WOULD E-COMMERCE REPLACE THE MIDDLEMAN?
By Rafay Bin Ali
July 12 - 18, 2004
Businesses that have the means to process transactions and fulfill orders over the web are e-commerce businesses. E-commerce is not a new trend. Businesses have long performed transactions electronically using Electronic Data Exchange (EDI) mechanisms. However, the potential of Internet, most notably the WWW, as a medium to carry out e-commerce has just begun to be realized. For once, even SME's stand a chance to compete with giant corporations. Specifically, e-commerce replaces the manual business processes with their automated electronic equivalents to accelerate ordering, delivery and payment procedures. This electronic paradigm has saved businesses billions in operational and inventory costs. For consumers, web acts as a cost-effective information arbiter. Much like the traditional business environment characterized by industries and markets, e-commerce also comes in various flavors or models: auctions, storefront, horizontal and vertical portals, bartering, online trading, entertainment and automotive sales, click-and-mortar businesses. If we look closely at each of these models we realize that e-commerce has brought buyers and sellers closer by directly connecting them and, in the process, bypassing intermediaries such as distribution outlets, brokers, dealers and agents. Since e-commerce over the Internet is a relatively newer phenomenon, there are still some misunderstandings as to its role. One such misunderstanding is the role of the traditional intermediary or middleman in presence of e-commerce.
The role of an intermediary or the middleman has been well defined in a traditional business environment. An intermediary, for our purposes, is any person or agency that acts on behalf of both the buyers and the sellers (manufacturer) so that the collective benefits of all the parties are maximized. As such, real estate agents, travel agents, wholesalers, retailers are all intermediaries. Take the example of a retail outlet. Retail outlets are the last stage in the distribution channel. Their functions were well defined and ranged from providing information to concluding transactions. However, with the advent of WWW as a global platform for pursuing business activities and consequently the emergence of e-commerce has provided the customers a cheaper alternative to retail outlets and other forms of intermediaries. Customers have discovered that an online purchase is often more lucrative to their wallets and fits well within their monthly budget. Furthermore, the Internet fulfills the consumers' need for reliable and timely access to information in a more cost-effective manner than a middleman does; the cost of obtaining information using middlemen is one of the reasons for a product's high price. With this scenario in mind, are we about to witness an end to the traditional intermediary? The answer would be an equivocal NO!
Most of the newbies mistake e-commerce as a virtual marketplace. However, we need to think of it in terms of a tool that aids in streamlining business processes to reduce transaction costs benefits of which are ultimately passed on to the consumers. The purpose is to improve productivity, rather than replace the traditional forms of agents. There are various reasons for this:
A) LIMITED HUMAN CONTACT
Traditional intermediaries survive by maintaining close relationships with their customers. They know that competing agents — because of the relatively homogeneous nature of the product that most of them offer — can easily out-compete them. For example, all travel agencies provide a similar product; it is most often the quality of the customer service that determines the bottom line.
Electronic commerce, on the other hand, has substantially removed the human component. This has two implications. First, it is no longer possible to form personal relationships with the consumers. Second, the psychological impact of not knowing the other party involved in the transaction is enough to make even the most ardent supporter of e-commerce think twice before actually placing an order.
B) SECURITY AND PRIVACY
Buyers generally do not trust content from parties that they do not know. And neither should they. Internet has been successfully used as a gateway to propagate malicious viruses and to sabotage online systems. A credit card number sent over the wire can easily be intercepted before it reaches the intended party. The Internet has simplified impersonation and provided an easier and, often less risky, means of conning buyers. Identity fraud is all too common on the Internet. The legitimacy of a traditional intermediary, on the other hand, can be questioned and verified.
C) NO CENTRALIZED CONTROL OVER THE INTERNET
The Internet is publicly owned. Anybody with $35 can purchase a domain name and setup a commercial web site without having to worry about proving credentials. This has become even easier with the emergence of escrow services that make it possible to avoid the cumbersome process of obtaining a merchant account for electronic transactions. From the perspective of small to medium sized enterprises (SME's), this is a clear advantage. However, this advantage has also been abused to con unsuspecting buyers. According to US FBI, 80 percent of the computer crime that it investigates involves the Internet .
Even though bodies do exist to monitor Internet and countries have amended their consumer rights protection legislation (US has amended its consumer protection rights act to adjust to transactions on the Internet) to safeguard the buyers' interests on the Internet, authorities often find it hard to enforce such laws. The root cause for this is not the negligence of law enforcement but the difficulty in imposing such provisions over the Internet, over which no particular country, market, business or agency has sole jurisdiction. In absence of a 100 percent enforceable law to protect consumers in the cyberspace, intermediaries would be responsible for providing the consumers access to genuine online merchants.
D) COSTS REDUCED BUT FOR WHOM?
The minimization of the inventory requirements, paper-less transactions, and automated records keeping are some of the benefits that e-commerce touts of. However, these are all benefits to the businesses. The costs to the consumers, on the other hand, have just changed facets. The cost of purchasing internet connection hours and spending time online in search of information are two of the most consequential examples of both implicit and explicit costs to the consumers. Such costs are highly immaterial in developed countries where access to the Internet is virtually free. However, in Pakistan and the rest of the third-world countries, these expenses go heavy on the wallet — an unlimited connection sells for around Rs. 1000-1200, while only 5.1 percent of the urban population earns over Rs.10,000 in a month (SBP FY 2000 statistics). A simple mathematical calculation should prove my point.
E) WEB CANNOT REPLICATE SOME OF THE INTERMEDIARY FUNCTIONS
Web may be a great venue for commercial activities and a source for reaching to the highest number of customers. Nonetheless, there are some functions that simply cannot be performed over the WWW. Take the example of an automobile purchase. Before a buyer actually buys an automobile, he or she needs to test drive it. There are other formalities such as insurance and registration requirements that are much too complex for the average consumer to figure out and should only be handled by trained professionals. Such functions, obviously, cannot be performed online.
F) INTERNET, ITSELF, WOULD REQUIRE TECHNICAL INTERMEDIARIES
The Internet is a vast array of computers, networks and nodes interconnected using devices such as routers, bridges and gateways. In a nutshell, it is quite complex to manage. As we travel down further into the digital age, intermediaries would also be required to take on the task of providing technical assistance to the consumers. Additionally, WWW is just a web of sites, some of which are genuine while others are just attempts by con artists to make a quick buck. Thus, eventually there would be a need for technical intermediaries to filter out the junk and provide the consumers with access to online merchants that can be trusted. Attempts by IT pioneers in the form of third-party digital certificates and signatures for e-commerce is a step in that direction.
It is quite evident that the existence of intermediaries is not threatened by e-commerce. In fact, most of the virtual malls on the web are a form of intermediary anyway: Amazon.com (www.amazon.com) is a reseller that integrates with several publishers to offer its customers the best deals possible. Rather, it is the present role of the intermediaries, which is up for a major makeover. The intermediary of the future would be an infomediary who would supply the customers with reliable and timely information. We can think of an infomediary as being a traditional intermediary's electronic counterpart. The infomediary would operate by forming numerous partnerships and providing value-added services to its customers. It is the value addition that would actually determine the existence of intermediaries, and not the emergence of e-commerce itself. Infomediaries have already started to make their mark: Yahoo! (www.yahoo.com) and Travelocity (www.travelocity.com) are examples of the two largest infomediaries on the web today.
The intermediaries of the future would also have to switch from advocating for both the buyers and the sellers to watching out more for the customer. As the web matures into a more viable venue for commercial ventures, intermediaries would have to take on the job of cyber patrolling to make the web a safer place. Currently, organizations such as Internet Engineering Task Force (IETF) and ICANN carry out verification of merchants using procedures that are quite inadequate. The intermediaries, in their new role as an infomediary, would have to assume such responsibilities so that trust can be maintained with the customers. Intermediaries would also have to mimic what consumer rights groups and activists have done for the non-wired consumer; they would have to force the governments to adopt new legislation to curb cyber crimes and protect the innocent.
The preference of the consumer is probably the best friend of a traditional intermediary. For example, Priceline (www.priceline.com) is an online travel site that promises to offer its customers the best air ticket deal that their money can buy. However, studies by research firms such as the Gartner Group and IDC have shown that most consumers still prefer to deal with a travel agent (an intermediary) rather than to negotiate directly with other travel related entities, such as hotel bookings, car rental and so on.
Much of the power of an intermediary comes from the fact that they are closer to the customer than any other entity of the distribution channel. They are aware of the needs and wants of their customers. Thus, most of the times they can accurately forecast the future demand. They are also aware of the customer's buying behavior, preferences and spending patterns. At present, while such information gathering remains the sole domain of market research firms, the future would demand infomediaries to also provide such information to the manufacturers.
In the end, it is necessary to emphasize that e-commerce would have a significant impact on the nature of the intermediaries. As I have already discussed, there would always be a need for intermediaries. It is just their functions that are up for change. A phenomenon that can cause change at such a rapid pace is seldom insignificant. As such, only the intermediaries who can successfully tap into the opportunities provided by e-commerce would survive and become infomediaries of the future.