Economic Impact of Technology Standards Summary Report
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Economic Impact of Technology Standards Summary Report The past and the road ahead October 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. Contents COMpaSS LEXEcoN Economic Impact of Technology Standards The past and the road ahead Contents Section 1 Introduction 1 Section 2 Connecting, co-operating and competing, with standards 3 Section 3 Why standards matter 5 What is a standard? 5 Standards help co-ordinate design and investment decisions by many different firms 5 Standards allow efficient scale, while maintaining competition 6 The economic effects of standards 6 Macroeconomic studies of standards 6 A transformative standardisation: container shipping 7 Good jobs at good wages: standardisation raises the value of acquiring skills 7 Case studies of standards in hi-tech industries 7 Section 4 Standards in wireless telephony 11 The first generation of mobile telephones 11 2G standards in Europe 11 2G mobile telephony in the US 11 Converging to a global standard – 3G mobile telephony 11 Updating global standards: transition from 3G to 4G 12 Section 5 Standard-setting in practice: how open standards drive competition and innovation 13 Competitive markets through open standards 13 Open standards, innovation and the market for technology 17 Section 6 Who decides? The role of the gatekeeper 21 A single private sector gatekeeper: proprietary standards 21 The state as gatekeeper: government standards 22 Open participation in the gatekeeper role: Standard Development Organisations 22 Avoiding multiple standards, standard wars and regional fragmentation 22 Selecting efficient technology 23 Innovation and competition 23 Competitive markets 23 Encouraging participation and innovation in open voluntary standards 23 Openness helps ensure balance of different interests 24 A variety of IPR policies, reflecting different industry characteristics 24 Policy changes and participation 24 Section 7 Conclusions 27 Section 8 Bibliography 29 Section 1 COMpaSS LEXEcoN Introduction Economic Impact of Technology Standards 1 The past and the road ahead Introduction 1.1 There can be few more important questions in competition 1.4 This has profound implications for industry structure. If policy than how to deal with technologies that connect companies have confidence in rules guiding their commercial different products and companies. Technological progress relationships – and confidence in the governance systems for is the most important contributor to long-term economic how those rules are set – then companies with very different growth, as well as driving social and environmental change. backgrounds, specialisations and skills can compete and Yet ownership of key technologies creates concerns about work together. If not, the alternative is most likely merger concentrated economic and social power, particularly for into a large, integrated business: which may be much less platforms with which other products must interact. The rules innovative, as it misses out on the variety of voices, and may governing these interactions will influence the success and also not need to compete so hard for customers. development of firms, new technologies and the economy as 1.5 Different SDOs work in different ways, but the basic concept a whole. is for experts to participate voluntarily to define and publish 1.2 Some politicians have gone so far as to call for regulation technological standards. Owners of technology essential to of tech giants such as Google or Facebook as if they were implementing the standard declare them as such. In return utilities. While still a minority view, such a proposal brings the owner commits to charging only fair, reasonable and non- out the dilemmas very clearly. We need the owners of such discriminatory license fees. There are disputes about such technologies to be entrepreneurial and dynamic but also fees and how much influence SDOs should have over them, to be restrained from abusing their power. We need global but these practical details should not be allowed to obscure businesses, to take advantage of economies of scale, while the overall success of the model: success that can be seen not preserving opportunities for innovative, small firms. We need only in the performance of the mobile telephony industry but technology owners to work together and produce compatible also in changing the way innovative industries are structured. products, while also competing in the marketplace and in the race for the next innovation. 1.3 These questions are often debated as if these choices are zero-sum. However, there are better solutions and they have arisen within the technology industry itself. In the mobile telephone industry, and other mostly telecoms-related industries, technology standards allow firms with many different specialisations to work together both to design products and also advance the underlying technology, without a single supplier owning the process. The Standard Development Organisations (SDOs) that do this provide a mechanism that, while not perfect, enables innovators and manufacturers to co-operate and compete. Section 2 COMpaSS LEXEcoN Connecting, co-operating and Economic Impact of Technology Standards 3 competing, with standards The past and the road ahead Connecting, co-operating and competing, with standards 2.1 Smartphones are the ultimate multi-function devices. A 2.3 There is no one owner of all of this, yet it works together, professional from London travelling to Madrid can listen to allowing us to make calls, transfer photographs and media, the radio, stream her favourite album or catch up on the latest and shop online. It works because of standards: agreed episode of her favourite TV series while waiting at the airport. formats, protocols and technology, usually published, define When she reaches Madrid, she can use an app to order a taxi the technology and how it works together. Standards not from the airport to her hotel and look for restaurants nearby only co-ordinate existing technology, they play an even more for dinner. Mobile telephony has made life simpler but the important role in defining how it improves. Standards allow underlying technology to achieve this is vastly complex. companies to co-operate and to compete: both in producing devices and in innovating to produce the next technologies. 2.2 A huge variety of firms is involved in making this all work. A smartphone uses components from firms across the USA, 2.4 This is only going to become more important, as more and Germany, Japan, Taiwan, Italy and South Korea, with supply more devices become connected through the ‘Internet of chains ultimately stretching to almost all countries in the Things’. Mobile phones, electricity meters, telemedicine world, as well as software apps from everywhere and cellular devices, smart vehicles and many more things – maybe service provided wherever the phone is used. The companies 20 billion by 2020 - are going to be capable of sending and working together to achieve this may have very different receiving data to one another. In effect, many industries are backgrounds. For example, Corning is a ceramics and glass going to become part of the ‘telecoms’ industry. This may be no specialist that now makes smartphone screens; Spotify is a bad thing, as the telecoms industry has achieved remarkable Swedish company supplying music streaming services and technical progress, while retaining very broad participation by Vodafone a cellular service company that originated in Cable many different firms: competing and co-operating together. & Wireless. Some companies involved, such as Imagination Technological standards and the way they are set have a lot to Technologies, provide almost no physical or software services, do with that success, as this report explains. instead being paid for the innovative technology they license. Section 3 COMpaSS LEXEcoN Why standards matter Economic Impact of Technology Standards 5 The past and the road ahead Why standards matter What is a standard? manufacturers need to invest in a plant to build the equipment, broadcasters need to invest in equipment to create colour 3.1 Some products need to work with other products, or at least images and transmit them, and customers need to invest in are more useful if they do. A keyboard is useless unless it colour televisions. Technological progress will be slow if any can connect to a computer; a computer is more useful if it of these groups of participants is not prepared to take the can connect to a keyboard than if it cannot. Such compatible risk of investing before it is clear that their investment will products are examples of : products which complements be compatible with the other elements of the system. Most deliver more value together than they do alone. countries therefore introduced colour broadcast standards that 3.2 Complements arise in many areas of life and need not were government-promoted (in effect, as broadcasters were involve high technology or compatibility. Beer and pretzels mainly state-owned, the broadcast standards defined what TV are complements; and can be consumed together without set manufacturers needed to achieve). their suppliers having to give much thought to how to design 3.6 Standards can also help solve the risk of commitment to just them to be compatible. However, most machines (or machine one other firm. A firm that designs a component to work only components) that are complementary must be consciously in – for example – a Boeing 747 is entirely dependent on Boeing designed to be compatible with one another in order to gain accepting that product, not changing the specifications without the benefits of joint use. A technology standard is a set of forewarning and so on. Although this would not matter if the technical specifications that – among other things - enable design could be quickly and cheaply changed, component products to work together.