February 16, 2000 1:00 PM PST

Probes are latest headache in e-commerce

The path to success in e-business has already been fraught with the perils of fierce competition, mounting losses and investor impatience. Now, high-profile sites face another obstacle: federal investigations.

In recent weeks, federal officials have launched inquiries into some of the top names in online business, including Amazon.com, eBay and eToys. Just today, Internet advertising network DoubleClick acknowledged an investigation by the Federal Trade Commission into its practice of collecting consumer information.

The inquiries are being opened as consumers are spending increasing amounts of time and money online--and filing record numbers of complaints. Although the complaints cause e-businesses many headaches, consumer advocates welcome the scrutiny.

"I think it's critical that the government monitor these sites," said Ed Myerzwinsky, consumer program director for the U.S. Public Interest Research Group (PIRG). "Big companies may be able to protect themselves in their dealings with each other, but small consumers need rules to be enforced."

Federal regulators apparently have heard the call of privacy advocates and consumers, stepping up their investigations of e-commerce companies recently. Among the latest moves:

  • The FTC announced Monday that it is teaming with federal, state and local law enforcement officials to combat online auction fraud. The new campaign involves increasing prosecutions of fraud as well as consumer education.

  • The agency is looking into allegations that Amazon's Alexa Internet division deceived users. The informal inquiry follows two lawsuits against Alexa concerning its use of confidential data.

  • The agency has also launched two inquiries into eToys. The agency is looking at how the online toy seller markets its video games and software that is supposed to be targeted at "mature" audiences. The FTC is also examining eToys' shipping policies and the timeliness of its shipments.

  • The antitrust division See special report:
The high price of auctionsof the Department of Justice has launched an informal inquiry into eBay and its dealings with auction portals such as AuctionWatch and Bidder's Edge. The department is looking into whether eBay's actions against those companies were anti-competitive.

    The FTC inquiry into DoubleClick follows a complaint filed last week by the Electronic Privacy Information Center. EPIC alleged that DoubleClick engaged in "unfair and deceptive trade practices" in the use of personal information collected from online consumers.

    Already the agency is coming to some conclusion in cases against online businesses. Last month, ReverseAuction.com reached a settlement with the FTC about charges that the company had violated eBay users' privacy by allegedly sending deceptive emails that appeared to come from eBay.

    The close watch on e-commerce companies comes as the industry experiences record growth. Jupiter Communications estimates that consumers spent $7 billion online during this past holiday season, more than double what consumers spent during the same period in 1998. Forrester Research projects that consumer spending will reach $184.5 billion in 2004, up from $20.3 billion last year.

    But along with the growth, federal regulators have seen a spike in consumer complaints. In 1999, for instance, the FTC received 11,000 complaints about online auctions alone, up from 107 in 1997. The portion of the FTC's consumer protection staff dedicated to fighting cyberfraud has grown to 23 percent in 1999, up from 4 percent in 1996, according to agency spokeswoman Claudia Bourne Farrell.

    Farrell declined to discuss the FTC's ongoing investigations and inquiries, but pointed out that the agency has taken action on more than 100 separate cases of online deception and fraud. "As more companies crop up on the Internet, I suppose you will see more companies investigated," she said.

    The scrutiny means validation for online consumers, who have complained about everything from online privacy violations to e-commerce sites that didn't meet their shipping deadlines. Toysrus.com, for instance, was hit with a class-action lawsuit last month after it failed to deliver several holiday orders in time for Christmas.

    "This sends a positive message to consumers that they are being looked out for," said Jill Frankle, e-commerce analyst at Gomez Advisors.

    Companies in the spotlight right now, for the most part, say that they are cooperating with the FTC's inquiries.

    Alexa, for instance, has been working with the FTC on a "informal, voluntary basis," Amazon spokeswoman Patty Smith said.

    "In light of all the attention around online privacy, I don't think it's surprising that the FTC is taking a look at this issue," she said.

    But some industry observers wonder whether the government is making much ado about nothing. Despite the growth of e-business, online sales still represent a small fraction of total consumer spending, and only a minority of consumers is actually buying online.

    "Without a question, the resources the regulators are putting into investigating Internet retailers exceeds the need at this point," said Mike May, digital commerce analyst at Jupiter Communications.

    But PIRG's Myerzwinsky said that the recent inquiries are a first step in monitoring the fast growing e-commerce industry. The results of the inquiries will give Congress the information it needs to determine whether new laws are needed to govern online commerce, he said.

    "I think we have see related story: Stellar e-commerce IPOs fallto make sure that existing laws are applied and expanded to the Internet context," Myerzwinsky said. "Voluntary self-regulation is just not going to cut it."

    The current investigations may not lead to any substantive penalties for e-commerce players, but May suggested that such companies may be penalized in other ways. The stocks of e-commerce companies have plummeted in recent months on concerns about profitability and increasing competition online. The inquiries could give investors one more reason to sell e-commerce stocks, he said.

    "This is a headache that e-commerce companies just don't need right now," he said.

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