Commentary: E Exchanges May Keep Trustbusters BusyDan Carney
At the American Bar Assn.'s annual antitrust confab in Washington D.C. in early April, one topic dominated the coffee-urn chatter--and it wasn't Microsoft. Since the start of the year, dozens of stodgy industries, from big oil to defense, have rushed out plans for joint-venture Web sites. Their idea is to buy or sell goods and services collectively, an effort to out-com the dot-coms. While such purchasing exchanges are a good idea in principle, they raise thorny legal issues that backers are confronting only as afterthoughts. New York antitrust lawyer Richard M. Steuer warns: "They are coming to their counsel and saying: `It's a done deal. Now we need some advice."'
New Economy or no, a little prudence is in order. If many major players in an industry go into business together, it's bound to raise eyebrows in Washington. The Justice Dept. and the Federal Trade Commission--not just the ABA--are intensely interested in the new ventures. Indeed, the FTC already has launched a probe of the e-exchange planned by the big three auto makers. Says FTC policy planning chief Susan S. DeSanti: "We believe it's important to get things right from the start."
COMPLEX ISSUES. None of these mega-sites has gotten past the embryo stage, but their goals are clear. Some, such as the parts mart planned by carmakers, will let members order goods from suppliers. Others will be set up primarily to sell finished products. And some, including an aerospace-industry site, will do both. Most are business-to-business exchanges, but a handful--notably a travel site to be owned by United, Delta, Northwest, and Continental--will market directly to consumers. All have the potential to spur big gains in market efficiency. And all pose antitrust issues that must be resolved early.
One question is who will own these ventures--and who will be allowed to join in the future. If a site is to be owned by a fixed number of partners, it will have to show it is not unfairly excluding anyone, says former FTC antitrust chief Kevin J. Arquit, now with Clifford Chance Rogers & Wells LLP in New York. The burden will be greatest in highly concentrated industries such as aerospace. That's one reason four major defense contractors decided early that their joint venture would be open to future partners.
Another problem could arise if Web partners use bricks-and-mortar dominance to gain an edge in e-commerce. For instance, if the airlines behind the travel exchange refused to give fare information to rivals such as Travelocity and Expedia, trustbusters could step in. The carriers vow they won't withhold data, but they do plan to offer discounted fares on their site that won't be available elsewhere. This infuriates travel agents, who are pressing Justice for a formal probe. They say the tactic is meant to wipe out not only rival exchanges but also traditional travel agents, thus eliminating other sources for airfares. "They are trying to get rid of all third-party information," says Paul M. Ruden, senior vice-president of the American Society of Travel Agents.
The most complex competitive issue arises on sites that primarily sell goods. If partners post price cuts or hikes and then quickly withdraw them, the government is likely to view this as a kind of price fixing. Prices posted at off hours also could raise red flags, since exchange members might be floating prices past their venture partners (who are their real-world competitors) rather than trying to find actual buyers. Justice accused seven airlines of doing something similar in the early '90s, using their old mainframe-computer reservation network. The two sides settled out of court in 1994.
To avoid some of these snarls, joint-venture partners need to follow a few ground rules. They should invite all the players in their industries to participate. They must set clear policies designed to avoid potential price collusion. And they should agree to do business with competing exchanges. Most proposed industry sites haven't yet addressed these issues. But if their backers want to avoid a nasty call from the Feds, they'd better do so--at Internet speed.