Is e-commerce a revolution?

Fall 1999 in E*Journal

Will the World Wide Web revolutionize commerce between consumers and producers, whether buying and selling of news, software, goods or financial services? The Web certainly has made it cheaper to do many things. Web sites such as the Drudge Report or would be too expensive for lone individuals if the creator were sending a newsletter in the mail. Collaboration of many programmers on software without the quick communication of the Internet would be very expensive. A week ago, my wife and I spent all Saturday morning searching local stores for a couple of items for our new house. I was able to find them on the Web in a matter of minutes. It now is possible for individuals to place orders to buy and sell stocks at a speed that only could be imagined a few years ago.

Do these developments herald the end of intermediation in the economy, as some claim? An “intermediary” is a business that exists between the producer and consumer.

Despite longstanding antagonism toward intermediaries, intermediaries add value or they would not exist. One common value added is aggregation, whether it is aggregation of information, of goods among which to choose or of funds. Another common value added is information about quality. Newspapers aggregate information about events in a day and write what they believe to be correct. Newspapers both aggregate information and certify quality. Software firms place their name behind the quality of a product; buggy software, such as dBase IV when released by Ashton-Tate, can sink a leading product and the firm. While it often is cheaper and easier to buy goods over the Web, such purchases are not fundamentally different than buying goods by mail order. The retailer provides information about items for sale and service if the good does not perform as advertised. It is possible to sit at a terminal and attempt to trade as if one were a broker-dealer in stocks, but the trader still must have an account with a member of NASDAQ for example. The member firm certifies that the trader has the funds to complete the trade and stands ready to make good any shortfalls.

There is no reason to think that the services performed by intermediaries will disappear because of the Web. Consider the value of news and information intermediaries. The case of is a good illustration. In August 1999, this Web site apparently posted documents from disgruntled Ford employees. How can I be reasonably sure that the documents were real and not made up? Actually, the best evidence is the pleading by Ford Motor Company in a suit that said so. I know about the suit because news sources that I trust, such as Ziff-Davis Net, which wrote about it. The value of such intermediaries has increased because the sheer quantity of words available on the Net is staggering. One way of thinking about the value of Yahoo! is its filtering and sorting of Web sites. The Web has increased the value of firms that aggregate information and certify the information's quality rather than decreasing that value.

Even if the value of some forms of intermediation increases because of the Web, the value of other forms does decrease. The size and price of an issue of Computer Shopper has fallen since the introduction of the Web, an unsurprising development for a magazine that is primarily a catalog of computers and parts for sale from various vendors. The vendors now provide the information on the Web, where they can update it more quickly.

“Open source” software, such as Linux and the Apache web server, has affected and will affect the value of software produced by software companies. One important reason for the success of such software is the lower cost of collaboration among many programmers on the Internet. Open source software, despite the hyperbole, is not entirely new and will affect certain types of software programs and not others. Collaborative development of operating systems by informed users has been ongoing since the early days of the Internet. Indeed, the basic programs running on the Internet were created by collaborative development. The spread of the Internet beyond universities and research labs makes collaboration by many more people feasible. Still, consumer programs such as word processors will continue to be provided by software companies. Open source software can be important when certification of quality by an external agent with a reputation on the line is less important than the ability to understand and correct the program.

The services performed by many firms and the delivery mechanisms will change. News organizations and magazines are having to transform themselves. I think that it is no accident that the print version of Byte magazine was discontinued after its sale in 1998, and it has emerged as an online magazine. Byte is a publication that covers small computers, whatever the operating system on them. In the early 1980s, it was a relatively technical magazine: I had to learn some electrical engineering terms before I could understand the material. Now it is online with a continued emphasis on computers running different operating systems.

In financial markets, the Web will affect the value of various functions performed by firms providing financial services. Individuals have little incentive to trade stocks directly with other individuals on or off the Web. Intermediaries will continue to be important, performing the valuable functions of providing access to liquid markets, often being willing to buy and sell, certifying that a party has the wherewithal to execute the transaction, and clearing the trade.

Firms in financial markets have adapted to new technology over the centuries and will continue to do so. Financial markets provide an inexpensive way for traders to deal with each other because there are intermediaries that guarantee trades and clear them. The usefulness of a reputation for making good on a trade will not decline. What is more likely to decline is the bundling of research on stocks and trading.

Indeed, new intermediaries are forming. Ebay is an intermediary that provides a Web site for people who want to buy and sell goods by auction. Ebay provides information about traders: it makes available comments about other traders and their delivery on contracts in the past. It could certify traders, but this would require more screening of sellers and bidders than ebay does at present or is likely to be sensible.

Does this mean that the Web will foster an increase in intermediation? No. If the value of a service is higher on the Web than elsewhere, there will be more of it as the Web increases in importance for commerce. If the value of a service is lower on the Web than elsewhere, there will be less of it. The Web will affect many aspects of commerce, but the changes will reflect the increases and decreases in value of functions performed by firms.