In general, I think that business regulations should be kept to a minimum — used only when necessary (like protecting the commons/environment, keeping the playing field level, etc.). One of the big regulatory issues that is coming up with regards to SBC/AT&T’s planned acquisition of Bell South is “net neutrality”:1.

Here’s an example from the wireless world (the world of oligopolies) that I think is illustrative of what will eventually happen in the broadband market without regulations. It was recently announced that Verizon wireless will soon be offering a service in conjunction with Tivo were you can program your Tivo directly from your mobile phone. The key quote from the WSJ’s “article”:2 on this announcement was…

bq.. Verizon Wireless executives said the service, to begin this summer, is expected to cost less than $5 a month, in addition to normal cellphone-service charges and TiVo subscriber fees, which are $12.95 a month.

p. The fact that they are even charging *_anything_* for something that you can do freely over the net on Tivo’s site highlights the greed (and cluelessness) of quasi-monopolistic companies (yeah, they probably created some neat “BREW”:3 application, but big deal) .

Unfortunately, I don’t believe that there is really a competitive marketplace for net access in the US. That is, you can choose to get your net on from one of two monopolies… phone or cable (obviously, this is even less choice than in the mobile world). That’s it, and that is not a marketplace. So until we have a competitive broadband marketplace, bring on the regulations.

[3(Wikipedia on BREW)]http://en.wikipedia.org/wiki/BREW

[2(WSJ article on Tivo on your Verizon mobile)]http://online.wsj.com/article/SB114169501674290993-search.html?KEYWORDS=tivo&COLLECTION=wsjie/6month

[1(Wikipedia on the concept)]http://en.wikipedia.org/wiki/Network_neutrality

A few days ago it was “reported”:1 that Toy R Us’ online arm prevailed in a case again Amazon. From the linked story…

bq.. On Thursday, Toys “R” Us said the verdict, which will be rendered today by the Chancery Court in New Jersey, severs the August 2000 agreement, and it expects to provide online access for its customers at www.toysrus.com.

p. This is a *_big_* deal for both companies since…

bq.. Currently, in a normal season, TRUCC products represent approximately five to ten percent in off peak periods. During the peak season, TRUCC utilizes 20% of “the thru put or capacity to process”. Actually during those peak periods the actual physical storage of the product is at 40%. The peak season runs from October to November for receipt of product through the day after Thanksgiving to the first two weeks of December for out flow.

p. And…

bq.. [T]RUCC sold over one hundred seventy seven million products during the year 2005 up to the time of the trial (25% over its 2004 sales).

p. And…

bq.. Mr. Bezos would later candidly testify that TRUCC and AMAZON had done extremely well in the five years the Agreement has been in place and in 2004 was more than profitable.

p. _TRUCC is the online arm of Toys. The quotes above were taken from Judge McVeigh’s opinion (linked below)._

That is, during the holiday season Toys’ sales utilizes 20% of the thru put of Amazon’s fulfillment-center infrastructure and 40% of the physical storage of those centers.

Unwinding this deal will leave Amazon with _a lot_ of idle fulfillment infrastructure and will require Toys to create their own, very expensive web infrastructure, fulfillment system and customer service department. Clearly trying to unwind the profitable relationship with Amazon was a non-trivial decision for Toys. That is, they must have been *_highly_* motivated to remove themselves from the partnership with Amazon.

To get the feel for what motivated Toys, it’s possible to read “Judge McVeigh’s opinion”:2 on the case (in addition to lots of other documents on the trial). Upon reading the Judge’s opinion, one is struck by the blatant deceptiveness of Amazon and their disregard for their business partners — while negotiating with Toys, in their ongoing business practices and even while testifying in court.

Here’s a gem from the Judge’s opinion…

bq.. From the very beginning of this agreement AMAZON was looking for ways to expand the selection of toys sold regardless of what the agreement provided. Repeated efforts were made by in house people to find alternatives to the way items were marketed, how to identify the products and the way items were sold.

p. And regarding Jeff Bezos (CEO of Amazon)…

bq.. Mr. Bezos presented a very complex appearance to this Court. He attempted to convey to this Court, that as the CEO of AMAZON he had a general overview of the Agreement but was not involved in the intimate details of neither the negotiations nor the terms or the language of the Agreement. Mr. Bezos preferred to refer this Court to Rudy Gadre, the in-house lawyer who worked on the Agreement with the key negotiators. However, this Court has no doubt his knowledge and understanding went much deeper than revealed.

p. And more on Mr. Bezos…

bq.. In a rather child like fashion, he tried to convince this Court he was unaware there was a problem between the parties about Merchants@sellers, selling toys until he be became aware of the restraining order entered in this case.

p. And an example of the typical view of the court regarding other Amazon testimony (Jorrit Van der Meulen was the go to person at AMAZON.com with regard to the Toys account from 2001 through 2004)…

bq.. Mr. Van der Meulen’s testimony suggests, if TRUCC would not accommodate AMAZON’s model then, AMAZON was going to find a way around or completely disregard the terms of the Strategic Alliance Agreement. AMAZON was going to interpret language in the Agreement to mean what AMAZON wanted it to mean.

p. From the opinion it is also clear that Amazon’s mistreatment of Toys was not unique..

bq.. However, if TOYS selected a product for sale by a third party, it would not become responsible for inventory of third parties. Mr. Gadre was dismissive in testifying there was no concern on AMAZON’s part as to what happened to a third party if TOYS selected its product. It was a risk the third party sellers accepted. This view is a poor indication of AMAZON’s good faith dealings with merchants.

p. And it goes on, and on, and on.

The main dispute between Amazon and Toys regarded exclusivity in the toys category. The spirit of the negotiations between Amazon and Toys was to make Toys the exclusive seller of toys on the Amazon site. Unfortunately the actual signed agreement between Amazon and Toys was very ambiguous in this key area… so ambiguous that the judge admitted “parole”:3 evidence in this case. However, the court found that…

bq.. AMAZON was aware that TRUCC believed it would be the exclusive seller of these categories of products throughout the ten year term of this Agreement which is also clear to this Court. First, AMAZON concealed that in its negotiations with TARGET. Next, AMAZON developed talking prints to placate TRUCC with regard to the TARGET agreement. (See Exhibit P20, E-mail from Miller to Jenson, Van der Meulen, Kalmbach, Broussard, Britto and “cc” to Curry, Risher, Bezos of 9/6/01.) Why did AMAZON employees including a negotiator go to such an effort to minimize TRUCC’s concerns about TARGET? If third parties could sell exclusive products just let it happen. Id did not happen because no one intended direct third party sales of products in TRUCC exclusive categories. This conduct blatantly demonstrated AMAZON’s pattern of behavior of misleading TRUCC in this exclusive Agreement as long as it was convenient for AMAZON. Whether AMAZON believed it had the right to add third party purchasers, or found a way to get around the Strategic Alliance Agreement — AMAZON was not forthright with TRUCC.

p. In summary, Amazon negotiated with Toys having them believe that they would be the exclusive toys merchant, then Amazon did whatever it needed to do to add more toy inventory to their site — including adding inventory from Toys’ direct competitors — a breach of the spirit of the negotiations and partnership with Toys.

Do you trust Amazon?

P.S. One of the best lines from the opinion…

bq.. During closing arguments counsel for TRUCC actually brought into the courtroom a four foot stuffed Geoffrey the Giraffe, arguing that “Geoffrey cannot find his home” and therefore came to Court to ask the Court to help him find it.

p. Clearly, Geoffrey does not belong in the Amazon.

[3(On parole evidence)]http://www.cba.uri.edu/Faculty/overton/MGT423/Parole.htm

[2(Judge McVeigh's opinion)]http://www.judiciary.state.nj.us/toysrus/index.htm

[1(Yahoo! New on the story)]http://news.yahoo.com/s/cmp/20060303/tc_cmp/181500441