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interop can help develop innovative devices and This change toward increased interoperability has
software, it can also support innovative devices increased competition in two ways. First, it has
and software with negative social impacts. increased competition for subscription TV services.
Worms, viruses, spam, and other unwanted By decoupling its content from cable and satellite
activity are in many ways just as “innovative,” and TV systems, HBO put those operators on notice
just as dependent on interoperability, as positive that they no longer have content monopolies to
developments. A recent example of this peril ensure customer lock-in. In fact, several cable
can be found in a vulnerability in the SSL protocol companies have begun offering “skinny” packages
(which enables secure, encrypted communication consisting of high-speed broadband, HBO, and
across the Internet) that led to the so-called just a few other channels, in order to compete
“Heartbleed” hacking episode. Because the SSL with lower-priced, online-only services like HBO
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protocol is interoperable, anyone with enough Now and Netflix. Second, by increasing its
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technical knowledge can write a version of the interoperability, HBO is competing in an entirely
protocol that can be used interchangeably. One different market: online content streaming
version, called OpenSSL, became so popular that services. This shift has not gone unnoticed by
it was running on an estimated 66 per cent of the Reed Hastings, CEO of Netflix, who recently
Internet. Unfortunately, OpenSSL had a critical remarked, “I predict HBO will do the best creative
flaw—the Heartbleed—that allowed attackers to work of their lives in the next 10 years because
see encrypted communications. Thus, interop they are on [a] war footing. They haven’t really
enabled this vulnerability to become widespread. had a challenge for a long time, and now they do.
It’s going to spur us both on to incredible work.”
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Additionally, high degrees of interop can This kind of competition benefits users by reducing
sometimes threaten innovation. For instance, prices and by providing incentives for product and
a successfully interoperable system’s network service innovation.
effects can lead consumers to stick with an
existing service. This might diminish operators' Although interop generally supports competition,
incentives to invest in an entirely new technology, in some circumstances it could, counter-
i.e., a radical innovation that would replace the intuitively, lead to anticompetitive results. Certain
older system. In such a scenario, operators might arrangements that lead to interoperability and
implement only incremental improvements to greater innovation may boost a single firm
to existing, interoperable systems. This would -- or a few firms -- in a manner that is, over
foreclose opportunities for radical innovations that time, anticompetitive. For example, standards
would more vastly improve services. consortiums may sometimes create closed
standards that enable interoperability across
only their stakeholders’ products. In this way,
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4.3.2 Competition interoperability can be employed as a tool
for building closed ecosystems. The value to
Standard economic analysis suggests that the consumer of being in the ecosystem (and
increased interoperability is likely to foster benefitting from the interoperability the ecosystem
innovation by reducing lock-in effects and lowering provides) can in turn raise costs for switching
barriers to entry. This pattern is observable in providers and thus reduce competition. 27
the subscription streaming video market. HBO,
a movie network and content creator, recently Even when more interoperability does lead to
began selling its HBO Now service directly to more competition, the net result is not necessarily
consumers over the Internet, breaking with its maximum innovation. According to one economic
traditional business model of selling only through theory, firms may have the strongest incentive to
cable and satellite TV providers. Under its old be innovative in circumstances where low levels
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model, HBO’s content distribution system needed of interoperability would promise higher or even
to interoperate only with those cable and satellite monopoly profits. This sort of (Schumpetrian)
systems. Under the new model, however, HBO competition incentivizes developing entirely new
needs interoperability with web browsers and generations of technologies or ways of doing
devices such as Apple TV, Roku, Chromecast, and business (so-called “leapfrog competition”) in
others. order to replace incumbent players and achieve
temporary dominance.

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