How more regulation for US tech could backfire

by HBR

February 14, 2018 | 5:45 pm
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If 2017 was the year that tech became a lightning rod for dissatisfaction over everything from the US presidential election to the possibility of a smartphone-driven dystopia, 2018 is already shaping up to be much worse.

Innovation and its discontents are nothing new, of course, going back at least to the 18th century, when Luddites physically attacked industrial looms. Hostility to the internet appeared the moment the web became a commercial technology, threatening from the outset to upend traditional businesses and maybe even our deeply embedded beliefs about family, society and government.

Given the proliferation of new products in recent years with their ever-deepening reach into our lives, the tech revolt of 2017 shouldn’t have come as a surprise, especially to those of us in Silicon Valley.

Still, the only solution critics can propose for our tech malaise is government intervention — usually expressed vaguely as “regulating tech” or “breaking up” the biggest and most successful internet companies. Breakups, which require a legal finding that the structure of a company is enabling anti-competitive behavior, seem now to have become a synonym for somehow crippling a successful enterprise.

Of course, nobody thinks tech companies should be left unregulated. They all pay taxes, report their finances, disclose significant shareholders and comply with a range of employment, advertising, consumer protection and anti-competition laws, to name just a few.

There are also laws specifically designed for tech firms, including those limiting how internet companies can engage with children. In the U.S., commercial drones must be registered with the Federal Aviation Administration. And genetic testing and other health-related devices must pass muster with the Food and Drug Administration.

There are growing calls, likewise, to regulate social media and video platforms as if they were traditional print or broadcast news sources, even though doing so would almost certainly run afoul of the very free speech protections proponents are hoping to preserve.

But perhaps what tech critics really want are more innovative rules. Traditional regulations were designed in response to earlier technologies and the market failures they generated. They don’t cover largely speculative and mostly future-looking concerns.

What if, for example, social media companies learn so much about us that they undermine — intentionally or otherwise — democratic institutions, creating a tyranny of “unregulated” big data centers controlled by a few unelected CEOs?

The problem with such speculation is that it’s just that. Legislators and regulatory agencies must weigh the often-substantial costs of proposing limits against their likely benefits. Unfortunately, there’s no scientific method for estimating the risk of prematurely shutting down experiments that could yield important discoveries.

Breaking up the most successful internet and cloud-based companies only looks like a solution. In reality, it isn’t. Antitrust legislation is meant to punish dominant companies that use their leverage to raise costs for consumers. Yet the services provided by technology companies are often available at little or no cost. Many of the products and services offered by Amazon.com, Apple, Google, Facebook and Microsoft — the internet giants referred to by The New York Times as “the frightful five” — are free for consumers.

More to the point, breakups almost always backfire. Think of the former AT&T, which was regulated as a monopoly utility until 1982, when the government split the company into component long-distance and regional phone companies. The sum of the parts  actually increased in value — except for the long-distance company, which faded in the face of unregulated new competitors.

Then, over the next 20 years, the regional companies put themselves back together, and, with economies of scale, re-emerged as a mobile internet network and pay TV provider, competing with cable companies and internet-based video services like YouTube and Netflix. What started as a regulatory punishment for AT&T led to an even bigger network of companies.

On the other hand, the constant threat of a forced divestiture can be disastrous for consumers and enterprises alike. IBM prevailed against multiple efforts to break it up along product lines, but was so shaken by the decadeslong experience that the company became dangerously timid about future innovations.

There’s an alternative to applying random and unproven regulations to emerging technologies: simply wait for the next generation of innovations and the entrepreneurs who wield them to disrupt the monopolists, thus stopping their disagreeable behaviors.

Today, it might seem that the frightful five have unbeatable leads in retailing and cloud services, social media, web search, advertising, desktop operating systems and mobile devices. But the landscape of business history is littered with the corpses of supposedly invulnerable giants.

In the early years of the internet, a half-dozen companies were serially crowned the victor in search, only to be unseated by more innovative technologies soon after. Yahoo and others gave way to Google, just as BlackBerry faded in response to the iPhone. Myspace collapsed with the introduction of Facebook. And Napster lost in court (no new laws were needed for that to happen), leaving Apple to create a viable market for digital music.

The best regulator of technology, it seems, is simply more technology. And despite fears that channels are blocked, markets are locked up and gatekeepers have closed networks that the next generation of entrepreneurs need to reach their audience, somehow they do it anyway — and often embarrassingly fast, whether the presumed tyrant being deposed is a longtime incumbent or last year’s startup darling.

That, in any case, is the theory on which U.S. policymakers have nurtured technology-based innovation since the founding of the republic. Taking the long view, it’s clearly been a winning strategy, especially when compared to the more invasive, command-and-control approach taken by the European Union, which continues to lag on every measure of the internet economy.

Or compared to China, which has built tech giants of its own, but only by limiting outside access to its singularly enormous local market. And always with the risk that too much success by Chinese entrepreneurs may one day crash headfirst into a political culture that is deeply uncomfortable with the internet’s openness.

That solution — to stay the course, to continue leaving tech largely to its own correctives — is cold comfort to those who believe that tomorrow’s problems, coming up fast in the rearview mirror, are both unprecedented and catastrophic.

Yet, so far there’s no evidence supporting the predictions of a technology-driven apocalypse. Or that existing safeguards — both market and legal — won’t save us from our worst selves.

Nor have tech’s growing list of critics proposed anything more specific than simply calling for “regulation” to save us. Perhaps that’s because effective remedies are incredibly hard to design.

(Larry Downes is a senior fellow with Accenture Research and a co-author of “Big Bang Disruption: Strategy in the Age of Devastating Innovation” and “Unleashing the Killer App.”)


by HBR

February 14, 2018 | 5:45 pm
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