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BUSINESSWEEK ONLINE: DAILY BRIEFING | |||||||||||
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Eliminating the Middleman Online Can Tupperware parties, music stores, and book publishers survive with direct sales in cyberspace? Tupperware Corp. recently announced that it's going to start selling its famous plastic containers online. That means it will begin competing directly with its own distributors -- women who peddle the goods at countless at-home Tupperware parties. The company says it's looking for ways to protect them. But, in truth, they have about as much of a future as rotary phones. What's happening to Tupperware is just an example of what the Internet is doing to traditional middlemen. Instead of relying on third parties to peddle their goods, producers are selling directly through the Net and cutting out those independent distributors. This shift will have profound consequences for the way we buy and for the prices we pay. Outfits such as Dell Computer have been selling direct for years, with great success. But now, it seems everyone is trying to get in the game. Auto makers, such as Ford, are selling cars directly online. This year, IBM expects to rack up as much as $15 billion in sales through its Web site. And we've all seen travel-related sites for airlines, rental cars, and hotels. BUILDING LOYALTY. What's happening here? For one thing, direct sales can hold down prices and keep up profits. There's no middleman to take a cut. But more important, companies hope to build stronger customer loyalty. The thinking goes like this: If a business buys 100 desktops direct from IBM, Big Blue has an opportunity to sell the hardware as part of an entire "solutions" package. But if that purchaser buys from some reseller, all it gets are the PCs. And the next time the customer needs computers, the middleman may very well ship a gross of Compaqs. IBM CEO Lou Gerstner says direct Net sales "drive customer retention and reduce our costs." You can't beat that. Smart intermediaries are not about to sit back and watch this trend ruin their businesses. Travel sites, such as Microsoft's Expedia, have found their own ways to use the Web to provide extra value to customers. They figure folks will still pay a premium for one-stop shopping, rather than having to bounce from site to site, searching for the best prices and products. That may work well for commodities. After all, one flight to Chicago is pretty much as bad as the next. But what about intellectual property such as books or music? The most obvious challenge there will come for the Tower Records or the Amazon.coms of the world. Already, kids can download the latest hot single directly from Sony Music. It won't be long before they'll be able to do the same with an entire 70-minute CD, or mix and match from among several Sony artists. Readers will do the same with books. SELF-PUBLISHED. Then there's the next step. Today, book publishers buy rights to most authors' work for a pittance. And what do they do once they obtain the work? Except for a few superstar writers, next to nothing. They don't edit. They don't promote. They do get the book printed and take financial responsibility for unsold volumes. But in a digital world, who will care? In the new world, mid-list authors may distribute their work themselves, either on their own Web sites or through writer's co-ops. Will they need publishers at all? Maybe not. In the next few years, we'll see an historic battle for the hearts and minds of customers. One result should be lower prices, as producers and distributors slug it out. For us consumers, it'll be fun to watch. Gleckman, a senior correspondent in Business Week's Washington bureau, offers his views on Mondays for BW Online
EDITED BY DOUGLAS HARBRECHT
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