2,851 Miles: Bill Gurley's talk at All-In Summit 2023 (Super Notes)
2,851 Miles: Bill Gurley's talk at All-In Summit 2023 (Super Notes)
JCal, Chamath, Friedberg, and Sacks called this talk on the dangerous effects of regulatory capture "the best talk in the history of All-In"
TL;DR
Bill Gurley talks about how regulation helps existing players while hurting startups.
“As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.” - George Stigler, winner of the 1982 Nobel Prize in Economics
“Regulation is the friend of the incumbent.” - Bill Gurley
Regulatory capture and four examples
Regulatory capture: a special interest is prioritized over the general interests of the public, leading to a net loss for society.
Regulation is influenced in a way that limits or restricts market entry and protects or even increases prices.
Companies influence policy in D.C. with money (exacerbated by Citizens United), exposure (time spent), and revolving doors of executives/regulators.
“The recent history of industry intervention in the US leads us to conclude that landmark regulatory action has the tendency to improve returns for the largest players in the targeted industry over an intermediate-time horizon. Long-term investors should consider capitalizing on any temporary weakness caused by market reaction to regulation. Many attempts to increase competition or improve customer experience have failed to deliver on the promise.” (emphasis added by Gurley)
Morgan Stanley research report (1999)
1. How the 1996 Telecommunications Act killed innovation in telecommunications
D.C. corruption and how AT&T, Verizon, and Comcast stopped the creation of citywide Wi-Fi networks
Gurley’s fourth VC investment was in a company that developed industrial-grade mesh Wi-Fi networks called Tropos Networks. It wanted to work with cities to offer city-wide Wi-Fi. It was highly disruptive.
There were hundreds of mayors across the country who wanted to provide free Wi-Fi service in their downtown area.
When Philadelphia wanted to do this in 2004, “Verizon successfully pushed a bill through the state legislature severely restricting any Pennsylvania municipality's ability to launch a municipal broadband network.” (emphasis added by Gurley)
New America Foundation
In the process of trying to prevent this, Gurley sought out a lawyer in D.C., who found a Congressman on the committee in charge of the telecom policy that affected Tropos Networks.
The lawyer told Gurley that the Congressman would be flying out to Silicon Valley to meet with him, with one condition; Gurley needed to get 10-12 people and their spouses to “attend” and more importantly, for each of them to write a $5k check ($120k total) to the Congressman.
This way, the Congressman would be able to report the donation as 24 personal donations of $5k, rather than one $120k corporate donation from Tropos Networks.
After two more of these “meetings”, Gurley stopped meeting with members of Congress.
Within two years, AT&T, Verizon, and Comcast would work with state legislatures to outlaw municipal broadband in over 22 states.
The states took the power of these local decision makers away from them, in the interest of the telecom companies, not the citizens.
Telecommunications Act (1996)
The Act was heralded as the most important telecommunications reform in 62 years. Its goal was to “promote competition” and “encourage the rapid development of new technologies”.
Literally, the opposite happened. The top four telcos actually grew their market share from 48% in 1996 to 85% in 2001.
Telecom equipment used to be 15% of VC funding. By 2006, it had gone below 1%.
If you want to talk to one of the expert VCs in telecommunications equipment, it'll be easy to do because they're retired. There is no more innovation in telecom equipment.
The Telecommunications Act did worse than fail. It created the opposite thing of what it was supposed to do.
2. Dodd-Frank (2009) basically stopped the creation of new banks
3. How Epic Systems used the HITECH Act to strangle competition
Epic Systems is a very large private company in Wisconsin that is the largest player in electronic health records (EHR) software.
Obama appointed founder/CEO Judith Faulkner to his Health Information Technology Policy Committee. Faulkner is a major Obama donor.
Under the HITECH portion of the Recovery Act (2009), doctors would receive $44k each if they bought software. In the second phase, doctors got paid $17k more to prove they were using the software; it's called meaningful use.
The Office of the National Coordinator for Health Information Technology (ONC) decided the threshold of features you would need for your software to comply with this mandate was Epic's feature set.
The ONC got the Department of Justice to enforce fines on companies that didn't have Epic’s feature set whose doctors were getting the payments. There were three record fines—$155 million, $57 million, $145 million—against the lesser competitors of Epic.
If you've studied the Innovator's Dilemma, the way startups disrupt is they come in with products with fewer features but with features that really matter to the customer in a simpler product, and they move up the value chain over time.
The government put a brick wall there so upstart competitors to Epic couldn't move up the value chain.
4. How an ex-Abbott Labs executive banned competing covid tests as an FDA official
Germany and the UK approved several dozen covid test vendors. Competition brought the cost of a covid test down to €0.75 ($0.80) in Germany and $1.50 in the UK.
But in the US, the FDA official in charge of approving which antigen test got approved, Timothy Stenzel, previously worked as a senior executive for Abbott Labs and Quidel.
Unsurprisingly, only three covid test vendors were approved in the US: Abbott, Ellume, and Quidel, and tests cost $7 each, 8x the price in Germany and 5x the price in the UK.
D.C. politicians want to bring Silicon Valley under their control so they can raise more money
Washington now wants to regulate Silicon Valley.
This is in spite of the fact that voters are much more worried about the industries where there's a lot of regulatory capture, e.g. healthcare, pharma, finance.
D.C. politicians want the money from tech companies. Industries like defense, finance, and telecom already donate heavily.
Four of the top 10 contributors to Elizabeth Warren are tech companies: Alphabet, Apple, Microsoft, Amazon.
Politicians know that if they attack companies, those companies will have to donate to the politicians to enjoy favorable regulations.
Silicon Valley executives to D.C.: “Please regulate us”
Brian Armstrong (Coinbase), Mark Zuckerberg (Meta), and Sam Altman (OpenAI) now all want regulation for their industries, likely because they believe they can influence the regulations so that it is favorable to their companies and unfavorable to disruptive upstart competitors.
There's a really scary thing in this AI space: the incumbents that are running to meet with government are spreading something that Gurley doesn’t think is accurate or fair.
The AI incumbents are spreading a negative open source message, and I think it's precisely because they know it's their biggest threat.
Three takeaways
A) We’re not very good at regulation
All four of the stories Gurley told above were failures, i.e. they were a net loss for society.
Senator Patrick Monahan felt like Congress should have to have something similar to the Hippocratic Oath that doctors have: “first, do no harm.”
He felt personally responsible for the homeless situation in America because he signed an act with JFK in 1963 that shut down the mental health institutions.
B) Regulatory capture gives capitalism a bad name
People say that we need to “fix capitalism”, but where capitalism is broken is where the regulatory capture is the highest.
The price of highly competitive products coming out of Silicon Valley are dropping like crazy. It's healthcare, education, and other captured industries where you have price increases.
C) Technology, commerce, and the sharing of ideas leads to prosperity
Gurley’s big fear is that regulation is the opposite of this. It's a blocker to innovation. If you care about prosperity and you kill innovation, you're going to kill prosperity.
2,851 Miles
The reason why the talk is named 2,851 miles is because that is the distance from Sand Hill Road in Silicon Valley to the U.S. Capitol in Washington, D.C.
“The reason Silicon Valley has been so successful is because it's so f-king far away from Washington, D.C.” - Gurley
Full Video
The entire talk is well worth watching in full.