Why is eBay a top supporter of the federal laws aimed at killing online gambling? What do government regulators think they will gain from forcing AT&T to voluntarily and unilaterally adopt “net neutrality” regulations? What’s the intent of the federal and state regulators threatening to block oil giant TXU from selling out?
Behind these three collisions of big business andbig government lie the same dynamic — one that uses threats of government force to win the big businesses over to the side of the regulators.
First, consider the case of online gambling, which has resurfaced recently since Rep. Barney Frank, D.-Mass., chairman of the Financial Services committee, introduced a bill to partially roll back a 2006 law that prohibited banks or credit cards from processing payments related to online gambling. Frank is no fan of this law, which he considers nanny-statish and calls “one of the stupidest” things he has seen Congress do.
When the bill passed last year, a chief ally of the regulation was eBay, one of the nation’s largest e-commerce businesses. EBay owns PayPal, and to find a motive for eBay’s support of the anti-gambling regulation, it’s crucial to look back at the circumstances that led to that purchase.
As former PayPal employee Eric Jackson tells the story in his 2005 book “The PayPal Wars,” the company was gearing up to list itself on the stock market, but in the weeks before the initial public offering, the state governments of Louisiana and New York threatened to block PayPal from doing business in their state for not having the proper licenses.
In New York, Attorney General Eliot Spitzer piled on the government attacks: PayPal’s user agreement “wasn’t clear enough” he argued, and he gently threatened suits against the company for its involvement with online gambling. The Department of Justice followed, prying into whether PayPal was violating the PATRIOT Act. A few months later, under withering government pressure, PayPal sold out to its dearest rival, eBay. To get the government off its back, eBay promised that PayPal would not do business with online gambling or pornography.
The regulatory harassment of PayPal not only made a nice purchase opportunity for eBay, it also won the government an ally in its push to regulate the Internet. If PayPal already hadsworn off involvement with Internet gambling, eBay had nothing to lose if the government were to create new regulations cracking down on Internet gambling. Indeed, eBay stood to gain from such a regulation, which would handicap its competitors.
Once PayPal left the cyber-casino, British company NETeller, a PayPal-like service, stepped in as one of the top money-handlers for Internet gambling in the U.S. About 70 percent of NETeller’s U.S. business was online betting. That means that 30 percent of its business directly competed with PayPal. Soon after passage of the 2006 federal law, NETeller’s founders were charged with gambling law violations. That’s one way for PayPal and eBay to eliminate competition: Lobby to make your rival’s business plan illegal.
It looks like we will soon see a similar story unfold on the question of “net neutrality” regulation and AT&T. “network neutrality” is the principle that Internet service providers (ISPs) like AT&T should treat every information packet — whoever is sending it or however big it is — equally, and carry each packet on a first-come, first-served basis.
This is a burden on ISPs, but AT&T has agreed to abide by this principle as a condition of the Federal Trade Commission’s approval of the company’s merger with BellSouth. Thus, the federal government has bought a new ally — complete with high-priced lobbyists — in its push to mandate net neutrality.
It’s not so different with oil giant TXU, which is abandoning some of its planned coal plants and undertaking carbon dioxide-reduction efforts in order to win regulatory approval to sell out to private equity companies. The regulators, by extracting these “voluntary” concessions from TXU, may be winning an ally in the push to slap government limits on carbon dioxide emissions.
This three-point plan is a key way government wins “allies”: (1) Threaten to block a merger or launch a criminal investigation into a company, (2) Promise to drop your attacks in exchange for the business “voluntarily” adopting policies you prescribe, (3) Sit back as that business soon develops into a lobbyist to make your policies mandatory federal regulations, thus giving you, the regulator or politician, more control over the industry in question.
In the mob, this is known as making them an offer they can’t refuse.
Examiner columnist Timothy P. Carney is author of “The Big Ripoff: How big government and big business steal your money.”
