Interoperability is an essential element of digital markets enabling different services and devices to work with each other.

A new report published today by Frontier Economics helps inform the current debate around the use of interoperability as a policy instrument to promote positive outcomes in digital markets.

The report, commissioned by Huawei, considers the benefits, costs and trade-offs associated with mandating interoperability, with a focus on consumer Internet of Things (IoT).

The effects of interoperability requirements will depend on whether they are imposed between competing services (for example between different social networks) or complementary products (for example between a digital platform and a smart home device). In general, where interoperability requirements soften incentives to compete (between competing digital services, but in some cases between complementary services) they can dampen incentives to innovate. Policy makers should therefore carefully consider a potential loss of innovation against the potential gains that result from interoperability.

However, as the report notes, interoperability is not a new concept. The report considers three historical case studies to demonstrate the benefits that interoperability can have:

• The shipping container made different transport networks interoperable boosting world trade (Case Study 1);
• The development of a single telephone standard meant different phone networks were interoperable, transforming the value of communications services for users (Case Study 2);
• The development of the USB standard unleashed innovation in computing peripheral devices (Case Study 3).

These case studies illustrate some of the costs of interoperability: a single standard for telephones limited innovation; the process for achieving interoperability of shipping containers was time consuming, taking over ten years, and in the end did not satisfy everyone. 

Therefore, interoperability is not a one-size-fits-all policy tool: specific forms will bring different costs and benefits. However, some common messages emerge from the report for policy makers which can guide decisions on how to apply interoperability.

• Policy makers should be clear on the rationale for intervention as this will drive the form of interoperability.
• Policy makers should assess the costs and trade-offs involved in different forms of interoperability. In markets characterised by innovation they should consider the risk that it will limit innovation as consumers and suppliers settle around a single common standard and incentives to invest in R&D are blunted.
• Where policy makers impose interoperability, they should support the process of defining the precise form of interoperability required.

Click here to read the full report.

For more information, please contact us at media@frontier-economics.com or at  +44 (0) 20 7031 7000.