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Tech Tuesday: Litigation, Legislation and Regulatory Protectionism

· April 25, 2014

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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.

 

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.

Innovation

New technologies are constantly emerging that promise to change our lives for the better. These disruptive technologies give us an increase in choice, make technologies more accessible, make things more affordable, and give consumers a voice. And the pace of innovation has only quickened in recent years, as the Internet has enabled a wave of new, inter-connected devices that have benefited consumers around the world, seemingly in all aspects of their lives. Preserving an innovation-friendly market is, therefore, tantamount not only to businesses but society at large.