EC's Kroes advocates mandatory enforcement of open standards

Europe's legislator and administrator for competition suggested this morning that free enterprise alone -- letting markets decide standards -- may not be an effective means of ensuring interoperability, and that penalties should apply.

During a panel discussion this morning in Brussels, which included European legislators and minor heads of state, European Commissioner for Competition Neelie Kroes took a very hard line stance in favor of open standards in software, going so far as to propose the consideration of new legislation that would actually mandate their use by "dominant players" in order for their software to be sold in Europe.

"Where equivalent open standards exist, we could also consider requiring the dominant company to support those too," Comm. Kroes told attendees.

The context of that statement concerned the questions of the day, as posed by the invitation that select individuals received to this morning's breakfast panel, entitled, "Being Open About Standards?"

As the invitation reads, "Standards, whether developed by firms or by standards bodies, are vital to drive innovation. But standards can sometimes be a threat to innovation. When should we standardize? When should proprietary technology be included in standards, and when should it be avoided? If proprietary technology is included in standards, what conditions should be imposed? If de facto standards emerge through the market, when, if ever, should competition law or regulation intervene? Should purchasers - whether public or private - take active steps to avoid being locked-in to closed standards?"

Kroes addressed each of those questions, and in a rare departure from previous speeches, did not mention the name "Microsoft" once, although obvious indirect references were made throughout. In addressing the question, "What conditions should be imposed?" Kroes began her speech by stating her office can and should only intervene in case of a breach of rules, presumably when a dominant player is abusing a market by forcing customers into using a non-interoperable standard.

Determining the proper time to intervene is a matter of policy, she said. But in deciding who develops that policy, she referenced herself in the first-person singular.

"As an enforcer, I act only where there is a proven breach of the competition rules," Comm. Kroes said. "But as a policy maker I take the knowledge I gain as an enforcer, and apply that more generally. If the proposals I come up with are grounded in the reality of markets, they will help to make markets work better, whether or not there is a breach of the competition rules in the particular case. What does that mean in the technology sector? Standards are clearly more important than ever. They often facilitate economies of scale but their real impact on technology markets is with interoperability."

Some proprietary standards are necessary, Kroes conceded, making an indirect reference to DVB-H technology adopted by the EC in March, for use with mobile digital television. Had there not been a rewards system in place for the development of such intellectual property, DVB-H might never have been established in the first place.

In other cases, the market is often capable of deciding standards in a de facto fashion, she continued, based on consumers' preferences. The problem there though, she said, is that there tends to be an absence of documentation about what it is consumers have decided they prefer. "Standards emerging from the market can be a good thing if they emerge as a response to consumers' expressed preferences. But they may also be problematic, having none of the safeguards of disclosure that standards bodies typically require," Kroes remarked.

The opposite extreme, which is just as undesirable, she continued, would be to enable the patent system to become an enforcement mechanism for "perpetual exclusion," especially in cases where patents protect "technology that is not even innovative." Last year, the EC considered imposing new rounds of fines on Microsoft for attempting to collect licensing fees for software protocols it didn't feel were innovative enough to require IP protection.

But Kroes suggested a new danger, separate from allowing a dominant player to lock its customers into using non-interoperable standards: allowing an industry consortium to decide what standards should be, without the aid of government judgment to determine whether such standards are actually innovative.

As Comm. Kroes told the panel, "Standardization agreements should be based on the merits of the technologies involved. Allowing companies to sit around a table and agree [upon] technical developments for their industry is not something that the competition rules would usually allow. So when it is allowed we have to look carefully at how it is done. If voting in the standard-setting context is influenced less by the technical merits of the technology but rather by side agreements, inducements, package deals, reciprocal agreements, or commercial pressure...then these risk falling foul of the competition rules."

Another possibly dangerous scenario Kroes suggested was that consumers determine a de facto standard based only upon their preferences, thus enabling a dominant player in the market to lock them into that standard. Sometimes the market resolves such a problem on its own; and in this case, Kroes actually did invoke the name of Apple, saying the music market was able to adequately resolve (for now) the issue of releasing music in an MP3 format on distributors' own terms, that's interoperable with the dominant iPod player.

But markets cannot be trusted to solve those problems for themselves in all cases, Kroes said, and that's when government should -- reluctantly -- intervene. In so doing, she suggested, that authority may need to speculate what might have happened had a documented standard been developed properly to start with, and then base its notion of damages upon the difference between that hypothesis and the actual state of affairs.

"Where a technology owner exploits that power, then a competition authority or a regulator may need to intervene. It is far from an ideal situation, but that it is less than ideal does not absolve a competition authority of its obligations to protect the competitive process and consumers. In essence the competition authority has to recreate the conditions of competition that would have emerged from a properly carried out standardization process."

Also present at this morning's panel was Munich Mayor Christian Ude, who last March wrote an open letter of objection to the International Organization for Standardization, urging that body to reject Office Open XML as an international standard. The basis for that objection was that the use of competing standards for essentially the same purpose could actually weaken competition between manufacturers that have to decide whether to support all those standards simultaneously. "A second standard for document exchange therefore does not increase competition, it will weaken it," Mayor Ude wrote in March.

Last month, Microsoft made the decision to support both OpenDocument Format and ISO 29500 in its forthcoming Office 2007 service pack and in Office 14.

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