Economic Impact of Technology Standards The past and the road ahead September 2017 Authors: Jorge Padilla, John Davies and Aleksandra Boutin compasslexecon.com This report was commissioned by Qualcomm Incorporated. All opinions expressed here are those of the authors, who are all employees of Compass Lexecon: Jorge Padilla, John Davies and Aleksandra Boutin, supported by Anubhav Mohanty and Sabire Ipek Demir. Executive Summary COMpass LEXECON Economic Impact of Technology Standards The past and the road ahead Executive Summary 1.1 This report examines the economic impact of technology others in the ITC sector. Furthermore, this approach is standards - which enable components from different spreading, not least because other industries are adopting suppliers to work together - on innovation, competition and wireless technologies in the ‘Internet of Things’. thus consumer choice and welfare. Such standards exist in 1.6 The mobile telephony industry has seen an impressive rate of all industries but are particularly important in Information growth and innovation, as well as a dynamic market structure and Communications Technology. We show that the way in in which new entrants continue to arise to challenge existing which these standards are developed and governed can have suppliers. Between 1994 and 2013, the number of devices profound implications for the pace of innovation and intensity sold each year rose 62 times or 20.1% per year on average. of competition. The cost of mobile subscriptions relative to maximum data 1.2 We present evidence that industries such as mobile speed has decreased 99% (approx. 40% per year) between telephony, which are based on open standards agreed through 2005 and 2013. 4G technologies have enabled a 12,000-fold voluntary participation in industry bodies, have an impressive increase in capacity relative to 2G; data download speeds record of innovation. Open standard-setting, with licensing have increased to 250 Mbps for 4G from 20 Kbps for 2G. of technology incorporated in the standard, allows many 1.7 It is no coincidence that this impressive performance has specialised firms to operate at all levels of the value chain arisen from a highly competitive and diverse market structure. - but most crucially in R&D - without needing to achieve a Downstream, more firms than ever are participating in large scale. This leads to more competition, more specialised handset manufacture and, upstream, each successive research firms and greater diversity in research. generation of wireless technology standards has wider 1.3 However, these outcomes depend on the Standard technology ownership. Development Organisations (SDOs), which govern open 1.8 The TV industry, based on mainly government-promoted standard-setting, striking the right balance between the broadcasting standards, and the personal computer industry, interests of technology developers and technology users. If based in part on Operating Systems acting as de facto innovation is not sufficiently rewarded, this model ceases ‘proprietary’ standards, have also been successful, but to work and standards must be established by other means. innovation and competition have at times been hampered Examples from other industries and other times – in which by the standard-setting process, as indeed occurred in the standards have been set either by firms acting alone or by early days of mobile telephony. These different experiences governments - suggest that these alternatives would result in illustrate the way standard-setting can affect economic a less successful, less dynamic economy. outcomes. Different approaches to setting standards Open standards enable competitive and 1.4 There are several ways to achieve standardisation. A standard innovative industry structures to emerge can simply emerge, often because one supplier achieves pre- 1.9 Standards are so pervasive in some industries that it is eminence in a network industry in which economies of scale difficult to determine their effect, since there is no obvious and scope are important – as Microsoft did in PC operating way to simulate how those industries would perform in the systems. Alternatively, a standard could be imposed by a absence of the standards. Without technology standards, government or, more commonly, groups of governments, as many industries simply would not exist. Many studies have happened in early mobile telephony or as still happens in TV therefore sought to measure the incremental effect of broadcasting standards. standards by comparing growth rates in different countries 1.5 The communications sector, in contrast, has seen the and different periods and attempting to relate differences rise of a third sort of standard-setting in which industry to the stock of standards. Such studies typically find that representatives agree technology standards on a voluntary about 20 – 30% of GDP growth relates to the development basis in Standard Development Organisations, typically of standards. Surveys show that firms consider standards incorporating many different patented technologies into the important for performance, especially in the ICT sector. standard. Modern wireless telephony standards developed and continue to be developed in this way, along with many Executive Summary COMpass LEXECON Economic Impact of Technology Standards The past and the road ahead 1.10 Economists have also examined the effects of standards new technology than the more open Windows-Intel standard. on specific industries. Industries such as mobile telephony Other companies with closed standards – such as RIM’s and PCs, based on patented technology incorporated in Blackberry – have been much less successful. standards, reduced costs and improved product performance 1.14 Even a standard such as Windows, which is open to use by many times more rapidly than other industries making little suppliers of complementary hardware and software, but use of standards (even those also based on semiconductor under proprietary control of Microsoft alone, has drawbacks. technology and presumably benefitting from ‘Moore’s Law’). Suppliers of complements are utterly dependent on the Standards lead to more rapid technology adoption: SMS text standard proprietor to maintain compatibility as it introduces messaging developed using a standard previously developed new versions, to inform them about its technology so they can for traffic management, for example, allowing rapid adoption, make best use of new features and above all not to exclude by avoiding a period of incompatible SMS systems. them from the market by – for example – incorporating their 1.11 Economics can help explain why standard-setting is valuable products as ‘features’ in new versions of the standard. IBM, and why different approaches to standard-setting will Microsoft, Intel and other proprietary standard-setters have result in different outcomes. Firstly, standards are obviously been accused of all of these. Aware of the concerns – and the most beneficial when the value of a technology to the user chilling effects they could have on innovation and investment depends on how many other users there are. These other – such proprietors typically go out of their way to inform and users could be all of the same type, as when the value of reassure their ‘ecosystem’ partners. Some have even given up a telephone depends on how many people you can call, or control of the standard, as Adobe did with PDF. a different type, as when consumers’ choice of operating 1.15 Economic studies of the handheld computer industry have system depends on how many software developers make confirmed the importance of openness. Operating systems apps for that operating system, and vice versa. In these open to third-party hardware and software enabled more circumstances, even without any formal arrangements, innovation than closed systems, but there is also evidence that one or more common standards will usually develop. opening the operating system governance and development to Proprietary standards market participants can raise innovation still further. 1.12 If a standard simply ‘emerges’, it will often be a proprietary Government-promoted standards one, under the control of a single company. This is by no 1.16 An alternative is for governments to set standards. The TV means a bad thing in itself, and it is usually preferable to no and telecommunications industries in post-war Europe were standard at all. However, the emergence of such a standard dominated by state providers, so standards were established will often be through a ‘standard war’ between one or more by states. Even in the US, however, federal agencies have competing standards, which can provide a beneficial choice often been responsible for setting standards and indeed one of technology but can also result in slower adoption. For of the first important post-war standards decisions – the example, 2G mobile technology was adopted faster in Europe, US FCC’s recognition of CBS’s colour broadcasting system with a single, government-promoted GSM standard, than –illustrates how a government standard-setter can make the in the US with two competing standards – but one of those wrong decision. The alternative RCA system, compatible with competing standards, CDMA, was technologically superior. existing black and white sets, was more readily adopted by Standards wars can also result in the ‘wrong’ technology the market and the FCC had to reverse course. becoming standard. VHS videotapes and the QWERTY keyboard are often cited as the archetypes