March 4, 2002 4:00 AM PST
Net efficiencies roil a lumbering industry
The conflict--involving accusations of market bullying and threats of lawsuits and complaints to federal regulators--offers a glimpse into the midlife crisis of EDI, which for decades has allowed companies to exchange purchase orders and other documents through proprietary, interconnected systems known as VANs (value-added networks).
Now, big EDI companies are belatedly making the jump to the Net, where they face an army of hungry new rivals offering steep discounts for similar services.
In this battleground, the New York-based Internet Commerce Corporation (ICC) has become the poster child for upstarts running into heavy resistance from established companies.
Although jockeying between rivals is a constant in the EDI business, analysts and ICC customers said the company has been on the receiving end of unusually strong tactics that could signal an escalation in the war over emerging Internet services between older and newer players.
According to some ICC customers, the fracas reflects the migration to the Internet that most businesses went through five years ago, and that the VAN services market--estimated by Giga Information Group to be worth $3 billion annually--is only facing now.
"You've got a couple of dinosaurs saying, 'We're not going to allow suppliers to do business with ICC,' and trying to squeeze them out," said Alan Diamond, president of Apparel Data Systems, an ICC customer in New York.
The first salvo was fired late last year, when General Electric's Global Exchange Services (GXS) severed a crucial interconnect with ICC that had allowed data to flow to each organization's customers. Last month, SBC Communications' Sterling Commerce followed suit, alerting ICC and Sterling partners that it would shut down its interconnect March 9, although the company has since extended the deadline to April 8.
The GXS severance and looming disconnect from Sterling have infuriated ICC, which claims its customers are being bullied into dropping a cheaper, faster system simply because it poses a threat to the traditional VAN providers.
"We caused the big VANs to have to cut their costs to compete with us," said ICC CEO Mike Cassidy. "Which is what you would expect the Internet to do."
ICC said it has managed to wiggle out from under the GE interconnect squeeze with a workaround connection with Peregrine, another VAN, to regain access to GE's clients. The company has also inked a deal with IBM to retain access to Sterling's clients once that interconnect goes down.
But these workarounds come at a premium. ICC claims that in addition to hiking its costs by up to 30 percent, the disruption of being cut off from the established VANs and their members is harming its reputation and slowing its growth.
GXS declined to comment. Sterling also refused to answer questions but provided a statement verifying that it would sever the ICC interconnect and promised "an active plan to enable customers affected by this announcement."
Net gains--and losses
In the computer business, where new technologies can come and go almost overnight, EDI is a relic. It emerged in the 1960s when the railroad industry sought a way to speed up and automate business communications between computer systems, and to eliminate the high cost of sending paper documents by mail. The concept didn't fully take hold industrywide until the 1980s, when standards were introduced to define data exchange.
Transportation, finance, insurance and other industries made heavy use of EDI and proprietary communications lines to conduct business.
However, the use of virtual private networks, which provide secure connections over the Internet, and Extensible Markup Language (XML), which makes data exchange more flexible, allows for similar services that are growing in popularity.
The more recent emergence of Web services technology for exchanging data could further change the EDI landscape.
The Internet Engineering Task Force (IETF), an industry standards organization, is working on proposals for standardizing a way to secure EDI transactions over the Internet.
But for now, plenty of businesses that invested millions in EDI still use the technology for business communications. And many see EDI as the best choice for secure, reliable transactions.
"You're starting to see the traditional VAN companies doing business on the Internet," said Frank Kenney, knowledge specialist with Stamford, Conn.-based Gartner. "But the buyers, the big companies that have always used VANs--Target and Home Depot--they are very happy with the way that they do business, and it works for them. And as long as you have big hubs demanding that you do business with them via EDI, VANs are going to stay in business."
ICC isn't the only company that hopes to grab a piece of this market. Other Internet-based EDI start-ups include Vitria Technology and IPNet Solutions. Still, EDI analysts said ICC's battle could have wide-ranging consequences for the industry as a whole.
While traditional VANs charge about 25 cents per 1,000 characters, ICC is able to charge less than half that, the company said. ICC also claims its clients can communicate through the Internet 100 times faster than traditional VANs, which in some cases continue to use ancient 9600 baud dial-up modems, according to Kenney.
As a result, ICC said it has been able to attract about 1,000 clients, including some big fish such as Colgate-Palmolive, Barnes & Noble, Reebok, Staples, Bethlehem Steel, Xerox, and the Department of Defense.
But it is still a blip on the radar screen compared with giants like GE, which on its Web site claims more than 100,000 partners and 1 billion annual transactions accounting for $1 trillion in goods and services. Customers in 58 countries include Eastman Kodak, DaimlerChrysler, Target, J.C. Penney, Sara Lee and 3M.
"The survival or demise of ICC will have a lot to do with the VAN rates that all organizations pay in the future," Giga Information Group analyst Ken Vollmer wrote in a Feb. 11 research note. "If ICC survives and continues to provide low-cost EDI document transport, the larger VAN providers will feel pressure to negotiate lower prices with their existing base of customers or run the risk of losing them altogether. If ICC does not survive, the larger players will have free rein to increase their prices."
Complaints of unfair trade practices
Although interconnect agreements are made and ended frequently in the EDI business, analysts said the double whammy facing ICC is unusual, and points to increasing competitive pressure on the big VANs from the Internet.
"If I had to take some educated guesses, I would say they have offerings that will compete against ICC, and why enable your competitor?" said Gartner's Kenney. "The overall concern of the open marketplace is nowhere as important as maintaining market share and making money."
For now, the gloves are off, according to several ICC customers, who said both GXS and Sterling had tried to solicit their business after the interconnect severance announcements.
"I demanded an explanation for this action from Sterling, and they told me it was an issue of bad control data from ICC," said Ed Ramsey, director of corporate applications services at Random House, which uses IBM, Sterling, GXS and ICC. "We have been using ICC for several years now and not once have I seen the bad data that Sterling has indicated. All the VANs try to get business away from each other...but this is the first time such tactics have been used."
One ICC customer, Rhodes International, a baked-goods franchise headquartered in Salt Lake City, said it plans to file a complaint with the Federal Trade Commission if Sterling goes ahead with the interconnect severance.
"I was very distressed when three months after switching to (ICC) we received the letter from Sterling telling of their cutting off the interconnect," said Devon Johnson, EDI manager for Rhodes International. "At the same time, they offered to solve the problem...by having us switch to their service."
The disconnects have put ICC's back to the wall. Cassidy said ICC is considering taking legal action against GE and Sterling.
The disconnections have "made the marketing challenge quite difficult, as it appears that they want customers to think we have something technically wrong," Cassidy said. "If you compete based on access, rather than functions and features, then you are bullying the market."
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