We could call Uber and Aereo “loophole startups.” While Uber provides rides and Aereo delivers TV signals, both have been entering established markets through a regulatory loophole.
Uber’s loophole was their app. Because customers were not “hailing” their ride service on the street, the vehicle that picked them up was technically not a taxi. Consequently, Uber did not have to observe taxi regulations and licensing requirements that would have obliterated its growth.
Aereo believed they could legitimize their TV service by claiming they were transmitting a “private performance.” Aereo has “antennae farms” that grab broadcast signals from the major networks. As one of their customers, theoretically (and maybe really?) for $8-$12 a month or so, one of those antennae is yours. Sort of like putting a pair of old fashioned “rabbit ears” on your TV, Aereo just gives you your own signal that lets you to watch slightly delayed programming whenever you want to view it.
Where are we going? As sources of disruptive innovation, Uber, Aereo and other entrepreneurial firms like them needed legal loopholes to legitimize their existence. Always though, a threatened status quo can pressure government to close those loopholes.
That takes us to the US Supreme Court. On Wednesday, in ABC Inc. v Aereo, a majority of the justices said that Aereo was in fact transmitting a public, not private performance. (Tech Crunch perfectly distinguished between public and private performance when they explained that it was “the difference between charging tickets to show a taping of a Lady Gaga performance and singing a Lady Gaga song in the shower.) With existing copyright law mandating retransmission fees for public performances, that meant Aereo would have to pay ABC, CBS and other broadcasters for any signal it delivered to its customers.
The Court emphasized that its decision was to be narrowly interpreted. It applied solely to Aereo. Other technology products and processes would not be affected.
As for Uber, in the US and beyond, with taxi cab drivers protesting, some governments have responded. The state of Virginia, for example, has said that Uber is operating illegally as an unlicensed cab service. Meanwhile, to our list of loophole startups, we could add AirBnB. While they say private individuals are providing places in which others can legally temporarily reside, the hotel industry disagrees.
Our bottom line? Government has the power to nurture entrepreneurial activity through an unencumbered market or to use regulations and licensing that protect a status quo.
Let’s create a list of “loophole startups.” In a comment, please let us know what you would add.