Photo by Bloomberg — Getty Images
By Ron Klain
September 10, 2014

In “Internet 1.0 and 2.0,” the first waves of great internet companies – from AOL and EBay (EBAY) at the outset, to Google, Amazon and Facebook more recently – largely disrupted two things: how we shared information, and how we purchased consumer goods. The two endeavors differ in many ways, but they have one thing in common: they are among the least regulated activities in American life. True, communications disruptors like Facebook (FB) have had to deal with privacy rules, and e-commerce disruptors like Amazon (AMZN) have had to sort out sales tax regulations. But by and large, these were technology companies that found a way to change our world without having to change our laws.

Today’s emerging Internet 3.0 giants (and the “Internet of Things” endeavors of the established web powers) are disrupting very different sectors. These include transportation (from Uber to Google’s self-driving cars), financial services (from non-bank lenders to virtual mortgage processors to peer-to-peer credit to crowdsourcing), energy, education (from MOOCs to companies transforming classroom-based learning) and health care. What these sectors have in common is that they are heavily regulated, at both the federal, state and local level. And for those interested in the intersection of technology and public policy, this means that the next 10 years are going to look very different than the past 10 in several critical respects.

First, what these Internet 3.0 companies are disrupting is not really technology, but regulatory regimes. What makes AirBnb exceptional is not any technological breakthrough, but how it is challenging local hospitality regulation, condo board rules, and all the other limitations on who can charge what and when for short-term housing usage. Crowdfunding sites likewise use technology that has been around for years: what they are disrupting is the vast array of federal and state regulations that govern who can invest in what, and under what terms. The same is true of so many other emerging Internet companies: their impact is far more in disrupting governmental and quasi-governmental rules than it is in technological breakthroughs.

The Internet 3.0 regulatory disruption is reminiscent of a period 40 years ago, when progressive Democrats (including Ted Kennedy) and conservative Republicans rallied behind plans of economic experts (like Alfred Kahn and now-Supreme Court Justice Steve Breyer) to overhaul the then-extensive regulatory regimes that governed the American trucking and airline industries. This bipartisan legal and regulatory upheaval ushered in vast changes in how goods move in our country (enabling companies like FedEx (FDX) and UPS (UPS) to explode in growth), and how people move (enabling new airlines to get off the ground, and cutting airfares by 75% in real dollars since the 1970s). Today, with Washington gridlocked and our politics polarized, it is startups, not bipartisan legislative coalitions, that are challenging outdated regulatory regimes and demanding change.

Second, as a logical extension of the above, it is going to be impossible for the Internet 3.0 companies to succeed without sophisticated and extensive efforts to engage policy makers. In their early phases, companies like Google (GOOG) and Facebook (FB) were famous for “ignoring Washington” – building their companies with as little contact with regulators as possible and trying to fly under the regulatory radar screen. While these companies have now built vast policy operations, this has been relatively recent and relatively late in their development. But the new internet powers are engaging the policy process early and extensively. Last month’s announcement by Uber that it was hiring one of Washington’s most skilled political strategists – Obama campaign manager David Plouffe – was a sign of how seriously and soon these new upstarts are engaging the political process. Chief policy and chief regulatory officers are going to be as vital to budding “Internet of Things” companies as chief technology or chief innovation officers were a decade ago.

Along the way, this effort to disrupt regulation and reform public sectors is going to create strange political bedfellows. Historically, technology firms and their executives have been Democratic-leaning, as they are socially progressive, support education funding and liberalized immigration, and reject the traditional business community views on issues like climate change or universal health care. But the new efforts by internet companies to disrupt regulation will put strains in that relationship, already evident in disputes between many new internet companies (such as Uber and AirBnb) and local regulators.

Still other conflicts will be less predictable. As Internet 3.0 companies tackle fields like biomedical research (including stem cell research) or alternative energy, it may be conservatives and Republicans who defend the regulatory status quo and resist the disruptions that start-ups seek. And efforts to lower the cost and expand the reach of higher education through greater use of online learning have found resistance from both progressive and conservative traditionalists.

Formulating a sensible approach for responding to this regulatory disruption is challenging. Pressure will be put on local governments to engage in a regulatory “race to the bottom,” to attract desirable startups and venture capital investments by being maximally deregulatory. This would be as foolhardy as efforts in earlier generations to attract industrial companies through lax pollution regulation, or to give out tax incentives willy-nilly. Especially where technologies threaten real harm if they go astray – driverless cars veering off the road, or commercial drones zipping above our heads – regulators have an obligation to ask hard questions and get concrete protections for public safety before liberalizing restrictions. Moreover, rules that are neutral and non-exclusionary between old business models and new ones – like requiring anyone who drives others for hire to pass an eye exam or safety test – are likewise legitimate and important, even if upstarts complain.

On the other hand, however, the contemporary analogues of the 1970s trucking and airline rules need reform. Where existing regulatory schemes thwart informed consumer choice, restrict new entry, or require governmental pre-approvals to launch a business for reasons other than public health and safety, these rules should get a hard look when challenged by the disruptors of Internet 3.0. As a progressive, I believe that regulation is vital and knee-jerk anti-regulatory sentiment has harmed our economy in countless ways. But I also acknowledge that some regulatory regimes have become ossified, and exist more to protect incumbents than protect the public. Enabling start-ups to disrupt these regimes will lead to more opportunity for more people – and outside of Washington’s partisan hothouse, that is an objective that should enjoy broad, bipartisan support.

Today’s emerging Internet 3.0 stars are trying to change our laws as much as they are trying to change our technology. The challenge for policy makers will be to acknowledge places where regulatory regimes are outdated and need change – without repeating past mistakes where vital regulations were mindlessly weakened or undermined in the name of promoting growth.

Ron Klain is a former senior White House aide in the Obama and Clinton administrations, who now serves as general counsel of Revolution LLC, a Washington DC-based venture capital firm. The views expressed here are totally his own. Revolution has investments in several sectors – though no company – discussed in this article.

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