I was reading through an interesting lecture from Balaji Srinivasan back in 2013 thats worth at least skimming through (Lecture 11. Regulation, Disruption, and the Technologies of 2013). In it, Balaji collects example after example of government regulations that at their core are arbitrary and capricious. It’s the inefficiency of government at its worst, choking off innovation for reasons spanning from legacy industries protecting themselves to political actors simply not understanding the technology.
I’m seeing from what I believe to be naïve and idealistic projects in crypto, that the government shouldn’t be involved at all. And in some cases like Bitcoin, maybe it should replace some aspects of the government. My libertarian leanings loved these larger ideas, but they are ultimately a terrible business strategy.
The answer from some in the crypto community is to not play the regulation game. Or worse, to brazenly move forward to create a new system that doesn’t need all of this political mess. Again, I love these ideas in theory, why not privatize most everything since the government is wildly inefficient (and monstrously wasteful). Yet in this scenario, you force a powerful entity to react to you, which is unfortunately a quick way to end the game. You’re ignoring the dangerous gorilla thats in the arena with you.
More frequently, I see companies looking to build a system that is obviously world-changing and beneficial, that will clearly benefit everyone, including the government via new industry, jobs and taxes. This strategy seems to provide obvious benefits upfront. By doing so, the government should just leave us alone right?
Bill Gates thought the same thing in 19941:
The Clinton administration brought antitrust charges against Microsoft after the Windows 95 operating system came preloaded with Microsoft's browser, Internet Explorer. Though the case was in the hands of the Federal Trade Commission and the courts, Hatch brought Microsoft CEO Bill Gates before his Senate Judiciary Committee in 1998, and gave him a good dressing down, ostensibly for being a monopolist.
But it grated on (Orrin) Hatch and other senators that Gates didn’t want to want to play the Washington game. Former Microsoft employee Michael Kinsley, a liberal, wrote of Gates: “He didn’t want anything special from the government, except the freedom to build and sell software. If the government would leave him alone, he would leave the government alone.”
This was a mistake. One lobbyist fumed about Gates to author Gary Rivlin: “You look at a guy like Gates, who’s been arrogant and cheap and incredibly naive about politics. He genuinely believed that because he was creating jobs or whatever, that’d be enough.”
Gates was “cheap” because Microsoft spent only $2 million on lobbying in 1997, and its PAC contributed less than $50,000 during the 1996 election cycle.
“You can’t say, ‘We’re better than that,’ “ a Microsoft lobbyist told me on Friday. “At some point, you get too big, and you can’t just ignore Washington.”
“You can sit there and say, ‘We despise Washington and we don’t want to have anything to do with them,’ “ the lobbyist said. “But guess what? We’re going to have hearings about the [stuff] you do.”
Microsoft now plays ball in Washington, and Orrin Hatch’s public flogging of Gates was a major reason. “It’s been a year since I was in D.C.,” Gates wrote the night before his Hatch hearing. “I think I’m going to be making this trip a lot more frequently from now on.”
To be frank, I would have thought the same thing Bill did; well, we’re creating all of these jobs and adding to the GDP, so wouldn’t they just leave us alone?
Thing is, however you feel about the government, you have to play ball with them. They are the ones who can end your business on a whim, for any reason they choose, and bleed you dry while you attempt to fight things in court, so you might as well find a way to get them on your side. It is an industry full of very large egos all motivated by an electorate that very likely will watch a two-minute news story on how terrible your product is. By extension, the regulators have the power to fine you out of existence, and if I’ve learned anything from Nicholas Taleb, that risk of destruction is more significant than any other.
In some sense, there are many in the space that appear to be repeating the mistakes of the internet companies of the past 20 years. This is what I think separates the successful projects of today with the more idealist companies that are guaranteeing a ceiling on how far they can go. I’m seeing some discussions from what I consider immature leaders stick to their idealistic political principles rather than face the risk that is in front of them.
I want to emphasize that political principles are important, what I’m highlighting is that there are times that the two come into conflict, and the result is a binary choice of life or death for your business. It is this risk that must be faced.
Whatever they think how things “should” be differs from the latest Cease and Desist letter or company-ending fine from the SEC. They don’t care what you think if you don’t attempt to have your say beforehand.
It’s why I’m invested in Chainlink, who has Eric Schmidt as one of their key advisors (along with Balaji Srinivasan, the primary source for most of this post). I followed a link within Balaji’s lecture to an interview Eric did with the Washington Post in 20112. Its difficult not to post the whole thing because its so enlightening, but here are some standouts from the interview (emphasis is mine):
Where’s the disconnect between Washington and Google, or Silicon Valley more broadly?
Washington—having spent a lot of time there, I grew up there and have spent a lot of time there recently—is largely defined by detailed analytical views and policy choices that are not very good. You know, each policy choice has a winner and a loser, right? Somebody’s ox is getting gored. They’re complex arguments: They’re economic and political and social, and everyone has an opinion on those. Here, the arguments are, how do we make something that affects a million people? How do we change the economics of an industry?
And one of the consequences of regulation is regulation prohibits real innovation, because the regulation essentially defines a path to follow—which by definition has a bias to the current outcome, because it’s a path for the current outcome.
So what’s the solution?
I’ll give you a formula. This is an Andy Grove formula. So I’m sitting at this dinner in 1995—Andy Grove was the CEO of Intel—and he gives this speech, and he says, “This is easy to understand. High tech runs three-times faster than normal businesses. And the government runs three-times slower than normal businesses. So we have a nine-times gap.” And I said, “Works for me.” But all of my experiences are consistent with Andy Grove’s observation.
And so what you want to do is you want to make sure that the government does not get in the way and slow things down. We’ve now all developed an ability to lobby about this stuff. We want the government [to understand] if you want to manage something, manage the outcome you want. Don’t specify the technology. Right? In other words, regulate this thing but don’t tell us how to make it technologically. Because if you do, you’ve locked in an incumbent, a specific technological view, et cetera.
So as a leader at Google, how do go about getting the government to think closer to the way you do? It’s been written that Google has more lobbyists in Washington now, donates more money…
You should see what Microsoft did. Come on. Give me a break. The press is so young, they don’t understand the history here. We’re still a small component of what a whole bunch of other companies have done, and certainly most other industries. So I reject all such charges. And I’m very clear on that because people can’t do math. Take the numbers of the amounts of money that go into the regulated industries of all sorts—and then compare high tech, and compare Google in specific, and it’s miniscule.
And privately the politicians will say, “Look, you need to participate in our system. You need to participate at a personal level, you need to participate at a corporate level.” We, after some debate, set up a PAC, as other companies have. And it’s basically in the interest of our customers to do this, because the government can make mistakes. And for every one of these Internet-savvy senators, there’s another senator who doesn’t get it at all. And it’s not a partisan issue. It’s true in both parties.
What’s the answer?
You’re asking it the way an engineer asks. It’s not an answer, it’s a journey. If it were an answer, then after we had done our thing and told everyone to leave us alone, they would have left us alone. That’s not how Washington works. That’s not how government works. It’s naïve, on our part. So the modern model is that we spend a lot of time trying to make sure the government understands how large the contribution is that technology has made to the GDP of the country. One of our quotes: Fifteen percent of the GDP growth has been due to the two-and-a-half percent of the economy that’s IT. In other words, don’t screw that up.
There’s another aspect that’s important to consider. Whatever your feelings about the US government, we should be focusing on making sure it’s our government that has the say on Web 3 and crypto, and to not cede that control to a foreign power. How worse could things be if the EU or China were having the final say on this industry?
It becomes a very delicate game of playing politics, but the more I listen and read from truly successful business practitioners, the more I understand that playing politics is mitigating the risk of an arbitrary shutdown. That comes in the form of everyday citizens complaining to their local politician that your product (for right or wrong) is harmful or inconvenient to them. It also comes from the heads of the agencies that arbitrarily decide whether or not to apply the laws in place, it’s a very subjective game.
This also comes from your competition, which adds a layer of risk in which you have motivated actors attempting to protect their turf. Remember the taxi industry when Uber came about? But Uber is dangerous! We can’t have unregulated drivers all over the city! They must be shut down!
Chris Dixon3 of a16z provides a great example of how this comes about, and an interesting take on how smaller businesses can mitigate this
A common way to think of business regulations is by analogy to sports: the rules are specified up front, and the players follow the rules. But real regulations don’t work that way. Regulations follow business as much as business follows regulations.
Sometimes the businesses that change regulations are startups. Startups don’t have the resources to change regulations through lobbying. Instead, they need to start with regulatory hacks: “back door” experiments that demonstrate the benefits of their ideas. With luck, regulators are forced to follow. . . .
Nextel was one of the all-time great regulatory hacks. In the late 80s and early 90s, the FCC’s rules banned more than two cellular operators per city. As Nextel’s cofounder said, “the FCC thought a wireless duopoly was the perfect market structure”. Nextel (called Fleet Call at the time) circumvented these rules by acquiring local (e.g. taxi, pizza truck) dispatch radio companies, which they then connected to create a nationwide (non-dispatch) cell phone service.
Predictably, the cellular incumbents tried to regulate Nextel out of existence. . . . The incumbents argued that Nextel’s service would interfere with public safety frequencies and therefore endanger the public. They also argued that Nextel’s service would be too expensive . . . And their call quality would be inferior . . . The FCC eventually decided not to block Nextel. Nextel grew to become a top five US cellular operators before it was acquired by Sprint in 2004 for $35B. Their service turned out to be cost-competitive, high quality, and safe. The only thing endangered were the incumbents’ profits.
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.
Over the years I previously considered lobbying and political donations as distasteful and underhanded. Today, especially after several years of watching a new disruptive technology develop, I’m watching in real time why all of these business practices exist. It seems to be a necessary evil because of the risk of not participating is so significant. Additionally, when dealing with technology that can disrupt several industries at once, you potentially have a gauntlet of legacy companies with strong motivations to protect their turf.
I greatly dislike the use of regulations from incumbent industries to secure their markets, yet I see that even that risk calls for a young company to participate in a political process. Regulation can be used as a weapon, so you have no choice but work to defend against it.
Whatever your political leanings or philosophies on how the world “should” be, I believe the most successful companies are aware of the element of how things “are”. They have their foot in both camps, working on products that can move everything to a better place, while operating in today’s system. In simplest terms, it’s mitigating the risk of being thrown out of the game. Another signal to be aware of, if your company is now attempting to use regulation to shut out a competitor, you’re now in the decline.
We are in a time where base regulations are needed just in the sense so we know the rules of the game. As much as I wish that the government didn’t have this much influence, that we were free to innovate and keep the profits of our hard work, that’s not the world we operate in currently.
I believe that good movement on regulation is happening now, especially since crypto and Web 3 is more than a trillion dollar industry (money talks to governments). The government is clearly behind the curve and in an attempt to play catch up, with some obvious overcorrecting in some cases.
It is this critical time where you want to have a say in the matter, to reach out to everyone involved and be a constructive voice, rather than an antagonistic one. The worst case scenario here is to gain the attention of the government in a negative way, that’s the fast lane to getting banned “so that we can study the effects of XYZ” for five to ten years while you run out of cash. It’s a fight no entity can win, so let’s play the game to win the game.
Will
https://www.washingtonexaminer.com/carney-how-hatch-forced-microsoft-to-play-k-streets-game
https://www.washingtonpost.com/national/on-leadership/googles-eric-schmidt-expounds-on-his-senate-testimony/2011/09/30/gIQAPyVgCL_print.html
https://cdixon.org/2012/10/10/regulatory-hacks