Why Industry Vets Should Play Nice With Startups

from the rather-than-regulating-them-out-of-existence dept

What's the secret behind the most successful tech startups? No, it's not having founders with perfect SAT scores or sealing a dozen coders in a room with cases of Red Bull. The answer often has more to do with refining and capitalizing on an established idea, than with conjuring up something new out of thin air. Or, as Isaac Newton quipped in 1676, "Success is standing on the shoulders of giants."

More than a dozen search engines were already online by the time Google's Sergey Brin and Larry Page debuted their hypertextual search algorithm, redefining the browser landscape. Netflix reimagined the DVD rental market – and upended an entrenched business with disruptive technology – by cutting out the brick-and-mortar rental barrier. And Pandora found a way to let listeners customize their own radio stations, with or without advertisements, while still paying artists royalties to play their music.

So why, in a culture that praises disruptive technology and innovation, do policymakers keep looking for ways to regulate promising new startups into oblivion?

Over time, incumbent business models build protectionist walls to help stave off competition – walls like regulatory hurdles that new competitive businesses have to clear before they can operate. We see this tension at play today as a number of innovative startups run into protectionist barriers supported by industry giants. Uber, for example, is fighting through one roadblock after another from the taxicab industry as the company struggles to gain market share in new cities. And as Airbnb offers travelers new options when they're on the road, it's in the crosshairs of city regulators and hotel lobbyists across the country.

When the costs of regulatory policies are diffused and the benefits are concentrated, the interests of the incumbents often begin to stray from the interests of consumers. Consider the 1984 Sony Betamax Supreme Court case, which pitted the behemoth movie industry against the emerging video recording device market. In that case, the court ruled that time shifting did not infringe on copyright law, and today the thriving home movie market rivals the box office, ultimately giving us more options for our Saturday night entertainment.

Often, benefactors have strong incentives to support protectionist policies, so they push for both greater regulation and enforcement. They seek to exclude new business approaches even when they provide consumers benefits like lower prices and more options. Just look at how TV broadcasters reacted to streaming-TV service Aereo – entangling the innovative startup in a lengthy legal battle that also made its way to the Supreme Court. Ruling in favor of the broadcasters, the court's decision ultimately hurts consumers, providing them with fewer choices for pay-TV service.

How do industry mainstays fair in highly-regulated economies? You don't need to be an economist to predict what happens next. Research suggests businesses of all sizes operating in strictly-regulated environments are often less productive. A report published this year by the Mercatus Center found over a four year period the most regulated industries experienced 33 percent growth in output per person, and a 20 percent increase in unit labor costs. Does that sounds like good growth to you? Before you answer, consider that over the same period the least regulated industries experienced 63 percent growth in output per person and a four percent decline in unit labor costs – yes, the cost of labor dropped with less regulation – which almost always translates into lower prices for consumers.

Any time new businesses pose even a perceived threat to the current profitability of existing incumbents there is a strong urge to sweep these new businesses into the existing regulatory framework, often at the expense of consumers' best interests. But it's time for legacy businesses to stand up for themselves and look for ways to adapt and innovate, rather than cower behind over-regulation. A closer look at disruptive innovation over the last decade reveals a strong tradition of industries cropping up next to preexisting industries and bolstering the overall market – for industry vets and startups alike.

There are dozens of examples of how industries have figured out how to pivot and adapt in order to compete with emerging technologies. Look at Makerbot's 3D printer, which is disrupting traditional manufacturing while providing innovative solutions for producing items that are otherwise hard to get. In response, traditional manufacturers are finding ways to incorporate 3D printing technology into their own practices for product development and testing. Apple's iPod changed the way we listen to and buy music, breathing new life into an industry plagued by piracy. And Amazon's Kindle has changed the book publishing industry by revolutionizing the way content is brought to consumers.

If the research holds, these markets – when not hindered by large regulatory burdens – should show strong productivity gains and broadly benefit consumers. Technology can be used to make markets more efficient by getting products into the hands of those who will use them the most and gain the most from their use. In other words, it helps balance otherwise lopsided markets, where suppliers and buyers weren't matching for any number of reasons.

The most successful startups haven't stumbled upon an entirely new service offering – they've simply found a better way to do something that's already being done. Rather than fighting a tsunami of change and potentially drowning the disruptors that strive to improve consumer choice, incumbent businesses should find ways co-opt technological solutions and in turn produce change themselves.

Shawn DuBravac is the chief economist of the Consumer Electronics Association (CEA), the U.S. trade association representing more than 2,000 consumer electronics companies. Follow him at @Twoopinions.

Filed Under: competition, innovation, legacy companies, opportunity, startups