Disintermediation is popularly associated with technology replacing jobs or eliminating intermediaries from a supply chain. In reality, disintermediation is an optimization process. While this does sometimes entail a removal of an intermediary, more often it involves a transformation of the services and values that these intermediaries are expected to provide.
As new technologies arise, consumers demand that these technologies imbue desirable values into their products. If an existing intermediary does not adapt to these technologies, then they are soon replaced by another intermediary that will. This concept of value addition and "disintermediation" can be seen in many industries.
Disintermediation is a term that originated to describe a phenomenon in the banking industry in the late 1960s. Depositors removed their money from savings accounts to invest in bonds and stocks with a higher return. This was done in response to Regulation Q, which restricted the amount of interest that could be accrued on money placed in federally insured accounts.
The term has evolved and now refers to any instance where an intermediary is removed from an interaction.
Disintermediation often occurs as new technologies are created. Some recent examples include:
- Cashiers replaced by self-checkout lines
- Gas station attendants replaced by self-service gas pumps
- Travel agents replaced by online ticketing and reservation services
- Video stores replaced by online video streaming services such as Netflix
- Drafters replaced by Computer-aided design (CAD) software
Disintermediation and Unemployment
What do all of the above examples have in common? Disintermediation has cost someone their job. Economists call this phenomenon technological unemployment, wherein the productivity increases from new technologies make workers extraneous and reduce employment. However, many economists believe technological unemployment is only temporary. The idea that continual productivity growth results in high structural unemployment is called the "Luddite Fallacy," a reference to 19th century textile workers who broke mechanized looms which threatened their jobs. It is labeled a fallacy because:
- Increased productivity leads to reduced input costs and product prices, which stimulates increased demand for goods. The increased demand means workers must be hired to produce additional goods.
- Skilled-biased technological change: As menial jobs are replaced by new technologies, people are needed to build, improve, and maintain these technologies.
This mindset is being challenged by believers of Technological Singularity, a theory that in the future technological growth will be so rapid that existing models of human development will become irrelevant. Key to this theory is the supposition that artificial intelligence will make decisions previously made only by humans.
Prior to the Internet, people did not have convenient access to information regarding their health concerns, for which they relied on doctors. Now people can use the Internet to access this information. Pharmaceutical information, treatments, medical procedures, symptom checkers, and more are readily available. The most widely used health website is WebMD.
WebMD is best known for its health resources. Using WebMD, you can access physician's blogs, pharmacy information, and symptom checklists. There is detailed information about everything from headaches and the common cold to the West Nile Virus and the Bubonic Plague. You can also store and track your own medical history.
The goal of WebMD is best summarized by its "About Us" section: "We will continue to publish even more content, communities, and services to help make your life better, to help you find your way when faced with healthcare decisions, and to help you feel better about the health of you and your family."
Many believe that WebMD does not live up to this motto. According to New York Times article "The Prescription for Fear", WebMD is a source of "pseudomedicine and subtle misinformation" .
Many bloggers voice similar opinions of WebMD. One woman named Jennifer relates how she became convinced she was having a heart attack after searching WebMD's symptom checklist "After about 20 minutes of panic I did realize that I wasn't having a heart attack, but rather I most likely slept on my arm wrong the night before" . Another blogger describes a similar experience using WebMD. He attempted to determine the cause of a rattling sound in his lungs resulting from flu congestion but received a false cancer diagnosis .
This has revealed a new social phenomenon called cyberchondria. People are being bombarded by information that they do not fully understand. They succumb to paranoia without experienced professionals to provide comfort and proper perspective.
“How do governments behave if they must one day operate on the assumption that any and every citizen has near instant access to a firearm through the Internet? ”. Cody Wilson set out to answer this question when he created Defense Distributed, a group which has joined the technology of 3D printing and gun manufacturing. The Wiki Weapon Project aims to provide open source computer files which could be used in conjunction with a 3D printer to create working hand guns. There is a fear that this technology could be used by criminals or minors to evade mandatory background checks. However, a case can be made that there should be no special regulation on printing a gun as opposed to making a gun by any other means.
Although its endeavor is legal, Defense Distributed has run into several problems. The ATF (Bureau for Alcohol, Tobacco, and Firearms) mandated that Defense Distributed must be licensed as a gun manufacturer because of the nature of their project. This has forced Defense Distributed to remove the preliminary gun designs from its website. The 1988 Undetectable Firearms Act also restricts Defense Distributed's work. The Congressional Act prohibits entirely plastic firearms and insures that firearms are detectable on security x-ray machines. This constrains the Wiki Weapon Project because most non-industrial 3D printers only print in plastic.
Federal agencies are not the only ones who are restricting the Wiki Weapons project. The 3D printer manufacturer, Stratasys, has reclaimed the 3D printer leased to Defense Distributed. Stratasys' legal team was concerned that the printer was being used for illegal purposes. This backlash has also revealed moral implications of printing guns. Some people believe that the right to bear arms is a "privilege" and should be treated as such. They argue that preventative measures should be imposed to stop abusers of this privilege from having access to firearms.
Publishers have experienced a large amount of change throughout history. Before the advent of the printing press, reproduction of texts was performed by scribes. With the introduction of movable type and the printing press in 1440 by Johannes Gutenburg, these scribes became less relevant. Texts could be printed and disseminated much more quickly. This spread of information improved literacy and allowed a market for writers to develop.
For hundreds of years, writers had to work within a constrained system to get their books published and distributed to the public. Since there is a limited amount of work which can be printed, publishers must be selective in the works it chooses to produce. The publisher then edits, formats, and polishes the work before it is printed. Publishers then secure shelf space in bookstores and help the author to publicize their work.
In recent years, this model has been challenged by the Amazon.com Kindle Store and other electronic book (e-book) distributors. Writers can upload their work to the Kindle Store, where readers may buy it and download it to any number of devices. This is very convenient for the reader, and also makes it easier for new writers to enter the market. John Locke, the first writer to sell one million copies on the Kindle Store, sells his books for $0.99. This is possible because many of the costs which exist in the traditional publishing model—physical printing, transportation, and inventory—are eliminated by electronic formats. Locke also owns the rights to his books and makes a larger margin per book than the typical author. Amanda Hocking, a 26-year old writer capitalizing on the teen paranormal fiction genre, has made over $2 million selling her books priced between $0.99 and $2.99. She aggressively self-marketed using social media such as Facebook and Twitter .
Do the successes of these authors suggest traditional publishers will soon be disintermediated? Not according to John Makinson, CEO of Penguin Books, "It does redefine what we do as publishers and I feel, compared with most of my counterparts, more optimistic about what this means for us..." . Makinson sees e-books as an opportunity rather than a death knell: "I am keen on the idea that every book that we put on to an iPad has an author interview, a video interview, at the beginning. I have no idea whether this is a good idea or not. There has to be a culture of experimentation, which doesn't come naturally to book publishers.” Makinson sees how the industry is changing and recognizes that Penguin Books’ survival depends on its ability to adapt.
Certainly if publishers provide the content that readers want, they have the chance to remain relevant. John Locke’s popular e-books were published online by Telemachus Press, a "work for hire" author services company that specializes in e-books. The same opportunity exists for retail booksellers. Borders was a large nationwide bookstore chain which went bankrupt in 2011 after some poor business decisions. Foremost was the neglect of the emerging e-book market. Borders invested heavily in physical bookstores, paper books, and CDs . This is not what consumers wanted, so Borders was disintermediated. Barnes & Noble, a competitor to Borders, has taken a different track. Far from neglecting the e-book market, Barnes & Noble has introduced its own tablet reader, the Nook. With the investment in technology consumers want, Barnes & Noble has survived.
All the cases listed above are illustrations of how value addition is an important part of the consumer-producer relationship. Consumers generally do not want to receive a raw product. Value is added to the product between production and consumption.
The case of WebMD showed that as people attempted to disintermediate healthcare professionals from the diagnosis process they became "cyberchondriacs", imagining illness where there were none. This happened because a comfort value was removed with the intermediary. While in theory a repository of medical information may be sufficient for medical diagnosis, the doctors provided an added value of human comfort and experience.
The case of the 3D-printed gun maker shows how a safety value was removed along with the intermediary. As the traditional weapons distributor was removed, concerns of criminals avoiding background checks arose.
The case of e-books and the e-book publishers is an example of how intermediaries can stay relevant by adapting to changing consumer desires. Even though traditional publisher roles of providing distribution to bookstores are becoming less relevant, publishers are still providing important value in their other roles. Writers produce a document of written text, but the publishers proof-read it, format it, design illustrations and cover art, and add an aesthetic appeal that consumers value. Penguin books and Telemachus Press illustrate how intermediaries provide new forms of value addition to avoid disintermediation by adapting to new technologies.
Disintermediation can be thought of as a tool, testing the importance and value of various intermediaries. Those that manufacturers or consumers judge to be a non-essential component in their interaction with each other are eliminated. However, more often this interaction is transformed as technology and consumer opinions and values change. Clever intermediaries such as Penguin Books, Barnes & Noble, and Telemachus Press alter their services and adapt to the changes in consumer values rather than holding onto traditional preconceptions of their respective roles. Disintermediation is not a tool of elimination, but rather optimization, seeking to provide an optimal value to consumers.
- N.V. (Nov 04 2011). "Difference Engine: Luddite legacy". Babbage (blog). The Economist.
- WebMD (2011). What We Do For Our Users. Retrieved from http://www.webmd.com/about-webmd-policies/about-what-we-do-for-our-users
- Heffernan, Virginia (2011). Prescription for Fear. The New York Times, (February 4) Retrieved from http://www.nytimes.com/2011/02/06/magazine/06FOB-Medium-t.html?_r=0
- Jennifer. (2011, March 11). WebMD Needs to be Banned from my Reality! [Web log comment]. Retrieved from http://thininvisiblesteel.blogspot.com/2011/03/webmd-needs-to-be-banned-from-my.html
- Unknown Author. (2011). WebMD's Secret Algorithm Revealed [Web log comment]. Retrieved from http://thisisnotthatblog.com/tag/web-md-is-such-a-bitch/
- Wilson, Cody (2012)Our Plan. Defense Distributed. Retrieved from http://defensedistributed.com
- Hsu, Jeremy (2012). 3D-Printable Guns Face Federal Ban. Tech News Daily. Retrieved from http://www.technewsdaily.com/15857-3d-printable-guns-ban.html?
- TheHuffingtonPost.com, Inc.(2012). Amateur Gunsmith Cody Wilson's 3D Printed Gun Project On Hold After Company Reclaims Wiki Printer. Huffington Post Tech. Retrieved from http://www.huffingtonpost.com/2012/10/02/cody-wilsons-3d-printed-gun-project-on-hold-after-company-recalims-printer_n_1933225.html
- Love, Dylan (2012). The Morality Of Making Guns On A 3D Printer. Business Insider. Retrieved from http://www.businessinsider.com/3d-printer-guns-morality-2012-11
- Haq, Husna (2011). Amanda Hocking, John Locke: poster children for self-publishing success?. Christian Science Monitor, (June 21) Retrieved from http://www.csmonitor.com/Books/chapter-and-verse/2011/0621/Amanda-Hocking-John-Locke-poster-children-for-self-publishing-success
- Teather, David (2010). Penguin boss has no problem with ebooks. The Guardian, (July 29) Retrieved from http://www.guardian.co.uk/business/2010/jul/29/penguin-john-makinson-ebooks
- Sanburn, Josh (2011). 5 Reasons Borders Went Out of Business (and What Will Take Its Place). Time, (July 19) Retrieved from http://business.time.com/2011/07/19/5-reasons-borders-went-out-of-business-and-what-will-take-its-place/