Link to full paperAbstract
To ensure contestability and fairness in digital markets, policy makers worldwide discuss whether interoperability obligations are an appropriate regulatory tool to achieve these goals. Thereby, interoperability is often not narrowly defined, and can range from forms of data portability to complete standardisation of interfaces so that consumers can interact across the boundaries of a given service. In this report, we adopt a wide view on interoperability obligations in the context of digital markets that is not confined to the narrow contexts of previous or ongoing competition law cases or the specific interoperability provisions discussed in the Digital Markets Act (DMA). This allows us to derive a more general framework on the scope and effect of interoperability as a regulatory instrument for digital markets that can feed back into the ongoing policy considerations.
We first define different notions of interoperability precisely and highlight that from an economic perspective the differentiation into horizontal and vertical interoperability is crucial. Horizontal interoperability refers to the ability of products and services at the same level of the digital value chain to “work together”. An example is the ability to send a text message from one messenger service to another. The key feature of horizontal interoperability is that it allows sharing direct network effects. By contrast, vertical interoperability allows services that are at different levels of the digital value chain to work together. An example is a possibility to run different app stores on the same operating system or to allow alternative identification service providers when accessing a digital service or website. The key feature of vertical interoperability is that it allows to mix-and-match system components. Horizontal and vertical interoperability are thus structurally very different, and their economic assessment is very different. They should thus not be confused in the policy debate.
Our first central insight is that mandated horizontal interoperability is likely a harmful remedy in digital markets, as it tends to enshrine existing incumbency, limits the firms’ innovation and differentiation capabilities, and requires enduring regulation. The main reason for this assessment is that in the dynamic context of digital markets, services compete and differentiate themselves by innovating concerning new features, which runs counter to attempts to standardize services. Interoperability, by contrast, requires standardisation and a relatively steady environment. Thus, only a low level of interoperability can be achieved for digital services. This is dangerous because consumers will still gravitate to the larger network to take advantage of the full richness of features. At the same time, horizontal interoperability lowers the incentives of consumers to multi-home services, which is a powerful driver for contestability. We therefore strongly advise against mandating horizontal interoperability in digital markets, where innovation is occurring frequently and multi-homing of services is typically easy to achieve with low transaction costs. In reverse, this means that policy makers should scrutinize and enforce against attempts of digital incumbents to limit consumers' ability to multi-home.
Our second central insight is that vertical interoperability is indeed a powerful instrument for regulating digital bottlenecks, but should be considered only when a digital gatekeeper is vertically integrated, and if there is evidence that vertical integration leads to discrimination or foreclosure of complementors that would not have occurred in the absence of vertical integration. Mandated vertical interoperability should require gatekeepers to provide ‘equivalence of input’ to non-integrated complementors. That is, whichever interfaces the integrated platform offers to its downstream service should also be offered to third-party complementors on a non-discriminatory basis. Concerns of the hosting platform about security and integrity can in principle be addressed through a licensing regime with oversight by a trusted third party. Concerns for innovation incentives of the hosting platform can in principle be addressed through an appropriate access pricing regime. However, the implementation of vertical interoperability obligations requires the regulator to make difficult and complex trade-offs, and implementation will likely take considerable time and requires careful deliberation.
Vertical interoperability offers innovative complementors an entry point to an ecosystem stack that they are not able to replicate. For efficient and innovative complementors, this can be a stepping stone, which enables niche entry and growth by new firms. The ultimate measuring rod for the success of a vertical interoperability regulation is whether such new complementors could establish themselves as vital competitors in the digital market, innovate and have ventured into other parts of the digital value chain (ecosystem stack), eventually not requiring vertical access to the regulated bottleneck anymore. In this sense, a successful vertical interoperability regulation is transient.
The Commission's proposal for the DMA foresees only vertical interoperability obligations for gatekeepers, albeit only for ancillary services, app stores and side-loading of apps. However, the EP’s amendments also include horizontal interoperability obligations for messenger services and social networks. In light of our findings, we suggest not to include horizontal interoperability obligations in the DMA. Moreover, to make the DMA more future proof, we suggest that the application scope for vertical interoperability obligations should be widened also beyond ‘ancillary services’ and the specific case of vertical interoperability for apps and app stores. However, vertical interoperability cannot apply immediately to gatekeepers, and must be specified with respect to technical and economic access conditions on a case-by-case basis, because it involves complex trade-offs. From experience with access regulation, the implementation of vertical interoperability, i.e., the necessary case-by-case deliberations on trade-offs (e.g., with respect to access pricing), will likely take years and not months in the complex settings of digital markets. Hence, while the DMA may provide the legal basis for such interventions in digital markets, the implementation of vertical integration provisions is likely to take much longer than the six months that the DMA currently foresees for its Article 6 provisions.