Posts Tagged ‘Middlemen’

This is a post by Patricio Robles a tech reporter at Econsultany:

Joe Hewitt is the Facebook employee responsible for the super-popular Facebook iPhone app. But thanks to Apple, he’s decided to move on.

On Twitter, he announced that he “handed the Facebook iPhone app off to another engineer“. Soon after, he revealed the reason why: the tyranny of Apple.

He told TechCrunch:

My decision to stop iPhone development has had everything to do with Apple’s policies. I respect their right to manage their platform however they want, however I am philosophically opposed to the existence of their review process. I am very concerned that they are setting a horrible precedent for other software platforms, and soon gatekeepers will start infesting the lives of every software developer.

The web is still unrestricted and free, and so I am returning to my roots as a web developer. In the long term, I would like to be able to say that I helped to make the web the best mobile platform available, rather than being part of the transition to a world where every developer must go through a middleman to get their software in the hands of users.

In a post on his blog, he has elaborated on his sentiments:

The Internet has been incredibly empowering to creators, and just as destructive to middle men. In the 20th century, every musician needed a record label to get his or her music heard. Every author needed a publishing house to be read. Every journalist needed a newspaper. Anyone who wanted to send a message needed the post office. In the Internet age, the tail no longer wags the dog, and those middle men have become a luxury, not a necessity.

Meanwhile, the software industry is moving in the opposite direction. With the web and desktop operating systems, the only thing in between software developers and users is a mesh of cables and protocols. In the new world of mobile apps, a layer of bureacrats stand in the middle, forcing each developer to queue up for a series of patdowns and metal detectors and strip searches before they can reach their customers.

That’s not to say there is no value to middle men. Middle men exist to reduce the cost of getting a product from A to B, and as long as that cost is significant, they will be useful. However, the moment the middle man monopolizes the means of distribution, he becomes a gatekeeper, and creators can be made to fail not by the merits and popularity of their products, but by the whims and short-term interests of the gatekeeper.

The subject of middlemen is an interesting one and Hewitt’s post highlights why: for all the talk about the internet eliminating them, they are still going strong, and in some cases, there are more of them than ever. Which begs the question: are they a luxury, as Hewitt suggests, or are they still largely a necessity?

Frankly, I think the answer is quite clearly the latter. From Google to eBay, the internet may have destroyed a few middlemen, but it’s created more than a few to take their places. And for good reason: middlemen just don’t pop up out of nowhere for no purpose. Middlemen perform valuable functions in many markets and bring significant benefits to the table. These include:

  • Distribution.
  • Sales and marketing.
  • Transportation.
  • Aggregation.
  • Customer service.
  • Liquidity.
  • Credit.
  • Expertise.
  • Security.

Taking the iPhone and the App Store as an example, Apple provides developers with an efficient means to distribute their wares the millions of iPhone owners in a single location with a single relationship. Without this, the market would be fragmented and the average developer would realistically have no ability to get his ‘product‘ to market, even if he felt ‘free‘. Additionally, Apple handles billing and customer service, something that would be a significant burden to many developers. And finally, Apple provides a form of protection through its developer program and review process. While that review process is understandably upsetting to developers and there are definite areas for improvement, the popularity of the App Store, and the volume of business conducted in it as compared to the competition, speaks for itself.

While Hewitt and others may lament the existence of middlemen, there is significant amount of economic research and literature that explains why middlemen (also known as merchants and traders) have existed since the dawn of civilization. A great article that addresses the subject of the ‘parasitic‘ middleman head on points out, “Without middlemen, we couldn’t have modern markets“. It’s a point that’s often lost today. Instead of economic common sense (the middleman has a significant profit motive to bridge the gap between supply and demand), we get economic myths (“creators can be made to fail not by the merits and popularity of their products, but by the whims and short-term interests of the gatekeeper“) that assume the middleman’s interests are somehow not at all aligned with those who he transacts business with.

Ironically, something that shouldn’t be lost in this discussion is the fact that Hewitt’s employer, Facebook, is a middleman in its own right. You can’t just throw any old application up on Facebook, for instance. There are rules which must be followed or else. Maybe Facebook hasn’t tried to directly monetize its position as much as it theoretically could, but that looks to be changing. Case in point: if you run a contest on a Facebook application or page, Facebook now wants your money. A minimum of $30,000 to be exact. I wonder how Hewitt feels about this.

All of this said, there’s no doubt that the internet has been incredibly empowering to creators. But the idea that the internet alone is a medium of disintermediation neglects the fact that market forces result in the introduction of new kinds of middlemen — reintermediation.

At the end of the day, nobody needs middlemen. Nothing is stopping Joe Hewitt from developing software and selling it to consumers directly. Just as nothing is stopping a farmer from selling his corn to consumers directly, or a manufacturer from selling his widgets to consumers over the internet. Yet how many actually do that?

Which brings me to my final point. It’s easy to complain about middlemen and the grass may look greener on the other side, but middlemen haven’t been around for thousands of years for no good reason: the grass isn’t greener on the other side. Even on the internet.

URL Link to Econsultancy:

http://econsultancy.com/blog/4975-are-middlemen-a-luxury-or-necessity