Not Dead Yet

Online intermediaries are finding new success by adding value to the products customers are buying.

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Commentary: Intermediaries

Like the resilient peasant in the famous Monty Python scene, intermediaries on the Internet are suddenly feeling much better

Just a year or so ago, conventional wisdom about middlemen on the Web went like this: Soon, there won't be any. The underlying thinking, of course: The Web lets sellers talk directly to buyers, without agents, brokers, distributors, wholesalers, or even retailers. Why fool around with intermediaries when you, the seller, can deal directly with your ultimate customers or when you, the buyer, can go straight to the source? Cutting out those middle layers creates what Bill Gates, in his 1995 book The Road Ahead, famously termed a "friction free" business environment, permitting direct, effortless, one-to-one E-commerce.

The Web, according to those ancient theories, would quickly lead to widespread extinction of entire professions: insurance and travel agents, real estate agents and stockbrokers, car dealers, computer retailers, even (or maybe especially) the editors and reporters who choose and package news. With the Web, you can trade your own stocks, book your own trips, configure your own new car or computer, buy your computer directly from the manufacturer, and report and disseminate your own news. The theory got its own spelling-bee stumper of a buzzword: disintermediation, meaning that nothing stands between producer and buyer. "Two's company, three's a crowd," KPMG analyst Bob Westrope observed just two years ago, calling the predicted shortening of the supply chain "a shift in the structure of our economy not seen since the dawning of the industrial age."

As it turned out, the greatly exaggerated death of the middleman ranks among technology's champion myths, almost as big a no-show as the Y2K bug. Intermediaries live, and many are thriving.

As Michael Hammer of Hammer and Co., in Cambridge, Mass., points out, the Web hasn't destroyed or replaced most intermediaries' jobs. But it has transformed them. The new-millennium middleman understands that customers -- both businesses and consumers -- actually prefer working with intermediaries who add value to whatever they're buying. Typically, Hammer says, that value is information, whether the product in question is a life-insurance policy, a BMW, or a Caribbean vacation. And in most cases, he adds, you'll get that information not from the producer but from the middleman -- the insurance or travel agent or the car dealer. (Even if you buy a car online, who are you going to call for a test-drive, service, or recall work? Certainly not a Web site.) That's why, for instance, I researched my recent trip to St. Martin online but booked the flight and the hotel through my favorite travel agent, who'd been to that island three times. (She also got us a deal that was much better than any of the ones I had found on my own.)

Cutting out the middleman has always sounded like an honorable idea -- the right thing to do. In theory, at least, setting up a direct link between buyer and seller improves communication, saves time, reduces waste, and cuts costs. But some of those who have gone that route have quickly found themselves mired in new problems. Many start-up owners who dream of dealing directly with their customers have wound up instead in a logistical nightmare -- realizing, for instance, that they can't handle their own warehousing or distribution.

Some major manufacturers have found they simply can't win by competing with their own partners. In one well-publicized case, Levi Strauss mollified its angry retailers when, late in 1999, it stopped selling products on its own Web site. And being the target of such hostility is hardly the purview of only large companies. Bob Duncan, CEO of American Leather, a far smaller manufacturer than Levi Strauss, was labeled by a retailer as an "unethical, two-faced liar driven by insatiable greed" when the retailer assumed that Duncan was promoting the company's furniture for sale over the Web. (See " First Do No Harm," Inc. Technology, No. 1, 2000.)

In a similar vein, writer Stephen King hit a few snags in his attempt last year to bypass publishers and bookstores by selling his novel The Plant online in serial form. King said he'd continue writing the novel, about a vine that takes over a publishing company, as long as 75% of those who downloaded it paid $1 or $2 for each of 10 installments. But by year's end, with only 46% of his online readers paying up, King posted Part 6 free of charge. He later put the plan on hold indefinitely, saying that he needed to devote time to other projects. Ironically, King notes in an explanation on his Web site, dozens of would-be readers told him they'd be happy to buy The Plant when it's really published -- in standard book form. (King, however, still considers the self-publishing experiment a success, citing gross sales of more than $600,000 -- with no printers, publishers, or agents to pay.)

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