From: allin
Bill Gurley, a venture capitalist since 1998, initially had no interest in interacting with government, as it seemed unnecessary for his work with founders in software and technology [00:00:08]. This perspective changed after he encountered an issue that required understanding government actions in Washington D.C. [00:00:28].
Initial Engagement with Government
Gurley’s first required interaction involved seeking advice from a D.C. lawyer [00:00:33]. This led to arranging a meeting with a congressman on a relevant committee [00:00:47]. The lawyer stipulated that attendees needed to contribute 30,000 [00:01:14]. The requirement then expanded to 10-12 people, increasing the total to 5,000 each, even if they didn’t attend the meeting [00:01:43]. These types of encounters occurred two more times in Gurley’s career before he stopped meeting with congressmen [00:02:02].
Case Studies of Regulatory Capture
Bill Gurley presents several examples of how regulatory actions can benefit incumbent commercial interests over public or competitive interests, a phenomenon known as regulatory capture.
Tropos Networks and Municipal Wi-Fi
Gurley’s fourth VC investment was in Tropos Networks, a company developing industrial-grade mesh Wi-Fi that could provide city-wide broadband [00:02:15]. Mayors across the country were enthusiastic about offering free Wi-Fi for public safety, economic development, and addressing the digital divide [00:02:37].
However, commercial interests intervened [00:03:31]. Lobbyists, representing companies like Verizon and Comcast (specifically David Cohen, Comcast’s chief lobbyist), drafted and pushed legislation through state legislatures to prevent municipal Wi-Fi [00:03:38][00:04:11]. David Cohen is described as a highly savvy corporate political operative [00:05:05]. As a result, companies like AT&T would later outlaw municipal broadband in over 22 states within two years, taking power away from local decision-makers in favor of commercial interests [00:06:16]. Gurley notes that this level of influence makes efforts by individual companies seem insignificant [00:05:58].
Telecommunications Act of 1996
The Telecommunications Act of 1996 was heralded as major reform with two goals: to promote competition and to encourage rapid development of new technologies [00:06:50].
- Competition: After the act, market concentration in telecommunications increased significantly, with the top four companies controlling 85% of markets compared to 48% previously [00:07:18].
- Innovation: Venture capital dollars invested in telecom equipment, which used to be 15% of VC funding, plummeted to below 1% within 10 years, leading to the market’s demise [00:07:34].
This outcome, where a bill signed by a heralded president achieved the opposite of its stated goals, exemplifies regulatory capture [00:08:07].
Regulatory Capture Defined
Economist George Stigler, a Nobel Prize winner and “father of regulatory capture,” defined it as regulation being “acquired by the industry and is designed and operated primarily for its benefit” [00:08:31]. Gurley summarizes this as “regulation is the friend of the incumbent” [00:08:51].
Key characteristics of regulatory capture include:
- Prioritizing special interests over the general public interest, leading to a net loss for society [00:09:25].
- Mechanisms typically involve limited market entry and price protection or increases [00:09:43].
- Influence mechanisms include money (exacerbated by Citizens United), exposure (time spent around people), and “revolving doors” (people moving between industry and government positions) [00:09:51].
A Morgan Stanley study from 1999 concluded that landmark regulatory actions tend to improve returns for the largest players in the targeted industry, often failing to increase competition or improve customer experience [00:10:16]. This is also evident in the number of new banks in the U.S. plummeting to zero after Dodd-Frank legislation in 2009 [00:10:54].
EHR Software (Epic Systems)
Judith Faulkner, CEO of Epic Systems (a large private EHR software company), was appointed to Obama’s Health I.T. Council in 2009, being the only corporate representative and a major donor [00:11:11].
The American Recovery Act included the HITECH Act, which created the ONC agency. This act incentivized doctors to buy software by offering 38 billion [00:11:51]. A second phase offered an additional 155 million, 145 million) against Epic’s smaller competitors who lacked the required features [00:13:30]. This effectively created a “brick wall,” preventing smaller, innovative companies from disrupting the market with simpler products, as described by “the innovator’s dilemma” [00:14:09]. Obama later called this the most disappointing part of Obamacare [00:14:28].
COVID-19 Antigen Tests
The COVID-19 rapid antigen test, based on commodity “lateral flow assay” technology from 1943 [00:15:15].
- Europe: Germany evaluated 122 vendors and validated 96, leading to tests costing as little as 75 Euro cents each [00:15:37]. The UK also distributed tests cheaply to homes [00:16:07].
- U.S. The U.S. fought antigen tests, partly due to hospitals profiting from PCR tests [00:16:14]. Only three vendors (including Abbott) were widely available [00:16:41]. Timothy Stenzel, who ran the FDA group approving antigen tests, had previously worked at Abbott for four years [00:16:52]. When President Biden authorized 12 [00:17:55]. Current prices at Walgreens and CVS are uniform at 1.50-$1.60, a 6x differential [00:19:08]. Gurley attributes Abbott’s market success to Stenzel’s role [00:18:27].
Silicon Valley and Government Oversight
Washington is increasingly scrutinizing Silicon Valley [00:19:31]. Gurley suggests politicians are interested in tech to bring them “into the system” like military, finance, and telecom, because there is money [00:19:57]. For example, four of the top ten contributors to Elizabeth Warren, a critic of Big Tech, are major tech companies like Alphabet, Apple, Microsoft, and Amazon [00:20:14]. Some tech leaders, like the CEOs of Coinbase, Meta, and OpenAI, have expressed a desire for regulation, aligning with Stigler’s theory [00:20:26].
Concerns exist that regulating AI could be an “existential threat” to Silicon Valley, potentially turning software into the next heavily regulated industry like pharma or military industrial complex [00:28:21]. The idea of a new regulatory agency for AI, or government mandating software features, is seen as stifling to startup innovation and funding [00:28:47].
Reflections and Solutions
Gurley’s key takeaways from his experiences with government interaction and regulatory capture are:
- Ineffectiveness of Regulation: Current regulatory practices often lead to “net loss for society,” failing to achieve their stated goals and sometimes causing harm, as exemplified by the homelessness crisis linked to the unintended consequences of the 1963 mental health institution closure act [00:21:41]. He advocates for a “first, do no harm” approach, similar to the Hippocratic Oath [00:22:04].
- Capitalism’s Bad Name: Regulatory capture undermines capitalism by benefiting incumbents and raising prices in regulated sectors like healthcare and education, while competitive tech products see price decreases [00:22:39].
- Blocker to Innovation: Regulation can block technology, commerce, and the sharing of ideas, which are crucial for prosperity and increased standards of living [00:23:09]. Gurley fears that killing innovation will kill prosperity [00:23:37].
Gurley suggests that Silicon Valley’s success is partly due to its distance from Washington D.C. [00:23:46].
Potential Solutions and Challenges
- Massive Transparency: Gurley proposes mandated transparency, similar to Open Secrets, where political contributions are immediately known to the public to expose obfuscation [00:25:39].
- Addressing Revolving Doors: The “rotating door” phenomenon, where government officials transition into lucrative lobbying roles, is a “massive problem” and difficult to stop [00:26:27]. Gurley also believes Citizens United should be overturned [00:26:49].
- Unwinding Regulatory Capture: Unwinding existing regulatory capture is seen as very difficult, if not impossible, as it often feels like “entropy” that only goes in one direction [00:27:01].
- Awareness: Simply increasing public awareness of these issues could help [00:29:18].
- Government as a Market Player: The U.S. federal government is the largest consumer and distributor of capital, raising concerns about its role in market dynamics and potential for decline [00:29:52].
- Learning from Others: Exploring policies from other societies, like the UK’s “losing party pays” rule in litigation, which reduces litigation significantly, could offer insights [00:30:21].
- Low Cost of Influence: It is shocking how little money it takes to influence major legislation (hundreds of billions of dollars worth of laws) [00:30:42].
- Duration of Influence: Lobbyists often have a long-term presence and influence with legislators, unlike transient Silicon Valley interests [00:31:19].
- Energy Sector: The energy industry is another sector with enormous regulatory capture and manipulation of laws [00:32:27]. Gurley is optimistic about the potential for nuclear fission but notes that regulations make it far more expensive in the U.S. than in China [00:33:05]. The idea of open-source solutions for fission or small modular reactors that individuals could own might circumvent traditional regulatory capture, similar to how solar power allows individuals to become their own utility, although even solar faces arbitrary regulations on power return rates [00:33:50].