June 08, 2003

The Business Case for Open Data Formats

Although I think any open data format bill will be met with opposition from vendors that use proprietary formats, I think this opposition is mostly reflexive; if anybody would take the time to listen, you could make a pretty good argument that opening up data formats is a good business decision.

In particular, I think opening up data formats makes a lot of sense for software companies that are dominant in a particular area, and for software companies that are niche players in a particular area.

Consider the case where one company dominates a class of software, with the rest of the market filled out by niche players. The file format used by the dominant company's software has undoubtedly become a de facto standard; its small competitors have reverse-engineered its format in order to give their software any chance of competing, since so much data is stored in that format.

So the dominant company will already have lost whatever advantage it had from owning a proprietary format. It may be worried that if it releases its data format, third party software will be reading and writing it, and possibly corrupting it--and the resulting calls to tech support will be to the dominant company's help line, not those of the niche company that wrote the offending software. But if the format has been reverse-engineered, this is going to happen anyway. Wouldn't it be better if the other companies were at least working from an official, complete format specification, rather than trial-and-error reverse engineering?

Meanwhile, the niche players, if they have their own format, have no reason not to make it public. In fact, in such situations niche players often adopt an existing public standard, trumpeting it as an advantage over the dominant company and allowing several niche players to effectively pool their forces in the battle to unseat Goliath. But even if they decide to invent their own format, releasing it publicly provides the same benefits: it can be used as a selling point, and each time other software gains the ability to read the new format, it increases the usefulness of the format and the niche company's software.

Now, dominant companies may feel that their format is a competitive advantage and that if others are going to use it, they should be licensing it. They should realize, first of all, that they are not licensing it now, so they wouldn't be losing any revenue. And more importantly, if they want to get it established as a de facto standard, they should be encouraging as many companies as possible to use it, not putting financial roadblocks in their way.

Large companies may also worry that "open data formats" means they have to use a standardized data format; as I wrote above, small competitors often do this and then use it as a selling point against dominant companies. The goal of ODFI, however, is not to require standard formats, but only to require that data formats be documented. Dominant companies can change the format as they wish, as long as they document those changes.

Companies may also be worried that documenting their data formats will require them to support older data formats longer. In fact that is false, and may actually save them some work. If the data format is proprietary than the company will need to keep conversion code around, since it is the only official supplier of such code; on the other hand, if the data format is public then in some cases the company may be able to offload the responsibility for that code onto someone else.

The only case where opening a data format might be a competitive disadvantage would be where there were two or three evenly matched competitors in the same market. In such a case, if only one company opened its formats, it might make it easier for competitors to take market share, since it would ease the migration path. Again, however, in such a situation it is likely that the companies have reverse-engineered each others formats or have some other solution for migration, so opening up your data formats should not be a competitive disadvantage.

What if a company has patented a part of its data format? This is an issue that I am working to come up with an official ODFI position on. I think, at a minimum, companies have no reason to charge money to license their patents; for the reasons described above, it is almost always to their advantage not to make it difficult for others to use their formats. One option is that a company could grant a license to use the data format, but only for reading it, not writing it. Most of the benefits of open formats come from others being able to read your format; most of the problems come from others being able to write it. If every word processor, as an example, could read the format of any other, but only write its own (which is essentially the way the market is now), then you would prevent users from being locked into one program and help with data retrieval in the future, which are two of the main goals of ODFI.

Posted by Adam Barr at June 8, 2003 10:23 PM | TrackBack