Innovation, Competition, and Standards

Stephen DeAngelis

September 14, 2007

Over the past couple of years that I have been writing this blog there have been a few recurring themes that have caught my interest; among them have been innovation and standardization. One would suspect that there is a built in tension between these two concepts. Innovation involves thinking outside the box while standardization, on the surface at least, seems to be trying to keep people in a box. The concepts are not as much as odds as one would first imagine. Think of innovation as a flight to a new location using GPS. One could simply start the journey without any consideration for others who might be on similar quests, but chances are your path is going to cross someone else’s path along the way. What do you do you then? That is where standardization plays an important role. To keep us safe, commercial and private aircraft follow rules and regulations that help maintain separation and avoid accidents. When there were only a few airplanes, rules didn’t matter much. The more congested the skies the more important the rules. The same was true when automobiles were first invented.

The first automobile propelled by an internal combustion engine is generally considered to be a three-wheeled vehicle introduced in 1886 by Germany’s Karl Benz. One horseless carriage didn’t present much of problem, but as numbers grew so did accidents. The first known fatal traffic crash killed a 44-year-old female pedestrian on 17 August 1896 in London. It became clear that traffic laws (standardization) were necessary. Did that standardization kill innovation? Of course not. Did it stop people from getting from Point A to Point B? Just the opposite. It meant that the chances of getting from A to B in a safe and timely manner actually increased. The same thing happened after the invention telephones and the Internet. Protocols were invented that made the orderly flow of data possible.

Standards make innovation easier because they make the results of innovation more widely available. That is why Microsoft went to the International Standards Organization recently to get its new extensible markup language (Open XML) approved as an international standard. It failed in its attempt [“Microsoft loses Office software standards vote,” by Richard Waters, Financial Times, 5 September 2007]. As Waters notes:

“Winning approval is considered essential since many governments are otherwise expected to balk at the new Microsoft technology, opting instead for the rival ODF format, which already has international recognition. Though technology standard-setting efforts like this seldom attract much public attention, Microsoft’s push is seen as a vital part of its attempt to win broad support for the latest versions of its key desktop software products.”

The interoperability that results from using standards makes life much better for consumers (because they can mix and match products and it increases competition which generally keeps costs lower). Companies, of course, would prefer locking customers in to their product lines but that creates a win-lose situation whereas open standards create a win-win situation. This is a lesson that many large companies are beginning to understand. This fact is highlighted in a great article by Alec Burnside and Lars Liebeler also found in the Financial Times [“The bright side of innovation,” 4 September 2007]. The focus of their article is the continuing standoff between Microsoft and European Union regulators who have feared for years that Microsoft’s dominance would stifle innovation. Microsoft is appealing the European Commission’s $675 million fine for alleged abuses of its dominant position in operating systems. The standoff started almost a decade ago and lots of things have changed over the intervening years.

“Microsoft has … moved with the market. The FT itself dubbed it a ‘symbolic event’ when the chief executives of Microsoft and Cisco recently pledged to make their equipment fully inter­operable: this was ‘a clear reminder of where the real power lies these days in the IT business … corporate buyers of technology … [are] in the driving seat’. Reflecting the same pressures, Microsoft had previously agreed with ‘open source’ companies, most notably Novell, to promote the combined use of their products in computer networks, and worked with other IT companies on enabling consumers to choose competing software products rather than Windows features.”

In other words, even without a final resolution of its dispute with the EU, Microsoft has had to adopt of international standards and learn to play nicer with other IT companies. That is why in my business I stress the importance of such standards and best practices. By creating a structure based on these features, organizations become more efficient, effective, and — yes — innovative. Burnside and Liebeler began their article by reminding us of a scene from a Monty Python movie.

“In Monty Python’s satirical Life of Brian an angry dissident demands: ‘What have the Romans ever done for us?’ A fellow plotter, innocently taking his question at face value, responds with a long list of Roman achievements, including aqueducts, roads, schools and, above all, public order – in essence, all the trappings of a civilised society.”

The authors then seem bemused by a question that struck them as similarly inane [is there really no such thing as dumb question?].

“Perhaps Nicolas Sarkozy was confusing ancient Rome with the Treaty of Rome when the French president recently asked his Pythonesque question: what has competition ever done for us?”

This wouldn’t have been so amusing had the question been rhetorical; but apparently, Burnside and Liebeler believed it demanded a response — at least a reframed version of the question.

“The question is ripe because the judgment may guide European competition policy for years to come. Is it regulation that has delivered advanced technological innovations, from desktop, to iPod, to do-everything mobile phones – or is it competition?”

That question, Burnside and Liebeler believe, is what is at stake as the EU once again takes up the Microsoft case. Their response to the question came in the form of how much innovation has taken place even though the Microsoft case has not yet been settled.

“The industry has moved on: IT markets have never been static. Innovation has flourished. New products, new business models and vigorous new competitors abound: think Linux, Flash (which is used on more than 95 per cent of personal computers in Europe), Firefox. Think Google – a company that was only three months old when Sun Microsystems complained about Microsoft to the European Commission. Today Google has an overwhelming share of online advertising revenues – its very name has become a verb – and its own share of antitrust (and privacy) controversies. Many of the issues in the Microsoft case are almost quaint now – the idea that customers want an operating system without a media player, for instance. Today, Apple dominates the market for online music. Google’s YouTube service is a juggernaut in the online video space. Was either held back because its target customers were mostly running Windows on their computers? No. Neither of these technologies existed when the Microsoft case started. Even Linux was a niche operating system being nudged along by a Finnish visionary and a small band of loyal developers. … What has competition ever done for them? Well, other than making and organising a nearly limitless world of information and entertainment for instantaneous use in home, business, school and cafés around the world … not much.”

As we move forward in the information age, standards will become increasingly important in ensuring that we all remain on the same playing field. It is the connectivity that standardization allows that has marks this era as different from all those that have preceded it. The record is clear that standardization helps increase competition and has no noticeable negative effect on innovation. In fact, the amount of venture capital being invested IT companies in the U.S. is at its highest level since the dot.com crash earlier this decade. People forget that we are, at most, in the early adolescent years of the information age. Watching it mature will be both interesting and exciting.