SAN MATEO (05/21/2000) - Backers of Internet-based trading exchanges will have to think twice about the issues of price-fixing and industry monopolies as they forge ahead to claim territory in the New Economy.
Representatives for the U.S. Department of Justice confirmed last week that the government has begun an investigation of a business-to-business site for the travel industry, tentatively called T2.
The commerce site is sponsored in part by five major airlines: American, Delta Air Lines Inc., United, Continental, and Northwest. Approximately 30 U.S. and non-U.S. carriers are behind the T2 effort, which was originally slated to launch later this year.
The Boston Consulting Group is reportedly working with the airlines to develop the site for selling airline services and providing information. Officials at The Boston Consulting Group did not return phone calls by press time.
However, a spokesman for the T2 effort said in a statement that the group would be cooperating with the government probe and that the collaborative venture would be shown to be in compliance with the law.
The investigation should serve as a wake-up call for emerging exchanges that even the appearance of price-fixing or monopolistic moves should be avoided, according to Randy Covill, an analyst at AMR Research, a market research firm in Boston.
As digital exchanges become more of an everyday reality and more competitors come together, the U.S. government is going to start paying closer attention, Covill said.
The problem is that for exchanges to get off the ground, they will need the support of major industry players on the buy side and sell side of the exchange equation, Covill said.
The independent, neutral exchanges, those without major-name buyers and suppliers behind them, are not likely to survive, he said.
"They need sponsors with name recognition and business status," Covill said.
"[But] the 800-pound-gorilla sponsors have got to stand back and let the child grow."
The government action will force the issue for many of these exchanges, Covill said.
The exchanges "need a plan and a process," he said. "[Exchange sponsors] will have to set up an independent layer of management and will have to step back from it to insulate themselves," Covill said.
In the rush to get first-mover advantage and claim territory, the exchanges "forgot some of the Old Economy rules that still matter," Covill said.
FTC rules on customer info
The Federal Trade Commission earlier this month issued a final ruling that imposes a trio of requirements on financial institutions regarding the privacy of consumer financial information.
The ruling, which is based on the Gramm-Leach-Bliley Act, states that financial institutions must provide customers a notice about their privacy policies and practices, describing how the companies may disclose personal information to third parties.
The ruling also requires financial institutions to keep customers updated via annual notices of their privacy policies and to give consumers a reasonable opportunity to opt out of such disclosures of their personal information to third parties.
The rule becomes effective Nov. 13, 2000, with full compliance required by July 1, 2001.
One analyst said the rule was expected, although its formulation took a surprisingly long time.
"The fact that they are going after the most secure businesses first -- or businesses that should have been secure to begin with -- is indicative of a trend, and they will most likely work across [other] businesses now," said Rob Enderle, vice president of research at Giga Information Group, in Santa Clara, California.
"It is the kind of trend we were hoping to see started, because there is too much sharing of information without the permission of the owner going on today.
It looks like the FTC will start with financial [operations] and go into the more common e-business sites after that," Enderle said.