The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit

199 Pages·2015·1.18 MB·English

by  Marina Krakovsky

THE
MIDDLEMAN ECONOMY
THE
MIDDLEMAN ECONOMY
How Brokers, Agents, Dealers, and Everyday
Matchmakers Create Value and Profit
Marina Krakovsky
THE MIDDLEMAN ECONOMY
Copyright © Marina Krakovsky, 2015.
All rights reserved.
First published in 2015 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world, this is by Palgrave Macmillan, a
division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills,
Basingstoke, Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies and has companies and
representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe
and other countries.
ISBN: 978–1–137–53019–6
Library of Congress Cataloging-in-Publication Data Krakovsky, Marina.
The middleman economy : how brokers, agents, dealers, and everyday matchmakers create value and
profit / Marina Krakovsky.
pages cm
Includes bibliographical references and index.
ISBN 978–1–137–53019–6—
ISBN 1–137–53019–7
1. Brokers. 2. Distributors (Commerce) I. Title.
HF5422.K717 2015
381′.2—dc23 2015007978
A catalogue record of the book is available from the British Library.
Design by Newgen Knowledge Works (P) Ltd., Chennai, India.
First edition: September 2015
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
To my family
CONTENTS
Introduction: Nobody Likes a Middleman, But Most of Us Are Middlemen
1 The Bridge: Spanning the Chasm
2 The Certifier: Applying the Seal of Approval
3 The Enforcer: Keeping Everyone Honest
4 The Risk Bearer: Reducing Uncertainty
5 The Concierge: Making Life Easier
6 The Insulator: Taking the Heat
Conclusion: The Middleman Economy
Acknowledgments
Notes
Index
INTRODUCTION
NOBODY LIKES A MIDDLEMAN,
BUT MOST OF US ARE
MIDDLEMEN
IN JANUARY 2014, AFTER PRESIDENT OBAMA DELIVERED his annual
State of the Union address to Congress, several Republican senators responded
with predictable disappointment. One detractor, Mike Lee, the junior senator
from Utah, focused his carefully prepared critique on what the government
should do to make the American Dream a reality for more people. To show that
the president had failed to keep his word about the problem of income
inequality, Lee said that for the past five years, the president “has promised an
economy for the middle class, but all he’s delivered is an economy for the
middlemen.”1
It wasn’t clear who these “middlemen” were—Lee didn’t explain2—but his
choice of words was shrewd. Though the divide between the country’s rich and
poor grows ever wider, many Americans continue to consider themselves part of
the middle class, which is why “the middle class” dominates rhetoric across the
political spectrum,3 but few think of themselves as middlemen.4 And why would
they identify as middlemen when the word carries so much ugly baggage? In
English, most uses of “middleman” are derogatory, suggesting either that
middlemen create no value or, at best, are a necessary evil.5
If you look more closely, though, you see that a huge number of people are in
middleman professions, even if they avoid the word. The US Bureau of Labor
Statistics tracks the obvious middlemen, those professionals who connect buyers
with sellers. These are the millions of people in jobs like sales rep, real estate
agent, financial advisor, headhunter, and insurance or mortgage broker. What’s
more, many other jobs in our complex economy have a less obvious middleman
component. Think of wedding planners, those stylish and ultra-organized women
and men who orchestrate the big event and help keep the bride from becoming
bridezilla; that doesn’t sound like a middleman job—until you consider all the
vendors (such as the florist, the baker, the wedding-gown maker) who must be
carefully selected and, equally important, held to the highest standard of their
professions. Lawyers, too, act as middlemen when they broker deals. Your
family doctor is a middleman when she refers you to a specialist or, more often,
prescribes one particular drug rather than another: if your health insurer is a
middleman between you and your doctor, your doctor is a middleman between
you and the drug maker. Even as a reporter, I often think of myself as a
middleman between the many people who have information to offer and my
readers, who count on me and my editors to deliver only information that is
interesting, accurate, timely, and useful to them.
The middleman element in these jobs isn’t always apparent to the person
doing the work, but it can make the difference between doing a decent job and
doing an excellent one. For jobs where the middleman element is the very
essence of the job, the effect of playing the role well is even more stark: buyers
and sellers have certain expectations of people in a middleman position, and not
meeting those expectations can sour business relationships. People rarely express
these expectations until things go wrong, but this book lays them out explicitly,
identifying the roles middlemen serve and what buyers and sellers expect from
each role.
Why Middlemen Are More Important Than Ever
In every age, a new technology seems to herald the end of the middleman: from
railroad networks to air travel, from the telegraph to the Internet to social media,
each technology brings with it the promise of direct trade. After all, the thinking
goes, who needs middlemen when buyers and sellers can communicate directly?
In the mid-1990s, no less a tech visionary than Bill Gates proclaimed that the
Internet would bring us “friction-free capitalism,” eliminating the sort of waste
that comes when people must drive all around town comparing prices of TVs,
for example. Gates expected that the Internet itself (or the “information
superhighway,” as we were calling it then) would become “the ultimate go-
between, the universal middleman,” such that “often the only humans involved
in a transaction will be the actual buyer and seller.”6
Why didn’t things play out that way? A major reason is the need for trust.
Because middlemen have more frequent interactions with buyers and sellers than
those people would if doing business without a middleman, they have more
opportunities to establish trust with both sides. In no place is this more visible
than on eBay—where, despite the opportunity for buyers and sellers to transact
directly, most of the trading flows through trusted middlemen, those sellers who
have built up the best reputations over thousands of transactions. We see in
eBay’s early days, for example, the rise of brick-and-mortar services like
AuctionDrop and iSoldIt; people trying to make a buck through eBay’s virtual
garage sale didn’t list their old Beatles albums and Pez dispensers on eBay
themselves but paid these intermediaries a commission of as much as 45 percent
to do it for them. Now that eBay has been around for years, thousands of people
make their living by buying specialty products and reselling them on the site, the
preeminent among them enjoying over $150,000 in sales per month. Even those
in the second tier, the platinum-level power sellers, make monthly sales of at
least $25,000. These hugely successful sellers, one of whom you’ll meet in this
book, clearly aren’t selling their own castoffs—they are wholesalers and retailers
of other people’s goods. Far from killing the middleman, eBay has generated a
thriving new breed.
It’s not just eBay. What’s happened on eBay is very similar to what’s
happened on LinkedIn. It’s all about middlemen. Even though hiring managers
and prospective employees can find and contact each other through the site, the
fact is that professional recruiters are the company’s highest-revenue customers,
paying more than do all of the job seekers on LinkedIn combined.7 Likewise,
instead of pushing aside real estate agents, sites like Trulia and Zillow (recently
merged into one company) partner with the agents by charging them to
advertise.8 Even though real estate agents no longer have a lock on local listings,
91 percent of houses in the United States are still sold through an agent.9
YouTube, through which anyone can post their own videos, build an audience,
and get a share of the resulting ad sales, is the sort of site that suggests we can
bypass cultural “gatekeepers”; indeed, it is a do-it-yourselfer’s dream, and it has
made micro-celebrities out of hundreds of niche performers (teen makeup
mavens, quirky home cooks, surprisingly compelling housecats) who, talented or
not, would have remained obscure without the Internet’s low distribution costs.
Yet, to reach new heights of fame and fortune, these newly minted celebrities
have been signing with professional middlemen—the talent agents who scout
YouTube for clients needing an advocate in negotiating TV deals and
endorsement contracts.10 Facebook, Twitter, and other social media make it easy
to strike up conversations with strangers, but when big stars use Facebook and
Twitter to engage with fans, it is typically through social media marketers,
publicists, and other middlemen with the expertise to do the job better and more
efficiently than the celebrities could on their own.11 Finally, consider the
workings of the so-called “peer-to-peer” or “sharing” economy—people selling
bits of unused labor or other form of spare capacity—which wouldn’t exist
through buyers and sellers acting alone. Everywhere you look in the sharing
economy, from Airbnb to TaskRabbit, Uber, and ZocDoc, right in the center is a
middleman business.
So much for the end of middlemen. Of course, there is no question that the
Internet has shaken up entire industries and caused the loss of many middleman
jobs: think of the stockbroker who merely executes your trade or the travel agent
who does nothing more than take your order. But on the whole, the web’s
growth has actually gone hand in hand with a rise in the middleman class, and
economic statistics show that middlemen now make up a larger part of the
economy than ever. Daniel Spulber, the Kellogg economist who’s studied the
matter more than anyone, calculated that back in 1999 middlemen contributed 25
percent to the gross domestic product (GDP) of the United States, already an
impressive figure.12 But by 2010, the last year for which enough data was
available, the portion had grown to 34 percent: more than a third of the US
economy was made up of the efforts of middlemen.13
What Do Middlemen Do, Exactly?
How is it possible that middlemen are still thriving? The simplest answer is that
they provide value to buyers and sellers, and providing value is the surest way to
staying relevant. Interestingly, and somewhat counterintuitively, the Internet has
created new opportunities for middlemen to provide value. One such provider is
Mike Maples Jr. the founding partner of the venture capital firm Floodgate,
whose work we will look at later in this book. “One way to look at middlemen,”
Maples says, “is that because of the advent of the Internet, the world has become
more ‘inter-networked.’”14 More people, companies, and products are connected
than ever. In this highly connected world, “things and entities that accelerate
connections are going to be more valuable,” Maples believes.15 This idea is self-
evident when you think of core Internet technologies and social networking tools
that speed up our personal connections; it is also true of middleman businesses
Maples has backed, such as Chegg, Lyft, and TaskRabbit, that speed up
connections between buyers and sellers. Perhaps more surprisingly, it is also true
of many human middlemen, including venture capitalists like Maples himself: