Academic

Standards Setting Organizations: deference to the market

By University of Houston Law Center

Many industries function under technological standards that shape the technology, the products, and the focus of competition. But standards-setting groups have become competition focuses themselves, such as in the debate about “open document” versus “open xml” as a standard. 

           The standards groups should follow a simple premise: standards-setting organizations should not dictate among competing technologies vying for market dominance.

            While much has been written about standards-setting organizations (SSO), most of the law literature concentrates on antitrust law, or on the relationship between SSO rules and intellectual property rights. The issues there, however, are merely symptomatic of a broader issue. SSO standards are market-shaping forces. Because of this, competing firms must inevitably engage in the SSO process seeking a result that benefits them or, at least, a result that does not harm their competitive position. When this occurs, the broader question is what role an SSO should play in a market that has not yet selected a winner.

            The appropriate role should be facilitative of competition, rather than to resolve technological competition before the market chooses. Where two (or more) technologies or products have viable market presence, the proper place to resolve that competition lies in the marketplace, not on the technologist’s computer screen or the bureaucrat’s regulations. 

This calls for deference to the market with respect to standards not associated with safety, health or other over-riding public policy issues. Standards imposed by an SSO in a competitive market should occur only based on true consensus, including among all competing firms, or one’s framed in a manner that does not alter the competitive balance. This can be accomplished in numerous ways, including by recognizing that competing approaches exist and adopting only standards for individual competitors or by adopting standards that reflect both (all) competing systems, leaving the separate standards compete in the same fashion as the basic products and technologies compete.

            The closer a standard moves toward resolving an existing, competitive issue in a mandatory or quasi-mandatory way, the more predictable it is that the standards-setting will in fact be driven by competition issues. Resolving such issues is not an appropriate role for standards setting organizations.

            The intrusive impact of standards into competitive contexts is directly related to the type of standard involved. As the standard moves more toward a permissive framework, its competitive impact lessens and the likelihood of competitive influences diminishes. 

          The SSO process potentially displaces the market in choosing preferred technology. In many circumstances, however, rather than being neutral, adopting a standard may advantage one competitor over another without allowing the market to judge the competing approaches. Standards-setting has become (perhaps always has been) a competition environment that impacts commercial markets, but that functions outside their influence.

            Why is it wrong, one might ask, to have technocrats deciding for a market based on technical criteria, rather than the market deciding. The answer in part lies in faith in the market and in innovation that is not prematurely channeled into a particular path by a “standard.” The simple fact is that the market is the best guide to consumer value. A standards-based choice risks choosing the wrong one and foreclosing alternatives. Once implemented, the switching costs to an alternative are high and perhaps insurmountable.

But the question is not simply why it is wrong to have technocrats decide. A pure technological decision in ongoing market competition is impossible to achieve. Any standards-setting will draw competition-based reactions. And so it should. SSO procedures should attempt to exclude competitive themes in a “neutral” SSO process, but that is likely to be impossible to enforce when significant competitive issues are involved.

The true question is – how should SSOs deal with the fact that for important standards there will competitive advocacy based on obtaining market advantage? The SSO setting is not a market, but a company whose competitive position may be affected by a standard will act to protect that position or enhance it.

SSOs should take the following steps:

·         First, SSOs must recognize the inevitability of competition issues whenever a proposed standard would resolve current competition in the market place.

·         Second, consensus standards-setting should in fact reflect a true consensus and, particularly, agreement among all major competing firms in the affected market before a mandatory or quasi-mandatory standard is promulgated. This gives veto power to all competitors and runs counter to the goal of those who seek expansive scope for standards drafted on the basis of pure technology, but it recognizes the inevitable competition impact that such mandatory standards may have.

·         Third, where standards are proposed in environments where two or more approaches are in active competition, any standard adopted should be permissive by focusing on only characteristics shared among the competitors, are unlikely to adversely affect one or another of the competitors, or are formulated solely for one of the approaches and not mandated for the others.

Full post as published by University of Houston Law Center Faculty Blog on September 27, 2007 (boomark / email).