Is there a future for the middleman?

In a memorable episode of NBC’s comedy 30 Rock, Liz Lemon (played by Tina Fey) is concerned that her profession – a TV writer – may become obsolete. She visualizes a horrible nightmare: a bunch of strange people telling her: “You are one of us – people whose professions are no longer a thing”. Among these people are a travel agent, an American auto worker, and the CEO of Friendster. While there is no short demand for CEOs, some professions – such as travel agents, once the middleman between travelers and airlines & hotels – lost his powerful positions and was replaced by online solutions.

There are many other sectors in which technology, innovation, and shifts in customer behavior dramatically changed the business models, marketing strategies, and identities of key players.

The middleman

The middleman’s crucial historic role

The ancient barter system – I give you vegetables and you give me eggs – enabled families to consume much more than what they could raise and grow alone. However, the real growth of commerce occurred when markets were established and intermediation between hundreds of people took place. Markets enabled families to purchase all the goods they required and suppliers reached a broad customer base.

Over time, new goods from remote places became available and more intermediaries joined the process; silk, gems, and herbs imported to Europe centuries ago passed many hands in transit from Asia.

Middlemen – wholesalers, re-sellers, distributors, agents, retailers – contributed to industry growth, offering solutions to several problems:

  • Geographic distance between continents, countries, and cities were broken down by middlemen into smaller units that were easier to manage in terms of inventory, logistics, and shipping.
  • Transaction risks (i.e., product quality and full and timely payment). A trustworthy middleman increased confidence through personal relationships with both suppliers and buyers.
  • Language and cultural barriers between sellers and buyers were broken down by middlemen’s personal knowledge of both sellers and buyers.

The intermediation had a toll, however: each layer, demanding profit margin, added markup to the final price. The last step – the retailers – often kept the highest margin, reflecting the challenge of actually selling goods to end-customers.

This raised understandable attempts to cut the middleman with innovative marketing (e.g., mail catalogues). While these attempts impacted some industries, they did not change the traditional middlemen-based commerce world.

The changes brought by the WWW

In the 90s, the internet enabled immediate and direct contact between millions of people, eliminated geographic distances, and created a new “global village.” Problems that had previously required middlemen were diminished:

  • Geographic distance became a lesser issue since millions of people gained real-time global interaction and shipping worldwide became accessible.
  • Transaction risks:Smart ranking systems such as those found on eBay dramatically reduced risks and increased the level of confidence and trust.
  • Language and cultural barriers became less of an issue too, as English increasingly became the de facto standard business language. Moreover, native language websites were created to serve local populations.

The internet revolution had diverse impacts on industries and business models. There were sectors in which the middle men:

  • Were completely cut out due to direct access between sellers and buyers
  • Were replaced by new and modern intermediaries
  • Survived, but were joined by new middlemen (often serving niche segments)
  • Were not impacted at all because of the specific nature of their business

Let’s see how this happened.

The initial industry shakers

The sectors impacted first were those with obvious and instant disintermediation benefits. For example, industries in which:

  • The middleman’s main role was to link multiple parties. E.g., real estate agents handling apartment leases were replaced by Yahoo! Real estate and by Craigslist.
  • The goods were commodities or well defined products with no customization: books, CDs, and DVDs; basic financial services (car insurance, stock trading); and travel. Amazon, ETrade, Expedia, and Travelocity were some noticeable new players.
  • Low value/low priced goods: a good example is today’s DealExtreme, where most items cost a few dollars and global shipping is free.
  • Major market inefficiency existed. For example, artists could not publish their art in industries dominated by powerful publishing companies. Eventually CD Baby was founded and enabled amateur musicians to publish and sell their music online. Lulu did the same to aspiring authors.

The second wave

The next generation of disintermediation initiatives benefits from current trends, such as:

  • Crowdsourcing:. Unless backed by savings or family and friends, startups traditionally rely on professional financing. Nowadays, initiatives such as Kickstarter, GoFundMe, and Crowdrise offer crowdfunding to entrepreneurs as an accessible alternative to angel investors and VC funds.Additionally, Zopa and Funding Circle are small scale substitutes to banks, connecting between small loans seekers and capital providers.
  • Smart Phones and App stores. The combination of GPS-enabled smartphones and application-rich marketplaces created many chances to cut traditional middlemen. One great example, the location-based GetTaxi app, links between taxis and those seeking a ride and applies both B2B and B2C models.
  • Social networks. The power of social networks and referrals enables Surge to offer an employee-sourcing platform as an alternative to traditional HR recruiting firms.
  • There’s more. Innovative companies that leverage current trends include, for example, Brayola, which offers women the ability to purchase underwear online, answering both comfort needs and style preferences. This used to require women to arrive to brick and mortar stores.
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New industries feel the heat

More sectors are now threatened, and some of them are just realizing the danger. For example:

  • Newspapers Originally threatened by online news resources, they are now challenged also by quality content and analysis on blogs and websites like Tech Crunch and Mashable.
  • Mobile phone carriers. The strategy of Nokia – once the mobile phone’s market leader – was focused on the carriers. However, Apple’s business model changed the market when the iPhone was launched. The App Store bypassed the carriers while providing Apple a 30% commission.
  • Cable TV/Broadcast networks: with Netflix producing its own TV series, House of Cards – and directly accessing millions of users – there may be a new threat to former kings of content.

Who is immune to disintermediation?

Despite the abovementioned trends, some middlemen are unlikely to vanish. This is especially true in these cases:

  • Complex/large/customized transactions, Billion-dollar M&A deals usually need experienced investment bankers to get the deal done.
  • Scale, brand, and operational excellence are crucial. Leading online marketplaces such as eBay, Amazon, etsy, elance, and Apple‘s iTunes offer a huge selection of products and solutions, a large user base, reliable intermediation, and robust operating systems, making these players unlikely to vanish.
  • Industries where trust and confidence are essential, especially B2B sectors such as the defense industry.
  • Wealthy customers. Owners of expensive houses enjoy the benefits of potential buyers’ screening provided by realtors.
  • Middlemen have access to many customers or leads. Affiliates, a major force in internet marketing, connect websites with guidance-seeking users.

Having said that, we can still expect the disintermediation process to continue in many other industries.

What Next?

So, the questions now are:

  • How far can this trend go? Will HMOs ever give up their position as middlemen between patients and medical services? Are universities likely to lose their role as the main providers of higher education?
  • Who will be the visionary entrepreneurs to disrupt stable industries and which existing players will adjust their business models to avoid the destiny of travel agencies?

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