Middleman Beware: The Internet is Making You Obsolete

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I’m not an expert in business trends by any means, but it really seems like the disintermediation opportunities the Internet provides is beginning to replace, well… almost everything.

Think about this for a moment.

Where do you check the morning news? Where do you get your music? Manage your money? Place phone calls? Do your research? Do your taxes?

Perhaps a better way to pose this question is to think about the old school, stalwart companies that held market share dominance for several decades/centuries, and now their middleman status is beginning to be sidestepped. In some cases, it’s being made obsolete altogether.

Internet Businesses Excel at “Cutting Out the Middleman”

Music. I marvel at how long the music industry lured $5 to $20 per CD/cassette out of people like me for so long, but were quickly brought to their knees by online properties like Napster, iTunes and YouTube. I’ve never agreed with downloading pirated music, but I haven’t bought a music CD in over 10 years thanks to free music sites like Slacker.com, Pandora.com, or even YouTube.com. Plus, basic radio is still free (but laced with crappy ads)!
Traditional Landlines. Cell phones were probably the biggest hit to the old school Baby Bells (even Verizon admits landlines are an oil well about to go dry), but even relative newcomers in the VoIP space like Vonage are beginning to feel the pinch by extreme cost cutting servicers like Magic Jack. I’ll be saving over 81% in the first year and 93% each additional year from this technology upgrade alone.
Cable TV. How many articles have you read about consumers disconnecting their cable television and turning to the web to watch favorite TV shows online? I’ve probably read 100+ in 2009 alone. With so many people dropping their cable service, it’s not surprising that cable companies are beginning to purchase high traffic, highly frequented online video properties (e.g. Comcast acquiring majority stake in Hulu.com) in order to retain/grow their subscriber count, as well as the ability to control the distribution channels of video content.
Peer to Peer Lending. Banking institutions cornered the market long ago on the generous rate of return the lending market provides. P2P Lenders like Lending Club and Prosper combine borrowers with investors who seek greater returns (around 10% on average) than those provided by savings accounts and CDs with less risk than investing in the stock market (depending on the quality of borrower or course). By bypassing the Too Big To Fail banks entirely, investors boost their ROI while simultaneously lowering the cost of investment capital needed by small businesses and entrepreneurs, or savvy consumers who demand a more competitive interest rate to repay debt.
Real Estate & Realtors. Realtors had a pretty sweet business model during the real estate bubble where they would show a few homes, offer some advice, and cater to the beck and call of potential buyers. They have a fairly difficult job but I’m not sold on the idea they deserve a six percent commission (shared 3% buyer’s agent & 3% seller’s agent) just because they facilitate a real estate transaction. With sites like Craigslist.org are making housing swaps more common, it allows home owners to keep thousands — maybe tens of thousands — in their pocket by allowing like minded home owners come together in a much larger forum and close their transaction without the middlemen.

Obviously, certain businesses have their jugular exposed more than others. For example, I really doubt Exxon Mobil is going anywhere in this world considering that we are still sucking on the fossil fuel teet and they have tremendous capital reserves. However, old school businesses like Kodak and printable pictures didn’t stand a chance once online photo sharing and storage went mainstream.

Perhaps the irony I find in the Internet’s disintermediation potential is that over a decade ago, I remember listening to the constant chatter that the Internet would never get past nipping at the heels of slow paced, or “evolution resistant” businesses that could never be replaced. Now that we’ve flashed forward 10 years, I’d say in many cases, the Internet went from nipping at their heels to taking a gigantic bite out of their ass(ets).

What about you?

What do you do today at a much lower cost, or far more efficiently, than you used to do 10 to 15 years ago? Do you see any other industries that are a prime target to be excised by a creative entrepreneur with a big idea and even bigger ambition?

(And yes, I know I just slammed myself for referring to a “pre-Internet” world.)

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Posted by Matt SF @ 14 December 2009 14 comments

Tags : Banking , Entrepreneurs , Peer to Peer Lending , Peer-to-Peer Investing , Real Estate , Saving Money , Small Business

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Dec 14, 2009
6:01 pm

#1 Prosper Lender :

Would you please document the assertion that people are averaging a 10% return on Prosper? You can’t – as it is simply not true. Most lenders on Prosper are lucky to break even. The current p2p finance model is flawed and not a sustainable mechanism for disintermediation at this point. We’re still waiting for a company to figure out this business.

[Reply]

Matt SF Reply:
December 14th, 2009 at 7:06 pm

True, I can’t document Prosper’s average net return. I’m a Lending Club investor and do not stay up to date Prosper’s investment returns.

I was referring to the data provided by Lending Club on their homepage, which states their net annualized return is 9.68% (forgive me if I rounded up) as of 12/14/2009.

I do not think the current P2P finance model is flawed. If you pick low risk candidates, you should do well. However, I will fully admit that I’m fairly new to the P2P investing market and my progress up the proverbial learning curve is amateur at best.

If I had the option to improve the business model, I would begin by verifying every applicant who initially passed the minimal credit score and debt to income prerequisites. I would also give the borrower an incentive to do this, and knock off something like 0.25% off his/her interest rate. It’s a pain to do the documentation, so make it worth their while.

Thanks for commenting.

[Reply]

Tiffany Fox, Prosper Comm Director Reply:
December 16th, 2009 at 4:30 pm

@MattSF Thanks so much for your post and perspective on the peer-to-peer lending industry. By way of background, as stated on Prosper’s home page, estimated portfolio plan returns are currently tracking at 8% to 14%… these estimates weren’t calculated in a vacuum, they were calculated based on the actual performance of over 28,000 seasoned Prosper loans.

Also, at the point of bidding, people can see the estimated performance / loss rate for the particular loan they’re bidding at… and lenders are prohibited from bidding at a rate below the bid floor (bid floor is calculated as estimated loss rate + the current 3-year CD rate).

Prosper’s bid floor, robust historical performance data, 640 minimum credit score requirement and ability to diversify by bidding as little as $25 per loan listing, provides a completely different experience compared to that of circa 2006 / 2007 Prosper lenders like the one above who seems to imply he/she broke even.

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Prosper Lender Reply:
December 22nd, 2009 at 1:04 am

Considering “new” Prosper has only existed for a few months, it feels a bit desperate for Prosper’s Director of Communications to draw fundamental distinctions in performance when compared to the original and “time-tested” 2006 version of Prosper. Anyone interested can view the raw data for how Prosper loans have performed at the Ericscc.com site.

Then again, the more important and more immediate concern is Prosper’s viability as a going concern – and the fundamental change in the platform where Prosper owns the notes and lenders are merely unsecured creditors of Prosper’s debt (see Prosper’s S-1 filing with the SEC).

[Reply]

Prosper Lender Reply:
December 22nd, 2009 at 1:13 am

Tiffany –

On one hand you state that “new Prosper” is entirely different from “2006 Prosper,” yet you state that the assumptions in the portfolio plan did not originate in a vacuum, but are based on the pool of 28,000 seasoned loans. Well, those seasoned loans include loans dating back to 2006. So, are you suggesting that the 8-14% range is conservative – considering these new loans are of better quality?

Can you shed some light on the percentage of lenders (in the pool of 28,000 seasoned loans) who are making anywhere near 8% ROI (the low end of your estimate)?

[Reply]

Dec 14, 2009
11:57 pm

#2 Tracy :

I don’t buy newspapers. I read everything online. It saves me the trouble of recycling the paper. It keeps them from piling up in my house and I have free access to papers from all over the world. I also do much of my buying online, like clothes and used items for my house from Craigslist.

[Reply]

Matt SF Reply:
December 15th, 2009 at 11:34 am

I completely agree on the newspaper front. I really don’t see the value of a newspaper when you have to spend so much energy (pollution) to make them, when you can get the exact same content on the web.

I can see why they’re useful if you have a non-house trained puppy, but other than that, it’s just a pain trying to get rid of them after you spend an hour reading it. They used to be valuable if you were traveling, but now that you can get internet access on a plane, I really don’t see how they can survive when Gen X and Gen Y rely on free web content versus an expensive piece of paper that stains your fingers.

I’m sure they will continue to be popular in some markets, but on a whole, I don’t see them surviving and the web will continue to cannibalize the business.

[Reply]

Dec 15, 2009
12:32 pm

#3 kenyantykoon :

the thing that comes to mind first is investing. the internet has opened the whole world to investors and speculators alike in that in formation about finance markets is literally at your fingertips and the best thing is that you dont have to travel there. you can use somewhat efficient banking system. it is a great time to be alive and i dont want this boom to pass me by
.-= kenyantykoon´s last blog ..THE DIFFERENCE BETWEEN TAX AVOIDANCE AND TAX EVASION =-.

[Reply]

Matt SF Reply:
December 16th, 2009 at 5:19 pm

Absolutely! I can remember paying a major commissions just to buy a mutual fund back in 1998 through an old world broker.

Now, you might have to pay $10 after getting 100 free trades.

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Dec 16, 2009
1:53 pm

#4 Kevin@OutOfYourRut :

“What do you do today at a much lower cost, or far more efficiently, than you used to do 10 to 15 years ago?”

All of the above!

I think your point about Exxon Mobil is huge. We’re moving toward an economic model where we’ll have industries in physical necessities, and those built around services which can easily be reshuffled and replaced.

It’s all faster, easier and usually cheaper doing business, but the downside is that it’s definately become a much more difficult world in which to find steady work! The bricks and smokestacks businesses needed a lot of people for a lot of jobs, the internet stuff is something entirely different.
.-= Kevin@OutOfYourRut´s last blog ..Face the Future Informed and Without Fear =-.

[Reply]

Dec 16, 2009
5:31 pm

#5 Matt SF :

Right, commodities will always be a necessity but the nature in which those commodities are consumed will constantly evolve. Which is why it’s important to remain versatile if you don’t have the huge capital reserves or cash flow potential of companies like a Exxon Mobil, General Electric and Cisco Systems.

Megacap conglomerates have the option of buying their competition (so called growth by acquisition) or cannibalizing their own weaker businesses with newer technology, so it really doesn’t affect their long term stability.

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