The good folks of Loren Data are well immersed in a process of ‘Obtaining Justice’; the founder, Todd Gould, rediscovering, yet again, that even legal professionals specializing in antitrust, techno/telecom/network effects, are occasionally fallible in not being up-to-speed on the complete application of said subject matter, i.e., how competing networks often leverage interconnections to in order to strangle competition.
Therefore, once again and with feeling: Interconnections are special. Interconnections belong to an awesome powerful class of intersecting market forces that harbor powerful societal externalities (consider for a moment an AT&T’ of the 1970’s, hegemony intact, the fallout on economy and society had there been no consent decree, no MCI antitrust win). The convergence of competition, innovation, and our very standard of living are intimately bound up with this (seemingly) foreign concept of competitors working in détente to create, sustain, and simply build new communications markets. These Meta Systems, such as the Internet and the long distance voice networks that span the planet, would never have endured – because the intuitive course of action would be to do the opposite – never connecting to any competitor. Right? Why is that? Be patient.
For the truly curious and older readership, I ask that you take an interim assignment and mentally, meditatively recall these three names and the services they purveyed: CompuServe, AOL, and Prodigy; three systems, for their time quite large in subscriber populations, failed as isolated, private networks – and as some know, all are but gone today or totally transformed in business model (quick hint, that’s AOL), with only their embers and cast-off husks subsumed into diffuse ventures. Long ago they were leaders for a time: CompuServe, AOL, Prodigy, and a few others lost to the sands of time. Will the Internet ever perish? The answer as we all know is that it will endure, evolve, and remain not only a system of communications, but also as an engine of innovation and imagination. Why? Interconnections between competitive systems – permissive attachment policies – and…….standards.
Interconnections are neither partnerships, nor synergistic marketing nor other business relationships.
Whether the interconnections are in corporeal form, such as cables, routers, racks of comms gear, etc. or in virtual incarnation as b-directional exchanges of party to party message traffic – interconnects exist in a totally different class of “technical market accommodations” unique to themselves alone. We are sure in this age of the Internet, itself a system of interconnected, independent networks, that competitors who are otherwise fully meshed across their systems via interconnections, are just as often at each other’s throats when competing in the market. When was the last time you had concerns over which phone network served a loved one, which ISP your supplier used, or what system delivered their email? We do not concern ourselves about these matters due to the power of interconnection.
It was not always so. With billions at stake, even such competitors engaged in acrimonious litigation over contracts and corporate misdeeds keep their hands off interconnects. When billions in customer goodwill is at stake, competitors still interconnect. When markets are a deemed ‘too important”, the laws of common carriage legally mandate interconnections between carriers. When connected markets predating the internet were forming, such as EDI VANs, the founding VANs instinctively sought interconnection with each other, because the subscriber demand was compelling: no supply chain manager in their right mind would contract a VAN that refused to route inter-system message traffic among a growing cohort of global EDI commerce systems – they would never consider asking their trading partners to collectively reside on one network – especially a network that refused to connect to other VANs! That golden era of permissive interconnections expired exactly ten years ago, in the acrid explosion of the ICC debacle. (see Todd Gould’s excellent posts on the subject).
Yet this is the essential argument of GXS – that all should home to TGMS VAN. The 70 or more existing interconnect agreements that GXS does have with other VANs? They are all encumbered by contractual limitations and a well-known common threat to never, ever transit traffic off the destination network: “…messages shall not leave the interconnected VAN for another host system”. Thus, GXS, in several letters, has admitted to what some legal specialists have termed a horizontal tying agreement (do this, if you want an interconnect to the largest VAN in the world) – considered a potential per se (illegal on its face) violation of the Sherman Antitrust Act, Section #1. Plainer still: “Thou shalt not connect your VAN to a service provider if you want a TGMS interconnect”.
The Foggy Gap
With carrier regulations and mandated interconnects on one side, and deregulated services of the Internet era on the other – crisscrossing and subsuming each other’s services, migrating from one shore to the other (VOIP, IP Data, Telex, email, EDI) …..we see that there are many examples where the regulators have failed to protect markets with an appropriately light touch. In the present case: EDI messaging services and the denial of a traffic exchange agreement between two competitors at opposite ends of the size and capitalization spectrum:
1) GXS is the largest Value Added Network (VAN), financed with a billion dollars of the cash and credit facilities of mighty Francisco Partners of the Bay Area.
2) Loren Data Corp. Not the smallest VAN, but tiny compared to GXS, and more importantly, the recognized innovation leaders of the sector – and therein lies one ingredient of the fermenting dispute. All of the technology brought to the EDI Communications market by Todd Gould, Loren Data Corp’s Founder and CTO, is concerned with lowering barriers to market entry. This just rubs GXS the wrong way. Loren Data’s network, ECGrid, is an engineering marvel and a rethink from the ground up for new age Service Providers – the on-demand B2B Applications specialists that made their mark by lowering (on the application side) the cost of B2B systems for mid-market end-users, this was accomplished by evolving web-based technologies long, long before GXS even considered managed services. GXS hates the service providers…..hates them with a passion. Hates them enough to create perversions of standard EDI nomenclature – creating new words to confound the laymen and Jurist alike. Read Todd’s blog for examples of how the legal process is being perverted with just such ‘for dissembling only” nomenclature.
Sustaining healthy competition and innovation in connected marketplaces.
When “network effects” are present, then interconnection abuses are not far behind due to their extremely tempting nature. In the case of Loren Data Corp v. GXS Inc, one may substitute “non-settlement message routing agreement’ for ‘Interconnection’ – if it so pleases). In the regulated world of telecommunications and common carriers, the FCC operates a system of bureaus for guarding against predatory trade practices unique to networked markets. For unregulated services, such as EDI, the justice system is at a loss to even begin to untangle what are business disputes, and which are practices of a monopolist using internetwork connections as anticompetitive weapons.
Building and sustaining connected markets is not a trivial matter. In the arena of antitrust law, many legal professionals are not up to speed on how markets are affected by a large actor exploiting inter-network connections. We all would have to be transported back to AT&T consent decree era just to find any “essential understanding” of how connected markets respond to monopolization of interconnections, and how perverting message routing paths can stop innovation in its tracks. Does any reader here believe that we would ever have enjoyed cellular phones or the Internet as we know it, had AT&T’s hegemony gone unchallenged? C’mon.
Rolling up large subscriber populations via the leverage of Private Equity, and subsequently perverting interconnection to legitimate peer (s) has profound economic effects on the entire market. In the case of a company like GXS, specializing in EDI messaging among trading partners in a supply chain, the aggregate subscriber population is important, true, but the type and weight of the subscribers are even more important in the VAN world.
Using the tremendous capital resources of Francisco Partners, GXS purchased GEIS, IBM’s IE VAN, and Inovis. The resulting +50,000 subscribers are weighted almost exclusively in favor of large retailers and manufacturers – whereas most of Loren Data Corp’s ECGrid subscriber population is biased towards the suppliers and mid-sized businesses. Therefore, GXS bolsters its refusal to interconnect ECGrid with TGMS, by exploiting the relationship between trading partners and their “hub buyers”.
Translation: the suppliers have no leverage in their relationship with their Hubs on TGMS – and therefore cannot properly advocate for Loren Data Corp (many wish that they could speak up in favor of ‘supplier independence’).
A growing number of mid-sized suppliers obtain services from Electronic Commerce Service Providers who are the primary clients of ECGrid – it is precisely these Service Providers that GXS loathes to the depths. The scale of GXS’ contempt for service providers on ECGrid is legendary. They (the Service Providers, SPS in particular) have put downward pricing pressure on many of the services that VANs used to specialize in, and profited richly by. By innovating and delivering web-based EDI solutions, companies such as SPS Commerce have beat GXS at their own game.
It’s not surprising that SPS Commerce and other EDI solutions providers use Loren Data Corp ECGrid – for value, support, and advanced communications features. This is the #1 reason GXS has taken a preemptive strike against Loren Data Corp: because Todd Gould and company service SPS Commerce, and have optimized their network for the rapid deployment of other innovative EDI businesses, so, GXS sets its sights on destroying the EDI Sector’s preeminent advanced communications innovator.
Fully briefed by your’s truly, the FCC is the natural go to agency to fix this G-d Damned mess, as the one bureaucracy that is intimately familiar with the economic impact of interconnection arbitraging on competition. As of this writing, the Agency has, at various times, turned its attention to and away from the mechanics of VAN interconnects, even though the market is on the precipice of dire trouble. Loren Data’s Desperate Dispute over Interconnection to GXS TGMS is merely one opening gambit in GXS’s efforts to monopolize or otherwise distort natural competition in the VAN market. Now the largest EDI VAN, and each year, GXS bleeding out 8-10% of its TGMS subscribers while under pressure to perform financially. The marching orders could not be more clear: Start making money…boyzzz.
Among all of the VANs that GXS interconnects with, they chose to joust with Loren Data Corp. The obvious danger read by GXS is if Loren Data get’s its hands on even a modest amount of capital or partners up with a technocratic institution at scale – and there you have it – the technology and advanced architecture that Todd Gould has lavished on ECGrid and ECGridOS, and his wildly rich Unified AS2 solution, will go from under-marketed EDI advanced arsenal, to the preeminent and proven technology portfolio it truly is. So it seems that GXS’ disparagement of Loren Data Corp viz Interconnection, actually belies a fear of Todd Gould’s architectural prowess in B2B Communications Platforms…….a strange but powerful approbation, as it comes from the best financed company in the EDI business, yet one that has absolutely zero innovations on the books. Now I get it.