Middlemen in Digital Age

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Middlemen at the Margins
By Jason Fry
June 9, 2008
Wall Street Journal

One of the generally accepted bits of wisdom about the Internet is that it eliminates middlemen. Which isn't quite right -- better to say that the digital world forces middlemen to stand or fall on their own merits. Because for every middleman sent packing, another one arrives to thrive or die.
The Internet has changed the way my family shops for most everything, from books (Amazon), music (iTunes and various other digital-music storefronts) and geeky junk (mostly eBay) to staples like food (FreshDirect). But disintermediation -- eliminating the middleman -- hasn't played much of a role. I'm not buying books directly from Del Rey (let alone Michael Chabon), songs straight from Sony, or soda from the rather kludgily monikered Dr Pepper Snapple Group. Instead, Amazon has replaced physical bookstores, iTunes has knocked out used CD shops, and FreshDirect has taken away a big chunk of the local grocery store's business. In each case, an old middleman has lost its job to a new one. In other cases, the Internet has added a layer to some of my transactions: When I buy used books via Amazon or baseball cards via eBay, I'm conducting a transaction with a dealer somewhere, with Amazon or eBay getting a piece for serving as middleman.
That may seem inefficient, but the middlemen of the digital world have earned their place. They keep me from having to know stuff I'd rather not keep track of (which company publishes an author or puts out an artist's CD), they've proved they'll deliver, and of course they save me time I no longer have. It's the last point that's driven the boom in e-commerce, letting us shop at 3 a.m. and saving us from phone conversations with customer-service drones. Give us a better way and we'll take it, adapt quickly and soon forget we ever did things differently.
And middlemen aren't limited to e-commerce. There are experiential middlemen, too -- TiVo is an additional layer between me and watching TV, but the benefits it delivers in terms of search, storage and retrieval and time management make it an invaluable one. And Google is the general-purpose middleman between us and the chaotic, overwhelming boil of information out there -- a role that's served as an effective audition for taking over other middleman roles. (And made it the digital-age killer app that makes all other contenders look like also-rans.)
While disintermediation is largely a theoretical concept, at least in its purest form, we now greet would-be middlemen with a healthy blend of open-mindedness and skepticism. Could I switch from Google or FreshDirect tomorrow if I wanted to? Of course -- and once upon a time those low "switching costs" were the silk from which Net pundits spun doomsday scenarios for online businesses. But in reality, I better be persuaded that it would be worth my while. And the middlemen who remain have earned their place, instead of owing their position to market inefficiencies, regulations or traditions.
It's not like the digital world has achieved maturity and we're all set in our ways. But these days it feels like the action is more at the margins.
Take two would-be middlemen who showed up on the radar this week.
The first is entertainment retailer FYE, whose corporate parent Trans World began a generation ago as Record Town and over the years gobbled up Strawberries, Camelot, Wherehouse and Musicland. FYE is aiming to test an MP3 kiosk in malls in Bloomington, Minn., and Albany, N.Y., at the end of the month. The idea of the kiosk is that you'll be able to browse songs, build a playlist and either get them burned to a CD or download them to a player. If you're of a certain age, that might make you remember the old Personics system2 for making mix tapes in music stores.
I haven't seen FYE's system in the flesh, but it sounds pretty easy to use:3 More than a million tracks are available now, with offerings from major labels in the works, the downloads are DRM-free, they cost a competitive 99 cents each and they can be downloaded to most any MP3 player, including the iPod. So there aren't artificial hurdles to contend with. (Tip of the cap for some details to Ars Technica4, where I saw the story.)
But in the age of Personics, you had to go to a record store to get music. That was a long time ago. Today, if you've got an Internet-enabled PC, you've already got a mall kiosk in your house. And iTunes is no longer the only game in town -- competing services such as Amazon's or eMusic work cleanly with Apple's jukebox service. Given all that, why would you go to the record store to essentially get the same thing?