For These Companies, Making Trouble for Regulators Is Part of Innovation

Users first, or the law first? For startups that want to rewrite the rules of the game through action and word of mouth, the answer is obvious.

You may have seen a recent piece of news out of Beijing: starting this January, the city will put most of its enforcement resources into checking "black taxis" that operate illegally through ride-hailing apps. Every violation found will be punished strictly under the law, with fines at the top of the range. Besides "Yihao Zhuanche," "Didi Zhuanche" and "Yidao Zhuanche," Uber, which recently signed a strategic cooperation agreement with Baidu, also risks penalties for its Beijing service because it has no operating license.

Chauffeured-car apps use technology to put idle cars to work, so more people can get a ride when they go out. At the same time, their subsidy schemes have kept drivers' service standards high, which is plainly good for the efficiency of a city's transport as a whole. Even so, these apps have become a target of regulators, and under a perfectly legitimate charge: illegal operation. Nor is it only Beijing. Since the end of last year, Shanghai, Shenyang, Nanjing, Zibo and other cities have also begun cracking down on them.

Still, the services backed by internet giants such as Baidu, Tencent, Alibaba and Uber have not given up. Today you can still use them as normal in Beijing and Shanghai. Expect them to keep trying to get into this market through carpooling, cars rented from rental companies and similar routes.

The ban on these apps is just one snapshot of the many tech companies that clashed with regulators over the past year. Many were even sued as a result. Airbnb, Toutiao and Bilibili, tech companies of different sizes from different countries, are all on the list.

Behind each lawsuit, you can probably see something disruptive in what the company was doing: cutting-edge technology solving an old problem, a new user need discovered and then met, or regulation and law lagging far behind innovation itself.

Think of Napster 15 years ago. At a time when CDs still ruled, it was the world's first widely used peer-to-peer MP3 music-sharing service. Suddenly people could enjoy easier streaming music for free, even though everyone knew that the music ripped from other formats was almost all pirated.

In December 1999, the Recording Industry Association of America, representing the five major American record labels, sued Napster. Napster lost, paid a total of US$36 million in penalties to musicians and copyright holders, and never recovered, eventually going bankrupt. But the idea of offering users streaming music has long since been adopted by legitimate providers, and even more disruptive products such as the iTunes Store have appeared.

Illegal services are sometimes a tool the market uses to keep itself working. By jolting existing services, they keep shifting the boundaries of outdated or existing laws. Government or regulators, the law and companies wrestle with one another until they find a solution: the industry becomes more efficient overall, and the public gets more convenience.

So, on the one hand, innovators deliberately look for room to survive and break through in legal gaps, or even in legally forbidden territory, to meet new needs as they appear in the market. On the other hand, tempted by the market, internet and technology companies use their technological edge to grab a large market share first. Once they reach a certain scale, they gradually bring themselves into line and, together with regulators and other companies, set new boundaries and rules of the game.

Government regulation and the legal system are bound to lag behind the constant stream of new needs and new technologies. But that does not mean that constantly testing the limits is right. What we would rather see is technology and innovation creating more ways for the parties to negotiate, ultimately making the market as a whole more efficient and fostering a better business environment.

Uber

In 2014, the tech company in the most legal trouble was probably Uber, which expanded aggressively all over the world. In the United States, district attorneys in San Francisco, Los Angeles, Philadelphia, Portland and Connecticut demanded that Uber explain its driver background checks, its "$1 safe rides fee," its illegal operation, and its unfair competition with local taxi groups. In Spain, Uber was boycotted by local taxi associations. In South Korea, it was accused of breaking local taxi laws. In India, it was caught up in a case in which a driver raped a passenger. Thai authorities accused it of lacking proper registration and insurance...

2014 was also Uber's fastest year of growth. By dispatching cars through GPS, letting users track a car's route in the app, and simplifying payment, Uber used technology to overturn the taxi problems common in big cities, and it created jobs and income for its drivers. In meeting more demand, what Uber really improved was the efficiency of society as a whole.

Uber opened up a new sharing-economy model for public transport, but many countries and cities have no relevant regulations, so whether Uber is legal cannot be settled. And everywhere it went, Uber entered the market aggressively, piling up local users at a frantic pace while falling short on local regulations, driver policies and safety. As for the lawsuits and bans around the world, Uber mostly ignored them and kept operating.

Airbnb

In April 2014, the New York State Attorney General sued Airbnb for "illegally operating hotels," demanding that it disclose how much hosts were earning from renting out rooms in New York City. In San Francisco, Airbnb's short-term rental business was also suspected of breaking local laws.

Airbnb, which pioneered a new model of short-term home rentals, built itself an image as both useful and kind. Travelers can book, by the night, a sofa, a bed, a room, a whole house, a boat, even a castle. Airbnb now offers more rooms worldwide than any hotel chain in the world.

Under the banner of the "sharing economy," Airbnb used its platform to change how people think about travel and lodging: once basic accommodation needs are met, offer a warmer, more local experience of staying somewhere. It also used a social model to improve communication between guests and hosts, and lowered hosts' rental costs. But for the traditional hotel industry, and for state governments that collect hefty lodging taxes, this model was a considerable shock. Airbnb ultimately lost in New York and handed the government information on the hosts involved, while San Francisco revised its existing laws on short-term rentals. Airbnb said: "We need to work together to draft some reasonable rules, so as to stop bad behavior and protect ordinary people who just want to rent out the home they live in."

23andMe

Strictly speaking, the genetic testing company 23andMe's troubles all began at the end of 2013. In response to a warning from the US Food and Drug Administration (FDA) in November 2013, 23andMe announced in December 2013 that it would stop offering health-related genetic tests to new customers. It then faced a class-action lawsuit in California questioning the scientific validity of its tests.

23andMe belongs to a new industry: it lets consumers see a detailed genetic map of their ancestry and future health. With a US$99 saliva test kit, users can check whether they are at risk of diseases such as breast cancer, heart disease and Alzheimer's.

Using genes to identify potential diseases, including heart disease, diabetes and breast cancer, along with potential resistance to particular drugs and everyday preventive health measures, seems very useful to customers. For medicine today, though, it is entirely new territory.

In 2014, after the US Congress stepped in to mediate, 23andMe was expected to resume its testing service soon, but its disputes with regulators, the FDA among them, may go on. 23andMe cannot yet guarantee that its results are scientifically sound, yet it is, knowingly or not, blurring the line between personal information and medical services. And the company bypasses doctors, delivering test results straight to patients.

MobileStats

In January 2014, the Singapore technology company MobileStats had sued the government for infringing its patent and copying its mobile medical emergency vehicle concept. When the case resumed, the company decided to drop the suit and not to contest the government's counterclaim seeking to revoke its patent. MobileStats thereby lost the patent it had registered in 2005 and had to pay the government's legal fees.

The emergency vehicle MobileStats designed opens on both sides and at the rear, extending awnings that shelter the injured from wind and rain. It also carries equipment that medical staff can reach up and pull down, and it can treat 240 casualties at once. Earlier mobile medical vehicles relied on staff pitching a camp to set up a first-aid station, which took at least 20 minutes.

The lawsuit centered on the battalion casualty station of Singapore's Ministry of Defence. MobileStats said its function and design resembled the company's patented mobile medical emergency vehicle, while the government questioned the originality of the plaintiff's design.

Toutiao

In June 2014, during the "Clean Net 2014" campaign, the National Copyright Administration said it had formally opened an investigation into Toutiao for suspected infringement of content from multiple media outlets.

Toutiao, launched in August 2012, is an app that uses data mining to recommend personalized news. In less than two years, with its distinctive transcoding technology, Toutiao shot to prominence in the crowded field of news apps, and its influence now exceeds that of the four big traditional web portals.

Media outlets want to protect their copyright and its value, but they also want a wider reach. For an outlet that wants to grow its own platform, the best model is clearly not to license its copyright for a fee, but to win growth through links back from a big platform. This is the fundamental reason Toutiao turned, in a short time, from a platform full of infringing content into an important distribution channel for major media outlets.

After the crisis broke, Toutiao issued a statement saying it would respect the wishes of all media websites and remove links to any content they objected to. It would also consider cooperating with them through conventional copyright purchases, and had already begun talks. Thousands of media outlets of every kind, including Sina, iFeng, SMG, CCTV Finance, Gmw.cn, Xinhua, Huanqiu, Caixin and Huxiu, have since signed cooperation agreements with Toutiao or joined its media platform.

Bilibili

Between December 26, 2014 and January 8, 2015, Bilibili's operator was hit with nine copyright lawsuits, large and small, all on the grounds of "infringing the right of communication of works over information networks."

Bilibili is a video-sharing site in mainland China devoted to ACG (anime, comics and games). What most sets it apart from other Chinese video sites is danmaku, real-time comments that float across the video. But its video sources and streams come almost entirely from other video sites, mostly through "hotlinking" without permission or payment.

Danmaku makes viewers feel deeply involved, and Bilibili turned it from a niche pastime of a subculture into something viewers genuinely need when watching video online. At the same time, Bilibili's strong platform effect made it one of the few sites in China able to offer new overseas anime almost as soon as it airs.

On hotlinking, Bilibili has always stressed that it is a platform: the infringement is done by its users, and hotlinking is just as common on every video site in the country. But since traditional video sites began buying copyrights on a much larger scale in 2013, tensions have sharpened between those licensed sites and an equally strong Bilibili.

Afterward, Bilibili's operator posted several Weibo messages in a row, clarifying that the company operates independently, describing its efforts to buy anime copyrights, and saying it respects other companies' use of the law to protect their rights. "At the same time, we will also use legal means to resolve problems, based on the facts."

Jumei

As we noted in an earlier report, since the first American law firm announced on December 10 that it was investigating Jumei for possible violations, more than 10 law firms have filed class-action lawsuits against the company. All of them allege illegal conduct, including false disclosures, misleading statements and failure to disclose information.

Jumei is a flash-sale cosmetics store that pioneered "cosmetics group buying": every day, the site recommends a dozen or so popular cosmetics products. It grew from its original group-buying model of one "limited-time discount" item a day into today's daily flash sales of many products. In managing its range, it mainly sells by recommending star products and pairing them with other products.

In the view of angel investor Xu Xiaoping, Jumei changed how people buy cosmetics. While its recommendation model steers consumers toward star products, it also relies on a full purchasing, logistics and customer service team to raise service quality.

On December 16, Jumei CEO Chen Ou responded to the onslaught from American law firms with a long Weibo post, saying "Jumei is the cleanest e-commerce company," "there are profit motives behind the law firms," and "we are actively negotiating with brands to buy authorization."

Qvod

In November 2013, Sohu Video's Zhang Chaoyang joined the major video sites in publicly calling for a crackdown on the piracy industry, aiming squarely at Qvod and Baidu Player, and demanded 300 million yuan in compensation. From January to April 2014, Qvod was named a defendant in more than 80 infringement cases.

Qvod was founded in 2007. Its P2P technology let small and medium-sized movie sites use very little bandwidth while still letting users watch all kinds of video directly and smoothly. Users also loved it for its video player, which supported many formats and let them share videos.

Users benefited from the wealth of material that sharing made available, but it also brought Qvod under outside scrutiny, and the industry attacked it in particular for the flood of pirated content and the spread of objectionable material. On April 17, Qvod announced that it would shut down its QVOD servers, stop video on demand and downloads based on Qvod technology, and purge vulgar and pirated content. It also began changing its business model, focusing on buying film copyrights and investing in original web series, and said it would try adding social and e-commerce features to its content in the future.

In the end, though, Qvod was investigated by the Shenzhen Administration for Industry and Commerce and hit with a record fine of 260 million yuan.