Interoperability in the Digital World:
Open Standards, Open Source, Property Rights and Markets

Grand Hotel Duomo
Milan, Italy
February 11, 2005


A premise in discussions of the highly interactive and interdependent industries of the digital age is that competition among firms can take the form of:

While some companies at some times still pursue an exclusive-control-and-use-of-the-standard strategy (e.g., Apple iPod), and should have every right to do so without government meddling, many have become skeptical that this approach is workable as a matter of everyday business practice.

The problems with a strategy of retaining exclusive control are:

In consequence, digital age companies are seeking a middle ground between exclusive control and total openness. They need hybrid models that will permit significant interoperability by making any particular business's systems open to interconnection with the systems developed by other businesses, but that at the same time allow innovative businesses to be rewarded for investment and risk-taking.

One route to openness and interoperability assumes that property rights must be decreased, via, for example, open source software (or other open source IP), cutting back on patentability, or other "open equals free" devices. This school may even advocate government mandates of open source or other interconnection mechanisms.

This approach recognizes only half the problem, the need for openness, while ignoring the need to maintain incentives for innovation and investment. In practice, the approach may also frustrate interoperability because its very openness encourages tweaking and forking, which can result in version proliferation and incompatibility.

A superior route relies on the creativity of private companies acting within free markets, with governments playing their classic role of defining/enforcing property rights and protecting the integrity of the market. In this approach, the business world is free to develop its own route(s) to interoperability and openness, relying on standard-setting processes, contracts, and property rights.

In our view, the second route is clearly preferable, because it takes accounts of both sets of needs, and it is in fact happening.

The purpose of today's session is to describe and analyze these developments, focusing on a few major points:

It is crucial that law and policy makers look hard at what the people in the arena are doing, and adapt law and policy to business culture and business necessities, rather than the reverse.

The purpose of the day is to explain how we reached these conclusions.