Five industries impacted by technological innovation

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Businesses based on technology are displacing traditional competitors, while regulators are struggling to keep up. As a result, a number of legal issues have emerged in various industries; IBISWorld has identified five industries affected by technological innovation as well as the legal challenges and opportunities that have surfaced as a result.

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Technological innovation is increasingly clashing with the old world

From smartphones to online food delivery, technology has infiltrated many aspects of daily life. For the most part, this trend has created immense opportunities for both businesses and consumers. However, technological innovation is increasingly clashing with the old world. Businesses based on technology are displacing traditional competitors, while regulators are struggling to keep up. As a result, a number of legal issues have emerged in various industries; IBISWorld has identified five industries affected by technological innovation as well as the legal challenges and opportunities that have surfaced as a result.

Online Apartment Rental Services

The rapid rise of Airbnb and similar services has ignited a protracted debate across US cities over the legality of short-term rental platforms. As a debatable component of the booming $163.1-billion Hotels and Motels industry, online apartment rental services enable individuals to rent out their homes and apartments to visitors for a price. The popularity of these services, which have become competitive alternatives to more traditional hotel and motel formats in a number of major metropolitan areas including New York and San Francisco, has raised a variety concerns from local city officials. While using the service alone is not illegal, many rentals advertised on these sites disregard local housing laws and regulations. They also skirt tax laws that require vacationing tourists to pay a levy for hotel services.

Airbnb has reacted to criticism from local officials and the hotel industry by changing its terms of service to make users aware of local laws and taxes; collecting hotel taxes itself in some instances; and waging a public relations battle to bolster its position. Nevertheless, these actions have yet to resolve the multitude of ongoing questions surrounding the legality of the services in most locations. As each city develops its own response to this emerging industry, online apartment rental operators and individuals alike will require assistance navigating the uncertain legal environment surrounding these services.

Online Payment Processing Software Developers

One of the most profound shifts in financial services in the past decade has come from the advent of online payment-processing software systems. Companies in this area of technology develop platforms that enable merchants to authorize, settle and manage credit card and electronic check transactions over the internet. Over the past five years, these systems have blossomed into a $15.4-billion industry that includes a variety of well-known tech and financial services companies, including Paypal, eBay, Visa, Google and, more recently, Apple, through its Apple Pay service. Nevertheless, regulatory issues have arisen in the past with regard to the classification of these platforms. For example, PayPal originally took the view that it was a third-party payment aggregator not in need of a money transfer license, only to provoke several states to pursue the firm for violating money transfer laws. State regulations and licensing requirements vary, as do their definitions of what constitutes a bank or a money transmitter, muddying the responsibilities of industry operators to comply with various systems.

Moving forward, proposed regulation by the Federal Reserve may significantly affect the industry. The FED has motioned to cap the interchange fees that credit and debit card providers charge retailers; however, it has yet to be determined whether or not this ruling would apply to online-payment platforms. If the transaction fees charged by industry operators are determined to fall under the same category as interchange fees, the regulatory burden on the industry may increase significantly, to the detriment of industry operators.

Taxi and Limousine Services

For decades, car dispatchers were required to connect drivers with passengers, and on-demand service was often difficult to coordinate en masse due to uneven supply and demand. However, the introduction of app-based transportation companies such as Uber has enabled passengers to order a car at any time of day with just a swipe of their smartphone. The ride-sharing network is one of a few companies that have revolutionized the Taxi and Limousine Services industry, a market valued at about $11.8 billion. Despite their meteoric rise, Uber and its competitors, which include Lyft and Sidecare, have faced an onslaught of regulatory challenges at both the municipal and national levels.

Within city jurisdictions, traditional taxi services and authorities accuse Uber operators of avoiding requirements such as possessing a commercial driver’s license, undergoing routine inspections and adhering to local pricing models. Last year, the district attorneys of both Los Angeles and San Francisco filed a lawsuit claiming Uber refused to comply with straightforward California laws that protect consumers from fraud and harm, citing the company’s lax background checks. Insurance has been another legal issue, and 14 states have issued warnings pertaining to the risks of riding in Uber vehicles. Nonetheless, Uber has maintained that drivers are considered contractors, and they are solely responsible for damages and injury during operation. Unfortunately for the young company, regulatory pushback has not only been a domestic concern; Uber faces legal issues in India, France, Thailand and South Africa, among others.

Internet Radio Broadcasting

The proliferation of mobile devices has ushered in the next generation of online radio broadcasting, a rapidly growing industry valued at $1.2 billion. Pandora dominates the Internet Radio Broadcasting industry, claiming over 70.0% of total online radio traffic. Royalties have been operators’ main regulatory concern, as it has profoundly impacted their bottom line (Pandora has consistently spent about 50.0% to 60.0% of revenue on royalty fees during the past five years). In May 2007, the Copyright Royalty Board of the Library of Congress set annual increases in pay-per-play royalty fees for internet radio broadcasting. Royalty fees increase along with the number of users; therefore, it has become increasingly difficult for industry operators to achieve profitability through scale. Instead, operators must boost advertising and subscription revenue at a faster rate than user-base growth.

In response, operators have attempted to reduce their royalty payments. Efforts include royalty legislation reform through the Internet Radio Fairness Act (IRFA). Currently, traditional radio broadcasters pay about 10.0% of revenue in royalty fees, compared with more than 50.0% for industry operators. The IRFA intended to lower royalty fees for internet radio broadcasters. However, the legislation failed to pass in 2012. In 2013, Pandora purchased a terrestrial radio station in South Dakota to benefit from the lower royalty rates charged to traditional radio stations, resulting in a series of lawsuits from publishers and agents. Other operators have faced similar legal action: in 2013, SoundExchange, a nonprofit in charge of collecting and distributing royalties, filed a lawsuit against Sirius XM Radio for the underpayment of royalties.

Unmanned Aerial Vehicle (UAV) Manufacturing

When it comes to regulatory issues, few technology industries have created more buzz than the $3.3-billion Unmanned Aerial Vehicle (UAV) Manufacturing industry. In particular, while the commercial potential of drones has continued to grow, regulations have stifled the commercial segment of the industry. In particular, the Federal Aviation Authority (FAA) has permitted the recreational use of drones, while relegating commercial operations to a stringent certification and permit process. This has created numerous legal issues, as the line between recreational, civil and commercial drone flights has been ambiguous at times, with the FAA fining a number of people for using UAVs for business purposes. In 2014, a Texas nonprofit search and rescue group sued the FAA over an email warning banning their drone flights, claiming that the group’s operations fall outside the FAA’s commercial ban (the lawsuit was later dismissed with the court deciding that the email order had no legal consequences). The potential for legal issues have even arisen in permitted UAV operations, as “hobbyist” drone operators run the risk of instigating tort cases, while the general use of drones raises privacy issues. Even as the FAA has proposed rules for the integration of civil small UAVs into the national airspace, the final form of these regulations remains uncertain, while civil and commercial uses of drones continue to grow regardless.

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Gavin Smith
IBISWorld
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