In the tech world, there seems to be a constant game of cat and mouse between the tech giants, which try to reinforce their dominance, and the regulators, which try to rein them back in. A recent paper from Ivey Business School highlights how the regulators are often one (or more) steps behind the tech firms at all times.
“Central to the emergence of these business model innovations is a willingness on the part of the innovator to challenge the existing norms and regulations of the market they are entering,” the authors explain. “For example, Mark Zuckerberg adopted the mantra ‘move fast and break things’ at Facebook until 2004, while Travis Kalanick listed ‘toe stepping’ and ‘principled confrontation’ among Uber’s corporate values.”
Asking forgiveness
It has long been the mantra of tech firms that it’s better to ask forgiveness than permission, and this underpins a notion that normal rules and norms don’t apply to them.
“These born-digital founders moved quickly, and they took advantage of the ambiguous rules in their respective markets to colonize the new market opportunities that had opened up,” the authors continue. “Policymakers and regulators, in contrast, were generally slow to understand how the business world had changed and were slow to adapt.”
As is so often the case, they began by trying to coopt existing regulations to the new landscape, but they were largely ineffective and it quickly became apparent that new regulations would be required to cope with the digital era.
Approach to the rules
The paper highlights that tech firms have generally taken one of four approaches to rules put in place by the regulators:
- Nullify, in which they act as if there are no rules for them to break. This was an approach taken by Google when they rolled out Street View.
- Sidestep, in which there are known rules out there, but the company attempts to circumvent them by reframing the situation. Uber is an example of this.
- Finesse, in which gaps and loopholes in the rules are sought. Airbnb is an example of this, as they compete with hotels but not under the same constraints as hotels.
- Conform, whereby the rules are adhered to.
“The boundaries between these categories are blurred, especially between the sidestep and nullify tactics,” the author explains. “A large part of what has allowed these born-digital firms to succeed is that the definitions of market boundaries, and the jurisdiction of the regulatory bodies that oversee them, are … open to discussion and contestation.”
Regulatory response
Regulators have reacted in various ways to new technologies:
No response: Some innovators operate with little to no regulation. For example, Upwork runs largely unchecked, and Airbnb often ignores local rules that apply to hotels, such as building safety standards.
Decisive action: Sometimes, authorities use existing laws to shut down new ventures. Flytenow was closed for violating federal aviation rules, and Napster was shut down for breaking intellectual property laws. Some cities banned Uber for not following local taxi regulations, and the FDA temporarily stopped 23andMe because it considered its technology a medical device. Both Uber and 23andMe later resumed operations with revised business models.
Negotiated rules: Often, new laws are created to address the specifics of digital businesses. Uber and Lyft faced early lawsuits about whether their drivers were freelancers or employees. In a key 2015 case, the judge said the choice was like trying to fit a square peg into a round hole. The ruling favored Lyft, but a later California law (Assembly Bill 5) said drivers were employees, though this decision was contested.
These responses show how difficult it is to fit new business models into old legal systems.
“Ultimately, we need better laws, laws that aren’t designed for the industrial era,” the author concludes. “Bit by bit, our regulations are being reshaped for the digital era. But it’s a painful process of transition.”
