Federal Trade Commission B2B Workshop,

June 29-30, 2000

Co-Authors: Wm. Randolph Smith, Jeane A. Thomas and Monya A. Phillip.

Those of us in attendance at the FTC's B2B "workshop" last Thursday and Friday came away with a strong sense that the antitrust enforcement agency is just beginning to understand and analyze the B2B phenomenon. Whether it came from the Commissioners, the FTC staff or the many panelists from the industry, legal profession and academia, the metaphors conveyed the same thought: "we're in the top of the first inning," "we're in the first yard of a hundred yard dash," "we're in the first minute of the first hour."

Clearly, the Commission and its staff are very interested in understanding the phenomenon of B2B exchanges springing up in every industry around the globe, and are committed to keeping a watchful eye on the impact of these exchanges on competition. Each of the five Commissioners briefly addressed the audience over the two days, and their remarks were strikingly similar. The development of B2Bs represents a dramatic change (even "revolution") in the way we will do business in the future, with technology driving the opportunity for enormous cost savings and efficiencies. Yet, unchecked, these exchanges could have a harmful effect on competition by facilitating information sharing and collaboration among competitors. Numerous Commissioners, staff and commentators throughout the workshop confirmed their confidence that traditional antitrust principles are up to the task of providing the regulatory framework for new B2B marketplaces.

Significantly, though, the FTC did not state any enforcement intentions, or even biases, in any way. They were there to listen to the industry, learn about how B2Bs are being structured and operated, and begin a discussion with antitrust lawyers, economists and academics as to what competitive issues are raised by B2Bs and how the FTC might address them in the future. As Commissioner Swindle put it, "whatever we do, we best get it right."

Thursday morning's presentations began with demonstrations of different types of B2B sites by Commerce One, SAP America, MetalSite and FreeMarkets. The demonstration of different types of auctions by FreeMarkets erased any doubt that reverse auctions can result in dramatically lower prices by creating instant price transparency and can be used for very complex, customized products. The other three demonstrations of catalogue-type sites focussed on the ability of B2Bs to drive significant costs out of the distribution channel, as well as to reduce costs in production and front/back-office functions through technology integration.

The first four panels represented the B2B industry: owners, operators, buyers, sellers and analysts. While recognizing that the industry barely has reached its infancy, the panelists extolled the tremendous distribution cost savings and other efficiencies that B2Bs will create. In addition to acting as buying and selling exchanges, some panelists believed that B2Bs eventually will offer "value-added" services like eBusiness counseling and other strategic business consulting services. In this way, B2Bs will be more complex than the financial services markets that some suggest should be the model from a regulatory standpoint. Other panelists noted the need to manage strict controls on data and suggested that exchanges may need to have rules for auditing companies' data available on their sites.

Some of the buyers and sellers discussed the difficulty of maintaining brand identity and product differentiation on a B2B exchange. Others discussed the potential loss of intellectual property with respect to product specifications and information, and a need to protect IP in order to attract suppliers to the sites.

"Interoperability" was one of the most frequently mentioned issues, and one of the most controversial. Some panelists advocated cooperation among technology companies and owners to develop interoperability solutions between marketplaces; others felt that exchanges should continue to develop different operating standards as a means of differentiating one site from another. In response to questions from the FTC staff regarding future consolidation, some speakers believe there will be one or two B2B exchanges for each vertical industry, while others felt there would be closer to five exchanges per industry with additional "niche" exchanges. No one seemed to believe that a situation like the construction industry with more than 100 exchanges will last over time.

There was also lively discussion on the issue of whether the type of ownership matters, pitting the "independents" against the "participant-owned" exchanges. That discussion involved the degree to which competitively-sensitive information can be adequately protected in an exchange owned and operated by competing suppliers or buyers. The independents also expressed concern that the owners set the rules for the exchange and participant-owners have an incentive to bias the rules in their favor.

The panelists also debated the extent to which the "network effects" (i.e., economies of scale) created by B2Bs would lead toward natural monopolies within each vertical supply chain. If so, some queried, should there be a limit on the share of buyers or sellers who are permitted to have an equity interest in an exchange, or who transact all or most of their Internet business through the exchange? Some of the practitioners and academics cautioned the FTC to be concerned about such monopolies and to foster competition among exchanges in order to get the benefits of competitive transaction prices.

At least once during each panel, one of the speakers commented on the global nature of the Internet and the need for the United States to make sure that its regulations are not overly burdensome on Internet commerce, but provide appropriate protection for U.S. buyers and sellers. Regulation needs to be consistent, or at least harmonized, across countries. For example, the U.S. and EC currently have different standards for data privacy, which creates compliance problems for B2Bs. On the issue of security, Jeffrey Hunker of the National Security Council made a brief plea to the industry to be in contact with the White House and let them know what the federal government should be doing vis-à-vis cybersecurity.

The final panel was comprised of antitrust lawyers, professors and government enforcement representatives. Some warned of the fine line between collusion (which is illegal) and coordinated effects (which are not). Even though B2Bs may create more coordinated behavior, the agencies should be careful to intervene only where there is clear evidence of an agreement. The FTC staff was also cautioned against allowing owners to be both buyers and sellers in a vertical exchange, which would create a greater opportunity for price signaling. And several panelists noted that the agencies should allow exchanges a period of incubation in which they are allowed to develop. During that time, the traditional test applied to joint venture restraints - i.e., is this the least restrictive alternative? - should not be applied.

The underlying theme was that agencies have a lot to learn but a good set of antitrust laws that will apply to this new technology. As Commissioner Leary stated, our traditional antitrust laws have survived dramatic industrial transformations in the past and the competitive implications of B2Bs are more likely to be familiar than strange. Several commentators agreed, noting that antitrust policy "is not rocket science," and B2Bs just represent a new technology to which we should apply our traditional rule of reason analysis.

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Wm. Randolph Smith
Partner – Washington, D.C.
Phone: +1 202.624.2700

Jeane A. Thomas
Partner – Washington, D.C.
Phone: +1 202.624.2877