Standards Are Insurance

I keep getting distracted from writing this long thing by responding to the discussion created by the last short-ish thing, but I wanted to explicitly call out one aspect, namely that standards are a form of insurance.

More correctly — and apologies if this sounds like a Planet Money episode — vendors sell derivatives contracts (insurance) against the proprietary nature of technologies. I.e., as a hedge against winner-take-all dynamics of network effects and the potential for monopoly rent extraction. Adopters of that technology often refuse to buy it at all without the availability of a derivative to cover their risk of lock-in.

The nice bit about these contracts is that the results (price) are free to the public — ITU and other old-skool orgs are exceptions — meaning anyone who wants to implement can assess what it’ll cost, and if they can provide a solution at a lower to-end-user price, they can compete under the same terms. The public nature of the derivative contract can have the effect of lowering the price of the good itself in markets that clear and have many participants.

Standards organizations are correctly understood as middle-men or market-makers for these contracts.

Update: It may seem strange to some that derivatives contracts (insurance) can drive prices down, but it happens in many industries. E.g., satellite insurance has done wonders for the commercial launch vehicle industry. And who would fund the construction of new cargo ships if you couldn’t convince enough people to ship their precious goods? Insurance matters.

2 Comments

  1. Posted September 21, 2011 at 1:08 pm | Permalink

    Yes, thank you. That makes sense.

    I always say “Standards are weapons in the hands of the losers,” which is more-or-less true on mobile. Standards as insurance nicely complement my approach: the current losers want to draw on the insurance and thus enter a standards-supporting phase.

    I will steal your idea for my own use.

  2. Posted September 22, 2011 at 4:39 pm | Permalink

    You hit the nail with the definition, yet – hoping W3C will care to reform itself (and defy Parkinson’s law) is very.. optimistic ;)