Thoughts from the FTC: Thomas Leary Keynote Address

Introduction
By Tim Clark

We're very pleased this morning to have for our keynote address Thomas Leary, Commissioner with the Federal Trade Commission. Thomas Leary was sworn in as a commissioner on November 17th of last year. His term on the five-member commission expires in 2005. Before his service on the FTC, Mr. Leary was a partner at Hogan and Hartson in Washington, D.C. since 1983. His practice was in the area of antitrust and trade regulation. Before becoming a partner at Hogan and Hartson, Mr. Leary was the assistant general counsel at General Motors with overall responsibility for antitrust, consumer protection and commercial law matters. Before joining General Motors, he was a partner at Light and Cason in New York. Mr. Leary received his undergraduate degree in economics from Princeton University and a law degree from Harvard Law School, where he was an editor and officer of the Harvard Law Review. He served as an air intelligence officer on active duty in the United states Navy from 1952 to 1955, and he's going to be sharing his thoughts with us this morning on what the FTC might have to do with what we're doing here at Ground Zero Four. And it is a pleasure for me indeed to introduce him to you and to welcome him to our conference this morning. Mr. Leary.

Keynote Address
By Thomas Leary

Thank you very much.
The title of my talk is "Antitrust and the B2B Marketplace." And let me give you first a two-minute capsule description of myself and the agency I represent. I'm one of five commissioners on the Federal Trade Commission. I have only one vote out of five. While I'm going to give you my candid views today, you've got to understand that I can only speak for myself, not for the other four. I haven't vetted this talk with anybody.

The FTC is one of our alphabet independent agencies. We date from 1914. Most of the others date from the New Deal era or from the second great wave of government regulation in the 1960s and early 1970s. But the Securities & Exchange Commission, the Federal Power Commission, the Federal Communications Commission are all basically structured the same way. We're non-partisan by design; no more than three of the five can be members of a single political party. There are three Democrats on the FTC right now; I happen to be one of the Republicans. We have staggered terms by design so that no incoming president can change the composition of the Federal Trade Commission overnight, which provides a sense of continuity. And even though we're appointed by the president of the United states, the president cannot fire us. The only way you can get rid of me is by impeaching me. And that's not all that easy, as you know. So I have a certain sense of freedom in discourse. It's the first time in my life that either an employer or a client can't fire me. So I can say pretty well what I damn well please.

I'm here I assume because you're concerned about the application of the antitrust laws to B2B. And the basic message I'm going to leave with you is one of reassurance. A lot of people worry about what government regulators are going to do to foul up this technology that works at warp speed. And the answer is, probably nothing that's going to alarm you. One thought I want to leave with you though is that everybody talks about the B2B marketplace as if it's high tech. The medium of communication is high tech. But the marketplace is not necessarily high tech. And that's something that I don't think many people fully understand. In the B2B marketplace, there are buyers and sellers of all kinds of goods, some of them literally nuts and bolts.

The one B2B venture that the Federal Trade Commission investigated, and as you probably know gave its preliminary approval to a few months ago, was the so-called [Culvison] venture, which involves some automobile companies and some suppliers of parts and components to automobile companies. And when I worked in the automobile industry, we thought we were pretty high tech. But I don't think most of you in this room would consider the auto industry that high tech today. The competitive effects that the Federal Trade Commission was looking at were not competitive effects in the high tech communications sector, they were competitive effects in the automobile business and the parts business. So it's not as if we're butting our nose into this new world. The great bulk of the issues that come up in the B2B field are effects in traditional markets that we've had a great deal of experience with. Those of you who may be over the age of 40 may remember a New Age guru of 30 or so years ago, saying the medium is the message. Remember that? I never understood what it meant, frankly, I'm not sure it meant anything. But it was part of the Zen state that people were in in those days. The medium is the message.

Well, I'm telling you the medium is not the message. Don't confuse the two. You are dealing with the medium, which is high tech, advanced. The messages that you may be carrying are very low tech. And those are the things we are concerned with at the FTC more than the medium, and I'll get to the medium in just a minute.

What are the kinds of things, specifically, that we're concerned about? I'll mention three things to you that are easy to remember: Collusion, exclusion, exclusivity.

Collusion--what's it all about? Well, in the B2B marketplace, you potentially have real time information about what a lot of your competitors are doing and the prices they are either receiving for the goods they sell or the prices they are paying for the goods they buy. And you have potentially a very dramatic window into their business. That can be very pro-competitive. And those of you who remember your economics 101 in college know that the models of perfect competition presuppose perfect information on all sides. B2B can facilitate that. But the problem is that the information is not anonymous in the same sense that it is, say, in a stock exchange. Compare a B2B marketplace to the New York stock Exchange--the New York stock Exchange, myriad buyers, myriad sellers, instant transaction information- -but you don't know who the buyers and the sellers are. And so there is not an opportunity to collude, to agree on the terms of sale or the terms of purchase. Okay? B2B marketplace may not be that way. It may facilitate agreements among people to behave in certain ways among competitors. In that respect it might be more analogous to public bidding. Public bidding for contracts of various kinds are regimes that have been put in place in order to minimize political corruption. But anybody who has worked in the antitrust field will tell you they are also hotbeds of collusion. It's no coincidence that many of the antitrust cases, particularly in the last 20, 25 years or so, have involved public bids. And that's because when you have information about your competitor--the terms of the competitive contract and so on--it makes it much, much easier to get together with that competitor and agree or not agree to do things. So, that's the dark side, if you will, of B2B marketplace.

Is it an insoluble problem? No. Because B2B technology gives you the opportunity to erect internal firewalls to minimize the likelihood of downside competitive spillover effects, while still giving you the benefit of a genuine auction market, the benefit of bringing in suppliers at virtually no cost, the benefit of creating, in many ways, a worldwide marketplace at virtually no cost, with immense potential for efficiencies. It provides the benefits of reducing of the contributions of middlemen, creating savings for the buyers and the sellers, and ultimately savings for consumers.

That's what we're all about: trying to protect competition for the benefit of consumers. So B2B has immense upside potential. The downside potentials are manageable. What you need, quite frankly, (and you should understand there's no money in this for me anymore) is the services of a good antitrust lawyer because they have the sensitivity to the possible downside potential of a B2B marketplace and they can give you guidance as to how to conduct yourself in ways that will create value and eliminate competitive problems. I don't gain anything from referring lawyers to you. So, I advise you to get one for your own protection and the protection of your clients, if you're a consultant. That's the collusion problem. It's there, it's tractable.

Exclusion. What's the problem with exclusion? Well, the problem with exclusion is: suppose you've got a B2B that's owned and run by a particular group of buyers and sellers. It may be so efficient, so convenient that for all practical purposes if you don't have access to it, either as a buyer or a seller, you can't really compete effectively in the marketplace. There's nothing new about that, by the way. Analogy: a group of investors a hundred years ago got together and built a bridge across a river. And it was the only crossing for miles around and people could not compete effectively unless they had access to that bridge and could cross it. More people got together and built a railroad terminal a century ago. And that became what is known as an essential facility. You can't really compete effectively unless you have access to that facility. So the antitrust laws require people to deal on reasonable terms with late-comers if they have the status of essential facilities.

Now I'm not saying that any B2B marketplace out there right now is an essential facility. But if you have some sense that your marketplace is going to become, if you will, the standard--the New York stock Exchange of B2B marketplaces--you may have some obligation to allow access to people on reasonable terms. And reasonable terms does not mean for free. The people who are the pioneers and who took the risks and set this thing up are entitled to be compensated for it. And the newcomers may have to pay higher fees or higher rates or whatever charges, whatever burdens are imposed on newcomers. Okay? Again, because this is not an unfamiliar problem, because this is something that antitrust lawyers have lived with for a century in other contexts, again, counsel can give you good advice. You may have to have reasonable terms of access and reasonable terms governing kicking someone out, due process considerations. Okay?

Exclusivity. Now the third thing is exclusivity. Exclusivity is not the same as exclusion. Exclusion is walling people out. Exclusivity is walling people in. And you may have some rules in your B2B venture that require the members of the venture to conduct all their transactions on the venture. There may be some reasons for that. Maybe you need to build a critical mass. Maybe you need to have enough start-up time to build it, to make it operate effectively. But one of the things you need to ask yourself is if these kinds of restrictions are necessary or appropriate once you go down the line, because there are a number of problems with it. I mentioned the possible problem of collusion earlier. One thing that keeps collusive agreements going is the ability to detect so-called cheaters. And if someone is dealing outside the venture, they may be dealing outside the venture in a way that violates the collusive agreement. And that's why exclusivity can be suspicious in certain circumstances, because it might be viewed as a way of insuring that people adhere to the terms of a collusive agreement. Or it might be suspect because it prohibits or prevents the creation of alternative competitive B2B ventures. That's the one issue that I think of as being kind of on the frontiers of antitrust. I don't think of the competitive effects on either the suppliers or the sellers as being difficult. I don't think of them as being new. But when you're talking about the potential competitive effects between rival B2B ventures, we are dealing in essentially uncharted territory. And I think we are dealing in territory that we have to be very careful about.

What makes them different? Well, let's start first of all with what makes them similar to other things. Think of the example of a telephone network or a cable network or an electricity transmission network. These tend to be inherently more efficient and effective as more and more people get on the grid. On the electricity side, it may be simply economies of scale, the ability to supply relatively cheaper and cheaper as you build scale. But if you think of a telephone network, there's not only the scale efficiencies, but the more people who are on it the more valuable the network itself becomes to the buyer. One person on a telephone exchange is worthless. Two, worth a little. Two thousand, two million, worth a great deal. So these so-called network industries evolve toward conditions of natural monopoly because a scale efficiency develops as it becomes cheaper and cheaper to supply individual consumers, and the network becomes more and more valuable to each individual consumer as more and more people get on it. That's the network effect, the so-called natural monopoly.

Natural monopoly breeds regulation. We always regulate natural monopolies in this country. And so you think, well, is this true of B2B? Is B2B (I'm thinking of competition in the B2B sector now, it's the only area I'm talking about) competition in the medium--is that going to be a natural monopoly? Are we going to evolve into natural monopoly conditions in various industries or in various sectors of the economy? Or is everything going to be in one bucket eventually? I don't think so because there's one very big difference between a B2B network and say a telephone network or a cable television network, which is that B2B networks are virtually costless to replicate. You don't have to build an entire new network of cables or lines or railroad tracks. So B2B networks may be able to achieve a close-to-monopoly status very quickly. But they may also be very vulnerable to attack. And that's the area, quite candidly, we don't know much about. And that's why I believe that it is incumbent on us, people like myself who are supposed to be looking after the competitive system, to be very, very cautious and careful as we proceed in this area where the waters are literally uncharted.

Conclusion. I just want you to remember a few things. First, many of the issues are not hard. A lot of the competitive issues involve nuts and bolts industries--nothing new about them. The application of those principles to B2B specifically and competition in B2B is challenging. It's not that the principles are wrong, that we need new principles, in my view, but we have to be very, very careful about the facts. I want you to feel confident that as far as I'm concerned and as far as I observe the people around me, nobody's going to run off half-cocked. I don't think we're going to rain on your parade. I wish you all health, prosperity, and a future with a lot of flashing lights and acrobats in the sky. Thank you.