When leading steel companies set out in 1996 to create an industrywide online exchange, one of their first moves was to engage antitrust counsel to advise on the plan.
That was only prudent. After all, the Progressive Era corporations built by steel-industry titan Andrew Carnegie and financier J.P. Morgan were early targets of modern U.S. antitrust laws. More recently, the industry has faced repeated antitrust scrutiny since the early 1960s.
So when MetalSite.com - an online exchange that brings together some of the biggest producers of steel, aluminum and other metals with thousands of customers - opened for business in the fall of 1998, strong safeguards were already in place: The company relies on specific antitrust policies and rules for information exchange. Every employee is briefed on antitrust and must sign a two-page list of dos and don'ts. And Arthur Andersen visits twice a year to audit antitrust compliance.
"Antitrust in the metals industry is nothing new," explains MetalSite President and CEO Patrick Stewart. "Antitrust concerns and policies are a way of life for these companies."
Indeed, Stewart was invited to speak on the importance of antitrust at a recent Federal Trade Commission workshop on business-to-business exchanges in Washington, backing up federal regulators who have made it clear that the rest of the b-to-b industry had best follow his lead.
The conference came as the growth of b-to-b exchanges highlights new competition issues, challenging an emboldened Justice Department fresh from its historic victory over Microsoft (MSFT) and its successful opposition to the WorldCom-Sprint merger.
Online exchanges offer opportunities for buyers and sellers to operate and exchange information more efficiently, resulting in lower transaction costs and easier comparison shopping. Some sites run auctions. Others simply organize products in catalog fashion.
The basic issues raised by the new exchanges are as old as the antitrust laws that prohibit agreement by suppliers to raise prices and buyers to lower prices.
In the online world, regulators have several concerns. The most obvious is collusion: If a group of competitors representing a significant portion of a market decides to jointly sell their goods, it's a small step for them to conspire to fix prices. The same holds true if the leading purchasers in a market join forces for joint buying.
"The whole promise of the exchange is compromised if competitors can collude on price," says John Nannes, deputy assistant attorney general.
So far, few exchange sites have drawn significant antitrust inquiries. The FTC is reviewing Covisint, the Big Three automakers' exchange.
Last month the Justice Department announced it was scrutinizing an as-yet-unnamed exchange set up in April by six meat and poultry processors, including Cargill (dossier) and Tyson Foods (TSN). The Justice Department is also looking into Orbitz, the online ticket-selling venture of leading airlines (which, strictly speaking, is not a b-to-b site). Antitrust experts and regulators agree, however, that those inquiries should be the exception, rather than the rule.
"I do not see a lot of enforcement activity," says Edward Correia, an antitrust attorney for Latham & Watkins (dossier). The FTC's former scholar in residence predicts that "most sites will pass muster."
While throwing down the antitrust gauntlet, federal regulators have also made it clear that they know what is at stake.
"These electronic exchanges can generate substantial cost-savings, efficiency gains and great benefits," says Nannes.
The key, he says, is to look for potential problems at the outset and establish rules or limits before regulators have to get involved. "Care has to be taken to design [b-to-b exchanges] in such a way that they don't have anticompetitive effects," Nannes says.
Adds FTC Commissioner Mozelle Thompson: "It's not the Wild West out there. If you couldn't do it offline, you can't do it online either."
In theory, designing competitive exchanges shouldn't be too difficult if companies pay close attention to the details and seek sound legal advice. Addressing antitrust concerns should be easier than dealing with other legal issues that have plagued Web developers and regulators alike. In the area of privacy protection, for example, few laws directly apply to online privacy, and many businesses going online have had no prior experience with the issue. And taxation of Internet sales has been caught up in the same controversy that catalog vendors contend with.
