According to a new European Commission directive expected to be approved in the next few months, tech firms will have to use a common charger for electronic devices such as smartphones, tablets, and laptops forcing Apple to switch to the USB-C standard. The EC claims this new regulation will benefit the environment, consumers, and firms. While convincing at first glance, we argue that it may also have a negative long-run effect on innovation.
On September 23, 2021, the European Commission advanced a legislative proposal to mandate USB-C as the standard technology for charging smartphones and other types of electronic devices. The stated objective of the regulation is to reduce electronic waste and to provide benefits to consumers and firms. If implemented, this proposal would force a technological adjustment by Apple, one of the major producers of electronic devices.
A common charger for smartphones has been on the agenda of the European Commission (EC) for quite some time. In 2009, it already celebrated a memorandum of understanding on the adoption of Micro-USB for smartphones. Günther Verheugen, then Vice President of the EC, said:
“I am very pleased that industry has found an agreement, which will make life much simpler for consumers. They will be able to charge mobile phones anywhere from the new common charger. This also means considerably less electronic waste, because people will no longer have to throw away chargers when buying new phones. I am also very pleased that this solution was found on the basis of self-regulation. As a result, the Commission does not consider it necessary to introduce legislation.”
Most companies in the smartphone industry honored this agreement and moved to Micro-USB and then USB-C chargers. However, the convergence to a common charger is still incomplete, as Apple continues to use its proprietary Lightning connector.
The USB-C technology is currently used by Apple’s competitors. By contrast, iPhone users must use a battery charger supplied or licensed by Apple to charge their devices, whereas a smartphone produced by any competitor can be charged using any USB-C battery charger (subject to some specifications). In other words, the market features a regime of “partial compatibility,” according to which some but not all companies use the same charging technology. If implemented, the policy proposed by the European Commission, would make any battery charger compatible with any smartphone (as well as other electronic devices such as tablets, handheld videogame consoles, and, at a later point in time, laptops). Thus, it would induce a regime of “full compatibility,” according to which all companies use the same charging technology. On June 7 this year, The European Parliament and the Council of the EU reached a provisional agreement—the formal approval is expected shortly after the summer break.
As stated by the EC, in the aftermath of the memorandum of understanding, companies have drastically reduced the number of incompatible chargers in the market (from 30 to 3). In other words, most in the industry converged to a common standard. The remaining fragmentation could suggest the existence of fundamental differences in firms’ incentives. Based on the impact assessment study on unbundling of chargers, the EC writes:
“[…] those manufacturers that have invested heavily in proprietary charging technology appear less keen, since the high charging performance of their bundled phones and EPS is an important part of their marketing strategy.”
Should the EC force the industry to adopt a common charger?
The Beauty of a Common Charger
On December 11, 2019, the EC presented the European Green Deal as “a roadmap for making the EU’s economy sustainable by turning climate and environmental challenges into opportunities across all policy areas and making the transition just and inclusive for all.”
The proposal to introduce a common charger is part of a broader strategy by the EC to make the European economy more sustainable—in particular, by reducing electronic waste (estimated by the EC to be approximately 11,000 tons annually).
The EC also argues that its proposal will have a positive impact on consumers. In particular, it will enhance consumer convenience. For instance, consumers will no longer need to carry a different charger for any device, as a USB-C charger will be enough for all. Similarly, they may borrow a charger from a friend in case they do not carry their own charger. When replacing a device, they can continue to use their charger. This increased flexibility applies to different devices supplied by the same manufacturer and across manufacturers.
At first glance, the idea of mandating a common charger seems an unambiguous improvement for consumers and society, with all the burden left to the firms which will have to adjust their devices. However, the issue is more complex, and the regulation could have unforeseen implications.
“Whereas higher prices may be a minor concern in the context of chargers, mandating a standard technology could have more serious long-run effects on the incentive to develop new and potentially superior technologies.”
Fly in the Ointment
In its impact assessment of the proposed policy, the EC claims that mandating USB-C as the standard charging technology will reduce prices. The reasoning behind the EC claim can be summarized as follows. Products using proprietary technologies have higher retail prices than those using USB-C technology. Therefore, by mandating USB-C as the standard, prices for consumers should decrease.
Recent contributions to the economics literature (Innocenti and Menicucci, 2021; Shuai et al., 2022) have considered a market that can feature a regime of partial compatibility. These papers show that partial compatibility can be the unregulated market outcome when one firm is of higher quality. In the market for mobile electronic devices, Apple may be seen as the higher-quality firm. Apple’s quality advantage can have multiple origins: for instance, higher intrinsic value or a brand effect. Independently of the origin, if the dominant firm’s advantage is sufficiently strong, the market features partial compatibility. Indeed, Apple is the firm using proprietary technology. According to Innocenti and Menicucci, full compatibility would induce the higher-quality firm to increase its mark-up, and its competitors would increase their mark-ups as well. As a result, consumers would be worse off.
Whereas higher prices may be a minor concern in the context of chargers, mandating a standard technology could have more serious long-run effects on the incentive to develop new and potentially superior technologies.
The proposed EC regulation is not fully static as it allows for a change of standard after some time. However, it may be harder to move to a new standard than agreeing on the current standard. Several technologies have been competing. Once the standard is in place, the dynamics for new technologies may completely change.
Since the regulation applies only to the EU and not to other countries, one possibility is that little would change globally and that there would be experimentation in countries outside the EU. The EU could then free-ride on the experimentation efforts and pick the best new technology as the new standard. Yet for such experimentation to take place, other countries must not follow the EU’s lead.
EU regulation may, however, spill over into other countries. Using Anu Bradford’s terminology, if the Brussels effect (which says that companies comply with EU regulation also in other countries because other countries mimic EU regulation or because companies find it more convenient to comply outside the EU even though they are not forced to do so) is present, firms will design their products complying with EU regulation even when selling elsewhere. This could reduce and—in the extreme—eliminate experimentation.
A firm willing to develop a more efficient charging technology would not be able to bring it on the market unless its technology is compatible with the standard or if it is recognized as an improvement, making it the new standard. Thus, the regulation is likely to harm innovation incentives in wire-based charging technologies. With a look at wireless chargers, it could also lead to biased investments toward less regulated alternatives.
A Less Heavy-Handed Regulation
Instead of the current heavy-handed proposition, an alternative regulation could include exemptions and experimentation clauses that allow firms with superior technology to not adopt USB-C. This would not be a free pass to Apple and others who would like to use proprietary technology, as they would have to show that their technology offers consumer benefits compared to the European standard.
The first test for the common charger legislation will be the wireless charging technology, whose development is ongoing and acknowledged by the directive. Therefore, the new directive may lead some firms to focus on proprietary wireless technology to bypass the new regulation. This may then lead to more innovation in this alternative technology. For several years, Apple and others have filed patents related to wireless charging. Wireless charging may then be the next target for regulation. As stated by the European Parliament:
“As wireless charging technology becomes more prevalent, the European Commission will be empowered to develop so-called delegated acts, on the interoperability of charging solutions.”
As readers can glean from the above quote, more regulation is likely looming, and it will be interesting to observe future developments in charging technologies. While a common technology would offer consumer benefits in the short term, the search for the next, improved technology may require the need for experimentation clauses and a willingness to examine a change of standard within a reasonable time frame.
Disclosure: Federico Innocenti and Martin Peitz acknowledge financial support by the Deutsche Forschungsgemeinschaft (DFG) through CRC TR 224 (project B05). This or related work is not funded by any interested party. Martin Peitz is a research fellow of CERRE (www.cerre.eu), a Brussels-based think tank that receives some of its funding from tech companies. On unrelated topics, Martin Peitz wrote reports for CERRE, the EC, and GSMA.
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References
Belleflamme, P. and M. Peitz (2015): Industrial Organization: Markets and Strategies, Cambridge University Press.
Bradford, A. (2020): The Brussels Effect: How the European Union Rules the World, Oxford University Press.
Innocenti, F. and D. Menicucci (2021): Partial compatibility in oligopoly, Journal of Economic Behavior & Organization, 188, 351-378.
Shuai, J., H. Yang, and L. Zhang (2022): Dominant firm and competitive bundling in oligopoly markets, Games and Economic Behavior, 132, 421-447.
