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Market Dynamics Will Force Zoom to Reform Faster and More effectively than Government Regulation

The videoconferencing service Zoom has been dominating the economic frontier of our new quarantine reality, but the firm recently ran into some privacy concerns with leaked videos and hacked online meetings. Reaction has been swift and flawed from many politicians. The threat of regulation risks preventing the superior market correction that would otherwise take place.

A few congressional Democrats have urged the Federal Trade Commission to investigate the firm’s privacy and security practices. Some state attorneys general have also expressed interest in legal action. Connecticut Attorney General William Tong told Politico: “We are alarmed by the Zoom-bombing incidents and are seeking more information from the company about its privacy and security measures in coordination with other state attorneys general.”

Meanwhile, back in the marketplace, Zoom went from 10 million call participants a day at the end of 2019 to 200 million a day just three months later. With that kind of rapid growth, a few glitches are understandable. Zoom CEO Eric S. Yuan said in a statement, “we recognize that we have fallen short of the community’s—and our own—privacy and security expectations. For that, I am deeply sorry … ” The blog post then goes on to explain what steps the company has already taken to address the problems and what improvements they are undertaking next, including user education and changes to their systems.

What market action can deliver, which static regulatory action cannot, is dynamism. Zoom can act much more quickly to correct mistakes than Congress or regulatory agencies can. And it’s reasonable to expect the tweaks made by Zoom will be superior in substance too; firms have skin in the game and hands-on expertise that politicians and bureaucrats likely lack.

Frontiers are messy and economic frontiers are no different. Firms will make mistakes. Even Zoom itself admits its failure here. But as long as firms face consequences of losing customers, revenue, and reputation, businesses have every reason to right their wrongs. This isn’t market failure that justifies government interference. It’s just the opposite; this is the market correcting a firm’s blunder.

While markets don’t guarantee perfection, government regulation often prevents even competence, let alone perfection. Restrictions of business practices, fines, or whatever kind of specific regulatory action the government might impose risks preventing or curtailing the corrective actions Zoom would otherwise take. It’s not necessarily a cure worse than the disease, but at best a second-rate cure that comes with lots of unpleasant side effects.

Ironically, many of the same politicians who fret about intrenched market leaders preventing new firms from being successful and call for antitrust action to break up big firms are the same people ready to throw the book at Zoom, a David among the Skype, Google Hangouts, and Facetime Goliaths.

If antitrust crusaders are so committed to new firms exploring the economic frontier and playing the role of creative destroyer, as Joseph Schumpeter so aptly described, would-be trustbusters shouldn’t be so quick to hobble the new guy. Regulators should stay at home. Better to let market forces work to correct mistakes and best serve consumers.