《華為：2022年消費者物聯網的互操作性研究報告（英文版）（92頁）.pdf》由會員分享，可在線閱讀，更多相關《華為：2022年消費者物聯網的互操作性研究報告（英文版）（92頁）.pdf（92頁珍藏版）》請在三個皮匠報告上搜索。

1、 INTEROPERABILITY IN CONSUMER IOT A Study for Huawei 16 MARCH 2022 WWW.FRONTIER-ECONOMICS.COM CONTENTS Executive Summary 4 1.1 Why interoperate?4 1.2 Interoperability implies costs as well as benefits 5 1.3 Interoperability involves trade-offs in competition and innovation 6 1.4 How is interoperabil

2、ity achieved?6 1.5 Historical case studies demonstrate benefits and costs of interoperability 7 1.6 The current state of interoperability in consumer IoT 7 1.7 Summary conclusions 8 2 Introduction 9 2.1 Why interoperate?9 2.2 When to intervene to promote interoperability?10 2.3 Conclusion 13 3 What

3、is meant by interoperability?14 3.1 Defining interoperability 14 3.2 Which parties should interoperate?16 3.3 The scope of interoperability can be defined by different“layers”19 3.4 The degree of interoperability 22 3.5 Interoperability can apply at different“locations”26 3.6 Technical design and sp

4、ecification of interoperability 27 3.7 Ex-ante obligations-neutrality alongside interoperability 29 3.8 Conclusion 31 4 Costs and trade-offs of interoperability 32 4.1 The application of interoperability implies trade-offs 32 4.2 Interoperability can affect innovation 33 4.3 Costs of increased inter

5、operability 38 4.4 Digital platforms weigh up opposing incentives to interoperate 40 5 Interoperability as a policy tool to promote competition and positive economic outcomes 41 5.1 Paths to interoperability 41 5.2 Examples of where interoperability has been used as a policy tool 43 5.3 Conclusions

6、51 6 Lessons on interoperability from historical case studies 52 6.1 Overview of Case Studies 52 6.2 Case Study 1:The Development of the Telephone Standard 55 6.3 Case Study 2:The Development of Shipping Containers 59 6.4 Case Study 3:The Development of the USB standard 63 7 Current issues and chall

7、enges with interoperability in consumer IoT 67 7.1 Voice Assistants 67 7.2 Smart Home 72 7.3 Automotive Infotainment 76 8 Conclusion and recommendations 82 8.1 Be clear on the rationale for intervention as this will drive the form of interoperability that is chosen 82 8.2 Carefully consider the cost

8、s and trade-offs involved in different forms of interoperability 84 8.3 Policy makers should support the process of defining the precise location,layer and degree of interoperability required 84 References 86 frontier economics|Confidential 4 4 EXECUTIVE SUMMARY Frontier Economics(Frontier)has been

9、engaged by Huawei to undertake a study which considers the principles and practice of interoperability in digital markets,with a focus on consumer IoT.1 Interoperability is not a new concept,however,the proliferation and growth of digital markets and services has put renewed focus on the development

10、 of the appropriate policies to manage interoperability.1.1 WHY INTEROPERATE?Interoperability describes how different systems work together in a way that creates value for suppliers and end users.Interoperability is increasingly important in digital markets where data can be shared across different

11、services and products.Policy makers are also interested in it as a tool to promote positive outcomes for users and mitigate features of digital markets which are considered harmful to competition.Policy makers might have different objectives for requiring interoperability.To realise benefits of econ

12、omic externalities whether environmental,to facilitate innovation;or to exploit network effects.Public policy can justify interoperability for example to promote user“rights”over the data that they hold.To overcome coordination problems where firms are unable to agree appropriate forms of interopera

13、bility.To promote“competitive”outcomes by mitigating market features which impair effective competition;preventing conduct which would amount to abuse of a dominant position;or by promoting“fair”competitive outcomes.When considered as a policy tool,the precise form of interoperability will be specif

14、ic to the individual context of the parties wishing to interoperate.The taxonomy developed in this report(Figure 1)describes how interoperability can be applied in a general sense,including for consumer IoT.The form of interoperability will depend on who it applies to,whether competitors(horizontal

15、interoperability)or providers of complementary devices and services(vertical interoperability).Interoperability can take place at different“layers”which determine its scope:technological layer(to physically,or otherwise,connect different systems);data/syntactic layer(using common data formats);human

16、/organisational layer(for aligned processes and responsibilities so data is commonly defined and understood);and the institutional/legal layer(a common and coherent legal and institutional framework to support sharing data).Interoperability can take place at different locations:on networks used to t

17、ransmit data;on devices operating systems or hardware;or on the apps and content that we use.Interoperability can take place to different degrees.This can range from the ability to move data from one system to another on an ad hoc basis;to more real time standardised processes and protocols which me

18、an different systems can replicate each others services.1 Frontier Economics is grateful to Dr.Inge Graef for her comments and review of earlier drafts of this report.Dr.Graef is Associate Professor of Competition Law at Tilburg University with affiliations to the Tilburg Institute for Law,Technolog

19、y,and Society(TILT)and the Tilburg Law and Economics Center(TILEC).frontier economics|Confidential 5 5 The form of interoperability will then determine the technical approach and design such as the detailed technical specifications and format of data flows;the approach to resolving disagreements;the

20、 commercial terms or any payment flows;the approach to privacy,security,user functionality;and how each party can develop their services while maintaining interoperability.FIGURE 1 DEFINING INTEROPERABILITY Source:Frontier 1.2 INTEROPERABILITY IMPLIES COSTS AS WELL AS BENEFITS Interoperability can b

21、ring substantial economic benefits not just in the sectors of the interoperating parties,but across wider parts of the economy,or it can bring wider social externalities such as environmental gains.However,it also involves costs which can differentially affect interoperating parties.First,interopera

22、bility involves transaction costs when agreeing the specific design and form of interoperability,including on the security and privacy implications,in an ongoing way.Second,interoperability may affect returns on investments made.Firms may seek to avoid competitors or complementary service providers

23、using interoperability to“free ride”on their investments.For example,digital platforms have invested in mapping,navigation,email,cloud data storage and virtual assistants which are in many cases provided to their end users for free,and may risk losing the value of some of this investment to rivals t

24、hey interoperate with.Third,platforms face risk where interoperability facilitates greater competition against the platforms own complementary services.Given that each party will face different costs and risks in relation to any interoperability agreement,aligning incentives to interoperate can be d

25、ifficult.Even where it is clear to all parties that interoperating will bring benefits it is challenging to coordinate and align incentives.frontier economics|Confidential 6 6 1.3 INTEROPERABILITY INVOLVES TRADE-OFFS IN COMPETITION AND INNOVATION Interoperability affects the incentives of providers

26、to compete and innovate.A lack of interoperability means that rival firms must compete hard with each other in order to win customers and to become the market leader.This intensity of competition drives rivals to innovate.Consumers benefit as a result of this“disruptive innovation”.Different forms o

27、f interoperability will affect incentives to innovate in different ways.Where there is interoperability between different competing digital platforms(“horizontal interoperability”)there is scope to grow direct network effects associated with the platform(since interoperability implies access to a la

28、rger number of users).However,there will be less incentive to innovate since the benefits to a platform of innovating can be partly captured by rivals that the firm interoperates with.Instead rivals will compete on price or service,and there will be slower innovation around the core platforms techno

29、logies and standards(“sustaining innovation”).Interoperability between a digital platform and suppliers of complementary services(“vertical interoperability”)allows parties to benefit from indirect network effects as the value of the platform to users increases,as more services interoperate with it(

30、and vice versa).However,vertical interoperability can decrease the differentiation between different digital platforms(because the same complementary services are available on each platform),which will soften the intensity of competition between the platforms,reducing incentives to innovate.1.4 HOW

31、IS INTEROPERABILITY ACHIEVED?It is common for firms to commercially agree,bilaterally or multilaterally,to interoperate with each other.In the case of consumer IoT,firms will set out Software Development Kits(SDKs)or Application Programming Interface(APIs)to facilitate interoperability and a testing

32、 and certification process will mitigate security and user functionality issues.However,as noted,even where parties agree that interoperability would be profitable and efficient,it can be difficult to coordinate and align incentives to agree the form of interoperability.Pooling Intellectual Property

33、(IP)can help firms align their incentives around a standard,since this provides some commitment that the form of interoperability would not disproportionately benefit one party.In some digital platform markets the process of coordinating interoperability is made easier in the sense that one party(th

34、e platform)largely sets the terms for interoperating between the platform and service providers and device manufacturers.Such an approach mitigates some of the costs and complexity in coordinating,though outcomes can be affected by an asymmetry in the bargaining position of the different parties.In

35、some cases interoperability can only be achieved with the intervention of government or Standard Setting Organisations(SSO).However,the process for agreeing standards is long and protracted and this can lock-in standards at a point in time.Finally,interoperability can be imposed on an ex-ante basis

36、to promote positive welfare impacts or to enable social externalities.For example,it has also been imposed to improve the competitive dynamics of a market(the Open Banking remedy in the UK,the EU Electronic Communication Code,and the draft Digital Markets Act,all impose forms of interoperability to

37、promote welfare outcomes).It can also be required as a behavioural remedy in abuse of dominance cases or as a condition for approval of mergers.For example,during Googles acquisition of Fitbit conditions were imposed so interoperability of Fitbits rivals with frontier economics|Confidential 7 7 Goog

38、les smartphones and operating system were maintained and that access to Fitbits Web API remained open.1.5 HISTORICAL CASE STUDIES DEMONSTRATE BENEFITS AND COSTS OF INTEROPERABILITY This report considered three case studies to put the topic of interoperability into its historical and economic context

39、.The early development of the telephone standard in the US where differing suppliers competed without interoperating with each other.The development of shipping containers to make the process of moving goods from land transport to ships more efficient.The development of the USB standard which enable

40、d communication and power supply between personal computers and their peripheral devices.The three case studies illustrate how interoperability brought not just significant efficiency gains,but led to positive externalities of greater competition and innovation in wider markets or environmental bene

41、fits.However,they also illustrate how interoperability may not emerge spontaneously given the disparate interests and incentives of different parties.In the case of containers,despite a seemingly simple product around which to interoperate(the size and features of a stackable box),it took over a dec

42、ade to agree standards in the US,then many more years to agree standards internationally.In early US telephony,it is unlikely that AT&T would have been able to impose its standard on the industry without a supportive regulatory and societal environment which allowed it to become a regulated monopoly

43、.By contrast the USB standard was an example of an industry led approach to interoperability.The case studies show how sharing Intellectual Property helped parties coordinate around a standard.Containerisation only developed after the pioneer of the container opened up his patent on his own containe

44、r technology.The USB standard was made possible following the creation of a shared patent-pool for the common standard.The case studies can also illustrate the trade-offs which can hinder innovation.For example,the adoption of AT&Ts standard in the US brought benefits to users who could reach more t

45、elephone users but the lack of competition hindered innovation.However,the USB standards case study showed how design improvements and innovation to a common standard can be driven.1.6 THE CURRENT STATE OF INTEROPERABILITY IN CONSUMER IOT IoT is a transformative technology that will bring new servic

46、es,devices and applications to be used across all aspects of daily life.Data collected and processed from a plethora of devices has the potential to unlock welfare and efficiency benefits throughout society:enabling firms to reach consumers,lowering barriers to entry,supporting the development of ne

47、w and innovative products,and bringing benefits of choice and competition to consumers.It is thus heralded as the next transformative technology which will shape industry and society.Digital platforms play an important role in avoiding a fragmented user experience by interoperating with devices and

48、apps from many different suppliers.Digital platforms interoperate with tens of thousands of different services.In doing so they overcome coordination problems by effectively setting the terms of interoperability,though terms agreed may be affected by a bargaining asymmetry between the parties.fronti

49、er economics|Confidential 8 8 There are a number of industry led initiatives which support and promote interoperability across different forms of consumer IoT.For example in relation to voice assistants the Voice Interoperability Initiative(VII)(led by Amazon)promotes the ability of consumers to cho

50、ose from multiple voice assistants on their devices.In relation to smart home devices,“Matter”is a new smart home connectivity standard developed by the Connectivity Standards Alliance which aims to develop and support a common connectivity protocol for smart home devices;and in relation to automoti

51、ve consumer IoT the Connected Vehicle Systems Alliance(COVESA),the Car Connectivity Consortium(CCC),and the Open Automotive Alliance(OAA)all promote interoperability in different ways.1.7 SUMMARY CONCLUSIONS It is important to recognise that interoperability can bring benefits as well as costs,and a

52、lso creates a trade-off in the forms of innovation.Furthermore,it is not a one size fits all policy instrument.Mandated interoperability is often context specific,and introduced to address a specific policy,environmental or competition concern weighing up the different costs and benefits.Nevertheles

53、s,some common messages emerge from our review for policy makers which can guide decisions on how to apply interoperability.1 Policy makers should be clear on the rationale for intervention as this will drive the form of interoperability.While in many cases there is no need to impose interoperability

54、,since firms will have strong incentives to agree terms,sometimes policy makers need to intervene to support public or social objectives;to mitigate competition problems;or to overcome coordination problems.Policy makers should carefully consider the rationale for intervention,as this will directly

55、relate to the precise form of intervention that is proposed or adopted.However,mandated interoperability will not necessarily change any existing bargaining asymmetry between parties.2 Policy makers should assess the costs and trade-offs involved in different forms of interoperability.Whatever form

56、is adopted,it will incur costs to implement,monitor and support privacy and security.Interoperability also involves trade-offs since it can soften incentives for different systems to compete and innovate.However,these trade-offs will be context specific and depend on the precise nature and maturity

57、of competition.3 Policy makers should support the process of defining the precise location,layer and degree of interoperability required.To the extent that interoperability is imposed it should be focused on a specific context and specific objective.Blanket ex-ante requirements for unspecified form

58、of interoperability will not identify the optimal trade-off and hence the appropriate form of interoperability.Hence where policy makers wish to impose interoperability they should be ready to participate in the process of agreeing the detailed form(who,location,layer,degree)as well as the technical

59、 design of interoperability.frontier economics|Confidential 9 9 2 INTRODUCTION Technological advances in digital markets have brought many benefits to consumers and have revolutionised production and supply processes over the last two decades.The consumer Internet of Things is the latest wave of thi

60、s technological change.It promises to connect many different devices to communications networks,and crucially with each other.Consumers will benefit as new services and products are created by leveraging the data generated across different devices.Digital platforms are integral to many parts of the

61、consumer IoT sector:they create focal point around which the interests of consumers,device manufactures and service providers can coalesce.Interoperability lies at the heart of these commercial relationships.Consumers benefit from being able to access digital products and services that interoperate

62、with the platforms they use.Likewise,the suppliers of digital products and services benefit from accessing a platforms consumer base,benefiting from the investments made by the platform in its service,and from interacting with each other to share data and create valuable products.However,digital mar

63、kets raise a number of issues which can affect outcomes for users.Where products or services are subject to network effects,the process of competition can be impeded.Some digital platforms are able to enjoy the benefits of network effects that their investments enable,but in a way that can make it m

64、ore difficult for new entrants to challenge incumbents.Digital markets exhibit strong economies of scale and scope which can in some circumstances be hard to replate.Digital markets also trade on data,which in turn raises issues around protection of privacy and security for users.It is in this conte

65、xt that policy makers around the world are increasingly interested in interoperability as a commercial practice and a policy tool.The importance of interoperability to commercial interactions between different digital providers is rising.It has also been suggested as a remedy to increase competitive

66、 pressure on large digital platforms by making them interoperate with rivals,and enable consumers to easily switch between rival providers.Frontier Economics(Frontier)has been engaged by Huawei to undertake a study which reviews the current theoretical thinking around the topic of interoperability.T

67、his section briefly summarises why firms interoperate,and the different motivations that policy makers may have to impose interoperability as a policy tool.Section 3 considers how interoperability is defined.Section 4 describes the different trade-offs involved in interoperability.Section 5 consider

68、s how interoperability comes about and how it is applied as a policy tool.Section 6 examines historical case studies where interoperability has played a key role in bringing efficiency and welfare benefits:the shipping container,the development of the phone system,and the USB hardware interface stan

69、dard.Section 7 considers the current state of play in three consumer IoT technologies:voice assistants,smart home,and automotive IoT.Finally,Section 8 provides some recommendations for policy makers in relation to applying interoperability.2.1 WHY INTEROPERATE?Interoperability is a common feature of

70、 many different supply and production processes.It defines the terms of commercial engagement between different systems to enable them to work together to supply a service or good to users(more formal definitions follow in the subsequent section).It enables different suppliers to realise economic co

71、mplementarities where,by working together,different systems are able to create value in the production and supply of goods or services for end users.frontier economics|Confidential 1010 Interoperability is not a new topic.Its role in enabling different systems to work together has been much studied

72、and applies in many“old-world”markets.Section 0 of this report considers historical case studies which demonstrate how interoperability applies across three physical products:shipping containers,the early development of the telephone and the USB computer hardware interface.In all cases,the productio

73、n process meant that the service provided to end users relied on many different parties supplying services independently:shipping goods internationally required land transport,shipping transport and port services;making long distant phone calls required the use of different telephone networks;and at

74、taching computing peripheral devices to computers required that devices were compatible.It was by interoperating that the individual suppliers could effectively and efficiently coordinate their activities to unlock value for consumers:by offering more efficient and lower cost shipping;or a higher va

75、lue telephone service with a wider range of potential call recipients;or a greater range of computing peripherals which were compatible with their computer hardware.Interoperating was,in these cases,vastly more efficient than bilaterally contracting on a case by case basis between pairs of suppliers

76、,or by fully integrating their production and supply processes.It provided a standardised way that firms could interact with each other.However,the value of interoperating goes much further than the direct parties supplying the service and the consumer.In this way interoperating can release“external

77、ity benefits”.In some cases these externality benefits can dwarf the direct private benefit to the suppliers and consumers of consumer goods that rely on interoperability.In our case studies shipping containers not only lowered costs of shipping but they revolutionised world trade and production and

78、 supply processes across all industries,which in turn led to productivity improvements in the worlds economies;telephone systems supported competition by enabling businesses to more effectively communicate with users,and brought social benefits enabling communication between disparate communities;th

79、e USB standard ushered in a wave of innovation and competition in peripheral devices,but also brought environmental benefits as there was less waste of electronic devices.These benefits were enabled by interoperability.By agreeing the precise process and terms by which different products could work

80、together,different suppliers were free to invest and innovate.Parties who interoperate need not even directly contract with each other,let alone formally integrate(merge)their production and supply processes to realise the complementarities when two goods or services are supplied together.Interopera

81、bility arguably plays an even more important role in digital markets than in many physical markets.This is because a defining feature of digital services is their ability to gather and process data,that can be valued and used in other services.And the pace of change is likely to increase.Advances in

82、 technology will increase the use and diffusion of digital services,and then as a consequence,elevate the role that interoperability has in shaping commercial and competitive outcomes.Section 7 explores how interoperability is currently applied in consumer IoT markets.2.2 WHEN TO INTERVENE TO PROMOT

83、E INTEROPERABILITY?As digital markets mature,policy makers are looking for tools to promote the welfare enhancing effects of competition,and some argue that interoperability can be used as a policy tool to promote welfare.However,interoperability can be costly to implement,and there is no standard a

84、pproach that can apply across all situations.There can be a number of different motivations for policy makers,regulators or competition authorities who wish to promote interoperability as a policy tool.In most markets,parties will have incentives to interoperate where it creates value for them.Howev

85、er,there can be circumstances where interoperability is not present and where it could lead to welfare benefits;or that the existing form of interoperability is in some way sub-optimal relative to a policy frontier economics|Confidential 1111 makers objectives.In these cases,policy makers can choose

86、 to intervene to achieve a desired level of interoperability.The rationale for intervention will reflect different goals(sometimes in combination),such as:to realise benefits of economic externalities associated with interoperability;public policy reasons;to support coordination of interoperability;

87、or to promote“competitive”outcomes in markets.2.2.1 REALISING ECONOMIC EXTERNALITY BENEFITS Interoperability can bring value not just to the parties interoperating and their direct customers,but potentially much wider benefits.These are termed“externalities”in that they are“external”to the interoper

88、ating parties supplying a good or service,and their customers.Typically,given that the parties supplying the service will not consider the economic value of these externalities,they will be under-supplied compared to the socially optimal level.This is therefore a classic market failure rationale for

89、 policy intervention:governments intervene to promote the socially optimal level of investment.There are many examples of externalities that can result from interoperating:The USB standard created environmental benefits as a result of agreeing common standards for interoperability between hardware d

90、evices.Using interoperable systems to share healthcare data for research can bring widely felt research and development benefits,by facilitating innovation in medicine.Interoperability can generate network externalities.Direct network effects occur where the value of the good increases as more users

91、 consume it,for example with communications services or electronic payment services.Indirect network effects can occur where a platform or service depends on two or more user groups,such as producers and consumers,buyers and sellers,or users and developers.As more people from one group join the plat

92、form,the value of the platform to the other group increases.Policy makers can therefore intervene to promote interoperability as a tool to enable the externalities that would otherwise not be realised.Inevitably,any intervention should carefully consider the costs of interoperability together with t

93、he benefits.2.2.2 PUBLIC POLICY REASONS There may be public policy rationales for intervening to promote interoperability which are not related to an economic rationale.Policy makers may wish to support a number of objectives which might relate to interoperability:control over data,regulation of con

94、tent or privacy considerations.Part of the rationale for promoting forms of interoperability in GDPR was to promote the rights of users over their data.2.2.3 SOLVING COORDINATION PROBLEMS Interoperability is promoted as a policy tool to solve the coordination problem.This can occur where parties hav

95、e unilateral incentives to interoperate,though have heterogeneous preferences.Individual firms preferences will vary depending on their overall business strategy,sunk investments,relative size of their customer base,and the benefits that they derive from interoperating(for example,by exploiting data

96、 gathered when interoperating).These differences can make it difficult to coordinate around a standard for frontier economics|Confidential 1212 interoperating.In some cases,there may therefore be a need for some form of government intervention to support interoperability.This was clearly illustrated

97、 in the development of the shipping container standard(which is explored in Section 6.3).In this case,while different operators understood the value of agreeing a common standard for different logistic systems to interoperate,each operator had strong incentives to design the standard to reflect.Stan

98、dard Setting Organisations(SSOs)or direct government intervention can provide a focal point around which different parties can agree to interoperate.SSOs set a common specification for the precise form of interoperability and providers can then design products and services that are compatible with t

99、he standard.2.2.4 MITIGATING COMPETITION PROBLEMS A third rationale for intervening to promote interoperability is to remedy competition problems observed in the market.It is helpful to distinguish between competition problems that stem from the features of the market,and competition problems associ

100、ated with conduct of market participants that have market power.Market features can impede the process of competition in many ways which mean that consumers do not benefit from competition,even where suppliers do not have significant market power.High switching costs or customer inertia can limit co

101、mpetition(since the gains from investing in innovation may be lower).Single-homing may reduce the scope for firms to compete compared with multihoming markets since competitors would have to convince single-homing consumers to abandon their existing supplier.There are certain features of digital mar

102、kets which can impact competition:economies of scale and scope and networks effects(described above).In such markets the competitive process can be impaired and policy makers may therefore impose ex-ante requirements to mitigate barriers to competition,or otherwise improve consumer welfare outcomes(

103、Section 5 discusses instances of interoperability used as a policy tool).For example,a form of horizontal interoperability is imposed on mobile markets to mitigate some of the barriers to switching and enable consumers to port their mobile numbers.In digital markets,suppliers can sometimes attain a

104、strong bargaining position with regard to other suppliers with whom they interoperate.This can affect the process of achieving interoperability.However,while a requirement for a party to offer interoperability can affect market outcomes,it may not necessarily be sufficient on its own to mitigate any

105、 existing bargaining asymmetry.A related but distinct form of policy intervention is the imposition of interoperability requirements(or remedies)as a result of an abuse of a dominant position.A dominant firm is held to have a special responsibility not to allow its conduct to impair genuine and undi

106、storted competition.Competition authorities may investigate the behaviour of dominant firms,and where they find that an abuse has taken place they may impose behavioural remedies including a requirement to interoperate.Competition authorities and courts may have a preference for structural remedies

107、over behavioural remedies,(such as requirements to interoperate)since a behavioural remedy implies that the competition authority or court may have to specify the design of the remedy and act as a day-to-day enforcer of the detailed obligations in a way that is akin to a regulatory agency.Nonetheles

108、s,there are examples where courts have imposed interoperability obligations in abuse of dominance proceedings,or as a merger decision(discussed in Section 5).frontier economics|Confidential 1313 Finally,a further and distinct motivation in relation to competition concerns might be to promote“fair”ou

109、tcomes2.One of the key motivating objectives of the Digital Markets Act is to increase fairness(alongside a co-objective of improving contestability).Fair competition outcomes do not necessarily have as a goal the overall level of welfare,rather it relates to the distribution of welfare between diff

110、erent parties3.Furthermore,some argue that it is not a necessary condition that a party has a dominant position:firms may impose“unfair”terms even where they do not hold a dominant position,if they are nonetheless able to exercise a degree of bargaining power.It is therefore argued that interoperabi

111、lity can increase fairness in digital platform markets as it means that smaller providers are able to earn a“fairer”(i.e.larger)share of the rents that would otherwise accrue to the digital platform.However,there can be potential limitations to applying fairness as a motivating rationale for interve

112、ntion.Fairness(in the context of competition policy relating to the share of welfare)can be difficult to articulate or measure objectively.2.3 CONCLUSION There are many different reasons why policy makers may want to intervene in a market to promote interoperability(whether,for example,they are requ

113、iring it where it would otherwise not be present,or by specifying a particular form of interoperability).However,as we explore in this report,any form of interoperability will involve costs(implementation costs,or costs to dynamic efficiency and innovation).Therefore,it is incumbent on policy makers

114、 to clearly define their objectives,and estimate the scale of the benefits that interoperability will bring.Different objectives will clearly lead to different forms of interoperability which are explored in the following section.2 Fairness as a concept is also relevant in the context of consumer pr

115、otection law such as the Unfair Terms Directive and the Unfair Commercial Practices Directive.3 For example,(Morton,et al.,2021)suggest that“A current source of discontent with digital platforms stems from the perception both by consumers and small businesses that the rents from digital technology a

116、re unfairly accruing to a handful of large platforms,rather than being distributed more equitably according to each partys contribution to surplus.When a platform enjoys network effects,an individual user or complementary business makes very little marginal contribution to the creation of surplus.Th

117、us,when an individual user or business bargains for a share of surplus,its leverage is low,and the platforms is high.The resulting bargain leaves the platform with the vast majority of the surplus.Interoperability increases fairness in this setting because it allows entrants to share the same networ

118、k effects the dominant firm enjoys.”See p.4 frontier economics|Confidential 1414 3 WHAT IS MEANT BY INTEROPERABILITY?3.1 DEFINING INTEROPERABILITY There is no single definition of interoperability.This is partly as its application is context and perspective specific.It can therefore encompass many d

119、ifferent types of transaction or relationship.At its most fundamental level interoperability describes the ability of a product,service or system to communicate and interact with other products,services or systems.It is a tool that can be used to achieve other goals and outcomes.Interoperability has

120、 been defined within legal texts and by policy makers.The 2009 Software Copyright Directive(Directive 2009/24/EC,2009)defines interoperability as:“the ability to exchange information and mutually to use the information which has been exchanged.”In one report for the European Commission(Crmer,et al.,

121、2019),it was defined as follows:“interoperability:Ensures that two systems can fully work together and that complementary services can be provided.”The European Parliaments proposed amendments(European Parliament,2021)to the European Commissions draft Digital Markets Act(DMA)define it as:“Interopera

122、bility means the ability to exchange information and mutually use the information which has been exchanged so that all elements of hardware or software relevant for a given service and used by its provider effectively work with hardware or software relevant for a given services provided by third par

123、ty providers different from the elements through which the information concerned is originally provided.This shall include the ability to access such information without having to use an application software or other technologies for conversion.”Finally,Palfrey and Gasser in their seminal book on in

124、teroperability(Palfrey&Gasser,2012)define it as:“the ability to transfer and render useful data and other information across systems,applications or components.”Interoperability has been defined by a number of other organisations,including the joint technical committee of the International Organizat

125、ion for Standardization(ISO),the International Electrotechnical Commission(IEC)4,and the Institute of Electrical and Electronics Engineers5(Hoffmann&Otero,2020).Whilst the precise definitions differ,they all encompass the same key concepts.Interoperability can be distinguished from compatibility.Com

126、patibility is a specific,narrow form of interoperability that represents design choices in the development of a system(Palfrey&Gasser,2012).It means products work with each other,but do not share data in a way that creates value.Compatibility is one of the overall elements of interoperability.Compat

127、ibility between products,often through agreed 4 The joint technical committee of the International Organization for Standardization(ISO)and the International Electrotechnical Commission(IEC)define interoperability as the capability to communicate,execute programs,or transfer data among various funct

128、ional units in a manner that requires the user to have little or no knowledge of the unique characteristics of those units.5 Interoperability is defined by the Institute of Electrical and Electronics Engineers(IEEE)as the ability of two or more systems or components to exchange information and to us

129、e the information that has been exchanged.frontier economics|Confidential 1515 standards,promotes product interoperability.For example,compatibility is often based around technical specifications on hardware or software so that devices work together.While interoperability is a potential policy tool

130、in a number of different contexts(as explored in Section 5),it is not a“one size fits all”solution.Different forms of interoperability will be used in different contexts.Therefore,having identified the rationale for intervention,it is necessary to define the precise form of interoperability.This can

131、 be considered across different dimensions(Figure 2).Who should interoperate.The relationship between the interoperating parties will be an important defining feature of the interoperating relationship:horizontal interoperability facilitates interaction between competitors;vertical interoperability

132、facilitates interactions between suppliers of complementary products which do not compete.6 Different layers define the scope of the interoperability relationship,from most narrow(technical interoperability allowing different technologies or systems to interoperate)to the most broad institutional or

133、 legal(where different societal institutions are designed to interoperate).Interoperability will occur at different locations.In the context of consumer IoT this implies that interoperability can be between:network,device hardware,device software,content discovery layer.The degree of interoperabilit

134、y will determine how deep the interoperability relationship will be.For example,in the context of consumer IoT this relates to the degree to which different systems share and act on data from each other.6 Some consumer digital markets can be characterised by digital platforms offering a portfolio of

135、 complementary products,adopting a conglomerate strategy,while also offering forms of(vertical)interoperability to third parties.This can mean it can be unclear whether services of a digital platform are substitutes or complements,for example Spotify is a substitute for Apple Music but a complement

136、for Apples Siri.Nonetheless it is very helpful to distinguish between the different relations given that they imply different incentives to offer interoperability since horizontal interoperability relates to direct competitors whereas vertical interoperability relates to complements that bring value

137、 to different parties.frontier economics|Confidential 1616 FIGURE 2 DEFINING INTEROPERABILITY Source:Frontier 3.2 WHICH PARTIES SHOULD INTEROPERATE?There is an important distinction between forms of interoperability which relate to i)the vertical and ii)horizontal relations between different supplie

138、rs.3.2.1 HORIZONTAL INTEROPERABILITY Horizontal interoperability describes the interoperability between competing or substitute products,services or platforms.For example,interoperability between competing communication networks which allows for mobile communications to be made across different netw

139、orks.Horizontal interoperability can be welfare enhancing in markets with network effects.Direct network effects exist in a market when consumer benefits grow as the number of users of a service or in a market increase and are common in some digital markets.Indirect network effects are also common i

140、n digital markets,where in two sided markets the increase in the number of complements on the platform,such as games and applications,increases the benefit for the consumers joining the market as well.Markets with network effects are prone to concentration because consumers benefit from being on the

141、 same network as other users(Stigler Committee on Digital Platforms,2019).Horizontal interoperability can have a number of impacts in relation to network effects.Interoperability shares network effects between large and small suppliers.This could lower switching costs and make markets more competiti

142、ve by lowering barriers to entry or expansion(since it mitigates the advantages to frontier economics|Confidential 1717 larger suppliers who benefit from network effects).In addition to interoperability,multi-homing,where consumers use more than one substitute service,lessens network effects because

143、 a consumer can enjoy the size of both networks,rather than having to choose one.Different firms will have different incentives to horizontally interoperate with other firms in the market.Some firms,usually smaller firms,have incentives to increase interoperability as they will then be able to acces

144、s data,information or even the customers of larger firms and benefit from the larger firms network effects(however,sometimes smaller firms have opposed horizontal interoperability for example during the development of the telephone standards(Section 6.2)smaller rivals to AT&T resisted horizontal int

145、eroperability with AT&T as they wished to differentiate their service from AT&Ts).Larger firms may not want to offer horizontal interoperability as they may be concerned that they lose their current advantage.HORIZONTAL INTEROPERABILITY IN SOCIAL NETWORKS Social media platforms sometimes interoperat

146、e with each other to allow their users to interact with the services of other platforms.This improves customer experience and access to content,often by providing the ability to“cross post”.This is achieved by the use of specific APIs(cross post or social graph APIs)which enable interoperability of

147、posts.“Cross post”interoperability is not full horizontal interoperability between social media platforms,which might include the interoperability of social connections,contacts and data too.The UKs CMA created a term for a specific type of horizontal interoperability across social media platforms c

148、alled content interoperability.This specific form of horizontal interoperability would allow consumers to post,view and engage with content across platforms without having to switch service,but they would still need to be registered on each service(CMA,2020)7.For instance,a consumer could post messa

149、ges that could be viewed by their contacts on different social media platforms.Some respondents to the CMAs review opposed the idea of mandating content interoperability,with several stating that it would reduce incentives to invest and innovate,could lead to privacy concerns and lead to excessive s

150、tandardisation,highlighting some of the possible risks from increased interoperability.This form of interoperability would be effective at sharing network effects with smaller players,and mitigating the competitive advantage which result from the network effects of larger players.In the end the CMA

151、felt the risks outweighed the benefits and did not suggest this as a possible intervention in the market.3.2.2 VERTICAL INTEROPERABILITY Vertical interoperability refers to the connection and flow of information between products,services or platforms which are complementary to each other(companies w

152、ith an ecosystem of products and devices will ensure their own internal products,by design,work with each other).Often vertical interoperability is seen in digital markets and their complex ecosystems.Digital platforms provide services to end users and simultaneously provide services to third partie

153、s,who in turn also supply services to the users of the platform.In this way digital platforms act as both complements to the third partys service,and in some cases competing substitutes for third-party services.Vertical interoperability can exploit indirect network effects on digital platforms.It en

154、ables service providers to access the platforms customers,and allows consumers to access service providers.Where 7 See p.372 frontier economics|Confidential 1818 more services join a given platform,the value to consumers of being on that platform will increase.This can in turn increase the value to

155、services of joining the platform.In this way,the platform,consumers and service providers can all benefit from increased indirect network effects.However,there can be a mix of(sometimes conflicting)incentives to vertically interoperate between digital platforms and third-party services.From the pers

156、pective of the third-party service provider,vertically interoperating with a platform could increase demand for the third partys product as the platforms users find it easier to use and access it.This is the case whether or not the platform offers a competing service.The platform benefits by vertica

157、lly interoperating with third-party service providers as they bring value to the platform(the addition of more third party services increases the value of the platform to end users).In this way there are indirect network effects:the platform is able to benefit from value generated by increasing the

158、number of third party services on its platform.However,if the platform has a competing product the incentives can change.The platform will weigh up the value to it of interoperating with a third-party service,against the loss that it would face by facilitating competition between the third-party ser

159、vice and the platforms own service.This trade-off is likely to be complex.First,the indirect network effects to the platform of adding new third-party services will accrue across the platforms ecosystem(including to its competitors).Second,platforms gain potentially valuable information on the use o

160、f the third-party services by the platforms customers.Third,platforms may not face a binary choice of whether to offer interoperability to competing services or not.Instead they may design interoperability in a way that limits the functionality of the third-party services such that it is“optimal”for

161、 the platform.An example of this trade-off is Apples decision to allow its voice assistant Siri to interoperate with Spotify,a rival music streaming service that competes with its Apple Music service.Between 2015 and 2020,Apples voice assistant Siri would only enable music related requests to use Ap

162、ples proprietary applications such as Apple Music.8 Therefore,Apples voice assistant was not vertically interoperable with Spotify.It was only in April 2020 that Apple opened Siri up so that Siri would support third-party music services with the release of iOS 13.It was then interoperable with Spoti

163、fy.9 There could be many reasons for the lack of interoperability prior to 2020,but one could be that Apple did not want its customers to have easy access to a rival music streaming service.Siri now allows requests to be played from Spotify.This change could have been made due to the growth of Spoti

164、fy,meaning that allowing Siri to access it could actually benefit Apples smart speaker and smart device sales.It could also be affected by competition from alternative voice assistant platforms which did offer interoperability with Spotify before Siri did.8 iDROPNEWS,Spotify Says Apple Still Has a L

165、ong Way to Go Before Its a Fair Platform,Accessed Feb 22-https:/ Digital Trends,The Spotify-Siri integration that Apple users have been asking for is here,Accessed Feb 22-https:/ economics|Confidential 1919 FIGURE 3 ILLUSTRATION OF THE INTEROPERABILITY CHANGES BETWEEN SPOTIFY AND APPLES SIRI Source:

166、Frontier Economics Matutes and Regibeau(1988)modelled and studied compatibility and interoperability decisions by firms.Their paper showed that increased vertical interoperability or vertical product compatibility can be beneficial to consumers as it increases consumer choice as they can flexibly mi

167、x and match the items used in their system.But increased vertical interoperability or vertical product compatibility can also lead to higher prices or less price competition.This happens because when products in a system are compatible or interoperable,one firm cutting the price of one good will inc

168、rease the sales of all systems and products that can also interoperate with that component,including those made by other firms.Since some of the benefit of the price drop will be captured by other firms,each firm will have fewer incentives to compete aggressively on price,potentially leading to high

169、er prices than in the case of less interoperability.The trade-offs and incentives around vertical interoperability will be further discussed in Section 4.3.3 THE SCOPE OF INTEROPERABILITY CAN BE DEFINED BY DIFFERENT“LAYERS”In considering how two distinct systems can interoperate it is first necessar

170、y to consider the rationale for intervention.This will determine the scope of the relationship between the parties:what elements of the firms systems should be subject to joint and agreed terms to facilitate interoperating.This can be defined from the most narrow(technical interoperating to enable d

171、ifferent systems to connect to each other),to the broadest scope(where different systems jointly create integrated decision making structures to integrate systems on an on-going and dynamic basis).It is therefore possible to define various layers between these extremes that broadly define the deepne

172、ss of an interoperability relationship.Palfrey and Gasser describe a generally applicable model of interoperability across four layers.These layers can identify and describe,in a given context,what is interoperable given the objectives of the parties.frontier economics|Confidential 2020 FIGURE 4 LAY

173、ERS OF INTEROPERABILITY Source:(Palfrey&Gasser,2012)Without interoperability at the technology and data layers,the deeper interoperability enabled at the higher layers in the model the human and institutional layers is often impossible.For example,in the shipping container case study described in Se

174、ction 0,the standardised container was designed at the technological level to enable different transport networks to interoperate using a common container technical specification.However,over time higher layers of interoperability have been developed.Data on each containers contents and onward journ

175、ey can be shared between shipping companies and ports which enables ports to optimise loading,unloading and storage of the many thousands of containers processed each day.Furthermore,there have been calls for further institutional interoperability to make the process of processing containers at port

176、s more efficient and effective by aligning common customs documents and procedures.Interoperability has been studied from different perspectives and the layers can be classified in different ways,depending on the precise focus of the interoperability relationship:whether sharing of data for conceptu

177、al modelling10,organisational structures to support data flows11,Industrial IoT12,or frameworks to enable smart applications to dynamically interoperate in changing environments13.Some of these frameworks are set out for comparison in Table 11.All these frameworks share common structure and themes.T

178、he initial three levels are broadly common across different frameworks.Whereas at higher levels,the approach tends to vary according to the authors aims.In most cases the layers determine the conceptual approach to interoperability,but in the case Hazra et al(2021)the levels 4-6 partly describe the

179、technical approach and location used to enable a specific form of interoperability.10 Tolk&Muguira,2003.11 Such as the European Interoperability Framework(EIF),Accessed Feb 22-https:/ec.europa.eu/isa2/eif_en 12 Hazra,et al.,2021.13 Pantsar-Syvniemi,et al.,2012.frontier economics|Confidential 2121 TA

180、BLE 1 LAYERS OF INTEROPERABILITY Source:Frontier Economics Note:Edge and cloud fog computing describes a network architecture where devices undertake processing,computation,storage and communication locally rather than in the data cloud(the word fog refers to its cloud-like properties,but closer to

181、the ground)One example of the layers of interoperability is with mobile payments(Gasser,2015).Mobile payments use a mobile device(often connected to a debit or credit card account),usually a smartphone,rather than a plastic card for transactions and are becoming increasingly popular.Mobile payment p

182、latforms include Apple Pay,Google Pay and LoopPay.Mobile payment systems rely on each of the different layers of PURPOSE OF INTER-OPERABILITY GENERAL APPLICATION TECHNICAL STANDARDS FOR TELECOMS USE OF DATA IN CONCEPTUAL MODELLING INSTITUTION INTEROPERABILITY TO SUPPORT DATA FLOWS BETWEEN PUBLIC BOD

183、IES THE APPROACH TO SUPPORTING INDUSTRIAL IOT APPLICATIONS Source Palfrey&Gasser,2012 van der Veer&Wiles,2008 Tolk&Muguira,2003 European Interoperability Framework Hazra,et al.,2021 Layer 1 Technological compatibility of hardware/code that allows systems to physically connect Technical compatibility

184、 of hardware and software components Documented Data with common protocols Technical-interface specifications,interconnection,data integration services,data presentation,security.Technical exchange of data over IIoT devices over standard protocols Layer 2 Data ability of interconnected systems to un

185、derstand each other Syntactic common format of exchanged data Aligned Static Data using common description of the data and Semantic-format and meaning of exchanged data Syntatic-common format of exchanged data Layer 3 Human The ability of users to act on the data exchanged Semantic common understand

186、ing of exchanged information Aligned Dynamic Data Common understanding of how data is used across two systems Organisational aligned business processes,responsibilities and expectations Semantic unambiguous meaning for exchanged data Layer 4 Institutional the ability of societal systems to engage ef

187、fectively Organisational different organisations can share data Harmonized Data different systems have a common modelling approach.Legal common or consistent legal framework governing the interoperability relationship Pragmatic-communicate seamlessly,meaning is understood,across different networks L

188、ayer 5 Platform a common framework between heterogeneous applications and devices(eg cloud based)Layer 6 Conceptual heterogeneous devices exchange data and act on data in a distributed way(eg via edge or cloud-fog computing)frontier economics|Confidential 2222 interoperability due to the number of a

189、ctors involved in a single payment transaction including customers devices,payment networks,banks and merchants selling the goods.Different systems have allowed for different types and degrees of interoperability across the four layers outlined in Figure 5.FIGURE 5 LAYERS OF INTEROPERABILITY IN MOBI

190、LE PAYMENT SYSTEMS Source:(Palfrey&Gasser,2012)The mobile payments example shows how each of the layers of interoperability can be important to achieve the outcome the system is aiming for.This example also highlights the varying possible degrees of interoperability that exist in any specific situat

191、ion which are discussed in Section3.4.For example,at the technological layer Google Pay interoperates with both Apple and Android smartphones,but Apple Pay has a lower level of interoperability and only interoperates and works on Apple smartphones.3.4 THE DEGREE OF INTEROPERABILITY Interoperability

192、is not a binary choice,there is a continuum of degrees of interoperability and different degrees could be appropriate for different market settings.Even at different layers(described in Section 3.3)there could be different degrees which reflect the impact that interoperability has within each layer.

193、For example at the data layer,data could be exchanged on a continuum between irregularly and continuously;at the human semantic layer,the degree of interoperability could be based around which parties integrate their processes for developing and implementing interoperability.Inevitably there may be

194、some overlap with the concept of the layer(describing the scope of interoperability)since institutional/organisational and human/semantic layers imply a higher degree of interoperability than interoperability confined to technical or data/syntactic layers.Nonetheless considering the degree of and th

195、e layer of interoperability provides a more specific description of the form of interoperability.The degree of interoperability in digital markets has been considered in a number of different ways.frontier economics|Confidential 2323 3.4.1 DATA PORTING TO FULL PROTOCOL INTEROPERABILITY Crmer et al(2

196、019)map out four versions of interoperability in relation to the data layer described in Section 3.3 and Figure 4(similar continuums could be considered for the other layers).The continuum described by Crmer et al(2019)ranges from less interoperability with data portability to greater interoperabili

197、ty with full protocol interoperability.FIGURE 6 DEFINITIONS OF DIFFERENT DEGREES OF INTEROPERABILITY Source:(Crmer,et al.,2019)The lowest form of interoperability is data portability(note the distinction in this framework between“data portability”which refers to irregular downloading of data from on

198、e system to be transferred to a different system,from“data interoperability”which implies real time sharing of data between systems).It brings some of the benefits of interoperability in a limited way,though potentially without many of the costs associated with implementing higher forms of interoper

199、ability(though costs are not necessarily lower).Data portability is referenced in the European Commissions Digital Markets Act14,and the EUs General Data Protection Regulation(GDPR)has introduced a limited right to data portability as a means to avoid data-driven consumer lock-ins(Crmer,et al.,2019)

200、15.Data portability allows more flexibility between two services or products with an aim to prevent lock-in and facilitate switching.It is not full interoperability since it does not imply the seamless exchange of data-there are still questions around when and how regularly the data can be transferr

201、ed and also about the form the data is ported in.Under data portability users can take their personal data from service A and port it(e.g.upload it)to service B.Typically it is the user who actions this process and the data may only relate to data volunteered by the user(or potentially observed of t

202、he user)to the data controller,and may exclude data which is inferred or generated by the data platform on the user.Examples of data portability include the ability of users to port some of the data collected about them to other services.For example,Facebook has a tool which enables users to copy th

203、eir posts and notes to Blogger,Google Docs and WordPress,and to transfer their photos and videos to some other services.16 Data portability is enshrined in European legislation as 14 Article 6.1.h,(European Commission,2020)-In respect of each of its core platform services identified pursuant to Arti

204、cle 3(7),a gatekeeper shall:provide effective portability of data generated through the activity of a business user or end user and shall,in particular,provide tools for end users to facilitate the exercise of data portability,in line with Regulation EU 2016/679,including by the provision of continu

205、ous and real-time access.15 See p.58 16 Facebook(Meta),Transfer Your Facebook Posts and Notes with Our Expanded Data Portability Tool,Accessed Feb 22-https:/ economics|Confidential 2424 part of the GDPR(see Section 5.2.1 for more detail).However,according to Krmer et al.data portability is not widel

206、y used(Krmer,et al.,2020).The authors consider this is because collection of personal data is highly concentrated(i.e.a limited number of digital suppliers gather a disproportionately large share of personal data)and currently few providers accept ported data from users.Where ported data is accepted

207、 it is using non-standardised processes.This in turn means there is limited appetite for consumers to try to port data.The Data Transfer Project aims to make it easier for consumers to port their data.Contributors to the project include Apple,Google,Facebook,Microsoft,Twitter and many others and the

208、y are trying to build a common open-source framework which will enable direct,user initiated portability of data.17 GDPR does not require continuous,real time data access or the ability to request data interoperability(as defined on Crmer et al.s scale)between two or more services used by a consumer

209、,but simply it is a right to receive a copy of a users past data from a service.It supports users switching between services,but it does not facilitate multi-homing or the offering of complementary services,which would rely on continuous and potentially real time data access.The next level of intero

210、perability is protocol interoperability.This is often what is commonly thought of as interoperability in IoT and would imply that a range of IoT devices interconnect with each other.It enables two or more systems to work together to exploit complementarities and create new services.It also means tha

211、t different services can work together.For example,Bs software is compatible with(and complementary to)As operating system.This was similar to the interoperability envisaged and imposed in the Microsoft v.Commission case when,due to an abuse of its dominant position,Microsoft had to license technica

212、l information the work group server operating systems needed to interoperate with Microsofts PC operating system Windows(see Section Error!Reference source not found.).Sometimes to aid protocol interoperability standards will need to be developed between complementary services.Data interoperability

213、is the next degree of interoperability and extends protocol interoperability to include the real time,machine readable exchange of data.This is a much more valuable form of interoperability since it enables third parties to create complementary services which use data supplied by another parties ser

214、vices.An example of data interoperability can be seen through the UKs Open Banking regulations which are a secure way for consumers to give providers access to their financial information.Open Banking requires that,at a consumers request,firms such as banks or building societies must share specified

215、 account information with a third party in a standardised way,often through APIs(Coyle,et al.,2019).This means that consumers can elect to have current real time information from accounts and transactions held across multiple providers shared with one app,making traditional bank accounts more intero

216、perable with third-party services(see Section 5.2.1 for further detail).The draft Digital Markets Act also has a requirement for real time data portability(art 6(1)(h)see Section 5.2.1).The highest form of interoperability according to Crmer et al is full protocol interoperability.This implies that

217、the different systems are effectively able to replicate each others services.It would imply that substitute services interconnect and work with each other.Full protocol interoperability is required in telecommunications markets where different telecommunications operators are required to interconnec

218、t with each other.Full protocol interoperability would decrease network effect driven lock-in as the network effects within a service provider would be spread through all interconnecting services.But it would also most likely require deep standardisation across companies to be possible.17 Data Trans

219、fer Project-https:/datatransferproject.dev/frontier economics|Confidential 2525 ATTEMPTS AT FULL PROTOCOL INTEROPERABILITY IN SOCIAL NETWORKS In response to the lack of interoperability between different social networks there have been a number of attempts to create standards that facilitate full pr

220、otocol interoperability between different social networks that participate.For example Mastodon18,Diaspora19,and friendica20.These use open standards(such as ActivityPub)which are designed to enable full protocol interoperability including access to profiles,following content,streams,commenting,liki

221、ng content,and messaging.Though they still require multiple user registrations and log-ins to each social network which can be accessed by the services.However,according to a 2017 study the different services had in many cases limited success at full interoperability with each other,even where they

222、were using common protocols21(Sebastian Gndr,2017).Each of these degrees outlined can have a varying impact on competition and innovation if implemented within a market and can have a range of costs and benefits which are further discussed in Section 4.3.4.2 THE MATURITY OF INTEROPERABILITY Rezaei,C

223、hiew and Lee (2014)use an alternative approach to considering the degree of interoperability defining it by the“maturity”of interoperability.This defines“the stages through which systems should logically progress,or mature,in order to improve their capabilities to interoperate”.Here,the least mature

224、 implies minimal readiness to implement interoperability up to the most mature which offers the highest readiness to implement interoperability.The authors set out five levels to describe how mature different systems are to interoperate.Level 0 Default level.In this step,the systems are in the first

225、 stages of becoming familiar with interoperability concepts and some measures are taken for establishing interoperability.Level 1 Initiating level.In this step,the initial steps for establishing interoperability are taken and systems are oriented toward the interoperability objectives.Level 2 Enabli

226、ng level.This level focuses on enabling interoperability.At this level,interoperable systems are implemented and deployed,data are managed and business processes are performed in technical and organizational domains of interoperability.Level 3 Integrating level.At this level of maturity,security is

227、established in the technical domain and services are managed and monitored in the organizational domain.The services are coordinated at the systematic level and service repairmen mechanisms are implemented when failure occurs and clients become aware of service changes.Level 4 Interoperating level.A

228、t this level,which is the last level of interoperability maturity,interoperability services are published and resources are managed during runtime.At this level,18 Mastodon,Accessed Feb 22-https:/joinmastodon.org/19 Diaspora*,Accessed Feb 22-https:/diasporafoundation.org/20 Friendica,Accessed Feb 22

229、-https:/friendi.ca/21 The study noted that“One of the possible reasons for the incompatibilities between the surveyed OSN services may be the lack of proper reliable documentation of interfaces and data formats.Some interfaces are not described at all,while others simply rely on listing API endpoint

230、s to which requests should be directed.A lack of a thorough and detailed description of all API endpoints,including data formats,response messages,and communication flows might be the main reason causing problems and incompatibility in communication between different service platforms.The survey sho

231、ws that a holistic standard for OSN interoperability that covers all functionality of todays OSN services is needed.”(Sebastian Gndr,2017).frontier economics|Confidential 2626 services are dynamically managed,and,in order to completely establish interoperability,some agreements are made between serv

232、ice providers and clients.The actions taken by the systems to facilitate interoperability at different layers,can be defined as a matrix.While helpful at describing the organisation processes used by different systems to prepare for and enable interoperability at different layers,this approach is le

233、ss focused on the precise form of interoperability than the“degree”presented in Section 3.4.1.For this reason this report uses the approach suggested by Crmer et al(2019).3.5 INTEROPERABILITY CAN APPLY AT DIFFERENT“LOCATIONS”Interoperability can be challenging to achieve in consumer IoT markets give

234、n the very heterogeneous nature of the sector.It encompasses many different types of devices,applications,networks and platforms.Devices range from high cost,high powered devices with high battery power(such as smart phones)to lower cost sensors with minimal computing or battery power.Devices may be

235、 mobile/nomadic or in a fixed location implying different networking technologies.They may require ongoing and reliable network connections or infrequent and irregular connections;they may need only short range networking or very long range networking requirements.Devices may connect to a number of

236、different IoT platforms which may include platforms supported by large digital providers(Google,Amazon or Apple)or more domain specific platforms(a smart home IoT platform,or a health IoT platform).Given this heterogeneity interoperability between different systems implies an understanding of exactl

237、y where and how the systems will interoperate.In consumer IoT,interoperability may occur at different points in the consumer IoT data ecosystems including the network level,the device level or the application level.Network level interoperability implies interoperability with or between different net

238、works.For example with telecommunications,this would be the interconnectivity with different physical fixed or wireless networks,or virtual networks(software defined networks).The network layer will be made up of a number of discrete components;(i)the backbone networks,i.e.the links between the remo

239、te server and a consumers internet access service(IAS)provider;(ii)the internet access network controlled by the IAS provider up until(and sometimes including)the customers router/modem(i.e.the last mile network);and(iii)the customers private network(e.g.a Wi-Fi network established by the router)(Fe

240、asey&Krmer,2021).Different networks will use different protocols to communicate with devices and therefore a lack of interoperability between different network protocols can limit interoperability between different devices.For example consumer IoT in the smart home uses a number of different network

241、 solutions such as Bluetooth,ZigBee or Z-Wave,in addition to IP based networks(Wi-Fi).However,the two most prominent communication protocols,Zigbee and Z-Wave,do not allow for interoperability among smart devices using one or the other(as discussed in Section 7.2)(European Commission,2021a).Service

242、and content level interoperability:Depending on the service or content there may be different layers between which interoperability would apply.For example,content provided over the internet may be mediated by a Content Discovery Layer such as search engines or online intermediation services(compari

243、son or aggregation sites).Different services and content would have to be interoperable with networks and devices.Consumers will benefit where their chosen IoT services are interoperable with all their preferred devices.As voice assistants have a growing role frontier economics|Confidential 2727 in

244、the content discovery layer,they can present specific issues around the use of preferencing and defaults to promote the voice assistant platforms own services.This is because in many cases they operate without a visual interface and therefore a voice assistant platform is able to exert greater contr

245、ol over user behaviour in providing content in response to user request.Devices level:The device is the user facing element where content is consumed.Feasey(2021)notes that devices may have a number of distinct layers.(i)The hardware layer denotes the physical device.This includes both fixed compone

246、nts(e.g.the network card,built-in sensors,and a secure element chip)as well as ancillary and exchangeable components such as memory cards or SIM cards.(ii)The operating system(OS)layer.The OS is separate from the hardware layer,because an OS can run on several different physical hardwares.The OS may

247、 restrict 3rd party access(i.e.prevent interoperability)with certain aspects of the hardware for security or functionality reasons;(iii)similar to the Content Discovery Layer,the app discovery layer includes those applications that are crucial for consumers to access other apps or web content(app st

248、ores and browsers).(iv)The app layer denotes all the apps(including web apps and websites)that can be used on a device.Content and content discovery may occur inside an app(e.g.a browser),so that it is logically located below the online content layers discussed above.Depending on the specific concer

249、ns or requirements,the approach to interoperability could apply in different ways.As set out in Figure 5 mobile payment systems require a complex mix of different approaches to interoperability across multiple devices,software and services.In principle there may be many different providers of each o

250、f the different layers within the network/service and content/device layers.Any given application may require interoperability between any or all of the different layers.Different suppliers across the different layers will have different roles in enabling interoperability between the different layer

251、s using proprietary(where a license is needed)or open standards(where a license is not required),common standards(standards set by a Standard Setting Organisation(SSO)or privately set standards.3.6 TECHNICAL DESIGN AND SPECIFICATION OF INTEROPERABILITY It is only after having agreed on the optimal f

252、orm of interoperability(i.e.who,layer,location and degree)that different parties can then agree the specific technical and design of the process for creating and maintaining interoperability.Parties will have to agree many factors such as detailed technical specifications;the content and format of d

253、ata flows;the approach to resolving disagreements;any payment flows;the approach to privacy,security,user functionality;or how the services can be developed while maintaining interoperability.3.6.1 DEFINING THE TECHNICAL APPROACH TO INTEROPERABILITY At a practical level,in the context of consumer Io

254、T markets,the content of these technical specifications,data sharing arrangements and design guidelines are in many cases determined by one of the interoperating parties.This party shares a range of technical documentation and guidelines,usually including an Application Programming Interface(API)and

255、/or a Software Development Kit(SDK)to enable the other to interoperate,as well as specifying the data exchange arrangement involved in integration.After developing the integration using the provided technical documentation,the interoperating party will usually go through a testing process to ensure

256、the integration functions correctly and meets any requirements or guidelines set out by the other party.While there are also many instances of more balanced bilateral negotiations,whereby a greater degree of collaboration takes place between the integrating parties,the extent to which this occurs de

257、pends on the bargaining position of each party.The frontier economics|Confidential 2828 exchange of real-time data is achieved through Application Programming Interfaces(APIs).These APIs enable the exchange of data to support the creation of complementary services.Data needs to be gathered,recorded

258、and exchanged in a way that can be recognised by the two systems interoperating.This means that the format and data structure of exchanged data needs to be consistent(i.e the data layer interoperability described in Figure 4).This implies that data is provided according to pre-APPLICATION PROGRAMMIN

259、G INTERFACES(APIs)APIs are a key tool to enable interoperability between different software systems.APIs are a type of computer program interface or piece of software that lets one program access and interact with another program,sharing data and functionality(CMA,2020).They enable machine-to-machin

260、e communication and the seamless exchange of data between programs and can therefore be useful facilitators of increased interoperability.They can be open where any third party can access them,or they can be more private APIs where the source firm or program controls access,often through access toke

261、ns.Access to APIs increases interoperability as it allows third-party developers to access data and information from another partys database.This can allow third parties to build and develop complementary services that work with the services offered by the owner of the database.Note however,that whi

262、le the standard design of APIs promotes openness and interoperability,they are not created by default.Whether to allow access through an API is a services own decision to make,and services have control over who can use the API and what data and information is shared through it.As an example,Meta mai

263、ntains thousands of APIs across its applications including Facebook and Instagram,with each API allowing access to a specific set of data or information.This is beneficial to third-party developers.However,API access and the data shared can be degraded.Changes to APIs technical specifications can ma

264、ke it harder for third parties to access the API or in the extreme case API access can be revoked.An example of this is when in 2013 Facebook disabled Vines access to Facebooks Find Contacts API after Twitter had acquired Vine.The API had previously allowed Vine users to easily begin using the Vine

265、platform by finding friends that they already knew on the Facebook platform.It is argued that regulated open APIs which can be used by industry participants are the route to promoting interoperability(Krmer,et al.,2020).For example,to support the UKs Open Banking Programme the UKs CMA forced the nin

266、e largest banks and building societies to fund and cooperate with a new independent body,Open Banking Implementation Entity(OBIE).“The OBIE developed,within a fixed(and short)timeframe,read-only open and common technical and product data standards and read-and-write open and common banking standards

267、 for the sharing of transaction data.”frontier economics|Confidential 2929 defined rules.Furthermore,interoperability may also imply not only that data is accurately exchanged between different systems,but that the different systems can understand and interpret the data in a meaningful way(i.e.the“h

268、uman/semantic layer”described inTable 1).22 This means that the data models,units of measurement must be consistent between different systems.3.7 EX-ANTE OBLIGATIONS-NEUTRALITY ALONGSIDE INTEROPERABILITY The adoption of obligations around neutrality are sometimes suggested to work alongside interope

269、rability.That is because while interoperating with each other,firms will also compete with each other and therefore some authors consider that interoperating firms(or a subset that have market power or otherwise hold an asymmetric strong bargaining position)should be required to apply interoperabili

270、ty“neutrally”with regard to their own services.For example,“Equitable interoperability”means that not only can an entrant join the platform as a result of interoperability,but it can join on qualitatively equal terms as others,without being discriminated against by the dominant platform that might h

271、ave its own competing service.Equitable interoperability effectively prohibits self-preferencing and discrimination against firms that are not part of the dominant ecosystem.(Morton,et al.,2021).This obligation implies that firms have an obligation to interoperate and not to discriminate and is char

272、acterised as a“light touch”regulatory tool.The concept of neutrality can be applied to the framework set out in this section.It can apply to specific layers(data and technical),degree(to facilitate a certain degree of interoperability)and location(for example at a device).For example it has been arg

273、ued that forms of device neutrality can promote interoperability between content and devices by restricting discrimination.23 In practice it is not clear that an obligation to provide reasonable requests for interoperability and on a non-discriminatory basis would result in“light touch”regulation.Th

274、e regulations of vertically integrated telecommunications networks illustrates some of the practical difficulties with applying non-discrimination principles.In telecommunications services,even where regulation is imposed which specifies the products offered and the regulated prices,National Regulat

275、ory Authorities(NRAs)find it necessary to impose strong and intrusive ex-ante regulation to enforce non-discrimination.24 This can be by requiring vertically integrated firms to use outputs which are equivalent to those used by competitors(“Equivalence of Outputs”);changes to internal systems and co

276、nstruction of internal“Chinese walls”to prevent discrimination;and requirements that the vertically integrated firm uses the same inputs that are used by competitors(i.e.to reorganise their internal systems such that a firm“buys interoperability from an internal supplier in the same way that a third

277、 party does “Equivalence of Inputs”).At the extreme NRAs can require firms to functionally or fully separate to enforce neutrality.All these interventions impose costs and require significant intervention from regulatory authorities.It is likely that any regulatory oversight to enforce non-discrimin

278、ation in digital and IoT markets could be complex given the very heterogeneous nature of the products and services.22 Semantic interoperability“means enabling different agents,services,and applications to exchange information,data and knowledge in a meaningful way,on and off the Web”W3C Semantic Int

279、egration&Interoperability Using RDF and OWL 23 However,it is argued that implementing device neutrality would be complex:“a coherent neutrality regulation would need to be applied to all layers of the internet access value chain,and not just to parts of it.However,regulating device neutrality on all

280、 layers(as opposed to just the network layer in case of net neutrality)would be much more complex and would require deep expertise by regulators at all layers,which is currently scant”(Feasey&Krmer,2021)24 See for example:Cave,M(2007)Six Degrees of Separation:Operational Separation as a Remedy in Eu

281、ropean Telecommunications Regulation.frontier economics|Confidential 3030 3.7.1 DIRECTIONAL INTEROPERABILITY It may be necessary to define the direction of interoperability between different parties.This can be reciprocal or one-way(i.e.non-reciprocal).For example,pre-2018,Facebook featured a Publis

282、h Actions API allowing consumers to post content onto Facebook from other social media platforms and from Facebook onto other platforms.However,Facebook degraded this functionality in August 2018 restricting consumers ability to post content from Facebook onto other Platforms and explained that this

283、 was due to concerns about safety and data privacy(CMA,2020)25.This current relationship is shown in Figure 7.The clear asymmetry in posting interoperability could favour Facebook by leading to greater and more varied content being able to be shared on Facebook compared to the other social media pla

284、tforms(CMA,2020).FIGURE 7 CROSS-POSTING CAPABILITIES BETWEEN FACEBOOK.COM AND OTHER SOCIAL MEDIA PLATFORMS REMAIN ASYMMETRIC Source:(CMA,2020)3.7.2 ASYMMETRIC APPLICATION OF INTEROPERABILITY Interoperability obligations may be applied to all parties(“symmetric”application)or only a subset of parties

285、 with particular characteristics such as dominant parties or gatekeepers(“asymmetric”application).Examples of asymmetric interoperability include the following.The European Commissions draft Digital Markets Act would only impose restrictions and obligations on a set of gatekeepers who meet certain t

286、hresholds,not across all the undertakings in the markets,or“core platform services”,the gatekeepers are active in(European Commission,2020).Gatekeepers could face rulings and obligations such as improved data portability which other firms in their markets will not face.Dominant firms or merging part

287、ies may face“asymmetric”requirements(behavioural remedies or commitments)to limit anti-competitive effects.A lack of interoperability is a potential concern in markets with dominant firms as it could limit some forms of competition and innovation.However,as noted in Section 4 there are complex trade

288、-offs in requiring interoperability around the costs of implementation and the form of competition and innovation which is enabled by different degrees of interoperability.Regulators may act to reduce the ability and incentives to 25 See p.371 frontier economics|Confidential 3131 exploit dominance b

289、y imposing interoperability requirements.One example is when the European Commission intervened to increase interoperability in the Microsoft v.Commission case(Microsoft,2007).The intervention aimed to prevent the possible leveraging of Microsofts dominance of its market power in PC operating system

290、s into workgroup server operating systems which could foreclose rivals.When the CMAs study on digital advertising concluded,its findings on interoperability between social media platforms suggested interoperability be applied asymmetrically to Facebook if considered by policy makers(CMA,2020)26.The

291、study said,“Given the market position of Facebook and the extent to which it benefits from network effects,we think that such interventions should apply to Facebook in the first instance(e.g.Facebook should offer a defined find contacts service to users of a third-party platform,but rival platforms

292、should not be required reciprocate)”.In addition,the UKs Open Banking legislation imposed a remedy that required that the nine largest current account providers in the UK produce a standardised API to share customer information on bank transactions and account details securely when requested by the

293、customers(see Section 5.2.1).This was an asymmetric intervention as some current account providers were not required to do this,although in this case the majority were.27 3.7.3 COMMERCIAL TERMS OF SUPPLY OF INTEROPERABILITY Policy makers may have to adjudicate on commercial terms of interoperability

294、.Commercial forms of interoperability in most cases occur without charge,and under GDPR legislation charging for data porting is prohibited.However,if more intrusive forms of interoperability are imposed on digital platforms it may be necessary to agree commercial terms.This is particularly importan

295、t where data gathered by one party is the result of significant investments in the platform(relating to map services,email,data storage,hardware personal assistants).Potential rivals who acquire regulated access to the data may be reasonably expected to contribute to the costs of investments that ha

296、ve generated the data.While there are many examples of regulated access pricing in network industries such as telecommunications,it is likely that arriving at an appropriate access price could be significantly more complex to determine or adjudicate an appropriate price for interoperability.This is

297、for a number of reasons:identifying the investments(including many intangible assets)that have generated value will be more complex than in network industries,the form of access for different interoperating parties will be very heterogeneous,and attributing(often international)investments to specifi

298、c users could be problematic.3.8 CONCLUSION Interoperability is a complex concept which can be applied differently in various settings.There is a continuum of degrees of interoperability and the optimal level will vary across this continuum for each specific market setting.In IoT in particular,findi

299、ng the optimal level of interoperability might be even more complex due to the range of actors active in the consumer IoT market but also because of the different ways that interoperability could occur.26 See p.374 27 The Open Banking Programme applied to the nine largest UK banks and building socie

300、ties(Allied Irish Bank,Bank of Ireland,Barclays,Danske,HSBC,Lloyds Banking Group,Nationwide,RBS Group and Santander)but not smaller banks.frontier economics|Confidential 3232 4 COSTS AND TRADE-OFFS OF INTEROPERABILITY 4.1 THE APPLICATION OF INTEROPERABILITY IMPLIES TRADE-OFFS Interoperability is not

301、 a one size fits all solution to issues in digital markets.It is more of a policy option or measure that can be considered to achieve other goals within markets such as the promotion of innovation or improved consumer outcomes.The degree of interoperability required depends on the market situation a

302、nd there is a trade-off between the costs and benefits associated with any increase in interoperability.Interoperability has been promoted as having many benefits.It has been suggested as a potential policy tool by many studies considering options to address the market power/position of strong playe

303、rs in digital markets,and the specific features of these markets,including the Vestager,Furman and Stigler reviews(Coyle,et al.,2019;Crmer,et al.,2019).The Stigler Committees report on digital platforms(Stigler Committee on Digital Platforms,2019)highlighted some of the perceived benefits of increas

304、ed interoperability in digital markets;“Interoperability would facilitate ongoing competition on the merits of the user experience,rather than on the size of the installed base,and potentially stimulate robust competition With easy interoperability,users will be free to make a real choice about whic

305、h service they prefer.This will encourage new market entry and vigorous competition between providers.”(Stigler Committee on Digital Platforms,2019)28 However,the reports also highlight the potential costs and trade-offs to the market that follow increased interoperability.For example,the Vestager r

306、eport notes;“Full protocol interoperability has the benefit that positive network effects stemming from the large user base of one platform extend to other platforms in other words,through the imposition of interoperability requirements,the benefits of positive network effects can be shared among di

307、rect competitors In this perspective,interconnection could be an efficient instrument to address concentration tendencies.On the other hand,full protocol interoperability can come at a high price:the need for strong standardisation across several competing platforms could significantly dampen their

308、ability to innovate and to differentiate the type(s)of service(s)they provide.One of the most important grounds for continuing competition between platforms,and possibly for competition for the market,could therefore be weakened or even eliminated.Furthermore,the need for coordination between the fi

309、rms affected by the requirement would provide opportunities for collusive behaviour,for instance to limit innovation.”(Crmer,et al.,2019)29 Similarly the UKs Furman review noted;“Open standards,and the interoperability they deliver,are widely recognised as delivering significant benefits.They enable

310、 firms to create applications that are able to work seamlessly with other applications based on the same standards.This also ensures that consumers arent locked in to products from one business.”(Coyle,et al.,2019)30 Therefore,the optimal level of interoperability will weigh up the relative costs an

311、d benefits of different approaches,in the specific market context.Understanding these trade-offs and realising what trade-offs 28 See p.118 29 See p.59 30 See p.73 frontier economics|Confidential 3333 exist in specific market conditions can allow policy makers to make more informed decisions about t

312、he appropriate and optimal degree of interoperability for a specific market(Yoo,2015).4.2 INTEROPERABILITY CAN AFFECT INNOVATION 4.2.1 THE DISRUPTIVE AND SUSTAINING INNOVATION TRADE-OFF There are lots of factors that can affect the level of competition and innovation in a market,including the market

313、 power of different players,the contestability of the market and the size of the market.Interoperability can also have an impact.Interoperability affects the incentives to compete,and by doing so it can affect the incentives to innovate.This can lead to a trade-off between different types of competi

314、tion and innovation that result from greater interoperability.Therefore,it is helpful to distinguish between different forms of innovation and competition.DISRUPTIVE INNOVATION Disruptive innovations are innovations which are often led by new entrant firms,are riskier and take a longer time,but coul

315、d bring large benefits to the market and consumers if they come through,such as increased quality(Brown,2020;Christensen,1997).This type of innovation is more likely to come from the incentives created by dynamic competition for the market which could result in an incumbent,or an incumbents technolo

316、gy,being pushed aside by a new competitor.For example,games consoles compete on their technology features and content with limited interoperability.If there is no horizontal interoperability,there are strong incentives for systems to compete with each other.They will therefore invest in innovation t

317、o differentiate their service and attract users away from their competitors system.For example in Figure 8,system X and system Y compete with each other offering products 1-4 to each of their respective customers.But a customer of system X would not be able to access Ys products without buying syste

318、m Y.Here there is greater scope for disruptive innovation.For example,system Y could seek to differentiate its platform by introducing a new product,Y.5,to entice system Xs customers to switch and disrupt all users of system X.These have been termed“isolated islands”,where consumers can only communi

319、cate within the platform they connect to and are unable to communicate across different platforms.FIGURE 8 NO INTEROPERABILITY LEADS TO CONDITIONS FOR COMPETITION FOR THE MARKET AND DISRUPTIVE INNOVATION Source:Frontier Economics frontier economics|Confidential 3434 SUSTAINING INNOVATION Sustaining

320、innovations are innovations which improve the performance or functions of an established product or system,incrementally bringing shorter term,more certain,but likely smaller benefits to the market.These can then often be easily copied by competitors(Christensen,1997).Sustaining innovations make up

321、the majority of innovations and are driven by competition that happens within the market.Competition in the market places firms under pressure to operate as efficiently as possible and to innovate in order to gain an advantage over competitors.The incentives to achieve a massive disruptive innovatio

322、n could be reduced,however,in the absence of the prospect of large innovation rents for the market leader,which might be competed away by competition within the market.For example,in Figure 9,where there is horizontal interoperability between systems,there is less incentive for each system to invest

323、 in disruptive innovation as the gains to innovation will be lower(since system X can interoperate and reach system Ys customers).There is less incentive for system Y to innovate to introduce a new product,Y.5,since system Xs customers will be able to access the product.Instead they will seek to ref

324、ine their existing suite of products.FIGURE 9 HORIZONTAL INTEROPERABILITY BETWEEN SYSTEMS CAN LEAD TO COMPETITION WITHIN THE MARKET Source:Frontier Economics INCENTIVES TO INNOVATE WITH VERTICAL INTEROPERABILITY WILL VARY In relation to vertical interoperability,benefits will include the increased v

325、alue that companies derive from offering complementary products.However,by interoperating with third parties,companies may not be able to fully internalise the benefits that they derive from incremental investments(for example to create a new product),as illustrated in Figure 10Figure 10,where third

326、 party producers A and B would benefit from investments in innovation by System X.Furthermore,where both systems offer vertical interoperability which enables third parties to offer complementary services,differentiation between the different systems may reduce.Here there may be greater incentives t

327、o innovate to differentiate their system,even where some of the benefits of the investment are appropriated by third parties interoperating with their system(A and B in Figure 10 10).frontier economics|Confidential 3535 Systems may therefore have an incentive to seek to agree exclusivity or other re

328、strictive vertical supply terms with third parties such that they remain differentiated from rival systems.For example,games consoles may agree exclusivity agreements with games developers such that a given game is only available on one console.In theory,firms could provide interoperability in retur

329、n for an access charge to reflect the investments made in their platform,such that they would be indifferent between i)offering interoperability with an access charge,or ii)withholding interoperability to protect the value of their investments.FIGURE 10 VERTICAL INTEROPERABILITY BETWEEN SYSTEMS CAN

330、ALSO LEAD TO COMPETITION WITHIN THE MARKET Source:Frontier Economics TRADING OFF DIFFERENT FORMS OF INNOVATION AND COMPETITION Therefore,a decision about the“optimal”form of interoperability is a decision about the desired form of competition and innovation.Increased interoperability through policie

331、s such as easier and faster data portability and the interconnection between systems,would encourage more static competition within a market and encourage“sustaining innovation”.Whereas lower interoperability would increase dynamic competition for the market as a whole,and encourage potential“disrup

332、tive innovation”.In addition,it is important to note that innovation,particularly disruptive innovation,remains an unpredictable process which is not only influenced by degrees of interoperability.The Stigler report highlights this trade-off with increased interoperability,which might be created thr

333、ough open standards,when discussing consumer IoT devices in a smart home environment.It argues that,although increased interoperability might reduce innovation for the market,or for the main smart home interface,it would increase incentives to innovate on the platform itself:“It is possible that such open standards can slow down innovation that depends on the interface,but open standards will dras