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April 13, 1999
Web posted at: 5:47 p.m. EDT (2147 GMT)

In this story: Online wine monopoly Producers vs Distributorss 'Too much confusion' Concerned about underage access RELATED STORIES, SITES

by Todd Woody

SARATOGA, Calif. (IDG) -- Savannah-Chanel Vineyards sits high above Silicon Valley, nestled in the redwoods of the Santa Cruz Mountains. Fittingly, this boutique winery, the fruit of owner Michael Ballard's toil in the Internet industry, sells its chardonnays and zinfandels online.

The same is true of other small wineries that emerged in the grape boom of the 1990s.

More than 1,700 wineries vie for the attention of the several hundred wholesalers that control wine distribution in the U.S. For vintners unable to secure shelf space, the Internet offers an attractive avenue to sell directly to their customers. There's also a powerful economic incentive to sell online: Winemakers get to keep what would have been the wholesaler's cut.

Wine wholesalers brand these upscale wineries as "Internet bootleggers," intent on evading the byzantine regulations that govern alcohol sales. The wholesalers have spearheaded a growing campaign to ban or restrict direct wine sales on the Web. Fueled by concerns over teenagers' access to liquor online, pending legislation in Oregon and Maryland would make selling alcohol over the Internet a felony in those states. And Congress is considering a bill to allow the states to sue in federal court to stop such sales.

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Online wine monopoly

Meanwhile, Wineshopper, a San Francisco startup backed by venture capital powerhouse Kleiner Perkins Caufield & Byers, is working with wholesalers to launch a Web wine store that some vintners fear will result in an online monopoly.

"It is ironic that the Internet, an industry I participated in and contributed to the development of, is now potentially being blackballed as a mechanism of the delivery of the very product I'm now producing," says Ballard, a former UUNet exec who bought his century-old winery in 1996.

Producers vs Distributors

On one level, the battle is a familiar story of conflict between manufacturers and distributors over e-commerce. But the struggle also will determine whether a regulatory structure erected with the repeal of Prohibition will survive the Internet Economy. "I'm convinced that what's happening is a difficult, protracted paradigm collapse," says online wine merchant Peter Granoff, cofounder of Napa, Calif.-based Virtual Vineyards.

The 21st Amendment replaced Prohibition with state regulation of alcohol in 1933. Some states remained dry, while most adopted the so-called three-tier system to control alcohol sales. Under this system, the states give wholesalers the right to distribute winemakers' products to retailers. States' ability to regulate and tax alcohol sales within their borders has resulted in a mishmash of laws.

'Too much confusion'

For example, 20 states ban wineries and other alcohol producers from shipping directly to consumers. But 30 states permit in-state direct sales. California and 11 other states maintain agreements allowing winemakers to sell directly to each other's residents.

Thus, a vacationer from Miami might wander into the tasting room of Napa Valley's Joseph Phelps Vineyards and take a fancy to its 1995 cabernet sauvignon. But since the winery produces only a small number of cases of that vintage, no Florida wholesaler will carry the wine. And the tourist can't order a bottle online or by phone when she returns home: In 1997, the state made it a felony for out-of-state wineries to sell directly to Florida residents.

"Right now we don't offer Internet sales from the winery because there's too much confusion over what we can do legally in all the states," says Joseph Phelps Chief Executive Tom Shelton. The rise of Web wine stores has prompted a rash of legislation, with some 20 states currently considering bills to regulate direct sales.

"As the number of Internet wine sites has grown, the wholesalers have stepped up their attempts to block any access that bypasses their middleman role," says Seana Wagner, a spokeswoman for Free the Grapes, a wine-industry group that lobbies for consumer access to wine.

Concerned about underage access

But a representative of an advocacy group bankrolled by the Wine and Spirits Wholesalers of America denies that his organization is trying to stop Web wine sales. "We're fighting illegal alcohol shipments, not legal shipments over the Internet," says Barry McCahill, executive director of Americans for Responsible Alcohol Access in Washington, D.C. "California wineries and retailers in other states are shipping with impunity. We advocate felony laws because it's the only thing that will stop these California wineries."

McCahill's group has attracted such supporters as the American Academy of Pediatrics and politicians around the country by focusing on two apple-pie issues: kids buying booze online and California wineries that allegedly evade state taxes by selling direct.

Winemakers call the underage-access issue a smoke screen. "I don't know of very many minors who are drinking $35 bottles of wine – and who even have the palate to enjoy it," says Lisa Marie, who handles marketing for Chappellet Winery in Napa Valley.

McCahill concedes that college students may not be buying pricey wine online, but argues that such sales have opened the door to Web sales of beer, tequila and other alcohol.

Savannah-Chanel Vineyards owner Michael Ballard denies wine makers are trying to avoid paying taxes. "The truth be told, wholesalers aren't even concerned about small wineries. They're worried about the Amazon.coms setting up centralized warehouses and selling alcoholic beverages."

If that's correct, wholesalers are hedging their bets with the Wineshopper arrangement. Wineshopper, formerly called Naxon, is developing a national database of wholesalers' wine inventory in exchange for the right to sell those products online. The company will operate within the three-tier system, funneling orders through existing distributors, according to CEO Peter Sisson, a 36-year-old former securities analyst who worked at Bell Labs. Sisson says he's raised $46 million in funding commitments from Kleiner Perkins and another investor he declines to name.

Wineshopper will offer small wineries national distribution when it launches sometime this year, according to Sisson. "We don't have any political agendas," he says. "There are plenty of wineries that want to get to market that wholesalers don't want to pick up. We can sell those wines."

Some winemakers have doubts about Sisson's plan. "If you're talking about a transaction that involves a consumer in Florida and a producer in Saratoga, Calif., where is the value-add in inserting this middleman?" asks Ballard. "The only thing it accomplishes is for wholesalers to participate in the profits of that transaction."