The disruptive economy is nigh, or so most new start-ups would have us believe. It is gospel among new and fast-moving start-up companies that routinely set their sights on global markets. Many do this with firm belief in the insight offered by Clayton Christensen[i] (and more essentially, Joseph Schumpeter) � that innovators can exploit new technologies[ii] to serve previously ignored markets (often at the bottom), refining their offerings while being ignored by complacent incumbents, until they can begin to steal away customers and potentially reshape entire industries. The list of industries witnessing disruption is rapidly increasing � examples include Uber for transportation, AirBnB for hospitality, Amazon and Alibaba for buying and selling physical goods, iTunes for digital content and WhatsApp and Viber for communication. A lot of us no longer hail taxis because we can �Uber it� and fewer people physically visits stores because they can �1-click� it on Amazon.
While it is certainly true that disruptors� success can be attributed to betting on early technologies, innovative business models and untapped markets, their focus on these heretofore disregarded spaces often lends them an additional competitive advantage � that of lower regulatory burdens. Laws often lag behind industry � decisions on regulating new markets are complicated by confusion on how to intervene even in the best of times � and disrupting firms ensure that they maximise on that delay[iii]. It is fair to argue that the abilities of Uber, AirBnB and WhatsApp to offer customers prices that are fractions of those charged by taxi services, hotels and telecom operators are buoyed by the latter�s need to adhere to existing regulations. These regulations are (more often than not) designed to protect consumers, promote competition, secure government revenue and (in some cases) protect incumbent firms. It is fitting then that increasingly, there are calls for regulation in disruptive industries from consumers, competitors, governments and those being disrupted.
The demands on regulation from incumbents facing disruption take one of two forms � that the regulatory requirements applicable to them either be extended to such new firms or that incumbents be relieved of the requirements as well[iv]. They argue that governmental intervention (one way or the other) is necessary to ensure fair competition and a �level playing field� � this holds true from traditional licensed taxi services to telecom operators. On the other hand, demands from disruptors for governments to step in and ensure competition is considerably more muted � understandable given their aversion to regulation as well as the fact that such firms often bank on the disrupted market becoming �winner-take-all�, which state intervention would seek to prevent.
While incumbents and competitors form the first wave of demand for regulatory intervention, eventually the greatest potential source of pressure for regulatory intervention however is consumers themselves. As the spaces within which transactions take place continuously evolve, frameworks that are competent to identify and enforce the resultant rights, responsibilities and liabilities as well as resolve occasional disputes become increasingly necessary. While unsupervised disruptors might occasionally seek to respond to consumers� apprehensions (Uber and Amazon advertise their in-built reporting and reputation systems while AirBnB insures users staying in homes accessed via its system), they are also known to ignore their own minimum standards – user elation over Uber�s low prices and ease-of-use was eventually dampened by incidents of assault by unverified drivers.
As a result, users are increasingly dissatisfied with purely contractual frameworks within which they have little bargaining power and no collective representation[v]. Hence the beginnings of demands on governments to ensure the protection of consumer rights. These demands are intensifying as consumers better understand their relationships with disruptive firms – this is true for example with regards to the analysis and use of customer data � there are reports of e-commerce and travel websites charging consumers differently based on factors including their purchase history, browsing history and even choice of platform (mobile or desktop, and even Apple Mac or Windows)[vi]. At the same time, consumer demand for government intervention goes both ways � including for the protection of benefits they see from disruption (as seen in the vigorous consumer movement to ensure Net Neutrality).
It is important to note that the apprehensions that lead to demand for regulation are not just limited to the transactions themselves. They entail larger debates about the trade-offs between privacy and convenience, and even the rights of labour (the argument that most strengthened the Luddite cause) and inequality (most recently outlined in the work of Thomas Piketty)[vii] . And while we may often believe that larger disruptions to our lives are a long way off, technology has a way of sneaking up on us � Amazon�s usage of drones might be a few years off but a pizza store in Mumbai piloted drone delivery (pun intended) last year.
Regulation has its work cut out for it as it faces the unenviable but essential task of balancing the needs of technological progress against those of present day citizens. When the ever-prescient John Maynard Keynes remarked upon the possibility of widespread unemployment from humans discovering means of �economising the use of labour� faster than �the pace at which we can find new uses for labour�[viii] , he could have been talking about Google�s driverless cars as much as any artefact of the industrial age. His follow-up optimism that �this is only a temporary phase of maladjustment� and that �in the long run […] mankind is solving its economic problem� could well depend on knowing when to regulate, and when to not.
—Sirus Libeiro and Parnil Urdhwareshe
[i] Christensen, Clayton (1997), �The Innovator�s Dilemma�.
[ii] �Technologies� here also include new business models.
[iii] In cases where governments do react rapidly, regulation can often suffer from poor quality. The results of this regulation can be ineffective at best and counter-productive at worst. Uber illustrates this – it regularly operates in many countries (arguably successfully and with consumer support) with disregard for laws attempting to rein it in.
[iv] These arguments are particularly common in telecom, where existing operators argue that disruptive services such as WhatsApp and Viber �free-ride� on the significant infrastructural investments made by incumbents to offer competing services.
[v] For some innovations based on two-sided markets, this includes producers as well. There are reports of Uber drivers (who are also car owners) unhappy with their lack of bargaining power in the traditional contractual framework, with responses including attempts at unionisation. (http://citypaper.net/uberdriver/; http://observer.com/2015/02/uber-drivers-are-scrambling-to-make-ends-meet-after-latest-fare-cuts/)
[vi] http://www.washingtonpost.com/posteverything/wp/2014/11/03/if-you-use-a-mac-or-an-android-e-commerce-sites-may-be-charging-you-more/; http://www.livemint.com/Opinion/BfgodGLHFjYT4QfMkbCeWM/I-am-a-hypocrite.html
[vii] Piketty, Thomas (2014) �Capital in the Twenty-First Century�; Mr. Piketty�s analysis goes to show that the returns on capital (including in the form of disruptive technology) outpace those on growth. An approximation of the argument is advanced by the Economist � �other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it� (http://www.economist.com/blogs/economist-explains/2014/05/economist-explains)
[viii] Keynes, John Maynard (1930) �Economic Possibilities for our Grandchildren�