The paradox of the middle man

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Over a million people downloaded Radiohead's In Rainbows album in the two months it was on their web site. In 2000, when Stephen King put Riding the Bullet on his web site, the servers crashed under the load. Seth Godin estimates that over 2 million people downloaded Unleashing the Ideavirus when he released it as a free eBook. These examples demonstrate how the internet is killing the middle man. Disintermediation is the (ugly) name of the game. That's how the conventional wisdom goes, anyway. I'm not so sure. I think there will always be middle men: better, smarter, different middle men. Sure, traditional travel agents, book stores and music companies will vanish, but this is the first stage in a cycle of creative destruction.

Here's an example of how the slayer of the old middle man is the midwife of the new. Say you're buying a car. A second hand car. You can buy from a dealer, or you can buy from an individual. In the past, if you bought from a dealer then you had the advantage of choice. There were a lot of cars in the same place. Similarly, selling to a dealer was easier than selling to an individual. eBay has changed this: you can bypass the middle man and buy direct from the seller, and with more choice than a dealer could ever provide.

There is, however, a need for a new type of middle man. The used car market is famously dogged by the lemon problem. The buyer has less information than the seller, and doesn't know if the car he is buying is a lemon. Therefore, he will assume that it is indeed a lemon, and will only pay the price of a lemon. If the price of used cars is determined by the lemons in the market, then sellers have no incentive to sell good cars (since buyers will assume they are lemons, and only pay the lemon price). Hence the bad cars drive out the good ones. This, however, relies on the asymmetry of information available to the buyer and the seller. If the buyer knows what the seller knows then this problem vanishes. This is an ideal role for a middle man. Not an Arthur Daley who trades on quantity and dishonesty, but somebody who trades on information and whose goods are expertise and trust. Would you pay a middle man to seek out a used car, verify its quality and then guarantee it? I would.

Recruitment is another example. In their attempt to cut out the middle man, sites like Monster have evolved into heaving meat markets of employers and employees. Unfortunately, Sturgeon's law - that 90% of everything is crap - applies. This cuts both ways: 90% of candidates are crap, and 90% of positions are crap. On Monster alone, that's something like 100 million crap applicants, and 50 million crap jobs. But there are gems buried deep in the crap, and sifting the crap is a precious skill. In other words, good middle men - recruitment agents - are now more valuable than ever.

It's not just physical goods where middle men are becoming more important, it's virtual ones too. The Internet provides an easy way for writers to connect with readers, musicians with listeners and artists with viewers, bypassing the traditional middle men such as newspapers, books and magazines. But the infinitely increased available data clashes with our finite capacity to absorb it. We don't have the time to filter the infinite down to the finite, so people - middle men - who can do this are increasingly prized. The quirky, human, personal editorial judgement that the BBC, Slashdot or Boing Boing apply to the morass of information out there is more valuable, to me at least, than the lowest-common-denominator mob 'wisdom' of digg, or the cold logic of Google's algorithm.

I don't think these examples are isolated. As the Internet removes the need for dumb middle men, it creates the need for smart middle men. The producers have removed links in the chains separating them from consumers, but consumers are slotting new links back in. As we get swamped by more and more information, and more and more choices, we're going to need more and more help filtering the data and making our choices: which cars should we buy, which holidays we should go on, which people we should hire and which news stories we should read. It's a paradox: the more we can remove middle men, the more we need them.

The middle man is dead. Long live the middle man!

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Comments

[Tim Weiler]

Neil - one of your better articles. Keep it up.

[Mark Murphy]

"As the Internet removes the need for dumb middle men, it creates the need for smart middle men."

I come at this point a bit differently than you do.

IMHO, eBay is a middle man in your used car scenario. After all, it serves the same purpose as the used car dealer -- it aggregates a lot of product, makes them available for sale using a single interface, and makes money off the transaction.

Moreover, eBay does provide value as a middle man, at least when compared to flesh-and-blood used car salesmen. It aggregates more widely, has a cleaner interface, and (I think) takes less of the transaction as its fee.

However, in your dumb/smart pantheon, eBay is clearly dumb. Other than a bit of reputation management for the buyer and seller, it doesn't add any value to the transaction itself -- it hasn't inspected the car, for example. Nor is it CarFax, showing you the reported history of the car.

I think the history of technology demonstrates not so much that dumb middle men are obsolete, but something else:

The value of dumb trends towards zero over time.

Here, I consider "dumb" as "something that can be completely automated".

Monks used to be the middle-men of copying services -- now it's a copier. ISPs used to be the middle-men of Web hosting -- first static sites became free, and now Google App Engine is starting to make full-on Web services free. Operators used to be the middle-men of voice communications -- now calls are handled by automated switches. And so on.

This doesn't mean you can't make money at dumb: Google and eBay are two prime examples. But dumb is a shaky value proposition, as you're always at risk of somebody offering your middle-man service cheaper. You can manage that risk by being in lots of dumb middle-men roles (Google) or you can hope the bulwark of network effects keep the barbarians at bay (eBay).

[Steve Mezak]

I admit it. I am a middleman.

I'm not sure I’d use a middleman to buy a used car as described in the post. But I would if he/she could present several cars that meet my requirements and then helped me objectively choose between them. Now that would be a service!

That is the kind of service I provide for companies that want to take advantage of global software development through our network of 40+ pre-approved global software development companies in over a dozen countries. And this "Offshoring Jumpstart" program is free.

Using offshore software development isn’t for everybody. And as you probably know, there are many offshore companies you can run into that aren’t really good for anybody.

Many will take your money and just give you some very junior programmers in a room in some exotic location you have to somehow manage yourself. Others will burn through most of your budget with the first few milestone payments and then never finish. They just go on to the next victim.

If you want to develop software professionally then after you get past the big Indian mega-vendors whose names we all know there are literally thousands of smaller vendors to pick from. So how do you choose?

There is a lot of crap out there – 90% or whatever. Using a guide, broker or middleman will help you get to the good 10% of smart programming teams around the world quickly.

Steve Mezak
CEO of Accelerance, Inc.
Author of Software without Borders

[Andy Brice]

>Using a guide, broker or middleman will help you get to the good 10% of smart programming teams around the world quickly.

Except that 90% of guides, brokers and middlemen are crap as well. ;0P

[Neil Davidson]

Thank you all for the comments, and thanks for the encouragement Tim.

Tim - I did wonder whether to consider eBay a middle man or not. I think there are arguments both ways, but I definitely agree that the dumb will get aggressively commoditized down to near zero.

Andy - good point, thanks!

- Neil

[Mark Dennehy]

I can definitely relate to the comments on Monster's job ads. In the last six weeks, the number of truly stupid mistakes that take what might otherwise have been interesting and promising roles and hid them behind ads that said "Don't even bother, you'd hate it here" or otherwise turned me away was staggering. In fact, even in the end when I found an absolutely ideal dream role for me, it was through a personal contact and a lot of random chance. The thing that gets me most though, is that the mistakes were so horribly basic and fundamental:

http://stochasticgeometry.wordpress.com/2008/04/25/tips-for-hiring-new-engineers/

[japancarbuy]

This is same as buying second hand cars, you know people are selling their used cars ...because they have already used it, they are fed and want to move on to a new one. In other words most of the used cars are not worth as in case of the jobs and candidates in the post but there are gems to found out and given an intelligent search you can find them for sure.