Standards are becoming ever more important in IT, communication and entertainment industries. The very fact that you can view this web page is thanks to standards. Your browser knows how to display the standard known as hypertext markup language (HTML), which is a set of rules for specifying how text and other elements display in your screen. My web server communicates with your browser thanks to the HTTP standard, and other standards are used for the pictures and the font formatting, and so on.

Standards are useful because they allow competition. Different web browser programs are available and can compete with each other because they all understand the HTML standard and other important web standards. Without these standards, we would have competing proprietary systems for web servers and browsers that would only work together in specific pairs. Either one proprietary system would emerge as dominant, destroying the benefits of competition, or a number of separate incompatible systems would exist, making life difficult for web publishers and web surfers.

On the other hand, standards themselves exhibit network effects. A standard becomes more useful the more potential users of the standard adopt and support it. This means that it’s often the case that a single standard dominates in a given area. HTML is the only dominant standard for displaying web pages. Similarly there’s one standard format for CD-ROMs and DVDs. Because of these network effects, ‘owning’ a dominant standard can be a profitable thing for firms. This means that firms tend to compete hard to establish their preferred standard in the first place. At the moment there’s hot competition between Blu-ray and HD-DVD to become the dominant next-generation DVD standard. Because of this intense competition ‘for the market’, the fact that a single standard eventually dominates might not be so bad. Consumers might benefit from the intense competition in the beginning, even if there is a lack of competition later. Also, history has shown that standards tend not to be dominant forever. Technological improvements mean that standards become obsolete and get replaced.

To me, the process of standards formation is quite interesting, especially when a standard involves multiple parties. Such standards are known as ‘consortium standards’ and depend on more than one key technology. Establishing such standards requires cooperation among firms that normally compete. They do so because they recognise the benefits of standardisation even if it means that competition between them once the standard is established will be intense. In other words, intense competition within a market can be preferred to winner-takes-all competition for the market.

ConsortiumInfo.org is an interesting website and blog about the process of forming consortium standards. They discuss in detail the events in standardisation processes and how the various parties use different strategies to try to manipulate the process. There are a number of strategic considerations that come up when establishing a standard requires the agreement of multiple parties. Essentially, the inputs of the parties are complements in the production of the resulting standard. What each does affects the outcome for the others. In the next post I’ll discuss some of the important strategic considerations.