Are open standards good business?

Abstract

The debate about the relative merits of open vs. proprietary standards is long and ongoing. Proponents of open standards argue that they are good for society as they encourage adoption, have lower risk, and increase interoperability between technologies. On the other hand, proponents of proprietary standards maintain that monopolistic returns are justified given huge upfront and ongoing investments. While there are merits to both sides of this debate, we take a more objective approach in evaluating whether it makes sense to develop or invest in open standards. We collect investors’ reactions to Extensible Markup Language (XML) schema announcements and compare these with estimated returns for the same stock to determine whether the returns were above or below normal. We find that investors prefer proprietary XML schemas to open XML schemas by as much as 28,000%. We also find that this preference has been stable over time except in 2001 – the period of the dot com bubble burst - when investors temporarily preferred open standards. We attribute these results to two things. First, expected returns from monopoly control of proprietary standards, even though uncertain, are often worth more than those expected from open standards. Second, it seems that the markets are still unsure of the monetary benefits of open standards to the firm. Thus, companies that embrace open standards will have to better communicate to the investors the value proposition of open standards if they want to generate positive reactions on their open standardization efforts.