Once upon a time – January 2000, to be exact – I wrote an article for the Harvard Business Review called Hypermediation: Commerce as Clickstream. In the early days of the commercial internet, it was generally assumed that the web was a force for disintermediation, that it would allow producers and consumers to connect directly, killing off middlemen along the way. I suggested that this view had it wrong: that while some traditional intermediaries were being cut out of the picture, myriad new ones were arising in their place:
Far from experiencing disintermediation, business is undergoing precisely the opposite phenomenon – what I’ll call hypermediation. Transactions over the web, even very small ones, routinely involve all sorts of intermediaries, not just the familiar wholesalers and retailers, but content providers, affiliate sites, search engines, portals, Internet service providers, software makers, and many other entities that haven’t even been named yet. And it’s these middlemen that are positioned to capture most of the profits.
The hypermediation phenomenon is continuing in the Web 2.0 world of online media. We’re seeing the emergence of another new set of diverse intermediaries focused on content rather than commerce: blog subscription services like Bloglines, headline aggregators like Memeorandum, blog search engines like Technorati, ping servers like Weblogs.com, community platforms like MySpace and TagWorld, tag aggregators like tRuTag, podcast distributors like iTunes, and of course blogs of blogs like Boing Boing. (Many of the most popular blogs in fact play more of a content-mediation role than a content-generation one.) Despite the again common feeling that the web is a force for disintermediation in media, connecting content providers and consumers directly, the reality is that the internet continues to be a rich platform for intermediation strategies, and it’s the intermediaries who stand to skim up most of the profits to be made from Web 2.0.
As I wrote in 2000, the economic power of online intermediation flows from two very simple characteristics of the internet:
First is the sheer volume of activity. People make billions of clicks on the web every day, and because each click represents a personal choice, each also entails the delivery of value and thus an opportunity to make money. A penny isn’t a lot of money in itself, but when you start gathering millions or billions of them, you’ve got a business.
The second characteristic is efficiency. Most physical businesses wouldn’t be able to make money on penny transactions; it would cost them more than a penny to collect a penny. But the incremental cost of an on-line transaction is basically zero. It doesn’t cost anything to execute a line or two of code once the code’s been written. The pennies taken in by many intermediaries are almost pure profit.
It’s no coincidence that the most profitable internet businesses – eBay, Google, Yahoo – play intermediary roles. They’ve realized that, when it comes to making money on the web, what matters is not controlling the ultimate exchange (of products or content or whatever) but controlling the clicks along the way. That’s become even more true as advertising clickthroughs have become the main engine of online profits. Who controls the most clicks wins.