Part of the charm of successful tech-industry startups is their willful disregard of prevailing realities. They laugh at things as they exist, invent new approaches, and reap the rewards when they get it right.
They succeed, of course, unless they guess wrong and reality bites them in the rear end.
The current boom-bust cycle may best be remembered for the insouciance of a crop of startups that ventured into heavily regulated industries and are only now finding out it’s tougher than they thought to ignore government. The weekend edition of The Wall Street Journal carried news related to three good examples.
The first is Zenefits, an upstart provider of human-resources software that is attempting to “disintermediate”—remember that annoying word from the first Internet bubble?—traditional health-insurance brokers. Zenefits discovered that its founder and CEO might have been a little too cavalier in how the company sold health insurance, a licensed affair. Zenefits dismissed 17% of its staff Friday and is trying to get to the bottom of its licensing issues, which state regulators are investigating.
Formerly high-flying LendingClub also is tweaking its business model because loans it hadn’t considered falling under regulatory scrutiny might be after all. According to the Journal, the company will “give up an undisclosed amount of revenue to avoid potentially being blocked from making loans by state usury laws.”
In a third example, the Journal reports that a variety of financial services companies that had hoped to use social media data to rate creditworthiness have been forced to retreat. The satisfying reason, at least for those who take umbrage at the screw-tradition crowd’s arrogance: Social media companies like Facebook don’t want to give out the data for fear of being regulated themselves as consumer-reporting agencies.
There are exceptions to this trend, of course. Despite setbacks in certain places, Uber and Lyft have thrived by acting first and seeking permission later. Yet by and large the upstarts who assumed regulations didn’t apply to them are getting their comeuppance. They’ll find business will get increasingly tougher, kind of like it is for the boring incumbents they seek to displace.
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BITS AND BYTES
Details of new trans-Atlantic data-sharing pact emerge. The Privacy Shield agreement between U.S. and E.U. privacy officials, which replaces the now-defunct Safe Harbor framework, requires major new oversight by U.S. companies, including limits on how European citizens’ data may be used. The deal requires U.S. companies to resolve issues far more quickly—within 45 days—and also calls for the U.S. to appoint an ombudsman to consider issues independently. The deal hasn’t been officially approved yet. (Fortune)
U.S. consumer privacy efforts move at snail’s pace. President Obama called for stricter—or at least clearer—data controls for U.S. citizens four years ago in anticipation of more Internet-connected things. So far, though, few concrete steps have emerged to address concerns outlined in the Consumer Privacy Bill of Rights. (New York Times)
Global financial regulations study bitcoin and blockchain. Here’s an indicator of just how seriously the financial services world takes digital currency—the G20’s Financial Stability Board has made this topic part of its core policy work. So far, there’s been little regulatory weigh-in globally, although the state of New York has been playing close attention. (Reuters)
Don’t expect Congressional help with the Apple-FBI dispute. Some lawmakers have made cautious overtures, with the idea of finding a compromise. But election year politics are in the way and Congress is too dysfunctional to agree on a solution, according to the top Democrat on the House Intelligence Committee. Meanwhile, the public may not support Tim Cook’s decision to resist a court order to turn over encryption code, but Apple’s shareholders sure do. (Wall Street Journal, New York Times)
This tax appeal will have huge implications for Intel and Alphabet. The Internal Revenue Service is formally challenging the ruling in an international tax dispute with Intel, which inherited the issue when it bought Altera last year. Current laws help U.S. companies reduce the tax liability for foreign profits. What’s at stake is how share-based compensation factors into income calculations. Google’s parent, Alphabet, could gain $3.5 billion in tax benefits if Intel prevails, and more than 20 other tech companies face a similar windfall. (Wall Street Journal)
Facebook prioritizes live video apps. CEO Mark Zuckerberg has added more resources for services that allow the social network’s members to broadcast video to their friends in real time, reports Re/code. This is directly competitive to what Twitter is doing with Periscope. Facebook’s Oculus division is also making video expertise a priority: It recently hired a former Hulu engineer, Eugene Wei, to spearhead these efforts. (Re/code)
Intuit will unload Quicken division by April 30. The tax software company, which is prioritizing cloud tax and operations management services for small business, hopes to raise $500 million from selling three products that are no longer core to its strategic focus. Aside from Quicken, a 30-year-old personal finance application, Intuit is selling the QuickBase database and Demandforce customer management system. (Computerworld)
Peek inside Microsoft’s new cybersecurity command center. The software giant spent more than $1 billion last year improving its encryption, malware detection, and other security technologies. Its new war room, which opened last November, brings together 50 experts from across the company who orchestrate the activities of more than 3,500 employees worldwide. (Wall Street Journal)
Sprint revives two-year contracts. The fourth largest U.S. wireless carrier is reintroducing the option after feedback from customers. T-Mobile abandoned lengthy contract terms in 2013, inspiring all three of its major rivals—AT&T, Verizon, and Sprint—to do the same. This makes Sprint the only U.S. carrier offering two-terms to prospective subscribers. (FierceWireless)
Sorry Apple, your ‘code is speech’ defense might not hold up. Unless you live under a rock, you’ve heard about Apple’s epic battle with the federal government over an encrypted iPhone used by one of the San Bernardino terrorists. The FBI wants a court to force Apple to write new software that would unlock the phone—and Apple is refusing.
One rationale that Apple is using: doing so would violate its First Amendment rights. The company says that software code is a form of speech, and the government can’t force it to “say” something.
The courts may decide the case (which is almost certainly going to the Supreme Court) another way, but for now, the First Amendment argument looms large. Fortune’s Jeff John Roberts offers a plain English guide to what’s going on and who might win. You can read more here.
IN CASE YOU MISSED IT
ONE MORE THING
5 weird gadgets from last week’s big mobile. Interested in a swing-perfecting golf shoe? What about a 3D printer for fresh food? These manufacturers have you covered. (Fortune)