
Regulatory Hacks - zachh
http://cdixon.org/2012/10/10/regulatory-hacks/
======
rayiner
The usual term for this is "regulatory arbitrage."

I do want to take exception to one point though:

> Of course regulations that truly protect the public interest are necessary.
> But many regulations are created by incumbents to protect their market
> position. To try new things, entrepreneurs need to find a back door. And
> when they succeed, it will all look obvious in retrospect. Today’s
> regulatory hack is tomorrow’s mainstream industry.

It's really a lot more complex than this. A lot of the regulations that seem
obviously protectionist now really weren't at the time they were implemented.

The FCC is rife with examples of seemingly protectionist regulations because
one of the core parts of its mission is to ensure universal coverage. It
exists to ensure that every little town in the US gets access to the new
communications technologies within a reasonable time.

Things like local monopolies/duopolies are the tool that the FCC uses to get
companies to serve areas that the free market would leave unserved. The FCC
says: "okay, you get a duopoly in Chicago, but you have to build out service
to Belleville, IL."

The taxi regulations operate much in the same way. If taxi companies were left
to their own devices, they just wouldn't operate in the sketchier parts of
town. They'd refuse to drive you to the Bronx. Protectionist regulations are
the concession that municipalities give to taxi companies in return for
forcing them to provide certain services and maintain certain rates.

You'll also see a lot of this in the utility industry. Local monopolies with
guaranteed rates of return are an incentive municipalities use to get
companies to provide power/water/gas to everyone, instead of just the places
where it's profitable.

Municipal regulation is a very complex topic, both legally and in terms of
economic theory. You can't consider the regulations standing alone, when
you're talking about industries that in some way form the infrastructure of
the city or relate to urban planning. You have to consider them in the context
of being alternatives to the cities building out certain infrastructure
themselves as part of their mandate to provide service to each one of their
citizens.

~~~
tptacek
Taxi regulation also serves the purpose of creating consequences for harming
the community. A taxi medallion is valuable. A profile on a dating site isn't.
There is no cost-effective way for us to police every vehicle on the street;
you'll learn this quickly if you get your license suspended when you realize
that basically nothing happens as a result as long as you're a reasonable
driver).

So instead, we create a different class of vehicles, require that only
vehicles from that class can carry passengers for hire, and when those
vehicles are driven unsafely we can revoke their licenses. It's hard to see
how you can reliably revoke someone's online car dating license.

~~~
gojomo
These modern rideservices can expel drivers (from the dispatch-and-payment
system) far more effectively than traditional regulations could suppress gypsy
cabs.

Policies should be driven by real results and demonstrated harm... not by
assuming that the risks/regulatory-tools of decades ago still apply.

~~~
tptacek
Exactly how does Uber reliably "expel" a driver?

~~~
gojomo
Ban their DL. Ban their device. Ban their car tags. Include a photo of their
approved drivers.

It's then at least as hard and probably harder to masquerade to Uber as
someone completely different than it is to masquerade to traditional
regulatory authorities.

Entering an Uber car, my own trusted device can supply me with car and driver
info, including photograph. In traditional systems, I'd have to trust
unauthenticated documents (including car markings) provided by the car/driver.
Such forged traditional documentation can even fool local law enforcement, in
some gypsy cab situations.

And even if someone can occasionally slip into the role/reputation of another
driver in good standing, with that other driver's cooperation, there is still
a chain-of-control/motivation incenting good behavior and allowing punishment
of transgressions (through the accomplice who loans out their valuable
identity).

We would need to empirically study whether this system offers better results,
overall, than the traditional system. I suspect it does: even if you can
contrive a few exploits, they could still be less prevalent/practical than the
weaknesses of the traditional system.

~~~
tptacek
Ok, now imagine there are 10 competing Ubers.

~~~
gojomo
Straining one's imagination is a bad way to inform policy. Observe, don't
imagine.

There won't be 10 Ubers: the reputation angle and network effects strongly
favor a few large recognizable operators. And maybe just one!

But even if there were 10: accident, citation, and criminal records are easy
to check. Consumers will prefer the branded/authenticated services which self-
police most effectively.

Traditionally, this may have been a problem needing regulation: at the moment
of flagging a streetcab, the fare was at the mercy of the provider, with
minimal authentication/reputation information available.

Now with the modern mobile-dispatched services, this problem is obsolete...
like the problem of needing to buy a paper street map when arriving in a new
city.

~~~
tptacek
You have to strain your imagination to see 10 competing companies? This is
another bias routinely evident on HN: we think of public policy for new
business models solely in terms of the best-known operator of that model; it's
not about regulating livery, it's about regulating _Uber_. No.

~~~
gojomo
You don't have to change the subject to be about _my_ capacity for
imagination, or some bias you perceive in _other_ HN conversations.

There aren't 10 such companies now. There might never be. Nor is there yet any
evidence of consumer harm.

Imagining the worst when it might never materialize is a bad basis for policy.
Especially with all the new factors which provide stronger, more-immediate
checks on bad-actors: many of which apply to one operator or 100 equally well.

Why not give them a chance to work before constraining new operators to an
ancient system which (a) disappointed customers with scarcity; and (b) got
captured by incumbents?

~~~
tptacek
You don't design public policy based on the interests and controls of one
single private company.

~~~
gojomo
This thread began with me describing the general case, "these modern
rideservices".

I happen to think there will be few of these modern rideservices, rather than
many, because the matching/reputation market has natural monopoly
characteristics. But that's just an aside.

The tech/market/reputation checks I've been describing don't depend on Uber or
any particular company. They are inherent to the category. I am making a case
for the modern mobile-dispatched-and-billed rideservices category, not Uber
specifically.

(My guess would also be that the average customer is more likely to someday
face economic 'harm' from an eventual dispatcher monopoly, than from the sort
of dangerous/abusive/unaccountable car/driver issues that you've been
mentioning. But those sorts of antitrust concerns also need to be handled in
retrospect, after observing how they develop, and not based on anticipatory
paranoia about what might someday happen.)

------
tptacek
Airbnb and Uber are running up against regs problems. Is Aereo? Aereo is being
sued by rightsholders, who argue that as the parties that fund the creation of
content, it should be up to them how to commercialize it. Copyright isn't
regulation. Copyright infringement is a tort.

The regulatory hurdle Nextel faced is also different from the ones Airbnb and
Uber face. If you took Airbnb out of the picture, it's unlikely that HN would
be so friendly towards the idea that giant hotel corporations should be able
to operate with zero regulations.

But if Marriott must be regulated, it's reasonable (though not dispositive)
for them to note that it's unfair for them to be structurally disadvantaged by
competing with businesses that effectively arbitrage regulations (and, more
importantly, regulatory enforcement).

~~~
rayiner
AirBnB is classic regulatory arbitrage.

Basically you have a type of business, a hotel, that creates a negative
externality in an area. You have regulations and zoning that attempt to
minimize that negative externality, or at least isolate it to commercial
areas. Then you have AirBnB arbitraging those regulations to profit.

~~~
tptacek
There is a fraction of Airbnb's client base that is purely regulatory
arbitrage --- the people who buy buildings and rent out all the rooms on
Airbnb.

But there's also a large fraction of Airbnb's business that is generating
value. The 4-bedroom 2-storey townhouse in W'burg that Airbnb has isn't
available on the hotel market at any price, and the owner of that very
valuable property has lots of incentive to keep it up, but because he's at
Cornell for the next several years, the house is a cash-flow drag to him.
Everybody wins when he carefully rents it out on Airbnb.

The challenge is to come up with a system of regulations that works for both
circumstances.

~~~
guylhem
I'd say that both are generating value.

The people who buy building and rent out all the rooms or Airbnb provide a
liquidity the market needs - they are doing something "of value"

If they do that for profit, odds are they are making money and the next best
use of these buildings would bring less money.

~~~
tptacek
Mob hotels generate value in the hotel market the way an illegal tire fire
generates value in the waste management market.

------
nostromo
Of the companies mentioned Aereo is clearly the biggest hack.

The regulation that having a single antenna for multiple subscribers is not ok
seems to inevitably lead to Aereo's one antenna for each subscriber - and
ultimately antenna farms.

Having (someday) millions of redundant antennas in rows to avoid copying
signals to meet an outdated regulatory requirement is so hilarious, I'm
tempted to call it entrepreneurship as social commentary.

~~~
rprasad
Aereo is not a regulatory hack, at least not in the context that the other
companies are regulatory hacks. It is a business model designed according to
what courts have said is legitimate commercial activity involving visual
media. It's not trying to bypass existing rules or regulations; rather, it is
very carefully modeled to work within what the courts have stated is
appropriate. (It is an open question as to whether courts will deem its
business model to run afoul of IP laws.)

AirBNB, Uber, etc., are/were regulatory hacks because they are/were attempting
to flout or "bypass" existing rules and regulations in their various markets.
In AirBNB's case, rules against hoteling; in Uber's case, rules against
unlicensed cab and livery services. The difference from Aero: there are no
enabling laws or interpretations of existing laws that actually state that
what AirBnB or Uber does is (legally) acceptable, but there are plenty of
existing laws and regulations that state what they are doing is not
acceptable.

------
bcks
It always struck me that a legal hack was Microsoft's real, core innovation --
the whole OEM installation agreement, more than anything to do with the
superior quality of its operating system. It took decades for the regulators
to catch on.

