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A year ago, a whole swath of U.S. companies seemed like plodding dinosaurs. Car dealers, toy stores, realtors, liquor wholesalers, pet-food stores, grocery stores, bookstores, newspaper publishers, even the hoary New York Stock Exchange all seemed destined to be overtaken by vibrant new Web-based competitors that could dance circles around these lumbering old guys. Well, guess what? America’s old guys didn’t just rock on the porch and watch the sun set. They have refused to let the Internet make them obsolete. Defying predictions, they have been throwing potent counterpunches at online ventures, trying to knock the newcomers out of business—and in some cases succeeding. Of course, many Web companies hurt themselves by pursuing ideas that were never going to be real businesses—remember Pets.com and its sock puppet? The stock-market shakeout that began last April injured even solid Internet companies by making financing scarce. But start-up companies also have faced unexpectedly fierce competition from established businesses, which have proved to be far scrappier than many newcomers anticipated. "The bricks-and-mortar people have sort of woken up and said, ‘We are not going to let these people do this to us,’" says Don McCubbrey, director of the Center for the Study of E-Commerce at the University of Denver’s Daniels College of Business.
In most cases, the old guys have counterattacked by taking advantage of decades-old laws and regulations, and the entrenched bureaucracies that go with them. Those laws won’t necessarily always be around to maintain today’s status quo, because New Economy companies are attacking them, and some lawmakers are sympathetic. But those laws will do fine for now, at least as far as the old guys are concerned. The most striking example is in cars, where online sales were supposed to put auto dealers out of business by letting consumers shop nationwide and bypass the middleman. After all, who actually enjoyed visiting dealers? And what auto maker wouldn’t be happy to bypass dealers—and their fat commissions? It’s not as though a Lexus in California is any different than in North Dakota. What few counted on were the bare-knuckled survival instincts and legal clout of America’s new-car dealers, who not only number 22,000 strong, but also account for an average of 20% of sales-tax revenue in each state. Faced with extinction, the dealers even attacked the hand that feeds them—the big auto makers. When Ford Motor and General Motors announced plans to sell cars directly to consumers, dealers sued and lobbied fiercely to tighten state laws that protect franchisees such as car dealers. In Arizona, for instance, dealers say that somewhere between 60 and 100 of them drove in to Phoenix from as far as 3 1/2 hours away to line the hallways as legislators considered toughening franchise laws. The dealers won, both there and elsewhere. During 2000, 18 states tightened franchise laws, according to the National Automobile Dealers Association, or NADA. As of last fall, 43 states had laws that restrict car makers from competing with their dealers—up from 32 in 1999. In the courts, dealers won a big ruling when a federal judge in Texas upheld a judgment that prevents Ford from selling cars directly to Texans via the Internet. Even start-ups that tried to artfully work around franchise laws have had to think again. CarOrder, an online auto retailer, bought large volumes of cars from a few dealers and tried to sell directly to consumers. But GM and Ford, under pressure from dealers who weren’t part of the arrangement, warned dealers against doing business with the likes of carOrder. The car supply dried up. Despite $100 million in investments, carOrder pulled the plug on its Web site in August. That is not to say dealers want to prevent online car sales. In fact, they are embracing the Internet. According to a NADA survey in August, 83% of U.S. dealerships have Web sites. Moreover, 98% of the sites are interactive, allowing customers to send e-mail, order online, or get financing. "Whether conducting research or negotiating a final transaction, dealers recognize that a growing number of consumers want to use the Internet," says NADA Chairman Harold Wells, a new-vehicle dealer in Whiteville, N.C. Dealers just want their cut—and it seems likely that they will get it. Now that car makers are announcing a new set of online ventures, they are offering equity to dealers. "As a species, car dealers are remarkably adaptable," marvels Baba Shetty, senior analyst at Forrester Research.
Liquor sellers have demonstrated equal staying power against similar odds. The expectation had been that consumers would rush to buy online to escape the humiliating experience of walking into a snooty wine shop to find a decent Cabernet. The typical markup on a bottle easily exceeds 100% at retail, meaning plenty of room for online sellers to cut prices. "I can’t think of another industry that is better positioned for e-commerce than the wine industry," says Tom Shelton, chief executive officer of California’s Joseph Phelps Vineyards. But when you visit the Web site for California’s Wild Horse Winery & Vineyards and click on "Wild Horse Store," you’ll get a sobering message: "It is an unfortunate reality that we live in a society where, in many states, it is far easier for children to acquire handguns than for adults to obtain a bottle of wine from a California winery." The winery said that, for the time being, it isn’t selling wine from its site. Why? "The extremely complex and archaic beverage laws of the U.S." Liquor wholesalers are fighting tooth and nail to block Internet upstarts. The Wine and Spirits Wholesalers of America, a trade group, argues that the Internet "has created a virtual 24-hour open bar for anyone, of any age, to order wine, beer, and spirits." To have a spokesman that can communicate that message with at least some subtlety, the wholesalers formed Americans for Responsible Alcohol Access. To lobby state legislators, wholesalers touted statistics to say that direct sales of wine already rob state and local authorities of as much as $100 million in taxes a year. To stop illegal online purchases, the wholesalers encouraged states to seize alcohol that is being shipped directly from out-of-state businesses to consumers. The wholesalers then helped publicize those seizures. Michigan, for instance, has worked with United Parcel Service to make 100 seizures, including 533 bottles of wine priced at as much as $100 each. "Our evidence room floweth over," says Irene Mead, in the state attorney general’s office. She adds that all confiscated alcohol will be destroyed. Wholesalers are taking advantage of the fact that, even though Prohibition ended in 1933, it left behind a maze of state laws that sharply limited who could sell liquor, and how. In general, states require a three-tier system: Producers can sell only to wholesalers, who sell to retailers, who sell to consumers. Most states prevent wineries and retailers from shipping wine directly to consumers using a "common carrier" such as UPS or Federal Express, but 20 states permit direct shipping. Six make it a felony. "What the states have done is establish 50 sets of rules of what is important to them," says David Dickerson, a spokesman for the wholesalers trade group. "The states can be lenient. Or they can be strict." Peter Sisson, who founded Virtual Vineyards in the mid-1990s with dreams of creating a national online wine retailer, says the legal system made the experience a "nightmare." The company ultimately conceded it had to work through the three-tier system, meaning that shipments would require three to 10 days, instead of just a day or two. Last year, the company threw in the towel and merged with rival Wine.com.
Companies that dreamed of revolutionizing Wall Street have likewise had to rethink their plans when the system struck back. Again, the system seemed ripe for a shakeup. At the New York Stock Exchange, for instance, some 3,500 people work on the floor daily. Brokers scattered among some 1,500 booths take customer orders via telephone or electronically. Nearly 500 "specialists" man trading posts, fielding the orders and matching buyers with sellers. Harold Bradley, senior vice president at mutual-fund giant American Century, dubs the system "the bucket brigade": As many as six sets of hands "touch" an order before it reaches a counterparty on the other side of a trade. But, aware that challenges were coming, the stock exchange has spent more than $2 billion on technology over the past decade to give investors electronic access to its market. The exchange has upgraded its computerized order-delivery system so that about 50% of the trading volume handed off to specialists is done electronically. Critics such as American Century’s Bradley say the stock exchange has gone even further, using its clout to create "a complex set of regulations that actively discourage the use of technology to trade there." He points to OptiMark Technologies, an upstart electronic exchange whose trading system was once heralded as a threat to the New York Stock Exchange. Bradley says the stock exchange set arbitrary limits on the number of shares that OptiMark could handle, effectively keeping it from attaining critical mass. Bradley also charges that specialists undercut the challenger by failing to execute orders that they received from American Century through OptiMark. He says that, once American Century rerouted those same orders through the stock exchange’s order-delivery system, the specialists promptly executed them. A New York Stock Exchange spokesman declined to comment about OptiMark, but supporters of the stock exchange say that traders found OptiMark cumbersome to use and that it handled so little volume that its market lacked liquidity. The stock exchange says it has eased its restrictions so that more players such as OptiMark can participate. But it is too late for OptiMark. It gave up in September, suspending operations on the Nasdaq, the New York Stock Exchange, and the Pacific Exchange. Few OptiMark-like systems are doing much better. The New York Stock Exchange has used its muscle so effectively that electronic systems have snagged only about 5% of trading in its listed securities, compared with about a third of Nasdaq’s volume.
Real-estate agents, too, knew the Internet could spell big problems. If buyers and sellers could find each other online, agents would be cut out of their normal 5% to 7% commissions. To keep from becoming obsolete, real-estate agents had to find some way to maintain a monopoly on the industry’s master list of homes for sale—the multiple listing service, or MLS. So, they struck pre-emptively. The National Association of Realtors decided to make the list broadly available—but on the NAR’s terms. The group selected partners and created a company, today called Homestore.com, that launched its Web site, Realtor.com, in 1997. The site shows 1.3 million homes, or about 90% of those listed nationwide. More than half of the listings can be found only through the MLS or Realtor.com. The site provides all the usual detail about the houses but typically doesn’t list addresses or the names or phone numbers of the owners. As a result, buyers and sellers still can find each other only through a real-estate agent. Buyers are also steered toward agents because the MLS is still the most up-to-date source of information—even more so than Realtor.com. While the MLS is updated in real time, the NAR says 80% of the Realtor.com listings are updated daily, while 20% are updated within three days. Denver broker Sue Edelstein tells of an Internet-savvy couple from San Jose who brought a list of about a dozen homes posted for sale on the Web site operated by the Denver-area MLS, Metrolist. Edelstein took a look at the actual MLS data and found half the homes already under contract. Online competitors have started to build their own lists of homes, but none has yet approached the number listed on Realtor.com. Meanwhile, the NAR has amassed a war chest by selling $53 million worth of its shares in Homestore.com, and experimenting with other ways of serving clients better, while still keeping agents in the middle of the transaction. For instance, the NAR is developing ways to electronically share the voluminous documents that buyers, sellers, and other parties need to exchange, but in a way that makes the agent the traffic cop. Realtor.com’s success has been so great that it has drawn Justice Department antitrust scrutiny. But unless the laws change or courts intervene, real-estate agents—and lots of other "old guys"—seem likely to dominate their part of the New Economy just as they did the Old Economy.
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