The New Innovation Battlegrounds Are City Hall And The State House

Colorado is currently considering proposals to outlaw Uber and other services that enable passengers to book a car service from their smartphones. Uber and its competitors face similar challenges from Los Angeles to Las Vegas to Washington, DC.

In May, the North Carolina State Senate voted unanimously to prohibit Tesla Motors, the innovative electric car company, from selling cars directly to consumers, including via the Internet. The Texas legislature recently retained similar prohibitions until at least 2015.

Also in May, a New York City judge issued a $2,400 fine to an East Village resident who used Airbnb, the fast-growing online marketplace for home sharing.

What’s going on here? In cities and states across the country, two forces are engaged in battles with major consequences for the future of the Internet and the U.S. innovation economy.

The first force is new ventures harnessing technology–particularly the Internet and mobile–to challenge incumbents in a growing number of industries: From hotels (Airbnb) to rental cars (ZipCar, Turo formerly known as┬áRelayRides, Car2Go) to taxis (SideCar, Lyft, Uber) to car dealerships (Tesla) to parking lots (Parking Panda) to textbooks (Chegg) to lending and fundraising (Lending Club, Kickstarter) to restaurants (food trucks) to boating (Boatband, GetMyBoat) to errand running services (TaskRabbit) to Internet service (Chattanooga, TN; Lafayette, LA; Google Fiber).

Many of these ventures are part of the new “sharing economy.” They are platforms that enable people to share things they own with others for a fee, sometimes called collaborative consumption. The new entrants are benefitting people throughout the country, saving them money, addressing real pain points, and offering new and better services.

And they’re finding large and growing demand: The global “sharing” or “peer-to-peer” property rental market is estimated to be more than $25 billion per year. Analysts predict more than 4 million North Americans will use a car sharing network by 2016.

The second force in these battles is city and state governments, which typically have long and deep relationships with established industries. Not surprisingly, and acting rationally from their perspective, existing businesses have been lobbying state and local officials to restrict new entrants.

And across the country, new laws are being proposed and enacted–and existing but out-of-date laws are being enforced–to protect incumbents from new Internet- and mobile-based competitors.

Our point isn’t that new services present no new issues. But far too often policymakers are invoking consumer protection but acting without a meaningful analysis of the real effects on consumers.

For example, earlier this year, Georgia nearly passed legislation that would have banned communities with inadequate broadband infrastructure from offering their own high-speed Internet service. Eighteen states have passed similar laws.

We’ve seen this before.

In the early years of the automobile industry, the horse-and-buggy and railroad industries successfully lobbied for “Red Flag Laws” limiting cars to four miles per hour and requiring that each be preceded by a man on foot carrying a red flag, ostensibly to protect consumers by avoiding scaring horses and raising excessive dust.

In the 1960s and 1970s, the Federal Communications Commission held back the disruptive communications innovators of the day–cable companies–at the behest of television broadcasters. This slowed down cable roll-out by decades.

In the early 1980s, at the dawn of the cell phone era, the FCC created a mobile duopoly by granting just two wireless licenses per geographic area, including one to the local wireline telephone company. The result? High prices and limited consumer choice–and by the end of the decade, only 1% of Americans had a cell phone.

We’ve seen very different results in the communications and technology sector from pro-innovation, pro-competition policies.

When the FCC in the early 1990s auctioned wireless licenses to new entrants and unleashed wireless spectrum for unlicensed use, cell phone penetration rose from less than 10% in 1994 to 45% in 2001, and innovators developed Wi-Fi, with massive benefits to American consumers and companies. More recently, FCC decisions to free up new spectrum and promote innovation and competition are contributing to a flourishing U.S. broadband economy.

There are lessons here for the current battles in city halls and state houses. We suggest four simple principles for every state and local official considering regulatory decisions affecting the sharing economy and other disruptive Internet- and mobile-based businesses:

Stand with innovation. The benefits of innovation can be hard to appreciate fully early on, but we know from our history that innovation drives consumer benefits and economic growth. Give innovative new services the benefit of the doubt. And where there are issues to address, take a tailored, technology-neutral approach.

Focus on consumers. Consider the full range of benefits new services provide consumers. Most innovators and their investors are putting up their time and money because they see a gap in the market–ways in which consumers are not fully served by existing businesses. The results of a fair-minded consumer-focused analysis might be different than some first instincts. For example, Airbnb and Uber provide insurance to protect consumers; grey-market home stays and unlicensed livery cabs may not. Weigh the benefits of moving grey-market activities out of the shadows.

Keep an open mind. Spend the time to understand new businesses and new technologies, including by speaking with new service providers and their users. Don’t just rely on opponents’ characterizations.

Use the service. Before deciding to regulate an innovative service, public officials should use the service. Because they’re new, innovative services can be hard to fully appreciate without experiencing them–and using them will provide hands-on insights on their benefits as well as tailored ways to address any issues. At the FCC we launched a Technology Experience Center so that agency staff could use cutting-edge communications devices and services potentially affected by agency rules.

Innovation is a core competitive advantage for the U.S. and a primary driver of economic growth and job creation across the country. In today’s fast-moving global economy, capital and talent can flow anywhere. Pro-innovation policies are critical to growing jobs and investment in U.S. cities.

Our history shows that, even when innovative services initially meet legal resistance, eventually we’ve done the right thing–and this has helped make the U.S. the world’s innovation leader. And there are positive signs in local government thinking on the sharing economy–encouraging developments along with the areas of concern. For example, in June the U.S. Conference of Mayors, led by the mayors of New York, Los Angeles, Chicago, San Francisco and a dozen other cities, passed a “Shareable Cities Resolution” urging cities to support the sharing economy and create local task forces to review and address regulations that may hinder it. And earlier this week California proposed allowing ridesharing platforms like SideCar and Lyft to operate legally in the state, which would preempt efforts by cities to block them. This week also saw the launch of Peers, an important new organization supporting the sharing economy.

State and local officials have the power to slow down American innovation, with potentially disastrous consequences for consumers and our economy. But they also have the power to enable and accelerate innovation – and doing that will be a win for consumers, businesses, and government.

By Julius jg.jpgGenachowski, a Senior Fellow at the Aspen Institute and former Chairman of the Federal Communications Commission, and Zachary Katz, a Senior Fellow at the USC Annenberg Center on Communication Leadership & Policy and former Chief of Staff of the Federal Communications Commission.

This blog first appeared on the Forbes website.