The Paradox of the Middle Man

As we get swamped by more and more information, and more and more choices, we're going to need more and more help filtering the data and making our choices...It's a paradox: the more we can remove middle men, the more we need them.

Over a million people downloaded Radiohead’s In Rainbows album in the two months it was on their web site. In 2000, when Stephen King put Riding the Bullet on his web site, the servers crashed under the load. Seth Godin estimates that over 2 million people downloaded Unleashing the Ideavirus when he released it as a free eBook. These examples demonstrate how the internet is killing the middle man. Disintermediation is the (ugly) name of the game. That’s how the conventional wisdom goes, anyway. I’m not so sure. I think there will always be middle men: better, smarter, different middle men. Sure, traditional travel agents, book stores and music companies will vanish, but this is the first stage in a cycle of creative destruction.

Here’s an example of how the slayer of the old middle man is the midwife of the new. Say you’re buying a car. A second hand car. You can buy from a dealer, or you can buy from an individual. In the past, if you bought from a dealer then you had the advantage of choice. There were a lot of cars in the same place. Similarly, selling to a dealer was easier than selling to an individual. eBay has changed this: you can bypass the middle man and buy direct from the seller, and with more choice than a dealer could ever provide.

There is, however, a need for a new type of middle man. The used car market is famously dogged by the lemon problem. The buyer has less information than the seller, and doesn’t know if the car he is buying is a lemon. Therefore, he will assume that it is indeed a lemon, and will only pay the price of a lemon. If the price of used cars is determined by the lemons in the market, then sellers have no incentive to sell good cars (since buyers will assume they are lemons, and only pay the lemon price). Hence the bad cars drive out the good ones. This, however, relies on the asymmetry of information available to the buyer and the seller. If the buyer knows what the seller knows then this problem vanishes. This is an ideal role for a middle man. Not an Arthur Daley who trades on quantity and dishonesty, but somebody who trades on information and whose goods are expertise and trust. Would you pay a middle man to seek out a used car, verify its quality and then guarantee it? I would.

Recruitment is another example. In their attempt to cut out the middle man, sites like Monster have evolved into heaving meat markets of employers and employees. Unfortunately, Sturgeon’s law – that 90% of everything is crap – applies. This cuts both ways: 90% of candidates are crap, and 90% of positions are crap. On Monster alone, that’s something like 100 million crap applicants, and 50 million crap jobs. But there are gems buried deep in the crap, and sifting the crap is a precious skill. In other words, good middle men – recruitment agents – are now more valuable than ever.

It’s not just physical goods where middle men are becoming more important, it’s virtual ones too. The Internet provides an easy way for writers to connect with readers, musicians with listeners and artists with viewers, bypassing the traditional middle men such as newspapers, books and magazines. But the infinitely increased available data clashes with our finite capacity to absorb it. We don’t have the time to filter the infinite down to the finite, so people – middle men – who can do this are increasingly prized. The quirky, human, personal editorial judgement that the BBC, Slashdot or Boing Boing apply to the morass of information out there is more valuable, to me at least, than the lowest-common-denominator mob ‘wisdom’ of digg, or the cold logic of Google’s algorithm.

I don’t think these examples are isolated. As the Internet removes the need for dumb middle men, it creates the need for smart middle men. The producers have removed links in the chains separating them from consumers, but consumers are slotting new links back in. As we get swamped by more and more information, and more and more choices, we’re going to need more and more help filtering the data and making our choices: which cars should we buy, which holidays we should go on, which people we should hire and which news stories we should read. It’s a paradox: the more we can remove middle men, the more we need them.

The middle man is dead. Long live the middle man!

This article was first published on the Business of Software blog. Anyone who is, or has been, in the business of software, might want to check out what we are doing with Business Of Software conference. Registration for Business of Software 2008 opened on April 14th. It will be held in Boston MA on September 3rd-4th.