Wednesday, March 15, 2006

Fran O'Sullivan: Why power to the people is killing off the middlemen

Here's to consumer power 21st century style and the demise of the traditional middleman, leading to the tech savvy "auteur" becoming a new force in business.

That's the challenge far-sighted internet entrepreneurs like Sam Morgan, with his phenomenally successful online trading business, pose to traditional industries.

Among the publicity Morgan generated when he sold Trade Me to Fairfax last week for $700 million was the point that technologies like the internet transfer power to users.

Many of what I call tech savvy "auteurs", for instance, would rather use Skype to place seriously cheaper "phone" calls over the internet than wait around for McKinsey to "teach elephants [like Telecom] to dance" as the management consulting jargon goes.

The technology is still a bit rocky and it takes time getting used to using your PC as a phone. But once you get the hang of it, there's little going back.

Skype's business has yet to reach the tipping point that Trade Me achieved with online auctions. But take a look at the business cards your more interesting contacts are now handing out, the prevalence of Skype numbers is an unmistakable sign that another significant shift is in the wind.

Take "tablet" laptops (today's university students do) also, which, as the technology gets better, now translate even scratchy handwriting into type and are increasingly armed with new generation voice software. When these students get real world jobs, will they rely on "gofers" or, will they be so self-reliant they opt not to delegate work which would once have been considered menial?

Digital technology enables anyone with an up-to-date cellphone to become a "citizen reporter" at a disaster site and catch the news by photographing the scene ahead of traditional media.

Technological advances are so great that anyone with a modicum of intelligence and an individualist bent can squeeze out middlemen.

"Newspapers just don't get it" - is how Morgan himself put it when he was chivvied late last year on the extent of Trade Me's galloping growth rates as his company capitalised on consumers' desires to "do deals" themselves in real-time, rather than comb through newspaper "for sale" notices a day later and place phone calls only to find the item had been sold or did not match requirements.

By choosing Trade Me, they substituted an online middleman for local newspapers "for sale" notices.

It's in Morgan's best interests to promote the notion the newspaper business is on the verge of being buried by the impact of the disruptive technology which he has used to devastating effect.

It's not (yet) of course.

Elephants can change. McKinsey is right. They can even dance. IBM proved that.

But the less adept will be hammered if they do not move swiftly to capitalise on real differences - not just try to mine ever elusive synergies.

Newspaper companies began flirting with the internet in the late 1990s. But many backed away from establishing paid news websites, or, putting their "rivers of gold" (classified advertising) on the net, for fear it erode earnings from their printed products.

The "dotcom bomb" - when tech stocks were hammered as a result of some rather "blue sky" projections which did not translate into earnings - slowed their strategies.

But now the companies are clambering back, either by beefing up their sites, or doing what Fairfax CEO David Kirk has done: Buy an online competitor before it demolishes your underlying cashflows and use it as a Trojan horse to try to attack the advertising revenues of competitors.

Disruptive technologies or disruptive innovations - as Clayton Christensen who has written extensively on this issue (and claims to have coined the term "disruptive technology") is that they have the potential to overturn the existing dominant technology in the market.

That's what Morgan was on about in the days when (free from the corporate constraints he will increasingly feel) he boasted that "newspapers just don't get it".

Christensen's books - The Innovator's Dilemma and The Innovator's Solution - are worth a read for anyone seeking more information.

The game gets more interesting when the number of other middlemen - real estate agents with their absurdly high fees, conveyancing lawyers, car salesmen and employment companies - find vast parts of their businesses migrating as tech savvy "auteurs" want to do more of their own deals online.

Morgan doesn't have a monopoly on the developing online markets.

Players like Telecom, the real estate companies, newspaper companies, motoring firms, employment agencies are all getting into the game themselves.

They have the ability - Commerce Commission willing - to protect their businesses through defensive convergence moves. But it is a stiff call trying to aggregate real market power in our small market where the commission is quick to smack down any so-called dominant moves.

In Morgan's case, he is blessed by good genes.

His hippie dad, turned first-class economist and latterly a businessman, has always thought outside the square and is not afraid to attack players that he believes abuse their own market dominance.

Gareth Morgan, who portrays himself now as "just papa on the porch", has had a serious whack at Telecom over the way it squeezes out broadband competition through its ownership of the local loop or copper wire phone network.

Sam Morgan makes the point that as more New Zealanders take up broadband, they will increasingly use Trade Me to do deals.

Dad Gareth may not approve.

But it's quite likely that Kirk - and his deal-making chairman Ron Walker - who admit they are poring over other New Zealand acquisition prospects - might also be under scrutiny from Telecom itself.

It's not as if there are no parallels.

Australian telecoms giant Telstra seriously canvassed buying Fairfax a couple of years ago. It probably makes more sense for Telecom and Fairfax - two transtasman companies - to talk merger.

Our tech savvy "auteurs" will not be concerned as long as prices stay down and functionality increases.


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