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Innovation: At the Crossroads of Technology and Regulation

pranav KumarRegulation has often been considered the bugbear of innovation and the reigning perception among many in the industry is that pace of evolution in the regulatory process significantly lags technological change. While it is true that technology has progressed very quickly and is slated to do so at exponential rates in the times to come, it will be beneficial for us to analyze whether regulation is the demon that it is made out to be. The answers that emerge from this analysis may pave the way ahead for companies and consumers, as well as direct efforts towards greater openness and innovation, which according to Plus Capital, should eventually be the goal for any healthy technology marketplace.

Essentially, three big trends are dominant in the technological world today and they are shaping the world (and not just the digital world as opposed to the physical world) in more ways than we can envisage. The first of these trends is the onset of the on-demand economy, exemplified by the rise and success of companies like AirBnb and Uber, which offer on-demand access to resources. They do so by blending the lines between the digital and the physical – you use your internet-connected device to get access to physical services (accommodation or transportation) without even having to place a single call or stepping out of your seat. The Internet of Things, the next big trend, does something similar by giving a sort of digital identity to practically every physical object that inhabits our space. Big Data is the third piece in the puzzle and in combination, these three trends have led to everything in the world now being networked. Data is all-pervasive and is no longer dependent on only online development to proliferate. In turn, all of this has opened out new vistas for the marketplace; we are witnessing not just competition between old and new technology, but also the creation of new markets and new demand being generated.

Amid this large disruptive dynamic at the fundamental level, I feel that not only have the boundaries between the “real” world and “digital” world been eliminated, but the ways in which we look at almost everything has necessitated a huge change. Not the least of these is the perception that many supporters of innovation have of regulation and the government. In fact, riding this latest mobile technology wave, we are well-positioned to ask ourselves – would these waves have been possible if regulation had innovation in an iron grip? On the other hand, at a time when e-commerce was beginning to gather momentum, it was the government egging it along by actively supporting start-ups and paving the way for a truly innovative marketplace. A potent example here would be Skype. When it had begun to operate, it was considered illegal and fell outside the regulatory structure. The Federal Communications Commission, however, recognized the potential that internet calling had and allowed Skype to function and develop. This is one of the several nascent technologies, including Uber (which was also initially considered illegal) that the regulators did not restrain with a bevy of rules. Of course, as these companies have developed and grown, they have worked with regulators to put the required regulations in place.

Regulators have also worked the other way, that is, they have imposed regulations when it was necessary for the market to grow. A case in point is Microsoft, which at one point had monopoly in the personal computing market, and no new player could innovate. It is only when an antitrust case was filed by the government against Microsoft that the PC ceased to be the only fish in the open internet economy. The entity that Apple is today as well as the rise of the smartphone might not have happened had regulatory action not been taken against Microsoft at that time. In a very recent scenario, regulators once again stepped in to let startups have free play in the market by preventing broadband providers from demanding an extra fee for reaching out to end consumers.

As this open internet economy develops further, the role of regulators will not diminish. In fact, it is set to become more complex and inclusive. A primary reason for this is the potential development of algorithm cartels. It is evident, for instance, that product pricing on platforms like Amazon runs on algorithms and other platforms’ algorithms are in competition. While this leads to cheaper prices being set because of the resultant algorithm battle (and thereby better for consumers in the short term), eventually the competing companies decide that prices cannot drop any lower and get together to set a higher price bracket. In this case, the consumers suffer.

There could be several other ways in which these algorithm cartels could form to the eventual detriment of the consumer. Regulation will play a vital role in ensuring that this does not happen and that true innovation is encouraged. Once again, openness and conversation is needed here, rather than an iron hand. Companies need to convey their interests to the government and the government in turn collaboratively figures out the solutions so that the companies as well as consumers are not harmed. Undoubtedly, access to data is the way to this.

While increasingly more data is being produced, the data transparency needs to go up as well for regulators to evaluate market performance. In turn, as regulation gets more data-driven and less reactive, it also takes on an algorithmic aspect. At the end of the day, we at Plus Capital think that this model will result in more harmonious relationships between the industry and regulators. A huge benefit to regulation itself will be the weeding out of old, irrelevant rules that have become obsolete in the current scenario.

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