Data Portability and Competition Policy in Digital Markets

Wouldn’t it be convenient to have all your texts, photos, videos, and files follow you from smartphone to smartphone across the years?  Or have all of your desired settings and preferences carried from appliance to appliance as you upgrade?  This is what is known as data portability, and it is highly desired by consumers.  Traditionally, purchasing a new electronic device has meant either sacrificing one’s data or going through a labor-intensive process to manually move data from the old device or system to the new one.  Why do some companies make it so difficult to easily port your data to another system?

Economics of Data Portability

Opportunity Cost of Switching Providers

If data is not portable, consumers must factor in the opportunity cost of having to manually port their data, or lose their data entirely, when purchasing a new digital device.  The time cost of manually porting data may make up the difference in cost between a new device from the same provider, which often allows for seamless data porting, and a new device from a different provider.  To avoid high up-front costs of data porting to other digital platforms, many consumers choose to stick with the same provider for upgrades, even when they have some critiques about quality.

Switching Costs Can be Significant Over Time

Part of the opportunity cost of switching to a new provider, known as “switching costs,” can include long-term contracts for services.  For example, when a product is purchased, the consumer is often encouraged to sign up for upgrade and maintenance plans, which may be fixed.  If the consumer decides to replace the product with one from a different provider, he or she is still responsible for paying the monthly fixed subscription cost for the various plans associated with the original product.

For example, a consumer might purchase a new vehicle that comes with optional digital upgrades, such as navigation and streaming entertainment packages.  These upgrades may come with fixed annual subscription fees.  If the consumer decides to trade the vehicle in for a substitute from a different manufacturer, the rest of the annual subscription becomes a sunk cost that cannot be redeemed.  To avoid these sunk costs, consumers may adopt brand loyalty to keep these digital upgrades portable from product to product.

Data Monopoly Versus Competition

So, why do producers make their data non-portable?  A concern is that allowing easy data portability would result in a loss of customers.  Another is that customer data is a crucial component of research-and-development, and allowing customers to take their data elsewhere might unfairly advantage a rival.  Start-ups could quickly import gigabytes of customers’ software usage data into their own algorithms, accomplishing in weeks what might have taken the original firm years to learn.  

Rules and regulations requiring companies to make it easier for customers to port their data to new products from different firms would create increased competition.  Firms would have to compete more directly on quality and price rather than relying on “data moats” that keep users comfortable with well-worn algorithms.  If customers could easily take all of their data and usage history from one firm’s product to another firm’s product, automatically transferring settings and preferences, firms would be spurred to innovate to create more attractive products that could make good use of such ported data.

A Negative Externality?  Data Portability and Privacy Concerns

Data portability is often seen as a noble goal that empowers consumers.  However, making data too easily portable can create the risk of eroded privacy protections.  When user data is ported from one firm’s device to another firm’s device, should all usage data be sent?  Could customers’ usage history with one firm lead to privacy concerns if it is seen by employees at a later firm?  Will customers be fully informed about what personal information firms can glean from customer usage data?

While many customers may not worry about their full usage data being ported from one firm to another, the increased incidence of porting data increases the risk of that data being exposed to unauthorized parties, such as hackers or scammers.  If firms have to make software changes to allow increased data portability, these changes could allow easier access by unauthorized users.  One hypothetical scenario of easy data portability is a hack in one firm’s system allowing the hacker widespread access to other firms’ systems, taking advantage of the same routes and methods used to seamlessly port data.

Reducing user privacy protections in the name of data portability would be considered a negative externality because it would harm third parties, namely users that were not intending to port their data to a new firm.  Even customers who did not want increased data portability would be more vulnerable to hackers due to firms’ pursuit of data portability.

A Positive Externality?  Reducing Asymmetric Information With Data Portability

Some user data can be life-saving, especially when it comes to health care.  One common criticism of privatized health care is that patient data is often not automatically ported from one provider to the next.  Due to the lack of a centralized system, patients can visit multiple doctors and never have their treatment data synchronized.  This can result in improper treatment later on, with clinic X not having vital data from doctor Y regarding previous medications or treatments.  Data portability in health care and education can help new providers make important connections that improve patient and/or student well-being.  

Frequently, however, data regarding patients and students is carefully safeguarded in the name of privacy.  In the United States, HIPAA is a federal law that protects patient medical information, which safeguards privacy but can limit automatic data portability.  Similarly, FERPA is a privacy protection law regarding student data.  Both are considered valuable for preventing unauthorized access to sensitive records, but both are also sometimes criticized for creating asymmetric information where one or more interested parties cannot access accurate information in a timely fashion.  Creating more centralized systems to allow for automatic porting of health and education data could increase societal efficiency by helping medical personnel and educators more quickly identify problems and target solutions.