The Reason Silicon Valley's So Successful is Because of How F*cking Far Away it is from Washington DC

Bill Gurley delivered a recent banger of a presentation. As a former First Boston sell-side research analyst, he does his homework.

The topic? Regulatory capture—the idea that special interests get prioritized over general interest of the public, leading to a net loss for society.

The presentation started with personal story—and his first foray into dealing with Washington DC.

He had a problem and he needed help. The problem was related to one of his early venture capital investments in the telecom industry. He called a contact in D.C. who knew a congress person on a committee who could lend a hand. And best yet? The congress person would even fly out to California to meet with him personally.

But there was a catch: the meeting needed at least five attendees and each needed to bring a check for $5,000 each. If more than five people could attend—and also brought $5,000 checks—even better!

The D.C. shakedown had begun.

Gurley’s problem was related to a company called Tropos Networks. They made industrial grade mesh WiFi.

In Gurley’s words:

“You could mount it on a telephone pole and bathe a city in it. It was awesome—we felt like it could change the world. Google was excited about it. Earthlink got excited about it. But the customer I was most excited about? City mayors. There were hundreds of mayors around the country that wanted to provide free WiFi across their downtown area. It would help with public safety, economic development, and bridge the digital divide.”

One mayor who saw the potential? The mayor of Philadelphia—who saw all the same opportunities Gurley mentioned.

It was a home run partnership from the outside looking in.

But the world works in funny ways.

Enter the corporate lobbyist— who immediately attempted to kill the partnership when they caught wind—because it “collided with commercial interests.”

Philadelphia was an unfortunate location because it’s home of the east coast Disney: Comcast.

Commercial interests directly translates to Comcast in this case. The voters and citizens weren’t putting up a fight against this partnership.

Other than TV, I’ve spent 0% of my time on this earth considering the impact of corporate lobbying on business outcomes. Maybe I should I have.

As Gurley stated, David Cohen—Comcast’s chief lobbyist—”was to lobbying what Bob Marley was to reggae.”

The New York Times even ran a profile referring to him as the most powerful executive in entire company. Another publication—The Inquirer—referred to him as Philadelphia’s “most powerful unelected official.” What a sentence!

Circling back to Gurley’s meeting with the congressman who came for a visit to collect the $5,000 checks. It didn’t go well—he compared the meeting “to a 2nd grader playing Michael Jordan 1-on-1.”

(Gurley didn’t clarify if he was talking about Bulls MJ or Wizards MJ. Big difference, but I digress.)

In summary, guess who ended up offering the city wide WiFi in Philadelphia?

Shocker!

Gurley then pointed out a piece of legislation that came about during the Clinton era—the Communications Decency Act of 1996—aimed at the telecom industry.

It’s purpose: promote competition and encourage innovation.

How’d it do?

Five years later the four leading telecom companies increased their market share considerably. It didn’t promote competition.

Venture capital investments into telecom equipment grinded to a halt. When the bill passed, the industry comprised 15% of VC money. Within a few years that number fell to less than 1%. The innovation never came.

The bill did the exact opposite of what it intended to do. There’s was lots of theories about the bills impact, but none of the came true.

As Yogi Berra said:

“In theory there is no difference between theory and practice. In practice there is.”

Enter George Stigler—the 1982 Nobel prize winner in economics—and considered the father of regulatory capture.

His famous quote on the concept:

Gurley deducted that quote to the following message: regulation is the friend of the incumbent.

In short, if you have a strong market position (think big companies!) you want the government to regulate the living shit out of you—it’s good for business!

Morgan Stanley investment research put out a report that reinforced this simple idea. Their findings:

“The recent history of industry intervention in the U.S. leads us to conclude that landmark regulatory action has the tendency to improve returns for the largest players.”

Data from recent history would echo this idea. Banking is an easy example. Dodd-Frank passed in 2010 and the creation of new banks came to a screeching halt.

Another example: the healthcare industry.

Epic Systems—the largest medical software provider in the U.S. to hospitals—played a pivotal role in shaping healthcare legislation that passed in conjunction with the Affordable Care Act in the late 2000s.

Judith Faulkner—Epic’s CEO—found her way onto the IT health council after it passed. She was the only representative that held employment with a corporation.

Wait—there’s more. She was also a huge donor to politicians who enacted the legislation. Can you believe it?

The details will make your head spin:

• Phase 1: doctors would receive $44,000 to implement Epic’s software. And to be clear, this was government money being paid to doctors.

• Phase 2: doctors would get another $17,000 if they proved they were actually using Epic’s software.

The eleventh commandment is: if somebody offers you $61,000 to use their software, then you should probably use their software.

But the best part was this: Epic was able to box out their competitors through this legislation.

How? The law was written that any software provider to hospitals had to meet certain criteria—mostly in the form of features the software could deliver.

Guess how the features were decided?

It was basically a regurgitation of the features that already existed in Epic’s product. And if you were a competitor selling software to hospitals that didn’t have these exact features—prepare to meet the government’s heavy hand.

The Department of Justice enforced this mandate and it led to three different record fines of lesser competitors to Epic.

In Gurley’s view—and he made a career investing in this stuff—most startup software companies start by creating one feature that customers need. They deliver one item customers really care about and then work their way up market after that.

And that was the genius of Judith Faulkner and Epic.

They put up a brick wall—you needed multiple features to meet the criteria hurdle. Or else the DOJ would have some questions for you.

The last example: Covid tests.

The technology underlying the rapid antigen tests we all took a few years ago was developed 80 years ago. In short, it’s a commodity.

Gurley compared the path the U.S. took versus Europe on making tests available.

Europe evaluated more than 120 vendors and allowed 90+ vendors to offer antigen test. There was lots of competition and the result was tests only cost a couple bucks. In Germany, you could pay less than $4 for a number of tests.

The US? We had three approved vendors for antigen tests. Three!

Abbott, Binax, and Quidel were our approved vendors. Because of that, it took time to ramp up production.

Similar to the Epic software story—one person played a pivotal role in shaping who became an approved vendor.

His name: Timothy Stenzel. He worked for the FDA and ran the group that oversaw which antigen test were approved.

His previous employment history won’t shock you: Five years as the Chief Scientific Officer at Quidel and four years as a Senior Director at Abbott. Both approved vendors!

And what happens when supply limited? Prices go up.

Compared to a few bucks in Germany, antigen test kits in the U.S. were selling for $23.99 across the board.

You don’t need a Harvard MBA to understand this: if every company is selling their product for the same exact price, that’s not a robust marketplace that promotes competition and benefits consumers.

Gurley then closed out his presentation by turning to Big Tech.

D.C. clearly has them in their bullseye. It’s been a revolving door of tech CEO’s making appearances on Capitol Hill to get grilled.

Maybe the funniest one of them all: Senator, we run ads.

But why is D.C.—and it’s both sides of the aisle to be clear—so focused on Silicon Valley?

Gurley makes the case: if you attack them, then they have to come to you.

His logic follows that they’re doing it because they want them in their system. It’s not because voters (broadly speaking) are passionate about the issue.

It’s because there’s money. Lots of it.

Gurley points to Elizabeth Warren (though I’m sure it’s true of Republicans as well) who now has 4 of her top 10 donors coming from Big Tech.

Again, if you attack them, they have to come to you. They want you to regulate them BUT they would also like to play a role in how that regulation gets shaped.

Who wants regulation? Surprise: the really big companies.

Coinbase wants regulation too!

So does OpenAI!

And we all know why: regulation is the friend of the incumbent.

The main takeaways from the presentation:

1) The U.S. sucks at regulation. We regulate big companies at the expense of small companies.

2) It’s easy to say capitalism is broken. I don’t believe this is true, but where it has extreme flaws is where regulatory capture is highest. As Gurley points out, highly competitive products coming out of Silicon Valley drive prices down while items heavily regulated by D.C. tend to hold price. (This may be oversimplified but holds a large element of truth.)

3) Technology, commerce, and sharing ideas lead to prosperity.

The closing argument:

“Silicon Valley is so successful because of how fucking far away it is from Washington D.C.”

The full speech is below and worth the listen.