The Internet, Disintermediation and You.

The internet is a massive engine of creative destruction. Historically, one of the biggest problems in commerce was information. Giant businesses were created to leverage economies of scale for information gathering and dissemination. Newspapers, magazines, publishers, radio and television stations, advertising agencies, real estate agents. Gatekeepers of creation and expression.   They provided a valuable service.

The Internet is destroying them all.

Old business models die hard. Newspapers are dying, TV stations have fewer viewers each year. The death throes of the record industry are legend. The movie industry is failing.  Like clockwork, each generation of Moore’s law takes another layer of middlemen out of the picture. The ultimate end brought by the Internet will be a one to one relationship between creator and consumer with no one in the middle.

The Internet is disintermediation.

With no need to print books on dead trees, and your book available to the world with a click of a button, the publishing industry is dying.   When anyone with a few hundred dollars of equipment and some talent can produce a song in their garage and sell it directly on the Internet, the record industry is dying.  The same thing is now occurring in video.  Equipment is so cheap that ANYONE can make a movie these days.  You don’t need a Hollywood studio.  Your movie will probably still suck, but who cares? You didn’t need anyone’s permission to make it.  Need to sell your house?  List it on the Internet for free.  No need to pay 6% to an agent.

Yet the dream of making a buck off of someone else’s work still lives on.  Would be middle men pop up all over the Internet.  Self proclaimed gatekeepers with grandiose claims and underpants gnome business plans try to convince others to provide them with free labor.  Their slick story and promise of future benefit is rooted in the old pre-Internet models and it sounds good because we still haven’t internalized the new reality.   “Hey blogger, contribute articles to our site and you’ll get added exposure and more traffic!”    Unfortunately it never works that way. The blog aggregation site benefits from the content and the traffic and the blogger gets jack and squat.

Comments

The Internet, Disintermediation and You. — 9 Comments

  1. The internet is the epitome of free enterprise. Even if the meddlers and tyrants want to control the system, somebody will devise an underground internet that operates without their control. Otherwise, the detractors are already defeated. Their best hope is to learn to quit meddling and jump on board.

  2. Pingback: SayUncle » Middlemen

  3. Shumpeter’s Creative Destruction and Ricardo’s Comparative Advantage are two ideas that people seem to have a lot of trouble understanding. If you can understand those ideas then you’ll see what the Internet is doing and you’ll have a good idea of what the end result will be.

  4. Ronald Coase’s The Nature of the Firm and his ideas on transaction costs should be required reading on this topic. In short, firms exist when it is cheaper to pool resources (despite increasing overhead) rather than act as individual entrepreneur. As described in your post, the barriers/costs between producer and consumer have been reduced to almost nothing. That one of a kind Star Wars limited edition pink roller skate is now worth something, because you can post it on-line and find the one person that really wants it.

    Ebay is a great example as it has tools that address a second type of transaction cost – trust. George Akerlof describes this in his “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” Ebay uses the reputation (positive/negative) to minimize the information disparity and reduce losses from buying lemons (thus increasing transaction costs).

  5. The elimination of middle men does have a practical limit. For example, one of the largest product lines we carry has 875 (or so) cataloged variations available from the factory in EACH of 5 frame sizes. There are thousands more that are not cataloged, but not difficult to produce with a little product knowledge. The manufacturing company wants nothing to do with responding to Joe-Bob the customer looking for 1 unit (or even 10 units). They do quite well with John Deere, or Case-IH looking for train loads. Their distributors can’t help Joe-Bob because they don’t stock anything (or can’t convert from one configuration to another based on their distributor contract). We get the business because we have the product NOW, and can build it up however the customer wants. We end up selling both up the chain to the distributors, and down the chain to re-sellers and end users. We also end up with customers coming to us for product knowledge an trouble shooting questions after they have called the manufacturer and were told.

    You can only eliminate the middle men so far up the chain as there is infrastructure in place to handle the demands of the individual consumer. We get LOTS of business of the internets, one of our better customers is in Australia and found us online. (We are in MN, USA; so that is pretty cool)