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How Middlemen Can Come Out On Top


Enterprise -- The Internet: STRATEGIES

HOW MIDDLEMEN CAN COME OUT ON TOP

Nimble businesses can change the Internet from a threat into an ally

Bruce Yoxsimer owned a travel agency for 13 years before events forced him into a bold, new strategy. The seven-employee company in Palo Alto, Calif., was doing nicely. Annual bookings came to nearly $4 million. But when the airlines capped commissions on ticket sales in 1994, the agency's largest source of revenue was suddenly under siege. Many competitors launched a protracted fight against the carriers--which amounted to tilting at windmills, as it turned out. Yoxsimer took a more farsighted approach: He set up shop all over again--this time on the World Wide Web.

Using credit cards and home-equity loans to bootstrap his new company (which swallowed the old one), Yoxsimer teamed up with a pair of software experts to launch the Internet Travel Network (www.itn.net). In 1995, it became one of the first companies to book trips over the Web. Despite the far greater sales volume of competing airline Web sites, the company has secured a place in the Web ticketing business by being there early and building a name. With just 50 employees, it is processing up to 1,000 reservations a day, a rate that is growing by about 10% a month, thanks to word-of-mouth referrals, advertising, and Internet search engines--not to mention businesses that have signed ITN as their exclusive online agent.

ITN is a sterling example of how rapidly the Web is forcing change on a huge sector of small business--the middleman. From real estate, travel, and insurance agents to car dealers and recruitment firms, virtually no middleman is immune to the upheaval caused when buyers and sellers meet directly on the Internet. For some, extinction is almost certain. But many businesses are finding fresh opportunities on the Web. Virtually all, though, will have to change how they do business. That may mean providing a level of customer service that a computer cannot deliver. Or teaming up with an Internet partner. Or converting the business to a Web site.

"In almost every industry, you'll find these new online middlemen," says Matt Ericksen, a vice-president at Boston Consulting Group Inc. "The risks they present should be making historical middlemen very nervous." As the new digital brokers gobble up market share, giving customers more options than ever, middlemen of all stripes need to develop survival strategies.

VALUE ADDED. Who's threatened most? Those who broker products and information without adding value. If your business merely sells access to a database--such as airline schedules, real estate listings, insurance rates, and stock exchanges--watch out. Realistically, you won't be able to beat the Web at its own game: offering fast access to databases and interactive information tailored to individual consumers.

Even businesses that do add some value will have to rethink their business models, says Jeffrey F. Rayport, an assistant professor at the Harvard business school. "It's a wholesale conversion to a better, faster, cheaper, more flexible way of doing business," he says.

While some experts predicted the Web would cause "disintermediation"--the demise of the intermediary altogether--Rayport thinks the Web is bringing about "re-intermediation," in which new online businesses perform at least some of the functions of traditional middlemen.

Take real estate. Agents may know a community, learn a buyer's quirks, and understand how to close a deal. But, pre-Internet, their lock on home sales sprang from the fact that only commissioned agents had access to the Multiple Listing Service, the database containing most homes on the market. Who could compete? No one, until the advent of digital middlemen such as Cyberhomes.com, which puts abridged MLS listings on the Web in markets where it is licensed to do so.

NEW SITES. Or consider San Francisco-based Abele Information Systems Inc., which runs the 10-employee Web service Abele Owners' Network (www.owners.com). Begun in the spring of 1996, the site is still a pipsqueak, over the course of the year listing 140,000 homes in 45 states, compared with more than 4 million listings on the MLS. But its potential and fast growth have already inspired traditional brokers to create their own sites, making some listing data freely available to everyone for the first time. "The industry feels threatened by the release of online listing information," says Becky Swann, a former agent in Grapevine, Tex., whose International Real Estate Digest (www.ired.com) rates hundreds of real estate Web sites run by agencies and entrepreneurs. "They got carried away with controlling the information. The ones that think their job is providing access to the MLS, those are the folks who will be out of business."

At owners.com, sellers can enter basic price and property data and add such extras as pictures for a small fee. The attraction, clearly, is that if a buyer and seller meet up, the price for both sides will reflect the savings on commission. Founder Hans Koch, a former commercial property manager, says that nearly a third of customers who list their homes on his site are first-time do-it-yourselfers. Koch projects sites such as his eventually will double the long-standing 20% of homes sold without an agent to 40% of the total and "change the economics of the deals for the other 60%."

Will this mean the end of the agent middleman? No, argues Regina Taylor, vice-president of marketing for Coldwell Banker Corp., whose Web site lists 150,000 properties and generates 100,000 user sessions per week: "We see it as a tool for generating sales leads for our brokers." But this kind of easy access to listings will force change on the business, argues Swann. While she thinks Koch's projections are exaggerated, she's sure the Web will gradually boost the number of homes sold by their owners. And with customers doing much of the preliminary legwork online through growing databases, they may start to balk at the standard 5%-to-7% commissions. To stay in business, agents might have to lower their fees or charge a la carte rates for such tasks as preparing documents, negotiating prices, marketing, or holding open houses. Exemplary personal service and customized advice could become the keys to making money--not the sale itself.

ONLINE TICKETS. Such adaptation is already under way in several fields. For instance, as Yoxsimer's success shows, the Web is a superbly efficient way to sell airline tickets. About 1% of domestic tickets are now sold online, according to the American Society of Travel Agents and Forrester Research Inc. forecasts that volume will quadruple to nearly $5 billion in sales by 2000. That's why Phil Davidoff, 57, owner and co-founder of 28-year-old Bel-air/Empress Travel, a small agency in Bowie, Md., has deemphasized airline ticket sales. He says that commission caps may have started the free-fall, but online competition--which emboldened the airlines to slash commissions--accelerated the plunge. In the past three years, airline ticket commissions dropped from 62% of his revenues to less than 30%. In response, Davidoff is now doing what computers can't--getting to know customers so well that he can advise them on cruises that he books. Other agencies are focusing on specialties such as adventure trips, senior citizen travel, or eco-tourism.

The alternative approach is to embrace the new technology one way or another. "I didn't even know how to turn a computer on," says Julian Hargraves, 58, the general manager of R.H. Long, a Framingham (Mass.) auto dealer that has been in the same location since 1927. But Hargraves realized his customers were changing fast. First, he watched his own daughter buy a car online, then his son found his new house on the Web. He became so intrigued by the potential for the popular Auto-By-Tel (www.autobytel.com), which provides free car research and price quotes over the Web, that's he's now spending $40,000 annually to be part of its 2,000-dealer network.

"People don't want to deal with a car salesman, and they want to save time," Hargraves says. With Auto-By-Tel, customers receive a low, no-haggle price upfront. Then they come in to the dealership and complete the paperwork in less than an hour. After joining the network in September, Hargraves says, he began receiving an average of one purchase request per day, leading to a handful of sales that he would never have landed otherwise. He predicts that Auto-By-Tel leads will soon account for 15% of his dealership's business.

SUPERLOTS. In fact, Boston Consulting's Ericksen predicts the number of auto dealerships nationwide will drop from 22,000 today to perhaps 10,000, and most of those will be superlots. This Auto-By-Tel phenomenon will sweep across "industry after industry," he says. "In the meantime, you'll find those who are totally ignoring the Internet sitting there wondering why their sales are dropping off."

Even the life insurance agent, who has traditionally relied on face-to-face sales, faces competition from the Web. LifeQuote of America Inc., a life insurance agency in Miami, says the company invested less than $50,000 to develop its Web site (www.lifequote.com). Soon after its launch in 1995, it started bringing in 60% of the 11-year-old company's overall business. According to LifeQuote, of the 300 people per month who use the site to request quotes, 17% become paying customers, surpassing the conversion ratios for both direct mail (1% to 2%) and cold calling (5%). LifeQuote still acts as the insurance agent, representing more than 50 insurance companies. And for each policy it sells online, it collects 50% of the first year's premium as its fee.

Then there's the recruitment business. Online job-posting sites are booming. Framingham-based Monster Board (www.monster.com) lists more than 50,000 jobs from over 4,000 companies, including Intel, Fidelity Investments, Nike, MCI Communications, and Arthur Andersen. Started by recruitment and advertising firm TMP Worldwide Inc., the site offers savings to clients who might otherwise use recruitment firms or want ads. It also offers value-added services, such as customized E-mail updates for job-seekers.

It appears there's no hiding from digital middlemen. They will surface wherever there's a demand for convenient--and often more efficient--services. But if you don't want to go the way of the milkman or become an online broker yourself, what choice remains? It's a safe bet that personal service will still give you an edge, that is, until pcs learn to smile and databases act on intuition.By Evan I. Schwartz, a former BUSINESS WEEK staff editor and the author of Webonomics (Broadway Books)Return to top


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