Regulatory Failure on the Web; Consequences and Solutions
November 17, 2010 Leave a comment
I have argued consistently since the mid 1990s that the global medium (combined Internet and Web) increasingly reflects the global economy and that rational, functional regulation is essential. I started this journey then with a very similar ideology to Alan Greenspan’s before the financial crisis; that self-regulation should be sufficient to prevent systemic crises, but unfortunately in practice it has failed to do so.
Most of the actual regulation in computer networking today is accomplished via manipulation of architecture in one form or another, but technical standards on the web are voluntary, as the Tech Review article The Web is Reborn highlights, which was apparently in response to the article The Web is Dead at Wired earlier in the year. In the U.S. we are really reliant primarily on one form of regulation on the web, other than proprietary architecture and voluntary standards, which is social. Social regulation has evolved with the consumer web, occasionally demonstrating some power—as was recently demonstrated with Facebook security issues, but social regulation has also proven to be self-destructive at times, particularly regarding sustainable economics and jobs. Few if any consumers can see how their actions on the web are impacting their own regional economy or industry, meaning that the blind is often leading the blind towards dangerous hazards in a similar fashion to the housing crisis. Ignorance is being exploited.
Two eras, opposing needs, yet same reaction
In order to provide some context with continuity let’s begin with the PC revolution about 30 years ago when the lack of interoperability allowed Microsoft to extend its growth from the operating system into productivity, communications, and eventually networking, forming one of the strongest strategic partnerships and business ecosystems in history.
During the PC era regulation was essentially outsourced to industry which employed a combination of proprietary computer code, strategic alliances and the failure of others to work together in a competitive manner to establish the standard, which of course led to a monopoly. The political, social and cultural dynamics at play were very interesting at the time, dominated by the view still common today that the only other option was government which couldn’t be relied upon to regulate technology. It turns out that many other forms of regulation exist that can be learned from in natural sciences, physical sciences, social sciences, and architecture, among others.
Among the most important business lessons in the PC era was that Microsoft bet against the abilities of others to work together which when combined with strong execution was rewarded at historic levels. At the time I clearly recall arguments from investors, customers, government officials and even competitors agreeing with Microsoft that the PC revolution was too young for external regulation (which I heard again this week regarding the web), so “let the best man win”. I myself said much the same then—not having the benefit of observing this case (and many others) in what is a very complex, quickly evolving environment.
In hindsight I believe we were correct regarding regulation in the PC era, but only for a very brief time—less than a decade; that’s how fast the big innovation door opened, scaled, and began to close. Our society cannot respond that quickly. This was new territory, just as the web would be a decade later.
In a very similar manner to the PC era the lack of regulation on the early web fostered a highly innovative environment during the very early days, but the era peaked much quicker on the web due to the toxic flood of capital during the inflation of the dot-com bubble; and the web was very quickly taken over by entrenched interests. Opportunity still exists of course, but the dirty secret few discuss is that the failure rate for new IT ventures is very likely at an all time high—no credible statistics exist on the entire ecosystem to my knowledge; only portions thereof. Of course knowledge, experience, relationships, resources and luck play a big role on outcomes, as usual, but lack of effective regulation generally favors and rewards predatory behavior.
The PC was sustaining innovation; the web is disruptive innovation
It’s important to understand that in the pre-network era economic alignment in desktop computing was primarily positive for everyone except direct competitors to Microsoft (or Intel in semiconductors), which was managed masterfully by a brilliant entrepreneur who became the world’s wealthiest human, and supported by many other brilliant people. The world needed a standard for interoperability, and since few were negatively impacted the increases in productivity from authoritarian rule were viewed largely as positive within the social regulation realm, even if only for a brief time. In hindsight government regulation failed not only to prevent the monopoly but also in resolving it. Government was then and still is today complicit in the creation and protection of monopolies, regardless of how they form, particularly in the U.S. and EU within the IT cluster, which is I think driving future industry leaders to other countries.
Once monopoly power sets in it can be very destructive, including to the long-term company culture within the monopoly itself, which provides a strong case to manage market share very carefully. The largest impact, however, is invisible, which usually manifests as aborted innovation within the specific market and industry, lack of adoption of competing technologies, and failed investment, which is evident today in most consolidated industries as reflected by very poor economic performance.
Failed regulation often leads to market failure, which is a real possibility for the web unless a sustainable economic structure is formed. This is essentially the argument behind the claim the “Web is dead”—with Chris Anderson suggesting that the Internet was moving over to wireless devices where a more viable economic structure is forming; customers are far more likely to pay for services rendered in the iPhone structure than the web structure.
As I have often argued since the commercialization of the web, the advertising industry is not nearly large enough to compensate for the economic displacement of industries from the disruption, particularly in the service dominated economies in the West. Silicon Valley, Madison Ave, Wall St. and D.C. cultures still don’t seem to fully understand this reality and equation, or presumably policy would reflect it. China and Germany on the other hand seem to understand the issue with abundant clarity, and are exploiting the situation brilliantly, as is India and others. A nation does not want to be dependent upon a service economy within a global economy that is increasingly delivering services over an ad supported medium; particularly a nation deep in debt that is challenged educationally.
The often misunderstood lesson here is that the PC ecosystem was not a disruptive innovation but rather a sustaining innovation—meaning that it threatened very few. In direct contrast the web is very disruptive—not only to specific companies, but to entire industry clusters, regional, and national economies, which affects everyone on the planet.
Despite this extremely important difference, regulatory schemes reacting to the two very different situations are essentially the same, and will very likely result in a similar outcome unless regulation improves quickly, particularly relating to technical standardization. As market share becomes more dominant in corporate cultures, so does hubris—the cultures become increasingly less influenced by voluntary standard processes or social regulation. Eventually, as we’ve seen in our recent past, the monopoly cultures can even directly challenge the authority of sovereign governments with the potential exist for global companies to actually dominate national policy. Currently Ireland provides a fine case study of why such a situation should be avoided.
I maintain that the winner-takes-all approach of the PC era would be catastrophic for the web and the global economy, perhaps even leading indirectly to civil disruption and conflict. Many wars have been fought over far less economic disruption so in a very real sense this issue is one of national and global security.
So is the web dead or reborn?
The web is primarily lost in a sea of confusion from lack of structure, which is largely due to the lack of effective regulation, which is in turn due to spin from those who benefit from the lack of regulation, and perhaps the impact of that spin on the ideology within our culture. As in all previous standards wars free from effective regulation, a continuous battle rages, albeit somewhat more rational given the global nature of the beast than in previous sector or geographic standards wars.
In an invited letter to the editor in an upcoming issue of a leading publication, I will argue for functional regulation of the web relating to the creation and enforcement of technical standards, which are necessary to achieve security, privacy, and a host of other essential issues, including some degree of certainty for investors and entrepreneurs like myself. It is far more important that credible independent standards exist than what the specific standards are, which is lost on the academic CS community almost entirely. The current scheme is without power, glacial, and entirely without dependability, the latter of which is synonymous with credibility outside of academia.
I will save my detailed suggestions on how such a regulatory body might be structured for my book, but there is an emerging regulatory scheme on the web worth noting within the largest industry. The U.S. health care legislation, as messy as it was, did empower the HHS to determine technical standards for electronic health records, which was tied to funding and reimbursement. While substantially less than perfect, this standards process does appear to have the ability to gain traction due to a combination of initial funding, need for interoperable data, and leverage from other governments around the world to achieve a functional global standard.
Just one example of how this may occur is the relationship between life sciences, government regulation over drugs and devices, and the delivery of health care, all of which will require interoperability in order to function with any degree of efficiency. In the current environment the health care technical standards process appears to be the most functional regulatory path towards adoption of a more intelligent web, aka the semantic web.
While we are all aware of the messiness of democracy, this alternate path towards regulation of standards on the web should not be viewed as a substitute for a rational, long-term solution. Welcoming luck once it occurs is one thing; depending on it for survival quite another. Our economy is too fragile and complex to depend on luck alone. Conflicted interests simply cannot be trusted, whether corporate, academic, or otherwise.