Evolution Shift
A Future Look at Today
May 11th, 2006

Disintermediation #2: A Deeper Look

[Reader note: in the short life of this blog your feedback has been important. There have been two format suggestions that have been made several times. First, people have said they like the orginal ideas, depth of content and the writing. Second they have said that they often do not have the time to read a lengthy post. Therefore, starting with this post, I will break up subject matter that requires length, such as the subject of disintermediation, into more frequent, shorter posts in proper conceptual sequence. Please let me know if you like this approach.]

The first post on disintermediation, “Disintermediation: a Buzz Word to Bring Back” suggested that this term should be used more often for the simple fact we are in an age of disintermediation. We are in one of those times that happens every few hundred years in human history when, in the course of 50-60 years, society is transformed.

The obvious primary agent of disintermediation in this transformative era is, of course, the Internet. In the century between the Middle Ages and the Renaissance the agent was Gutenberg’s invention of the moveable type printing press. History will show that the Internet is and will be at least as transformative as that invention has been.

As defined in the above mentioned post, disintermediation is:

“the undoing of the act of intermediating” or “the removal of the intermediary person or entity”

During the Internet 1.0 time of the late 1990s the two industries that began to experience this effect were the travel industry and the stock brokerage industry. Thousands of travel agents and stock brokers were put out of business as the Internet gave people direct access to necessary travel and stock information and gave them the ability to transact on-line. It is important to point out that there are still travel agents and stock brokers, but they no longer hold the same power or command the same income per transaction as they used to. This brings me to the first point of this post:

Disintermediation does not necessarily wipe out a certain business, but it does drain it of excess compensation to the middle man.

Today we can choose to use a travel agent or choose to use a stockbroker, we no longer have to, and if we do, it is at a lower cost than ten years ago. I always buy my airline tickets on-line because all the information I need is available to me, the airlines usually make it the cheapest alternative and it doesn’t take much time. I am planning a summer trip to Europe with my son right now, and I am using a travel agent. Why? Because he will save me time and will not cost me anything for his service. It would take me tens of hours to study German flight and train schedules, research and communicate with hotels and car rental agencies. Instead I expect to spend perhaps 2 hours on the phone and email with my agent. So, I save time. He is providing me with the knowledge learned from prior customers, so I have a knowledge base working for me. He has already found low cost flights within Germany, which I most likely would not have found. So he has saved me money that will go against any commissions that may be on my side of the ledger. This is what a service economy is about, providing a service that saves me time and provides me with the opportunity for educated choice.

Historically, middle men, or interemediaries have been paid fees because they possess knowledge that their clients do not have. Proprietary data bases that only the middle men have access to allow them to trade and act on that knowledge in return for rich fees. That cliche which is a truism holds true: knowledge is power. However, the Internet is the greatest agent of knowledge and information dissemination since Gutenberg’s invention. This leads me to the second point of this post:

Industries that try to hold information and knowledge hostage for financial benefit will ultimately succumb to disintermediation.

As I wrote in the “Cheney the Shooter” post, withholding information is a losing proposition in this age where thousands of terabytes course through the global Internet hourly. I have more information at my fingertips due to high speed Internet and search engines than the greatest scholar did 20 years ago. I can find information faster than the world’s best research librarian of the 1980s. This leads me to the third point of this post:

Technology, in this era the Internet, acts as an agent of disintermediation to existing distribution channels.

Ths means that if there has been value ascribed to the distribution beyond the value of the content that it delivers, it will be drained away, as content or customers have the option of the Internet for distribution. Media is clearly a prime example here. Think of newspapers charging a subscription or newsstand price for the paper delivery of the news. Today you can receive the newspaper on-line without paying for the physical newspaper, so you get the same content but are no longer paying for the means of distribution.

So, in quick summary:

1. Disintermediation is the removal of the intermediary person or entity

2. If the intermediary remains in place, it will be drained of any excess compensation

3. Industries that hold information hostage for financial gain will be disintermediated

4. The Internet can be the agent of disintermediation of existing distribution channels

Next we will look at some of the industries that are undergoing disintermediation. Media is living it, real estate feels threatened, and insurance might not yet see it.

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