Research Institute of Economy, Trade and Industry (RIETI)BBL Seminar
Handout
December 7, 2011
"Standards, Platforms, and Public Policy"

Shane Greenstein
http://www.rieti.go.jp/jp/index.html

Shane Greenstein
Kellogg School of Management
Northwestern University Thank you for hosting me.

◦ Big thank you Dr. Reiko Aoki!

 Thank you for opportunity to talk with you.

◦ Interested to know what is useful.

 Please ask questions.

◦ I tend to talk quickly…
◦ Apologies in advance…just slow me down.

2 Introduction,はじめ Illustrations,イラスト

 Key concepts,キーコンセプト

 Evolution of platforms,プラットフォームの進化 Conclusions,結論3

 What does the (old and new) literature onstandards suggest about government policy?

◦ When should policy makers intervene in markets
where standards play a large role?
◦ When is a government policy that favors compatibility
between standards superior to a policy that favors
competition between standards?
◦ How well do non-market mechanisms perform incomparison to market mechanisms?

 What are the big open questions?

4Let me start with a personal
story….
 Victor Stango & I edited abook, Standards and Public
Policy (Cambridge Press,2007).
 Why did we do this book?
◦ Michael Moskow, head of theChicago Federal Reserve Bankat the time, asked for it (andpaid for it!).
◦ Moskow was Victor Stango’sboss.

Why did Moskow want his
research department toinvestigate standards?

5

同総裁は、チェックのクリアを基準に簡単に起因得ていたことを知っていた

The Fed had helped pushthrough standards for checksclearing.

◦ Improved efficiency inprocessing checks.
◦ Helped the Fed while helping theindustry.
◦ Large gains for US economy.

Did not happen until Fed didit. No individual bank couldget others to agree. Fedendorses a design.

 Moskow received manysuggestions for additional
things to endorse.
 But he was very wary of making
a big mistake….

Moskow wanted to know:
When to intervene and whennot, and why?

6 Old & new literature on standards differ in theiranalysis of the effects of standards on markets,
so differ in framework for policy.

◦ Old literature focuses on the demand for compatibility &the creation of switching costs.
◦ Focused on the number of ways in which standards
limits the distortions from switching costs.

 New literature focuses on competition betweenplatforms which embed standards.

◦ Shifts focus to analysis of participation & adoption ofplatforms by users, developers, advertisers.
◦ Investigates multiple ways to grow a platform, and theeffects of intervention on platform growth.

7 Introduction,はじめ Illustrations,イラスト

 Key concepts,キーコンセプト

 Evolution of platforms,プラットフォームの進化 Conclusions,結論8

 Motivate general approach to thinking aboutstandards and platforms.

◦ How do standards help markets emerge out of an
exploratory period?
◦ What are the catalysts for growth of mass markets?

 How do competitive events and governanceinterplay as platforms evolve?

◦ Does governance respond to competitive pressure?
◦ Does competition act as check on poor choice ofgovernance?

 Where can policy make a difference?

9 Experiments throughout most of the 1990s.

◦ Early wireless LAN designs generated little sales◦ Interesting usage cases – campuses, warehousing,wireless cash registers.
◦ Equipment firms the primary innovators.

 IEEE committee 802 designed an interoperability

standard. First released in 1997, again in 99.

◦ Helped commit firms, grow mkt size.
◦ Used unlicensed spectrum so all could interoperate.

 Market competition pushed it forward in 99.

◦ Apple commissioned first product from Lucent. Dell wasnext. Competitive rivalry took off after that.
10 Firms formed an alliance shortly thereafter◦ For conformance testing◦ For branding. Name “Wi-fi” chosen.

 The unexpected emergence of the “hot spot”.

◦ Experimentation by access providers.
◦ This was the most valuable use. Variety of models.

 Unexpected design of Centrino in 2003

◦ Intel designed Wi-fi into motherboard.

 Intel also designed the chip set to be a commodity.
 Further cost declines. Fostered ubiquitous use.

 IEEE committee continued to upgrade speeds….

◦ Each redesign has become more contentious.

11 Experimentation continued for some time

◦ Throughout most of the 1990s wireless LANS were not a
profitable market! But many believe in the usage case,which propelled experimentation by equipment firms.

 Breakthrough with an unexpected use.

◦ Leapfrog functionality for the mass market required
making equipment at a low cost price point.
◦ IEEE-endorsed standards contributed to growth because
antenna and receivers had to interoperate.
◦ Growth in ubiquity encouraged more follow-on
complementary uses.

 Sponsors attempted to profit.

◦ By selling equipment.
◦ By taking a slice of access revenue.
◦ Policy enabled considerable experimentation.
12

Experiments early by leading firms & entrepreneurs.

Smart phone designs from Microsoft and many others.
 Limited adoption in US, more outside US.


Unexpected emergence of the iPhone in 2007.

One touch movement: a leapfrog in functionality.
 Bringing the iPod installed base + phone + pictures.
 Apple has a core of fanatical and loyal buyers  sales.
Ecosystem develops for mass market iPhone.

Apple adopts strict rules for developers. Resentment.
 Tries to dictate standards (e.g., Flash). Anger.
 Apple profits in App store.
13

 Google looks for competitive response to Apple.

◦ Strategic issue: deter proprietary standards.
◦ Buys Android OS, redeploys it with open APIs to invite
partnerships. Allows variance in implementation.
◦ App store  ecosystem, Android profits in app store.

 Growth due to less restriction and lower price◦ Not as profitable as iPhone. Growth through variety.

 Change in competitive landscape?

◦ MS almost gone, Symbian declines, Blackberry in trouble.
◦ Tablet competition? Amazon, Apple, B&N, Sony.
◦ Many other firms involved (Nokia, MS, HP, Samsung, etc.)14Experimentation propelled by software firms.

Breakthrough with an unexpected use.

Android a competitive response◦ Through most of the 2000s Microsoft did not have aprofitable mobile segment. Usage case presumed strong
interplay with PC. Presumed pieces came from many
players, organized by Microsoft.
◦ Music + phone + pictures + finger navigation = leapfrog
functionality for the mass market◦ Required making equipment at a low cost price point.
◦ Proprietary standards contributed to the virtual cycle
because copyright holders wanted IP for music.
◦ Strategic benefits towards openness pay off for Google.
◦ Revenue in app store too.
◦ Many others want open, such as Amazon, and mostentrepreneurs and their VCs….
15

 Experimentation can continue for some time

◦ Variety of strategic choices over time.
◦ Usage case propels activity, search for value.
◦ Often unprofitable for extended periods.
◦ Standard/platforms vary with experimentation.

 Breakthrough often unexpected.

◦ Leapfrog functionality or other catalyst, such as a new
design with wide appeal.
◦ Important: Applications develop  ecosystem.

 Especially developer behavior  choose among platforms.

 Sponsors attempt to profit.

◦ Sell equipment, gain revenue within given platform.
◦ Designers, sponsors, close allies typically benefit more.
16 Introduction,はじめ Illustrations,イラスト

 Key concepts,キーコンセプト

 Evolution of platforms,プラットフォームの進化 Conclusions,結論17

 Facilitate inter-networking.

◦ Data in one location shared w/many other locations.
◦ Contribute to low costs for Internet applications.
◦ Many standards facilitate routinized procedure for sharingdata.

 Facilitate network effect.

◦ Value of a standard rises w/participation.
◦ Standards facilitate interoperability, services build on topof that interoperability, and these services display network
effects.

 Platforms reduce transactions costs◦ Between complements components that work together…
◦ Between users and application developers.
18

 A platform: Reconfigurable base of compatible

components on which participants buildapplications.

◦ Multisided: Many distinct group of participants Users, advertisers, content providers, app developers, etc.

◦ Platform accommodates each group.
◦ Often subsidy/cost for one group & revenue from another.
 Ex: Newspaper, Google search, Apple iPhone.

Platform serves economic function, as intermediary
between groups with different interests.
◦ Which supports mix&match.

 Among antennae and receivers in Wi-fi.
 Among apps, handsets, and users in Android.
19 Leadership affiliated w/designing computer

hardware and/or software that mediates
activities among participants.
◦ Many firms aspire to leadership role.

 MS, IBM, Oracle, Google, Apple, Amazon, etc.
 Windows, web services, search, mobile devices.

 What role entails◦ Design standards. Alter them. Inform others aboutalteration. Roadmaps & targets. Provide assistance.
 Lower the transactions costs for partners.

◦ Timing mismatch of costs/revenues: Expend costs indesign/operations. Gain revenue later.
20 Both profit or not for profit forms◦ NFP: Industry consortia, SSOs, Open source org.

 Important aspects: Restrictions/limitations onparticipation and release of information.

◦ Open: make all info available. No limits on use.
◦ Differ on interconnection. Open has no limit.
◦ Pricing at zero? Maybe in open source, but notnecessarily.
 Confusion about free/libre.

 Platform governance shapes several margins ofpotential platform value.

◦ Not only price. Many strategic choices, often taken atmoments when payoffs quite uncertain.
◦ Particularly important decision: what technicalinformation developers know about present and futureplans for the platform.
21 Analysis of standards needs to frame issues interms of platforms.

◦ Platforms are an organizational form for market oriented
users & firms, designed to diffuse standards in mannerthat serves platform sponsor.
◦ Literature stresses private strategic purposes.

 Analysis should focus on participation in andadoption of platforms.

◦ By users, developers, advertisers.
◦ Shift in emphasis. Places less emphasis on engineeringfunction, more on economic decision making andeconomic contribution of platform.

 Important policy question: regulatory and legal

rules for how platform leader treats participants.
22 Introduction,はじめ Illustrations,イラスト

 Key concepts,キーコンセプト

 Evolution of platforms,プラットフォームの進化 Conclusions,結論23Standards and platforms are rarely static.

◦ Most are embedded in products that continuallyupgraded, etc. Standards change.
◦ Platforms add value over time.

 Platforms shapes firm competition.

◦ One ecosystem may compete with another.
◦ Competition evolves as both platforms evolve.

 Policies shape the evolution of competition◦ By shaping firm incentives, and rules for platform.
◦ By shaping the margins on which firms compete24 Participants gain from involvement

w/platform.

◦ In comparison to unilateral action.
◦ Potential bargaining issues or misalignment ofcost/benefit.

 Ex: Bar code scanner useful if all cooperated. Bar code
almost collapsed b/c little profitability in first decade.

 Platforms become focal for learning andexperimentation.

◦ A societal trade-off: Concentrate learning withfewer platforms, but more platforms nurturesvariety & competition.
25

 If platforms add value w/o limit…

◦ Existing platforms grow, but there are inherent limits
on numbers of platforms.
◦ Backward compatibility tends to limit growth of anyspecific platform (eventually).

 Platforms competition incents platform

differentiation.

◦ Nurture survival of multiple platforms in market.
◦ On what margins do platforms compete?
 Generally, not on all margins.

26 Multi-homing: users and/or firms maintain viableeconomic relationships w/multiple platforms.

◦ More MH can help sustain more platforms competition.
◦ Absence of MH can contribute to monopoly of platform.
◦ Many examples of where it matters: Bar codes, Battle of
the Bund, Internet BB, Smartphones

 Converter: Technical bridge b/w platforms◦ Can change size of market, alter evolution of platforms.
◦ Examples: US email systems in 1987; Resolution of 56K
modem fight.

 Multiple pathways to platform development.

◦ Many ways for market to evolve and achieve economiesof scale.

27 Early stage quandary: what design/operation

most valuable?

◦ Many usage cases for early adopters do not imply
usage case for mass market adopters.
◦ Public actors can facilitate experimentation.
 At early moments, pursuit of variety of approaches.

 Quandary: Is market working? Look for

symptoms of health.

◦ Economic experiments, entrepreneurial entrants,vigorous standards competition, absence ofunilateral bargaining.
28 Quandary: Are platforms growing? Hints ofvirtuous cycles.

◦ One participant’s action raises value of participationin another type of participant. E.g., more users more apps more ads.
◦ E.g., IBM PCs in early 80s, Apple iPhone in ’07.

 Developers are focal for analysis.

◦ As symptom of success/failure of virtuous cycle.
◦ Difficult management challenge for many platformsponsors.

29 A complete analysis requires analysis ofchange over time, (often) at level of platform& (sometimes) at level of firm.
 Multiple pathways for platform evolution totake. Firms usually have preferences about
which path the market takes, but policy may
not have strong preferences.
 There are a variety of intuitive concepts toanalyze evolution as it occurs.

30 Introduction,はじめ Illustrations,イラスト

 Key concepts,キーコンセプト

 Evolution of platforms,プラットフォームの進化 Conclusions,結論31

Private orderings can (& do) resolve issues.
◦ If the conditions are right.

 Often a few large lead organizers w/incentives to lead.
 Many producers of complementary goods.

 If “joining” a coalition is voluntary, hard to design standards
that makes everyone happy.
 Bargaining and negotiation inevitable.

Standard more than just endorsement of a design.
◦ Changing w/technological possibilities, firm needs.
◦ Institutions to support, upgrade, test.
 Firm interest change over time.

Even after a breakthrough, there will be manychanges in a design.

◦ This usually creates more value for all participants.
◦ Implies policy cannot be static.
32

 Disclosure raises many issues.

◦ Disclosure rules in standards committees shapes
whether firms participate.
 Sometimes interoperability is why firms participate –they want assurances that all the complementary
equipment works together.

◦ Firms pay close attention the disclosure rules.

 Big difference between open and proprietary platforms
when IP is at stake.
 Open platforms will elicit disclosure from private firms,
but only if rules are tightly written.

 Who is favored by disclosure rules?

 Important open question for policy.

33

 Generally when to consider intervening.

◦ When one platform better than none. When intervention
can avert bargaining failure.
◦ When public actor hold statutory authority over key input
into platform components.
◦ When intervention facilitates entry and/or experiments.

 Generally when not to intervene.

◦ When private orderings can manage platform
development.
◦ When platform competition shows symptoms of vigor.
◦ When use case remains uncertain, but private initiatives
continue to experiment and compete.

 Government mandates for designs only rarely will

work better than market processes.

◦ Due to leadership failures or statutory requirements.
34 ご清聴ありがとうございました ご質問は？

35