Co-written by Thomas Demitrack
The Internet is revolutionizing the way businesses in virtually every sector of the economy go to market. The first wave involved so-called "business-to-consumer" initiatives ("B2C"), characterized by the phenomenal rise of Amazon.com. The most recent manifestation is the proliferation of "business-to-business" or "B2B" electronic marketplaces, which create online exchanges or sites for the purchase and sale of goods and services between companies. The May 1 edition of Forbes reported that some 600 B2B 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 B2Bs being formed by Procter & Gamble, Nestle, and H.J. Heinz (consumer products); International Paper, Georgia-Pacific, and Weyerhauser (paper); and Johnson & Johnson, Medtronic, and Abbott Laboratories (medical products).
But perhaps the most highly publicized B2B announced to date — described by The Wall Street Journal as "what promises to be the granddaddy of all the exchanges" — is the "Covisint" exchange being formed by General Motors, Ford, and DaimlerChrysler to establish a global, independent auto parts exchange for the companies’ thousands of suppliers and dealers. The "Big Three" announced their joint B2B initiative on February 25, noting that the new venture will create "the world’s largest virtual marketplace" and offer "open participation to all automakers around the world, and their respective market suppliers, partners and dealers."
By late March, however, it had been reported that the automakers’ proposed B2B exchange was under antitrust investigation by both the Federal Trade Commission and the European Commission. More recently, it was reported that the FTC is also looking into the "GlobalNetXchange" B2B exchange being formed by Sears, database software maker Oracle, and French retailer Carrefour to serve the retail industry. It was also reported that the Antitrust Division has launched an antitrust probe into the meat and poultry processing exchange being developed by IBP, Tyson Foods, GoldKist, Farmland Industries, Smithfield Foods, and Cargill. Antitrust observers on both sides of the Atlantic suspect that these reported investigations are just the tip of the B2B iceberg in Washington and Brussels.
These suspicions were largely confirmed during the last week in June, when the FTC hosted a two-day "public workshop" on B2B electronic marketplaces in Washington. The June 29-30 workshop was held before a standing-room-only audience and featured panels of various B2B stakeholders, including buyers, sellers, operators, and antitrust experts. During a June 28 press briefing, EU Competition Commissioner Mario Monti hailed the FTC workshop as a "highly promising" forum in which to assess "B2B exchanges’ implications for competition policy."
What’s the Buzz with B2Bs?
The antitrust enforcers concede that B2Bs promise enormous efficiencies in reducing transaction costs between commercial trading partners. In its 1999 Annual Report, FreeMarkets estimated that its clients enjoyed average savings across all product categories of 15 percent by participating on its B2B marketplace, with United Technologies reportedly realizing savings of 43 percent on a $42 million circuit board procurement via a FreeMarkets auction. The B2B marketplace also offers enhanced market visibility and access to buyers and sellers alike, especially to small and medium-size enterprises that might otherwise never even get on the screen (either literally or figuratively).
So what’s the problem? Why are the antitrust regulators concerned about concededly efficiency-enhancing ventures that are intended to promote lower prices, reduced transaction costs, and improved market access to SMEs? Good questions, and about the only thing that the FTC’s recent B2B workshop made clear is that the regulators themselves don’t have ready answers. Susan DeSanti, Director of Policy Planning at the FTC and the chief organizer of the workshop, pretty much summed it up, stating: "We’re in a learning mode" — hardly a comforting thought to the Big Three and the other investigation targets that are apparently conducting a real-time tutorial for the agencies.
A variety of factors have contributed to the agencies’ fixation on B2Bs. First, the B2B phenomenon is big business in absolute terms by any measure. According to industry analysts, business-to-business 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 B2B initiatives announced to date (including the automakers’ Covisint marketplace) involve collaborative arrangements between horizontal competitors — a circumstance that inevitably invites antitrust scrutiny. Third, B2B marketplaces involve a new Internet-based platform for business transactions and business models that largely represent uncharted territory for the regulators. And fourth, the conflicting interests of various interest groups, ranging from independently operated exchanges to brick-and-mortar-oriented middlemen and suppliers, have undoubtedly fueled the regulators’ imagined vision of the inevitable virtual smoke-filled chat rooms that will result from industry-sponsored B2Bs.
The Devil’s in the Details
To their credit, the enforcement agencies have indicated — publicly, at least — that they are keeping an open mind about the degree to which B2Bs may raise potential antitrust concerns. This is not only the right policy call, it’s the only responsible call at this juncture. Simply put, the term "B2B" encompasses a broad array of business arrangements that may or may not raise serious antitrust issues. At one end of the spectrum, a B2B may only function to facilitate one-on-one Internet-based connectivity between individual buyers and sellers. At the other extreme, a B2B venture might involve a joint sales and marketing arrangement between competitors. And in between, there is an infinite variety of B2B models and functionalities with an equally diverse range of potential antitrust sensitivities. In sum, the B2B buzzword is not a unitary concept, and it is simply not susceptible to "one-size-fits-all" antitrust analysis.
There are, however, several guideposts that will undoubtedly shape that analysis. In particular, where the B2B venture is organized by competing firms on the selling or the buying side, the agencies have indicated that the DOJ/FTC Guidelines for Collaborations Among Competitors will provide the starting point in their B2B analysis. The principal areas of focus identified thus far are summarized below.
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 anticompetitive effects by creating, increasing, or facilitating the exercise of market power. Seller-oriented B2Bs can therefore expect heightened scrutiny to the extent that they involve such agreements, although an even more significant practical hurdle might be attracting buyers to their site in the first place.Joint Purchasing
. The Guidelines similarly recognize the pro-competitive and anticompetitive 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, B2Bs directed at joint purchasing will normally not raise serious antitrust concerns unless: (1) they pool purchases accounting for a substantial percentage of total market purchases of the relevant product (giving rise to possible "monopsony power" concerns); or (2) 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 have also indicated that these potential concerns may be heightened in the B2B context, given the real-time nature of the information flow. In this connection, the agencies (and some commentators) have cited the 1993 consent agreement in United States v. Airline Tariff Publishing Co. as something of a "poster child" for the potential for abuse in the information exchange area. In that case, the DOJ charged that the defendant airlines colluded to increase prices and eliminate discounts through their computerized (albeit pre-Internet) fare dissemination venture. At bottom, however, ATP Co. was a garden-variety conduct case. The government did not challenge the underlying venture itself, nor, for that matter, the price transparency inherent in the venture per se. Rather, the government’s challenge focused on specific 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.In sum, 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 B2B activities. And this is true whether or not the B2B model entails price transparency as a necessary element.
Membership/Exclusivity
. The agencies have indicated that B2Bs may raise two distinct potential concerns vis-a-vis membership rules: exclusion, i.e., restrictions permitting only select businesses to participate in a given B2B marketplace (or only allowing them to participate on discriminatory terms); and exclusivity, i.e., rules prohibiting firms that participate in a given marketplace from joining or participating in other B2Bs. As a threshold matter, such restrictions may oftentimes be unnecessary at best and counterproductive at worst from a pure business standpoint. New B2B exchanges will usually want to promote "open access" to drive volume. And the ultimate success of a B2B 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, especially in the B2B’s formative stages. Like any other ancillary restraints, the underlying purpose of the restraint and its net competitive effects will need to be examined to assess its ultimate legality under the Rule of Reason.Network Effects
. Finally, the agencies have indicated that competitive concerns may be raised if and when a particular B2B exchange establishes a dominant position in the "market for marketplaces." In particular, they have indicated that so-called "network effects" — pursuant to which the value of a particular product or service increases as others use it — may have particular relevance in the B2B context since such effects may dictate that only one (or very few) B2B exchanges will ultimately become the marketplace.Where precisely that conclusion takes them is not entirely clear, since one hopes we are now well 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 B2Bs and that the more successful B2Bs in any given industry and/or product market will need to be especially circumspect in connection with imposing rules or other measures that may be viewed as unreasonably exclusionary vis-a-vis their online and offline marketplace rivals — but there’s nothing particularly new here either, aside from some new jargon.
OldTimeReligion.com
As the foregoing discussion suggests, the potential antitrust issues raised by B2Bs are hardly new, and traditional antitrust rules seem fully adequate to address this new marketplace phenomenon. More importantly, the applicable antitrust rules do not present any fundamental obstacles to the creation and operation of a properly conceived B2B, whether or not it is organized by competing firms. At the recently concluded B2B workshop, all of the FTC representatives — including each of the Commissioners — emphasized that they perceive the clear pro-competitive promise of B2Bs and that they are approaching these new e-marketplaces without any 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 and creativity in the B2B’s planning stages. It’s a bit more complicated than just connecting the "dot-coms," but it’s familiar ground to experienced antitrust counsel.
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 GM/Ford/DaimlerChrysler B2B may be something of a test case. Hopefully, the transatlantic regulators won’t "throw out the B2B with the bath," either by imposing overly restrictive rules within their respective jurisdictions or by reaching conflicting results that undermine the efficiency-enhancing potential of emerging B2B global markets.
Further Information
For further information on the subject of this Antitrust Commentaries, please contact the principal authors, Joe Winterscheid in our Washington Office (202/879-3823) or Tom Demitrack in our Cleveland Office (216/586-7141) or any Jones Day antitrust lawyer.
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