Brian Armstrong

Technology and Innovation - Is It Being Stifled by the Law?

The term “disruption” gets thrown around a lot in entrepreneurship circles.

Entrepreneurs like to talk about disrupting an industry or its incumbent players as a buzzword for innovation, and there is even a startup conference called Techcrunch Disrupt.

So what does it mean to disrupt an industry?  On the one hand it means you are making your customer’s lives better with a faster/better/cheaper alternative.  On the other hand it means you are putting someone else out of business.

This is one of the darker sides of entrepreneurship - competition means an ever present threat where someone can come along and take you out.  It’s a kill or be killed world.  Well, not in terms of bodily harm, but certainly in terms of jobs and fortunes.

To an outsider this may sound cold hearted, but in the world of business I wouldn’t have it any other way.  Competition means that I’m continually kept on my toes trying to provide the best product at the best price.  Customers don’t owe me anything, I actually have to earn their business.  And this motivation, in it’s purest form, is what drives innovation and human progress across a wide range of industries.

In other words it’s a meritocracy.

Henry Ford’s Model T was a brilliant invention that undoubtedly changed the world for the better.  But he had to put a lot of horse and buggy makers out of business to do it.  Some jobs were lost and some were gained.  But people chose which they preferred by voting with their dollars, buying cars instead of buggies.

So it’s somewhat discouraging whenever I see companies NOT competing on quality or price, but instead by competing in the courtroom - trying to outlaw their competition.

A few examples I’ve seen lately.

Newspapers

The crumbling newspaper industry reached out to the government to seek special protection back in 2010, naming Google amongst the sources of it’s troubles.  Google responded pointing out that.

The large profit margins newspapers enjoyed in the past were built on an artificial scarcity: Limited choice for advertisers as well as readers. With the Internet, that scarcity has been taken away and replaced by abundance. No policy proposal will be able to restore newspaper revenues to what they were before the emergence of online news. It is not a question of analog dollars versus digital dimes, but rather a realistic assessment of how to make money in a world of abundant competitors and consumer choice.

Uber

Uber is a startup disrupting the cab industry - they allow you to hail a driver from an iPhone or Android app, rate the driver, and pay electronically - tip included.  In many cities, like San Francisco, there is unmet demand for taxis during peak hours and Uber originally planned to allow anyone to sign up as a driver with their personal vehicle (the Airbnb of taxis, if you will).  That is until the city of San Francisco issued them a cease and desist, saying they were operating an unlicensed cab service.  The cab drivers union isn’t too happy about Uber and claims it’s unsafe.  Of course, it’s sort of a silly argument since nobody is being forced to ride in an Uber cab, and consumers can make up their own mind.  So it’s more likely cab drivers simply don’t want to compete with Uber and are using the law to try and put down a competitor.

Uber has found a loophole and is now operating with licensed black car services.  My hope is that they are using this to gain momentum and save up some cash for the big push where they eventually get back into letting anyone work as a cab driver.  This would be hugely beneficial to consumers by the way,  both in the availability of cabs and driving down the cost.  Uber will have some big legal bills in the process so I don’t blame them for saving up before the fight.  But really, why should a startup be forced to compete in the courtroom?  Why not let consumers decide?

Paypal

When Paypal was starting up, existing banks were not too happy about a new competitor on the scene and wanted Paypal to be regulated as a bank just like they were - even though Paypal didn’t engage in fractional reserve lending.  Existing bank legislation would have made it difficult or impossible for Paypal to operate.  When I saw Reid Hoffman speak at startup school, he mentioned there was some sort of rule where you had to submit any new product or business idea through an approval process that could take a year at the federal level.  For a tech startup this wasn’t feasible.  Paypal eventually found its own loophole, and incorporated itself as a bank in Luxembourg, while only becoming licensed as a money transmitter in the U.S.  Paypal probably wouldn’t have existed today without finding this loophole.

Anyway, I’m continually surprised at how often the law is a barrier in entrepreneurship - and how existing companies have built moats around their business not from having better products, but from lobbying the government.  It seems to come most often near the end of a company or industry’s lifetime, when they are feeling threatened by new upstarts and sense some change on the horizon.  It often comes wrapped in the guise of consumer protection or jobs for America (worked for Chrysler), but in reality they are simply trying to save their own profits without earning them in an open market.

Make no mistake, competition is certainly cut throat for businesses - but the consumer is the beneficiary of these battles as companies keep trying to win their business with new products at lower prices.

Quick thought experiment: which industries are doing the WORST at innovation?  Which have the worst customer service?  Which seem most behind the times in terms of technology?

Off the top of my head…cable companies, real estate, healthcare, cars, education?  You can probably think of others.

I don’t think it’s a coincidence that these also happen to be the industries with the most laws and lobbyists, and consequently the fewest startups.

Do you agree that companies competing in the courtroom instead of the market has stifled innovation?  Have you seen any other examples?  Feel free to leave a comment below.

Brian Armstrong

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