Chicken-and-Egg Disruption: Misunderstanding YouTube, Uber, and AirBNB

AirBNB offers ubiquitous illegal rentals, says New York’s Attorney General. Uber gets shut down or hobbled in new markets around the world. Viacom’s legal department could have wiped out YouTube for ripping off their content.

At one level, you have to ask why somebody would build a business that’s either always illegal or probably going to be used illegally. If you want to be really contrarian, you could try asking that but not rhetorically.

To be fair, these businesses don’t just callously break the rules. They break the rules for a while, then start obeying either those rules or slightly more practical ones.

One popular misinterpretation is that they’re breaking the law and then going legit, like a money launderer whose front business eventually stands on its own two feet. That’s zero-sum going-legitimate, and there aren’t many famous examples because the skills needed aren’t really compatible. (Connie Bruck details some of the unsavory deals that helped Kinney Services grow from a funeral home operator to a global media conglomerate.)

But there’s also positive-sum going-legit: bending a few rules that made sense when they were written and aren’t tenable any more. The laws are going to change, but the only people with money are on the side of the status quo. An entrepreneur’s options are: wait for a legislative miracle and then start your business; or start your business, fend off lawsuits, and eventually drag your industry into the future.

They may not plan that consciously. Probably, most of them don’t. AirBNB was “the thing that would pay the rent until we thought of the big idea.” It wouldn’t occur to someone in 2007 that this would be illegal, because if the law had been written in 2007, it wouldn’t have been illegal. Safety measures and cleanliness standards that only made sense at hotel scale fifty years ago make sense at apartment scale today.

So the cynical story is: crafty hackers find a way to break the law below the radar and eventually get caught and pay a fine. The more accurate story is: founders find an opportunity, build a product people want, and suddenly discover that their app/website and social network got preemptively accidentally banned generations earlier. At that point, they could have shut it down—which would have saved them a few mean Valleywag headlines. But, they’re offering a service that makes sense now and didn’t make sense when the laws were written, so shouldn’t they try to get big enough to change the law?

That requires an ongoing balancing act. They can’t just say “We intend to break the law for as long as it takes to change it.” That’s a good way to lose lawsuits, and it’s hard to attract motivated employees to a criminal enterprise. So they have no choice but to be rampant idealists. Maximizing the value of your options in AirBNB Inc. is an okay motivator to overturn a law, but leading AirBNB the movement is a great one.

Your average hotel, taxi, or IP lobbyist would probably feel ripped off if every law governing commercial transactions had a ten-year expiration date to ensure that the laws got revised in time with technology. But thanks to laws that have to be killed deliberately, the hoteliers, taxi companies, and TV execs have to face down a highly motivated social movement—with VC funding.

| October 29th, 2014 | Posted in economics |

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