On Tuesday, the FCC hit Comast with the largest fine it has ever issued to a cable operator. For Comcast, the amount of the fine, $2.3 million, is inconsequential. The bad press, and increased public scrutiny, is more painful.
What happened? Comcast charged customers for equipment and service that the customers didn’t request. Sound familiar? That’s almost exactly what happened to Wells Fargo, when they faced their 9 figure fine in September. And on Wednesday, in the aftermath of that scandal, Wells Fargo CEO John Stumpf retired, effective immediately.
These incidents will further strengthen consumer protection regulations
When we talk about the “strength” of regulations, we’re talking about two things:
- The scope and structure of the regulation
- The enforcement of the regulation
You can have a broadly-written, highly-punitive regulation. If enforcement is weak or nonexistent, so is the regulation. Likewise, we can vigorously enforce a narrow, diluted regulation, which could then become meaningful.
I’m not sure the Comcast and Wells Fargo incidents will lead to an overhaul of the regulations themselves. But I sure think enforcement of existing regulations will ramp up, given the abuses detailed in the past couple of months.
That’s a problem for business. Almost as a rule, regulation increases costs and decreases flexibility. Regulation can be justified if the broader benefits outweigh the specific costs.
Businesses will rarely recognize that justification, even in the abstract. The easiest way for businesses to fight regulation? Prove that the regulations are unnecessary.
Wells Fargo and Comcast proved that consumer protection regulations are indeed necessary. That’s an unfortunate outcome for business leaders, who tend to argue that businesses can effectively police themselves.
Public opinion is the driving force of regulation
Philosophically, we know that regulation is justified when benefits exceed costs. Practically, we should know that regulation is largely a reaction to public outcry. In other words, story, not rationality, drives regulation.
In my utopia, a community of experts would analyze the costs and benefits of regulation from first principles. With modern market forces in mind, we would design, then continuously adjust, our body of regulation to incentivize preferred behavior. We would scale punishments and rewards in a way that imposes minimal burden, while motivating maximum gain.
That’s not how our regulatory apparatus functions. What happens is something going haywire. The public gets upset. Government reacts, either by drafting new regulation or more vigorously enforcing existing regulation.
Almost all existing environment regulation is motivated by some catastrophe, or near catastrophe. Almost all financial regulation is motivated by some giant fraud or some egregious instance of willful neglect. Almost all health regulation is motivated by visible cases of a capable system inexcusably failing someone in need of care.
The argument is that when something bad happens, and it was preventable…we empirically are under-regulated. That explains the ratchet effect, whereby our body of regulation continues to grow, bit by bit.
Importantly, there’s a threshold effect here as well. When something bad happens, it has to be bad “enough”, to justify further regulation. And that’s where story comes in. The story of big corporations ripping off average Americans definitely strikes a nerve. Particularly now, when the public has registered an extreme resentment of elite institutions. The Comcast and Wells Fargo stories exceed the required threshold. The regulatory machine is in full gear.
Trouble comes from an unhealthy relationship with growth
If you have listened to any business authority speak, you’ve probably heard of the growth mantra. If you’re not growing, you’re dying, right?
The problem is that all markets have equilibria. A given company, with a given offering, can only capture so large a slice of a given market. No one offering will win over all customers.
That doesn’t mean growth is impossible. It means, though, that to continue to grow, you need different offerings. Or you need to target different markets. But if you stick with your same offering, and target the same market…you will eventually capture all the customers you’re capable of capturing.
No amount of fancy salesmanship can move you past that equilibrium. People are different. They want different things. They believe different things. They identify in different ways. Any single business can only capture so many of them.
If you insist on growth, but don’t have the patience to reengineer your offering, or to break into new markets…you’ll have to cheat. You’ll either have to mislead customers or book false sales.
That’s the price of believing there’s always growth directly in front of you. That’s particularly true for large companies, which are larger today than ever before. Large companies have the resources to max out their market share.
But investors don’t want to hear that. So, large companies can either do the hard work of changing how they deliver value to customers. Or they can do the easy work of forcing their sales team to sell more into the teeth of a saturated market. As you’d imagine, the easy work leads to a lot of trouble.
Because business performance can never be “good enough”, we will always require regulation
If Comcast or Wells Fargo leadership could be satisfied with their existing performance, we might not need regulation. If Wells Fargo executives could say, “Given what we have to sell, we’ve sold as many products to as many customers as we reasonably can”, they might not be facing a crisis. But they can’t. Investors demand more and more sales. That led Wells Fargo first into some gray areas, and then into some outright illegal sales practices.
The same thing happened to Comcast. Customers said they didn’t want premium channels. They didn’t want fancy DVRs. But that’s not the answer Comcast’s investors demanded. At the end of the day, executives report to shareholders. It’s not surprising, then, that Comcast eventually recorded sales that customers didn’t authorize.
I’m not saying business leaders need to resign themselves to a no growth reality. What I am saying, though, is that executives have to make really hard judgments about the true barriers to growth.
Is the barrier really that your sales force isn’t doing a good enough job selling your existing offering? Or is the barrier that you’ve reached all the customers that find your existing offer compelling?
A lazy sales force is easier to fix than a structural impediment. That’s part of the reason truly exceptional executives are so rare. They need sober, disinterested appraisals at times when their environment pushes them hardest toward convenient, reactionary narratives.
Because we have so few exceptional executives, we rely on regulation to help fill the gap. Not ideal, but given what we’ve seen from Comcast and Wells Fargo, it’s at least understandable.