Royalty-Free Standards vs. Loyalty-Free-Standards: Freedom from royalties, or freedom of choice?

By Eric K. Clemons

Why would you expect good standards to be free? Why does a royalty-free standard often result in a client’s entrapment in a relationship with a single vendor?

The first time I heard the phrase “royalty-free standards” I couldn’t parse it.  I couldn’t make the words make sense.  I actually misheard the phrase in an interesting way — I heard the exact opposite of what was intended.  I heard “loyalty-free standards.”

Why doesn’t the phrase “royalty-free standards” make sense?  Why would you expect good standards to be free?  Is superior air travel free?  Is superior wine free?  Is a superior laptop, or a superior server, or a superior network switch free?  Sometimes superior standards are developed less to achieve advantage than to counter the advantage of others, and in those instances standards may be provided without royalties.  Often, even when standards are publicly available there are royalties and licensing fees; VHS was a public standard in order to counter the 100% market share enjoyed by Sony’s Betamax at the time, but JVC did collect royalties of 3-5% from companies that used the VHS standard.  Moreover, superior standards are frequently developed by groups, over time, and at considerable expense, and these groups may be supported in large part by the royalties they earn from their standards.

But why is a loyalty-free standard the opposite of a royalty-free standard?  Why is a royalty-free standard often synonymous with entrapment and enforced pseudo-loyalty, and why does a royalty-free standard often result in a client’s entrapment in a relationship with a single vendor?  Consider the cost of switching away from Betamax if you had a large library of videotapes, and consider the pain when your Betamax machine finally died after Sony had abandoned the format.

More importantly, consider Cloud Computing.  If you are willing to pay royalties you can get a fairly standard “stack” from your vendor … you can use a X86-based chipset, a Windows-derivative or a Unix-derivative operating system, a standard virtualizer on top of the operating system, a relational database management system to manage your data and … there you go.  Not royalty free, but certainly free of any entangling relationships.  If you don’t like the terms of your vendor contract, you don’t renew it.  How many vendors offer systems with the same component choices?  I can immediately think of three — Amazon, Rackspace, and Microsoft — and I suspect that many others, like Huawei, could be added to the list.

Still considering Cloud Computing, what if you are not willing to pay royalties for any part of your Cloud stack?  You will probably still use an X86-based chip set … sorry … some things have to be paid for!  But you can look for a royalty-free operating system, a royalty-free database management system, and a royalty-free virtualizer.  Just to complete the adventure, you can implement your applications using a royalty-free programming language and a royalty-free database.  Of course, you’re likely to end up with a non-standard operating system, a non-standard database management system, a non-standard virtualizer, and perhaps a non-standard programming language.  And you may indeed save some money initially.  But if you don’t like the terms of your next vendor agreement what, exactly, are your future options?  You can port your applications to a new vendor after rewriting them for the different OS and the different programming language; that’s actually not too difficult.  Data conversion will be much more time consuming, but it’s possible as well.  But it’s not free.

Indeed, conversion may be quite expensive.

What will come next if you enter into a contract based on a non-standard architecture?

Any vendor clever enough to develop his own operating system, programming language, and database management system is clever enough to have figured out how to use industry standards, just as Rackspace, Amazon, and Microsoft did.  And any vendor clever enough to embrace a marketing slogan like “royalty-free standards” is clever enough to have a marketing strategy that exploits its proprietary standards.  What will that strategy be based upon?

It is well-known that the use of non-standard applications, or non-standard investments of any kind, leads to switching costs, and it is well-known that switching costs lead to vulnerabilities.  This is often observed in the experience of outsourcing clients at the time of contract renewal.  We did not need Oliver Williamson’s Nobel Prize1 to know that there were dangers associated with outsourcing, and we did not need my own more humble work2 to explain how dependence on a vendor leads to higher prices in Cloud-sourcing.  Royalty-free implementation may provide freedom from royalties, but often at the expense of commitments to a single vendor.  Yes, clients can break that commitment, but only at considerable expense; this is not absolute lock-in, but economic lock-in.  As long as the costs of converting and porting are less than the excessive charges of remaining with an abusive vendor, a rational client will admit his mistake, accept the hidden cost of “royalty-free standards,” and stay with his initial vendor.

How bad can conversion costs be?  What creates economic lock-in in a poorly considered Cloud contract and how can you manage lock-in?  First, you need to make sure that you can even recover your data after contract termination.  Second, you need to make sure that you can get it quickly and in a usable format; with non-standard, royalty-free data formats interpreting your data well-enough to convert it for your new host may initially be problematic.  Cloud-sourcing contracts are surprisingly vague when discussing rights to data after contract termination.  I call this the data hostage problem.

Cloud-sourcing contracts are surprisingly vague when discussing rights to data after contract termination. I call this the data hostage problem.

So what do I recommend?

First, read the contract carefully, and find out what your rights are after termination of your contract.  It’s hard for most of us to negotiated changes to a Cloud-sourcing contract, just as it is hard for most of us to negotiate changes to a contract for software from Adobe or Microsoft, which are often referred to simply as shrink-wrap contracts:  when you cut the wrapper you have accepted the contract.  While most small organizations must accept shrink-wrap contracts, larger corporations can negotiate more explicit and more equitable terms from their Cloud vendors.  Make sure that you can retrieve your data quickly, and in a format that you can use with any replacement vendor.  If you are unable to ensure this, and if you are unwilling to tolerate the risk of business interruption associated with the data hostage problem, make sure that you factor this into your analysis of contracts with any possible Cloud vendor.

Cloud-sourcing is an extreme form of outsourcing. Switching Cloud vendors may be more difficult than most clients assume, and more difficult than switching vendors in traditional outsourcing relationships.

When you know your costs, including switching costs from software conversion and data conversion, then you can make an informed selection of your Cloud vendor. Remember that Cloud-sourcing is an extreme form of outsourcing; access to the internet may be as standard and as universal as access to an electrical grid, but switching Cloud vendors may be much more difficult than most clients assume, and more difficult than switching vendors in traditional outsourcing relationships.

How should you view royalty-free standards when selecting a vendor?

As always, that depends on a range of factors, including the specific royalty-free standards being considered, the expected lifetime of the applications, and your tradeoffs between short-term savings and long-term vulnerabilities.

I just recommend that you know what you are doing and why you are doing it, and that you avoid being swayed by catchy phrases.  Royalty-free standards may, in the long run, be far more expensive than the alternative, loyalty-free standards.

About the author

Dr. Eric K. Clemons is Professor of Operations and Information Management at The Wharton School of the University of Pennsylvania. He has been a pioneer in the systematic study of the transformational impacts of information on the strategy and practice of business. His research and teaching interests include strategic uses of information systems, the risks and benefits of outsourcing and the impact of online social networks on business strategy. Additionally, Dr. Clemons is the founder and Project Director for the Wharton School’s Sponsored Research Project on Information: Strategy and Economics.

In his consulting practice, Dr. Clemons focuses on helping clients to anticipate and manage the fundamental impacts information technology will have on the structure of their industries.






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