Standards Development as Transactions for Bundles of Intellectual Property

INTRODUCTION Information technology (IT) standards allow different technologies, including hardware, software, and even people, to interact, thereby forming systems. Without information technology standards, there can be no information systems (IS). Thus, standards development is one of the most important activities of technology vendors. It is also one of the most difficult because it requires the coordination of a variety of different entities, each with their own agenda. This gives rise to economic (Shapiro and Varian, 1999), social (Fomin and Keil, 2000; Fomin, et al., 2003; Krechmer, 2005; West and Dedrick, 2001), and political problems(Backhouse, et al., 2006; De Vries, 1999; Raimers and Li, 2005), in addition to the purely technical problems (Krechmer, 1996) of development. More recently, we have seen a rise in legal problems relative to standards (Bekkers, et al., 2002a; Bekkers, et al., 2002b; Farrell, 1995; Shapiro, 2001). In this paper, we delve more deeply into the legal issues of standards development and their consequences on the governance structures that can be successfully deployed by standards developers. We apply theory from law and economics— transaction costs economics, specifically—to develop a theory of the impacts of intellectual property rights law on standards developers. We propose that certain antecedents lead to transaction costs, which are moderated by the choice of governance structure of the standard setting body. Our innovation is that we recognize that standards themselves are not atomistic legal entities; rather they are made up of bundles of intellectual property. Moreover, the ownership of these individual pieces of intellectual property is often distributed among many different organizations. Therefore, developing a standard requires transacting for the property rights of a bundle of intellectual property, which leads to transaction costs.