The Economy of Standards: or why old school standardisation will never work

Every now and then we get inspired by content from others. Like this time. We received an alert that a newsletter from the European Payments Council contained high quality analysis on the ‘standards discussion’.  All credits go to Prof. Dr. Knut Blind.

As we just can’t get enough from standards, we had to check this out. And though very abstract the article discusses the standardisation discussion at a must read level. Yes it is still boring and not sexy, but this article contributes big time to the way we think of standards.

1a. The research question: way too difficult

The article in the EPC newsletter poses an actually very interesting question. But it is way too difficult:

How can multiple and parallel existing standards within the same technological area be
fundamentally evaluated in terms of theoretical static efficiency and with respect to their dynamic effect on innovation and competition?

To be honest, I had to read this question a few times to understand.

1b. The easy version of the research question

Thankfully, the article contained an easier version of the research question:

“Instead of a competition between two or more incompatible standards, why not investigate the compatibility between these standards in the cooperative space?

2. What is a standard?

A standard represents an agreement in respect of the standardisation of products, procedures or practices. We know of formal, industry (or consortia), company specific and de facto standardisation. Sometimes a standard is based on a strict consensus process. And sometimes formal standards organisations and bodies also publish specifications, not developed by consensus.

In this research the term ‘standard’ the term standard will be used because the development process is of secondary importance for the general analysis (Sorry guys).

3. Old school standardisation: standards competition

The old school (also called: theoretical, static or industrial school) assumes that:

  • standards in competition are not compatible with each other.
  • it is not possible to achieve a stable equilibrium in the competition between two incompatible standards.

Furthermore the old school of standardisation:

  • determines that a market decision on one of the two standards is required for the complete network effects to materialise.
  • highlights the significance of actors using a technology:  it is these actors who make the market decision.
  • does not address an economic efficiency assessment of the selection of a standard.

And this is how old school standardisation can take place (we all know of the Betamax-VHS story):

  • through the forces of network effects a dominant standard emerges, which captures 100% of the market in the long-term.
  • Since the company, which - in the commercial environment - holds the ‘winning standard’ anticipates a strong and long-term monopoly position, the incentives to come out on top of the ‘winner takes all’ game, are intensely pronounced.
  • the opposing standard loses its attraction very quickly and therefore disappears from the market (Often, the technical advantage of a standard is not the decisive factor driving the market decision, rather the expectations generated with respect to the future possibilities of using the technology or the equipment.)
  • The investments made by commercial competitors to win the standardisation game exceeds the expected return several times over.

4. In comes the new standardisation school

So why such as static approach. Why not let the standardisation approach be determined by effiency analysis based on several parameters. The new school (also called: the dynamic, flexible standardisation school)  assumes that:

  • The standardisation approach can be (1) a settlement on one standard, (2) the use of multiple standards in a cooperative space or even (3) competition between standards.
  • parameters to determine which approach suits best are:
    - preference for network effects
    - local (national) networks effects
    - heterogeneity of preferences
    - cost of development and maintenance of a standard
    - uncertainty about technical quality
    - length of technology life cycle
    - development potential
    - uncertainty about future user preferences
  • the efficiency gains from this approach are much bigger that the gains from the immediate decision for one standard.

And then you get something like this:



5. How this effects the e-invoicing standardisation discussion

From looking at it, the current e-invoicing standardisation contain all the elements of an old school.

Perhaps we should take a look at the new school approach every now and then. And analyse whether the current approach delivers what is actually needed in this arena.

Also the new school approach introduces objective parameters and disconnects the standardisation itself from stakeholder interests

But then again that has a flipside:  there is a fat chance that the current old school “stakeholders” are not all that enthusiastic about the new school approach. (Because stakeholder interests are not part of the equation.)

So, what school are you in? The Old? The New.

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