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, 2009) 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 selectively • 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 raised: – “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 exist. • 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: non-proprietary Open standards: proprietary Closed standards (exclusive or selective access) Linux operating system USB specification (licensed by USB Implementers Forum) Microsoft .doc format, exclusive use on Microsoft Word Extensible Markup Language (XML) (produced by World Wide Web Consortium) CDMA air interface design (licensed by Qualcomm) iPod, exclusive use of iTunes format Service-oriented 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!