B2B exchanges eye FTC report on antitrust issues

Computer World –

Most business-to-business electronic marketplaces probably have little to fear from the U.S. Federal Trade Commission (FTC) on antitrust grounds, based on a report that the panel released last week. But that doesn't sit well with Ravi Kalakota, chairman of Atlanta-based Hsupply.com.

"I don't know what the FTC was smoking, but they're not looking at the evidence," Kalakota said of the commission's Oct. 26 report. The report set forth what the FTC described as "guideposts" for evaluating individual B2B exchanges but concluded that online marketplaces as a whole don't raise new antitrust concerns.

However, Kalakota, who runs an independent exchange for the hospitality industry, sees things differently. Kalakota said he constantly comes across individual hotel operators who tell him they're barred from buying goods through Hsupply.com under franchise agreements with big-name companies such as Hyatt Corp. and Marriott International Inc. -- both of which are partners in an exchange called Avendra that's currently under development.

"So, in my marketplace, there's a huge antitrust issue because these guys can put me out of business," Kalakota said. However, rather than take up any action with the FTC, Kalakota said he plans to let things run their course in the expectation that not all of the consortium efforts in the hospitality industry will survive in the long run.

Last week's report, which was written by the FTC's staff and unanimously authorized by the five commissioners, is based on information gathered during a two-day workshop on B2B exchanges held last June in Washington. As the FTC sees it, there's no hard and fast evidence of anticompetitive behavior on the part of Internet-based marketplaces, at least for now. In a statement, FTC Chairman Robert Pitofsky said exchanges typically would lend themselves to "traditional antitrust analysis."

But the report did lay out several conditions that could potentially raise red flags and spur the FTC to take "a closer look" at individual online marketplaces. These have to do with how large a share of a given vertical industry is held by a marketplace's partners, whether any restraints have been placed on buying or selling outside of the marketplace and the level of interoperability among different exchanges in the same industry.

"The government is taking a go-slow approach and essentially saying that the devil is in the details," said Joel Mitnick, a partner at law firm Browne & Wood LLP in New York.

Whether a marketplace provokes antitrust concerns will "depend on the way the exchange really works," Mitnick said. And because most exchanges are just getting off the ground, he added, the FTC "is correctly reticent to interfere until everyone understands what the economics are."

Still, many industry-backed exchanges aren't taking any chances.

At Envera LLC, a chemical-industry marketplace backeed by Solutia Inc., Occidental Petroleum Corp. and Lyondell Chemical Co., among others, no participant can own more than 5% of the exchange's voting stock, said Mike Geissler, Envera's chief technology officer. Envera also guarantees a secure transaction database to prevent the sharing of information among rival buyers or sellers -- another potential red flag for antitrust enforcers.

E2open.com, a marketplace for buyers and sellers of electronic components, has taken similar steps to avoid antitrust-related scrutiny. Mark Holman, E2open's president and CEO, said venture-capital backers were brought in to keep the industry participants from having a combined market share of more than 50%.

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