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Kozmo’s digital dividing lines probe reveals
Net firm doesn’t
deliver to many black areas
  Photo: Kozmonaut
A 'Kozmonaut' leaves a Manhattam distribution center on a delivery, but is leaving minorities behind?
By Elliot Zaret & Brock N. Meeks
WASHINGTON, April 11 — promises to deliver books, music, video rentals and sundries “from the Internet to your door in under an hour.” But an investigation has revealed that in the cities it serves, the company does not offer delivery to many neighborhoods with high concentrations of black residents. The company says it only looks at Internet usage when deciding which areas to serve and says race is not a factor. But some lawyers and advocacy groups say the investigation may have exposed the first case of cyber-redlining.

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  TAKE THE EXAMPLE of Washington, D.C., where rolled out its services this fall. The nation’s capital has a substantial black population, living in neighborhoods that are largely segregated. But in a city that is 66 percent black, the neighborhoods Kozmo delivers to are 65 percent white and only 25 percent black, according to research, which relied on data from the U.S. Census Bureau.
       According to the data, nearly 350,000 of the the city’s 400,000 black residents live outside of the areas served by the company. But 130,000 of Washington’s 170,000 white residents can get one-hour delivery from Kozmo.
       And many of the unserved areas are wealthier than the areas that are served, according to the study, which examined median income as well as racial demographics — a fact that suggests the decision about which neighborhoods to serve was not solely income based.

       David Berenbaum, executive director of the Washington-based Equal Rights Center, which specializes in fair housing and other discrimination cases, said looking at Kozmo’s D.C. delivery area, along with the data outlining where it provides service in other cities, creates an extremely suspicious picture.
‘This is a striking example of consumer racism. I’ve never seen anything like this on the Internet.’
Equal Rights Center
       “This is a striking example of consumer racism,” Berenbaum said. “I’ve never seen anything like this on the Internet. People tell us the Internet is the great equalizer — that you don’t know the color of the person on the other side of the screen. In fact discrimination is manifesting itself in the way it was 20 years ago, in that we’re having geographic redlining.”
       “Redlining” refers to a nefarious practice, first identified in the finance and insurance industries, of denying services to specific geographic areas based solely on overall ethnicity or perceived poor financial risk. All too often, those businesses have been found to actually carve up neighborhood maps, delineated by “red lines,” to starkly identify the boundaries of majority white and black or brown neighborhoods.
       The practice led to civil rights reforms that outlawed this form of racial discrimination by financial and insurance companies in many states.
       In recent years, however, the definition of redlining has grown more subtle. “The cases have evolved from the literal drawing of red lines around areas where loans would not be made to a failure to solicit loans in an area,” notes Alexander Ross, special litigation counsel at the Department of Justice.
       But for consumer companies, determining whether a practice is discriminatory, and whether it’s illegal, has always been trickier. Many experts aren’t convinced the evidence against Kozmo is simply black and white; as with other issues, the Net tends to gray problems transferred from the analog world to cyberspace.
       A merchant’s “affirmative duty” to serve a particular neighborhood is typically determined by the physical location of the business, said Anita Ramasastry, associate director for the Center for Law, Commerce & Technology. “If you walk into a store, you can’t be refused service based on your race,” Ramasastry said. The flip side, however, is that the government can’t compel a business to locate in any particular area, Ramasastry said.
       Kozmo “kind of crosses the boundary,” Ramasastry said, “because on the one hand the store isn’t the brick and mortar kind, so it’s not in your neighborhood. It would be interesting to see if you can make that argument that they have that duty to serve because it’s Web based.”
       Kozmo, which recently filed for an IPO, has not been accused of any illegal activities. However, a look at which communities are eligible for Kozmo’s service and which are left out raises the broader question of whether the promises of the Internet include everyone equally.
       Most e-tailers rely on mail, UPS or FedEx for the delivery or fulfillment end of their service. Kozmo is the first Internet company to offer direct delivery in so many cities nationwide.
       The company currently operates in Washington, D.C., New York City, Boston, San Francisco, Seattle and Los Angeles, and plans to expand into 10 more cities this year including Chicago and Atlanta, both of which rolled out limited service last week, according to documents the company filed with the Securities and Exchange Commission. Other e-tailers surely will follow Kozmo’s lead in a race to get the goods to consumers fastest.
‘The most important criterion for making a market decision is based on online penetration and Internet usage. We use standard practices for any businesses in doing that type of research.’
Kozmo Chief Operating Officer
       Kozmo says that race simply isn’t an issue when determining which neighborhoods to serve.
       “The most important criterion for making a market decision is based on online penetration and Internet usage,” said Kenneth “Skip” Trevathan, Kozmo’s Chief Operating Officer. “We use standard practices for any businesses in doing that type of research.”
       “Kozmo is prepared to look at any area within a city that meets the criterion of online penetration and Internet usage,” he added. “We are definitely good market citizens. We employ a highly diverse workforce, we pay them excellent wages and excellent benefits, so I consider us a credit to the communities.”
       The demographics and income figures of the five cities initially served by Kozmo were analyzed by using computer assisted reporting techniques. Kozmo added Los Angeles, Atlanta and Chicago to its service area after the study was conducted.

       Although Kozmo doesn’t clearly indicate the extent of its coverage area in any one city, confirmed through a Kozmo customer service representative that the “drop-off locations” listed by ZIP code on the firm’s Web site are indeed the same zip codes to which they deliver.
       Some of the delivery ZIP codes listed on Kozmo’s Web site are government agencies and office buildings that have their own ZIP codes; we removed those from our study. We then gathered demographic data from the 1990 U.S. Census — the most recent information of its kind — and created a spreadsheet for all the ZIP codes in each of the five cities. That information was correlated with the delivery information, and the results were plotted on maps.
       In every city except Seattle, which has a black population of less than seven percent, the areas served by Kozmo have substantially higher white populations and lower black populations than the areas that aren’t served.

Delivery zone discrimination
MSNBC Interactive
Where Kozmo ventures
and where it doesn't

       When plotted on a map, Kozmo’s delivery zones seem to creep right up to majority-black neighborhoods and stop. For example, the bulk of Manhattan’s Harlem is unserved, as is Boston’s Roxbury and San Francisco’s Hunter’s Point — all well-known black communities. In Washington, D.C., with its majority black population, the only area served is the starkly-white Northwest quadrant of the city.
       In each of the Kozmo-served cities, some black neighborhoods are served and some white neighborhoods are not.
‘If you look at the markets we serve, we do in fact serve highly diverse areas in every market. We have a highly diverse workforce in every market. We are certainly diversity aware. Race is not a consideration in our business model.‘
Kozmo Chief Operating Officer
       “If you look at the markets we serve, we do in fact serve highly diverse areas in every market,” Trevathan said. “We have a highly diverse workforce in every market. We are certainly diversity aware. Race is not a consideration in our business model. The primary consideration in our business model is Internet usage.”
       Lawyers point out that just because it may look like discrimination doesn’t mean it’s illegal. While census-based maps like those used in the investigation are widely used as evidence in discrimination trials, some courts also require that intent to discriminate must be established as well.
       But the ERC’s Berenbaum said the pattern of service revealed in the investigation clearly resembles the patterns used by banks and insurance companies before the laws were changed.
       Looking at data supplied by, Berenbaum said Kozmo appears to have made a conscious decision which ZIP codes to serve — and the geographic choices exclude heavily minority neighborhoods.
       “The banks used to do that, and it’s called redlining,” Berenbaum said. “It appears from this data, it’s a market decision across the country.”
       Kozmo’s defense might include the right of a new growth company to choose wisely how to spend limited resources, Berenbaum said. “But there’s a strong argument here that intentional decisions [to discriminate] were made,” Berenbaum said.
       And in the almost too-stark case of Washington, “it’s not even sophisticated line drawing,” said Leslie Proll, assistant counsel for the NAACP Legal Defense Fund.
       In fact, “growth” is exactly what Kozmo points to.
       “What you have to understand is we are a new, growing company and we have to make prudent decisions with our investments that allow us the most significant potential for immediate growth,” Trevathan said. “Now, the company is prepared to look at any market area that meets the primary criterion which I’ve stated before, which is online penetration and Internet usage.” did not have access to the Internet usage statistics that Kozmo relied on. However many experts, including Internet demographics expert Donna Hoffman, a professor at the Owen School of Management at Vanderbilt University, said that Internet usage is mostly correlated to income level and does not vary with race at higher levels of income.
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       Kozmo considers the exact decision-making process underlying its delivery area a trade secret. The company cites industry-standard Internet usage statistics as its main consideration, but also sends people to look at the areas it is considering serving.
       “We looked at and actually had feet on the street to evaluate the initial area,” Trevathan said. “We looked for signs of Internet usage. We did do personal looks at the market areas to find new startup businesses.”
       The company also refuses to identify where its distribution centers are located, dubbing that information a “company secret” as well.
       However, in public documents filed with the Securities and Exchange Commission relating to its IPO, the company says it has one 10,000-foot facility in a “low-rent” neighborhood in each city. The prospectus says it delivers by car, van, scooter and bicycle depending on what the company determines is the best way to get the goods to the customer in an hour.
       “The number of required distribution centers in any particular market will vary depending on the geographic size of the market, its population density, Internet usage, and expected size and frequency of customer order volume,” the company says in its SEC filing.
       Through a combination of public records searches and eyewitness reports, was able to identify the locations of some of Kozmo’s distribution centers to gauge the feasibility of delivering to the unserved areas.
       Kozmo has at least one New York distribution center at approximately 105th Street and Amsterdam Avenue in Manhattan. That address is just blocks from unserved Harlem and quite a distance from many of the neighborhoods Kozmo does serve, such as Wall Street.
       Similarly in Boston, the distribution center is in the Allston section of Northwest Boston. That area is no closer to Downtown Boston or the majority-white Back Bay than it is to Roxbury. (Trevathan said Kozmo serves a portion of Roxbury.)
       In Washington, D.C., the delivery center is on 14th Street NW in a central location in the city. But Kozmo basically only serves locations west of its distribution center, and does not deliver to the black areas east of it.
       It is important to note that Kozmo is not the only company making these decisions. In New York, its main competitor, Urban Fetch, also does not deliver to Harlem, and in fact cuts off its delivery area roughly 20 blocks south of where Kozmo’s delivery zone extends — and in upper Manhattan that translates into Kozmo serving more black residents than Urban Fetch.
       But Berenbaum said the fact that Kozmo has made similar decisions in each of the cities it serves demonstrates a national pattern of discrimination.
       Warren Dennis, a D.C.-based attorney who has worked on many redlining cases, said that one reason a company like Kozmo may not serve some areas has to do with crime rates and the safety of the “Kozmonauts,” as its delivery people are called.
       Dominos Pizza used the “safety first” argument as a defense when the company was sued for refusing to deliver to primarily black public housing projects, Dennis said.
       But crime isn’t even an issue to Kozmo. “We do not look at crime rate,” said Trevathan. “Our model is based on making the most Internet usage the priority on how we develop a market.”
       Kozmo’s critics point out an obvious irony: since Kozmo has a centralized delivery strategy, even if the company were to extend service to an area where the Internet penetration was so low that no one ordered anything, the company wouldn’t be out any money for merely offering service there. And if people did order things, Kozmo would profit.
       “There is no business defense here,” Berenbaum
       At a time when many companies have become increasingly aware of the so-called “digital divide” — the fact that minorities have not had the same access to high technology and the Internet — it is important to scrutinize whether new services such as Kozmo’s will bridge or reinforce that divide.
       “This practice suggests what could be one of the serious dangers of the digital divide,” said Donna Hoffman, a professor at the Owen School of Management at Vanderbilt University and an expert at Internet demographics.
 Byron: Kozmo profits lost in the cosmos
       Hoffman said the Kozmo issue is “what the digital divide is all about,” noting that much has been made in the media about access issues — who has it, who doesn’t. “But I think many people are ready to move beyond that because the data are showing clearly that once you have access there’s no difference in usage,” Hoffman said.
       Studies show that at upper income levels, Internet usage among blacks and whites is nearly identical, Hoffman said. “And once everyone has access, the main concern will be, are we going to see discrimination arise along the lines of electronic redlining?”
       Kozmo’s Trevathan agrees that companies have a responsibility to consider the digital divide, but said that startups like his company need to primarily look at growth.
       “I think the company has the obligation the same as any company, but I think as a new startup company we must make prudent decisions on our business investments that will give us the most immediate growth,” said Trevathan.
Though Kozmo’s selective delivery practice ‘looks like a de facto discriminatory decision, making that legal leap, just calling it per se discrimination, given today’s business climate, isn’t one that I think you can make.’
Center for Law, Commerce & Technology
       But civil rights experts note there are really two questions: whether Kozmo’s practices are ethical, and whether they are illegal.
       Though Kozmo’s selective delivery practice “looks like a de facto discriminatory decision,” said Ramasastry from the Center for Law, Commerce & Technology, “making that legal leap, just calling it per se discrimination, given today’s business climate, isn’t one that I think you can make.”
       Regardless of today’s business climate, old and new economy businesses must adhere to federal laws that prohibit raced-based contracts and services.
       The “public accommodation” statute of the 1964 Civil Rights Act, spawned by segregated facilities such as water fountains and lunch counters in the Deep South, prohibits discrimination of services based on race. The Equal Rights Center, using the “public accommodation” statute, recently filed a class action suit against KB Toys, claiming the toy store refused to accept checks in stores located in black neighborhoods, though they accept them in stores in white neighborhoods. KB Toys denies any wrongdoing; the case is pending.
       Recently, this law has been used in cases much more subtle, said the Justice Dept.’s Ross, such as the hotel chain that did things like intentionally playing music they thought black customers wouldn’t like in an attempt to keep them away from the hotel bar.
       Ross said that other than being an Internet company, the issues raised by Kozmo’s delivery strategy are very similar to other cases, and it can be argued that “it’s a violation of the public accommodation statute that hasn’t come up before.”
       “It really depends on how arbitrary the distinctions are geographically,” Ross said. “I don’t know if [Kozmo’s delivery scheme] is a violation of law, but it’s something we want to look at.”
       Kozmo’s delivery strategy also appears to be flirting with violating the Civil War-era law prohibiting race-based business contracts, said the NAACP’s Proll.
       The contract doesn’t have to be a written one, Proll said. As with Kozmo’s Web-based ordering method, the contract is implied; you order and pay, the company delivers. The contract covers “the purchase of something, the sale of something, any item that is in the stream of commerce,” Proll said. “So I think you could certainly make a case that [Kozmo’s strategy] is in violation of that statute.”
       Many point to the irony that the Internet is supposed to be so anonymous that racial barriers simply disappear. That idea is embodied in the famous New Yorker cartoon of one pooch talking to another, paw on keyboard and saying: “On the Internet, no one knows you’re a dog.”
       Kozmo doesn’t know if you’re a dog; they probably don’t care. But in an era of sophisticated business planning, they can easily know the demographics of a customer’s ZIP code.
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