Gigaom, October 24, 2012 – By now, we’ve gotten pretty used to the disruption that the rise of the social web has created in the media industry, where it has upended traditional business models and allowed creators of content to connect directly with their audience. But that same wave of socially-driven disruption is now moving through the rest of the economy too — particularly in services that can be easily socialized, such as the hotel business, the taxi industry or the education market. As that wave progresses, we’re seeing companies like Airbnb and Uber and Coursera run into more and more regulatory hurdles, but the writing is already on the wall: service businesses that don’t use social features to lower barriers and increase efficiency will likely not survive long.
Coursera, which offers online-education courses, was recently hit with a regulatory freeze in Minnesota, because the rules for education-related businesses in that state require that they jump through a series of hoops, including filing for registration (and paying fees). The state later modified its views on the service after an uproar about these restrictions, but it is unlikely to be the only roadblock the company runs into as it tries to expand. The reality is that in any number of markets, from education to the hotel industry to broadcasting, regulations haven’t kept up with the evolution of the businesses they are supposed to be regulating.
Entrenched industries and regulators are fighting hard
Airbnb is in a similar position to the hotel industry: the application of social features — which allow owners of apartments, houses, trailers and even treehouses to easily find and connect with potential short-term renters — has changed the balance of power to the point where someone with a spare room has the ability to create a peer-powered business with virtually no overhead. That’s clearly a threat to the hotel business, which is using whatever political and regulatory connections it can to put limits on the company, even as its grows larger: Airbnb is rumored to be talking with Facebook investor Peter Thiel about a funding round that would value it at $2 billion.
It’s important to note that the social aspect of these services is crucial to their success. As I tried to describe in a recent post about using Airbnb, the social element isn’t just a nice addition —it is a key part of how it functions, and why the barriers to entry and transaction costs are lowered as a result. If I hadn’t been able to see that an owner was connected to a Facebook friend, I might never have used it (and they might never have accepted me as a renter). Designing this kind of socially-powered service is something I’m going to be talking about with Airbnb co-founder Joe Gebbia at GigaOM’s RoadMap conference on November 5th.
Uber, the car-scheduling service, has been another prominent participant in this back-and-forth struggle with regulations and an entrenched industry — virtually everywhere the company has set up shop, from San Francisco to New York, it has run into a regulatory morass that is designed to protect the existing taxi and livery industry as much as it is intended to protect consumers. Although New York has been trying to fast-track changes that would make it easier to operate there, the SF-based company was recently forced to withdraw one version of its service.
The service has had problems in San Francisco as well, and is likely to run into similar issues anywhere there is an entrenched taxi industry that is trying to protect its historic market power and profit margins. In New York, for example, taxi “medallions” — which allow an owner to operate a cab business there — sell for $1 million each. That kind of industry isn’t going to appreciate a disruptor like Uber, and in New York in particular the taxi business is a big political player. In many ways, however, Uber is just the thin edge of a larger wedge: also coming are services like Hailo that use an Uber-style service model for the regular cab business.
Disruptive businesses as “regulatory hacks”
As New York-based venture investor Chris Dixon described it in a recent blog post, startups like Airbnb and Uber are “regulatory hacks,” in the sense that they are designed to do an end-run around existing industry regulations — in much the same way the early disruption in telecom was driven by startups which played fast-and-loose with the rules, and eventually forced regulatory change and became the norm. As Dixon puts it:
“Uber is being threatened by the taxi industry, Aereo by the TV broadcasting industry, and Airbnb by the hotel industry… 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.”
The list of these kinds of companies is only continuing to grow: Kickstarter and Indiegogo have not only helped entrepreneurs raise millions of dollars outside the traditional financing industry, but they have also helped trigger changes to federal legislation around small-business funding — and have spawned their own offshoots as well, such as Kickstarter-style platforms that focus on specific niches like raising money for amateur athletes. Aereo may not be a typical startup, since it is backed by billionaire Barry Diller, but it is also aimed at disrupting a traditional business (broadcasting) that is tangled in red tape and controlled by an oligopoly.
There are dozens of other startups such as Lyft and SideCar and TaskRabbit that are trying to bring the peer-to-peer model of social business to different aspects of various industries — even custom manufacturing, where platforms like Etsy and others help creators monetize their services without having to go through the usual channels or middlemen. Regulatory restrictions can impede these kinds of solutions for awhile, or even cause one or two to fail, but the tide of which they are a part continues to advance.