Reshuffling the Data Economy: The Major Role Interoperability Plays in the Data Act

The volume of data is increasing dramatically. Predictions put the amount of data worldwide at an incredible 175,000 billion Gigabytes by 2025 – an increase of 530% since 2018!

As data includes valuable information which can be extracted for commercial purposes using algorithms, a rise in the data-based economy has accompanied the increase in data. The value of the EU-27 data economy – firms with data processing as their core business model – will expand to 829 billion EUR by 2025, contributing to more than 5% of GDP. But data is playing an increasingly important role in almost every part of our economy. However, unlike other commodities, data is currently characterized by a low level of regulation.

As a result, today’s data economy is dominated by monopolistic service providers exploiting and gaining market power in this situation. Moreover, these monopolistic service providers are suspected of misusing their market power, hindering competition, and potentially ignoring European values such as fairness, equality, and transparency.

The problem of insufficient regulation has been taken up by European policymakers. Since the introduction of the General Data Protection Regulation (GDPR), the EU’s far-reaching data protection law, in 2018, the EU has undertaken multiple other legislative initiatives, the Data Act being the latest one.

All these measures contribute to the overall goal of transforming the data-based economy to be more in line with European values. Numerous policy instruments are currently being discussed to achieve this goal. However, one policy instrument introduced with the Data Act could evolve to be the most powerful: obligation for interoperability.

What “interoperability” means: moving data from one platform to another

Interoperability in the data economy means that service providers can interact seamlessly. For this to happen, the data used by one service provider must be compatible with others. What looks simple at first sight turns out to be a difficult task because data is not (yet) a standardized commodity. Data comes in countless formats, types, and shapes. For using data across different service providers and market participants, data needs to be – at least partially – harmonized. This requires common standards on how data is designed, stored, and linked together.

A commonly cited example of a situation lacking interoperability is messenger apps: It is not possible to write a message on WhatsApp and send it to another messaging app like Signal. Why is it impossible to operate between different platforms?

First, for commercial reasons, most messenger apps or social networks aim for a walled garden with no outside access—they are closed communities where people within can communicate freely, but those outside are cut off.

Second, the underlying technical data formats are not compatible with those of other messaging services because there is no common standard.

The first obstacle can be resolved by forcing each service provider one by one to open their walled garden by introducing “gates” or publicly available interfaces.

In contrast, the second obstacle involves some coordination: an agreement among all service providers to set up common standards on how to communicate is necessary – but comes at much higher costs for adjusting and aligning the systems of individual providers. These obstacles can be found nearly everywhere in the data economy!

Interoperability is already in place: Standard and norm-setting in the economy

Interoperability is a fundamental principle in the European Union and the backbone of the Single Market as it ensures that commodities produced in different member states and traded across borders are compatible.

In the offline world, interoperability is taken for granted. Without interoperability, it would be impossible to make phone calls across countries on different devices, use the same power plug for different electric devices or use the same tires for similar cars.

Standards exist for many products, parts, and processes. In Germany, for example, 24.000 DIN norms exist to date, and new standards are now mostly decided at the European (EN) or international (ISO) level.

In the digital world, there also already exist many examples of interoperability. The e-mail system is probably the most prominent and widely used one. E-Mail data is stored following common standards, allowing information exchange across service providers.

Without interoperability, users could only send e-mails to other users of the same service provider. The result would be a similar scenario as we currently have with messenger services.

Another timely example of data interoperability is Covid-19 certificates in the EU. Thanks to harmonized data standards that were established by the European Commission and the member states, it is now possible to check Covid-19 certificates issued in one EU country in 26 others.

The benefit of interoperability

The lack of interoperability is the foundation for monopolies in the data economy as it reinforces the network effect – the value of each user of a service increases the more users there are.

A messenger service used by only some of a user’s contact is not as valuable as a messenger service used by all of them. The flipside of the network effect is that it creates lock-in effects because it increases the costs of changing the service provider.

Perfect interoperability is the main ingredient of a perfectly competitive market. Economically speaking, interoperability prevents distortions in the market that individual market participants can exploit for their own advantage.

Effectively, interoperability creates similar conditions for everyone enabling all service providers to do their best. In the end, users have the choice between different alternative service providers and receive higher quality because of multiple efforts to provide the best service possible.

Interoperability trade-off: Innovation vs. standardization

Interoperability achieved by defining common standards raises concerns about the negative impact on innovative activity. Innovation may be limited or even prevented by limiting the room for revolutionary creativity.

Setting too many or too narrow standards can create adverse effects by preventing disruptive innovation, which could advance society for good. Too few standards reveal the negative effects we are currently experiencing in the data economy. Therefore, the trade-off between room for innovation and excluding negative effects caused by network and lock-in effects is crucial when imposing standards.

With data, finding the balance between innovation and standardization is a particularly difficult exercise. Unlike many other goods and services, data has infinite forms and variations. Though while it might be impossible to standardize every type of data, it is, in fact, not necessary, as not all data has the same potential for adverse effects.

Deciding which data needs standardization should depend on its importance for the data economy (measured, for example, by frequency of employment) or by societal needs (determined by a political process).

An example of data that is well-qualified for standardizing is postal addresses. The system has been established for 200 years, there is basically no innovative capacity, and almost every service provider uses it. Further areas for standardization can be found in data that is heavily regulated by law, such as accounting data.

The underlying bookkeeping system is more than 2000 years old, highly regulated by both the member states and the European Union. However, there is still no full-fledged universal standard for storing data.

The EU’s evolving stance on interoperability

The first legislative measure at the EU level that incorporated the idea of interoperability was the GPDR which foresees in Article 20 a right to data portability, i.e., retrieving and carrying your data to other providers. To achieve complete data portability, interoperability is required. Currently, service providers allow exporting data, but it usually follows no industry standard, which makes the exported data not viable.

The EU is currently discussing a range of measures to regulate the digital market and the data economy under the framework of the Digital Market Act (DMA), the Digital Services Act (DSA), and, most recently, the Data Act.

While the DMA defines criteria for service providers acting as a “gatekeeper,” the EU’s term for a monopolistic service provider, it is vague on how to establish interoperability, a counteracting measure. In the DSA discussions, interoperability plays a role, but it focuses on integrating different services rather than making the underlying data available in a unified format.

In the Data Act, interoperability plays a major role. The initial internal draft failed the internal impact assessment by the Regulatory Scrutiny Board because it was too vague on how interoperability should be achieved. The final draft – which is expected to be officially published on 23 February – entails a mandate for the European Commission to request European standardization organizations to draft harmonized standards.

Besides legislative measures, various initiatives by the European Commission are dealing with interoperability. One of the most important ones is Joinup, a common venue to bring together public administrations, businesses, and citizens to improve interoperability between governments and the private sector, including citizens but also governments across member states.

Interoperability plays a fundamental role in the high-priority endeavor of establishing European data spaces during the digital transition. With the rolling plan for ICT standardization, what is needed to support EU policy activities are also being identified.

Implementing interoperability as long-term project

Interoperability is key for regulating the data economy according to European values such as fairness, equality, and transparency. A lack of interoperability is closely associated with the current situation dominated by monopolistic service providers, which act in closed and isolated data-rich networks. With the Data Act the latest in a series of legislative or regulatory policies, interoperability aims to open these networks.

Establishing common data standards for increasing data interoperability should be a high priority for the current development of the EU Strategy for standardization. The focus should be on how to best implement interoperability that meets industry requirements and where to start. There are numerous open questions to be answered, starting from the definition of common standards reaching to their enforcement.

All this will take a lot of thinking, negotiations, and political agreements on uniform standards for data – making it a long-term endeavor, especially for European standardization organizations. Therefore, clear priorities need to be established to allocate resources to remove the biggest distortions in digital markets first. Despite the substantial effort required, these endeavors will be more than worthwhile when this leads to a fairer, more equal, transparent, and, ideally, more innovative environment in Europe and beyond.

BIO NOTE

Thomas Schwab is Project Manager for the Europe’s Future Program at the Bertelsmann Stiftung. He applies a data-driven approach to economic analysis by employing data science and econometric methods.