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In Defense Of The Middleman

The Internet was supposed to kill middlemen, instead it made them even stronger.

In Defense Of The Middleman
[Photo: Don Klumpp, Getty Images]

Back in 1995, when Netscape was the hottest company in the Valley and Bill Gates a fearsome force in software, eggheads and cranks alike predicted that the “World Wide Web” connecting us would soon do away with middlemen. Gates foresaw a world of “friction-free capitalism,” one in which the Internet itself would become the only intermediary we’d need—”the universal middleman,” as he wrote in his bestseller The Road Ahead.

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Twenty years later, a look around shows that the opposite has happened: Middlemen are more prevalent–and more important–than ever. Agents, brokers, dealers, and resellers get a bad rap, but they play a crucial role in almost every platform today—including the ones that were meant to cut them out of the transaction. As a result, being an effective middleman has become an even more valuable skill than it was in the past.

Daniel Spulber, the Kellogg School economist who’s studied the matter more than anyone, calculated that back in 1999 middlemen contributed 25% to the gross domestic product (GDP) of the United States; by 2010, the last year for which enough data was available, that had grown to 34%: more than a third of the U.S. economy was made up of the efforts of middlemen at a time when middlemen were supposed to be drifting into irrelevance.

Consider eBay. From its earliest days, anyone with a computer and Internet connection could post anything they wanted to sell on eBay—and find prospective buyers from all over the world. But as the site evolved, middlemen emerged, first with handy stores like AuctionDrop and, eventually, with “PowerSellers” hanging their virtual shingles on the site. These PowerSellers have become the site’s most active and reputable users. Although they make up only 4% of all eBay sellers, half of all eBay sales flow through them. PowerSellers aren’t hawking their own collectibles–they’re retailers and resellers of other people’s goods, and the preeminent among them enjoy over $150,000 in sales per month. We trust them more than we trust the amateur eBay seller because we understand that they won’t squander their hard-earned reputation by misrepresenting the quality of the goods they’re selling. Many PowerSellers wouldn’t even be in business if it weren’t for eBay. Far from killing the middleman, eBay has generated a thriving new breed.

What’s happened on eBay mirrors what’s happening on LinkedIn. Everybody can join for free—and if you’re looking for a job, you might spring for the paid version, which gives you deeper searches and ways to contact people outside your personal network. LinkedIn makes money off these premium subscriptions–but LinkedIn makes more money off professional recruiters. In fact, professional recruiters are the company’s highest-revenue customers, making more money for the company than all of the individual job seekers on LinkedIn combined. Talent Solutions, which includes LinkedIn’s premium product geared specifically to recruiters, netted $1.3 million in 2014, a 46% increase from the previous year. LinkedIn has not killed recruiters, it’s made them more useful and efficient.

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Or look at the world of real estate sales. Ninety-one percent of all houses sold in the United States are still sold through a real estate agent. These middlemen no longer have an exclusive lock on listings, thanks to sites like Trulia and Zillow–but instead of pushing real estate agents aside, these sites have partnered with the agents by charging them to advertise. More than 103,000 agents spent an average of $354 per month advertising on Zillow and Trulia in the first quarter of 2015, a record amount for the recently merged companies.

YouTube’s self-made celebrities show that cultural gatekeepers aren’t the only way to find an audience–but old-fashioned agents look to YouTube to scout out new talent for television and film, much the way literary agents have turned to the blogosphere in search of authors who will write the next bestseller. Social media as a whole, predicated on direct connections, has become the province of publicists and advertisers and other specialists whom stars and businesses hire to connect them with fans and customers.

Sure, the Internet caused the loss of some middleman jobs: think of the stockbroker who used to execute trades on the floor of an exchange or the travel agent who does nothing more than take your order. But on the whole, the web’s growth has actually gone hand in hand with a rise in the power of middlemen.

What happened–why didn’t things play out the way Bill Gates and other visionaries predicted? Their premise was that in the past we’ve turned to middlemen (often grudgingly) to reduce the high transaction costs of the brick-and-mortar world. This is true, and it’s the standard economic explanation for the existence of middlemen, from merchants to dealers. The visionaries assumed that if the Internet reduced transaction costs—the “frictions” of which Gates spoke—middlemen would become less necessary.

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But that’s turned out to be wrong because the Internet reduces everyone’s transaction costs, including those of middlemen. And if middlemen can harness the Internet’s power more efficiently than the rest of us–which the best of them can–then they’re still a great value.

One of the middlemen I interviewed, the micro-VC Mike Maples, Jr., put it well when he pointed out that in our highly connected world, “things and entities that accelerate connections are going to be more valuable.” This is why Maples is bullish on so many Internet businesses, having made early investments in Twitter, Lyft, and TaskRabbit, among others. “That’s what a middleman does,” Maples says: “They connect nodes in a network to increase the value of the network.”

That’s as simple an explanation of a middleman’s job as you’re likely to hear. But for someone looking to become a middleman, that job description raises new questions. What kind of networks most benefit from middlemen? Which nodes should they focus on connecting? How can they strengthen those connections? I contend that middlemen provide value by playing some combination of six roles, and the most successful middlemen are those who play the roles best.

The most basic role is the Bridge, the person or company that promotes trade by reducing physical, social, or temporal distance. An appliance flipper on Craigslist who buys a washer or dryer for $50 or $100 and turns around to sell it on Craigslist a few days later for $250 or $300 creates value for both the buyer and seller, taking the appliance off someone’s hands who wanted to get rid of it right away, and selling it to somebody who needed it a few days later.

The Certifier separates the wheat from the chaff and gives buyers reassuring information about the seller’s underlying quality. The PowerSeller on eBay or a headhunter who finds hidden talent must excel at quickly sussing out quality and staking their reputation on that: If you present a client with a series of duds, you’ll be seen as a parasite, not a partner.

The Enforcer makes sure buyers and sellers put forth full effort, cooperate, and stay honest. A wedding planner doesn’t just coordinate the efforts of multiple vendors–she uses her clout as a repeat customer with these vendors to make sure they deliver the highest service.

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The Risk Bearer reduces fluctuations and other forms of uncertainty. ZocDoc, by connecting patients who don’t know when they’ll need an appointment with doctors who have last-minute slots to fill, plays this role well. This is tricky because it means separating external risk (like normal ups and downs in demand) from counterparty risk (doctors who disappoint patients). The danger to ZocDoc is attracting doctors who’ve got slots to fill because they’re terrible doctors, so the Risk Bearer role usually goes hand in hand with being a Certifier and an Enforcer.

The Concierge reduces hassles and helps clients make good decisions in the face of information overload. Finding information online is quick and easy–but processing all that information to reach a good decision can take forever. You can spend months researching a trip to Japan, for example, and find yourself unable to build an itinerary–or you can hire a travel agent who specializes in this destination and can quickly guide you through the whole process. To a middleman who does this every day, the costs are low compared to your costs of doing it yourself. The key to playing this role well is to keep things simple for your customer.

The Insulator comes into play when two parties already know each other but need a middleman to keep them apart; by strategically inserting themselves between the two sides, Insulators can help clients get what they want without the stigma of being thought too greedy, self-promotional, or confrontational. Drew Rosenhaus, the NFL super-agent, plays this role well, routinely saying things to team owners that no player will dare say for himself. What’s really interesting is that while the player’s reputation would suffer if he acted that way on his own behalf, the agent’s reputation actually improves when he does things like this for his clients.

Middlemen still have an image problem, and that’s not likely to change anytime soon. But those who play these roles well provide tremendous value, even if they’re not dealers, merchants, or other obvious intermediaries.

Whether you’re a doctor referring a patient to a specialist, a lawyer handling a negotiation on behalf of a client, a startup promising to be the next Uber of whatever, or a blogger curating the information you present your readers, you are a middleman–whether you acknowledge it or not. So you may as well embrace the role and play it well.

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