Open Doors?

Removing the Barriers

Many free-market advocates argue that, in theory, deregulation--the reduction of statutes and oversight in an industry--usually helps small companies because regulating industries allows monopolies to develop, throwing up barriers to entry for start-ups. "Entrenched companies, which usually have more political power, can be very successful in using laws to prevent any opening in their industry [and] turn into monopolies," says Braden Cox, technology and policy counsel at the Competitive Enterprise Institute, a free-market think tank in Washington, DC. "When you remove red tape in an industry, you don't need to be as big to have a chance there, and when businesspeople see that there is opportunity, it encourages more entrepreneurs to enter the field and leads to risk-taking and creativity."

Wang and many other online real estate companies believe the theory. "If we can get New York to repeal the 1975 law, we can have a real market, where companies like mine can survive," says Wang. Similarly, small players in other e-commerce industries are pushing for deregulation of a series of statutes used by large companies to prevent competition from Web upstarts. Large wine wholesalers have used their influence to get laws passed that restrict Internet wine sales, while major contact lens companies have allegedly done the same to Web-based contact lens vendors. Indeed, in an October 2002 ruling, the FTC noted, "Regulations may be having significantly anticompetitive effects on e-commerce." In response, Web sellers have pushed for deregulation of Internet wine and contact lens sales.

"When you remove red tape in an industry, you don't need to be as big to have a chance. . . . It encourages more entrepreneurs to enter the field and leads to risk-taking and creativity."

The positive impact of deregulation can be seen in trucking, one of the first two industries to be deregulated by the federal government (the other one was aviation). "Before 1980, [when President Carter deregulated the industry], it was very hard to start a trucking company," says Charles Harrett, president of New Albany, Indiana-based Northern Continental Logistics, a seven-employee firm that he started in 1998, after working for a larger logistics firm. "All existing routes were held by large companies, and you had to prove to the Interstate Commerce Commission (ICC) there was a need for you to enter the industry. To convince the ICC, you'd have to get the support of many companies--have them say they wanted you in the market shipping their goods. Going through this process was time-consuming and expensive."

Now, Harrett notes, it's easy for entrepreneurs to get started in the trucking industry. He believes lowered barriers to entry have fostered competition, reduced prices for consumers, and encouraged innovative people to enter the business--people who have introduced satellite technology and other breakthrough technologies to the industry.

Other truckers agree. "In general, deregulation has been positive for small companies," says Gary Hanke, 49, president of Pegasus Transportation Inc., a shipping firm in Jeffersonville, Indiana, that has 275 employees and also started after the 1980 deregulation. Like Harrett, Hanke had worked for larger companies before deregulation but couldn't start his own business until the market opened up. "Today you can easily get a license for a few hundred bucks, so anyone can get into the business and quickly be able to ship to 48 states," he says.

The White House, many congressional representatives and some state legislators agree with Hanke and Harrett. President Bush has highlighted the need for deregulation in a range of industries, including energy and the military/defense sector, as a means of helping more entrepreneurs. The Bush administration has already begun privatizing and deregulating large segments of the federal government. Treasury Secretary John Snow has said that for the American economy to grow strongly again, "the requirement is for greater flexibility, for deregulation." And Michael Powell, head of the FCC, has turned out to be one of the most forceful proponents of deregulation in the media, telecommunications and communications industries in decades.

Meanwhile, last year the U.S. House of Representatives Small Business Committee proposed the Small Business Advocacy Improvement Act, which tried to strengthen the SBA's Office of Advocacy, tasked with highlighting regulations hindering small companies. At press time, the bill was in markup before the Small Business Committee. On the state level, several legislatures have proposed creating state commissions of deregulation to reduce statutes in certain industries.

Ahead of the Curve
Is your industry on a path to deregulation? Plan ahead with the following steps:

1. Recognize that larger companies will try to fight back. "Big companies are naturally going to do whatever they can to limit anything that hurts their monopoly power," says William Schuck, executive director of Competition Ohio, a Columbus-based nonprofit focused on telecommunications choice. He advises small companies in an industry being deregulated to band together to inform consumers about the upcoming deregulation and develop advocacy organizations to fight the larger firms.

2. Move into a niche before deregulation. Companies that don't find a way to compete on grounds other than slashing prices may not survive deregulation, experts say. "Once the trucking industry was deregulated, there were so many small companies starting up that many clients didn't know how to distinguish among them, and they just looked for the lowest price," says Gary Hanke of Pegasus Transportation Inc., a shipping firm in Jeffersonville, Indiana. "If you didn't have a name before deregulation, you could get lost."

3. Learn from previous examples. Deregulation processes have, in many cases, followed similar trajectories. Business analysts say entrepreneurs thinking of entering a field in the process of being deregulated--wastewater management or energy, for example--should study previous examples of deregulation of that particular industry, whether in other states or in other countries.

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This article was originally published in the September 2003 print edition of Entrepreneur with the headline: Open Doors?.

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