Mar 252011

For many years, we believed the Internet would see the middleman’s demise. Just as it has with the newspaper and recording industries, we expected manufacturers, service providers and content creators would stop using intermediaries such as agents, brokers or retailers and move to set up their own online distribution channels.

The new middlemen

The rise of services like Groupon, along with booking platforms like Wotif and employment services like Seek, show just how wrong we were. What we’ve actually seen is a rise of new middlemen to replace those who have fallen away like telephone directories and record stores.

If anything, we’ve seen even more powerful intermediaries develop like Google, Facebook, Apple and Amazon develop to replace the old gatekeepers.

Why we need intermediaries

Part of the reason for this is that none of us, even the biggest corporations, have all the skills to bring a product to market; retail itself is a tough business, marketing is hard work and distribution is easiest when you have economies of scale. Middlemen bring these and other skills required to get products into the marketplace.

The danger with middlemen is they can dilute your brand. We see that with Groupon as businesses give their brand over to them with steep discounts on their products. As Esther Dyson points out at Salon, Groupon will eventually destroy many of their merchants.

None of this is new as many brands who’ve found themselves hostage to single outlets have found. This isn’t a just a small business problem either as we see hotels and airlines try to break their dependency on travel websites whose readers mainly shop on price.

The Internet’s price paradox

Price is one of the big paradoxes we have on the net, we’ve largely trained customers to buy on price – or look for free – yet for the middlemen to make money, it’s essential there’s a decent profit in the chain. If a $50 product only has $10 margin to share across the supply chain, there’s not a lot in it for the various intermediaries.

Right now, we’re seeing another paradox as the middlemen are keeping their profits while retailers and producers – such as the hairdresser, restaurants and personal trainers selling through group selling sites – are taking the pain and absorbing both cost increases and reduced income from retail price discounting.

That’s not sustainable and it’s probably a transition effect as the technology changes distribution and marketing at the same time that the Western economies are moving from being driven by consumer debt.

Are most of us really middlemen?

We were wrong to predict the death of the middleman, they provide too many benefits and many of us are middlemen ourselves whether or not we’re prepared to admit. What does happen is the middleman’s role evolves as markets, technology and industries change.

Regardless of whether we use, or are, middlemen it’s necessary to keep an eye on that evolution and make sure we aren’t caught out when the market tips and moves against us.

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