How fragmentation can improve co-ordination: setting standards in international telecommunications.
There is a stark contrast between the way industrial economics asks us to think about standard setting in telecommunications and the way standard-setting is actually organized. On the one hand, leading scholars maintain that standard setting is a natural monopoly. On the other hand, the number of standards organizations for telecommunications is quite large and there is no indication that this number will decrease. The paper analyzes how to resolve this discrepancy. It argues that there are reasons to believe that the natural monopoly hypothesis is wrong. Under a certain set of conditions which are prevalent in international telecommunications, the distribution of standard setting to a multitude of competing standards organizations is both stable and efficient.
Descriptors: governance theory, bargaining theory, co-ordination problems, telecommunications, standards
There is a stark contrast between the way industrial economics asks us to think about standard setting in telecommunications and the way standard setting is actually organized. On the one hand, leading scholars maintain that 'standard-setting in international telecommunications, as in any other market, is likely to be a natural monopoly' (Besen and Farrell 1991: 319; see also, Besen 1993: 21; David 1993: 14). The co-existence of more than one standard-setting organization is assumed to be both inefficient and unstable. On the other hand, the number of standards, organizations for international telecommunications is quite large--a recent handbook counts about 50 (Macpherson 1990)--and there is no indication of an impending shake-out.
To be sure, telecommunication experts complain about the 'alarmingly' large number of standards organizations (Rankine 1990: 46; see also, Reynolds 1990: 433) which, as they suspect, causes friction, delay, inconsistency and the dissipation of scarce resources (Rusconi 1990: 2; Cullen 1987: 183; Inner 1990: 5). Yet no measures are taken to cut back the organizational plethora. The major players--large network operators, manufacturers, service suppliers and corporate customers--regularly support several standards organizations at once with contributions, experts, and standard-setting initiatives. The minor players, while usually extending their support to fewer standards organizations, rarely support the same organizations. As a result, the fragmented, multi-organization structure is perpetuated.
The purpose of this paper is to resolve the contradiction between the natural monopoly hypothesis of industrial economics and the organizational fragmentation of real world standard setting. Three related questions are considered. First, why did the fragmented structure evolve in the first place? Until the 1970s standard setting in international telecommunications was the virtual monopoly of a single organization, the 'International Telegraph and Telephone Committee' (CCITT). Why was this monopoly lost (Section 2)? Second, once it had evolved, why did the organizational fragmentation stabilize? Since telecommunications today is governed by competition and cost considerations, it seems highly unlikely that industry players would stick to something which is not at least individually rational (Section 3). Third, is the fragmented structure inefficient? Even if it were individually rational for industry players to support the fragmented structure, it need not necessarily be collectively rational as well. The natural monopoly hypothesis would rather suggest that it is not. Has the telecommunicatiions industry fallen into a 'rationality trap' where individual and collective rationality sharply diverge (Scharpf 1988a: 72)? Section 5 summarizes the answers to these questions. Section 6 speculates on general implications for the study of governance systems.
From Monopoly to Fragmentation
Till the 1970s, standard-setting in international telecommunications was monopolized by the CCITT, a sub-unit of the International Telecommunication Union (ITU), the UN special agency for telecommunications. The CCITT was a club of national network operators. Its highest organ, the 'Plenary Assembly', met every four years to pass standards and identify future standarization needs. The technical work was done by 'Study Groups' of technical experts from the member administrations and from industry. The CCITT standards (Recommendations) were not binding in a legal sense. Implementation was voluntary, but, nevertheless, compliance was high. An informal rule of consensus--a vote was taken only as a measure of last resort--ensured that the standards were generally acceptable to all actors concerned.
The 'Old Regime'
Tne CCITT was a creature of the governance structure that dominated telecommunications until very recently. Telecommunications was segmentalized into self-contained national systems, each of which was controlled by a monopoly network operator--a national post, telegraph and telephone administration (PTT) in Europe, a private company tightly controlled by the state in the Americas. The monopoly extended from the operation of the national telecommunication network to the provision of telecommunication services and terminal equipment. More often than not, the network operator also controlled the development and production of network equipment. In some states, such as Sweden, Canada, or the United States, the operator integrated vertically into manufacturing. In Japan and Continental Europe manufacturing companies were formally independent, but tied to the network operator by a mixture of long-term contracts, state regulations and lack of export opportunities. International trade in telecommunication equipment was slight. Services were not traded at all (see Cowhey 1990; Schneider 1991; Grande 1994).
The only interaction between the national telecommunication systems was through the conjoint provision of international services. In order to provide connections between their respective countries, network operators had to get together, hook up their networks at some international network interconnection point and decide on the administrative, technical, and legal rules of cooperation. The CCITT facilitated the process by suggesting focal points for agreement. Its standards greatly simplified the rapid expansion of international telephony during the 1960s and 1970s.
The 'New Regime'
The 1970s also witnessed the beginning of a series of technical and political changes which eventually undermined the very basis on which the CCITT was operating: Telecommunications started to converge with computer technology, and the politics of de-regulation and liberalization took root in the US and the UK, and subsequently diffused to other countries throughout the world (Cowhey 1990). The network operators lost their dominant position and telecommunications turned into a transnational technology. The monopoly over network provision and service supply was de-regulated and network operators increasingly had to compete--on a more or less restricted basis--with private networks, carriers, and service suppliers. In many countries the national operator was also privatized and lost control over former 'court suppliers'. The computerization of telecommunication led to large increases in R&D costs and caused a spate of cross-border mergers (Grande and Hausler 1994: 94-95). Manufacturers were forced to turn to the international market to increase sales. As a consequence, the ties to the national PTT became loose.
While the supremacy of the PTTs eroded, the telecommunication industry became more transnational in character. Equipment production, network operation, and service supply, which formerly had been organized separately in each national market, were increasingly arranged on a transnational scale. Network operators started to form global alliances and compete in foreign markets (Bernard 1994). Multinational firms built large private networks, tailored to their specific needs (Schneider 1994). Networks grew to transnational dimensions, and the technology, which had long been marked by strong national peculiarities, became more alike across countries. At the same time, however, it became more diverse across functions. The variety of telecommunication services exploded (computer communication, paging, mobile communication, multimedia, etc.), transmission technologies multiplied (satellite transmission, optical cables, mobile communication, etc.) (Rutkowski 1991).
The Erosion of the CCITT Monopoly
The transformation of the old telecommunication regime also affected standard setting. The CCITT lost its monopoly. Standardization began to fray out organizationally. Starting in the 1960s, the convergence of telecommunication and information technology caused increasing overlaps between the activities of the CCITT and other international standard-setting organizations outside the telecommunication domain, primarily the 'International Organization for Standardization' (ISO), an international association of national standard-setting bodies covering all technical fields outside the telecommunications and the electrotechnical domain, and the 'International Electrotechnical Commission' (IEC), ISO's sister organization responsible for standard setting in electrical and electronic technologies. The lines of demarcation became blurred, especially in the field of computer communication. The monopoly of the CCITT was lost in the 'diagonal interdependence' (Astley and Fombrun 1983: 207, 225) with the computer sector.
The process of organizational fragmentation accelerated during the 1980s as a host of new standards organizations was set up. In North America, the Pacific Region, and Europe new regional standards bodies were established, the ANSI Standards Committee T 1, the Telecommunications Technology Committee (TTC), and the European Telecommunication Standards Institute (ETSI), respectively. Private standards bodies and business consortia proliferated. Organizations such as the 'Standards Promotion & Application Group' (SPAG), the 'Corporation for Open Systems' (COS), the 'Asia Oceania Workshop' (AOW), the 'Cooperation for Open Systems Interconnection Networking in Europe' (COSINE), the 'World Federation of MAP/TOP Users' (MAP/TOP), the 'Electronic Document Interchange Group' (EDIFACT), the 'European Workshop for Open Systems' (EWOS), or the 'Internet Society' (Isoc) entered the scene. The institutional structure for standardization in international telecommunication mutated from a relatively simple, centralized pattern to a relatively complex, multi-organizational configuration (see Figure 1).
Why was the old structure abandoned? Why did the actors set up new standard-setting organizations instead of making do with the standards monopoly they already had? Three main issues played a role: spatial proximity, blocked reforms, and competition for market share.
The de-regulation and computerization of telecommunications gave rise to new problems of coordination and standardization. Under the old regime, the technical integrity of the national network infrastructure had been guaranteed by the national network operator. After de-regulation, this function had to be provided decentrally. Since standards are an instrument to secure technical compatibility and fit, the demand for standards increased. This increase was further reinforced by the effects of computerization, because computerization gave rise to new types of services, network functions and components which presented new challenges for technical coordination and standardization (Genschel and Werle 1993). 1 The surge in demand for standards, while a global phenomenon, was primarily felt as a local problem. Despite the transnationalization of the telecommunication industry, interdependencies and interactions between industry players tend to cluster regionally. Actors who operate in close spatial proximity also interact more closely. Regional coordination has a higher salience than global co-ordination. Therefore, when new and pressing problems of technical co-ordination emerged, actors preferred to assign them to newly established regional organizations rather than to global organizations such as the CCITT. Regional organizations, it was hoped, would be quicker, more flexible, and more responsive to local concerns. When AT&T was divested in the United States and NTT privatized in Japan, public authorities did not rely on the CCITT to provide the standards which were needed to preserve the technical integrity of the national network under the changed circumstances. Instead, they asked industry to establish new standards organizations specifically for that purpose, T1 and TTC. Although both organizations were conceived as national organizations, they were given very liberal membership rules making it possible for alien firms to participate in the work. In the meantime, they have evolved into veritable regional organizations with participants from many countries (Lifchus 1985; Miiller and Kuhn 1988). When de-regulation and the completion of an internal market for telecommunications created new demand for telecommunication standards in Europe, the European Community initiated a new regional standards body designed to suit its needs, ETSI (Temple 1991; Hawkins 1992).
A second motive to establish new standards organizations was the failure of CCITT, ISO, and IEC to adapt to the new technical, political and economic environment. Although each of these organizations was exposed to considerable pressure to change its basic structures and procedures, none embraced substantial reforms. Private firms urged the CCITT to give them equal status to the national network operators in order to reflect the new realities in the telecommunication sector. Multinational companies criticized the standard setting, saying that it was organized according to nationality, which, allegedly, made it impossible for them to bring their transnational interests to bear. Finally, most industry players complained about excessive delays. The pace of the old standards institutions was perceived as far too slow given the speed of technological innovation.
Despite these complaints, reforms were not forthcoming, because 'veto-players', i.e. actors 'whose agreement is required for a policy decision' (Tsebelis 1993: 6) blocked agreement. In the CCITT it was the developing countries which were afraid that reforms would further marginalize them. In the ISO and the IEC it was the national standards organizations which blocked radical reforms (Genschel 1995). As a result, the structural and procedural set-up of the old institutions remained basically unchanged.
In order to get the organizational innovations being blocked by the old standards institutions, many reform-minded actors decided to set up new standards organizations (OECD 1991: 84-85). In computer communications, new groups such as MAP and COS waged 'a revolt against ... the managerial and organizational template of the [old, P.G.] standards groups', mainly ISO (Cargill 1989: 115; see also Rutkowski 1994). T1, TTC, and ETSI were conceived, at least in part, as a response to the slowness of the CCITT's standards process (Besen and Farrell 1991: 311). Free of political and institutional inertia, the new organizations embraced all organizational innovations which had failed to attract sufficient support in the old organizations: liberal membership rules, lean management, and the direct participation of private firms in international standard setting.
Ironically, the set-up of new standards organizations largely broke the reform-impasse in the old standards organizations which had precipitated the set-up of new organizations in the first place. The new organizations provided 'exit' options, which reform-minded members of the old organizations could use to put pressure on their opponents. Hence, when the surge of start-ups was just past in the late 1980s, the old institutions belatedly started to reform. The CCITT, especially, went through a series of far-reaching changes (see ITU 1992, 1993) as symbolized most dramatically by a change of name. Today it is called the 'ITU-Telecommunication Standardization Sector' (ITU-T).
Competition for Market Share
Setting up new standards organizations made it possible to exclude not only the opponents of institutional reform, but commercial competitors as well. This was another motive which fuelled the setting up of new organizations.
The old telecommunication regime was characterized by the absence of competition. Network operation was monopolized, equipment supply was cartellized. Nobody had anything to fear from standards. They just served to facilitate international connections. Everybody benefited from their existence. Standard setting resembled a conflict-free game of pure co-ordination (see Figure 2) (Schmidt and Werle 1997). In this game, the preferences of the actors are perfectly aligned. They both prefer co-ordination over non-co-ordination, and they rank the alternative solutions to the co-ordination problem equally. Both will opt for strategy combination 'aa'. It is the best solution for everyone and gives reason to diverge from it to no one. Individual and collective rationality coincide.
[FIGURE 2 OMITTED]
In the wake of de-regulation and transnationalization, the effects of standards have become much more ambiguous. On the one hand, the dependence on standards has increased because critical control functions provided hierarchically by the monopoly network provider under the old regime have to be arranged for decentrally. On the other hand, the danger of being put at a disadvantage by standards has increased as well. In the new, more competitive, environment success or failure often depend on the particular shape of a standard. A standard that fits the specific assets and competencies of a firm provides a competitive advantage or even a temporary monopoly. A standard that conflicts with the given assets and investments burdens the firm with a competitive disadvantage. The pure co-ordination game has thus been transformed into the more conflictive battle of the sexes game (see Figure 3). Industry actors still share a general aversion for incompatibility (ab, ba), but they are at odds on how to avoid it (aa or bb?). They all want a standard, but they disagree on which one. Individual interests are in partial conflict; individual rationality and collective rationality do not perfectly coincide (Swann 1994: 242; Schmidt and Werle 1997).
[FIGURE 3 OMITTED]
Given the new strategic situation, some actors tried to make standard setting more socially exclusive. Like-minded actors established separate standards organizations in order to reduce haggling problems and increase the odds in favour of their plans and priorities. In March 1983, for example, a couple of large European computer companies set up SPAG to gain control over standards for computer communication. Like IBM, which had dominated the market for mainframe computers with the System/360 architecture (Hohn 1996), they wanted to dominate the market for computer communication equipment with joint standards. The plan required a new standards organization because old organizations such as ISO were open to all comers. Competitors could not be excluded (Genschel 1995).
Strategic Options in a Fragmented Structure
The preceding section has shown why the unified system of international standardization broke up during the 1980s. This section asks why the resulting fragmented system proved to be so relatively stable. Why has standard setting not been re-centralized even though many experts implicitly or explicitly advise such a move (see e.g. Cullen 1987; Rankine 1990; Reynolds 1990; Besen 1993; David 1993)? The answer is that the fragmented structure provides strategic options which would be lost if standardization was monopolized again. More specifically, the fragmented structure opens the possibility to strategically exploit institutional bias.
Most standards organizations differ in composition and technical orientation. Although there is a lot of overlap in jurisdiction and membership, standards organizations hardly ever do exactly the same jobs with exactly the same people. The reason is that most actors are highly specialized technically and locally (Schmidt and Werle 1997; also Porter 1990), and participate only in those standards organizations whose work is of immediate concern to them. Even large multinational companies, which usually send their experts to a great many standards organizations, (see e.g. Dankbaar and van Tulder 1989: 44; Hawkins 1992: 350) do not participate literally 'everywhere'. As a result, standards organizations differ in their institutional bias (Riker 1980: 443). Their responsiveness to specific concepts and ideas varies depending on the unique composition of their membership. Proposals which fail in one organization may go through in another.
Differences in institutional bias open strategic options which industry actors routinely exploit to their (individual) advantage. Regularly they attempt to carry standardization initiatives which are of special importance to them into standards organizations which are biased in their favour. If they succeed in channelling a project into the right organization, their chances of making their specific concerns and priorities felt improve. However, since virtually all actors use this strategy of initiating work in 'friendly' committees, work on similar standards is often started in several standards organizations at once (Sirbu 1989: 5; Eckert 1991: 409).
Differences in institutional bias can also be exploited by switching the organizational context of standards processes which are already underway. When, for example, the standardization of the Ethernet protocol for local area networks ran into difficulties in IEEE's Committee 802, the main sponsors of the project--DEC, Intel, and Xerox--initiated a parallel procedure in ECMA. ECMA was much smaller than the IEEE committee. Some of the actors, who had hampered progress in the IEEE, were not represented. The opposition was much more suave, and ECMA agreed fairly quickly on the standard, which had been blocked in IEEE. However, Ethernet's main opponent, IBM, was active in both IEEE and ECMA and had to be brought off by a package deal. IBM agreed to Ethernet. However, DEC, Intel, and Xerox had to let IBM's Token Ring standard pass in return. After having been passed by ECMA, the standard was reconsidered by IEEE and also passed as an IEEE standard (Sirbu and Hughes 1986).
We may conclude that the fragmented structure for standard setting allows actors to stick to a proposal even after it has been dismissed by one standards organization or another. Given the structure's fragmentation there is always another organization where a failed proposal can be re-launched. Even if it is impossible to win the support of any of the existing standards bodies, it is still possible to set up an entirely new one to sponsor one particular project (Besen 1993: 20). The fragmented structure thus provides a multiplicity of points of access to the standards process which allows actors to remain obstinate. They do not have to bow to a veto. They can sidestep it by switching to another organization.
Is the Fragmented Structure Inefficient?
Supposing that the fragmented organizational structure for standard setting is stable, is it also efficient? The frequent complaints about bad performance--delay, excessive haggling, waste of resources--raise some doubts. However, would a centralized structure perform any better? Would it allow for quicker decisions, and smoother standardization?
The answer largely depends on how the centralized structure is conceived. If the membership rule of a hypothetical central standards organization was so restrictive as to exclude large groups of actors from participation and if the organization's decision rule allowed for simple majority voting, standard setting would clearly be easier than in the fragmented structure. Causes for obstruction, haggling, and delay would be reduced, and time would be saved--provided, however, that the excluded and out-voted actors did not organize separately to develop competing standards. But who should prevent them from doing so? In the absence of an international authority which could enforce the central organization's monopoly, it seems fair to assume that the organization would have to operate on fairly liberal membership and fairly consensual decision rules to prevent the spin-off of dissenting groups. Hence, any agreement would have to satisfy as many veto-players as in a fragmented structure. The core of the problem, therefore, is whether consensus is easier to organize in a fragmented or in a centralized structure. Given the same number of potential veto-players, is deadlock less likely in a centralized than in a fragmented structure?
There is probably no general answer. The ability of each type of structure to elicit consensus is likely to vary as underlying strategic problems change. The following analysis, therefore, starts from the strategic situation which has been described as archetypal for standard setting in international telecommunications, the battle of the sexes game (Farrell and Saloner 1988; Schmidt and Werle 1997): All actors are better off if they agree on a standard than if they adopt incompatible solutions. Nevertheless, they disagree on which standard is best. Superimposed on the joint interest in a standard is a distributive conflict which makes agreement on a standard inherently difficult. Under which type of governance structure is this partial conflict easier to overcome?
Centralized Standard Setting and the Logic of Negotiated Agreement
In a centralized structure, as favoured by many standards experts, conflicts of interest are accommodated by negotiation. Actors meet in a monopoly standards organization and try to align their plans by suasion, issue-linkage, and compromise. The likelihood of success depends in large measure on the number of actors involved and the intensity of their conflict. If many actors participate in the negotiations and if their idealpoints (i.e. their most preferred solutions) are set apart, success is less likely than if only a few actors are involved, whose idealpoints cluster in close proximity (Tsebelis 1993: 10-11).
In a central standards organization with liberal membership and consensual decision rule, the number of actors participating in the negotiations would tend to be large. Differences in outlook and interest would have to be bridged between actors from various technical fields and regions. Conflicts would he intense, deal-making difficult and time-consuming. Certainly, all actors would have a general interest to facilitate bargaining. However, the only way that they could do that would be to sacrifice their (distributive) interests. Bargainers cannot press their own specific interest unless they are willing to refuse offers, and thus stall the bargaining process. They cannot unblock stalled bargaining processes without compromising their own specific preferences (Heckathorn and Maser 1987: 156).
Bargaining is inherently vulnerable to deadlock, because the only way to succeed in bargaining is to engage in tactics which delay agreement or reduce its likelihood (Elster 1989: 82). One has to refuse offers which do not fit ones own preferences and insist on offers, even if they do not fit the other parties' preferences. In the end, the bargainer who is most stubborn wins. Less stubborn actors yield. In a sense, negotiations resemble wars of attrition (Farrell and Saloner 1988: 238).
It is a somewhat disturbing consequence of this logic that the actor who cares least about agreement has the most bargaining power. A company, for example, which has invested heavily into a new product and needs a standard in order to market it could not afford to be stubborn in a centralized standardization arena. To get the standard it needs (and get it quickly), it has to be prepared to pay dearly, for example by offering favourable package deals to potential opponents. Companies which are less dependent on a particular standard can more easily risk deadlock. Their bargaining power is greater. As a result, a centralized structure for standard setting would not only be susceptible to deadlock, but to deadlock due to all the 'wrong reasons'. Obstructionism, opportunism, and cheating would be systematically rewarded (Scharpf 1988b: 257, 259).
Some readers may object that the scenario lacks plausibility. A large and innovative company, which wants a standard badly would never succumb to the obstructionism of a small firm, but rather try to establish a standard of its own outside the central standards organization. Note, however, that such 'sidestepping of veto' would jeopardize the integrity of centralized standard setting and lead to a fragmented standard setting structure.
Decentralized Standard Setting and the Logic of Sequential Agreement
Negotiation is also a core element of standard setting in a fragmented structure, but it is more compartmentalized than in the centralized structure. The industry splits off into various sub-groups which bargain independently of each other in different standards organizations. Bargaining within these organizations is comparatively easy. The number of actors is smaller than in a hypothetical central standards organization. Moreover, idealpoints tend to cluster together within the same standards organization because, in order to exploit institutional bias, industry actors tend to join standards organizations where they meet like-minded actors with compatible interests. A clash of interests or ideals is therefore less likely than in a central organization. Agreement is easier; deadlock is less likely.
However, agreement within a standards organization is only half of the problem in a fragmented structure. The other half is agreement between standards organizations. Certainly, inter-organizational agreement could be negotiated as well. In fact, this solution drew a lot of attention at first. In the wake of the proliferation of standards organizations, a host of additional committees was set up to deal with inter-organizational issues. T1, TTC, and ETSI, together with the CCITT, established the 'Interregional Telecommunications Standards Conference' (ITSC), which, in the meantime, has been joined by additional members and changed its name to 'Global Standards Collaboration Group' (GSC) (Evagora 1992); EWOS, AOW, and NIST-OIW set up the 'Regional Workshop-Coordinating Committee' (RW-CC); CCITT, ISO, and IEC came up with a 'Joint Working Party Information Technology', etc.
As it turned out, however, these committees had only little to contribute to inter-organizational co-ordination. There were two reasons for this. First, the distributive conflicts which had been avoided by splitting off the industry into different standards organizations resurfaced in inter-organizational negotiations. Second, negotiations proved to be unnecessary. Inter-organizational co-ordination came about by unilateral adaptation, without any bargaining. Once a standards organization had issued a standard on a contested standardization problem, the other standards organizations eventually fell in line and adapted to this model. In this way, they sequentially 'agreed' on a common standard (or at least a set of compatible standards).
A good example for sequential agreement is provided by the 'message-handling systems' case (MHS) (Schmidt and Werle 1997). In the early 1980s, three organizations were working in parallel on standards for MHS. The CCITT was developing its X.400 series standards, ISO worked on MOTIS (Message-Oriented Text Interchange System), and ECMA designed its MIDA (Message Interchange Document Architecture). The CCITT quickly gained a head start. In 1984 it passed the first version of X.400. The other two organizations eventually adapted to X.400. ECMA did so fairly quickly. Even though its membership was recruited mainly from the computer industry and entertained somewhat different notions about MHS than the telecommunication establishment represented on the CCITT, the interest in compatible standards was so great that MIDA was reworked along X.400 lines. ISO was more obstinate. Some experts, especially from academia, criticized features of X.400, which they found technically lacking. Eventually, however, the interest in commonality prevailed. MOTIS was revamped in order to secure a considerable degree of compatibility with X.400.
Another more recent case of sequential agreement is the standardization of desktop videoconferencing. In 1992 the industry agreed on a standard (H320) for the compression and decompression of images, sound, and data to be transmitted on telephone lines to enable live electronic meetings. Only Intel stuck to its own standard, Indeo, in an attempt to increase the demand for microprocessors with very high processing power. Its stamina was seriously tested, however, because the rest of the industry showed no intention of backing down, even though the battle of the standards was hampering the development of the new market. Finally, in the spring of 1995, Intel gave up. In an attempt to boost the market it embraced H320, but it still argues that the future of desktop videoconferencing and hence of standards for desktop videoconferencing lies in increasingly powerful chips.
Both cases are remarkable for the fact that final agreement on a standard was secured, despite considerable conceptual and distributive conflict. What made Intel or the hard-liners in ISO give up their initial opposition and embrace a standard ex post which they refused to accept ex ante? How was deadlock avoided? The analysis of the battle of the sexes game provides a clue (see Figure 3).
The battle of the sexes game is prone to deadlock if the players cannot move without the other player's prior consent, that is, if prior agreement is a precondition for action (as in a hypothetical centralized standard-setting structure). Under this condition, there is little reason for either player to retreat from their preferred equilibrium because both equilibria are equally accessible. The distributive conflict comes centre-stage and locks the players into a battle of wills.
Agreement becomes much easier if one player can commit to its preferred equilibrium without checking with the other player first--'I'm going ahead. You may catch up later' (as in the fragmented standard-setting structure). The first mover's move (e.g., player 1 in Figure 3 committing to strategy a) significantly reduces the second mover's opportunity space. The second mover's options shrink to the alternative of co-ordination on the first mover's terms (a,a) or no co-ordination at all (a,b). Co-ordination on the second mover's most preferred terms (b,b) is not an option anymore. Thus, the first mover's move has settled the distributive issue. All that is left for the second mover is a coordination problem. Therefore, sequential agreement can often overcome distributive conflict which in the context of negotiations would result in deadlock.
Why Fragmentation Facilitates Co-ordination in Standard Setting
To summarize, we may say that all clamour to the contrary notwithstanding, the fragmented standard-setting structure does surprisingly well. A centralization of standard setting would not improve performance. Given a battle of the sexes pattern of interaction, standard setting is not a natural monopoly. A monopoly would be neither efficient nor stable.
The advantage of the fragmented structure is that it combines two modes of achieving agreement. While standard setting in a centralized structure would be pure bargaining--all relevant actors meet in a central arena and try to negotiate a common standard--standard setting in the fragmented structure is a mixture of bargaining and sequential adaptation. Subgroups of industry actors negotiate in separate standards organizations while co-ordination between these organizations is left to sequential adjustment. The injection of an element of sequential adaptation reduces the system's liability to deadlock in two ways. First, the number of actors having to reach agreement within a standards organization is reduced. As a consequence, negotiations are less conflictual and intra-organizational agreement is easier. Second, the logic of sequential adaptation puts the standards organization into a competition for speed, which rewards quick intra-organizational agreement and punishes delaying tactics. If an actor obstructs progress in his/her own standards organization, s/he risks letting another organization get a head start and eventually being forced to adapt to a decision which is even less desirable.
One important implication of this logic is that actors who are particularly concerned about a standard have the best chances of putting their plans through. In a centralized structure, a standardization project can be taken hostage in order to force concessions from its sponsors. In the fragmented structure that is impossible, because veto can be sidestepped and deadlock avoided by a switch to another standards organization. Standardization initiatives cannot be stopped. At best, they can be preempted by a counter-initiative. Launching such a counter-initiative requires substantial cognitive and material commitment, and it is unlikely that actors who are only marginally concerned will want to bear the costs. Note, however, that a less benign way to put the fact that in a centralized structure less concerned actors can exploit the commitment of more concerned actors while in a fragmented structure they cannot, is to say that in a centralized structure small actors can defend their interests against large actors, while in a fragmented structure they are bullied by the larger ones.
In appreciation of the advantages of sequential agreement, one may he tempted to ask if there is any justification left for negotiated standardization. Why not scrap all standards organizations and rely entirely on sequential adjustment? Why have arenas for negotiation ff negotiations make distributive conflict more difficult to solve? The short answer is that some negotiation is required in order to make sequential adaptation work.
In the battle of the sexes game, it is virtually assured that the second mover will follow the first mover's lead. In real-world standardization that is much less certain. In the noisy environment of the telecommunication industry a first move can easily fail to start a bandwagon of sequential adjustment because it is overlooked or because it is judged to be too insignificant to merit recognition. The risk of failure increases as the power of potential first movers (i.e. the significance of their decisions for others) decreases. Hence, if all actors are comparatively small, sequential adjustment may fail to work properly (Dybvig and Spatt 1983). In order to overcome inaction and attentism, actors have to join forces to assure that a first move will make an impact. Standards organizations are the arenas where this joining of forces is negotiated. For the actors involved, it is a matter of strategic acumen to keep negotiations small enough so as to prevent conflict and extended haggling, but large enough to assure that any decision will be accepted by non-participants (Besen 1993: 8).
Interaction Effects between Pure Governance Types
The analysis of this paper fits into the larger context of what has been called 'governance theory' (Schneider and Kenis 1996). Governance theory is a very broad label covering research conducted in sociology, political science, and economics on the way institutional arrangements (governance systems) structure and regulate 'the interplay and integration between the "local rationalities" of actors and the "global rationality" of the system composed by them' (Grandori 1995: 3). The aim has been to distinguish 'alternative generic forms of governance' (Williamson 1991: 269) and assess their comparative efficacy. Ideal-typical forms of governance such as markets and hierarchies (Williamson 1991), clans and networks (Ouchi 1980; Powell 1990), and communities and bargaining systems (Streeck and Schmitter 1985; Scharpf 1988a) were identified and compared regarding their ability to cope with different social, political and economic conditions.
The heuristic value of ideal-types can hardly be disputed. However, if we want to understand real-world governance, it is not enough to define and compare ideal-typical governance structures. Real-world governance structures are complex, and more often than not they mix and combine different governance types (Schneider and Kenis 1996: 21). The fragmented governance structure for telecoms standardization, for example, combines two different types of governance: bargaining systems and markets--bargaining within standards committees and unilateral adaptation between these committees. The general lesson to be drawn from this case is that the mixing and combining of governance types does not leave their qualities unchanged. The properties of the fragmented structure in standard setting are not the sum of the properties of the two isolated governance types it combines. Rather, it emerges from the interaction of these two types, which is precisely why this structure does so comparatively well. The interaction between the structure's two constituent elements is such that they make up for each other's weaknesses: The competition between standards committees reduces the risk of deadlock within these committees. The committees, in turn, reduce the 'missing market' problem, i.e. the risk that bandwagons of standardization might not get rolling in every instance where there is a need for a common standard. Hence, the fragmented standards structure is less prone to deadlock than a centralized pure-bargaining structure would be, and at the same time it is also less prone to attentism and missed opportunities than pure-market standardization.
We cannot conclude from this that the interaction effects between different governance types are always positive. It may very well be that the weaknesses of different governance types cancel out in interaction, but it is equally possible that they make each other worse. The strengths of particular structures can reinforce each other, but they can also be mutually destructive. Therefore, it is not enough to analyze the logic of pure governance types. It is necessary to analyze the logic of their combination as well.
Figure 1 Standard Setting in the 1990s: High Organizational Fragmentation (adapted from: Schmidt and Werle 1997) List of abbreviations: AOW Asia Oceania Workshop CCIR International Radio Consultative Committee CCITT International Telegraph and Telephone Consultative Committee CEN European Committee for Standardization CENELEC European Committee for Electrotechnical Standardization CEPT Conference of European Posts and Telecommunications Administrations COS Cooperation for Open Systems COSINE Cooperation for Open Systems Interconnection Networking in Europe ECMA European Computer Manufacturers' Association EDIFACT Electronic Document Interchange Groups ETSI European Telecommunications Standards Institute EWOS European Workshop for Open Systems IEC International Electrotechnical Committee IEEE Institute of Electrical and Electronics Engineers IISO International Organization for Standardization ISOC Internet Society ITU International Telecommunications Union JTC-1 ISO-IEC Joint Technical Committee 1--Information Technology MAP/TOP World Federation of MAP/TOP (Manufacturing Automation Protocol/Technical Office Protocol) Users NIST National Institute of Standards and Technology SPAG Standards Promotion and Application Group T1-ANSI American National Standards Institute Accredited Standards Committee for Telecommunications--One TTC Telecommunications Technology Committee
* I would like to thank Margaret Levi, and Renate Mayntz for valuable comments on earlier versions of the paper. Conversations with Susanne Schmidt, Volker Schneider, and Raymund Werle have also been extremely helpful. The paper was presented at the 12th EGOS Colloquium 'Contrasts and Contradictions in Organizations', Istanbul, 6-8 July 1995. I would like to thank Anna Grandori and the other participants of the 1st Work Group 'Local versus Global Rationalities' for a lively discussion.
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