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Digital innovation is giving rise to new business models. Uber and Airbnb are household names today when not so long
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ago we were all learning about the sharing economy. But regulations don't always evolve as quickly as uh technolog
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technological change at least that's a perception. Uh so what should policymakers and regulators do? Here to
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talk about some his some of his insights is uh Wharton professor Kevin Warbach. He recently wrote a policy brief for the
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pen Wharton policy public policy initiative. Uh welcome Kevin. Thanks. Glad to be here. So in your article you
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mentioned something called the internet of the world. Can you tell us what that is? Well I think there's something big
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going on and it's it's a bigger trend than most people realize. There are
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three trends that each in of themselves is significant. One is uh what we often call the sharing economy. I think it's
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really more the ondemand economy. It's not just about sharing resources, but
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services like you mentioned like Uber and Airbnb which give ondemand access to resources. The second piece is the
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internet of things, all kinds of devices, billions and billions of devices gettingororked. And the third is
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big data and analytics, the ability to understand and manipulate trends coming out of all those devices. What those
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three things together mean is that all of the world potentially isworked. It's
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not just that you go somewhere to a computer, you go to your phone to get access to information. It's that
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potentially everything is a generator of data and all that data can be integrated
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and analyzed and processed and manipulated. Um, and so what that means is the kinds of trends and the kinds of
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developments that we saw online are now happening offline. they're happening to
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things and physical objects in the world as well. You also point out that the scale of ondemand services is
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potentially much greater than the legacy industries they challenge. How so? So there's this uh kind of cheap talk about
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new technologies disrupting old technologies. And actually the theory of disruptive innovation which goes back to
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Clayton Christensen at Harvard Business School is a a serious academic theory. Uh but far too often people in business
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and entrepreneurship and the media kind of use the word disruption as just kind of a synonym for new technology. And the
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reality is it's not that you have one market and suddenly a bunch of new companies come in and replace that
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market. Often what happens and this is what we're seeing with things like ondemand economy is that the new markets
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are different. So it's not that Uber takes the taxi market and every taxi gets replaced by an Uber driver. Uh in
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fact Uber has put out some numbers for the past several years that show that the scale of the market they are tapping
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into is actually much bigger. So they generate far more revenue in the cities where they are mature than the taxi
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industry as a whole does. So what that means is it's not just a competitive threat and certainly it is a competitive
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threat to the incumbent industries but it's creating something new. It's
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unlocking latent demand that the previous approaches didn't reach. You also say that um you also pointed
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out that throughout the different techn technological waves since the 1990s we went through e-commerce, social media,
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now mobile that regulations have always been seen as an enemy of innovation. But
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you say that this digital dichotomy is actually misunderstood. Can you explain that? Sure. So there's two pieces to it.
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One is the term that you reference that I use in the paper called the digital dichconomy. That is a misunderstanding
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that the online world is inherently different from the offline world. Uh and the reason that's not true is what I
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said at the beginning. Um increasingly there is no difference even if you're
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using a physical thing. So take the Uber example and it's such a perfect example.
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Uh the per there's a person there's a physical person driving a physical car
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but from your standpoint running the app and pushing a button and saying make a car appear. It's as though that's
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something that's in cyerspace. It's as though it's something digital. an
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extension of the software infrastructure of Uber. Uh even though it's a physical
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thing, a physical person driving a physical car. Um and so we tend to assume that there's one set of rules for
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the real world, there's one set of rules for the digital world. And that's a
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mistake because increasingly there is just the world. Software, technology, networks, all these trends in what I
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call the internet of the world are affecting everything. So that's the first piece. the assumption that uh we
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can just ignore the rules of the physical world because we need totally new rules for the digital world. Um the
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larger issue though uh is this question of innovation and regulation and again there's this common assumption that
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innovation needs to thrive with no regulation and anytime government gets involved that's a check and a drain and
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a block on innovation and that's not really the case and what I talk about in
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the article you referenced uh and the larger larvy article it's based on is that if you go and look at the history
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uh how the internet developed how electronic commerce developed in the 1990s A surprising amount of the time it was
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government action actually facilitating innovation and uh the emerging startups actually pushing for that government
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innovation to help create a more innovative marketplace. That's an interesting point and uh in your article
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you also pointed to uh one challenge for regulators and that is um a lot of these
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new startups don't really fit neatly into industry categories. So uh and the
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example you pull up you use is uh Uber versus Skype. Can you go through that example? Sure. So I should be clear.
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It's not that regulators always get it right. They make mistakes and they have
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lots of flaws and lots of reasons why they act in a certain way. Uh and we should definitely criticize bad
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regulations. Um we just shouldn't assume necessarily that they are bad and necessarily what what startups do is
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good. Um the Skype and Uber comparison is basically that both of them were companies that when they started were
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illegal in most jurisdictions. So Skype which is the very popular internet communication service originally voice
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calling now also video and messaging and so forth eventually now owned by Microsoft. Uh Skype was illegal in most
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of the world when it launched because there were rules saying you could not do a communication service, a telephone
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service outside of the existing regulatory infrastructure in the US because of what we did. I was at the
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Federal Communications Commission in the 1990s when we had to think about voiceover IP. We very deliberately left
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open the door. Even though things like Skype were outside of the regulatory structure, we made a conscious decision
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to allow them to develop. And that's an example where regulators consciously
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deciding not to impose a whole set of rules early on when these were nent technologies allow them to grow. Um so
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Uber is similar. Uber is illegal in most of the cities where it operates. Uh and
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the story of Skype I think is a hopeful story because what happened with Skype is that first of all you had regulators
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like the FCC in the US who understood that these new internet calling technologies were an opportunity. They
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were a way to lower prices and create better service and new service and innovation. Uh and so that we shouldn't
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rush to impose all the traditional rules on them. And then as these companies grew, they were able to work with
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regulators to address the rules that were necessary. So for example, it's a concern if you're using Skype or some
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other voiceover IP service. What if you want to call 911? What if you have an emergency? Um those services were all
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outside of the infrastructure of the emergency calling system. And that's a problem if you have your phone and which
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app you're using determines whether if you have an emergency you get through to
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the police or the fire department. Um that's a technical problem that was overcome through regulators working
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together with the companies. Um and it could only be done by a willingness to not immediately impose rules that would
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have shut these companies down on day one, but work through how they can actually help in addressing some of
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these concerns. And I think that's the path forward for companies like Uber and
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Airbnb as well. What we've started to see is they began with this very strong
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keep no regulation, keep it away from us. Uh, and gradually we're starting to
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see them recognize that they need to work together with the regulators. But don't you think there's one critical
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difference between Uber and Skype and that is, you know, with Uber there's the
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issue of safety of the users or the writers, but that's not the case with Skype. So the example I gave about the
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911 service, the emergency, that's a safety issue. Um but no question uh all
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these companies are different. Uh and it's not the case that there's one set
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of rules, there's one regulator that applies to everything. Um I'm making the
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general point that these new services that spring up outside of the traditional regulatory structure. Um
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they raise public policy issues uh and you can't get away from that. So Uber
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raises a whole host of issues. It raises issues about worker treatment. It raises
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issues about safety of the people in the cars as you mentioned. raises issues about the Americans with Disabilities
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Act. Do they have to provide access for people in wheelchairs and so forth? All these issues. Um, and the way to address
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those issues is not to say it's new, so therefore regulators stay away, they'll
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figure it out. The way to address them is to say, okay, let's look at the issues. So, um, is there a way to
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address what we really care about in safety? What we care about is you don't
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want people to get into a car and someone be an axe murderer who's driving the car. All right. there's different
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ways that we can solve that problem and and maybe there are solutions and in fact Uber because they have all this
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data and they've got an app and they know everything about the driver maybe there's a better way they can solve that
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problem. Um so the way to work that through is to have that discussion and say identify what it is the regulators
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are trying to do and figure out how we can do that. The problem is initially so much of the reaction was the regulators
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are necessarily bad. um they have nothing to do but to stop the innovation. Uh and I think that's not a
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helpful conversation. Uh your point is that government can actually be a positive force in innovative markets.
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Can you give us more examples of that? Sure. So we saw a lot of examples with the growth of the internet and
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electronic commerce starting 20 years ago. Um one of them was the antitrust case against Microsoft. So Microsoft was
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the dominant company on the personal computer with the operating system market and lots of startup companies,
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companies like Netscape realized if they wanted to innovate, they wanted to build
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the internet economy as we know it today, you couldn't have Microsoft standing there using its power at the
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time. It's hard to realize today with what's happened, the growth of Apple and
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the growth of smartphones and so forth, just how much power Microsoft had as a bottleneck. Microsoft controlled access
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to the PC and the PC was the only game in town. Um, had it not been for that action by the government in filing that
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antitrust case, Microsoft may have been able to warp or slow down the growth of the open internet economy. And it turned
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out most of the startups were on the side of the government in that case wanting to open it up. Um, a similar
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more recent case is the fight over network neutrality rules where lots and lots of startup companies went to the
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Federal Communications Commission and said, "We don't want broadband providers, the access providers, the
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internet service providers or ISPs as they're called to stop us from getting
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into the market or to basically tax us to say, well, you can only get to customers if you pay us this special
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fee." Um and so they were actually urging government to act in order to create a more open market. Great. Um you
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also say that ondemand services would bring what you call algorithmic competition policy questions to the
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four. Why is this important? What do you mean by that? This is a really interesting issue. So competition
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policy, I gave the example of Microsoft um is tremendously important to the digital economy and uh the Microsoft
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case was an example where there was a new kind of uh business model. Microsoft was one of the first to build this
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platform network-based business model where Windows benefited from all the applications on top of Windows. uh but
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Windows would always want to uh ensure that none of those applications would then compete with it. Um and there was
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tremendous benefits of that model. You know, Microsoft did great things for innovation. Uh but uh the Microsoft case
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put a spotlight on some of the dangers and the downsides. What we're seeing now
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with these next generation platforms, these ondemand platforms is a new twist on that model. Um companies like Uber
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and Airbnb are built on algorithms. are built on software that understands supply and demand uh and matches people
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on both sides of the network. Um and again that's a tremendous boon for competition and innovation. I'm not
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saying it's bad by any means but it does put the platform owner in a position of
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unimaginable control. Um how do you know that what you are paying for that Uber ride is the efficient price? Uber says
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well by definition it's what the algorithm gives you. Well but who controls the algorithm? Um, and what
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stops the algorithm from colluding with someone else's algorithm uh behind the
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scenes to fix prices? And again, we have antitrust doctrines about things like price fixing, but those are based on
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people in a smokefield room saying, "Okay, you're going to charge this and
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I'm going to charge that and if you defect." Um, now it's all happening
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silently through software. Um, and so I think this is one of the great competition policy challenges of our age
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is how to prevent those kinds of mechanisms from uh raising costs and raising prices and hurting consumers
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while still allowing flexibility for companies to innovate and do things that most of the time actually wind up uh
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helping consumers. So that brings us to the point you made about algorithmic cartels. So how could
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those come about? Uh well so again uh the algorithms can talk to other algorithms and we see this um already
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you look at uh pricing on Amazon.com. So Amazon has this platform that allows anyone else to sell on Amazon.com and
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they can set their price and a lot of the companies that are sophisticated that do this uh set their prices
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algorithmically. So they might say Amazon is charging this price automatically charge 2% less than
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Amazon's price. So when it comes up they're the cheapest price. Um, but what
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happens is you get this increasingly complex uh war between the algorithms because they're all basing their prices
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on each other and so forth. And what can potentially happen is uh companies decide well no let's both agree we'll
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set a price higher as opposed to competing and a race to the bottom and we'll both be better off but who's worse
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off is consumers. So um that's a concern that we're starting to see on platforms
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like Amazon and it's more of a concern on these digital ondemand platforms where again everything is in software uh
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and where you have lots of different actors coming together um and uh we don't even know what the mechanism is to
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get access to the data to see if that's what's happening. So how do you regulate
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that? Uh well so it's a good question. The first is you start to have a conversation where the regulators say
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here's what we're trying to achieve and the companies say here's what we're
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doing and you figure out what's possible. Um ultimately as I said there needs to be access to the data. Uh and
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this is a great opportunity because these new platforms generate tremendous amounts of data. uh and if they uh and
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they use the data internally to be more efficient and to provide better service,
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but if they could provide more transparency of that data um that would give regulators the opportunity to
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identify what the market performance is and this can be done in a secure way in a way that doesn't uh harm them with
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competitors and so forth. um but it's actually making the regulation itself more algorithm making the regulation
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itself more datadriven which is a healthy and a good thing and so I think this is potentially the new model we're
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going to come to uh but it takes the company's willingness to work together and not to you know make these sort of
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great you know statements uh that oh we don't need any regulation so you mentioned alternatives to direct
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direct regulation which are self-regulation and what you call co-regul regulation and delegated
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regulation. Can you explain the differences among all those? Yeah, these are models that actually are used much
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more widely elsewhere in the world, especially in Europe for things like internet content. Um, and there's a
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whole variety of different models, but basically u they start with the notion that um companies individually and
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industry collectives and industry groups um potentially know the most about their
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market. uh and if they're well-meaning, they can come up with mechanisms that
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achieve the goals of regulators without government having to be intrusive and without government having to be
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inefficient. Um because regulatory agencies don't have the data and they're
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not set up to operate in that way. The problem is you need some accountability. So just saying let companies regulate
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themselves is meaningless because there's already always incentives for companies to cheat or to game the system
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or to basically help themselves at the expense of the public. Um but there's a
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variety of mechanisms where for example government sets goals and then gives industry or either individually or
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industry groups uh uh opportunities to meet it and then to report on how they're doing and again to provide
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transparency of the data. Um they're mechanisms that basically say all right
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in the first instance you have this opportunity to act but if you don't act in a way that we find appropriate then
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we're going to intervene. Um and uh again there's a variety of different
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variations on these mechanisms. Uh but it's an approach that says instead of
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everything starts with the regulator the regulator says yes or no before anything
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happens in the marketplace. It says, "All right, companies can come into the
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marketplace, especially new companies." Goes back to what I was saying before,
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nent small innovators, should have lots of running room. Uh because even a good rule will kill them off when they're too
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small. Um but that doesn't mean that when you've got an Uber, which is a $65
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billion company, it's one of the, you know, the largest companies in the world, even though it's not even public,
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and has hundreds of millions of uh people that it's serving around the world. They're not a small company. um
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they're fairly new, but but they're now a large player that's having big
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impacts. It doesn't make sense to say that that approach makes sense for them
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anymore. Um so the question is, can we allow them in and then have a process to then collaboratively have them work with
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government uh and have them be more transparent? And again, there's a variety of ways to do that. And I'm not
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arguing for any particular one as being perfect. I'm arguing for an openness and
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a recognition um that um regulation isn't a dirty word. Any final thoughts for policy makers and regulators?
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Um so regulators have to take action here too. It's not that they need to just stay where they are and expect the
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companies to come to them. Um often there's lots of legacy in regulation and
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some of it is regulators fault and some of it is the fault of for example the legislators that set up the rules. Um, a
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lot of what we're seeing in these markets is the need for legislative change, for um, governments to change
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the structure of the rules because the rules use terms that no longer make sense or they have categories that no
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longer make sense. Um, and so there needs to be a lot of dialogue between industry and regulators and legislators
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to say, all right, where are these glitches? Let's fix them. Um, and regulators need to be part of that and
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not to just assume that the status quo is the right approach. Um, regulators also need to be open. They need to go to
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these uh companies and say to them, "Okay, we have shared goals here. We're
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not here to put you out of business. Um, but we care about consumers and we trust
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that you do too. So, let's let's come up with a solution." Um, and so it really
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has to go both ways and and ultimately this is about trust. There needs to be a mutual process of generating trust
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between these industries and the regulators. Um, and in a lot of cases that's lacking, but I'm hopeful and I
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think the examples that we saw with the growth of the internet really are a story about um, good work on both sides
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uh, that facilitated this extraordinary explosion of innovation and wealth creation that we saw. That's very well
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said and thank you so much for joining us. Thanks. My pleasure. [Music]