Disruption, Regulation And Regulatory Hacks

Rattling sabers and shots fired over the bow!

The appearance of a disruptive force puts everyone on edge. This is especially true of government regulators and entrenched industries. There are legitimate concerns to consider, such as monopolization, safety and fraud protection. Even more worrisome for some officials is the potential loss of millions of dollars in tax revenue. Once you begin to dip into Uncle Sam’s (or Sam Walton’s) wallet, he takes notice quickly. In China, you might even get your hand chopped off.

It comes as no surprise that many times government and entrenched industries work together to regulate or block disruptors.

Image by Opensource.com via Creative Commons

Image by Opensource.com via Creative Commons

Any Door But The Front Door

As Chris Dixon tells us, back in the early 90s, Nextel was a regulatory hack that went by the quaint startup name, Fleet Cell. The FCC had put rules in place to ban any more than two cellular operators per city. So Fleet Cell hacked in through the back door scooping up local radio dispatch companies like taxi and pizza-shop call centers. Once Fleet Cell grew too big and became a threat, the regulators took offense.

The naysayers touted “danger” to public safety radio frequencies, and other critics said the Fleet Cell price would be too high. The industry was described as being “alarmed”. You’d be mad too if someone was cutting into your lucrative monopoly.

Fast Forward

Fast forward to 2014. Nextel looks like a dinosaur compared to agile apps like WhatsApp and Viber. So it should come as no surprise that USA, Canada, the Netherlands, India and Saudi Arabia are all considering restrictions or complete banning of these messaging/voice platforms.

Now let’s sit back and think a bit. Do we really believe that some government legislator/career politician realized by themselves that WhatsApp address book issues could be considered a breach of personal privacy? Or maybe some entrenched industry lobbyist whispered these bad tidings in the ear of the lawmakers. Wouldn’t it be ironic if it was Nextel?

WhatsApp has 350 million monthly active users and it has now introduced push to talk technology. Is regulation pressure is rarely only the due diligence of loyal politicians protecting the common good?

What’s An Up And Coming Disruptor To Do?

In an earlier section, we talked about the backlash against the ride sharing Uber and room sharing Airbnb companies. The majority of this reaction is industry driven, and sometimes the push back can border on the absurd. At one time, free online education was actually declared illegal in the state of Minnesota. What did these online educators forget to do? Pay the regulatory fee.

The long battle Uber continues to face has included sting operations, cease and desist orders, and a whole host of lawsuits. Uber lets people call for a ride using a cell phone app, and the payment can be made by credit card. Does this mean that making things easier and cheaper is a bad thing? Basically, everything is fine if you are small, but when you start hacking deeper into the taxi business income, don’t think the cabbies won’t put up a fight. Remember, it costs $1 million to own the rights to operate a taxi business in NYC.

Currently, Uber’s battles continue to get messy including the unfortunate incident of a Uber driver who hit and injured a family including a 6 year old girl. This opens up a whole bag of worms that includes insurance issues, background checks and more. The solution? Get some help from government lobbyists and start working the system instead of against it.

Really Big Wars

Bitcoin might just be the most intriguing of the regulatory hacks. It is an invented currency that is not backed by any bank or country. As recently as July 2013, TechCrunch reported that:

“Certainly there appears to be early signs that Bitcoin startups may desert the US for less regulated climes. Speaking to TechCrunch at the Bitcoin London Conference, Jonathan Rouch, founder of Bits of Gold in Israel, said he has no plans to launch his service for creating Bitcoin liquidity in the US because of the potential for regulatory intervention.”

Less than 6 months later, the New York Times reported that Bitcoin adovcates appeared before New York State financial regulators to try to sift through the regulatory mess that a nation-less, bank-less digital currency creates. The Times says:

“In the end, the panelists did much more than defend Bitcoin — they spoke about it as an almost messianic force for good in the world.

“It’s about freedom, ultimately, and whether you want to live in a society that embraces innovation and free speech and freedom or not,” Mr. Wilson said.

A minute later, Tyler Winklevoss echoed that: “Back to what Fred said: “Bitcoin is freedom. It’s very American.””

Some might call it a Ponzi scheme, but this funny money is accepted now by Amazon, Home Depot, CVS, Overstock.com and TigerDirect.com according to a recent Forbes article. The question is, as it grows, how, and by whom, will Bitcoin be regulated?

Regulation Or Reputation

What is the real purpose behind regulation? If you are the state treasurer you might be wondering how to recuperate the lost income from hotel taxes as Airbnb continues to grow. Some reports claim that there is one Airbnb listing for every six hotel listings in New York City alone. That a lot of potential tax money.

However, the real goal of regulation is to make sure business runs smoothly and fairly. Despite all the fighting and lobbying, what we really need is a system of checks and balances. Which brings us back full circle to one of the oldest disruptors around: Ebay.

With its rating system, Ebay has proven that these systems can regulate themselves. A bad apple will not get business. A business with a poor reputation will die much faster than it would if we had to rely on traditional methods of registering complaints. How many people are taken advantage of every day by unscrupulous businesses that would never survive in a public rating arena?

Even the Bitcoin enigma is partially solved since buyers and vendors can check out each other’s reputation before doing business. The chance for theft and fraud always exists – with any type of money be it dollars, yen or digital but transparent reputations help tremendously.

Unfortunately, like any system, ratings and reputations can be gamed and good reputations can even be manufactured.

Granddaddy Of Disruptors Regulated In A Market Of 1.3 Billion

In China, despite the huge economic growth over the past few decades, the Internet is still heavily monitored and censored. The Huffington Post recently reported:

“In early September, a Chinese judge re-interpreted Internet restrictions so that any individual spreading “slanderous rumors” on the Internet that are seen by 5,000 people or shared by 500 people could face up to 10 years in prison. This stricter interpretation of Internet limitations indicates that an open Internet China is not on the immediate horizon.”

Here, regulatory hacks could find themselves paying dearly for becoming too popular at the wrong place and time.

The New 1984

Something scarier than Chinese government monitoring might be how invasive – and easy – technological regulation can be. Wired magazine eerily suggests (unintentionally):

“For example, couldn’t video monitoring inside Lyft cars – made ubiquitous and inexpensive by today’s technology capabilities – enhance our system of centrally licensing taxi operators, while also helping resolve driver-passenger disputes? Perhaps low-cost surveillance technologies in Airbnb shares…could substitute and supplement conventional lodging inspectors. The self-regulatory capabilities of the online sharing economy could permeate traditional commerce as well. Why bother with restaurant inspections, when we could put a camera in the kitchen to spot health violations and leave Zagat and Yelp reviews to “administer” the quality control? Do we even need hotel regulators any more, when we have TripAdvisor to give us instant feedback on cleanliness, service, noise levels, and several other dimensions?”

Words like “ubiquitous”, “permeate” and “camera in the kitchen” sound scary. Perhaps the old-fashioned government regulation might not be seen as such a bad thing in the future.


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