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May 25, 1998

Standards: Open For Business

“He’s different and he don’t care who knows it.
Somethin’ about him not the same.
He’s different and that’s how it goes.
And he’s not gonna play your gosh darn game.”
     -Randy Newman, “I’m Different”

If you pay attention to high-technology business markets, you have undoubtedly noticed the frequent usage of “open standards” as not only a product strategy, but also as a marketing message and political mantra. Leading high-tech executives such as Andy Grove, John Chambers, Jim Barksdale, Larry Ellison, and Scott McNealy all wax poetic about their “support for” and “adherence to” open standards.

Of course, they are not the only supporters. Executives of small start-ups, magazine columnists, industry analysts, and even customers such as CIOs and MIS managers express their “loyalty to” and fundamental “belief in” open standards. With all this support, adherence, loyalty, and belief, you might think that discussing open standards would be a short-lived exercise—kind of like discussing the force of gravity or a human’s need for oxygen.

We all know that this is not the case. While everyone voices support for “openness,” time and again we see executives and analysts quibbling over the true definition of “open” and whether this company or that company is really adhering to the standard. If we all agree that standards are a good thing, why is there so much dissent? When I hear executives announce support for open standards, I am left with an innate empty feeling. It’s not that I don’t trust these people; it’s just that I believe supporting openness as a fundamental philosophy runs directly counter to the basic objective of most businesses: differentiation.

How do you differentiate your product if your core mission is to ensure that your product operates exactly as your competition? The bottom line is that you don’t, and this paradox is behind most of the confusion and rhetoric regarding open standards.

With this as a backdrop, I would now like to walk through what I see as seven fundamental principles of open standards. It is not my objective to halt all future arguments and discussions related to the topic (although a reduction in attention would certainly be welcomed). I do, however, hope to open people’s eyes to the realities that surround these standards, such that we can move past this current “religious war” environment where nothing is ever settled. Moreover, I hope to highlight the motivation behind certain corporate initiatives, not so that we can criticize a company’s behavior, but rather so that we can empathize with their natural search for survival and success.

Principle 1: Open standards are a good thing.

Make no mistake about it, open standards have a huge positive influence on technology markets. First, they speed market evolution. Since there is a high need for interoperability, guaranteeing that every printer works with every PC seriously reduces the R&D tasks for both the printer company and the PC maker. This allows both companies to get products to market faster, and reduces costs. With standard, or open, interfaces, the design requirements for a printer or PC are greatly reduced. The customer also benefits through greater flexibility. If you buy a printer from one vendor, and then upgrade your PC, it is nice to know ahead of time that you won’t also need to buy a new printer. This flexibility also helps protect the customer from becoming overly reliant on a single brand. If you buy a cellular phone from one network service provider, you can feel safe that the phone will work on its competitor’s network, such that you are not “locked in” to a single solution.

Principle 2: Openness is a product-specific interoperability strategy.

It is important to recognize open standards for what they are. Companies choose to support open standards on a product-by-product basis. When it makes sense for a company to embrace openness they will; when it does not, they won’t. This may sound trite, but many people try to position openness as a religion, business strategy, or corporate mission. This is going too far. It would be virtually impossible for a company to adhere to a policy of openness in everything it does. Would you consult a standards committee every time you made a corporate decision? Would you post the design plans for your next significant product on the Internet for all to see, including your competitors? Do you invite outsiders to your internal meetings to ensure compliance? Sure, Sony lost a great deal of money when the proprietary Betamax failed to gain market share against the open VHS. However, other companies have grabbed significant share and market capitalization by achieving success with proprietary design. Sometimes it makes sense, and sometimes it doesn’t. Intel supports open standards on high-speed xDSL technology but works diligently to patent-protect its microprocessor spin-out. Is Intel open?

Principle 3: The “open” buzzword is overused.

Undoubtedly, many high-tech executives are guilty of abusing the “open” term, either to position their company or to discredit their competition. We need to recognize that openness is really a position along a continuum and not an absolute way of life. We can choose to be completely open, or completely proprietary, but there is a huge gray area in between. You likely have heard the phrase, “We will support open standards, but innovate on top of them.” Is this open? It’s hard to say. The fact of the matter is that open is non-definitive, and therefore its use serves more to confuse than to clarify. I think executives should be limited to stating support for specific standards, and should be dissuaded from stating that a product or product category is inherently “open” in and of itself. “This product supports standard PCMCIA interfaces” is a more sincere statement than “this product is open.”

Principle 4: We must recognize that companies need to differentiate.

In a very real sense, open is a euphemism for commodity. Companies continually seek to differentiate their products, and it is hard to differentiate a product that is supposed to behave exactly like the competition’s. There are, in fact, markets that are close to 100 percent open, such as DRAMs and PCs. But in these more commodity-like fields, companies differentiate themselves more with production or distribution prowess and less with innovation. In markets that are fundamentally based on intellectual property, like software, production and distribution are almost entirely frictionless. Theoretically, you could have a better sales force or better service and support, but these are not typically assets that small innovative companies possess. This means that competing with a completely “open” strategy would offer very little room for differentiation, and there is almost a necessity to have some closed proprietary advantage. It is difficult to criticize companies for trying to innovate in a proprietary manner. After all, survival is instinctive.

Principle 5: It is very difficult to have open standards for complex products.

For extremely complex products, it is simply too hard to coordinate activities across multiple providers and to ensure that all of the products will behave precisely as expected. This is really just a problem of numbers. As you add individual standards to a particular product, the number of potential permutations, or “states,” that the product could exhibit rises exponentially. Therefore, it is very difficult to have an open standard for operating systems or microprocessors or Java virtual machines or even browsers. This is why most Webmasters have to write browser-specific code to ensure that their sites behave as expected in every environment. It is easy to have open standards for a PC mouse. It is difficult to have open standards for an electron microscope. This is not a political statement, but a fundamental reality.

Principle 6: Open standards favor larger companies.

It is almost ironic that the start-up community in Silicon Valley was the primary catalyst for the current “whirlwind” surrounding open standards. This is because open standards primarily favor the large company with entrenched market share. The prevailing wisdom was that, by persuading the market to support open standards, the smaller company could be certain that no company could obtain market ownership based on proprietary technology. However, the tragic flaw in this theory was the failure to recognize that large incumbents could use open standards to protect themselves from smaller innovative competitors. If a small company gains market share with a new proprietary product, the incumbent can simply argue that, with a product this important, the industry should really have an open standard. Once the start-up gives in and supports a standard (with the only other choice being losing the support of an important market leader), the company must then differentiate based on sales, marketing, service, and support. Yet, these are the assets of the larger entrenched companies. Open standards allow large entrenched companies to mitigate the innovation and market share leads of hot young start-ups and easily move into their markets. Silicon Valley created a sword that is most often used on itself.

Principle 7: In an open world, new companies need new strategies.

Recognizing the true realities of an open world, smaller companies must seek new strategies if they want to succeed. Unfortunately, the precedent of patent protection in the information technology world is quite weak, which serves to aggravate the new open paradox. Companies must now offer broader and richer product portfolios that are packaged as complete solutions instead of simple “protocols” or technologies. Let me give an example: I am very interested in investing in a company that leverages the Internet to change the education market. There is no shortage of companies that fit this bill, but most focus on the technological problem of distance learning, such as one-to-many streaming multimedia. The problem is that the protocols for this underlying technology are likely to be standardized and included in the underlying platform. Therefore, the education company that will most likely win is not the one with the best streaming technology, but rather the one that ignored this aspect of the problem and focused on something else. The trick is to find added value beyond the open protocol, such as implementation of class-administration or enrollment features. The problem is that solving these problems is not as technically sexy, and that is a hard lesson for the entrepreneur to understand.

Posted by Bill Gurley on May 25, 1998 at 08:00 AM | Permalink | Comments (0)

DISCLOSURE: The information contained Above the Crowd has been obtained from sources believed to be reliable but is not necessarily complete, and its accuracy cannot be guaranteed. Any opinions expressed herein are subject to change without notice. The author is a general partner of Benchmark Capital, a venture capital firm in Menlo Park, Calif. Benchmark Capital and its affiliated companies and/or individuals may have economic interests in the companies discussed herein. © J. William Gurley 2005-2006. All rights reserved.