The Revenge of the Brick-and-Mortar Middlemen

One of the most challenging (maddening?) aspects of the Internet has been figuring out which business models really work in the long run. Many supposedly smart people have come up with many supposedly surefire answers to this challenge. 2000 will likely go down as the year when many of these people were very much humbled.

One of the new “marketing realities” of the Internet was supposed to be the inexorable movement away from traditional middlemen — travel agents, stockbrokers, and auto dealers. These old-time middlemen were supposed to be replaced by a new breed of virtual Internet businesses. Their models would be based on the fact that the Internet drastically lowers the costs associated with putting buyers and sellers together and that the old middleman models are untenable.

But alas, things aren’t working out quite as predicted. Yes, many of the Internet middlemen, such as Travelocity.com and E*Trade, have thrived. But increasingly, they are under fire. Priceline.com is a prime example. Its gasoline and grocery buying services have collapsed, and even its original airline ticket service is under pressure.

A recent special Wall Street Journal section (October 23, 2000) on e-commerce vividly chronicled the extent of the problems facing the new-age middlemen. For example, the world of real estate was supposed to be revolutionized by online home searches and mortgage originations. It turns out that though many buyers scan the web for home information, most deals are still done through traditional real estate agents. And fewer than two percent of mortgages were originated on the web last year. The business of marketing IPOs via the Internet turns out to be a huge bust for most consumers, with only 10 to 20 percent of shares offered winding up in the hands of online firms.

But perhaps the most vivid example of how badly online middlemen are stumbling is in auto sales. The Wall Street Journal chronicled the case of the owner of an East Coast auto dealership chain (with more than $400 million annual revenue) that tried the major online services, such as autobytel.com, DriveOff.com, and CarPoint. The dealership has since canceled its deals with all of them. It continues to work with AutoVantage.com, cars.com, and InvoiceDealers.com but finds its closing ratios on leads produced by each are less than half those from leads produced by its own web site. As a consequence, the owner predicts that the remaining three will be gone before long, and he will instead rely solely on promoting his own web site. This old-line middleman will have co-opted the new technology to maintain and grow his position in the marketplace.

What’s gone wrong with the new-age middlemen? It partly comes down to dollars and cents. Even though the Internet businesses promised lower-cost sales than through conventional means, the brick-and-mortars are increasingly discovering that such promises aren’t being kept. In fact, they’re discovering something quite startling: They can use the same techniques as new-age middlemen and get better results.

But it also comes down to control. The brick-and-mortars are discovering that when they do online marketing, they keep control over the message, marketing program, and customer. Control is very important, be it for a manufacturer, customer, or middleman. Thus, aviationX Inc., a web company that hoped to be the middleman for airlines and their suppliers, had to bow out when giant aerospace companies such as Boeing, Lockheed Martin, and Raytheon formed their own online exchange and were soon joined by the major airlines.

One of the things that the online middlemen may have underestimated was the extent to which the traditional middlemen would fight to maintain their traditional roles and traditional manufacturers and retailers would fight to increase their control of the marketing and sales process. Thus, we’ve seen the major airlines try to muscle aside conventional travel agents by cutting commissions to the agents and selling tickets directly to consumers.

Clearly, the Internet is shaking up the supply chains in many industries. It’s just not shaking things up exactly the way the Internet upstarts always expected. Their challenge is actually the challenge being placed on every middleman, whether on- or offline: Prove your worth. Proving your worth usually has little to do with developing cool technology but means demonstrating old-fashioned marketing value over and above what the brick-and-mortars can accomplish themselves.

The value may differ from industry to industry. In one industry, it may mean delivering low-cost leads. In another, it may mean demonstrating a special closeness to end users. Whatever it is, it should be something that can be clearly articulated to key constituencies.

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