e-Commerce
Collusion? The Trustbusters Take Aim
September 1, 2000
By Richard Stavros
The
Federal Trade Commission likely will regulate those business-to-business
Web portals, but how much?
Electric
utility executives may be a step behind the Internet revolution,
but in one key respect they may have an advantage over anyone else building
an e-commerce Web portal for business-to-business (B2B) procurement.
Utility executives don't fear
government regulation. They're already caught in the net.
That affinity may in fact prove
downright useful. Consider the comments and reactions heard in Washington,
D.C. in late June, when business leaders from around the country gathered
with government regulators at the U.S. Federal Trade Commission to share
ideas on how to avoid collusion and ensure fair trade when industry competitors
collaborate in e-commerce ventures.
The public workshop, "Competition
Policy in the World of B2B Electronic Marketplaces," took place less than
three months after the FTC had issued new antitrust guidelines for evaluating
"collaborations among competitors," including joint ventures and strategic
alliances. In that action, taken on April 7, the FTC had referred specifically
to purchasing collaboratives to centralize procurement. It said such deals
could "facilitate collusion" by standardizing costs or enhancing a competitor's
ability to "monitor a participant's output level through knowledge of
its input purchases."
And at the workshop itself,
the discussions revealed a definite concern for antitrust issues and a
leaning by the participants and hosts alike toward regulatory oversight.
Susan S. DeSanti, director
of policy planning at the FTC, set the tone in her opening remarks. "B2B
e-marketplaces offer opportunities for substantial productivity-increasing
effects, but also raise concerns. Collusion, monopsony, and exclusionary
conduct preceded the e-commerce revolution and will no doubt succeed it
as well," she said.
Certainly, the possibility
of the FTC taking a more active role in overseeing B2B platforms is of
particular interest for the many e-procurement ventures by the electric
utilities industry. In one of the earliest such ventures, for instance,
PG&E Corp. and 20 other major energy companies created the Pantellos Corp.
to operate and manage an open, independent Internet marketplace for the
purchase of goods and services between the energy industry and its suppliers.
FTC rulings on e-commerce marketplaces
also might affect the scores of energy trading platforms being built by
utilities and power marketers. For example, Aquila Energy (a subsidiary
of UtiliCorp United), Duke Energy, American Electric Power, El Paso Energy,
Reliant Energy, and Southern Company Energy Marketing (a unit of Southern
Co.) have entered into an agreement to purchase an equity position in
Intercontinental Exchange, an independent online market for energy and
metals.
In addition, Williams and Dynegy
formed an energy-trading platform named E-Speed, while Enron and Coral
Energy, an affiliate of Shell, built Internet-based transaction systems
for customers to buy and sell energy-related products directly with them.
Then there are the scores of independent e-commerce energy trading exchanges
such as Altrade, Houston Street, Red Meteor, and the Intercontinental
Exchange.
And new platforms are being
created all the time. American Electric Power, Carolina Power & Light,
Duke Energy, and Unicom will launch an independent Internet-based exchange
that offers a single gateway, or portal, for arranging electric transmission
capacity.
Overall, most of the FTC commissioners
seemed content at the workshop simply to foreshadow the possibility of
regulatory oversight rather than arguing for a plan of action. The FTC
regulators preferred to be in "learning mode," as they called it, and
that comment appeared to please many in the audience.
Yet at least one other regulator
saw potential problems of biblical proportions.
"I wonder if there is a serpent
in the garden of [B2B] efficiencies," remarked Bill Cohen, deputy director
at the FTC, perhaps skeptical of the "invisible hand" argument made by
many executives, who argued that market forces would provide the best
oversight.
Such fire-and-brimstone references
may have put industry on the defensive. Analysts interviewed during and
after the meeting noted that workshop participants spent their energy
debating which e-commerce model deserves the most antitrust scrutiny,
when they could have presented a united front against federal regulation.
For example, executives representing
suppliers argued heatedly that consortium exchanges led by buyers would
erode their profits to the point of bankruptcy.
"Buyer exchanges lower costs
by starving the supply chain downstream," said Harpal S. Sandhu, president
and chief executive officer at Integral Development Corp., a provider
of B2B e-commerce software and services for capital markets.
Suppliers, he said, are concerned
with rules dealing with fairness and unfairness.
"In the next four years, there
will be 10,000 verticals," added Stephen Attanasio, president and CEO
at WIZNET.Com, a content provider for e-commerce platforms. "How do you
keep intellectual property, specifically? I don't want new business rules
[on how to present my product on exchanges] because it will commoditize
my product."
Buyers, on the other hand,
alleged that supplier-led exchanges would lead to cartels that arbitrarily
set prices too high and slash the buyer's profits.
"Supplier-led exchanges could
lead to price-fixing, restriction of access, dissemination of information
to suppliers, or preferential treatment," said one workshop attendee,
adding that some suppliers may exclude other suppliers.
One antitrust lawyer attending
the workshop was more blunt: "Collusion is not only possible, but likely."
Privacy Concerns:
Can Gaming Be Prevented?
Some at the meeting raised
concerns about privacy and criticized both supplier- and buyer-owned exchanges
for their claims in neutrality.
Setting up a procurement exchange
owned by competitors that conduct "arms-length" transactions with the
"independent" company they've formed may not be enough to ensure the security
of competitors' sensitive corporate information, said Kaushik Shridharani,
managing director in equity research at New York investment bank Bear
Stearns & Co.
In addition, he said, without
regulatory oversight, consortium-led exchanges may be induced to perform
"front running." Front running is a practice whereby a securities or commodities
trader or the owner of a procurement exchange takes a position to capitalize
on advance knowledge of a large upcoming transaction expected to influence
the market price.
"For example, if Exxon-Mobil
needs chemicals within a week, the price of that chemical will go up,"
Shridharani said.
To prevent that information
from being used to game the market, Exxon-Mobil will want assurances such
as non-disclosure agreements in all supplier deals, he explained. But
non-disclosure agreements may not be enough.
"How can front running of customers
trades be stopped? How do you protect information flows?" Shridharani
asked. "Some of these exchanges clearly have an incentive to control the
price that they will sell at."
E-Procurement:
Utilities Get Their Feet Wet
|
|
Web hubs still pose
more questions than answers, but the answers are coming at Internet
speed.
By Charles Maglione
New business-to-business
(B2B) exchanges across diverse industries are being announced at
a rate almost too fast to track. But many of these exchanges haven't
yet moved from the announcement stage to actually conducting their
first transaction, suggesting that more than a few companies simply
are eager to be "on the e-commerce bandwagon."
Although the electric
utility industry historically has been slow to react to business
trends, including e-business, a group of utilities is creating its
own B2B exchange. And while this initiative comes a bit later than
efforts in other industries, in the evolving B2B space, the utility
industry may not really be that far behind.
Pantellos in Process.
The Pantellos Corp. was announced in June as an independent Internet
market for the purchase and sale of goods and services between the
utility industry and its suppliers. This electronic marketplace
was formed by 21 member utilities that also are investors, including
PG&E, Duke Energy, and Reliant Energy. While no public plan exists
for future liquidity events, it is likely that the lure of IPO riches
is what motivated these most cautious of investors, the utility
companies themselves.
The utility members of
Pantellos haven't disclosed whether they will commit a set percentage
of their annual procurement spending to the exchange. The likely
rationale in enlisting 21 partners was to capture enough business
to provide instant liquidity to the exchange, liquidity being the
most critical success factor for any business exchange. In line
with that goal, the exchange also will need to attract non-member
utilities. That will hinge on the exchange providing cost savings
and efficiency. The exchange also should incorporate content, community
features, and a positive user experience.
Pantellos is not alone
in the B2B utility e-marketplace. In the coming months, other energy
companies likely will band together to create utility industry exchanges.
Independent electronic exchanges that serve cross-industry needs,
such as FreeMarkets.Com, VerticalNets, and MRO.Com, are transacting
business and possess the bandwidth to reach utilities. Independent
exchanges will continue to outpace their industry rivals, as within-industry
exchanges force competitors to collaborate.
Profits for Suppliers?
An important goal for a B2B exchange is to provide the real-time
pricing and product availability that will introduce the efficiency
needed to reduce prices. However, cost savings from exchanges that
follow an aggregator model (i.e., many buyers and sellers) cannot
come at the expense of the sellers. Ideally, small as well as large
suppliers will have ample opportunity to gain market share. In reality,
however, smaller vendors in the exchange may be forced to consolidate,
because they may not be able to lower their prices enough to compete
directly with larger vendors. Furthermore, sellers participate in
an exchange at the expense of traditional distribution channels
that may offer substantial benefits.
In some of the press
regarding Pantellos, the utilities mention that they will procure
big-ticket transmission and distribution items like power lines,
poles, and transformers through the site. However, it is more likely
that traditional MRO (maintenance, repair, and operations) goods,
like office supplies, will be the first items to be purchased through
e-procurement. Utilities will be less likely to forgo long-held
vendor relationships with industry giants for their big-ticket,
customized items.
First Movers Draw
Scrutiny. The market power some online exchanges recently have
exhibited has raised the interest of the Federal Trade Commission.
B2B exchanges such as Covisint, the automotive exchange started
by Ford, GM, and Daimler Chrysler, as well as an evolving airline
consortium, have come under FTC scrutiny. Thus, as participants
in e-hubs centralize and streamline functions, it will be a challenge
for these online exchanges to stay within the bounds of what the
FTC deems to be fair trade.
In the end, the convenience
and savings of exchanges likely will be enough to move the utility
industry into the e-business arena. However, the perception of bias
may preclude non-members from participating in exchanges. The following
metrics have been vital to the initial success of online exchanges:
few companies leading the effort, quick alignment with technology
partners, rapid adoption by the CEO and supporting team, the attraction
of big-name sellers that can bring big-name buyers, and alignment
with industry-accepted purchasing practices.
Above all, the ongoing
activity in e-procurement is sure to spark some provocative explorations
into the issues and opportunities of e-commerce as its potential
is widely recognized. Stay tuned!
Charles
Maglione is industry director at Proxicom, an e-business consulting
and development firm.
|
Shridharani recommended that
risk management, fraud-detecting technologies, and insurance against loss
of sensitive corporate information be developed to guard against market
power on procurement exchanges.
Nevertheless, he worries that
industry-affiliated exchanges are slowing the development of independent
exchanges because of the "psychology of intimidation." In other words,
said Shridharani, "Independents are worried about keeping their competition."
Enron expressed such worries
about utility-owned exchanges in public statements to the FTC:
"Enron shares the FTC's concerns,
however, that the transition to electronic commerce ('e-commerce') may
result in anti-competitive activity as individual companies employ illegal
tactics in an attempt to protect and extend their monopolies into new
markets. As a result, Enron cautions the FTC to monitor e-commerce developments
to ensure that individual Internet business proposals are truly pro-competitive."
The energy marketer added that
it should be a requirement that B2B have firewalls or protective measures
to guard against improper flows of information.
But even Enron itself may not
escape antitrust scrutiny.
Vinod K. Dar, CEO and founder
of Energy E-comm.Com, a vertical business search and knowledge-mining
platform, said that independent trading exchanges may be at risk of gaming
when linked with proprietary trading platforms such as EnronOnline. He
explained that while having many independent markets linked online creates
efficiencies, linking different types of platforms may create market distortions.
For example, Houston Street,
an independent trading exchange, announced a memorandum of understanding
with Enron in mid-July. Under this arrangement, North American electricity
and natural gas prices posted on EnronOnline automatically will be posted
on HoustonStreet.Com. Traders will be able to act on the EnronOnline prices
via either platform. EnronOnline also executed a memorandum of understanding
to connect its trading system to the independent True Quote energy exchange,
to which PG&E Corp. has committed some of its energy trading volume.
Dar said that under such circumstances,
energy traders, who have an incentive to front run, might try to force
exchange prices to move in favor of their trading books. In other words,
Enron more easily could game the prices offered on the independent exchanges.
A spokesman for Enron, however,
argued that the link up to the exchanges is merely another distribution
channel for displaying prices. "Enron could offer the same price whether
it was linked up to Houston Street or trading on Houston Street."
The spokesman denied that Enron
could manipulate prices on the neutral exchanges. "In the end, it is going
to be about offering the best price," he said.
Meanwhile, Dar suggested that
Enron's decision to link with the independent exchanges might be a survival
play. "It's a matter of business model evolution; Enron knows that proprietary
online trading forums will be supplanted by huge neutral or independent
digital, many-to-many markets."
Dar speculated that Enron was
transitioning from a closed proprietary to an open independent e-exchange.
"The sharing of price postings
is the first baby step; having used a proprietary online trading floor
to reach transactional critical mass, Enron may be ready to evolve its
business model so in a year or less it could do an IPO of the business
as a leading independent T2T [trader-to-trader] e-exchange."
Protecting
National Security: Technology Isn't Enough
To the surprise of many, the
very Web technology developed to protect the integrity of corporate buying
and selling habits on e-exchanges was called into question at the FTC
conference.
"Much of the hardware and architecture
was never designed to have the level of security to prevent outsider intrusion,"
said Jeffrey Hunker, senior director at the Critical Infrastructure Assurance
Office (CIAO), part of the White House's National Security Council.
The President's Commission
on Critical Infrastructure Protection was the first national effort to
address the vulnerabilities created in the new information age. The commission,
established in July 1996 by Presidential Executive Order 13010, was tasked
with formulating a comprehensive national strategy for protecting the
Web infrastructures from physical and cyber-threats. Critical infrastructures
are defined as systems whose incapacity or destruction would have a debilitating
impact on the defense or economic security of the nation. These include
telecommunications, electrical power systems, gas and oil, banking and
finance, transportation, water supply systems, government services, and
emergency services.
In a late-June hearing before
the House Government Reform Committee, Subcommittee on Government Management,
Information and Technology, John S. Tritak, director at the CIAO, outlined
some of the risks.
"Restructuring, including deregulation,
is driving companies to apply these new [Web-based] technologies more
widely to perform core business functions and operations," he said.
Tritak acknowledged that there
will be benefits, but with those benefits come risks. "The interplay between
complexity and technology increases geometrically the different ways technical
failures can occur. More importantly, cyber tools are readily available
to individuals or groups to attack and disrupt our infrastructures, whether
for fun, profit, revenge, or political or strategic gain."
Charles Maglione, industry
director at Proxicom, an e-commerce industry consultant and developer,
while acknowledging that security is a real concern, said that software
and middleware in place provide more than sufficient security.
Other executives simply called
for the FTC to oversee industry-affiliated exchanges. But even the FTC's
involvement presents a technological challenge, said analysts.
"How will a slow-moving government
bureaucracy like the FTC be able to enforce its laws in the warp speed,
point-and-click world of e-commerce procurement?" critics asked.
Energy E-comm.Com's Dar highlights
some of the e-commerce challenges for regulators.
"[For example, suppose that],
using the Net, a U.S.-domiciled merchant of gas, electricity, and bandwidth
sells a bundled offering that has convergent pricing with a participating
swap feature and cash flow financing to a multi-facility industrial with
plants in the U.S. and Canada," he said.
"The transaction occurs on
a server in the Grand Caymans; the payment is made via an encrypted disbursement
account in the Bahamas to a receiving account in London, which uses a
website sitting on a host facility in Ireland." The transaction originated
via an e-mail proposal delivered by the U.S. merchant's U.K. arm to the
U.K. parent of this industrial. The email server sits in Houston.
"What regulatory authority
governs this transaction: the FERC, the FCC, the CFTC, the IRS, the FTC,
or no one? Or is this transaction illegal?" he asked.
Dar questioned whether U.S.
regulatory agencies will be able to track business transactions in cyberspace,
and said international regulatory obstacles may deny the government access
to corporate transaction data. Enforcement of reporting also may be difficult.
"I don't think the U.S. government
is going to send in the Marines to attack Caribbean-based corporate data
havens," he joked.
Market Power:
Is Smart Software the Equalizer?
Many e-commerce executives,
quizzed by the FTC about market power issues, saw a possible solution
in software that scans various markets for the best price. They claimed
that these programs would eliminate the need for regulatory oversight
because they make it impossible for B2B marketplaces to collude by making
the price available at all times to all participants.
In their present form, these
software programs, known as "shop bots," compare prices among multiple
electronic vendors, and in some cases, traditional retail vendors, as
well. In response to a query such the title or brand/product description,
a shopping bot will return a sorted list of prices and product descriptions,
sometimes including comparative shipping costs, according to Jared Hansen,
of the marketing department at Brigham Young University.
According to Hansen, there
are four basic types of shopping bots, although only the first is truly
a searching "bot"; the others are compiled guides and directories: (1)
pure search engine price/product locators; (2) vendor-partnered shopping
guides; (3) category-specific comparison services; and (4) human-based
interaction.
But other e-commerce executives
argued that "shop bots" pose regulatory obstacles of their own because
of copyright issues.
For example, when auction giant
eBay Inc.'s prices were being searched by auction aggregator Bidder's
Edge, eBay cried copyright infringement. eBay's lawsuit contended that
Bidder's Edge was trespassing when it culled listings from deep in eBay's
site. In late May, a federal judge sided with eBay Inc., and issued an
injunction barring Bidder's Edge from using an automated system like a
Web crawler to search eBay's site for information about its auctions,
according to a report in Computerworld Online. A California law that prevents
unauthorized computer intrusion into databases also protected eBay.
"People forget that prices
quoted on the New York Stock Exchange or the New York Mercantile Exchange
are copyright-protected," said one executive.
Consequently, the use of shop
bots would either have to be through agreement among industry exchange
owners or by pronouncement of the FTC, said a workshop participant.
Others argued that even without
shop bots, e-commerce markets that exhibit market power will be disciplined
by new entrant independent exchanges at the first opportunity.
"If buyers and sellers share
too much information and prices are [affected], the market self-corrects,"
said Mark L. Walsh, president and CEO at VerticalNet, an owner and operator
of industrial trade communities.
But Walsh said that worse than
collusion is the denial of information by some exchanges to other exchanges.
"The problem is not the information itself, but denial of information,"
he said.
In addition, workshop participants
representing suppliers claimed that supplier-led exchanges may introduce
procurement catalogs that are seen by some rival suppliers and not others.
Moreover, Walsh believes that
there are industries where geography and integration can be a barrier
to entry. He explained that after big companies have spent millions integrating
their back-office systems with two or three exchanges, they will be less
likely to jump to yet another exchange.
FTC regulators questioned whether
interoperability standards could pose another significant barrier to entry.
"What happens if [one market]
is selling a product that cannot be found on the other?" asked Gary Fromer,
vice president of new business and partner solutions at SAP America.
"As market places achieve critical
mass, there will need to be industry standards," Fromer said. He added
that interoperability has not been enough of a problem to require a standard.
Commerce Extensible Markup
Language (cXML) was used to get the inter-exchange started, he explained.
cXML began as a collaboration among more than 40 companies looking to
reduce the costs of online business. It is used to standardize the exchange
of catalog content and define request/ response processes for secure electronic
transactions over the Internet. The processes include purchase orders,
change orders, acknowledgments, status updates, ship notifications, and
payment transactions.
But Rod Gray, chief financial
officer at Petrocosm, a procurement website that enables companies to
buy and sell products and services in the oil and gas industry, said that
it was the financial barriers that led oil majors such as Texaco and Chevron
to seek an alliance or ownership stake in Petrocosm.
"You need liquidity equating
to $10 billion to make your market. It cost between $100 and $200 million
to create Petrocosm.Com. The efficiencies of sharing costs of creating
the exchange and lowering transaction costs were better than having 25
different sites," he said. Gray predicted that Petrocosm will be one of
at least five exchanges.
"Ownership does not have anything
to do with the exchange being successful and it being seen as neutral,
because it will be the volume that drives it."
Richard Stavros is senior
editor at Public Utilities Fortnightly.
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