The real options approach to standards for building network-based services

In this paper, we show the economic value of flexibility in standards by linking the business concept of market uncertainty to the technical aspects of designing standards and implementing network-based services based on them. We quantify our theory with a options-like model, showing how to maximize overall gain from the market's point of view when creating standards used to build network-based services in highly uncertain markets. We show how network architectures based on standards that promote parallel experimentation such as the end-2-end argument have a greater chance of providing network-based services that meet an uncertain market because of the added value from the ability to innovate. This model provides a framework to understand the tradeoffs between being able to experiment, market uncertainty, business and technical advantages to services with centralized management and how service providers learn from past generations of the service.