“Will the Internet transform the role of the middle-man creating friction-free capitalism or will it transform the very nature of capitalism by creating a global peoples’ market?” asks Sohail Inayatullah
While asking for a fare quote, my travel agent responded: “I’ll call you back, I have to check the Internet.”
I thought, wait a second, I too can check the Internet. I did. Who needs travel agents? www.travel.com.au has a wealth of information – the best deals – for the flights I need. Then came the endless destination rules, and the problem of flight availability. I was quickly exhausted.
Back to my travel agent it was. However, this time, I could give her my suggestions, ask her to check routing through Singapore, Kuala Lumpur as well as Bangkok.
While the Internet will not replace the travel agent, it has empowered me, made me into a smarter consumer. I have more information on routes and prices. But I will not spend a half hour only to find out that the days I want to travel are unavailable. She can do that for me much faster. And she has a human face and voice.
Historically, it was the middle-man that has both provided the grease for capitalism and has been the bane of the consumer. The middle-man gets the cut, negotiates distribution, delivering, marketing and price between the producer and I – he is the information broker. That cut keeps the economy going, lets producers focus on what they do best (make commodities, goods and provide services), and helps me decide what I want to buy.
But with the growth of the Internet, is the middle-man still needed? Or is the Internet itself the new middle-man, websites skimming dollars from producers through their advertising arms? The middle-man becoming the medium itself. Of course, the Internet is a far cheaper middle-man, dramatically reducing transaction costs, from 1$ to 1 cent in many industries, banks, for example, reports Chuck Martin in his book, Net Future.
While I still currently need my travel agent what if in a few years a travel.com site came on with far more advanced artificial intelligence knowbot – finding me the right price, airline schedule, with ease? Would my travel agent still have work? Will her role as broker of information remain intact even with AI developments? Or will she need to reinvent herself as web designer, an artificial intelligence engineer?
Perfect Information
Certainly the Internet will increase efficiency, costs will go down. For General Electric an appliance service call via phone costs $5 to execute but only 20 cents via the web. Costs will keep on dropping. Labour from poorer areas can do much of the e-service work since geography is web-irrelevant. When I emailed the United Airlines site asking for information on my Mileage Plus/Points card (I had forgotten my password), the response could have been from the US (a high wage area) or from India (a cheaper area). United saves money, I save time, India moves up the world economy, and everyone is happy. Well, except the employee in the US, who now has to compete with service personnel throughout the world. Where will she get a job if she can’t retrain herself? She can join the Internet unemployed, or perhaps advertise her services on the Web. Eventually perhaps her Indian counterpart in Bangalore will start her own Net company, and hire her to provide on-line services – true globalization, the freedom of capital and labour.
In the long run what will happen? There are two perspectives. In the first: markets are profitable because information is not perfect, thus helping one to buy low and sell high (other factors are relevant as well: skills, capital, marketing). As information becomes perfect, capitalism faces a crisis, since profits cannot be made.
World Systems thinker Immanuel Wallerstein says it like this: This is the presumed ideal of the free market with no restraints and restrictions. At that point the buyers would simply go from one seller to the next until they found the lowest possible price because they would have perfect information and the lowest possible price would soon be battered down to an infinitesimal amount over the cost of production price and you couldn’t make a profit. This is in fact what happens with most of the poorly profitable industries in the world. If today you don’t make very much money from selling clothing, its because everybody’s doing it.
With everybody doing it on the Net, will profits keep on shrinking as customers and markets keep on getting smarter? Will the Internet fundamentally transform capitalism creating a world bazaar where goods and services are matched perfectly according to need? No monopolies, no government featherbedding. Is this the end of corporate capitalism and state socialism, and the beginning of a global peoples market?
The only way out for producers is to have the State come in and protect their business. But because of globalization and the freedom of the Net (information wants to be free), this is far more difficult now to achieve. Consumers with more information means a much more difficult time for producers. They need relative monopolies, relatively few sellers. Since the start-up costs on the Net are relatively minor, new sellers can come in quickly.
The bet on Amazon.com (capitalised at 36 billion US$) is that those who enter first and gain brand recognition and high-portal visibility will make profits. Borders’ – a bookstore that does make profits, has great coffee, is capitalized at 1 billion US$ – stock continues to go down as profits go up. Borders is a late comer to the Web, and thus is considered a dinosaur in the long run. This is the principle of increasing returns, of lock-ins, and not diminishing returns. Who gets advantage first, will keep it.
The bet is also on the medium itself. Internet based businesses will do better than brick businesses. “Broadband lets producers skip the whole physical stage – especially for products such as CDs, books and videos that straddle the boundary between physical and digital – and just shoot the bits straight from their mainframe to your hard drive,” writes John Rubino for Thestreet.com. And once, or if, nano-technology is proven then physical products can be downloaded (materialized) as well. Either way, middle-man companies are doomed.
The second perspective on the future of the middle-man is that the Net will benefit the consumer as he or she will get the lower price. Competition will bring profits to a bare minimum, where no new entrants will be attracted, but a sufficient number remain to continue competing. Thus, in the very short term we will have a massive shake-out in the industry, with only a few surviving, and thousands of Net start-ups hitting the dirt. The strong will survive and eventually the Internet will become a mature industry (right now probably half way through its cycle with productivity gains just kicking in).
What type of information?
It is not only that consumers have more, quicker, and easily accessible, information, but they have now information that reflects their aspirations, their ideal standards.
Thus, demands for new types of information will transform business. Standards have gone through three phases. The first, writes Clement Bezold, of the Institute for Alternative Futures (www.altfutures.com), are physical standards, based on a products inherent physical qualities. The second are functional standards (how well it works and how cost effectively). Emerging standards are contextual (demands regarding the larger context of the product’s manufacture, distribution, use and disposal). These are values and aspirations based. Issues of environmental impact, gender equity, labor fairness, child labour, organic or gene-altered food all become critical information.
These issues are far more crucial for Generation X’ers who are more likely to purchase products that match their values and boycott companies and products that do not.
The Internet allows product information to be far more accessible and advanced technology will allow each product to have total context information available. Consumers can then make decisions based not only on physical and functional standards but on context standards as well, becoming smarter and wiser buyers. Companies that don’t provide this information will lose out on marketshare, and those who are judged poorly on these social accountability standards will also lose ground.
Writes Bezold, “Smarter markets will give us a clearer choice of both the products we want and the world we are building by buying and using those products.”
Already, says Hazel Henderson, a director of the Calvert Social Investment Fund and the Council of Economic Priorities, social responsibly mutual funds are bringing in billions, competing alongside traditional “lets only make money” funds – the balanced scorecard makes good economic and social sense.
.Com Generation and beyond
But after generation X, what of the .Com generation that has grown up with the Net? Will they still call their travel agent, or having been raised on the Net, will humans be considered slow portals, to be avoided, rocks on the Netsurf?
Most likely they will be far more comfortable with Net grocery shopping, indeed Net everything. Flexibility, immediate delivery, multicultural products will be crucial to them. The Net world will be less of an array of computers and more a global always-on, always-everywhere peoples’ market.
And after them? The Double Helix generation – the designer children who will be born in the 2020’s – won’t even make the distinction between human and Net since they will have been born genetically enhanced, a few even created in hospital/factories. The genetic/organic debate will no longer be relevant since by that time all will be human-made.
In the meantime, however, we can expect massive economic transformations. Argues Ronald Coase, the nobel laureate in economics, up to 45% of the economy will be made irrelevant by information advances as we disintermediate (as the middle man and related transaction costs disappear), that is, $2.5 to $4.5 trillion of the 10 trillion dollar US economy. And with globalism reducing the size of the state bureaucracy, where will the jobs be? Or will be so productive and efficient that jobs and work won’t matter?
What will happen to my travel agent? Will she go on a terminal vacation?
Dr. Sohail Inayatullah can be reached at: s.inayatullah@qut.edu.au and at www.futurists.net.au. He is professor with the International Management Centres and author of a cdrom on forecasting the future. He is a fellow of the World Futures Studies Federation and visiting academic at Queensland University of Technology. Recent books include Transcending Boundaries and Situating Sarkar.