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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.)


The new-millennium middleman understands that customers actually prefer working with intermediaries who add value to whatever they're buying.


In fact, some of the Web's most successful companies have been intermediaries. Search engines like Yahoo serve as middlemen between people who are seeking something and people who are offering to provide it. EBay, the pioneering auction site, offers buyers and sellers a way to find each other online.

Then there's service. The Web's most lasting legacy may be that it's created an expectation of 24-hour help, in person, in real time. In a 1999 survey, Forrester Research, in Cambridge, Mass., found that more than a third of people who bought something online requested service at some point during the experience. In other words, being able to buy the product or service anytime wasn't enough; nor was it enough to be able to contact customer service later if there was a problem with the purchases. From the moment people log on to a Web site, Forrester concluded, they expect to be able to turn to other people for help.

But that expectation creates new opportunities, too. Service is, in fact, the new differentiator, as Geoffrey Moore writes in Living on the Fault Line: Managing for Shareholder Value in the Age of the Internet. "Even the most product-centric of companies -- automobile manufacturers, factory equipment vendors, and raw materials providers, real atom guys -- are now assigning their best and brightest to the task of differentiating on services," Moore writes.

Customers increasingly place a high value on companies that offer one-stop shopping -- access to a range of services in a single location. That, analysts say, bodes well for companies like Accuship.com, a Memphis-area company that shows its corporate customers all their price and service options for shipping packages. (See " Express Delivery.") Accuship is, in fact, a prime example of a trend highlighted in a 10-year business forecast prepared in 1998 by the Institute for the Future. The concept of disintermediation is "a mirage," futurist Paul Saffo writes in that report. "It's directly at odds with what is actually happening." In fact, Saffo writes, the Internet and other technologies "enable new kinds of transactions, which lead to new market niches and, overall, make the market environment more complex."

Such changes will, of course, kill off some intermediaries, but, as Saffo notes, they will create opportunities for others. Meanwhile, those who too readily bought into the wholesale slaughter of the middleman might want to keep Saffo's big-picture conclusion in mind for next time: "Beware of conventional wisdom, for it is nearly always wrong."

Anne Stuart is a senior writer at Inc. Technology.


With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any "new rules," but there are rules, and we suspect every one of them will look familiar.

DVD Empire: The Bootstrapper
SitStay.com: The Mom-and-Pop
Shoebuy.com: The Scorekeepers
Accuship.com: The Traditionalist
Fashionmall.com: The Conservative
Healthcommunities.com: The Underwriter

Commentary
E-tailing
Intermediaries
The Markets


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Last updated: Mar 15, 2001




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