BUSINESSWEEK ONLINE : MARCH 22, 1999 ISSUE
BUSINESS WEEK E.BIZ

'The Buyer Always Wins'
Customers are seeking--and getting--lower prices on the Web

Hoping to save a few bucks, United Technologies Corp. (UTX) decided to try something new last year. Once, it would have spent months haggling individually with dozens of vendors to supply printed circuit boards for various subsidiaries worldwide. Instead, UTC put the contract out on FreeMarkets OnLine Inc., a Web marketplace for industrial goods. Bids from 39 suppliers poured in--and the winners managed to slash a cool $10 million off the initial $24 million estimate. Says Ed Williams, vice-president for supply management at UTC subsidiary Carrier Corp.: ''The technology drives to the lowest price in a hurry.''

E-business deals like that are fast driving home a startling shift in the commercial balance of power: To a greater extent than ever before, the customer is king. In the physical world, buyers face all kinds of obstacles to getting the best deal--far-flung suppliers, limited time to do research, middlemen who keep a tight lid on information. ''It's a pain to drive three different places to save a dollar,'' says Jeffrey P. Bezos, chief executive of online megastore Amazon.com Inc.

NO DISTANCE. On the Web, shopping's a snap. Buyers can quickly compare information about products and vendors almost anywhere. Suppliers are only a click apart and an E-mail message away, giving buyers unprecedented influence to demand lower prices, better service--even a direct say in product design. Dell Computer Corp. (DELL), for instance, lets buyers configure their own personal computers and track them through manufacturing and shipping--all online. Says FreeMarkets CEO Glen Meakem: ''If you're surviving on schmoozy sales relationships, you're not going to make it in this world.''

It's a world where the virtual distance between the producers and their ultimate customers has collapsed, sometimes to near zero. All of a sudden, relationships among producers, wholesalers, distributors, and retailers, once virtually sacrosanct, are up for grabs--and along with them, their customers.

That's prompting a goodly number of producers to reach customers more directly by making an end run around the traditional channels. Although they won't talk about it publicly, says Gartner Group analyst Beth Enslow, auto makers, consumer-electronics companies, and almost all other large manufacturers are looking for ways to shorten their selling chains--even if by doing so they risk alienating partners. Says Enslow: ''If they don't, somebody else in their industry will.''

Or already is: Dell is growing more than twice as fast as other PC makers, thanks largely to its $14 million a day in Web sales. Any company whose main edge was privileged pricing, product, and other information--travel agents, car dealers, stockbrokers, industrial-parts distributors--risks being cut out of transactions.

In many cases, buyers are starting to skip past the old industrial distributor and the neighborhood insurance salesman. Web efficiencies are freeing up money to fund a whole new class of Web-savvy middlemen--from consumer sites such as Amazon.com (AMZN) and Autoweb.com to a trucking spot market called National Transportation Exchange and a seafood exchange called GoFish. They're providing a more direct conduit between producers and the ultimate buyers. And a much cheaper one. Chemdex Inc., an online site where scientists can buy biochemical supplies, takes a 10% cut of transactions from vendors--less than a quarter of most distributors' take--and passes the savings on to buyers.

INFOMEDIARY. Naturally, not all distributors and merchants are ecstatic about this development. Sellers in some industries worry that listing their products in an online market could bring unbearable pressure, prompting them to erect filters on their sites to repel automated shopping comparison software--or else forcing them to refuse to take part in online markets. GoFish, for instance, netted new buyers for some seafood companies, but other merchants have been more reticent--perhaps with good reason. Neal Workman, who started GoFish last year as an outgrowth of his credit reports company, Seafax Inc. in Portland, Me., concedes that GoFish may well bring seafood prices down. ''The buyer always wins,'' he shrugs.

Unlike many existing middlemen, a growing number of these upstarts claim allegiance to the buyer, instead of to the producers whose wares they offer. That is bound to amplify the power that the Net already gives buyers, says McKinsey & Co. principal John Hagel III, co-author of a new book called Net Worth on these new middlemen, whom he calls information intermediaries, or ''infomediaries.'' He estimates that consumer infomediaries can save an average client household the tidy sum of $1,110 a year by searching for the best deals on its behalf. Says Hagel: ''The reduction of transaction costs will give more power to the buyer.''

These dynamics are playing out in business trade as well. IMX Exchange, for example, provides an online marketplace for mortgage brokers to find loans. Instead of having to comb through dozens of daily faxes of lender rate sheets, brokers place requested loans on the exchange, and lenders bid on them. San Jose (Calif.) real estate broker Cecelia Babkirk says IMX saves her up to a half-point on loans and another half-point for the home buyers she serves--adding $60,000 to her annual revenues.

These upstart middlemen may be poised to play a commanding role in their industries. Infomediaries aimed at trade between businesses alone will grow from $290 million in revenues last year to about $20 billion by 2002--a quarter of all business trade, predicts Charles H. Finnie, an analyst with investment bank Volpe Brown Whelan & Co. Says Finnie: ''Infomediaries have the potential to fundamentally reorder the economy.''

Over the long haul, these infomediaries will be able to pool enormous buying power over the Net to extract even more from vendors. Early results from individual buyers point to potentially huge savings. General Electric Co. (GE), for instance, has reduced prices by 20% on more than $1 billion in purchases of operating materials by pooling various divisions' orders online--something too cumbersome in the physical world--to demand volume discounts.

Caveat emptor may be the byword of traditional commerce, but E-business has added a new twist: Caveat venditor. Let the vendor beware.



ONLINE LINK
A chapter from Net Worth, by John Hagel III and Marc Singer, is available here.

BY ROBERT D. HOF

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