The Stability of Proprietary Standards in the Network Era

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Unlike the early days of the computer industry in which computer manufacturers developed vertically integrated proprietary hardware/software systems, many technological systems today are collections of commodity components (West 1). Common data formats, protocols, and interfaces allow these various components to communicate and share data. The world wide web, for example, operates on the HTTP message protocol and TCP/IP networking protocol. The fact that these standards are open, allows anyone to implement them free of cost and restriction. Proprietary standards, on the other hand, typically requires the payment of a license fee to access or invoke the standard. While closed-source software doesn’t necessarily exclude the option of supporting open standards, the nature of open-source software means it is often more likely to implement open-source standards (Simon 233). In exploring the relationship between open and closed-source software and standards, this post suggests that locking in customers with proprietary standards is not a stable equilibrium in the network era where interoperable software is king.

One of the biggest dangers of closed software/standards is vendor lock-in. In Simon’s look at the value of open standards in government, she describes proprietary software as having a focus on integration with tightly coupled components bundled together. As I reflect on this description, Microsoft products like the Windows operating system and Office application suite come to mind. Thanks to Microsoft, I experienced the disadvantage of proprietary file formats in my own life. In middle school, I used the edition of Microsoft Works that came bundled with my new PC for word processing. Only later in high school when I began to use OpenOffice and started sifting through my archives did I realize that I couldn’t open the old works file format. While a converter to the Microsoft Word file format did exist, one could imagine a scenario where a company goes out of business and no such converter is ever created. For institutions like government which are responsible for archiving content, not being able to open old archives is unacceptable.

More recently, Microsoft Office and its family of file formats (doc, xls, and ppt) have become a de facto standard in the realm of office applications because of Office’s dominance. However, the fact that “many government agencies have already adopted or are currently adopting policies that require adherence to open standards” (Simon 299) has forced Microsoft to act in attempt to avoid losing market share. In September 2006, Microsoft published its Open Specification Promise, opening up these formats for compatibility with other applications. While Microsoft’s newest office suite, Office 2007, doesn’t natively support the OpenDocument format (an open standard implemented by OpenOffice), a Microsoft sponsored plug-in to read the format is available. Also, Microsoft has lobbied (successfully it appears) to pass Office 2007′s native file format Office Open XML as an ISO standard. As an interesting aside: Google Docs, a product looking to make inroads in the office application space, offers import and export for many formats including Microsoft’s .doc format and OpenDocument. Microsoft’s change in its stance on file formats demonstrates that proprietary standards aren’t sustainable in an era where consumers demand interoperability.

Another example of vendor lock-in is the Apple iTunes music store, specifically songs that are encoded with Apple’s FairPlay DRM protection. The DRM restrictions only permit these songs to only be played on iPods. While you can burn the songs to CD and then re-encode them on your computer to circumvent the copy protection this process is lengthy and cumbersome. While Apple has recently surpassed Walmart as the number one music retailer in the US, it is unlikely that iTunes will remain the only dominant player in the digital media market, especially with these restrictions. Already more open competition has sprung up like Amazon’s DRM-free MP3 store. Besides offering DRM free MP3s, Amazon’s service boasts the Linux client that iTunes lacks. Pressure from competitors to go DRM-free has also resulted in Apple beginning to open up and offer DRM-free music. But imagine investing hundreds of dollars in iTunes music, only to realize that when you replace your iPod with some other MP3 player you cannot play it on that device. (Although this might not be entirely true for the tech savvy consumer since iTunes DRM has been cracked, in addition to the loophole mentioned earlier, the example is illustrative nonetheless). Time and time again, we see copy protection schemes cracked, demonstrating consumers demand for interoperability.

Interoperability and open standards are also important on the web. While many online services are closed source, they offer a layer of compatibility. Google’s Gmail, for example, offers POP3 and IMAP for compatibility with other mail clients. Financial sites allow data to be downloaded into Quicken and other financial software. It is interesting to speculate on the future of sites that don’t embrace open standards. The current stance taken by the social networking site Facebook, for example, is against interoperability with other social networking sites. While Facebook has an API for application developers, its Terms of Service prohibit exporting user data. By doing so, Facebook keeps the switching cost to another social networking provider high and essentially locks in it’s users. It’s a matter of time to see how Facebook fairs with this decision. It seems unlikely that Facebook would face legal pressure in the same way that Microsoft did, however, competition in the form of open social network providers like Google’s OpenSocial have already sprung up. OpenSocial “defines a common API for social applications across multiple websites” thus making your social connections portable. If I were Facebook, I would be careful because as we’ve seen previously, closed standards are often unstable when consumers desire freedom with their information.

As noted earlier, the early days of mainframe computers saw proprietary hardware bundled with proprietary software before PC hardware evolved into a collection of commodity components. As history often repeats itself, a similar paradigm is re-emerging in the market of embedded systems. For the most part, devices like cell phones and PDAs have been bundled with closed, proprietary software. As the industry matures and consumers become frustrated with these limitations, open-source projects like the OpenMoko (open cell phone hardware) and Google’s Android (open cell phone software) are in development. While their future remains to be seen, I predict innovation and growth in these markets as consumers realize the restrictions of closed platforms.

Contrary to this paper’s thesis, Aggarwal et. al argue that proprietary standards are stable from an economic standpoint. They describe a pie representing the total market for a technology and use this metaphor in describing the motivational differences between proprietary and open standards. They characterize proprietary standards as being “concerned with pie sharing—trying to increase your share of the pie” while open standards are “concerned with pie expansion— trying to increase the size of the pie while leaving your share fixed.” The authors argue that trying to grab the biggest piece of pie, rather than cooperating and splitting a larger pie, is a dominant strategy in this classic prisoner’s dilemma situation. Pursuing the proprietary standard is dominant because “If one firm gets a reputation for pursuing the monopoly route, then the best response for other firms is to do the same.” I would argue, however, that there are external forces that affect the payoffs in this game. Whether it is government pressure, consumer demand, or high-quality open-source software, these forces drive the situations we’ve examined toward more open solutions.

If open standards are the future, then what do we make of closed source software? Should open-source always be preferred to its closed-source competitor? Not necessarily. Sutor argues that the decision between closed and open source software should be made “from practical business considerations, not political or ideological reasons”. As much as I like the idea of open-source software, I have to agree with this. In choosing the best software, consumers should choose the software that provides the best cost/benefit ratio. Interoperability, however, is a hidden factor that most people don’t consider. Sutor argues that in a perfect world closed and open-source software can coexist with open standards as the mediator. It’s a win for consumers if they can choose software that is simply the best tool for the job, rather than worry about compatibility with existing systems and interoperability with others.

References:
1. Aggarwal, Nitin and Qizhi Dai and Eric Walden. “Do Markets Prefer Open or Proprietary Standards for XML Standardization? An Event Study.” International Journal of Electronic Commerce, Vol. 11 Issue 1. October 2006.
2. Simon, K.D. “The value of open standards and open-source software in government environments.” IBM Systems Journal. 2005.
3. Sutor, B. “Open Standards vs. Open Source.” Striking the Right Chord, If You Can Find It. Available on the web: . May 27, 2006.
4. West, J. and J. Dedrick. “Proprietary vs. Open Standards in the Network Era: An Examination of the Linux Phenomenon.” In Proc. of the 34th Annual Hawaii International Conference on System Sciences. IEEE Computer Society, Washington, DC, 5011. January 2001.

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