Articulating Interoperability in the Regulation of Digital Markets in India
This importance of interoperability has increasingly been recognized in digital markets, which are characterised by high network effects and economies of scale, along with positive feedback loops. Therefore, these markets tend to either tip in favour of one market participant or lead to the creation of large firms commonly addressed as ‘big tech’. Interoperability, in these markets, essentially aims to create more ‘contestability’ in the market and reduce the adverse effects of digital markets on price, quality and innovation.
In Mr. Umar Javeed and Others Vs. Google LLC and Anr (2022), the Competition Commission of India (‘CCI’) considered the denial of access of Play Services Application Programming Interfaces (‘APIs’) by Google to original equipment manufacturers (‘OEMs’), app developers, and existing or potential competitors, as an ‘exclusionary conduct’ or abuse of dominance under s. 4 of the Competition Act, 2002. The first case of its nature, here the CCI penalised the degradation of existing interoperability in a vertical supply chain through restriction on access to APIs as constituting competitive harm.
In this piece, I argue that interoperability is not without its limitation and risks, whose magnitude is contingent on the regulatory architecture within which you operationalise it. This piece thereby highlights that even with increasing recognition of interoperability in digital markets, the above-highlighted aspects are yet to be deliberated upon.
The Taxonomy of Interoperability
Interoperability refers primarily to the ‘ability of different digital services to work together and communicate with one another’. It can be categorised in two predominant contexts i.e., first, the supply chain and second, the level of technical integration between services. The former categorises interoperability into horizontal, as the ability of services to communicate with rival systems, and vertical interoperability, as the ability to incorporate protocols, data and functions from an upstream or downstream producer. The latter categorises interoperability according to the technical integration between interoperable products, on the level of core protocols, real-time data exchange and full-protocol back-end connection for substitute services.
The technical implementation of interoperability is possible through common interfaces that can facilitate interaction, provided predominantly by web services or APIs. These services can be closed (unique to certain platforms) or open (created together and open to all). However, the policy implementation of interoperability is possible only on the analysis of the recognition of the pro-competitive and anti-competitive effects of interoperability, within a particular market, and the regulatory mechanism involved for implementation.
The Benefits, Risks and Limitations of Interoperability
The benefits and risks of interoperability to competition map as per the categorical basis adopted for it. Horizontal Interoperability allows network effects to transition from firm-specific to public and market-wide goods, limiting the firm’s ability to compete primarily on network effects, and shift on factors such as price, quality and innovation. This may lead to a reduction in entry barriers for new participants, who would not require a significant user base essential to function in the market. Horizontal Interoperability may also reduce switching costs for consumers since they can avail of similar functionalities without losing their social connections or filling in data from the start. Therefore, it promotes competition across digital platforms.
Vertical Interoperability, on the other hand, promotes competition within digital ecosystems. It allows consumers to ‘mix and match’ components of the supply chain and increases competition between complementors, supporting innovation. Vertical Interoperability also reduces the cost of designing for entrants due to the existence of APIs and web services and directs attention towards the better distribution of labour and innovation by the firm.
However, interoperability is not a blanket measure for the resolution of all concerns within a digital market and its potential could be significantly limited or risky within a specific market. In nascent markets, where the user interfaces are varied due to changing services and user preferences, there is less scope for operationalising Horizontal Interoperability and standardized systems. Even in a market with complex services, interoperability may be imperfect, so previously dominant firms continue remaining significant. Vertical Interoperability also leads to inefficiencies of vertical separation to arise, including the ability of market participants to charge their levy at multiple stages and the reduction in rents that can be charged by platforms to invest in innovative cross-subsidisation and pricing mechanisms. Lastly, interoperability mandates which prescribe certain standards can also entrench specific functionalities, business models and technologies of gatekeeper firms.
Therefore, it is essential to give significant attention to the nature of the market within which these interoperability measures are imposed along with the regulatory mechanism of its implementation to understand the magnitude of these competitive risks and benefits – in particular the latter.
The Mechanisms and Institutional Framework for Adoption of Interoperability
The implementation of interoperability is an instrumental factor in deciding the competitive impact of the measure since it is contingent on the number and nature of firms over which this standard shall be imposed, as well as the duration and form of this measure. This can be ensured institutionally through regulatory oversight of existing agencies such as the Competition Commission or the creation and control of standards by independent third parties such as the National Payments Corporation of India. The oversight is categorised into two policy options, ex-post including competition enforcement and ex-ante, including competition-focussed regulation of ‘gatekeepers’, data protection mandates, and sectoral regulatory measures such as those by RBI.
Interoperability within ex-post competition law enforcement can arise by exclusionary behaviour by dominant firms or merger between two entities leading to degradation or abuse of interoperability standards in vertical and horizontal market(s), or as a distinct affirmative remedy. In ex-ante regulation of digital markets, firms with significant market power or ‘gatekeeper position’ are required to maintain interoperable systems. On the other hand, data protection mandates focus on providing data subjects with control over the collection and storage of their data – and in particular real-time data exchange systems. These different goals not only affect the capacities of the regulatory agencies but the unique costs imposed by one particular option, therefore, it is essential to highlight and choose the regulatory options wisely.
For example, in comparison to ex-ante regulatory action, competition law enforcement involves lengthy and firm-specific proceedings and high evidentiary burdens such as identification of consumer harm and particular misconducts. Moreover, competition authorities may have limited capacity to monitor these firms and their interoperable standards continuously, non-compliance with which could easily allow dominant firms to entrench their technologies and disrupt rival firms. However, competition law enforcement also allows well-tailored and flexible remedies in comparison to regulatory actions.
In India, though, these regulatory options have yet to be opened for them to actually be considered for discussion and operationalise interoperability in a particular digital market most efficiently. This is evident in particular in the recent Standing Committee on Finance’s report on ‘Anti-Competitive Practices by Big Tech Companies’ on December 22, 2022, which highlights exploitative but not this form of exclusionary conduct and the resulting remedies of data portability, interoperability, and obligation to provide access to data. These practices, contrary to the Indian experience, have been particularly highlighted in European Union, United Kingdom and the United States. Even the Data Protection Bill, which in its 2019 form included the right to data portability under s. 19, successive amendments of the bill such as the one in December 2022 do not include them anymore without their competitive and regulatory repercussions.
The regulatory choice shall differ and cannot exist solely through ex-post competition law enforcement for all forms of digital markets. There is an essential need to recognize the role interoperability plays within digital markets and put in place mechanisms to operationalise it. As highlighted above, interoperability is not without its limitations, but its competitive impact and effective implementation is contingent on the regulatory architecture within which it is operationalised. This shall ensure an appropriate balancing of the benefits of effective competition for consumers as well as extraction of economic and dynamic efficiencies from the market.