Few things rankle the entrepreneur more than the prospect of more government regulation – or as many business people prefer to call it, “government interference.”

This line of thinking holds that innovation and disruption thrive in chaos, where no rules or limits inhibit imagination or possibilities. While often true, sometimes being regulated, and being seen to be regulated, is the best – and indeed, in some cases, the only – way for entrepreneurs to harness their discovery and innovation into real scalable businesses.

One of the most telling instances of this heretical tale is Napster.

Founded in a college dorm in 1999 as a means of peer-to-peer, digital file music sharing, Napster represented a revolution – and an existential threat – to the traditional recorded music industry. Within two years the file-sharing service housed 34 million songs and boasted 80 million registered users.

And then, via court order, it was shut down.

While the Napster name lived on and was sold to various acquisitors seeking to cash in on the iconic brand, the company itself – and the entrepreneurs who developed this technology – faded into obscurity. In its wake, however, the protected recorded music industry withered to one-half its size, only to be eclipsed by other digital downloading services like iTunes, which are now being left in the dust by streaming services like Spotify.

Napster’s “crime” was “contributory and vicarious copyright infringement under the U.S. Digital Millennium Copyright Act.” Basically, in the company’s rush to innovate and disrupt the traditional music industry, it failed to subject itself to the prevailing regulatory regime that required copyrights to be licensed as a precondition of distribution.

But the Recording Industry Association of America, which sued and shut down Napster, committed an equally catastrophic “crime” where they were convicted not in a court of law, but in the court of consumer preference.

By failing to embrace not just the new, digital distribution system Napster represented, but also failing to understand that Napster’s success represented a fatal flaw in its own business model, the recorded music industry allowed itself to be held hostage by other innovators who adopted digitization and negotiated a new regulatory regime of copyright licensing that recognized the consumer preference for digital distribution of music over analog.

And the story of Napster vs. the recording industry vs. downloading services vs. streaming services is not an isolated case. Indeed, we are seeing the same opening pattern play out with shared-economy services like Uber and Airbnb and disruptive innovations like drones, and we can fairly confidently predict that the same issues will be repeated as recreational marijuana is legalized.

Something new, innovative and disruptive comes on the scene that threatens both the status quo and vested interests; its early success is predicated on a lack of rules and regulation which did not anticipate this new disruption; and the innovation either thrives and flourishes or is shuttered depending on whether or not the innovator can get ahead of the regulatory curve and craft a new regime that works to their advantage.

Within this pattern, the key to success is not to regulate or not to regulate, but business-led smart regulation.

The irony of this cautionary tale is that the entrepreneur’s blinders to this maxim are often rooted in the hubris of innovation. For all the genius and creativity housed within the business community, the fact is that it is the citizen and consumer who are always right.

Furthermore, for whatever government’s failings or incompetency, whenever the public interest is perceived to be at risk, the citizen and consumer will turn to government – not business – to arbitrate, mediate and mitigate the public interest. This is because – and this is a hard pill for entrepreneurs to swallow – at the end of the day the population believes that government will be more responsive and accountable to their wishes than the private sector will be.

Add to this the fundamental tendency of human behaviour to view the unknown or unfamiliar as inherently more “risky” than the known and familiar – and therefore more of an inherent threat to the public interest – and you can pretty much predict that calls for regulation of the new and unfamiliar with be met with government action.

So, notwithstanding the demonstrable consumer preference for Uber over traditional taxi services, allegations of uninsured or unlicensed drivers invariably lead to conflict between the more popular service and governments around the world. It has taken the popular ride-hailing service some time to recognize that the key to its business success is not to ignore or litigate but to subject itself to regulation that will be seen to be protecting the public interest.

And recently it has done just that in Canberra, leading Australia’s National Roads and Motorists’ Association President, Kyle Loades, to pronounce that “Uber is here to stay.”

Photo: Napster Sticker in an Aspen Alley by Paul Sableman is licensed under CC BY 2.0.

In Position is a monthly column focusing on communications, public relations and government relations for tech companies. It is produced for Communitech News by the Earnscliffe Strategy Group in Toronto.

About The Author

Allan Gregg
Principal, Earnscliffe Strategy Group

Allan is a Principal at Earnscliffe Strategy Group and is one of Canada’s most recognized and respected senior research professionals and social commentators. Allan is also an entrepreneur with diverse interests. He was one of the founding shareholders of Canada’s children’s network, YTV, the Chairman of Toronto Film Festival, past Chair of the Walrus Foundation and has executive produced documentary television as well as recordings by Canadian artists such as The Tragically Hip.