As disruptive innovations enter the market with faster velocity and increased firepower, entrepreneurs are finding themselves dealing sooner and more intimately with the law. Sometimes, the innovation is just too new, creeping out consumers and lawmakers who hurriedly work to ban it. Few people remember, for example, that the day after Scottish scientists announced in 1996 the successful clone of a sheep named Dolly, President Bill Clinton issued an executive order banning the use of federal funds for cloning in the U.S and urged Congress to outlaw the technology. (Before that, it had been a subject only for science fiction novels.)
But more often the imposition of legal constraints comes indirectly, the maneuverings of incumbents caught off-guard by something dramatically better and often cheaper than their core products and services. Performing a bit of regulatory judo, they often respond to such threats by pressuring regulators who oversee their own activities to declare the innovator illegal or otherwise in violation of rules that were never designed to cover it. Internet-dispatched limousines and ride-sharing services such as Uber, Lyft, and Sidecar, for example, are dealing with such challenges on a daily basis, as trade groups press local taxicab commissions to prohibit the new services.
Incumbents also run to the courts, filing sometimes-dubious infringement lawsuits based on a yellowing sheaf of patents, copyrights, or trademarks. Implicitly, these lawsuits are often aimed not at stopping the new entrant so much as to slow it down, wasting its precious time and limited funds.
Here, think of the response of the music, film, and other mass media to the advent of digital distribution of content. Much of it, at least in the early days, might in fact have been illegal. But incumbents who continue to rely exclusively on the courts are only putting off the inevitable. The same year the music industry successfully shut down Napster, Apple launched iTunes.
One result of the uncomfortable and increasingly frequent collisions of once-separate worlds of innovation and law is that entrepreneurs now engage with lawyers much sooner in their lives. They must, if only to secure their own patents and copyright or fight off life-threatening lawsuits.
Now, more startups are even opening their own policy offices in Washington, Brussels, and other lawmaking capitals. Only four years into its existence, for example, Twitter opened a D.C. office headed up by a former senior Congressional and FCC staffer. Facebook's D.C. office has almost 30 employees. Google, Microsoft, Yahoo and other Silicon Valley brand names all have their own, often extensive, government operations. For the new breed of disruptive innovators, it's a necessary evil.
Beyond being used both offensively and defensively with lawmakers, regulators, and litigants, legal constraints on innovation are increasingly finding their way directly into product design. In the U.S., the Federal Trade Commission has been using its general consumer protection powers to shape how Internet service providers do and do not make use of user-generated information and other content. (In the E.U., regulators are likewise groping to find ways to enforce more specific, but still undefined, privacy directives.) The buzzword for social media these days is "privacy by design," a concept that unfortunately hasn't advanced much beyond the purely rhetorical.
At the extreme are start-ups created specifically to satisfy legal loopholes, and perhaps to push them open just a little further. Think of these as "barely legal by design." For this category, I've collected several recent examples of companies whose major innovation is to creatively adapt new technologies to old laws.
Perhaps the most interesting is Aereo TV, a start-up launched last year and backed by investors including former Fox Chairman and CEO Barry Diller. For as little as $8 a month or $80 a year, Aereo lets users watch and record TV programs offered by local over-the-air broadcasters and play it whenever they like over the Internet—including on their smartphones, tablets, and home computers. The service is currently available to 19 million residents in the New York metropolitan area, though the company declines to say how many it has actually signed up.
In essence, Aereo offers its customers a virtual DVR for over-the-air channels, and uses the public Internet to replay live or recorded programs on any connected device. But here's the catch: unlike cable and satellite providers, who are required by law to pay broadcast stations for the right to retransmit their programming, Aereo is paying the stations absolutely nothing. And, the company has maintained in several preliminary courtroom appearances, it is not violating any law or FCC regulation.
How's that? The company is delicately threading the needle — successfully so far—of several important court decisions involving copyright law. Indeed, it is little stretch to say that the company's entire business is engineered around those decisions. To make a long story short, it does so by maintaining a tiny antenna (about the size of a dime) for each of its customers — completely unnecessary to accomplish the technical feat but a handy way to fall within the "fair use" doctrine established back when Betamax and Cablevision first posed their technology-based threats to broadcasters.
Aereo is arguing that it is no different than having your own antenna and a VCR at home. Now those are simply located remotely, and you control them through the Internet and not your television.
Not surprisingly, Aereo has been fighting legal challenges. At a recent oral argument, Judge John Gleeson, appeared skeptical of Aereo's business model. He characterized the individual antennas as a technical "fiction" designed solely to shoehorn the Aereo service comfortably between the Betamax and Cablevision cases. "You don't have all these little antennas because it makes any sense," he said. "It's a belt-and-suspenders approach to the Copyright Act."
That's clearly the case. But does that make it illegal? As innovation and law bump up against each other more frequently and in more awkward positions, entrepreneurs might actually be well-advised to wear both belts and suspenders, if not a few dozen other technical and legal forms of support. When a single case can make or break your business, there's no such thing as too much innovation — or too much lawyering.
Larry Downes
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