Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.
- How the web disintermediated the old world
- Disintermediation examples
- Enter the gatekeeper’s hypothesis
- Super platforms and super gatekeepers
- Blockchain and the renewed dream of decentralization at scale
- Key takeaways
- Other business phenomena of the web 2.0 era
- Connected Business Frameworks
How the web disintermediated the old world
“Your margin is my opportunity,” this quote apparently attributed to Jeff Bezos, explains well the process of disintermediation that has been going on with the advent of the web.
One of the core premises of the web was the concept of decentralization and as a result intermediation. Companies like Amazon, Google, Facebook, Netflix, Uber, Spotify, Shopify and many other startups born in the web era, have all grown with the purpose of dismantling the old distribution pipelines, thus unlocking distribution.
Amazon has been disintermediating a whole supply chain for e-commerce and now it’s looking into last-mile delivery to cut out from the supply chain traditional large carriers (DHL, UPS, FedEx) to realize its dream of customer obsession.
Netflix has been for over a decade disintermediating the entertainment industry.
Google and Facebook unlocked branding and marketing at first. In the previous era, if you wanted to get brand exposure you had to go through the classical ad agency or a set of intermediaries that kept tight control over the industry and their marketing budgets.
As Google first, Facebook later, came up with a massive, mostly automated digital advertising machine, they first targeted a different segment of the ad industry (not that interesting to those who were used to the old way of advertising).
Indeed, Google itself proselytized a set of new marketers who learned to believe in the only god of performance-based marketing. No more branding or marketing, done without data, measuring, and clear ROI.
The engineering approach of Google first, Facebook later, made the whole deal look promising to those companies (especially startups) who didn’t have the budgets to invest in TV advertising.
Those digital marketers started to look for what we might define last-mile advertising, where it gets easy to track the click from and therefore measure the impact of marketing.
With that simple, yet powerful promise Google and Facebook created a digital advertising industry that, initially grabbed those who were all about performance, and therefore didn’t need an ad agency.
And later on, digital advertising would transition and become much more complete. As those companies evolved, both brand and performance advertising on Google and Facebook were covered up, and this process of disintermediation brought to the end of the traditional ad agency.
Yet, all in all, as those companies turned into tech giants, it started – I argue – a process of reintermediation. Before going there, let’s also look at the process of intermediation that happened after the consolidation of a new era, turning mature.
Below we will list just a few of the many examples of how companies are removing intermediaries from a transaction.
No article on disintermediation would be complete without mentioning the American multinational electronics company Dell.
The company, which was founded in 1984, started as a direct seller with a mail-order system that eventually shifted online.
By 1997, Dell was direct selling around $4 million worth of computers each day.
While its competitors were selling pre-configured computers in retail stores, Dell used cost savings from cutting out the middleman to offer deeply discounted and highly customizable machines.
Unlike other vehicle manufacturers that tend to sell via authorized dealers, Tesla employs a direct sales approach with a global network of company-owned showrooms in major cities.
The company claims disintermediation increases product development speed and creates a superior buying experience for the customer.
Interested customers can visit a showroom in person and chat with sales and service staff who are employed by Tesla and have no conflict of interest.
Alternatively, those wishing to purchase a Tesla vehicle can customize and order it online.
The company also handles its own servicing.
Many showrooms double as service centers, with these supplemented by a fleet of mobile technicians who can perform routine maintenance at a customer’s residence.
Tesla is also following the same playbook when it comes to offering insurance premiums, through its real-time insurance.
The example of Uber disintermediation is perhaps the most controversial on this list.
The company was a major disrupter of the taxicab industry, enabling passengers to connect with drivers directly via an app.
While Uber has no doubt harmed the viability of taxis, it is nevertheless a representation of how removing the middleman can transform industries where regulation, lobbyists, and bureaucracy have created significant barriers to progress.
One of the earlier examples of modern disintermediation comes from the travel site Expedia.
Once upon a time, consumers wishing to go on vacation would employ the services of a travel agent who would organize airline tickets, hotels, rental cars, and so forth.
Today, Expedia and many similar sites allow consumers to purchase airline tickets from the airline and accommodation from the hotel chain.
This has caused many travel agency businesses to shut down or move into related industries such as insurance.
Glossier is a beauty brand that favors customer centricity over so-called “stale retail”.
Instead, its skincare and makeup range is sold online and in a selection of retail stores across the United States which the company owns.
According to COO Henry Davis, Glossier is an innovative example of disintermediation because it controls the bottom section of its sales funnel and does not rely on third parties to make sales on its behalf.
The company is also looking at ways to disintermediate social media, noting that the brands of the future will need to take ownership of business-customer interactions away from companies such as YouTube and Instagram.
As companies like Google and Facebook disintermediated the advertising industry. At the same time, the market has been adjusting to the new industry created by those players.
As marketing itself got redefined through the lenses of data and measurement, once ad agencies turned into digital marketing agencies. Today the whole industry of consultancy companies born as a result of the SEO/SEM and SMO/SMM industries has seen the rise of digital agencies managing budgets for clients.
So after all, after the first stage of actual disintermediation. The market adjusted, and the dream of disintermediation, transformed in something else.
Another case of disintermediation
Another interesting case is how, over the years, thanks to the rise of Google, more and more vertical search engines started to spring up. Where Google could not offer a great search experience, users and qualified traffic would be sent there.
Whole new industries were born thanks to that. OTAs or online travel agencies were born, or at least, further disintermediated travel agencies, and locked-in demand in the travel sector, thanks to the massive amounts of traffic Google sent them:
Those digital players became the new intermediaries. They, together with Google, helped disintermediate an entire industry from fragmented players. Yet they became the primary intermediaries.
Disintermediating the disintermediators
Yet as Google turned, in what we can call “the everything search engine” or the tool able to cover many verticals that before could not be covered.
Google started to roll out products like Google Travel (Trips), and Google Flights that have the potential to offer an end-to-end experience within its own platform, thus disintermediating the digital disintermediators.
Enter the gatekeeper’s hypothesis
Those once startups turned gatekeepers. The old markets that crashed under the pressure of new industries, also matured. That might have created a process of dominance, where winner-take-all effects took over.
And markets once fragmented by many intermediaries, turned into new markets primarily dominated by a few central players, setting the rules of the game. According to what I called the “Gatekeeping Hypothesis” we sort of went back to an era of blocked distribution by a few key players, with some critical differences.
First, this time algorithms defined the rules to follow, even though at central levels, a few key people (usual engineers following the executives’ instructions made those rules in the first place).
Second, this era is primarily customer-centered. Where in the past, it was all about keeping a tight control on the supply chain and distribution, so that over time consumers wold get used to whatever it got sold to them (standardized mass-marketing helped indeed). To an era where those tech giants are stubborn and obsessed with customer experience.
When Google sets the rules for websites to follow, it does that by keeping as North Start, the user experience (of course defined a la Google), and those who do not conform to that are out from the walled garden.
Third, consolidation and asymmetry took over. Where many more intermediaries might have controlled fragmented industries. The new players learned that domination is what matters and they set for it.
In addition, most processes are now asymmetric. When the user gives data to Facebook, the value it gets back is much lower compared to what Facebook can and will do with that data. Both in terms of usage and monetization. In short, Facebook will be way better by getting the data of the user, as this will add up to its network effects. Compared to what the user gets back (some form of entertainment).
Therefore, winner-take-all effects created a few, super large players that became the main intermediaries.
Super platforms and super gatekeepers
Let’s add to that, those gatekeepers have been stretching their tentacles to cover more and more parts of the user experience, thus generating potential for the rise of super gatekeepers.
Blockchain and the renewed dream of decentralization at scale
There isn’t a single way for the web to evolve. And renewed dreams of scaled decentralization took place with the Blockchain and its potential commercial applications. Whether this will be a permanent effect, we can’t be sure.
However, for one thing, Blockchain might get us to the rise of a new form of organization, something that goes beyond the classic corporation and take the form of a super, decentralized company, made of many companies combined, and all joining a shared protocol.
- Disintermediation is the process of cutting out intermediaries from the supply chain. The web has been a critical driver of this process, by disintermediating old industries to create whole new market opportunities for all.
- The wave of disintermediation is still going on (see Amazon last-mile). At the same time as those companies created new markets that are becoming more mature, a process of reintermediation (where new intermediaries are born as a result).
- As former startups, turned tech giants, those became gatekeepers and winner-take-all/intermediaries at large scale.
- The Blockchain brings back the dreams of disintermediation and decentralization at large scale. Whether this will happen, be permanent we don’t know yet, and can’t be sure either.
Other business phenomena of the web 2.0 era
Let’s look also at a few other phenomena enabled by the web.
In the digita era, business platforms have become the key foundation for massive entrepreneurial ecosystems to form, and therefore the development of products used by a large consumer base.
The advent of business platforms has taught us that to scale up a product at mass-consumption level, it’s not enough anymore to have the physical side (hardware).
Instead, the non-physical, comprising the software, and all the other applications built on top of it become critical. In short, while hardware and software are critical to build a solid foundation, those are usually highly centralized.
Instead, there is another part, where companies act more like governments, setting the policies and rules for the platform. But then the platform itself is left to develop.
The products made as a result of these platforms enhance the core products offered by the organization (your iPad would be worth much less without apps).
Customer-Centrism and Customer Obsession
In this era, customers got at the center of the business stage. They became the focus for the development of products in the first place. Indeed, at an entrepreneurial level, today, you first validate the market, understand if people really want something, then go on and build it.
At the same time, like Amazon taught us, customer obsession also takes the form of random discovery, where the company audacious enough to push products that customers don’t even know they want, yet, also win.
The decoupler learned how to look at the whole customer value chain, only to focus on one core aspect of it, to enable a whole new experience, based on convenience, in terms of money, time and effort.
The new experience designed by the decoupler breaks apart the customer value chain, thus identifying and offering only the most valuable part.
Network effects instead become critical to enable the platform to scale, and as it does become more valuable. In short, where in the past we talked about economies of scale, in this era, we talk about network effects.
Negative Network Effects
Many of the companies that entered those new spaces, and dominated them, started out as unbundler. They took an existing “pre-packaged experience” from the previous era, and they only offered the most valuable part.
In short, they surfed the giants of the previous era. And as they did they gained massive growth.
As new companies come into the market and supplant incumbents with an unbundling process, they tend to consolidate their distribution, thus bundling things up to offer an end-to-end experience and gain as much control possible over the customer journey.
When this process is mature, other companies, with a different mindset, willing to take the best of that experience and unbundle it, might gain traction at expense of the incumbent.
Innovators in the digital age, have been able to innovate by breaking down the wall between cost and value. This is at the core of the Blue Ocean Strategy.
Vertical Integration (in the bits world)
Over time, once small players that have gained more and more market shares in their industry, also expanded in adjacent markets. Thus, controlling more parts of the journey for potential customers.
For instance, where Google has been able for decades, to only find relevant information for users, and it then sent them toward whatever site it was available on the web.
Google integrated more and more products to its search engine to enhance the user journey and create an end-to-end experience, and at the same time by integrating its supply chain, to gain control over the whole process.
A phenomenon known for decades to the physical world, has become also widely applied to the digital world.
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