Big Backlash

Middlemen try to bar e-tailers

Traditional brick-and-mortar middlemen are successfully persuading state and federal lawmakers to prevent Internet-based competitors from selling everything from contact lenses to autos directly to consumers.

To block e-commerce efforts, car dealers have helped get laws passed in 49 states to prevent auto manufacturers from selling cars online. Wine wholesalers have lobbied Congress and the states to prevent wineries from selling wine directly to consumers over the Internet.

"The fear of the Internet has these incumbent middlemen fighting back," said Rob Atkinson, vice president of the Progressive Policy Institute, a Washington, D.C., think tank founded by Democratic Party centrists. "Its not a paranoid fear," Atkinson said. "They are losing market share to Internet players."

An estimated 10 percent of the failures in the e-commerce economy resulted from the blocking of e-commerce initiatives by middlemen, Atkinson said. And U.S. consumers pay a minimum of $15 billion more annually for goods and services as a result of such e-commerce protectionism, he said.

The examples are multiplying:

Texas has outlawed Ford Motor from using the Internet to market used cars to consumers, a ban upheld in federal court.

Auctioneers in New Hampshire, North Carolina and Tennessee have pressured their respective state officials to take on eBay, the Webs most popular auction site, by enacting or considering laws that require sellers to pay auctioneer registration fees to the state.

In Virginia, optometrists opposed the states move to renew drivers licenses online for fear that people would not visit their optometrist to get their eyes checked.

The regulatory arm-twisting isnt reserved exclusively for state legislatures. Often, powerful industry trade groups do the job themselves.

The American Optometric Association pressured contact lens manufacturers to distribute only to licensed optometrists and not to alternative providers, including those that sell directly to consumers over the Internet, according to a legal brief filed by attorneys general in 33 states against the AOA. As a result, companies such as 1-800 Contacts, which sells over the Internet and by phone, have more difficulty obtaining lenses and must buy from wholesalers, instead of directly from the manufacturers.

When Microsofts HomeAdvisor site set out to establish a real-estate portal where agents would accept lower commissions, the National Association of Realtors not only lobbied against Microsoft in its antitrust battle, but also required brokerage firms to list exclusively with its own Web site,

The issue has garnered the attention of federal regulators. On May 8, the Federal Trade Commission plans to hold a workshop to examine competitive policy issues that may arise in distribution and marketing online.

Atkinson said Washington, D.C., should take steps to protect e-commerce. Such steps would include national licensing of certain businesses — such as car dealers and some financial institutions — that are usually state-regulated, and using federal antitrust law to scrutinize industries that might be colluding to prevent producers from selling directly to consumers.

Yet, many of the industries enjoying protection have strong lobbying groups to guard their interests. Wholesalers and dealers play a dominant role in the distribution of automobiles and wine across the country, and they arent willing to give up their role to Internet upstarts.

State franchise laws have long protected auto dealers. In 49 states, it is illegal for automakers to sell directly to consumers. Its also difficult for business-to-consumer sites such as, said Robert Brisco, the companys CEO. CarsDirect sells autos directly to consumers over the Internet in 40 states. "We would like to be in more states in the future," Brisco said. "But we face regulatory constraints."

A federal law enacted in January gives states the right to prosecute, in federal court, wine sellers that ship product into their states. Thirty-nine states and the District of Columbia have laws on the books severely restricting the direct sale of alcohol to consumers. At least seven states have felony laws on their books prohibiting wineries from selling and shipping wine directly to consumers.

Hood River Vineyards in Oregon would have a 30 percent higher revenue if it could fill orders that it receives from certain states, said Bernard Lerch, the wine companys owner. "Were turning down business all of the time," Lerch said.