Primary, Secondary, and Tertiary Effects of Standards
Standards are generally good things to have. They are used to grade food, set communication protocols, mediate finance, allow computer programs to interoperate, dictate railroad track size, and much more. They have existed in some form since the beginning of recorded history. This essay describes primary, secondary, and tertiary effects of standards, and explores the link between practice and standard setting. The objective is to predict the outcome of certain trends in practice observed today based on the evolution of standards in the past. Insights gleaned from an analysis of the unique characteristics of tertiary effects of standards are used for this purpose.

For this essay, primary effects of standards are the changes brought about in the things being standardized; secondary effects of standards are changes made to things closely related to but not directly dictated by the standards; and tertiary effects are changes that come about in things not directly affected by the standards but rather as an unanticipated change because of the existence of the standard.

There are very important primary effects of standards: things that adhere to standards can be used by more people, can be made by more suppliers, and they usually cost less than their non-standard predecessors. Money facilitates trade because its value is known and it is commonly accepted. Electrical equipment is useful when plugs and voltage and batteries are standard. Trains and goods on trains travel farther when tracks are standard. Computer programs are more useful if the language they are written in and the operating system they run on are standard. "Killer Apps" depended on there being a standard platform to operate on.

In addition, there are important secondary effects of standards: things that are standardized are easier to buy and sell, or ship, or communicate, and standardized things lead to standardized related activities. Markets emerge when standards are set, as with physical commodities such as wheat, or financial instruments such as derivatives. Ancillary services emerge when primary products are standardized, such as cargo carriage in standard boxes or on standard pallets, or insurance for specific risks.

Finally, there are elusive but important tertiary effects, where the possibility of a standard allows something totally new to emerge, something that would not have come about if a specific standard did not exist or if standards in general were not expected. The derivatives market can be described as the tertiary product of standardized contracts and the existence of liquid underlying cash markets. The creation of the World Wide Web can be described as a tertiary result of standard nomenclature for describing ideas, standard file descriptions, and simple procedural rules. These together with a piece of software now called a browser made the Web possible and initiated the Information Revolution.

The motivation for this essay is to advance the notion that disruptive change occurs in particular when the tertiary effects of standards come into play, thereby establishing a link between the standard setting process and disruptive change. Predicting disruptive change is valuable since being correctly positioned economically, financially or politically in the event of the change is valuable. Therefore, analyzing practice, studying the process of standardization, and predicting tertiary effects of standards can lead to valuable predictions concerning disruptive change.

Standards Follow Practice, They Don't Lead
The iron rule in the story of standards is that standards follow practice, they don't lead. That is, a standard does not burst forth fully formed, causing a revolution on a clean sheet of paper or out of whole cloth. What eventually becomes a standard typically begins as limited practice that is nurtured and then promoted. Once a practice gains traction, it is subjected to the give and take of a marketplace, and is eventually accepted by a community of users. A community grows up around a practice, and the community influences and then controls its evolution. Some form of committee process is created, within certain boundaries. It is a process fraught with peril: defined too tight, a standard cannot grow; defined too loose, a standard does not yield sufficient benefit. A standard will survive and evolve over time only if it attracts adherents and offers them value.

Examples of practice preceding standards are everywhere. The width of horse drawn carriages dictated the size of railroad tracks. Wheat grading standards were dictated by what was grown and how it was stored. Financial derivatives began as extensions of the instruments they were based on before they took on a mathematically determined life of their own. Hypertext protocols laid the groundwork for the World Wide Web.

Since standards follow practice, they cannot be dictated. Practice typically comes from products that are offered and which succeed. A successful product can become the basis for a proprietary standard (Microsoft's Windows is the one of the best examples, the Palm OS is another) or it can become a de facto standard that is generally used by many but not owned by anyone (the 386/6502/Z80 instruction sets and the IDE plug-in interface are specialized examples, while the automobile gearshift pattern is a general one). It is tempting to try to push a standard along, to try to get a new technology it into the market quickly, but pushing a standard before it is practice usually fails. There must first be a practice for there to be a standard.

In the beginning, financial derivative products were designed to solve a specific problem. What are now derivatives markets were patterned after the commodities markets. The primary effect of standards for commodities was that the markets grew to the degree they facilitated the use of the commodities. The secondary effect of the growing market for commodities was a growing market for transportation, for financing, for products made of the commodity, like bread, etc. The market for these secondary products was linearly related to the growth of the primary products.

Tertiary effects are special examples of the rule. As an example, the growth of the derivatives market is a tertiary effect of the effect of standards on the commodities markets. Derivative markets are built on the cash markets they are derived from. Puts and calls for stocks and currencies were traded like options for wheat. The market for derivatives is broad and deep ("has liquidity) because the quality of the product being traded and the documentation surrounding the transaction is standardized, just like the cash markets. A standardized framework for trading made possible a wide variety of derivative products (more varied than the underlying cash products), and derivatives markets have grown to truly gargantuan size. The tertiary effect of the standard setting process was that the knowledge standards would be in place is what allowed the market to grow. The growth of the derivatives markets exhibits primary, secondary, and tertiary effects of standards, and demonstrates the rule that standards follow practice.

The World Wide Web was conceptualized because there was an Internet, and there was a Hypertext protocol for linking ideas, and there was the prospect that standards could be set to allow the two to work together (Tim Berners-Lee, Weaving the Web,1999). Thus, the standard of the Web came about because of the practice of interconnection between networks and among participants, which also was a tertiary effect of the standards set earlier for the Internet, file description, and software use .

Tertiary Effects as Disruptive Change
Primary and secondary effects of standards are linear changes. They may be very important, but the effects are extensions of what came before. By contrast, tertiary effects are often geometric in effect rather than linear. The evolution of the derivatives markets and their explosive growth provides an example of this phenomenon.

A derivative market is trading in an instrument may be derived from an underlying commodity, but there are many ways for it to be derived. The original commodity derivatives were just future delivery, or optional delivery. Newer derivatives depend on the price of the commodity, on the weather that affects the production of the commodity, the creditworthiness of the institution creating the commodity, etc. Any characteristic of the commodity can be the basis for a derivative. Thus, the standardization of the framework created a whole new market, which is the tertiary effect.

The size of the derivative market is not limited by the size of the market for the underlying commodity. Indeed, the financial derivatives markets have reached $100 Trillion, many multiples of the size of the markets for the cash products. The growth of the derivatives market could not have been anticipated from the size of the underlying cash markets. Derivative markets solve wholly new problems so they are not limited by the magnitude of the underlying markets. The derivatives markets have far outstripped the size of the cash markets in which they were born. This is a tertiary effect, and it has been disruptive.

Sometimes a tertiary effect is disruptive because it is facilitated by another, larger change already underway or in place. For example, the early growth of the WWW was explosive because there already were millions of PCs. Free software, an existing population of PCs, and free local telephone calls (if you called from home) all facilitated the explosion. This was "under the growth curve" of the personal computer, which provided a platform already in place. The Web was a tertiary effect of standards because its explosive growth was a result of a new way of looking at information and its use, not because of the direct effect of the standards on which it was based.

Christensen's discussion of disruptive change deals with one aspect of this effect (Clayton Christensen, The Innovator's Dilemma, 1997). In his approach, a new technology enables a new market to emerge, usually at the expense of market leaders with predecessor technology. To cast Christensen's argument in the frame of this essay, a new technology can become the new standard by building on the practice of the old. The primary and secondary effects are the replacement of the old by the new. The tertiary effect is a radical expansion of a market based on a new use being found, or a new market being developed .

New Disruptive Tertiary Effects
Any number of trends might generate tertiary effects through the standards process and could lead to disruptive change. Here are a few candidates:

     A. Analog to Digital:

A wholesale conversion from analog to digital is underway in every form of information creation, dissemination, and use. The first order effects are wholesale changes in technology for processing, transmission, and use. The secondary effects are higher bandwidth capacity per physical unit, better fidelity and resolution for the content delivered, and higher quality of service. The tertiary result is the collapse of time and space, as creation becomes real time, and copying costs and transmission costs approach zero. The changes that have come from this tertiary effect are seen in the collapse of equity values in the telecommunications industry and dislocations in the music industry, and they have been extremely disruptive.

Entertainment distributed in digital form will be different from entertainment distributed in analog form. The primary and secondary effects of the change are that distribution in digital form will be better, cheaper, and faster. In economic terms, this means the bottom line of the players in the value chain will change. In functional terms, there will be new forms of delivery and new business models.

The tertiary changes go beyond better-cheaper-faster. There will be new modes of interaction between user and artist, and new attitudes toward content. Tech-savvy users are refusing to pay for digital goods at all. While some artists feel closer to their fans as a result, many hate them because they are ripping them off. What has happened to music as a result of Napster/MP3 will happen to video as a result of MPEG-2 and MPEG-4. New ways to link artists and consumers will be found, and new business models be created. FullAudio, pressplay, and MusicNet are trying to develop viable approaches.

     B. Convergence Boxes:

Another candidate tertiary effect is the convergence of PCs and consumer electronics (CE) equipment. The primary effect of standards such as DVD, MP3, and Windows was the growth of the market for the devices and media they play or use. A secondary effect was the growth of Internet-based information services, new distribution of digital media, and the growth of the digital content creation business made possible by the PCs and the CE devices. The tertiary effect is the inter-relationship between the many components in the PC and CE markets. TVs are being fed by microprocessor-powered DVD players, Personal Video Recorders (TiVo, Replay), cable Set Top Boxes, and Game Players, most of which depend also on large hard disk drives. The Internet is the vehicle for distribution of the media to the user. Information is available on the Internet that becomes an important aspect of the consumer experience, in a way that is often hidden from the user. The MP3 junkie downloading songs from Napster knows he is using the Internet: the listener who's CD player accesses Gracenote (formerly CDDB) for artist and track data probably does not.

The next stage in this process can be predicted using the rule of standards following practice. The new practice is that entertainment is being driven by information. MP3 was popularized on the Web, where content, data processing, and information came together. Users expect CD and DVD players to display information about content so home audio systems will have to be connected to the Web: OpenGlobe and others will make this possible.

Thus, while the primary and secondary effects of the MP3 and DVD standards appear as new devices, the tertiary effect is on the way the devices are used. The tertiary effect will dictate the nature of the next generation of CE devices, seamlessly integrating information storage, Web access, and content packaging. The knowledge that standards exist is giving rise to whole new commercial practices, not of hardware but of software and of use. Thus, the revolutionary effects are tertiary. The new user experience is derived not from any one device but from the expectation that common entertainment functions will be available from all of them. It will be driven by standards of use rather than technical standards. (This might be considered the ultimate form of standards following practice!)

     C. Open Source Software:

A very compelling example of standards following practice is the open source software phenomenon (Eric Raymond, The Cathedral and the Bazaar, 1999). One of the best examples of the open source movement is Apache, used to run more than half of the Web servers of the world. The code is managed by a self-organized group of academic and commercial hackers. Another example is Linux, the only thing stopping Microsoft from exercising monopoly control over microprocessor operating systems. IBM could not compete with Microsoft for PC operating systems (O/S2 died, Windows lived) but IBM is now embracing Linux more aggressively than its proprietary offerings because of the competitive advantages it offers.

By definition, in every open source case, practice preceded the "standard." Once each open source application program gained currency, a standard-setting process was established because users realized there was value in having a process to settle on a "standard" for each. What is disruptive about open source is the belief that software developed and supported in the open, by non-commercial players, will be better, more responsive, and more cost effective. This belief in open source is a tertiary effect of the standards setting process and is what makes open source disruptive.

     D. The Semantic Web

The next iteration of interactivity on the World Wide Web is the Semantic Web, where ideas will be linked as easily as facts are today. This is a manifestation of the tertiary effect of the belief in standards becoming more disruptive than the standards themselves.

Conclusion
The objective of this essay was to distinguish between the primary, secondary, and tertiary effects of standards, and to demonstrate the iron rule that "standards follow practice, they don't lead." From this background, the notion was advanced that tertiary effects of standards were responsible for important, sometimes disruptive changes. Finally, it was suggested this framework for analysis could be used to predict future disruptive change.

Examples were drawn from the world of derivatives trading, the evolution of computer technology, the world of consumer electronics, and the evolution of the World Wide Web. A case was made that primary and secondary effects are linear extrapolations but that tertiary effects are non-linear and can become disruptive. Understanding the way tertiary change comes about can be of substantial value.

The tertiary effect that the belief by users that standards will prevail once they are embraced by practice is seen as disruptive in the case of derivatives, open source software, and the Web. The growth of all three reflects tertiary effects of the standard setting process. Similarly disruptive results will come from the standards emerging in the digital media space (CDs, DVDs), and in consumer electronics, where the belief that standards will prevail will lead to wholly new practice in entertainment.

Henry Lichstein
Biography
February 25, 2002

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