Douwe Osinga's Blog: How the Internet cuts in the middleman

Wednesday, February 4, 2004

How the Internet cuts in the middleman

Back in the day when Wired preached the long boom gospel, people talked about disintermediation. Before the Internet, large parts of the economy had been inefficient because of lack of information. Markets had been unclear, consumers and producers didn’t know about each other, so we needed middleman. Car salesman, real estate agents, even newspapers, where just sitting between consumer and producer, making margins on every transactions. With the Internet, things would happen directly and more efficiently, because of the information at you fingertips thing. Unfortunately this nice theory turned out to be wrong.

Yes, we have more information and can shop directly. Travel agents have a hard time with people scorning the Internet for the best deals. Newspapers feel the heat now that people can gather there own information (and don’t place that much personal ads). Car salesman are suddenly confronted with a public that knows about technical problems to be expected by this make and year. The Internet revolution took place and made the economy better – who knows it might even be responsible for those feisty productivity numbers in the US. But the intermediates it didn’t kill.

Take travel agents for example. We don’t go to two, three travel agents and compare prices; we compare prices with thousands of providers with the click of a mouse. But what happens? You go to Google, type in cheap fights Armenia and hey, on your left hand an interesting text ad pops up, promising the best deals compared. You click and land on a page where you enter your travel data and it gives you a list of options, you click one and book. You could do it in thirty minutes, no need for pesky travel agents getting a slice of the pie.

But Google got some money for the ad, when you clicked it. And a guy who specializes in building interesting pages and advertising for them by Google did the page you landed on. He gets his money by using something like Trade Doubler, companies where you can get banners and sometimes complete webapps that make money, among them a complete bookings centre for air tickets, which you used in this case. Trade Doubler did not implement the bookings centre; another company did that. Finally, the ticket was booked at the airline. So there you have it, instead of having one intermediate, we now have four, all getting a slice of the profit margin.

The Internet not only improved the flow of information, it also reduced transaction costs dramatically. Travel agents are not in trouble because we don’t need them anymore; we still don’t buy our tickets at the airlines. They are just too expensive. They need 20 dollar or so a transaction to function. On the Internet people run companies on tens of cents per transaction. Going through the four intermediates didn’t involve any human intervention. So anytime an inefficiency on the Internet is spotted the size of a dime, somebody jumps in there. There are people making money with websites that contain nothing more than a Dell shopfront to sell computers. They advertise at search engines, get traffic and let Dell handle all the details. They are slightly better at this than Dell, so they jump at the opportunity.

Little P.S. a guy named Aaron discovered that if you type ‘Jesus Christ died’ in GoogleTalk, a little app I wrote that lets Google finish your sentences, the result is:
Jesus Christ died for our sins. BY his blood we shall be Free from defects in material and workmanship.
Christianity for you, I guess.