Open Letter to our Regulators and the EDI Communications Industry

Dear Colleagues:

Periodically, I asses the sum total industry impact of the Loren Data Corp vs. GXS Antitrust action, and what (if any) action has fermented at various agencies – FCC, DOJ, etc., in short, is this case having an impact on our regulatory apparatus?

Is this case having any impact or influence on the behavior of the protagonists?

For a good long time, many of my Government relations had never heard of “EDI Message Routing Services” or Value Added Networks; yet the EDI Sector predates the Internet. Today, EDI  is a set of Business Document Compatibility Standards, with communications conducted as application layer (A2A)  services over internet protocol. Value Added Networks provide the communication and data layer services (schema compatibility).  End users  might also choose to operate in-house communications services, such as As2 clusters or some such COTS EDI management systems. The VANs of the legacy period having made the leap to IP data carriage, inherited a  globally meshed routing  system using ‘layer seven addressing’ , i.e., the address is embedded within the EDI document’s ‘envelope segment’ – it’s a BIG mess, and there are opportunities for massive technical improvements, yet it kinda sorta works –  except for the potential for routing abuses.

As messaging system go, VANs and their subscribers are vulnerable to anti-competitive abuse via network effects; the contemporary rollup of large subscriber pools via Private Equity, has caused damage to the sector and stifled innovation. The VAN sector has the largest population of trading partners, and sells specialized supply chain IT solutions to  their constituencies. VANs offer the convenience of having a globally routable address, and they lift the burden of operating in-house comms, which is still a burden for many subscribers

Though EDI is obscure, it is a vital networked market for retail and manufacturing supply chains, global trade, logistics, etc. Doing business with a retail giant, manufacturers, grocery, etc, means being EDI Compatible.

I have alerted our Nation’s regulators on numerous occasions, via briefings and emails, alerting them to the fact that this vital networked market is being consolidated to resemble a reconstituted AT&T of the 1960s.

“By who”, you say? By GXS Inc, backed by the Private Equity of Francisco Partners of the Bay Area.

“Why are they doing this dastardly deed?”  Well, there is much at stake; electronic invoices,  purchase orders, and numerous ‘transaction sets’, (as standardized by ANSI X12, UN EDIFACT, and others) are transmitted via EDI VANs. Two of these VANs are TGMS (operated by GXS) and ECGrid (Operated by Loren Data Corp). VANs provide EDI communications (Document Interchanges) between businesses,  and are critical systems in a chain of powerful services that make B2B markets….work. In addition to communications, VANs enjoy a legacy business selling software and services, such as retail and manufacturing software (accounting,  ERP) and also provide professional services, such as system integration consulting. However, our present case concerns the Loren Data Corp v. GXS Antitrust lawsuit.

As we shall see, EDI Communications are bound to the sale of software and professional services. It’s a lucrative business sector, and gaining control over the “comms channel” is but one step in hammering out an unassailable niche, without having to innovate a thing. Think of Interconnection denial as a lever to threaten clients and competitors.

For a good long time, all of the VANs cooperatively “interconnected” with each other, so that parties subscribed on a different VAN could reach any other party (trading partners, in supply chain parlance). When you or I dial a phone, we don’t worry about which phone network our family members are on, or which email provider a colleague uses. It all just works.

In the EDI Messaging sector, GXS acquired three of the top traffic carriers in the EDI market: IE (ex IBM VAN), GEIS (ex GE VAN), and Inovis (the #2 VAN in 2011), GXS now has 65% to 80% of all EDI message traffic (depends on which analyst you read), #2 is now IBM Sterling, and #3 is up for grabs, let’s say Easylink, now owned by OpenText.

Normally when consolidation occurs in a Network effects market, we let it slide as long as the consolidator practices good interconnection hygiene.

Explanation: Good Interconnect hygiene is when a market leader, or any network actually, does not impose undue limitations on agreeing to interconnect with a competing network. This serves the end-users, above all. A well interconnected market allows end-users to change their EDI provider, and interconnected markets ensure that an influential Retailer, like Lowes or Target, can’t force its suppliers to be residents of any one network …..like GXS.. Interconnections are even more special than I am letting on here, as they have the power to simultaneously enhance and limit  network effects. Yes, yes, it is strange.

Interconnection is a competitive lubricant and a hedge against monopolization – Companies like Loren Data Corp, 25 years in the EDI messaging business, create innovative messaging technologies that allowed the first EC Service Providers, like SPS Commerce, to bring Web-based supply chain solutions to the B2B market, at much lower costs, and with greater functionality – the EDI service providers drove out costs and added value.

However artificially birthed, GXS started interfering by denying interconnects to a peer-competitor, Loren Data Corp ECGrid®. Although GXS benefitted richly by building on the network traffic foundations of its three acquired VANs – these VANs grew their current market stature via the liberal interconnect policies of their peer-competitors in the EDI market!

GXS bought its way into the market, made acquisitions to concentrate messaging traffic from the three top VANs, and commenced the great experiment to stifle competition via interconnection abuses under the FCC and DOJ’s noses. So far, so good, as there has not been a peep from the agencies….murmurs, maybe….not peeps.

The seemingly cool response of the DOJ’s antitrust division is puzzling, as the division is now under the leadership of Joe Wayland, (an antitrust expert known never to shrink from a battle). The DOJ made a mess of vetting GXS-Inovis merger under the Hart-Scott-Rodino anti monopolization statutes….therefore one would speculate that Attorney Wayland would at the very least prevent GXS from openly abusing smaller competitors via Interconnections…which are the most piquant and brutal anti-competitive levers.

These are not facilities-based interconnections, but are virtual IP (routing) paths with zero operational overhead? Now you know that this is not a capital resource based denial, as in the Internet backbone market and CIX cases, nor is this a common carrier mandated LEC-CLEC fiber interconnect dispute.

VAN Interconnects are software configurations that move message traffic from one trading party on one VAN, to the destination trading party on another VAN.

Where Interconnections play a central role in maintaining a competitive market, is in maintaining the end user’s freedom to choose an EDI network based on well-known market calculus: selection of a provider based on price, features, and quality of support services – all together, these attributes spell value to consumers.

Even before transitioning to IP-based messaging, VANs used the PSTN to interconnect with each other, routing messages to collegial competitors when their subscribers needed to trade with a supplier on the competitors VAN. .

Such cooperation was a real ‘network effects laboratory’; it proved that liberalizing the granting of interconnections was beneficial to the EDI marketplace. And, as far back as the 1960’s, ( VANs were Mainframe time-sharing systems then, liberal and generous interconnect policies allowed the EDI VAN market to flourish through the ‘60s, ‘70’s, 80’s, and 90’s right till 1999, as long as the competitor VAN had at least one real trading partner with a requirement to exchange EDI data on one’s own network.

To this very day, when a far-flung VAN, even one located in the EU or Australia, contacts Loren Data Corp Network Operations, they can generally expect they will be allowed to interconnect (recall, these are soft circuit configurations), as long as it can be verified that they have a real customer that requires message exchange with a trading partner on ECGrid. So it is with just about every VAN we can name; ECGrid has formal and informal interconnect agreements with ~40 true VANs (EDI network that manage their own routing tables) , Service Providers, X400 mail systems, and direct connections to retail and manufacturing supply chains.

Almost 100% of VANs, including ECGrid, do not charge for interconnection to bona fide peers, as all EDI transactions are bidirectional and reciprocal – all originating messages receive responses – therefore, two-way billing (full settlement) is not efficient or warranted.

Non-settlement interconnection is also the norm in Internet backbone market peering – although astute observers of networked markets are aware that an increasing amount of Internet data traffic is being accomplished via paid transit agreements , due to the plummeting costs of wholesale IP packet traffic.

GXS Inc. has now achieved the status of Common Carrier and Essential Facility, by anyone’s measure, and has started the grand rip by denying Loren Data Corp a non-settlement interconnect to TGMS, GXS’ VAN destined to take over traffic from its three acquired VAN properties.

If not for the amazing network engineering acumen of Loren Data’s Founder and Chief Technology Officer, Todd Gould, and his super netops VP, Crystal Kuczynski, such clumsy actions by GXS would be damaging….but presently, these actions are impacting only the cost of operations, not customer traffic. That could change of course, but network relations continue to remain remarkably stable within the domain of message traffic reliability.

GXS will attempt to strangle Loren Data Corp, establishing a precedent if DOJ and FCC do not act. As we speak, GXS is investing unlimited legal resources in its defense of LD’s antitrust case and appeals, and the further attempting of getting rid of the EDI market’s only Network API provider – the one EDI network that services the wholesale service provider constituency. Now, the smart one’s get it. API =  democratized access for anyone with skills to code, and Todd has let the genie out of the lamp – he actually let the genie out ten years ago, but the ECGridOS API is so unique and powerful in the EDI network operations market, that the theme song ditty I wrote for its introduction as a sort of clever-funny hook, is now true. What do you think?

The Service Providers make it cost-effective for small and medium businesses to process EDI, and Loren Data ECGrid makes it easy for the Service Providers to connect to the global mesh of EDI B2B Commerce networks. GXS can’t stand this. They do not want service providers in the market at all.

Loren Data Corp’s President has GXS’ position and thinly veiled contempt for Service Providers, like SPS Commerce, memorialized in a letter penned by GXS Executive VP Steve Scala.

FCC’s inaction is, in essence, the quiet sanctioning of a toxic monopoly under the regulatory nose. The EDI market is not an “Enhanced Service”, is not a content service, it is a hybrid, telecommunications message switching service that essentially replaced TTY and Telex when computers entered the enterprise – and applications specific messaging (EDI) created the need for VANs.

VANs spontaneously interconnected with each other to grow the market, and now, PE has come to use Interconnection in order to monopolize and harvest the goodwill, innovation, and profit that other VANs and EDI alternative providers built. Under FCC’s and DOJ’s nose.

Each VAN that GXS Inc. acquired used reciprocal, non-settlement Interconnection to grow themselves within the market. Now that GXS has cash equity and credit facilities established by their beneficial owners, Francisco Partners – they shall use the aggregate power of these inter-network connections to thwart competition, strangle innovation, and drive away any incentive for investment in R&D.

Factoid: There has not been a new VAN started up since 1999? That was ICC, and they sold out, Soft Share caved to an EU buyout. Easylink, the #4 VAN, sold out to Opentext – why stay in a market when a monopoly has 65-75% of message traffic volume and a border choke point? GXS can can take away your reciprocal connectivity to any trading partner on TGMS…..and all VANs need to reach clients on TGMS!!! After all, they bought up the top 2/3 of the market.

In the not too distant past, FCC and DOJ acted to make sure that AT&T did not succeed in stifling competition in long distance (MCI v. AT&T, DOJ amicus curiae and FCC in rulemaking) and in third-party connected equipment. (Caterfone v. AT&T).

My dear colleagues at the two agencies charged with protecting our communications markets from being easily monopolized: are you simply going to let GXS become an AT&T style Leviathan in the EDI Communications market?

In this age?

Please, I invite anyone to leave a comment on this pressing issue.