The Broad Backlash Against E Tailers

Brick-and-mortar rivals set up legal curbs all over the place

When Texas-born Jonathan Coon co-founded 1-800 Contacts Inc., a venture that sells contact lenses over the phone, fax, and Internet from an office in Orem, Utah, he made his native state an early target market. But the Lone Star state has given Coon the cold shoulder. In 1997, Texas optometrists successfully lobbied to pass a law requiring out-of-state lens providers to obtain the original, hand-signed prescription before shipping contacts to Texas customers. That makes it more time-consuming to order on the Web, which generated half of 1-800 Contacts' estimated $145 million in sales last year. "Retail optometry has done a good job of striking fear into the hearts of consumers," fumes Coon.

He's not the only online entrepreneur to feel the sting of a brick-and-mortar backlash. Threatened by displacement in cyberspace, retailers, distributors, and other middlemen are waging a surprisingly successful, behind-the-scenes campaign to block e-commerce. While a few cases have come to light, most have occurred under the radar screen at the state level. Now, a new report, due on Jan. 31 from the Progressive Policy Institute, a Washington think tank, catalogs how pervasive the offline rush for protection in everything from autos to wine has become. "The revenge of the disintermediated represents perhaps the biggest threat to the widespread digitization of the U.S. economy," says Rob Atkinson, director of the Technology & New Economy Project at PPI and author of the report.

Atkinson figures that anti-e-commerce efforts cost Americans at least $15 billion a year. And that has consumer groups turning up the heat. The nonpartisan Consumer Federation of America is working on a study showing how consumers are being penalized by state curbs, strongly backed by dealers, on Net auto sales. "This is the kind of fight we really like to take on," says Mark N. Cooper, CFA's director of research.

Of course, industries threatened by economic change have often sought government protection. In the 1920s, the Horse Association of America campaigned to limit the use of trucks and automobile parking on public roads. Independent banks lobbied in the 1930s for a ban on branch banking that was a bulwark against big banks for nearly half a century. But because the disintermediation wrought by the Net is so far-reaching, the reaction has been unusually broad, as the PPI report makes clear.

TELEMEDICINE. Consider radiology. Because X-rays and other forms of medical imaging move easily across the Net, patients can get second opinions from out-of-state practitioners without having to travel. But while this expands opportunities for some doctors, many fear the competition and are pushing to strengthen state licensing laws to raise the bar for out-of-state radiologists. So far, only six states have rules that make telemedicine easier. "Issues around protecting turf do enter in," says Dale L. Austin, an official of the Federation of State Medical Boards, which backs easing the rules.

Wine merchants, music retailers, and realtors have also appealed to lawmakers and the courts to rein in e-commerce. Last year, liquor wholesalers successfully lobbied Congress to let states go to federal court to sue out-of-state suppliers that ship alcohol to consumers in states that ban direct shipments across their borders. "Just the threat of that will diminish online sales," predicts David K. Rher, president of the National Beer Wholesalers Assn. The National Association of Recording Merchandisers is suing Sony for selling compact disks that, when played on a computer, can link users to a Sony-owned Web site where they can purchase more CDs with a few mouse clicks.

Many of those battling shops in cyberspace argue that they just want to level the playing field. Wineries shipping direct to consumers who order on the Web, Rher insists, don't pay state sales and excise taxes and don't take precautions to keep deliveries out of minors' hands. Others say they are acting in consumers' best interest. "With fewer companies controlling too much copyrighted material, there won't be room for choice" or price competition, says Pamela Horovitz, president of the recording merchandisers suing Sony. And radiologists who balk at letting out-of-state specialists make diagnoses from images made locally say patients need to be protected from unqualified practitioners.

What to do about the e-commerce protectionists? Atkinson recommends that the Bush Administration create an e-commerce ombudsman to advocate for cybercompetitors. That's not likely, given Bush's hands-off approach to markets. But the feds already seem to be taking his suggestion that they beef up enforcement against retailers that collude against companies selling directly via the Net. Last year, the Justice Dept. forced the National Association of Realtors to stop requiring brokerages to list exclusively with its Web site, But for now, the brick-and-mortar folks will be keeping the pressure on.

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