Guilty or not, the Regulators are Coming

By Olivier Blanchard - August 2, 2017

Purpose and justification: Hounds, quarries, and the nature of the chase

If you’re a large enough company, sooner or later, a regulatory body will come after you. Maybe you’ll have done something to deserve it, but then again, maybe not. That part doesn’t really matter. It should, but it doesn’t. Unfortunately, wrongdoing – or a reasonable presumption of wrongdoing – isn’t as important to that dynamic as most people think it is.

While regulatory bodies are generally politically-agnostic, they aren’t apolitical, meaning that while “left” and “right” may be irrelevant to their activities – and ultimately, their decisions – they aren’t divorced from the everyday politics of power. At their core, regulators must regulate. It is their function, just as investigators must investigate, and prosecutors must prosecute. In other words, regulatory bodies, like all other organizations tasked with a specific function, must justify their existence on a regular and continuous basis. Marketing departments have to spend their budgets and come up with campaigns that generate KPIs. Quotas or not, police departments are expected to contribute to the municipal coffers by issuing a certain volume of traffic citations. Regulatory bodies are no different: It’s what expected of them. Unfortunately, how they go about achieving that goal isn’t always as neat and objective as we would like it to be.

Whenever regulators can find organizations that are guilty of something illegal or unethical, great. Everything works the way it should. Bad behaviors are quashed. Order is restored. Life goes on. When they can’t, or an investigation turns out to have been a waste of time, that’s clearly less great, but it can work too. The objective is still exactly the same: justify your existence. Do the thing you are here to do. Regulate. You don’t have to drop the hammer on everyone as hard as you can. All you have to do most of the time is wield it, and show that you can and will use it. How hard it comes down on an organization that you have been investigating for months or years is less important than making sure that it does. Why? Because you don’t want to be the regulatory body that wastes millions of taxpayer money on investigations into huge companies, and turn up a big goose egg. No one wants to be on a podium reading a statement like “after investing 92,000 man-hours into this investigation, we have found no evidence of wrongdoing.” In that world, that isn’t how you ensure your own professional longevity or how you maintain your agency’s authority and power. No one who rises to a position of senior authority within a regulatory ecosystem is going to operate that way. (People who do don’t last very long.) If you go after a company, you had better produce a win of some kind or you will have failed to produce the desired outcome. Power fades when it isn’t being applied.

What this means is that once a regulatory body notifies you that a complaint has been filed against your company, and that an investigation has been launched, you can rest assured that your organization will ultimately be found guilty of something and fined. The only two questions left to answer beyond that are “how long will this take” and “how much will this cost us?”

And here is the catch: In one way or another, the house always wins. And if the house always wins, it means that on some level, the game is rigged. How rigged the game is depends on who you are dealing with, and those differences can be vast. Depending on the region or country, regulatory commissions and agencies can be entirely independent and well-meaning, they can be de facto instruments of the state, or they can be influenced by a powerful regional competitor.

If your company is large enough to do a significant amount of business in the EU, the United States, South Korea, Taiwan, Russia, or China, for instance, those nuances aren’t merely academic. They are practical, everyday realities. Regulators can be motivated by fair trade practices, or nationalism and protectionist policies, or personal interest, or a dozen other things. Some governments can and will use regulatory bodies to extort desired outcomes from companies, or hobble them in order to give local competitors (the home team) a leg up, for instance. And sometimes, governments aren’t the problem: The human factor is. One person with a powerful desire to make a name for himself – or herself – can turn a perfectly good regulatory agency into a personal instrument of ambition. Same with prosecutors. Same with courts. Same with anything, really. They say that power corrupts. I say that it doesn’t always, but it does open a mighty big door to all sorts of abuse that many people, if given the opportunity, will find themselves motivated to take advantage of. Don’t ever make the mistake of assuming that regulators (and courts) are all on the same page or playing the same game. Understanding who falls into which bucket is the first order of business, because motive always informs action.

Knowing this, how you negotiate your way forward depends on your ability to read the regulatory terrain and play by the rules set forth by the gatekeepers. Not just the official rules, the unofficial ones too. Perhaps especially the latter. One good rule to live by if your company is an industry leader, or a potential threat to a powerful organization’s agenda, or attracts too much attention in the press, is that no matter how large and successful your company may be, you are never on your turf. You are always on someone else’s. If nothing else, regulators will always make a point to remind you of that fact. Google, Apple, Amazon, Microsoft, Qualcomm, it doesn’t matter. In this equation, you’re never the hound. You’re always the quarry.

Why this discussion is crucial to the future of technology

Why am I talking about this? Several reasons:

First, because technology isn’t just about the tech. We can’t always just talk about technology for its own sake. There is far more to technology disruption and digital transformation than features and capabilities. Technology is about impact, and change, and process. As analysts, we are tasked with understanding why things happen, and what their effect will be. Our job is to dig, and ask questions, and find answers, and share them to the best of our ability. So here we are. We have to cover this.

Second, because technology is an integral part of the fabric of our lives now, and because it is always tied to intellectual property (IP), it means that the fabric of our everyday lives is now tied to a whole lot of IP. (A + B = C, therefore A + C = B.) How regulatory bodies around the world rule either for or against fair business practices, open innovation, and the right of companies to protect their IP from infringement or theft, matters more today than it did a decade ago. And as we move towards 2020 and a decade that is sure to bring radical changes to the way our economies and markets operate, keeping an eye on regulatory bodies cannot be an afterthought. We have to be proactive about it. We have already touched on the importance of the fight between Apple and Qualcomm, and how the outcome may decide the future of innovation for the next 20-30 years. (If you haven’t read it, you need to.) This is not hyperbole or an abstraction. A few poorly reasoned decisions by key regulatory bodies could have a devastating impact on the pace of innovation, fair competition, and economic outcomes that stand to affect billions of people around the world.

Third, this topic isn’t one anyone can expect to understand reasonably well overnight. It takes time to get there, to get the lay of the land, to understand who all the players are and how they operate. Understanding the nuances between the FTC, the EC, the NDRC, and the KFTC, for instance takes diligence and discipline and time. If we start focusing on this topic now, we’ll all be a lot further along in six months than if we wait until the next big decision or ruling to start talking about it.

Seeing through the smoke requires laying down some basic foundations

The first and most important lesson to be learned from this discussion is that regulators never go home empty-handed. Once a complaint has been filed against a major company (oftentimes by a disgruntled competitor), and an investigation has been launched into the matter, that company can forget about walking away Scott-free. At the heart of this observation lie two cardinal insights:

Just because a regulatory body files a complaint or brings a suit against a company for alleged wrongdoing doesn’t mean that the company is guilty of wrongdoing. It just means that the hounds have been let loose in the field.
And just because a regulatory body wins its case (on its own turf) and the judgment results in fines and other penalties, doesn’t mean that company deserved to lose. It just means that the hounds couldn’t come home without having extracted some measure of flesh from their quarry.

Depending on the court or regulatory body, how unevenly “influential” the various parties might be, the politics of the case, and the diligence of the adjudication process, outcomes can range from 100% legitimate and fair to… well, neither. You can’t ever take any of it at face value Not anymore. Each decision, sanction and fine involving a regulatory body going after a large company must be looked at individually and thoroughly:

How did this all begin?
Did the arguments in the case make sense?
Do the facts of the case check out?
Were there conflicts of interest involved in the decision?
Was there any foul play involved?
Do the penalties seem too low or too high relative to the alleged offense?
Is your opinion on the matter being swayed by lazy journalism (or a lack of diligence on your part)?
What did I miss?

Because it is so important to how technology companies will impact business, privacy, security, employment, human rights, education, healthcare, politics, and culture, covering this topic is a tasks that we have to take on. Keep an eye on this space for that.

In the meantime, if you want to put some of what we covered here today to the test, here is some quick homework for you. Try your hand at these two exercises and tell us what you come up with.

Exercise 1: Objective analysis of an EC ruling.

Earlier this summer, Google was hit with a $2.7 BILLION fine by the European Commission (EC) for alleged antitrust violations. The Court deemed that Google’s practice of promoting its own comparison shopping service while simultaneously demoting its competitors’ in its search result gave Google an illegal advantage, and given Google’s dominance in search, subsequently harmed not only Google’s competitors but consumers in general, as the practice deprived them of fair access to competitive choices. In addition to the fine, the Court required Google to rectify its behavior and give equal treatment to its competitors within 90 days.

On a scale of 1 to 10 (1 being unfair and 10 being fair), how do you rate the EC’s overall decision?
On a scale of A, B, C and D (A being fair and D being unfair), how do you rate the fairness of the penalty against Google?

Exercise 2: Gauging the impact of incomplete reporting on public perceptions.

Read this news story about the KFTC’s recent antitrust ruling against Qualcomm.

On a scale of 1 to 10 (1 being unfair and 10 being most fair), how fair do you think the KFTC’s ruling was?

Now read this follow-up about the KFTC’s antitrust ruling against Qualcomm.

Given this new information, on a scale of 1 to 10 (1 being unfair and 10 being most fair), how fair do you now think the KFTC’s ruling was?

Extra credit: Now read the first story again.

Can you spot where the first article may have made unsubstantiated claims and assumptions?

That’s it for today. This is a big topic, and there’s a lot more to talk about. We’ll be back with more before long.

Cheers,

Olivier

Disclosure: Fatty Fish is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

The original version of this article was first published on Futurum Research.

Olivier Blanchard

Olivier Blanchard is Director of Content and Executive Editor of Fatty Fish, and Senior Analyst and Research Director at Futurum Research. A Paris native, his extensive experience working in technology innovation and regulatory policy on both sides of the Atlantic has given him a unique perspective on the most significant technological challenges and opportunities of our time, from China’s geostrategic ambitions and threats to U.S. technology leadership, to how innovation can be leveraged to drive job creation, fuel economic growth, and empower humanity to solve its most complex problems. A trusted source of insights into critical technology sectors and topics ranging from 5G, AI, and silicon, to policy, legislation, and regulation affecting the tech industry, Olivier also speaks about technology disruption around the world and is a 5x bestselling author, including his most recent, “Human/Machine: The Future of our Partnership with Machines,” co-written with Daniel Newman. Based in Greenville, South Carolina, Olivier is also an avid cyclist, latte enthusiast, and world traveler.