ECONOMIST - A striking number of innovative companies have business models that flout the law

From The Economist 2 May 2015 http://www.economist.com/news/business/21650142-striking-number-innovative-companies-have-business-models-flout-law-shredding

PIONEERING entrepreneurs have often had an uneasy relationship with the law. America’s ruthless 19th-century “robber barons” believed it was easier to go ahead and do something, and seek forgiveness later, than to ask permission first. (It helps if you take the precaution of buying up the politicians who dispense the forgiveness.) The first carmakers had to battle against rules of the road that had been designed for the horse and cart. Britain’s “pirate” radio stations in the 1960s had to retreat to international waters to bring pop music to the masses.

 The tension between innovators and regulators has been particularly intense of late. Uber and Lyft have had complaints that their car-hailing services break all sorts of taxi regulations; people renting out rooms on Airbnb have been accused of running unlicensed hotels; Tesla, a maker of electric cars, has suffered legal setbacks in its attempts to sell directly to motorists rather than through independent dealers; and in its early days Prosper Marketplace, a peer-to-peer lending platform, suffered a “cease and desist” order from the Securities and Exchange Commission. It sometimes seems as if the best way to identify a hot new company is to look at the legal trouble it is in.

There are two big reasons for this growing friction. The first is that many innovative companies are using digital technology to attack heavily regulated bits of the service economy that are ripe for a shake-up.

 The second is the power of network effects: there are huge incentives to get to the market early and grow as quickly as possible, even if it means risking legal challenges.

There are risks .....

 So companies need to be able to pivot to new strategies...

 There may be a lot of such pivoting ahead as disrupters are forced to explain themselves in court. The judge presiding over the Lyft lawsuit has noted that, in being asked to decide whether its drivers are employees or contractors, “the jury in this case will be handed a square peg and asked to choose between two round holes.”

 But for more fragile firms, it would be better still if legislators and regulators responded to the emergence of so many innovative, law-testing businesses by revving themselves up to internet speed and adapting their rule books for the digital age.