The Coronavirus Recession, Tech, and the Market for Legal Services

Post-2008, it quickly became conventional wisdom that technological innovation, including artificial intelligence, was going to transform both the practice of law and legal job market. The promised changes didn’t materialize. Will they now, amid twin imperatives to cut costs and avoid physical contact, and with tech more advanced?

The specific claim was that the 2008 recession strengthened the bargaining power of clients, who were long unhappy with footing the bill for training junior lawyers, at a time when innovation offered a plausible alternative: substitution of technology for human labor.

Tech tools have long assisted law practice. But tech was now said to be “transformational” because it would substitute for, not merely complement, law jobs. The government labor analysts dismissed this, but the nature of the claim made it just the kind of thing they’d miss.

Continue reading

Is Online Education Likely to Prove a Complement or Substitute for In-Person?

With educational programs from K-12 to graduate school nationwide going online nearly instantly in the midst of a devastating pandemic, a vigorous debate has begun over whether, post-COVID-19, education will go back to being an in-person activity or will remain online, especially at the postgraduate level. My focus here will be on the latter, in particular law schools.

Prof. Josh Blackman writes, “This is the new normal. We are not going back.” Prof. Howard Wasserman believes students hate it and is in general more bearish on total transformation. My views here are very much subject to revision—events are moving fast, and more evidence will become available—but for the time being what I hope to contribute to the discussion is a framing device: the economic distinction between complements and substitutes. Coke and Pepsi are substitutes, keyboards and mice are complements, and bicycles and buses (and bourbon and soda) can be either complements or substitutes, depending on circumstances. We do ourselves a disservice when we assume online teaching and conferences are in competition with their live counterparts—in other words, that they are only, or mostly, substitutes.

Most innovations are complements, not substitutes. Online classes and conferences are, right now by necessity, substitutes for their traditional live counterparts. The extent to which they are perfect substitutes is highly contingent on other factors, on both the creator and consumer side as well as external factors. At some point, the necessity will end (we hope). I am skeptical online will end up being deemed close to the perfect end of the spectrum, but of course that conclusion is debatable.

Continue reading

Petty Tyrants Rejoice

Today, Yelp appears to have removed almost 1,000 reviews of the Union Street Guest House, many of which were negative and stemmed from the controversy that was the subject of my post this morning. As of about 4:15PM ET, the hotel’s average Yelp review was up to 2.5 stars, from 1.5, and there were 15 total reviews, down from almost 1,000 as recently as yesterday.

I can’t say I like this outcome. Much like the original dispute between consumers and the Union Street Guest House, any grievance over Yelp’s decision is likely to sound in contract law. While I argued that that body of law would probably produce a “pro-consumer” result (by prohibiting USGH from enforcing its policy), I think in any dispute over Yelp’s decision contract law would not be of much help to consumers.

Henry VIII was a not-so-petty tyrant.

Henry VIII was a not-so-petty tyrant.

Review controversies are a flashpoint for Yelp. Both the company and individual Yelpers have been sued repeatedly over reviews, often by business owners annoyed by what they regard as unfairly negative or even defamatory reviews (or alternatively, for fluffy Yelping by the friends and family of competitors). A few weeks ago, a businessman-plaintiff notched some progress against Yelp in a California appeals court.

Some of this litigation turns on fine distinctions that only matter to those who follow this stuff – for example, the California lawsuit alleges that the company misrepresented the accuracy and efficacy of its review filter, not that it improperly filtered reviews in the first place – but to the average consumer or business, that will seem like hair-splitting. The key question for most people is the scope of Yelp’s discretion in deleting or promoting reviews.

Yelp’s discretion is vast, by design. The company is publicly held and, as one would expect, it appears to use seasoned lawyers to draft important disclosures and agreements.

Yelp’s Terms of Service are characteristically broad for a social media company. They tell users that “you hereby irrevocably grant us . . . rights to use Your Content for any purpose(emphasis mine). Just to make the definition of “use” completely clear, they specify that “[b]y ‘use’ we mean use, copy, publicly perform and display, reproduce, distribute, modify, translate, remove, analyze, commercialize, and prepare derivative works of Your Content” (emphasis mine). In other words, the right “to use . . . Your Content” includes the right “to remove” your reviews, or for that matter do just about anything else they want to with them. Well then.

It’s possible these terms could be held to be unenforceably vague or unconscionably broad in some instances, but I doubt that would happen here. (If Yelp sought to “use” your profile picture to market pornography, you might have a case.) So if a private citizen or regulator complains about Yelp deleting Union Street Guest House reviews, you can expect the company to cite these terms while gesturing in the direction of higher principles, like improving accuracy by working to ensure that its reviews are written only by actual customers. If you were to note that many reviews of actual customers appear to have been deleted as well – which I strongly suspect has happened in this case, given that (as sorting by date reveals instantly) Yelp has removed all reviews posted between April 3, 2014 and August 5, 2014, inclusive – they would surely lean on their prerogative, under the ToS, to delete any of Your Content. This is before considering the effect of any statutory privileges that may protect Yelp.

Abstracting back from Yelp’s rights to first principles, it seems sensible, on one hand, for a company to limit reviews to actual customers (if that’s what Yelp is trying to do); one can see why Yelp wouldn’t want a ton of random people with no connection to a place commenting on it. Cf. hearsay. On the other hand, it’s a shame that reviews that discuss an official policy of the establishment aren’t allowed unless someone has patronized it. And what does “patronize” mean, anyway? Buy something? Stay the night? Surely a review site would want to let someone who walked in, or called, and was denied service because of his appearance or accent say as much in a review. How to answer these questions is up to Yelp. Whatever their internal policies, I suspect they have to make a lot of judgment calls. In the end, a contract-based analysis is unlikely to do a lot of “pro-consumer” work here.

But not all is lost. If you patronized Union Street Guest House and wrote one of those now-deleted reviews, you can feel a sense of pride in “Your Content” being nobly sacrificed in the war against petty tyranny.

3 Thoughts on the Alibaba IPO

Chinese tech-company giant Alibaba filed papers this week to go public in New York. Since this news is at the intersection of three sexy topics – tech companies, large amounts of money, and the general sense that anything big and China-related must be a unique threat/opportunity  there has been a lot of reporting on the company’s planned initial public offering (see, e.g., herehere, here).

Alibaba is an enormous company. Estimates of its value range from $100 billion to $235 billion, in the ballpark of American Express to AmEx plus Amazon. The company is arguably even “bigger” if you consider it in terms of reach rather than economic value. As Zach Karabell put it in Slate, Alibaba is “a behemoth in China that acts as an Amazon, PayPal, and UPS all rolled into one, plus a dollop of Facebook and other social network sites.”

I have three observations about what the Alibaba IPO might mean for U.S. equity markets, Alibaba’s plans, and Yahoo, which owns a 24% stake in Alibaba:

1. Despite various headwinds, U.S. equity markets continue to dominate. Specifically, U.S. markets continue to be the destination of choice for many global companies – which now includes China’s most ambitious tech company as well as many European tech companies – looking to raise capital. As the chart below indicates, it’s not even close; Alibaba is just the latest data point.  This observation cuts against two common memes: one about the putative burden of U.S. regulations, the other a generally overstated point about the declining relevance of the U.S.

    • Every time U.S. securities regulation expands, there’s an immediate objection that the costs of regulation will drive companies overseas – either they’ll reduce their U.S. presence or they’ll choose to list on an exchange in a jurisdiction with more lax securities laws. Most recently we have seen this argument during the debates over Dodd-Frank, but it comes up a lot. It was prominent during debates over Sarbanes-Oxley, and it colors discussions of America’s accounting and anti-corruption regimes (GAAP and the FCPA, respectively), which are among the most stringent in the world.
    • I don’t think anyone disputes that these forms of regulation have the potential to chill capital formation in the U.S. to the point of sending it abroad. A serious effort to measure the tradeoffs would require a data-intensive study in itself (not a blog post), but it’s worth emphasizing just how competitive U.S. capital markets continue to be. To date companies, including foreign companies, have continued to come to market in the U.S., opting into those onerous U.S. regulations. Although it would be nice to find more longitudinal data (this only covers two years), you can see from the table below that U.S. equity markets continue to dominate (PDF) the world – in 2013, they accounted for about one half of the total value of the planet’s top ten stock markets and are at least holding their own from 2012-13:

World Federation of Exchanges - 2013 WFE Market Highlights

    • This is probably because American equity markets offer network effects and other competitive advantages that no other market can match. As Karabell argues, U.S. markets are better positioned “in terms of complexity, liquidity, and transparency. . . [If] you are almost any company of size doing business anywhere in the world, the United States remains a safe and potent place to raise capital.” (This has been true for as long as anyone reading this post has been alive.) Our sophisticated regulatory framework is integral to that competitive advantage.
    • One caveat to this point is that right now U.S. equity markets are likely benefiting from the perception that they are safe and stable relatively speaking, and offer shares denominated in the world’s reserve currency. Modest growth in the U.S. paired with elevated economic and political risks abroad would appear to favor issuing in the U.S. at the moment. It will be interesting to see what happens to the U.S. share of the global public equity market if/when economic conditions normalize and some of those political tensions ease. But it’s also not clear the U.S. will lose this advantage anytime soon, since there are always economic and political tensions.
    • In Alibaba’s case, it has also been reported that the company’s unique ownership structure means it could not list in Hong Kong. If that’s true, the U.S. may have an additional competitive advantage on that point, though it seems likely that other factors also drew them to New York.

2. Alibaba’s F-1 registration statement tells us very little about the company’s plans. There’s been Talmudic scrutiny of this filing, as if the true intentions of the company are now hiding in plain sight, just waiting to be divined by someone with expertise in legal and financial jargon. This places far too much weight on the F-1, which is a basic disclosure document that must be filed by any foreign company issuing securities in the U.S.

    • Quartz ran an article yesterday headlined, “Alibaba isn’t going global – at least not yet,” that exemplifies this practice. Analyzing the F-1, the author emphasized that in that document “Alibaba framed its growth prospects in terms of only the Chinese market. . . In fact, Alibaba doesn’t list eBay or Amazon in its list of competitors, naming only Chinese firms,” and regarding the proceeds of the offering it only states they will be used for “‘general corporate purposes’ and short-term debt instruments or bank deposits.”  From this the author concluded that “it’s not apparent that funds from the listing will go toward international expansion.” Elsewhere we see bald assertions that Alibaba really has its eye on the Chinese market.
    • To the extent these comments are based on the registration statement, they are overblown. These disclosures are designed to satisfy the relatively limited requirements of the Securities Act of 1933, not tip the company’s hand.
    • So why else are they raising money? Beyond the usual reasons – raising more capital than is feasible as a private company, allowing early investors to cash out – I have no idea. However, it’s worth noting that being a U.S.-listed company may make it a little easier for Alibaba to do a few things. One is acquire other American-listed companies that offer services in the U.S. that Alibaba offers in China, on the basic principle that deals among firms that share regulators and an investor base tend to implicate fewer regulatory and other concerns than pure cross-border M&A. Given the enormous size and diversity of Alibaba businesses, that is potentially a lot of U.S. companies – eBay, maybe, but a lot of smaller ones too. It would be idle speculation on my part if I said I thought they were going to do some big acquisitions in the U.S., but the limited “use of proceeds” they declared in their registration statement certainly does not mean they are not going to. There is nothing nefarious or Trojan Horse-like going on here; it’s an issue of reading too much into registration statements.
    • Bottom line: to understand Alibaba’s F-1 statement to the point of drawing conclusions about the company’s growth strategy, you’d have to have a lot of knowledge about Alibaba, its current competitors, and the industries it could plausibly enter. I suspect few journalists poring over the statement can clear that bar (I certainly can’t).

3. What will happen to Yahoo stock and Yahoo CEO Marissa Mayer’s reform efforts once Alibaba goes public?

    • Currently, Yahoo owns 24% of Alibaba, and the value of Yahoo excluding Alibaba is probably less than zero – about negative $3.45 billion by one calculation. For years now, Yahoo stock has partly served as a vehicle for owning an indirect piece of Alibaba’s explosive growth in China. Soon, anyone interested in buying into Alibaba will be able to do so directly, and it’s been reported that Yahoo will sell around half its stake in Alibaba after the IPO anyway.
    • It’ll be interesting to see what impact all this has on Marissa Mayer’s efforts to overhaul Yahoo. Those efforts have generally been well received by Wall Street to date. With Alibaba contributing much less to Yahoo’s top line in the future, will she have less freedom of action (because revenues are down) or more (because revenues are down)? Even more intriguing, maybe she’ll find some really neat way to put the proceeds of the sale to use (one-up Tesla CEO Elon Musk’s hyperloop idea?). But based on what she’s been doing, we’ll probably see a boost in dividends and buybacks instead, and maybe an acquisition or two.

My thanks to Chris Gaskill, who has advised companies on IPOs as outside counsel and has worked in house at two public companies, for his thoughts on these subjects. As always, all opinions are my own.