Hal Varian (Google Chief Economist) – OpenForum Europe Summit (Sep 2011)

Chapters

Abstract

“Balancing Standardization and Innovation: The Critical Role of Open Systems and Standards in Technology Development”

In a dynamic keynote speech, Dr. Hal Varian, Google’s chief economist and a respected UC Berkeley professor emeritus, delved into the complex interplay of standardization, innovation, and openness in the technology sector. He highlighted the significant benefits of open systems, including network effects, reduced switching costs, interoperability, modularization, and their role as building blocks for innovation, while also cautioning against the challenges such as strategic manipulation, time consistency issues, coordination problems, network externalities, path dependence, proprietary interests, and lack of commitment to openness. This article synthesizes Varian’s insights with broader industry observations, revealing how standardization catalyzes technological advancement, the dangers of premature standardization, the role of open source as a commitment to openness, and the delicate balance between interoperability and innovation. Furthermore, it addresses the role of government and the private sector in setting standards, emphasizing the importance of transparency in public services.

Main Body:

Introduction of Hal Varian:

Dr. Hal Varian, in his keynote, underscored the dual aspects of open systems in technology: their capacity to foster growth and the challenges they face. His approach to understanding the dynamics of “coopetition” – a blend of cooperation and competition – offers a nuanced view of the technology industry.

Benefits of Openness:

Varian emphasized the myriad benefits of open systems: enhanced value creation through larger networks, ease of switching between services, the fostering of innovation through standardized modules, and the creation of building blocks for future advancements. These benefits collectively contribute to a robust and dynamic technological ecosystem.

Challenges to Openness:

Despite the advantages, open systems are not without challenges. Varian pointed out the risks of strategic manipulation, time consistency issues, coordination problems, and path dependence. Additionally, proprietary interests, the lack of commitment to openness, and concerns regarding network externalities can hinder the widespread adoption of open standards.

Coopetition and the Fundamental Equation:

Varian’s concept of “coopetition” encapsulates the industry’s competitive dynamics. He highlighted the importance of increasing the total industry value, a goal shared by all players, even as they vie for a larger share of this expanding pie. Understanding the equation “share times total industry value” is crucial in evaluating an industry participant’s value.

Open Source as a Commitment to Openness:

Open source software stands as a bulwark for maintaining openness. By making code and document formats accessible and modifiable, open source solutions mitigate the risks associated with changing corporate strategies and the lack of commitment to openness. Time consistency is ensured by the very nature of open source, as it ensures that openness is not just a claim but a reality.

Standards Development and the Rush for Standardization:

The process of developing standards is fraught with the challenge of timing. Premature standardization can lead to suboptimal technology choices, while delayed standardization risks fragmentation and inefficiency. Network industries often require early standardization, while other industries may have more flexibility. Optimal standardization occurs when the technology plateaus, allowing for the creation of commoditized interfaces and products.

Identifying the Right Time for Standardization:

The decision on when to standardize varies across technologies. For network industries, early standardization may be vital, whereas waiting for technological maturity might be more prudent in other sectors. Premature standardization can lead to standard wars and fragmentation, which can be costly.

The Race to the Motherboard:

In the tech industry, setting a standard often equates to winning the “race to the motherboard.” The establishment of a standard spurs widespread adoption and further innovation, making technology ubiquitous and cost-effective.

The Importance of Standardization and Innovation:

Standardization is critical for technological progress, allowing for interoperable components and fostering innovation. However, the risk of premature standardization and the need to balance backward compatibility with performance improvements are key considerations.

The Challenge of Fragmentation in Competitive Environments:

Competitive pressures can lead to product differentiation and, consequently, a loss of interoperability. The fragmentation seen in the Unix operating system’s various versions illustrates this issue. Nokia’s adoption of Microsoft’s Windows Mobile OS showcases the need for interoperability flexibility to foster innovation.

Balancing Interoperability and Innovation:

Achieving the right equilibrium between adhering to standards and allowing for innovation is a significant challenge in setting standards. A standard for interoperability is crucial for network development. However, companies often seek to innovate on top of the standard, potentially compromising interoperability. Striking a balance between adherence to interoperability standards and allowing innovation is a key challenge.

The Problem of Excessive Power:

The concentration of too much power in entities controlling proprietary standards can stifle progress and trust. Solutions may require government intervention or market-driven competition. Electronic payments and electronic books highlight this issue, where a single transparent system is lacking due to power concerns.

The Role of Adapters and Connectors:

Adapters and connectors facilitate communication between different networks and document formats, enhancing interoperability. The internet and web are prime examples of successful connectors. Adapters and connectors can bridge disparate networks, creating common standards for individual participants, as seen with document formats and DVD standards. Effective adapters can minimize the impact of disparate standards, facilitating industry development.

Government and Private Sector Roles in Standard Setting:

The government and private sector play distinct roles in standard setting. The government’s approach is characterized by thoroughness but can be slow, while the private sector is driven by commercial needs and responsiveness. The private sector can be the primary driver of standards, responding quickly to commercial needs. The government can intervene in cases of compelling reasons, such as encouraging industry standardization or facilitating interoperability.

Challenges of Transparency:

Transparency is a fundamental requirement for effective and accountable online public services, but it comes with challenges. Balancing the public’s right to information with individual privacy and ensuring the accuracy and completeness of information are crucial. Additionally, striking a balance between transparency and other important values like security and privacy can be difficult.



Transparency in public services is paramount for building trust and accountability, especially in an era increasingly reliant on online platforms. As technology continues to evolve, the interplay of standardization, innovation, and openness will remain pivotal in shaping the future landscape of the tech industry. Understanding and navigating these dynamics, as Varian’s insights suggest, is essential for fostering a balanced and progressive technological ecosystem.

Notes by: ChannelCapacity999