Customer Focus vs. Changing the rules; it’s not Either Or

In the 2000s, the startups that became Unicorns (with $1bn values) created whole new markets. Google created an online auction for advertising (Adwords) that generates $US95bn in advertising. Facebook created an interest-based advertising engine with $US33bn in annual revenue. Meanwhile Amazon, which started of selling books online, now generates over $US200bn in annual revenues.

While advertising is not new, the ability to laser-target users based on what they are looking for, or what their interests are, was unprecedented. Between them, Facebook and Google control around 60% of digital advertising spend in the US.

In New Zealand, the story is similar, with the two companies, between them accounting for over 50% of digital advertising.

Traditional media have been caught flat-footed, and regulators such as the Commerce Commission seem to ignore reality, to the extent that Fairfax may well pull out of New Zealand, and, in the next five years daily newspapers may be a thing of the past. It’s not clear who will actually create local news stories if this happens.

Yet Google and Facebook, because of their vastly superior ability to target consumers that advertisers care about, keep on trucking. There are minimal regulatory roadblocks.

Naked Bus was Uber before Uber

When Naked Bus launched in New Zealand in 2006, it didn’t fit into the regulatory framework. It didn’t own buses, it didn’t employ drivers. Instead it partnered with local bus operators to provide the service. I remember having a surreal conversation with a regulator who phoned up in around 2009, asking us to “register” our bus services.

“We don’t run bus services.”

“I understand there’s a Naked Bus service from Auckland to Rotorua.”

“Yes.”

“Then you must register it”.

“But we don’t operate it. Our partner operators do.”

“It says ‘Naked Bus’ on the side, so it must be your service.”

I kid you not, the conversation went on in this vein for 10 minutes, as the regulator tried to get their head around what we did – something that was not contemplated by the framers of the regulations.

The truth was that Naked Bus identified a demand – low cost bus fares, and also a supply – bus operators with spare vehicles – and put the two together, and grabbed 40% market share in short order. We didn’t bother with the regulators because they weren’t relevant. Filling in forms wasn’t going to improve our customer experience. We just did it.

Uber – David or Goliath?

Many people have commented to me that Naked Bus was Uber before Uber, and they’re right. Uber does not own vehicles, but it tightly controls the operation and quality.

Uber also started out by operating beneath the regulatory radar.

It also saw a gap – reasonably priced and easy to use taxi services – and drivers with under-utilised vehicles. Regulations were stacked against this kind of operations – regulations that both protected drivers and customers, but, whenever and wherever the new service launched, users and drivers flocked to it. It generated demand to the extent that it is a threat to public transport in many cities, including Auckland.

Uber managed to position itself as the scrappy underdog, whereas in fact, it was soon a mega business, steamrolling over owner-operated taxis around the world.

And, now it is facing regulatory pushback, most notably in London, where it temporarily lost its license to operate, in part because it ignored passenger safety issues.

Low hanging fruit

In most western economies there are regulations. Businesses may not like them, but generally they are there to protect consumers, in terms of safety (food hygiene, for instance) and choice (monopoly regulation).

And while a startup can operate under the radar for a while, eventually it will hit regulations. Google has just been fined $US5bn in the EU for anti-competitive behaviour with its Android operating system, and Facebook will soon follow.

And it may be that the “low-hanging fruit” unregulated opportunities have largely gone. Innovation does not happen within a vacuum. The joke is that many Silicon Valley startups are trying to solve the problems of the nerds who inhabit that space – delivering Pizza at the click of a mouse, picking up laundry, home help on-demand – or “Mum as a Service”.

Those are real problems for a segment of the community, but they are not the major problems facing humanity

Where the real gains are

I suggest the problems worth solving are in markets that are highly regulated:

Problem: Healthcare costs are rising and access is declining
Regulation: Most healthcare is controlled and paid for by Government (or insurance); In New Zealand accident coverage is controlled by ACC with money siphoned off to private providers, thus constraining the public health system

Problem: Transport is gridlocked in major cities
Regulation: Roads are controlled and built by Government, public transport is controlled and subsidised by Government, new metro systems are built by Government

Problem: Energy is polluting (carbon based fuels), security of supply is a major issue in many markets (electricity)
Regulation: Much of the distribution is controlled by Government; the pricing model is controlled by Government in New Zealand (Spot market and infrastructure pricing)

Problem: Food safety is a major issue in many markets; consumers want more transparency on what is in their food and where it comes from.
Regulation: Food safety and labelling are regulated by Government; animal welfare is regulated by Government

I’m sure you’ll agree that these are major challenges, and the potential gains are huge. But clearly they require a more collaborative approach with Government. This does not mean that Startups in these areas should not be pushing for changes in outdated regulations. But what it does mean is that regulations should become more outcome focused rather than process focused. A backstop for safety and choice, rather than a prescriptive recipe for how to organise a business.

The Opportunity for New Zealand

New Zealand has a reputation for moving quickly, and creating innovative regulation. In health, Pharmac was set up to reduce the cost of pharmaceuticals to New Zealand consumers. The electricity industry was deregulated with the aim of reducing prices and preserving competition. ACC was designed to reduce the litigation cost of injuries.

The opportunity now is to look at emerging markets and industries and imagine how these might be regulated. Because, as markets become global, what’s created here might just become big over there.

The Opportunity for Business

Forward-thinking businesses looking to reinvent themselves will want to be a part of this conversation. But that is only part of it. Businesses must tackle the things that they can control, things that make a difference. Many of what matters to customers – food traceability, access to elective surgery, the ability to choose non-polluting fuels, are unlikely to be improved by Government in the short term. It is in areas like these that businesses can differentiate and meet customers’ needs better.

So, it’s not a question of choosing between doing your own thing, and influencing how Government regulates. Successful innovators in the future are likely to do both.

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