Book: The Economist - 2016-01-09

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Toy story

What the fad for the non-hovering hoverboard tells us about business

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THAT was quick. A couple of months ago hoverboards were the next big thing. Today they are a bad joke. It turns out that they sometimes burst into flames, pitch their riders onto the floor and otherwise cause mayhem. In his boxing career, Mike Tyson was knocked out only five times. A YouTube video shows him felled by a hoverboard in a matter of seconds.

This is more than a story of a short-lived fad. It is a parable of business life under what Jeremy Corbyn, the hard-left leader of the British Labour Party, would probably call “late capitalism”. “This is the modern economy in a nutshell,” says Josh Horwitz on Quartz, a news website: “viral trends, massive manufacturing hubs, IP disputes, weak regulation, immensely powerful businesses, and global ripple effects.” The big question is whether it is a prophecy as well as a parable: a growing number of analysts think that 2016 will be the year in which the new economy falls back to earth.

The hoverboard craze exemplifies three facets of modern business. The first is its propensity to blur the boundaries between fantasy and reality. Many modern high-tech devices started life in science fiction: think of “Star Trek” characters consulting clever hand-held devices and talking to their computers. Elon Musk wants to shoot people across California in vacuum-sealed tubes. Jeff Bezos wants to deliver packages by drone. Hoverboards themselves were introduced to the world by Hollywood in “Back to the Future Part II”.

One problem with hoverboards is that they don’t blur the line between fantasy and reality far enough. Rather than hovering above the ground, they trundle along it on a couple of wheels (although someone has now invented one that really hovers; see our Science section). Hoverboard entrepreneurs dealt with this problem by pulling another rabbit from the fantasist’s hat—pretending that hoverboarding is part of the celebrity lifestyle. The trick was to put the product in the right places—at the MTV awards ceremony and under the feet of Justin Bieber. The fad gained momentum as the B-list celebs followed the A-listers, and the wannabes aped the B-listers. Kendall Jenner, a reality-TV starlet, posted a video of herself on one. More than a million people “liked” it on Instagram. Wiz Khalifa, a rapper, was stopped and handcuffed for riding on one in Los Angeles airport. A Filipino priest sang to his congregation while gliding around on one.

The craze for hoverboards also exemplifies the agility of modern business, from the prowess of China’s manufacturing cluster in Shenzhen to the reach of e-commerce platforms in both China (Alibaba) and America (Amazon). China’s manufacturers have a long record of churning out cheap knock-offs at high speed. But they are more efficient than ever thanks to the arrival of internet platforms. Alibaba allows Chinese manufacturers to place bulk orders for components and lets wholesalers place bulk orders for finished products. Amazon completes the picture by allowing Western consumers to have their hoverboards delivered rapidly with just the click of a mouse.

And the hoverboard fad points to a third characteristic: the difficulty of regulating a global supply chain that starts with a fantasy, ends with an Amazon package and takes in a bustling Chinese assembly plant in the middle. Everything in the product’s supply chain emphasised speed over competence. Britain’s National Trading Standards agency found that 15,000 of the 17,000 hoverboards it examined were unsafe because of problems with their plugs, cabling, chargers, batteries or cut-off switches. It is frustratingly hard to hold the various producers of the gadgets accountable for these problems: manufacturers subcontract as much as they can and internet retailers are often simply electronic shopfronts with no influence over product quality. The regulation of hoverboards was complicated further by a legal battle between three separate entrepreneurs over who has the rights to them. Even so, this still does not explain why retailers in the United States were able to sell the products apparently without even rudimentary health-and-safety tests.

Hovering on the edge of legality

The problem may have solved itself: so many hoverboards have burst into flames that Amazon has either dramatically restricted the number of models it sells, as in America, or banned them entirely, in the case of Britain. Several Chinese firms have stopped producing them. But, for a remarkable number of new-economy businesses, the regulatory problem remains unresolved.

Many tech startups have tended to adopt the same approach as the hoverboard industry—exploiting legal grey areas on the ground that, if they build enough momentum, legislators and judges will simply adjust the law to take into account new commercial realities. That is a big bet: many of today’s biggest firms are like hoverboard riders heading for bumpy ground. Uber may be forced to reclassify its drivers as employees rather than contractors, rendering it liable for millions of dollars in back pay and upending its business model. Airbnb may be forced to abide by the health-and-safety and licensing rules that apply to hotels.

The threat of adverse regulation animates the question of whether the hoverboard fiasco is a prophecy as well as a parable. Silicon Valley has long displayed some of the classic characteristics of a bubble: companies vying to build the most eye-catching headquarters and CEOs competing to produce the most extravagant ideas to “change the world”. There are growing signs that private valuations of tech “unicorns” will not hold up when they are subjected to the rigours of the public market. Some unicorns have shied away from going public at the last moment and others such as Good Technology, a mobile-device security firm, have sold themselves at lower valuations than they had hoped. If regulators alter the landscape further, 2016 might be the year that such firms follow the hoverboard and go up in a puff of smoke.


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