In business school, they used to lecture us a lot about the "Network Effect" and "Network Externalities" which meant, more or less, that some things are more valuable because of the number of people using them, rather than because of any of the thing's intrinsic merits. Or, as the wise wikipedia puts it:

A network effect is a characteristic that causes a good or service to have a value to a potential customer which depends on the number of other customers who own the good or are users of the service. In other words, the number of prior adopters is a term in the value available to the next adopter.

One consequence of a network effect is that the purchase of a good by one individual indirectly benefits others who own the good — for example by purchasing a telephone a person makes other telephones more useful. This type of side-effect in a transaction is known as an externality in economics, and externalities arising from network effects are known as network externalities. The resulting bandwagon effect is an example of a positive feedback loop.

I bring this up as a required background reading for this bit from today's New York Times, entitled "I.B.M. to Offer Office Software Free in Challenge to Microsoft’s Line" which says, in part...

Any inroads I.B.M. and its allies make against Microsoft, analysts say, will not come easily. “Three major players — I.B.M., Google and Sun — are now solidly behind a potential competing standard to Office,” said Rob Koplowitz, an analyst at Forrester Research. “But it’s a tough road. Office is very entrenched.”

So the NYT is reporting that IBM has joined Google and Sun in support of a free, open-source alternative to Microsoft Office, and devotes a lot of time to the discussion of the competing XML standards promulgated by MSFT and by this triumverate.

Make no mistake, this little XML jig is the pivot point on which the future of the business end of desktop computing rests. Who that controls the XML standard of office documents controls... well, a heck of a lot, actually. This network effect thing says that a big part of the value of office software is its ability to exchange files with other users, so the more users on a particular bit of office software, the more valuable it is. Unless, of course, the document formats are compatible across several different office softwares. Look how much more valuable Macintosh PCs have become since getting Intel chips and quality Windows emulation capabilities.

IBM and their buddies don't have to make better office software to beat Microsoft - that would almost certainly not help - they have to make more compatible office software. Hence the standards push.

But when has Microsoft really cared about official standards? The millions of MS office users don't seem to care if their .DOC .XLS and .PPT files are standards, as long as they can send them around (usually as unsecured email attachemnts) and expect that they'll be readible on the other end. And largely, they can. Sounds like a de facto standard, doesn't it?

So, is there hope for Open Office? Unless they can somehow win the file format battle, I think IBM, Sun and Google will find themselves on the losing end of an open and shut case of network effect.

Posted by David Karp
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