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Knieps, G.”Internet of Things and the network economics of operator platforms”

The paper “Internet of Things and the network economics of operator platforms” (Knieps, G.) will be presented at the 8th Conference on the Regulation of Infrastructures (20-21 June, 2019 ). 

ABSTRACT

The Internet of Things (IoT) poses disruptive challenges for traditional network industries, enabling IoT applications for physical network services based on real time, adaptive and location sensitive data. There is an open and ever-expanding set of physical IoT applications. Important areas for applications are smart sustainable cities, intelligent transportation systems, smart energy networks, commercial drones, smart manufacturing, e-health etc. Prosumer peer-to-peer activities as well as business-oriented market activities are organised via operator platforms in order to provide shared mobility services, transactive energy services connecting home networks via microgrids, cooperative networked vehicle services etc. New challenges and requirements for a variety of heterogeneous operator platforms arise, combining the requirements of physical IoT applications with complementary virtual networks enabling interactive machine-to-machine communication. Different virtual networks which are complementary for heterogeneous IoT application services are based on sensor networks, quality of service (QoS) requirements of all-IP broadband communication and big data processing. The transactions of platform operators are manifold: Questions regarding the division of labor between all-IP traffic service providers, virtual network providers and platform operators for physical IoT applications arise, including the role of bundling between virtual network operators and physical platform operators as well as the bundling of different physical IoT application services. The focus of this paper is on the industrial organisation of operator platforms driven by the requirements of IoT applications and the future role of regulation of operator platforms.

ICT based smart networks are characterised by large innovational potentials for changing the architectures of physical networks as well as changing markets for network services. Thus, operator platforms for IoT applications are facing highly innovative markets with entrepreneurial opportunities to develop new innovative services and thereby disrupt traditional network industries. “Mobility as a Service” platforms can be organised for physical transportation services enabling seamless app-based mobility as a service combining the advantages of different forms of transportation. Driverless vehicle platforms provide highly interactive (cooperative) net-worked/automated vehicles with the support of high-volume location critical big data processing (edge cloud). An issue which is gaining increasing attention is the future potential of shared self-driving vehicles, where the function of driver responsibility is shifted to the platform operator for the transportation process. Microgrid platforms organise the low voltage generation and consumption of electricity with a particular focus on renewable energy. The traditional value chain in electricity networks from large power planed generation, high voltage transmission networks, medium voltage distribution networks and local/regional low power household networks is challenged, due to bottom up renewable energy production and consumption within home networks and aggregation of prosumer activities via microgrid platforms with import/export to the mi-crogrid node of the distribution network.

The question regarding the future role of the regulation of operator platforms has several dimensions: Firstly, an increasing need for technical regulations, such as specifications of safety and liability regulations in shared mobility, ride sourcing and networked driverless vehicles application can be identified. Secondly, data protection and cyber security become increasingly relevant within the IoT. Thirdly, network neutrality regulation should not hamper the entrepreneurial search for new IoT applications and the required QoS guarantees of data packet transmission within virtual networks. Fourthly, if public subsidies for loss-making network services are granted, platform operators should also be allowed to participate in the competition process for subsidies, e.g. subsidies for public transit should not be limited to providers specialising in a specific mode of transportation. Finally, the future role of antitrust policy and market power regulation of platform operators is analysed. It is to be expected that operator platforms will not require a new paradigm of market power regulation. The market for taxi services should be liberalised and ride sourcing should no longer be forbidden. Although direct and indirect network externalities as well as the potentials of economies of scale are significant for operator platforms, they do not result in network specific market power. The key question is whether the interaction between platform operators and the providers of the underlying physical infrastructure raises market power problems, which then would require regulatory interventions. If, due to the absence of active or potential competition, the owner of a monopolistic bottleneck facility has network specific market power, this should be regulated to guarantee non-discriminatory access at regulated access charges. Platform competition should be enabled by access regulation. Only a platform which constitutes a monopolistic bottleneck infrastructure needs to be regulated.

ABOUT THE AUTHOR

Prof. Dr. Günter Knieps is professor of economics at the University of Freiburg and holds the chair of Network Economics, Competition Economics, and Transport Science. Before that he held a position as professor of microeconomics at Groningen (Netherlands). He studied economics and mathematics and obtained his PhD in Bonn. He held post-doc positions at Princeton and the University of Pennsylvania and obtained his habilitation in Berne. He is author of numerous publications on network economics, (de-)regulation, competition policy, and sector studies on network industries (e.g.transport, telecommunications and postal markets, internet and energy). He is a member of the Scientific Advisory Councils of the Federal Ministry of Economics and Energy and of the Federal Ministry of Transport and Digital Infrastructure.