Case Study in Political Regulatory Risks for Business Planning

By Chris Oates

Mark Zuckerberg once famously said that his motto was “Move fast and break things.” He has since walked back that comment, and a Harvard Business Review article from 2019 argued that the era defined by this constant drive for disruption is over.

According to its author, Hemant Taneja, MD for General Catalyst, ““Minimum viable products” must be replaced by “minimum virtuous products”—new offerings that test for the effect on stakeholders and build in guards against potential harms.”

This is true, but it is not the whole story. Companies like Facebook and Google must not only prepare themselves for potential “harms” - which gets us into an ethical discussion about what constitutes harm - but for the power of those who believe that they are harmed.

Tech startups need to be aware of regulatory risks when creating their business model, not only of existing regulations, but of new ones that might emerge in reaction to their growth, as Facebook and Google have found.

What happened?

The Australian Government in April 2020 started the process to enact the News Media Bargaining Code and it is expected to pass Parliament this month. It requires tech platforms that display news content on their sites to compensate the publishers, with an arbitrator required if the two sides can’t reach an agreement of the revenue generated.

Both Google and Facebook protested the proposed law when it was released but have taken opposite paths since. Google has agreed to a deal with News Corp and is negotiating payments with others. Facebook blocked all news articles, with its ban even extending to non-profits and public policy organizations.

Forecasting politics

There will be lots to dissect about what this means for the relationship between tech platforms and content providers, as well as the results of a natural experiment where Facebook is no longer a source of news in a country (similar to Liverpool’s ban of The Sun for decades and the possible impact on Euroscepticism)

But what stands out to as the most shocking is that this is a surprise at all.

Facebook and Google are built on selling advertisements which were previously the foundation of newspapers. Newspaper ad revenue has fallen by more than 50% from 2006 to 2017 and more than 20% of newspapers in the United States have closed over the last 16 years.

The question is not whether Facebook and Google should have built this model, but why they did not see the obvious consequences of the model, and the reaction of those impacted by it.

What did Facebook and Google expect? That journalism would continue to bleed ad revenue, shut up shop, and do nothing? Journalism is a pillar of democratic society, a public good, and has close connections with government. A reaction was almost certain, and forcing platforms to pay for content was a fairly obvious way that reaction might manifest.

Proofing business models

I am not arguing that Facebook and Google were right or wrong to create a business model that undermined journalism. That’s a discussion for a different day. But they were certainly wrong to create that business model and not understand its risks.

All businesses exist in a legal, regulatory, economic, and political environment. In the same way that a startup tries to forecast the market they’re looking to enter and the reactions of their competitors, they should also try to forecast how the political world might react or change.

This is a common practice for MNCs investing in expensive physical assets in volatile countries, like an oil company building pipelines through Central Asia. As Facebook and Google have discovered in Canberra, all countries can become volatile if your business model assumes no change in your legal environment even as you disrupt industries.

The tech sector, I would argue, is particularly ill-suited to understanding regulatory risks.

Whether it’s that there is an intense focus on the technical aspects of the product, that customer acquisition is often the biggest focus of attention in the early days, or the natural blind spots that most people have to the negative consequences of their passion projects, the tech sector seems to constantly run into these issues.

Taking steps in advance to understand and plan for these political risks can be the difference between growing smoothly and shutting down abruptly.