director of
Research, Stockholm Network &
Senior Lecturer, University of Haifa
Economic significance of standards
• Germany – contribute 1% to annual GDP growth (€20 billion); 84%
of companies use European and International standards as part of
export strategy (Source: DIN, Economic benefits of standardization, 2000)
• UK – contribute £2.5 billion annually; 13% of growth in labour
productivity attributed to standards (Source: DTI, Empirical economics of
standards, 2005)
• EU-15 – 10% increase in number of shared standards enhances
bilateral trade by 3% (Source: Moenius, 1999)
• Cost of developing standards in CEN system = €800 million
annually; 80% funded by private sector (Source: CEN, A Success Story,
Defining key elements
• Proprietary standards: transferred or diffused using intellectual
property rights (IPRs), may be open or closed
• Closed standards: proprietary-based, available exclusively or
• Non-proprietary standards: no exclusive rights attached; may
include open and open source standards
• Open standards:
– Definition is highly contested and varies among different communities
– May refer to a range of elements including: implementation based on
FRAND – fair, reasonable and non-discriminatory – terms; royalty-free
implementation; development is transparent and consensus-based
Both types of standards drive
technological development
• Companies owning the rights to a particular standard can license
the knowledge and use of a particular standard to other companies
or to standards-setting organisations (SSOs), based on which new
or competing products are developed.
– Examples: Qualcomm and the CDMA standard
– Apple, HP, Microsoft, Intel, etc and the USB Implementers Forum
• Companies or individuals may release standards, such as source
code, to the public, which companies or bodies modify and
implement free of charge.
– Example: the Linux operating system, implemented in such notable
products as Mac OS X and Android
Both proprietary and open standards
involve economic incentives
• IPRs (including patents, copyrights, trademarks, etc) act as an
incentive for companies to invest in the creation of new, often pathbreaking, standards by guaranteeing them:
– A temporary advantage in the market, and/or
– Commercial return from royalties, in the case of licensing the standard
• License fees are especially important for companies that sell inputs
(and access) rather than a full product, and operate in markets in
which applications and further innovations based on existing
knowledge are common.
– Example: ICT and network industries
• Opening standards to the public, whether on a paid or royalty-free
basis, can allow for greater competition in implementation and the
development of new and better standards and end products.
The debate between open and
proprietary standards
• All of these standards – including open, proprietary or nonproprietary standards – are legitimate and important depending on
the circumstances.
• Nonetheless, open and proprietary standards are often slated
against each other, with some of these notions and arguments often
– “Open” = “free”; “proprietary” = “closed”
– Open standards promote more competition and better innovation
than proprietary efforts.
– IPR-based efforts are closed standards, and are barriers to competition
and innovation, even if they are publicly accessible
Are open and proprietary
standards really incompatible?
• On the one hand, many standards involving IPRs are publicly
accessible at a reasonable, transparent and non-discriminatory price
– hence they are open.
– Example: patent pools such as MPEG LA for MPEG standards and the
Open Patent Alliance for WIMAX technology
• On the other hand, standards typically considered to be open are
still based on different aspects of proprietary models.
– Examples: the Android operating system, available under an Apache
License (proprietary extensions may be added)
– RPX, which aggregates set of standards for companies in 4G wireless
market – no license fees, but an annual access fee
Verdict: Friends
• The dichotomy between proprietary and open standards need not
• Both types of standards are crucial for maintaining forward
momentum in the development of ICT and network technologies.
• Furthermore, in many cases they work together.
• Policy recommendation: balance the different approaches to
standard creation, not emphasising one at the expense of the other,
in order to optimise innovation and competition.
Different standards in the ICT field
Open standards:
Open standards:
Closed standards (exclusive
or selective access)
Linux operating system
USB specification (licensed
by USB Implementers
Microsoft .doc format,
exclusive use on Microsoft
Extensible Markup Language
(XML) (produced by World
Wide Web Consortium)
CDMA air interface design
(licensed by Qualcomm)
iPod, exclusive use of iTunes
architecture (SOA) (IBM,
HP, Open Group)
MPEG standards (licensed
by patent pool MPEG LA)
“Smartphone” technologies,
i.e. user interface, hardware
(Apple, HTC, Nokia)
Thank you for your attention!
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