The Next New--Potentially Illegal--Thing

In part one of Inc.'s interview with Larry Downes, the author of the forthcoming The Laws of Disruption, he explains why the legal system is the enemy of innovation.

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Once, technological innovation was embraced by early adopters, who were followed by the masses. Today, technological innovation is embraced by early adopters, who are followed by the lawyers. According to Larry Downes, partner, Bell-Mason Group, a venture consulting firm focused on corporate investments in start-ups, it is the lawyers' job to shut down innovation before it reaches the masses. He warns that the market isn't the only place where innovators must prepare to fight.

Downes has written prodigiously about IT, business strategy, and law. His book on the subject, "The Laws of Disruption," comes out from Basic Books in October. Inc. magazine's Leigh Buchanan spoke to Downes about why fast-forwarding entrepreneurs should be cautious of the legal system's approach to technological change.

The premise of your book is that innovation—especially technological innovation—happens very fast, while legal systems move very slowly. What's a good example of that?

Historian Lynn White Jr. tells the story of the stirrup, which was adapted in Europe around 800 and turned the tide in invasions from the east by creating a mounted cavalry—the knights. But to keep these new troops trained and ready, Charlemagne needed to give them an indirect source of income. So he took land from the church and created the feudal economy that dominated Europe for centuries. Vestiges of feudal law still play a significant role in real-estate law in the U.K.

The Internet is our stirrup. We all know it's changed the way we do nearly everything. But we're just starting to sort out its impact on economic and legal systems. Internet telephony, for example, is a relatively simple innovation that adapts the powerful data-communication infrastructure for voice. But its popularity is forcing the FCC to think differently about a subject it thought it understood for decades.

In the gap between revolutionary change and incremental lawmaking, regulators get very uncomfortable. For example, the FCC keeps trying to tell Internet phone companies they have to offer emergency 911 support just as land-line and cellular carriers do. But for companies like Skype, the calling phone number no longer indicates where a caller is located. The architecture that makes their service inexpensive also makes it impossible to handle 911. The Commission is trying to fit Internet phone companies into familiar categories and apply old rules.

What can innovators do to head off problems?

When gotchas like these appear, innovators have to work them through with regulators, messy as that is. Where you can see it coming, even slightly ahead of the government, it's a good idea to give a heads-up and, where possible, to offer a solution. While you can't predict everything, most start-ups can do a much better job anticipating and minimizing some of the worst headaches.

Where innovators must improve is anticipating legal challenges at the heart of their products and services. These come not from the government but from competitors, who use the legal system to slow or stop the progress of innovations they don't like. The more radical the innovation, the more likely that traditional competitors will use the courts to slow or stop your progress. That's a natural consequence of the widening gap between technology's potential to change our lives and our ability to adapt quickly. The tendency for technological innovation to change the rules of an industry is invariably faster than the industry wants to change. Law is one of the principal weapons of resistance.

To stay with Internet telephony, the idea of free or nearly-free unlimited calling using the Internet infrastructure and existing broadband connections strikes at the very heart of what traditional phone companies do at a much higher price. So it's not surprising that in addition to putting pressure on the regulators to slow down Internet phone companies, the old guard have also unleashed their full legal muscle in a series of patent lawsuits that nearly killed Vonage. In some sense it doesn't even matter if these lawsuits have merit—that is, if the patents are any good or if Vonage is actually infringing on them. When a core service is at risk, incumbents will spend anything to slow or stop the innovation. Often, as here, they have very deep pockets. So you can find yourself fighting life-or-death lawsuits with much less money to spend than your adversary. That can spell the end for an innovation.

Do you think entrepreneurs like Shawn Fanning (Napster) and Chad Hurley and Steve Chen (YouTube) were brave rebels or simply had no idea what they were getting into when they launched businesses that acted like Velcro for lawsuits?

I can't say for sure in those examples, but you'd have to imagine they had some idea the major media companies wouldn't be happy. On the other hand, how much real planning--legal or otherwise--went on before those services went live? One of the greatest features of innovation in the digital age is that it's relatively cheap and simple to experiment.

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Leigh Buchanan

Leigh Buchanan is an editor at large for Inc. Magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture, and she contributes Inc.'s capsule book reviews, "A Skimmer's Guide to the Latest Business Books."

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