> “The inducement law in Washington is clear,” Commissioner Kreidler said in a statement accompanying the order. “Everyone has to play by the same rules.”
> As a result of the order, Zenefits has worked out a compromise with the State whereby it will offer its software on a paid basis, at a rate of $5 per employee per month.
I don't get it. So the rule is that you have to charge your customers something? Why can't businesses get free services off the fat of VC capital? Who's being protected by this besides existing insurance companies that are getting their lunches eaten?
Note that I'm not defending any of the other shenanigans that Zenefits has done. I'm just curious what the rationale is for requiring them to charge customers a fee. Anti-dumping laws?
The risk is that a well funded company gives away their product, drives all their competitors out of business and creates a monopoly, then jacks their prices up. It could be viewed as anti-competitive.
Yes, this looks like a simple effort to safeguard against anticompetitive behavior of a well funded company. I think there should be proper regulation against this sort of freebies. Even more straight forward example would be Uber vs all other ride-sharing companies. They started off offering steep steep discounts to both drivers and riders (from their VC coffers) while running at a loss, making it impossible for any less funded competitor to even think of entering the business.
There should be some sort of regulation about starting off free and jacking up prices once the competitors are driven out of business. Or if such already exist, it must be enforced and made more stringent.
The old joke is if you charge more than your competitor, you're price gouging. If you charge less, you're anticompetitive, if you charge the same, you're colluding. Basically, government can arbitrarily terminate any business it so wishes.
If you do any of these in good faith then you wont run into any trouble.
* If you aggressively price to extract almost all of the value of your product or service because of an unnatural (i.e. not market based) advantage then you're price gouging.
* If you purposefully operate at a loss with the intended path to profitability being raising your prices later then you're being anti-competitive. We want to reward companies for real efficiency, not just who happens to have the largest VC war chest.
* If you charge the same as your competitor in good faith and don't find yourself in the first bullet because of collusion then there's no problem.
Both have been kicked out of markets for not playing by the rules.
Now they may both "win" in the end and make many billions, so the end story may be "focus on growth not playing by the rules, if you have enough money you will eventually win anyway"
I don't think Uber's case is more obvious. Uber's business only works at scale, therefore they need to get there and deep discounts to get to scale make sense regardless of competitors. This is particularly clear in the case of Uber Pool which only makes sense with lots of riders using it, which you need to bootstrap somehow, or it will not be feasible for anyone.
> Uber's business only works at scale, therefore they need to get there and deep discounts to get to scale make sense regardless of competitors.
I understand why this might appear to be the case, but that's not what this [0] HN front page article analysis asserts.
The article asserts that 'Uber’s actual financial results, which show no meaningful margin improvement through 2015 while the limited margin improvements achieved in 2016 can be entirely explained by Uber-imposed cutbacks to driver compensation. It is also contradicted by the fact that Uber lacks the major scale and network economies that allowed digitally-based startups to achieve rapid margin improvement'.
"Uber's business only works at scale, therefore they need to get there and deep discounts to get to scale make sense regardless of competitors."
Isn't that almost universally true for everything? Is it an acceptable reason to stifle open market competition?
I mean think about any other industry. Say a new airline wants to get into business. Is it okay for them to offer $1 tickets (while writing off taxes/airport fees as losses) until they gain enough market share? What would that do to other competitors in that industry?
Not really. "Only works at [large] scale" means that you cannot be profitable and be a small business.
As over 70% of business transactions in the US are done by small businesses, then most businesses can profitably exist at a small scale.
When something is only profitable at large scale, typically what's done in the western-style economic nations is to (a) make a public company like the US Post Office (b) tightly regulate the market so the inevitable large actors has to serve the public good as is done for insurance currently or (c) hand out monopolies at the local level as is done for telecom companies.
Is it okay for them to offer $1 tickets until they gain enough market share?
No "until", the point is that they would offer $1 tickets forever, it's just that they would only lose money while they scaled. So competitors would still be screwed even after the "dumping" part.
And in a sense, isn't any new business temporarily "dumping" its products? If you're a solo founder writing and selling a SaaS product for $20/month, your income won't pay for the costs (e.g. your salary) until you get enough customers. Is that dumping? What if the competitors' products all cost $1000/month?
I would argue that dispatch was never a large or profitable part of taxi companies. The profitable part was picking people up off the side of the road where network effects do not matter.
That's the part where its a misapplication. These are fundamentally websites we're talking about, not steel mills. The barriers to entry, especially for competitors operating in other states, are incredibly low.
No new roads, no new ports, no mineral leases, etc.
Barriers to entry aren't the only thing protecting a monopolist's position. In many markets, network effects work against a newcomer's ability to acquire customers.
It's not just a website, though. There's the services offered through the website.
And while there might be some competitors that come in (no guarantee of that), it'll still take time. Time which the entrenched monopoly can use to entrench itself further.
But is this a case of dumping? It looks like Zenefits doesn't actually need[1] to charge for the software, in order for their revenue model to work; and it's not dumping if your costs of production are actually that much lower.
[1] edit: or want -- the loss of platform size plus transaction costs might outweigh the extra revenue it would bring?
'Dumping' is just a scare word, used to slander competitors; there is rarely (if ever) any evidence that 'dumping' is used as a tactic to destroy competitors, then hike prices. This irrational fear has been around for a long time, at least since Bastiat's time.[1]
>The risk is that a well funded company gives away their product, drives all their competitors out of business and creates a monopoly, then jacks their prices up. It could be viewed as anti-competitive.
Or they go belly-up and leave people without insurance. Because selling things below cost isn't a sustainable business model, despite how that looks from the confines of Silicon Valley.
>>The risk is that a well funded company gives away their product, drives all their competitors out of business and creates a monopoly, then jacks their prices up. It could be viewed as anti-competitive.
So... Uber? They aren't exactly "giving away" their product but the rides are massively subsidized.
That is the logic they tell the voters, but we all know the reason this law was passed was campaign contributions and speaking fees paid to politicians from incumbent companies.
Their business model doesn't rely on charging for HR software. Their HR software is free and will continue to be free forever. This is just a straight up win for consumers.
Is Facebook, or Hacker News, or reddit "price dumping" its free software?
The same can be said about the Zenefits users. They don't care about the 5 dollars per user that they can make in revenue. They care about the x000 dollars in insurance dollars that they make off of them.
The customer is the insurance companies, not the users. The users are the product, so of course they give it away for free.
The top comment in this tread says: "Why can't businesses get free services off the fat of VC capital?"
Perhaps an explanation of Zenefits' business model is in order. The explanation of it's software being free is and has always been that they don't make money from the software but from the brokerage fees from insurance which is sold through the software.
Think of it like Expedia, they doesn't charge you for flight search and booking software. They make money as a "broker" for the sell of flights. Without any data, I can't nor could a government entity, say whether or not Zenefits is "dumping" using VC money. Zenefits have had their missteps and have paid for them. This case though feels like pure protectionism of existing players.
Again, I'm saying that absent the data. Maybe, this seems unlikely, running the business actually does take more money than could potentially be made from brokerage fees. A reasonable measure, in my mind, could be a look at their average(mean) customer lifetime value. All new customers are going to be negative (cost of acquisition being fairly high for a sales driven company) but over time it should recover unless the average customer churns quickly. VC dollars _should_ reasonably be spent on increasing up front spend in order to acquire customers more quickly. If Zenefits have increased that spending so dramatically that the average customer isn't profitable then perhaps it should count as dumping.
This is based on the regulation that brokers can't be better than one another on the basis of price. You can't give "kickbacks" to your customer that make you appear to be a better option. The health insurance companies get the same premium regardless of broker (1), so this is about inter competition between the brokers, not insurers.
(1) OK, well in the large group segment you could make an argument that a sufficiently large broker could use that pressure to negotiate better rates with the insurance companies, but I don't know if that's the tack being taken here.
Zenefits doesn't want to be an insurance company, they would much rather be a broker.
But to actually answer your question, a broker is a tool for the consumer / provider to facilitate sales. If there's a better replacement tool, we don't need brokers. For example, travel agents used to be the best tool to find and purchase flights, but they have been replaced by Kayak and competitors.
I know what brokers ostensibly do. I'm asking: Why do we need healthcare insurance brokers in this day and age? If the answer is "we might not", then entrenched middlemen shouldn't be propped up by outside lobbyists, regulations, or "because, jobs."
In fact, you could probably make a real case that middlemen are directly responsible for substantial markup on healthcare insurance costs!
You could make that last case: However, I think a broker is probably the best way to compare different insurance plans when buying from the market instead of through your employer.
For example, take 3 insurance shoppers. One has asthma, the second diabetes, and the third has MS. The three have vastly different needs for care and coverage, and the key to matching up the needs is the broker.
The need for brokers could theoretically be eliminated, but that would take some government software and regulation and whatnot to get done.
Three capitalist pigs were sitting in a jail cell in glorious Soviet Russia. They were discussing their plight, and how they might be better re-educated for the benefit of the proletariat, when they got onto the topic of their incarceration.
The first says, "I sold my goods for more than my competitors, and was found guilty of price gouging "
The second says, "Well, I sold mine for less, and was accused of dumping."
To which the last responded, "And I sold mine for the same as everyone else, and I sit here for collusion!"
"As part of its free software offer, Zenefits provided certain features with a paid commission. To access these premium features, the company required the client to designate Zenefits as its broker of record, then collected the commissions associated with the insurance product sold."[1]
Free software is fine with Washington state. Attaching an illegal revenue stream to "free" isn't.
Zenefits should show a counter on their site to each logged in user: "Get the state law changed and we will refund you the $24,545 you paid us so far." Let a few hundred thousand businesses see that amount in their dashboard and see if it affects the support of the law.
As a licensed insurance agent and tech person working in insurance, this sort of law is common and is a big part of the ethics portion of the licensing exam. I honestly don't think it applies here, but I could see how it could be justified.
Mostly it's to prevent brokers from giving customers kickbacks (either pure money or gifts). When a broker is helping people make decisions about what plans to buy, it seems like a reasonable restriction, although I don't think the intent was to prevent what Zenefits is doing.
Kickbacks just means "charging customers less money" and "giving customers a better deal than their competitors" and "competing in the free market".
The insurance industry is so messed up that they have made it illegal to give customers good deals and have made it illegal to compete.
Imagine that a bunch of companies got together and decided that everyone should increase their prices. In the normal world that would be called illegal monopolistic pricing. In the insurance world, charging people less money and giving consumers a good deal is the illegal thing.
Kickbacks (especially in the form of gifts) often go to the individuals rather than the company.
A broker who gives a 10% discount to a company saves the company money which allows them to get their employees a better plan (or higher profits or whatever).
A kickback of steak dinners and free golf for the HR manager is more like a bribe: no benefit accrues to the company itself.
Insurance prices are often approved by state regulators. It requires approvals and the state provides backstops and other safeguards. Prices in the insurance industry are pretty controlled. This even goes so far that despite there being a state backstop to many forms of insurance, a broker or agent aren't allowed to even mention this safety net without violating ethics laws. As for "why", I'm not completely sure. My guess here is it's to minimize the chance of the state needing to get involved with bailouts and to reduce competition so that companies don't take on unreasonable risk playing the odds that they'll make it through another year on the happy path without paying claims.
Honest question. Why is charging consumers higher prices the "ethical" thing to do? Giving "kickbacks" is just another word for "charging customers less money".
Is the issuance industry so messed up that choosing to not screw over consumers is considered "unethical".
The health insurance industry is heavily regulated. Typically regulation begets more regulation, it's conceivable that they've limited insurance cos in such a way that the inducement restriction for brokers makes sense.
You definitely want insurance companies competing on price, but you may not want insurance brokers arbitrarily giving out rebates.
Imagine (and this is totally made up) that the insurance companies give brokers higher commissions at higher volumes; if that were the case, and brokers could give rebates, there are times a broker would push one insurance company's plan over another's simply to hit a sales incentive. That's probably not good for the people buying insurance. Part of the broker's job is to give good advice.
In the retail world, there's now far, far less corruption than there used to be. When buyers from Home Depot came to visit my employer, they wouldn't even accept a soda because there was a strict, zero tolerance, no receiving anything from a manufacturer policy.
This was driven initially by Walmart, which has a similar policy, because executives at Walmart realized that if manufacturers were bribing their buyers, the cost of those kickbacks was being built back into the price of the product. By loudly (and actually) having and enforcing a "no taking anything" policy, they could then demand further price reductions. This is now widespread.
A broker offering kickbacks or discounts is recouping the cost somewhere. If the product is the same but they're cheaper by the broker, then it's likely that the product isn't the same in fact--perhaps there's some special rider in the contract, or maybe the broker just knows how to slow-walk or otherwise chip away at claims. The insurance industry is famous for some parties failing to provide the future service you're purchasing on technicalities or just bureaucratic abuse.
In a market where expert assistance is needed, and end users can't fully protect themselves with informed purchasing, requiring parties offering the same service to charge the same price is a way of forcing honest dealing. That's the idea, anyway.
Insurance itself isn't a consumer-friendly product without regulation. It's too easy to make a lot of sales and just disappear when the going gets tough. One bad player can run all the good ones out of business by out-"competing" them. I wouldn't be surprised if there are similar games to play in the insurance broker business but I'm not sure how it's done.
Wouldn't it make more sense to impose a capital requirement, like on banks? E:g. if you're insuring for $X in total value, you need to at least keep $Y in a fund.
Good comeback. People in general understanding that and fighting it would be really helpful. Instead, they too often fall for the published excuse for laws or regs that only existed for money or votes in key districts.
Or, heck, they don't think about the published excuse at all. That's the real knotty problem - most people don't really have the time or information or inclination to care, so regulatory capture just keeps ratcheting up because each new step "seems reasonable".
Well, I was kind of joking. People who call it "regulatory capture" of course understand the concept. To most people it's counterintuitive and barely grasped.
To be fair, Uber is a much better example, Airbnb not so much. Uber is shitty in the way it treats drivers, but the majority don't seem to have an issue with the platform (doesn't excuse their behavior). The housing laws Airbnb is constantly battling with are to protect residents from inflated housing costs, and if Airbnb gets its way it is going to do actual damage compared to the "think of the taxi drivers" silliness that Uber runs into.
Uhh, that's generally not the purpose of housing laws. Residents generally benefit from higher housing prices, since they usually own houses. From what I understand, it's a mix of giving political power to local homeowners, protecting housing prices, and opposing things that make the area less desirable to live in. NIMBY bullshit, basically.
I mean, sure, it's marketed as being a measure to control housing prices, but so is rent control.
Property owners benefit from higher housing prices, in dense urban areas these are not typically the same people that occupy the dwelling. Renting out apartments on Airbnb removes that unit from the local housing stock, raising prices as demand increases and supply drops. This is why San Francisco is battling with Airbnb, housing is already expensive enough, having people sub-let apartments or buy houses only to put them up on Airbnb is making an already bad housing shortage even worse.
"Uber is a much better example, Airbnb not so much. Uber is shitty in the way it treats drivers, but the majority don't seem to have an issue with the platform (doesn't excuse their behavior). "
I'll take that one. Especially "think of the taxi drivers silliness." It's the kind of stuff I'm talking about that's politically motivated.
Regulations such as creating a high, financial, barrier to entry that benefited incumbent, taxi companies more than consumers. Regulations paid for by lobbyists for incumbent, taxi companies. Corruption 101.
Yes. Unless you think the taxi companies were giving millions to local politicians protecting them just coincidentally and out of some greater good. Example of that plus the competition responding similarly:
No. I have not, nor will I ever buy into the propaganda that Uber was out to do anything to regulations. They were out to make money, and they decided they didn't have to follow the law. That's it.
> “The inducement law in Washington is clear,” Commissioner Kreidler said in a statement accompanying the order. “Everyone has to play by the same rules.”
> As a result of the order, Zenefits has worked out a compromise with the State whereby it will offer its software on a paid basis, at a rate of $5 per employee per month.
I don't get it. So the rule is that you have to charge your customers something? Why can't businesses get free services off the fat of VC capital? Who's being protected by this besides existing insurance companies that are getting their lunches eaten?
Note that I'm not defending any of the other shenanigans that Zenefits has done. I'm just curious what the rationale is for requiring them to charge customers a fee. Anti-dumping laws?