 Thank you, Vice President. I think we can promise to that we will back you up in in any of your fights If you promise to come back and speak to us. So that's a deal Very pleased to welcome our next keynote speaker or the world's leading economist dr. Hal varian I saw that Hal varian is Google's chief economist and also a professor emeritus at UC Berkeley In addition to authoring two major micro economics textbooks that have been translated into 22 languages He's also done groundbreaking research in the area of information economics He's the co-author of the bestseller Information rules a strategic guide to the network economy Which and I haven't verified this has been translated into every known human language In addition to cling on So that's something I found out late last night Something I also found out was that Hal varian has been quoted as saying that the sexy job in the next 10 years will be statistician and this gives us some hope in You know if he has one of our long-standing goals has been to make Standards sexy. So there's some hope in there Please help me welcome dr. Hal varian. I thought standards were already sexy. I guess Okay, this year Okay, so of course, there's no need to tell this audience We think open systems are great. I hardly need to say that But they don't just happen in order for open systems to be successful There has to be a lot of work behind the scenes by organizations like this by standard-setting bodies and industry and government and many other groups and What I want to talk about today a bit are some of these challenges to openness some of the problems that arise and What we can try to do to overcome them Before I get to that topic I need to balance things by saying just a few words about the benefits of openness from an economic perspective We're all familiar here with network effects when you have a network good the value the network depends on the number of users So the larger networks or platforms tend to create more value for the participants There's reduced switching costs and lock-in that we heard about a few minutes ago When you have many alternative providers of a technology, then you have a credible threat To switch and that enhances competition in an industry and of course has consequent benefits for consumers There's an issue of interoperability if you have a common standard you can have interconnection For example the internet as we heard Started out just as a technology for transferring files But then it evolved into a technology for email for voice over IP for streaming video and lots of other ways of communicating information When you have standards that facilitates modularization So you have a standardized interface and allow for moderate design Which tends to be simpler and more robust So for example a standardized document format Then allows you to easily incorporate one document into another or to create multi-author documents or do all sorts of subsequent transformations and Finally these off-the-shelf modules when you have a standard modular format Then you have building blocks for future innovation. I think this is a very very critical idea. I've referred to it as a as combinatorial innovation having lots of component parts allows you to assemble those component parts into different Innovations and generally facilitates the process of Innovation now, there's a fundamental equation that I think we all have to understand when we're contemplating the role of open systems in the economy and that is when you look at Your value as an industry participant You can write that as your share times total industry value So there's kind of the public piece the total industry value and there's the private piece your share of that value and when you have these issues surrounding network effects and avoidance of lock-in and interoperability the industry value can be a very very important part of that Equation so each company has a common interest in Increasing the industry value and then they have a private interest in increasing their own share of that value So conflict isn't inevitable. There's obviously a conflict on your share. They have to sum up to a hundred percent but there isn't necessarily a conflict on the increasing the total value the industry and that's why Co-opetition is really the norm in technology industries. I have to warn you Co-opetition is not an English word. You can't look it up in the dictionary It was a term made up by Ray Nord of Novel, but I think it's a very important concept It's a combination of cooperation on the one hand and Competition on the other hand and the fundamental equation. I mentioned earlier your share times total industry value Well, you exploit or increase the total industry value by cooperation and you Try to get your share of that value via competition, so the Cooperation can be in things such as standard setting the topic We're talking about today and then the competition can be in things like product innovation or pricing decisions or cost reduction That accrue to the individual players and I think both pieces are quite critical Now that the problem is when Even though I think overall there is this force to try to increase the industry value there are cases where This can break down and that leads to the challenges of openness that I alluded to a few minutes ago So one example of this is strategic manipulation so because the networks and common platforms can produce so much value Then companies will invest heavily in them in order to extract that value and that opens up some possibilities for strategic manipulation so one Concept that we've heard to a lot in economics is a time consistency It's quite easy to promise openness But then not actually deliver because you may want to promise openness and to make into making your products Widely adopted, but then the issue is well, how do we ensure the people people actually deliver On that promise of openness for example, it's easy to make openness in one direction You can import competitors documents, but then not export them for example You can have a pro a powerful proprietary format and then a weak open format And these things can happen either even when the individual players Deal in good faith for example There's often changes in ownership and private businesses for example if you look at Sun Which was recently acquired by Oracle, which Sun was a great champion of Java open Office another open source initiatives in Oracle has a somewhat different perspective on some of those Some of those choices you look at bankruptcy like the nortel bankruptcy where there was a huge number of patents some of which were part of industry standard agreements and then those patents were Sold once the company went bankrupt so there can often be Initial commitment to openness and then there might be a change of ownership or some other Structure that cast some of those openness issues into doubt Now, how do you solve that problem where there can be binding industry standards that constrain behavior? multilateral legal contracts Such as a RAND licensing and I think these days one of the very very powerful tools For openness is in fact open source because if you think about what open source does it provides a commitment to openness by releasing the code or the document formats or whatever in a usable format and provides actual commitment to This time can to solve this time consistency problem that I alluded to a minute ago So examples would be open office Android Firefox Chrome and so on where it's not just a claim of openness But in fact actually providing the open source that allows for that time consistency Now note that it's usually the competitors and the Complementers that is the firms that provide complementary products of a dominant firm that pushes for the standards or open source in the first place So there's a nice history of standards development the automotive industry back in 1915 Where it was not the dominant firms at the time which then was forward and GM But it was all the individual suppliers that banded together to try to create industry standards to make them more competitive With the leading firms and that's been a story that's been replayed over and over again when you look at the history of standards So for example One-point IBM had a standard for local area networks called token ring, which is a very Widely used standard and you saw three companies digital Intel and Xerox Band together to create an alternative open standard called Ethernet And as we know Ethernet has ended up being pretty much the open industry standard for local area networking Similar example was Sun with open office where of course they weren't the dominant firm and providing office software They but they were leaders and trying to create a open document format And if you look at Android and Chrome Google's own open source initiatives Google was by no means a leader in the Mobile world when they started but they're provider of a complementary product Namely search and advertising services. And so it was quite important to Google to have a competitive and open environment for both telephone mobile operating systems and Web browsers okay, another issue that's important when you look at Challenges to openness is a rush for standardization because sometimes you can have premature Standardization because networks are valuable It's often the case that you might try to standardize on something before the standard is really mature, so for example that would be In the US we standardized in the number of scan lines and analog TV Europe came on a couple years later and standardized on a better system So as common for people back when analog TV was widely used It was common for people to look at that fuzzy picture in the US and say why is it so bad? And the answer was really the US standardized I would say somewhat prematurely in that particular case when there was a race to develop high-definition TV between US and Japan Japan went the analog roots and and the US went for the digital route Japan standardized prematurely on a Analog version of HDTV If you look at wide area networking, there was a standards battle that went on or maybe not a battle, but a standards debate that went on between OSI and TCP IP Where I think there was a move to standardize on OSI really before the technology Was there to to support it? So you might ask when is the technology? Ready or ripe for standardization, and I think there's not a uniform answer It depends on the nature of the technology because sometimes you have Industries that are inherently network industries, and you can't really get going until you have a standard So examples would be things like local area networks or mobile phones CDs DVDs HDTVs. There's got to be a standard in place to even start the industry but sometimes there's a choice about when to standardize and The temptation to standardize prematurely is there because having Standards that fragment and having standard wars can be very very costly at one time with writable DVDs There were six different standards. We all lived through the Blu-ray and HD DVD standard And of course, there's the classic of VHS versus beta and video recorders And the general rule is unless you have this kind of network industry that I alluded to earlier You want to try to look for a point where the where the technology plateaus and then in that case It's quite attractive to standardize the interface and Essentially turn the product or the service into a commodity. So in Silicon Valley We talk sometimes about the race to the motherboard. You might have alternative standards for let's say local area networks and You're trying to get your standard or a standard Whether you're operating in private interest or whether it's industry interest. You're trying to get a particular standard commoditized Put on the motherboard Turned into something that's so cheap and ubiquitous and functions well That really that's the natural choice for anybody who wants to innovate further And I think this further innovation is really the critical part because once you have a technology that has become standardized And to some degree commoditized then it becomes a component for future innovation and Allows further development on top of that particular standard The danger of course is if you have a very rapidly evolving technology And you standardized at one particular point It may be that that standard won't fit the needs or won't realize the possibilities of that Of the technology in the future the standard can fork. You can have different Standards becoming available a few Standardized prematurely you have to someone that can manage the standard innovation and coordinate both the evolutionary steps and the Revolutionary steps when you have new technological possibilities that weren't available when the standard was originally conceived so there's always going to be something of a trade-off between Backwards compatibility and making the standard move forward and then having superior performance You know there's this old line about How did God create the universe in only six days and the answer is he didn't have an installed base to worry about? Now Because companies want to compete via differentiation. I always want to say my product is better or cheaper Then my competitors It's possible to lose interoperability because of those competitive forces So the classic example is Unix one time there was just one Unix from AT&T and then When workstations became popular it morphed into Versions of Unix that ran only on IBM hardware only on HP hardware only on Sun hardware Apollo hardware and so on and There was no Champion that could really push the technology forward in a unified way Now that ended up being solved by open source. It was Linux and BSD that Contributed to a kind of a standardization. I would say a mostly standardized Unix and if you go back and look at the development of the web these forces came together just at the right time Because we had this wonderful suite of applications the lamp applications Linux Apache MySQL and Python all open source That allowed pretty much anybody to develop a web application and a very very low cost Now the challenge of fragmentation in a competitive environment is always Going to be with us here in the case of the web in the case of Unix. It was solved by open source There's very interesting story last month in business week a cover story About Nokia's decision to adopt the Windows mobile iOS and the claim in the article was that Microsoft was willing to grant flexibility to Nokia with respect to interoperability requirements so that Nokia was able to According to the story was able to innovate unilaterally and not necessarily required to adhere to the interoperability requirements that one normally has when you're trying to build a network systems. I Don't have any first-hand information about this. I'm only going by what was available in the story But it's a nice example because any time you do develop Standard for interoperability firms would like to innovate on top of this potentially in ways that Destroy or at least make the interoperability Much more difficult Now it's absolutely critical to have an interoperability standard if you're trying to build a network otherwise, there's no network and The challenge is how do you Make sure that people can a Adhere to the interoperability standard and be still innovate on top of that standard without destroying that interoperability Avoiding Fragmentation of a standard is actually quite difficult when you have open source because by definition Anybody can take that open source and modify it in any way they want and even for example With the Android operating system from Google that I mentioned earlier the code is fragmented to some degree Because if you look at the nook the e-book reader from Barnes and Noble, that's built on top of Android you look at the forthcoming Amazon Kindle which is said to be built on top of Android these do not necessarily interoperate with the other Components of the system. However, they are Targeted towards very particular uses namely e-book reading on on tablet devices so that particular fragmentation may not be too bad from the viewpoint of the Common use of on mobile phones The next challenge to open a side I want to mention is the problem of Excessive power in some sense fragmentation comes from having too little power if you make the system Completely open so anybody can modify it you have this difficulty of managing the fragmentation But then if you have companies that have potentially excessive power from controlling a Proprietary standard you also create difficulties It's hard for example to engender trust So the prime example of this I think is why don't we have a single? Transparent electronic payment system at the consumer level Well, I think the answer is that if a single party controlled Electronic payments it would be extraordinarily powerful and every player in the industry is Worried about one of their competitors grasping this power and so we end up with Put together a payment system That's not really very transparent and not really very efficient because no one wants to cede power to another party, you know Andy Grove famously said that Only the paranoid survive so of course everybody is somewhat paranoid in this respect and That means it may be hard to push forward with the common standard and of course this would be a very natural place for Governments to step in and I think they've tentatively dipped their toe in this in this issue But it hasn't really moved forward Very rapidly and there's a similar but I think much simpler issue with electronic books Where there's a proliferation of standards some proprietary and some open and no party wants to cede control To their competitors at least at this stage I think that eventually there will have to be an Interoperable standard for electronic books in order for the industry to thrive But it's going to take a while for that to work itself out and unlike the payment system example I think this is probably something that's better left to the to the private sector Even though it may be frustrating to Many of us. I think that's the natural place to fight out that particular battle now With respect to that issue, I think it's important to recognize the absolutely critical role of adapters and Connectors because you can have disparate networks that have a common Converter or adapter so that for the viewpoint of the individual participants of that industry the disparate networks are essentially Transparent so think about Document formats we have lots and lots of doc different document formats out there But if we had perfect adapters or perfect converters Then who cares if they're disparate document formats because that becomes Transparent from the viewpoint of the users and I alluded a few minutes ago to the problem of six different formats for writeable DVDs Well, the industry worked well enough that These were reasonably transparent with respect to the user That is your piece of hardware would look at the disk and say oh, this is DVD minus or this is DVD RW or this is DVD whatever and then do the right Thing so even though there were different standards having good adapters and connectors Allowed for those to not be too much of an impediment to the development of the industry I think we will see ebooks evolving in this in this particular direction fact if you think about the internet which which we just heard discussed it really is just a Standard because it's kind of an adapter between Devices and and local area networks doesn't really matter how you connect to the internet you can use Wi-Fi Ethernet DSL cable satellite all of these different technologies which have their own Standard but once you've got two separate devices connecting to the internet the internet provides this common standard allows for the Interoperability and this is also true of the web Which has become a kind of connector for many different document formats and many different modes of communication Finally, let me just say a couple words About the government versus a private sector Maybe I shouldn't say versus I should say the government and the private sector Their roles and standard setting. I think the government has this advantage that they can be very very thorough But sometimes rather slow whereas in industry it has a very strong private incentives for rapid standardized setting More urgency, but not necessarily Quite so a thorough so both systems have an advantage when we're talking about government documents I've done some work on Classification systems we look at industry classification or job classification product classification and so on and Generally, you'll find that the private sector or to get a product out the door You'll develop a standard or a let's say a system for For Taxonomy or classification very very rapidly and the system will evolve to keep pace with the developments in industries, but they don't have the historical integrity that Government taxonomies and classification systems normally have if you look at the Bureau of the Census and the US It's very very important to them that you keep a standard That persists across time. So when you're talking about Product definitions, they mean the same thing now that they meant a few years ago Well, obviously if technology advances, that's not necessarily going to be possible But they attempt to do it in as much as they can whereas the private sector Generally tends to be much more forward-looking and it's not necessarily Recognize this issue of trying to maintain the historical integrity for the Taxonomies So there's not a single answer about which system is best for that example either You've got to show some flexibility and also try to maintain Consistency I think my own opinion would be that that the Driver of a lot of these standards should be come from the private sector because They are they tend to be responsive to Commercial needs very quickly, but The government then Can find a role a definite role to intervene When there are compelling reasons to do so such as some of the points I mentioned earlier So what can the government do well they can encourage industry standard setting obviously provide enlightened intellectual property laws and antitrust laws about Talking with competition in order to create these industry standards that confer so much value They can obviously enforce private contracts such as the rand licensing and step in when necessary to make these systems work Recognize their power of being large purchasers This is certainly the case for example in the security industry the government trying to set standards for secure communications patent reform The kinds of movements that we've seen Happening in the u.s. And in europe on rights for prior use and trying to clarify this standard of novelty that should be necessary to acquire patents in the first place and try to avoid The use of patents is Kind of patent thicket issues where there are Battles which are not Which are purely rent seeking transferring rents back and forth rather than pushing The industry forward and then finally the copyright reform where I think there's a pretty clear Understanding now that we should be moving towards a registry system. We need to find ways to deal with orphan works we need to find ways to try to Respect the rights of intellectual property right holders, but also don't Allow the industry to advance in terms of Being able to provide flexible markets in those rights So there's lots of things to be done I think there are lots of interesting economic issues And we're going to watch with great interest to see how these play out in the next decade. Thank you Thank you many interesting Examples in there. I took a lot of notes. Um, I think we'll be Seeing a film Is that uh, is that going to happen now? If everybody is ready the message from france Exigences of transparency that the citizen is entitled to wait for from the government is a important word The transparency doesn't have to face problems. But it's a requirement for transparency And and it is brought