Conducting a business involves certain social responsibility, often mandated by laws and regulations. But what if you could reap the profits from the business model without the inconvenience of having to comply with those regulatory, legal and ethical nuisances that slow down your expansion?
Getting into the retail, hotel, taxi or news business is hard, because you’ll have to compete with established players. But if you can find a loophole that gives you competitive advantage, you might have a chance.
If you run a Hotel and don’t comply with smoke alarm safety regulations, you’ll eventually be held responsible. If you run a Taxi business and don’t comply with worker’s compensation regulations, you might be fined. If you sell products to consumers but don’t pay VAT according to the laws, you’ll get in trouble.
Can you see where this is going?
The larger a business becomes, the more it will be subject to regulations and, in the past decade, a loop-hole to avoid regulations has emerged:
• Pick a business model that involves social responsibilities
• Crowdsource the business model
• Shrug off when your users ignore regulations, laws and ethics
• Get a share of the profits without being responsible
Traditional business models that involved social responsibility have been undermined by business models that work around those responsibilities by providing marketplaces instead of the services and products themselves.
Let’s look at four industries and how they have been disrupted by crowdsourcing responsibilities:
In retail, sellers are responsible for paying VAT for every purchase made and making sure their products are genuine and safe. Amazon Marketplace allows third-party sellers to list and sell their wares on Amazon.com. In many cases, third-party providers failed to pay taxes or provide adequate quality control (up to the point of offering counterfeit products.).
This gives Amazon Marketplace an advantage over companies that do not “outsource” their responsibilities as customers can often find cheaper products on Amazon, not knowing that this is because taxes aren’t paid or some of the products being counterfeit.
Apart from labor regulations like minimum wage that affects all sorts of businesses, Taxi operations in many cities are subject to strict regulations like driver background checks, vehicle safety checks or overtime regulations that protect drivers and riders alike. As the excellent Book “Uberland” describes, many drivers are operating below minimum wage, working overtime or ignore local regulations. Uber has also been ignoring accessibility regulations, often charging more for an accessible ride, even though some local regulations might prohibit this kind of discrimination. Again, since Uber isn’t directly offering the (non-accessible) ride, the responsibility is with the drivers. Even in some Cities where Uber is outright banned (due to being non-compliant with regulations), Uber continues to operate, with the burden of responsibility for offering unlicensed taxi rides being with the drivers.
This puts Uber at an advantage since they can charge less, not having to comply with, sometimes costly, regulations.
Depending on the jurisdiction, there are regulations for Hotels (like smoke alarm availability, accessibility or exit routes). While AirBnb provides a database on accessibility and some safety features, they leave compliance with regulations up to the hosts. In addition, AirBnb, being a mediator between guest and accommodation provider, only collects occupancy taxes in some jurisdictions, leaving it up to most providers to pay occupancy taxes or other applicable taxes (or not).
This puts AirBnb at an advantage over traditional Hotel companies since they can offer cheaper rentals and keep part of the profits, since they don’t have the additional cost of complying with regulations.
Publications have an ethical obligation to fact-check their published content and avoid misleading material. While any kind of write-up (including the one you’re reading right now) has some form of opinionated bias, one cannot state facts that are simply wrong. When a Newspaper publishes manufactured information, it could have legal implications if it defames a person or legal entity. Facebook has become a major news source for large parts of the population, but only reluctantly attempts to fight fake news or curate the content like traditional news outlets do.
This puts Facebook at an advantage as they can make money with advertisements, just like a traditional news outlets, while spending less on curating and fact-checking content.
In all of these cases, the formula shifts the responsibilities from the provider that you pay and interact with towards individuals providing a vacation rental or shipping a product . Now, all of these business models aren’t necessarily evil. If every of the individual providers complies with regulations, everything is fine. But the problem is that this practice, due to its intransparency and sheer scale, creates an environment where it’s possible for individual providers to take a relaxed stance on the regulations. This benefits both the platform owner (they can offer cheaper products on their platform without being responsible for the regulations that are being ignored) as well as the individual providers. Consumers will then seek those cheaper products from the “black sheep” providers, continuously eroding quality and ethical standards in the marketplace.
Due to the ever-changing nature of those “markets”, it’s hard for customers to tell if the services they’re buying are actually complying with regulations. Or, In case of Taxes, end customers might, knowingly or not, not pay the sales taxes due during their transaction. Amazon marketplace sellers come and go. This essentially creates a “Market for Lemons” where customers will always chose the cheapest options because they have no or limited visibility of other factors that might influence their purchase decision.
The mentioned companies have grown tremendously and became serious competitors to traditional business models because they have the competitive advantage of not having to follow the same regulations because they outsource this inconvenience.
But the social responsibilities don’t go away. They’re just shifted.
There’s a cost associated with enforcing policies, laws and regulations for certain industries. When you outsource most of your responsibilities in your day-to-day business to millions of individuals, the costs of enforcement goes up, while the benefit (e.g. the taxes collected or smoke alarms installed) are reduced. Corporations use this fact to their advantage, making it so uneconomical to enforce regulations that one can get away with ignoring them.
If you order some counterfeit product on Amazon, good luck trying to find the seller in some Shenzhen suburb that existed for 2 weeks before changing their name. Have fun trying to chase some questionable news post on Facebook to its origin and verify the sources.
All the four companies mentioned have a big part, if not most of their revenue coming directly from consumer sales, services or related advertisement (in case of Facebook), but at the same time, say that these are not the business they’re actually in to protect themselves from the responsibility associated with conducting business in their respective fields.
If each of these companies would offer their “Marketplace” for free, that’d be a different story. But a for-profit company should be responsible for the products they profit from.
Now I’m not saying that each of these companies were founded with the premise of exploiting this legal loophole. But evolution of the respective business models has ultimately led to them taking advantage of this loophole, willingly or not.
Regulations need to change to accommodate this. There has already been a lot of change, making Amazon a marketplace facilitator by law, with certain responsibilities. There’s also a recent court order, ruling that Amazon can be, in fact, held responsible for the quality of their Marketplace sales. I’m looking forward to positive change to close this loophole.