Consumers, Wake Up! Middlemen Are Ripping You Off

For a year now at TechCentralStation.com, we have been warning of a menace we call "the revenge of the middleman."

The Internet gives consumers the ability to buy directly from producers. That's one of the great gifts of technology. Go straight to www.palm.com for your Palm Vx. Or go to a retailer, online or otherwise. Decide on the basis of price, convenience, service. The choice is yours.

All should have the opportunity to bypass agents, dealers and retailers – if that's our wish. These intermediaries can certainly add value to a purchase (by giving us good advice, for example), but if we want to go it alone we shouldn't find government standing at the side of middleman gatekeepers, ordering consumers to pay a toll in higher prices.

That, however, is exactly what is happening. Middlemen, organized in groups with lobbying skill, are getting laws passed that stop consumers from exercising a right that's nearly as important as free speech – the right to buy from whom you choose, using new technology that saves money and time.

Just recently, the Progressive Policy Institute—a Washington think tank affiliated with the Democratic Leadership Council, an organization started by centrist Democrats—issued a comprehensive policy paper called "The Revenge of the Disintermediated," laying out some of the most outrageous examples of this phenomenon.

If you're baffled by the term, Robert D. Atkinson, author of the paper, can help: "Disintermediation can be defined as the reduction or elimination of the role of retailers, distributors, brokers or other middlemen in transactions between the producer and the consumer."

He goes on with an example: "Consumers could buy books online directly from publishers who would ship the books directly from their printing plants. But even publishers and printers might be disintermediated if authors were to sell 'e-books' directly to the consumer, as mystery writer Stephen King has attempted to do."

Imagine publishers going to their state legislators to bar King from selling his own works online. As crazy as it sounds, that is precisely what other industries are doing. The cost to the consumer, says Atkinson, is $15 billion a year.

We alerted you first to the outrageous example of laws (now in 49 states) that prevent consumers from buying automobiles directly from manufacturers over the Internet. Ford Motor Co. opened a website in Texas that allowed customers to bid on used cars returned to the manufacturer by drivers whose leases were up. The car would be transported from a Ford warehouse to the dealer of the customer's choice, where it could be test-driven and purchased, with Ford paying the dealer a commission. Good idea, all-around, right?

Unfortunately, the arrangement violated Texas law. Acting on a complaint from dealers, a state official ruled that Ford was "acting in the capacity of a dealer by selling and offering to sell motor vehicles directly to the retail public via the Internet." That's illegal in Texas and, now, in nearly every other state. Ford quickly closed the site and took the case to court. But in November of last year, an administrative law judge ordered a $1.7 million fine for the company.

Meanwhile, Arizona, a state that in many other respects has a proud libertarian tradition, recently passed an absurd law that prohibits car manufacturers from selling even insurance, parts and auto-financing over the Internet. This law, too, is being challenged in court, but the damage is being done right now.

The Progressive Policy Institute paper provides more detail on the auto outrage. It also lays out examples in such areas as music, travel, contact lenses and medicine.

New technology, writes Atkinson, allows X-rays and other types of medical imaging to be easily transmitted digitally. So the images of a broken leg in Kansas City can be sent online to a radiology specialist in New York. But "practitioners in some states have pressured legislatures to make it illegal for radiologists not licensed in the state where the image is taken to read the image and make the diagnosis. In fact, the medical profession in many states is attempting to pass laws restricting the practice of all forms of telemedicine."

For wine lovers, the Internet seems the perfect technology. Scores of small, remote American wineries, which in the past could not afford to market their specialties, can develop websites with all sorts of descriptive material and simple ordering forms. But, again, the middlemen won't let them.

Recently, the Wine Wholesalers Association successfully lobbied Congress to pass a law that lets them sue out-of-state wineries that ship directly to consumers in states that have prohibited sales of wine via the Internet. Atkinson says that 30 states now have such prohibitions, and in six of them Internet sales of wine are a felony. Why? One reason is that the disintermediaries in the business of selling alcohol are especially powerful politically.

In fact, the attack on consumer choice by the wholesalers isn't limited to just the Internet. Recently, one of the largest liquor distributorships in the Midwest dispatched armies of lobbyists to the state capitol in Illinois to pass "wholesaler protection" legislation that would make it next to impossible for suppliers to fire their wholesalers for any reason. After spending more than $1 million on what was panned in the media as the worst sort of special interest legislation, the monopoly wholesalers won – but only temporarily. The bill, which was signed into law by Gov. George Ryan in 1999, led to higher prices and created havoc on the marketplace. Consumers and the press were outraged, and a court challenge led to an injunction, still in effect, against its implementation.

It's an old story. "The resistance which comes from interests threatened by an innovation in the productive process is not likely to die out as long as the capitalist order persists," wrote the great economist Joseph Schumpeter, quoted by Atkinson. And, as Business Week recently pointed out, in the 1920s, the Horse Association of America "campaigned to limit the use of trucks and automobile parking on public roads." The difference is that Internet technology threatens nearly every middleman who does not truly add value, not just blacksmiths and buggy-whip makers.

But the real question is not why threatened middlemen squeal, but why politicians heed them. Sure, they have clout, usually in the form of campaign contributions. But don't consumers have even more clout? They would if they were organized, or if they knew what's happening to limit their Internet freedoms. But they aren't organized, and they don't know.

While the PPI paper is sound, the recommendations it makes to solve the problem are questionable. Their focus – as, I guess, you might expect from an organization of Democrats – is on government action.

PPI wants, first of all, for the Bush administration to create "the position of e-commerce ombudsman to serve as an advocate for e-commerce competitors." But the last thing e-commerce needs is a new official who'll build a techno-bureaucracy. Consumer action, not federal action, is what's needed.

PPI also wants to get the federal authorities to "increase efforts to prevent retailers" from colluding to retaliate against companies that attempt to sell directly to consumers. This is a big problem – Levi Strauss, for example, shut down its e-commerce site in 1999, "mainly because of a backlash from retailers," writes Atkinson. Certainly, antitrust violations caused by collusion should be punished, but, otherwise, this is another area where government should not play a role. Producers (including the auto manufacturers) are going to have to work out their own compromises with dealer networks.

The think tank also wants to develop "." No, again! Government licensing of hairdressers, optometrists, plumbers and practically everything else is simply a method for perpetuating cartels of professionals and wannabe professionals – to keep competitors out. Yes, such licensing rules at the state level create barriers to trade on the Internet, but the answer is not federal licensing. The answer is federal laws that prohibit the use of state licensing to restrict interstate commerce on the Internet – as restrictions like the one against radiologists clearly do.

I agree, however, with PPI's recommendation that the Justice Department and Federal Trade Commission "take a more tolerant position if producers act collectively to sell goods or services online, as long as they are not colluding." Absolutely. And I would amend that recommendation to say "sell or buy." Alliances of all sorts are one of the great benefits the New Economy has spawned. Keep them coming.

And the think tank's call for Congress to consider "national licensing requirements for industries and companies that now need to be licensed by the state" is fine, too – but only as a spotlight on state regulations that ought to be removed. Federal licensing would merely perpetuate many of the cartels of professionals and wannabe professionals that want competitors kept out. The goal ought to be to prohibit the use of state licensing to restrict interstate commerce – as restrictions like the one against radiologists clearly do.

The glare of publicity might energize consumers to organize against the barriers to the Internet disintermediated middlemen try to erect.

A new study by three economists from the National Bureau of Economic Research looked at 2 million referrals from the website Autobytel.com to auto dealers and found that "buyers who use" such a service "save about 2 percent on their average new car purchase." Not bad: saving $600 on a $30,000 car. But imagine the savings if the Internet could be home, not merely to referral services, but to manufacturers selling direct. Two percent would look puny.

Consumers: get angry and get together.