Tech Tuesday: Litigation, Legislation and Regulatory Protectionism

by Glenn Manishin on April 25, 2014

Tuesday was a big day in the world of tech-powered disruptive innovation. What the news of April 22nd shows, however, is expanding use of the legal process by incumbent industries to thwart change — and the unfortunately all too frequent concurrence of regulators and courts with that ancient mantra of obsolescent businesses, namely “consumer protection.” Old, entrenched industries frequently lean on their political connections and get the government to come up with some new justification (or recycle an old one) for shutting down upstart rivals or, at the very least, undermining their competitive advantages.

Tuesday witnessed two potentially landmark events, ones that may in time change this familiar paradigm. The first was the morning hearing before the U.S. Supreme Court in ABC v. Aereo, the broadcast networks’ copyright law challenge to the now well-known streaming IPTV start-up. The second, just slightly later in the day, were oral arguments at a New York state court in Albany over whether Airbnb will be permitted to offer its peer-to-peer apartment rental services in New York City, where a 2010 measure meant to curb unregulated hotels prohibits renting out an apartment for less than a month.

Tech Tuesday

At DisCo we’ve devoted a series of posts to the Aereo case. Like a Sony Betamax for the 21st century, the Supreme Court is being asked to decide whether moving technology that is lawful for an individual to use on his or her own becomes a copyright violation if offered over the Internet. But the major broadcast networks (like the movie studios who opposed VCR recording in the 1980s) are convinced their entire business model will collapse if Aereo is sanctioned, threatening the nuclear option of stopping over-the-air transmission in favor of all-cable distribution should Aereo prevail.

Airbnb, in contrast, is fighting an effort by New York regulators to collect the names of Airbnb hosts who are breaking the law by renting out multiple properties for short periods. The company, which is now estimated to be worth $10 billion, is framing the dispute as a case of government scooping up more data than it needs for purposes that are vague. What the tussle is really about, of course, is whether the renting public actually needs protection from “unregulated hotels” and, even if true, why Airbnb’s efforts to make a market for DIY rentals is at all harmful.

These are far from the only recent instances in which legacy firms have played the legal card to impede expansion of business models that disintermediate their market power. Car dealers have thwarted Tesla from selling electric automobiles direct to consumers in many states on the ground that service and support will suffer if manufacturers do not retail cars through local dealers. Read that in reality for “we need higher margins to survive, so keep them away.” Uber and Lyft, both of which offer locally-sourced taxi alternatives, have been a special target of the taxi and limousine industries. In San Antonio, for example, Lyft was recently sued by a group of taxi drivers, who complained that the public is at risk because P2P ride sharing cars and drivers are not specially inspected and licensed.

Consumer protection has a long and colorful history in America as a tool to shelter established markets from competition and avoid the inevitable economic dislocations arising from innovation. While the buggy whip is a favorite metaphor for Schumpterian destruction, fewer recall that the Horse Association of America lobbied fiercely against automobile manufacturing on the ground that consumers would be prone to exploitation and injury. Lawyers themselves tried collectively to impose minimum fee schedules on all attorneys as a purported means of preventing unethical conduct until overturned by the courts on antitrust grounds in 1975.  In the later 1970s and 80s, the Bell System invented the concept of “cream skimming” to add a pseudo-public service aura to its efforts to thwart telecom competition, arguing that the poor and elderly would be unserved by new competitors looking only to the highest-margin customers. Given that phones are essentially free today and that wireless prices have fallen to commodity levels — let alone that no one ever fears the cost of calling “long distance” anymore — and it is easy to see that the cream skimming and consumer protection arguments are both smokescreens. Yet it is disconcerting that in the current legal maneuvering this archaic concept has a raft of new believers; those San Antonio taxi drivers, for instance, are convinced that Lyft operators “are skimming only the profitable trips.”

We would love to live in a world where business competition is decided by consumers voting with their wallets, not officious regulators captured by the industries they oversee or an ill-informed judiciary making competition policy choices in the guise of addressing IP rights. A Texas federal court on Wednesday may have taken a modest first step in that direction, denying a preliminary injunction against Lyft in San Antonio. Yet the reality is that legal budgets often offer business executives a far higher return on investment when directed to impeding rivals than making and selling a better product could ever realize.

As Uber’s Corey Owens forthrightly said about Portland’s opposite decision to bar all unlicensed ride sharing services, “Consumers’ interests are getting bulldozed by lobbyists, campaign contributions and cronyism run amok.” So long as legislators and regulators are willing to act as guardians of special interest industries (such as automobile dealers and taxi associations, i.e., those with large war chests) rather than the broader public interest, we’ll continue to see more cases like those of last Tuesday. We’d all be better off if the words of the late Circuit Judge J. Skelly Wright — whose court famously ordered the Federal Communications Commission to let MCI into business over the relentless opposition of AT&T — were remembered. Just as the FCC, he wrote,

is not free to create competition for competition’s sake, it is not free to propagate monopoly for monopoly’s sake. The ultimate test of industry structure in the communications common carrier field must be the public interest, not the private financial interests of those who have until now enjoyed the fruits of de facto monopoly.

How soon we as a society seem to forget this venerable wisdom.

 

  • Dan Horowitz

    Glenn, I defer to your wisdom of litigation.

    But the never ending effort by entrenched incumbent industries to use DC policymakers to defend themselves against new Tech is nothing new. You raise two separate but equally fun-filled issues. Airbnb and Aereo.

    First, Airbnb. (This is easier and briefer.) Glenn, you miss the one KEY issue regarding why so many jurisdictions are becoming more incensed by the disruptive success of Airbnb.

    Money.

    Well, to be precise tax revenue based on the short term rental of rooms. As many folks know, this fight is very similar to part of the fight experienced by Orbitz, Expedia and the other travel sites who assist travelers find a room. Assist, not pre-purchase. In that fight, the established industry (hotels) utilize municipalities to fight a disrupting industry. And the local governments just want their money. I wonder whether Airbnb collects the ridiculously high local hotel room tax or places that burden on the property owner who likely has the obligation to pay on a quarterly basis for their small business?

    ——–

    Second – Its easy to see why folks are getting wrapped around the axle about the questions SCOTUS put forward during the Aereo hearing. Our friends in the Tech industry fear any decision could mean “the Cloud is Falling”. Meanwhile our friends in the content creation and distribution industries can’t decide whether Barry Diller is either attempting another take over of Hollywood or merely another massive disruptive shake up of the industry… or something completely different.

    While industry insiders and advocates have each made advantageous analogies or quoted from past decisions to support their own point of view, it is perhaps most interesting to note that the best example I’ve heard this week was put forward by Geoffrey Manne (Or for greater insight see Jerry Brito’s pointed post on TechLiberation way back in 2012).

    CATV fought this same fight back in 1968, didn’t they? The situation seems pretty much the same. An antenna connected to a really long cable to someone’s TV. The Court’s decision (and substantial lobbying) caused Congress to act (hence cable’s retrans fees). I wonder whether Congress could act now regardless of whether they even should.

    It should be fun to see what the Roberts’ Court will put forward. If I were running the Coalitions work on that project, I would definitely be pushing the work of Manne, Brito and Thierer into the mainstream media, bloggers and before the eyes of the Court…

    – Dan Horowitz

    • J. S. Greenfield

      Retrans did not come out of the 1968 Fortnightly (and 1974 Teleprompter) decisions, and is not part of the 1976 Copyright Act, which makes local retransmission of broadcast stations by cable systems royalty-free, under a compulsory license. Retrans is part of the Communications Act, adopted as part of the 1992 Cable Act, and despite the broadcasters’ frequent mention of it as justification for their position, is not at issue in the current proceeding, and wouldn’t apply to Aereo, even if it were publicly performing.

      As for AirBNB, whatever “bad” reasons there may be for governments wanting to intervene, there is an important issue being ignored here, altogether, that most individuals would consider a legitimate concern. People living in a building not permitted for hotel use can be quite justifiably concerned about the impact on themselves and their home environment, due to neighbors turning their apartments/condos into hotel rooms, and without any regulatory controls whatsoever, no less.

  • Glenn Manishin

    > the never ending effort by entrenched incumbent industries to use DC
    > policymakers to defend themselves against new Tech is nothing new.

    Precisely, Dan!!

Previous post:

Next post: