disintermediation

Although Webvan failed in its goal of disintermediating the North American supermarket industry, several supermarket chains (like Safeway Inc.) have launched their own delivery services to target the niche market to which Webvan catered.

In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor, wholesaler, broker, or agent), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.

Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer and thereby pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a B2C company functions as the bridge between buyer and manufacturer.

To illustrate, a typical B2C supply chain is composed of four or five entities (in order):

• Supplier
• Manufacturer
• Wholesaler
• Retailer
• Buyer

It has been argued that the Internet modifies the supply chain due to market transparency:

• Supplier
• Manufacturer
• Buyer

History

The term was originally applied to the banking industry in about 1967: disintermediation referred to consumers investing directly in securities (government and private bonds, and stocks) rather than leaving their money in savings accounts, then later to borrowers going to the capital markets rather than to banks.(OED, Google News Archive) The original cause was a US government regulation (Regulation Q) which limited the interest rate paid on interest bearing accounts that were insured by FDIC.

It was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized.

Impact of Internet-related disintermediation upon various industries

Strong impact

• Computer hardware and software
• Travel agencies
• Bookstores and music stores
• Stock Purchasing see E-trade

Still in progress (due to legal or structural obstacles)

• Alcoholic beverages
• Real estate

A real estate market is social. Buyers and sellers communicate to discover information and negotiate to exchange goods or services. Internet transparency is letting home buyers view Residential and Commercial MLS, FSBO listings on their own. It has reduced home buyers search costs, and given them access to multiple new product options to choose from when going into a real estate transaction. Also sellers have found new tools and services to attract home buyers and sell their houses, they can now leverage Internet market tools that are intended to increase the efficacy of transactional requirements.

This transparency has made it difficult for Real Estate Agents, Appraisers, Lenders, etc. to collect the fees - tipping the balance of power towards the consumers. By opening access to information outside of the Brokers/Lawyers control, buyers and sellers now gain economic benefits that would be otherwise be received by market intermediaries or inappropriately distributed among the smart and connected deal makers of the financial world.

• Prime brokerage for hedge funds
• Health Care - due to developments in eHealth and specifically Consumer Health Informatics
• Video rental and distribution

Failed and became niche ancillary services

• Furniture
• Groceries
• Pet supplies (especially dog food)

Discussion

A prime example of disintermediation is Dell, Inc., which sells many of its systems direct to the consumer — thus bypassing traditional retail chains. In the non-Internet world, disintermediation has been an important strategy for many big box retailers like Walmart, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for inventory removes one function of an intermediary.

The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of Japan and Germany in the 1990s.

However, Internet-related disintermediation occurred less frequently than many expected during the dot com boom. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than shipping them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as bricks and clicks.

Reintermediation

Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first.

Although at the beginnings of the Internet revolution, electronic commerce brought the idea of disintermediation to many producers, as a way of cutting costs or increasing profits, many (if not most) of those producers found out that it was not so easy. It was thought that the Internet would "disintermediate" middlemen and drive them out of business by having producers sell directly to users.

However, what these predictions missed was that cutting out the middleman brought problems such as the high cost of handling to ship small orders, dealing with massive amounts of customer service issues and confronting the wrath of retailers and other channel partners. Producers did not consider that they had to spend huge resources to accommodate presales & postsales issues of individual consumers. Before disintermediation, those middlemen acted as salespeople for the producers. After disintermediation, somebody had to handle those customers. Furthermore, producers did not consider that selling online also has high costs: Developing the web site, maintaining the information & marketing expenses to draw online customers.

Maybe most importantly, producers did not consider the fact that being the only source of their products for online consumers is similar to having only one store in a city selling a particular brand. Many thousands or even millions of web middlemen are pushing their own products and spending money to draw customers to their web sites. So if a producer shuns those middlemen, it gets less "shelf space" on the web and therefore the decrease of the probability of getting online sales for their products.

Both reintermediation and disintermediation are results of the dynamic nature of the Internet.

Examples of companies

The most notable example to disintermediation is Dell, which has succeeded in creating a brand, well recognized by consumers, profitable and with continuous growth. Likewise, maybe the most notable example to reintermediation is the Levi Strauss company, who unsuccessfully launched a multimillion dollar web site and later shut down most of its online operations.

References

• Graham, Mark. "Warped Geographies of Development: The Internet and Theories of Economic Development." Geography Compass, (2) 2008.

• Hawken, Paul. "Disintermediation: an economics buzzword that neatly explains a lot of the good that is going on." CoEvolution Quarterly, Spring 1981, pp. 6-14.

See also

Look up disintermediation in Wiktionary, the free dictionary.

• Outlet store
• Flat fee MLS — An example of disintermediation in the Real Estate industry.
• Laiki agora - an example of disintermediation of agricultural foodstuffs in Greece