Mar 26, 2020

Regulation and Competitive Advantage

A couple of years ago, I was in conversation with a group of technologists and investors at the annual meeting of the Transportation Research Board. This gathering takes place every January in Washington DC. Think of it as the transportation industry's equivalent of Mobile World Congress. 

Our group was discussing the then emerging market for connected cars. I threw in a question about the impact of regulation on their business strategies. Regulation matters in relation to safety, liability and insurance solutions, and data management. Factors such as these matter more to commercial viability than technical innovations. The need to factor regulation into technology choices and business models was evident even then. The universal response I got from the group was that innovators needed to be given the leeway to develop the technology and novel services. Putting it explicitly, regulators needed to stay well out of the way.

The same issues are apparent as new markets develop on top of the foundations of mobile communications. One example is the sharing of consumer data derived from mobile phones [1]. Another is Facebook's difficulties in launching its Libra currency and payments initiative, ahead of regulatory buy-in.

New markets, new rules 


Why is this a good time to revisit these issues and why is the role of government in setting market rules, through legal measures or standardized practices, so important now?

One reason is the stance that the European Union (EU) is taking on the topic of new markets for data. A few weeks ago, the EU announced a data strategy initiative for Europe [2]. In seeking to make the EU a leader in the data-driven society, its proposals will create a new single market. This is generally positive for economies of scale, standardization and innovation.

Once the details materialize, The EU’s proposals will have far reaching implications for businesses and not just in Europe. The adoption of GDPR rules by non-EU firms has already shown the way in the case of personal data.

There have been complaints about the cost and implementation burden of adopting GDPR, especially for startups and small businesses. My informal research on the issue contradicts this view. GDPR provides a framework around which innovators see ways to enhance their core offering by demonstrating a commitment to a high standard of data stewardship. Microsoft is a recent example of an organization that is using GDPR compliance as a competitive differentiator [3] as are others [4].  Another benefit of a rules-based system, in the words of one start-up, is that it helps conforming businesses to differentiate themselves from 'cowboy' outfits.

The EU's new data strategy aims to empower people, businesses and organizations to make better decisions from non-personal data. In the absence of significant buy-in to rules emanating from large markets (e.g. China, India) and gridlock at the Federal level in the USA, decisions made in Europe will establish the foundation for whatever happens elsewhere. An example of the change in influence comes from the recent agreement between non-EU firms such as AirBnB and Expedia to share data with the EU [5]. This outcome follows from a set of guidelines published in 2016. Think of this as a benchmark when estimating the lead time for implementation planning.

The upside of rules 


Innovators that are working to create large, new markets (as distinct from those disrupting existing businesses) face a choice of designing businesses models with short or long-term staying power. Short-run success equates to an exit strategy through which the firm gets acquired. The acquiring organization gets to invest in the changes necessary to conform to regulatory rules. That's because rules and regulation are inevitable in the long run, especially for services that attain mass scale or develop into utility-like businesses.

The EU's new data strategy will draw a critical mass of innovators and investors. It will spawn new value-chains and partner eco-systems, creating opportunities for business model innovation. There are benefits for incumbents to be proactive in planning their solution strategies around new rules. However, this requires a shift away from viewing rules as an onerous obligation. By treating rules as a mechanism for certainty, business can de-risk strategies. They can also avoid betting on not being subjected to eventual government rules that might put them out of business [6].


 [1] FCC proposes over $200m in fines against four largest wireless carriers for apparently failing to adequately protect consumer location data https://docs.fcc.gov/public/attachments/DOC-362754A1.pdf   

[2] European Data Strategy - https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-digital-age/european-data-strategy_en 

[3] Microsoft cloud now ticks GDPR https://us16.campaign-archive.com/?u=625563fede2e41349e3c1ac05&id=69141b735b  

 [4] Championing Data Protection and Privacy - A Source of Competitive Advantage in the Digital Century https://www.capgemini.com/championing-data-protection-and-privacy/   

[5] The Commission has reached a landmark agreement with Airbnb, Booking, Expedia Group and Tripadvisor on data sharing https://ec.europa.eu/commission/presscorner/detail/en/ip_20_194   

[6] London's Uber ban shows how much of the company's business is based on regulatory arbitrage https://www.businessinsider.com/ubers-is-based-on-regulatory-arbitrage-2017-9?op=1

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.