Supreme Court Ruling May Impact All Online Retailers By: David Rodnitzky - Topic: Marketing - Date: July 22, 2007

No doubt most online marketers didn't lose much sleep when they heard that the Supreme Court was going to hear a case called Leegin Creative Leather Products v. Kay's Kloset. The recent decision, however - overruling legal precedence that has stood for almost 100 years - should wake some marketers from their slumber. Let me explain why.

Prior to the Leegin ruling, the concept of "minimum advertised prices" or "MAP" was illegal under US anti-trust law. In other words, Sony couldn't send a letter to all of its vendors telling them what they could sell a Sony product for. They could set a "manufacturer's suggested retail price" - better known as a MSRP - but they couldn't prevent vendors from choosing to sell below the MSRP.

And in fact, as consumers, we are all accustomed to seeing advertisements proclaiming "25% off MSRP!" or "Save 40% off all Best Sellers!" Who in their right mind, after all, would go into a car dealer and actually pay the sticker price listed on the car, right?

In reality, a lot of manufacturers have been preventing vendors from selling at below MAP. For example, open any photography magazine and you'll see a lot of products that say "call for our lowest price." This is a clear indication that the vendor is selling below what he is suppose to be selling the product for and doesn't want to risk losing a relationship with the manufacturer.

At the same time, manufacturers have understood that setting a MAP was illegal, so it was often difficult to actually punish any renegade vendor who broke MAP. In fact, a friend of mine told me that one of his competitors appeared to be purposely and flagrantly violating MAP in the hopes of getting cut off by the manufacturer and thus having grounds for a very profitable lawsuit.

But now the Supreme Court has made MAP legal. To quote the Court's opinion:

"Minimum resale price maintenance can stimulate interbrand competition--the competition among manufacturers selling different brands of the same type of product--by reducing intrabrand competition--the competition among retailers selling the same brand. See id., at 51-52. The promotion of interbrand competition is important because "the primary purpose of the antitrust laws is to protect [this type of] competition." Khan, 522 U. S., at 15. A single manufacturer's use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer's position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between."

The consequences of this decision on the online commerce world could be substantial. Here are the online players who stand to be most impacted by the decision:

1. Comparison Shopping Engines (CSEs): Imagine what happens to comparison shopping engines if, well, there are no prices to compare. I guess they just become "shopping engines?" In fact, the likely outcome would be that the comparison engines would become nothing more than repositories for consumer satisfaction ratings. Since the price would be the same across all vendors, the user would simply need to sort the vendors based on the number of positive reviews.

Of course, in such a scenario, I can't imagine too many vendors with low ratings wanting to stick around for long on the CSEs, nor would it be likely that poorly reviewed vendors would get too many clicks in the first place.

The end result, then, for the CSEs seem pretty bleak - less utility to consumers and fewer paying vendors.

2. Small Online Merchants: New online vendors won't fare much better in the new MAP world. Forbes had a good piece on this point, noting "opponents [of the ruling] argue that it will serve to raise prices, which will prevent small retailers--particularly those who are trying to break into burgeoning markets on the Internet--from being able to compete with established retailers."

Imagine how big Overstock.com would be today if they had not been allowed to sell at deeply-discounted prices. Any new merchant looking to establish a foothold in a market by underselling the competition is in trouble. Indeed, the Consumers Union issued a press release noting: "The emergence of Wal-Mart and Amazon.com can be directly traced to the ban on [MAP]. Unfortunately, this ruling may very well serve to prevent The Next Big Thing in retailing.

3. eBay: In many ways, eBay is at the center of the storm for this ruling: it owns Shopping.com - a leading comparison shopping engine - and a good chunk of its core business comes from vendors selling "buy it now" items on eBay below MAP. In a way, you could say that eBay's entire business model is based on helping consumers find ways around manufacturer's minimum prices. This could be a huge blow to that model.

4. Google: Of course it is silly to talk about any issue impacting the Internet economy without discussing Google. I actually think that this ruling won't impact Google one way or the other, simply because much of Google's revenue comes from advertising that is not price-sensitive. For example, most Google AdWords ads make murky claims about "save 50% or more" but these claims will continue regardless of this ruling.

To put it another way, eBay and Shopping.com base their value proposition on price, Google bases it's value proposition on "relevancy", which is not always price-related.

On the other hand, Google has been gradually trying to bring Google Base front and center in their search results and company strategy. If it is true that this ruling hurts comparison shopping engines, Google Base may not be as lucrative a strategy as Google once hoped.

5. Web 2.0: Amazingly, this ruling may actual help Web 2.0 companies develop a profit model! Wow! Insofar as many Web 2.0 companies revolve around consumer opinion (Yelp, blog sites, StumbleUpon, etc), the gradual decline in the importance of price may make sites that capture masses of consumer opinion the de facto destination for shoppers looking to choose between different vendors.

And unlike CSEs, which tend to have stodgy surveys as their proxy for consumer opinion, Web 2.0 companies tend to get much more mainstream and thorough opinions from their loyal users. I can envision some sort of affiliate revenue-sharing model where the 2.0 company stays out of endorsing any one vendor but makes a few bucks on any sales that result from a user's reviews.

Over the next 3-6 months, I predict you will be hearing a lot more about this case. And after reading this post, you won't be too surprised when eBay buys Yelp either.

David Rodnitzky is Vice President of Advertising for Mercantila.com. You can read this post and others on his blog at http://blogation.blogspot.com.