Interoperability as a tool for competition regulation
Many thanks to Jonathan Todd for helping put together this condensed version of my first preprint on interoperability and competition. I hope it’s a useful introduction to the topic! I’ve also created some slides on this subject.
Interoperability as a tool for competition regulation
Requiring large online platforms (such as Facebook and Google) to enable up-front interoperability with other services would give the EU the means to boost competition in digital markets where existing antitrust enforcement has failed to do so.
Such enhanced competition would:
– benefit consumers (via increased choice and quality of products and services that better suit their needs);
– stimulate innovation by competitors offering new products and services; and
– bring broader social benefits including:
* improved social infrastructure (e.g. access for users irrespective of their attractiveness to advertisers, and willingness to sign up to large platforms where increasingly essential communications take place);
* promoting media pluralism and diversity (e.g. more incentive for news sources to offer quality news rather than seeking to maximise user attention/advertising revenues with disinformation/hate speech);
* incentives to offer more better privacy (e.g. competing in terms of quality of data privacy/protection safeguards, more data portability);
* improved moderation of harmful content while protecting freedom of expression (e.g. giving users a choice of moderation regimes);
* reduced environmental impact of the online economy and “Internet of Things” (e.g. more incentive to offer sustainable products, and to allow users to switch between service providers without buying new hardware);
* favouring Europe’s digital sovereignty (e.g. by allowing new market entrants from Europe to compete successfully).
What does interoperability mean?
Interoperability is a technical mechanism for computing systems to work together – even if they are from competing firms. An interoperability requirement for large online platforms has been suggested by the European Commission as part of an ex ante (up-front rule) mechanism in its forthcoming Digital Services Act (DSA), currently due to be proposed on 2 December 2020.
Interoperability is the online equivalent of interconnection that the EU imposed on the telecoms sector in the early 1990s, and was fundamental to the successful opening up of these markets to competition. Interoperability has been fundamental to competitive communications markets since their inception, and underlies many technologies today, including email, digital TV, and indeed the Internet itself. Users can exchange calls, text messages and e-mails irrespective of their phone, network or e-mail service.
An interoperability requirement would apply to the largest online platforms, such as social media (e.g. Facebook), search engines (e.g. Google), e-commerce marketplaces (e.g. Amazon), smartphone operating systems (e.g. Google’s Android and Apple’s iOS), and their ancillary services, such as payment systems and app stores.
These major companies are piggy-backing on decades of interoperability, baked into the Internet, to provide their own, non-interoperable services. In the same way that the Internet’s interoperability led to unprecedented innovation and consumer benefits, introducing interoperability on these markets would bring innovation and consumer benefits to users of these — currently monopolised — services.
Interoperability would boost competition by obliging such platforms to compete on the merits of their products and services, rather than relying on the sheer size of their existing user base. This would enable new market entrants to offer users a real choice, and allow users to choose their providers on the basis of their needs and preferences.
An equivalent technical interoperability requirement for the largest social media platforms would enable interconnection between very large services (such as Facebook/WhatsApp/Instagram) and services run by other organisations and even individuals that wish to. Users of these services could choose to communicate with each other cross-platform when authorised to do so, using common functions of such platforms (e.g. connecting as “friends” or “followers”; sending messages; sharing information such as profiles, status updates, “likes” or “retweets”, location, and photos, with individuals, groups and the public; following and responding to each other’s’ feeds; and searching across connected services.)
Large services required to interoperate would still be able to develop new functionality that would not be standardised until it became much more common.
Facebook and Twitter already enable other systems and software to connect in a limited way to some of their services, although those apps are no longer able to access some features due to changes made by both companies in their technical interfaces (“Application Programming Interfaces”, or APIs).
The Mastodon social network, a Twitter-like microblogging service with over 4m users, already has a decentralised structure that allows users to create an account on one or more of hundreds of connected “instances”, run mainly by individual enthusiasts, many for specialised communities. Users can also connect to other interoperable services, such as the French PeerTube.
A technical interoperability requirement could succeed where existing competition rules have failed to tackle the fact that a small handful of technology giants currently have extraordinarily high market shares, and so little incentive to compete on the basis of their products’ merits. These high market shares harm consumers by reducing their choice of quality products and services, and harm innovation because potential competitors wishing to enter these markets face considerable barriers to entry.
Why interoperability helps with tech monopolies
The major tech platforms benefit from so-called network effects, where each new user makes the service more valuable to existing users (e.g. because they can share with more users). They enjoy extreme returns to scale and scope, as their costs are mainly fixed (e.g. software development, and developing strong bargaining position with suppliers and advertisers) while the additional costs of serving millions more users are very low (e.g. because they can use consumer data they have already gathered). The extraordinarily high market shares in the EU (and elsewhere) we see for Google, Facebook and others stem from these factors.
As a result, it is very difficult for new market entrants, large or small, to enter such markets, even if they can offer innovative products. For example, even Google failed to challenge Facebook with its Google+ social network. Requiring major platforms to enable their competitors to connect to their services and users can reduce these monopolistic tendencies. Interoperability between services enables society to benefit from network effects, but without market power going to one provider.
Another characteristic of these markets is customers sometimes face obstacles to using competing services (so-called “multi-homing”), such as the need to install multiple apps, create multiple accounts, manage passwords, and learn the features of each. The less the extent of “multi-homing”, the greater the chances that a market will “tip” towards a situation where one company takes most of the market.
Interoperability lets users communicate with friends and families on major platforms using their own choice of tools, without having to install, learn and manage many different apps, or agreeing to be profiled in exchange for “free” services.
New entrants can also find it difficult to break into a market if users have to pay for services available from existing players for “free” (i.e. by being profiled, mainly for targeted advertising purposes) or if entrants need to attract advertisers (given their small number of users compared to the existing players).
Large online platforms can also hinder competition by acting as gatekeepers, controlling access between businesses and potential customers (e.g. advertisers wishing to reach social media users and sellers using e-commerce marketplaces) so as to charge high prices or manipulate rankings to favour their own products.
Other obstacles to competition include large firms using their strength in one market to move into another (e.g. Amazon expanding from selling books online to cloud computing services), or creating their own network of services using data and channels not available to their competitors (e.g. Apple’s iPhone, iOS, App Store and Apple Pay). As a result customers may suffer reduced choice, less innovation and higher prices.
Where large operators dominate a market, they are unlikely to favour technical interoperability because they do not want competition from new market entrants able to connect to their existing users. Technical interoperability therefore needs to be imposed on those large platforms by regulation.
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