Remember the good old days, when Silicon Valley was all about creating cool stuff, taking risks, and making people say, “Wow!”? Now it seems the headlines are much more focused on the valley’s encounters with government: The heads of Google (0) and Facebook (1) were called to Europe to face calls for increased regulation, the Federal Communications Commission (FCC) wants to regulate the Internet (2) and set-top boxes (3), and European telcos (4) are calling for app regulations that would hinder their US competitors.
What happened? As I explore in this post, tech firms have satisfied almost every rule for ensuring undeserved government regulation. This is sad because many of these growing regulations are slowly cutting off the very oxygen that has made US tech great.
Rule #1: Be successful
Tech can’t help but create successful people and companies because of the value it adds to the world. Forbes’ 2015 list of the 25 wealthiest Americans (5) include nine from tech, up from eight last year (6). Its list of the 25 largest public companies (7) for 2015 includes at least five from the tech sector.
Why does success lead to undeserved regulation? The primary reason is that politicians and regulators can gain political support by appearing to stand up to powerful players or extracting concessions (8) from profitable companies, especially foreign ones (9). For example, the EU, having made numerous headlines with the record-breaking (10) fines it imposed on Microsoft (11) and Intel (12), is being lobbied to regulate (13) Google and Facebook because of the scale of their reach.
Rule #2: Serve a lot of customers
This is similar to being successful, but the issue here is how many citizens or voters politicians and regulators can claim to save, protect, or otherwise benefit with their regulations. The more the merrier. This puts a lot of successful tech companies in the crosshairs. With more than 1.5 billion (14) monthly active users, Facebook’s user base is larger than China — the world’s most populous country — by a margin of approximately 140 million people. Microsoft is comparable with 1.5 billion (15) Windows users, as is China-based Tencent with about 1.5 billion (16) users in its QQ and WeChat services. Google has 1.17 billion (17) unique searchers per month, which is almost equal to the number of inhabitants in the world’s second-largest nation, India (1.25 billion), but more than three times the size of the US population. Whatsapp is next, with about 900 million (18) users. Apple has sold more than 700 million (19) iPhones. The numbers drop off pretty fast from there. With the exception of Tencent, each of these companies and services has been targeted by US and EU regulators.
Rule #3: Threaten others’ business models
As famous Chicago-School economists noted many years ago, businesses seek regulation to limit — or eliminate — competition. Customers generally like Uber, but taxi companies are suing (20) to stop the newcomer. European telecom companies want to impose the regulations they face on Facebook (21) and other social media. Google and other large edge providers may have pursued net neutrality rules as a way to limit competition (22) from upstart web content providers.
Rule #4: Invest heavily
Businesses that have put down large investments (23) are particularly vulnerable to opportunistic politicians and regulators — in other words, those that apply regulations once it is too late for these businesses to divert capital. The idea is simple: Once a company, such as an Internet Service Provider (ISP) or edge provider, has sunk its investment, it cannot pull up its fiber optics or undo its research if regulators decide to change the rules. Customers are able to enjoy the value created by the investment because it cannot be reversed, and the politicians and regulators are able to take credit for being “consumer-focused.”
Rule #5: Have secrets
News organizations jump on stories where there are secrets to be uncovered. And politicians and regulators respond to news. Suspicions over trade secrets, such as Google’s proprietary search algorithms and Apple’s iPhone encryption, invite media attention and attract government officials who want to be in the news.
Rule #6: Have regulations with catchy names
Ever wonder why net neutrality isn’t called “application neutrality,” the “antidiscrimination principle,” or prohibitions against “restrictions based on inter-network indicia,” even though all of these names are used in Tim Wu’s 2005 article (24) defining net neutrality? They lack marketing power. All three lack alliteration. At least two have too many syllables. And the last one is, well, not very intuitive for the non-engineers among us. Also, who could be against neutrality? In part as a result of the attractiveness of the name, the list of regulations falling under the net neutrality umbrella has grown and continues to grow. Just as companies are tempted to extend (25) the number of products sold under a single brand, the marketing of new regulations works best if the public has already bought into the overarching brand name.
Rule #7: Attract attorneys and consultants
Regulations create cottage industries of attorneys and consultants who debate the issues. Net neutrality, for example, has attracted a host of pundits and advocates that have formed (26) large international coalitions (27). It has also spawned numerous lawsuits and regulatory proceedings in the US (28) and elsewhere (29).
Can we break the rules?
It will be hard for tech to break out of this situation. Rules 1–5 are tech DNA. Rules 6–7 are beyond tech’s control. The best chance for getting the right kind and right amount of regulation is to have laws that require evidenced-based regulations (as opposed to regulation that qualifies as an economics-free zone (30)) and regulatory leadership that values sound regulation over politics.