Antitrust Enforcers Click on BTBThe Internet is revolutionizing the way businesses in virtually every sector of the economy go to market. The first wave involved business-to-consumer initiatives, characterized by the phenomenal rise of Amazon.com.
The most recent manifestation is the proliferation of business-to-business electronic marketplaces, which create online exchanges or sites for the purchase and sale of goods and services among companies.
Forbes magazine reported that 600 BTB sites in hundreds of industries have been launched, and new initiatives are being announced daily. More celebrated examples include MetalSite (metals); MyAircraft.com (aeronautics); WorldWide Retail Exchange (retail); and the BTBs being formed by Procter & Gamble, Nestle and H.J. Heinz (consumer products).
Perhaps the most highly publicized BTB is Covisint, an exchange being formed by General Motors, Ford and DaimlerChrysler to establish a global, independent auto parts exchange for the companies' suppliers and dealers. The Big Three automakers announced their joint initiative Feb. 25, noting that the new venture will create "the world's largest virtual marketplace" and will offer "open participation to all automakers around the world, and their respective market suppliers, partners and dealers."
By late March, however, it was reported to be under antitrust investigation by the Federal Trade Commission and the European Commission. More recently, it was reported that the FTC is looking into GlobalNetXchange, a BTB exchange being formed by Sears, database software maker Oracle and French retailer Carrefour to serve the retail industry. It also was reported that the Antitrust Division of the U.S. Department of Justice has launched a probe into the meat and poultry processing exchange being developed by IBP, Tyson Foods, Gold Kist, Farmland Industries, Smithfield Foods and Cargill. Observers suspect that these reported investigations are just the tip of the BTB iceberg.
These suspicions were largely confirmed in June, when the FTC hosted a two-day "public workshop" in Washington on BTB electronic marketplaces. Mario Monti, European Union competition commissioner, hailed the FTC workshop as a "highly promising" forum in which to assess "BTB exchanges' implications for competition policy."
What's the Buzz With BTBs?
The antitrust enforcers concede that BTBs promise enormous efficiencies in reducing transaction costs among commercial trading partners. In its 1999 annual report, BTB e-marketplace FreeMarkets, Pittsburgh, estimated that its clients enjoyed average savings of 15 percent across all product categories by participating in its BTB marketplace, with United Technologies reportedly realizing savings of 43 percent on a $42 million circuit board procurement via a FreeMarkets auction. The BTB marketplace also offers enhanced market visibility and access to buyers and sellers, especially to small- and medium-sized enterprises.
So why are the antitrust regulators concerned about efficiency-enhancing ventures intended to promote lower prices, reduced transaction costs and improved market access to SMEs? The only thing that the FTC's BTB workshop made clear is that the regulators don't have ready answers.
A variety of factors have contributed to the agencies' fixation on BTBs. First, the BTB phenomenon is big business. According to analysts, BTB transactions, which represent 80 percent of Internet commerce, are projected to grow from $237 billion this year to $2.8 trillion by 2004. Second, a large number of BTB initiatives (including Covisint) involve collaborative arrangements among horizontal competitors -- which inevitably invites antitrust scrutiny. Third, BTB marketplaces involve a new, Internet-based platform for business transactions and models that largely represent uncharted territory for regulators. And fourth, conflicting interests of interest groups have undoubtedly fueled the regulators' imagined vision of the inevitable virtual smoke-filled chat rooms that will result from industry-sponsored BTBs.
The Devil's in the Details
The enforcement agencies have indicated -- publicly, at least -- that they are keeping an open mind about the degree to which BTBs may raise potential antitrust concerns. This is not only the right policy call; it's the only responsible call. The term "BTB" encompasses an array of business arrangements that may or may not raise serious antitrust issues.
At one end of the spectrum, a BTB may only facilitate one-on-one Internet-based connectivity between individual buyers and sellers. At the other extreme, a BTB venture might involve a joint sales and marketing arrangement among competitors. The BTB buzzword is not a unitary concept, and it is not susceptible to one-size-fits-all antitrust analysis.
Several guideposts will shape that analysis, however. Where the BTB venture is organized by competing firms, the agencies have indicated that the U.S. Department of Justice/FTC Antitrust Guidelines for Collaborations Among Competitors will provide the starting point in their BTB analysis. Following are the principal areas of focus:
Joint marketing. The guidelines recognize that agreements to sell, distribute or promote goods or services on a joint basis "may be pro-competitive, for example, where a combination of complementary assets enables products more quickly and efficiently to reach the marketplace."
On the other hand, the guidelines caution that when a joint marketing arrangement involves agreements on price, output or other competitively significant variables, the arrangement can result in anti-competitive effects. Seller-oriented BTBs can expect heightened scrutiny to the extent that they involve such agreements.
Joint purchasing. The guidelines similarly recognize the pro-competitive and anti-competitive potential of joint purchasing. On the positive side, joint purchasing can reduce transaction costs through scale economies in purchasing, reduced manufacturing and warehousing costs, and other efficiencies. As a consequence, BTBs directed at joint purchasing normally will not raise serious antitrust concerns, unless either they pool purchases accounting for a substantial percentage of total market purchases of the relevant product (giving rise to "monopsony power" concerns); or the jointly purchased inputs represent a significant element of the competing firms' downstream output costs (potentially resulting in downstream price stabilization or coordination).
Information exchange. The guidelines caution that in some circumstances, the sharing of information among competitors "may increase the likelihood of collusion," especially when the shared information relates to price, output, costs or other competitive variables. The agencies also have indicated that these potential concerns may be heightened in the BTB context, given the real-time nature of the information flow.
The agencies have cited the 1993 consent agreement in United States vs. Airline Tariff Publishing Co. as a "poster child" for the potential for abuse in information exchange. In that case, the Department of Justice charged that the defendant airlines colluded to increase prices and eliminate discounts through their computerized fare dissemination venture. However, ATP Co. was a garden-variety conduct case.
The government did not challenge the underlying venture nor the inherent price transparency. Rather, the government's challenge focused on conduct that allegedly constituted an express price signaling scheme, involving the advance communication of proposed fares among the airlines and the use of codes in the fare descriptions as a means of initiating a series of collusive offers and acceptances on individual fares.
While ATP Co. is useful as a point of reference as to the type of conduct that should be avoided, it should not be interpreted as presenting a serious obstacle to legitimate BTB activities. This is true regardless of whether the BTB model entails price transparency as a necessary element.
Membership/exclusivity. The agencies have indicated that BTBs may raise two concerns vis-à-vis membership rules: exclusion, i.e., restrictions permitting only select businesses to participate in a BTB marketplace (or only allowing them to participate on discriminatory terms); and exclusivity, i.e., rules prohibiting firms that participate in a marketplace from participating in other BTBs. Such restrictions may often be unnecessary at best and counterproductive at worst from a business standpoint.
New BTB exchanges usually will want to promote "open access" to drive volume. And the ultimate success of a BTB will depend on the extent to which it generates cost savings and other efficiencies to its participants, as opposed to artificial exclusivity commitments. Still, certain membership limitations and purchasing commitments may nevertheless be perfectly lawful. The underlying purpose of the restraint and its net competitive effects will need to be examined to assess its ultimate legality.
Network effects. The agencies have indicated that competitive concerns may be raised if a BTB exchange establishes a dominant position in the "market for marketplaces." They have indicated that "network effects" -- pursuant to which the value of a particular product or service increases as others use it -- may have particular relevance in the BTB context, since such effects may dictate that only one (or very few) BTB exchange will become the marketplace.
Where that conclusion takes them is not entirely clear, since one hopes we are beyond the "big is bad" mentality that motivated antitrust enforcement in earlier eras. At a minimum, the potential significance of network effects analysis in the current enforcement climate dictates that the agencies will be inclined to examine the possible "overinclusiveness" of industry-sponsored BTBs, and that the more successful BTBs will need to be especially circumspect in connection with imposing rules or other measures that may be viewed as unreasonably exclusionary.
The potential antitrust issues raised by BTBs are hardly new, and traditional antitrust rules seem adequate to address this new phenomenon. More importantly, antitrust rules do not present any fundamental obstacles to the creation and operation of a properly conceived BTB, regardless of whether it is organized by competing firms.
At the BTB workshop, the FTC representatives -- including the commissioners -- emphasized that they perceive the pro-competitive promise of BTBs and that they are approaching these new e-marketplaces without preconceived regulatory bias. At the workshop and elsewhere, the agencies have merely identified certain areas of potential antitrust concern, all of which can be addressed with forethought in the BTB's planning stages.
Perhaps the greatest risk lies in the potential development of conflicting antitrust rules in different jurisdictions. In this connection, the resolution of the parallel FTC/EC investigations of the Big Three BTB may be a test case. Hopefully, the regulators won't impose overly restrictive rules within their respective jurisdictions or reach conflicting results that undermine the efficiency-enhancing potential of emerging BTB global markets.