April 28, 2006, 12:00 AM

Tug of War

Philip Krim, president and co-founder of online retailer The Merrick Group, is on a roll. His company doubled sales last year to about $9 million, and he expects to come close to doubling that amount this year. “We’ve been growing tremendously,” he says.

Merrick Group, with four web sites that sell bedding supplies, embodies the power of the Internet by figuring out how to capitalize on its open nature to meet specific needs of consumers and compete against more established and traditional retailers. With plenty of resources to support continued growth, the company entered a new market last year with the launch of window treatments site NationBlinds.com, and earlier this year it expanded into the tickets business with the acquisition of TonysTickets.com.

The niche e-retailer has no intention of slowing down. “We’re always looking for market opportunities,” Krim says, adding that Merrick Group has the skills and resources to operate additional sites. “We have plenty of room for growth.”

Paying for bandwidth

Plenty of room, that is, if the Internet maintains its “network neutrality” and remains the open highway of commerce that has fueled the growth of Merrick Group and countless other e-retailers over the past decade. Recent interest in a system of tiered Internet usage as expressed by major telecommunications companies-namely AT&T; Inc. and Verizon Communications Inc.-threatens to eliminate network neutrality, forcing the Internet into a system more like cable TV, where retailers and other content providers compete-and pay-to operate with the best exposure to consumers, Krim and others say.

Under the telcos’ scenario, retailers or other site operators would pay for consumers to have faster and smoother access to their web sites. That, opponents contend, could lead to a drastic change in how the Internet operates by making it more difficult for consumers to get to the majority of web sites that would probably not be on a premium usage or access tier. As a result, those sites could suffer a severe slashing in their volume of online visitors. “The Internet has always been premised on the idea that consumers could reach whatever online businesses and services they want to,” says Brent Thompson, vice president of government affairs for multi-channel retailer IAC/InterActiveCorp, whose online retail properties include The Home Shopping Network’s HSN.com. “It’s easy to see how this could fundamentally change the Internet.”

Second-class citizens

For now, the issue involves the stated interest of the telecommunications companies to offer for a fee higher bandwidth to web sites that need to accommodate huge amounts of traffic or downloads of high-density items like music videos. The general understanding is that such offers would be made evenly to all sites within the same market, to prevent bandwidth providers from giving any favored sites an unfair advantage over their competition-keeping at least theoretically within the guidelines of network neutrality.

But those concerned about the loss of neutrality say there are at least two things wrong with that approach. In the near term, they say, retail competitors could wind up overpaying for bandwidth. “It’s conceivable that Kmart’s and Target’s online properties could get into a bidding war to see whose site loads fastest,” says Bill McClellan, director of government affairs for the Electronic Retailing Association, a trade group of infomercial and online retailers. And in the long term, the multi-tiered system could lead to a polarization of sites between those who can afford to pay a premium for higher bandwidth and those who cannot.

More important, once different tiers were created, there would be no telling how they would be used and what impact they’d have on the entire online retail community, experts say. If Kmart, Target and Amazon can each buy higher bandwidth because they’re in the same general merchandise market, that raises the question of what that means for the thousands of other merchandise retailers that compete with them on one level or another. “Maybe Amazon could pay higher fees for bandwidth, but what about the next Amazon or smaller retailers that could not afford to pay to insure that their content is delivered?” says Maura Corbett, partner with Qorvis Communications, a Washington-based public relations and lobbying firm representing online retailers.

Alarm bells

The prospect of a wholesale change in the Internet as a commerce channel has raised the alarm among a small but growing group of retail industry activists, who are desperate for broader backing from retailers as well as consumers. “We want to see the online marketplace continue to grow and expand with open architecture and few points of constriction, whether from broadband providers or any other restraint on the openness of the system,” says Krim, whose company has joined the Online Retailing Alliance, a group of more than 20 retailers and vendors involved in e-commerce-including eBay Inc., ShopNBC.com and IAC/InterActiveCorp-formed last fall to counteract the lobbying might of the telcos.

The group’s immediate goal is to win enough support from the U.S. Congress to put teeth into laws that would protect network neutrality, an issue that must be resolved soon before the telecommunications industry is able to establish a new status quo through legislation that could put them in more control of how the Internet works, says Corbett, whose firm represents the Online Retailing Alliance, which is a subgroup of the Electronic Retailing Association. “It’s unlikely any legislation will get through both chambers of Congress in this mid-term election year, but there’s a good chance it will next year,” Corbett says. “In the scheme of things, that’s not a lot of time.”

Indeed, retailers have already lost their first legislative battle. A subcommittee of the House Committee on Energy and Commerce last month voted down a measure that would strengthen the federal government’s hand in enforcing network neutrality.

“The train has already started to leave the station, and we’ve lost the first round,” says the ERA’s McClellan.

But the retail industry will press on with its fight, hoping to win broader industry support along the way, he says, adding: “I can’t think of any reason why every Internet retailer is not climbing over hill and dale to fight for network neutrality.”

Phantom problem?

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