Concerning Technology and the Middleman, A Few Thoughts

Middleman

For a variety of reasons, mostly having to do with speaking in front of large and small audiences, I’m researching the whole notion of “agent value” as technology turns our world upside down every other day. I’ve written about how technology is just a tool back in 2009 and maybe I’m just conceited but everything I’ve written there still seems to hold true.

But in my research, I came across this op/ed by Matt Fuller at AGBeat titled, “Middlemen cut out by internet in most industry, but not real estate” in which he compares real estate brokerage to book retail/publishing and to travel agents, and concludes that real estate brokers aren’t cut out because homes are not commodities and are permanent:

Homes differ from both other consumer goods and financial instruments because they have an innately physical and fixed presence, and they exist in a context of other homes and people. Regardless of what book you place on either side of War and Peace, the book in the middle will always be War and Peace. But a home with two great neighbors is more valuable than a home with two horrible neighbors. Homes are also not a disposable consumer good. No one ever says, I’m finished with that home lets put it on the shelf and go buy the sequel. And while people might like to brag or worry about how their investment portfolio is doing, no one ever invites you to come over and enjoy the physical presence of their stocks or bonds.

I find this argument puzzling for a variety of reasons, but believe there’s something here to be investigated, which after I write this post may end up in a presentation, since I don’t know what I think until I’ve read what I’ve written.

Deconstructing Fuller

I don’t know Matt Fuller (at least, I don’t think so…) but he seems like a really nice guy and a solid pro who knows his stuff. But his argument for why real estate middlemen are not (and cannot be) cut out by the Internet is weird.

Bookstores, he says, were destroyed by Amazon.com who did not have the cost of having to stock millions of books on retail shelves, unlike regular bookstores. Plus, a particular copy of a book is the same (more or less) as any other copy of that same book: they’re commodity goods, not unique items. Chris Anderson explores explores this phenomenon in some depth in The Long Tail, so Matt’s not incorrect about that.

Travel, Matt thinks, was destroyed by the Internet because again, an airline seat is an airline seat is an airline seat. They’re mostly commodities, where price is the most important factor, and so the travel agent lost his job when the Internet allowed travelers to book their own flights and hotel stays.

Real estate, however, is not commoditized since each home is unique in some way even if in a cookie-cutter subdivision. And, real estate is permanent in a way that an airline seat is not:

[T]here is no economy of scale to be gained with a really big warehouse of homes, because homes don’t exist in warehouses, they exist in neighborhoods. Furthermore, while two homes may be very similar, no two homes are identical. Real estate, by its very nature, cannot be commodified.

So that’s why real estate agents haven’t been cut out by the Internet.

Well, he’s correct as far as noting that real estate cannot be commoditized, but… he misses the point entirely. Bookstores and travel agencies didn’t get disintermediated because the book and the airline ticket are commodities; they got disintermediated because the service they were providing was a commodity. So it doesn’t much matter that each home is unique, if the service provided by a real estate agent can be commoditized

Even today, in the post-Amazon world, there are boutique bookstores everywhere that thrive, because they offer some unique set of services that you just can’t get at a big box store or off the Internet. Check out St. Marks Book Shop in NYC, for example.

And on the flipside, does anyone really think there’s a huge difference between Sotheby’s and Christie’s auction houses, even though they deal only in the most unique, one-of-a-kind products like art? I never saw a difference. And Ebay’s crushed a whole lot of smaller auctioneers despite the fact that they don’t deal in off the shelf consumer products.

So what’s going on here?

Technology Makes Things More Efficient

Well, for one thing, Matt is simply wrong when he says that the Internet doesn’t cut out the middleman in real estate. Of course it does, if you think of the middleman not as a guy or gal who makes money from the sale, but rather as a collection of services.

Imagine a team back in 1993 with extreme specialization. One agent only found houses for buyers. Another only drove them around. Yet another only compiled market data from MLS books and weekly sales reports. One agent did nothing but negotiate the deal. A transaction coordinator did nothing but manage the process.

The Internet comes along. That agent whose sole job is just to find houses for buyers? Cut out. The one who only compiled sold data information? Cut out. Even the transaction coordinator may be on her way to being laid off, if the current generation of transaction management platforms takes off.

stonewheel

Displacing labor since 15,000 BC!

But that’s not what happened. What really happened is that the same number of people ended up being able to do far more work because of technology. It may not feel like disintermediation because people haven’t lost their jobs, but the underlying mechanism is the same. And I know it’s disintermediation since brokers I’ve spoken to have told me that they didn’t have to hire two more marketing managers, because of some newfangled cool piece of technology they went out and bought.

Amazon didn’t kill off a whole lot of bookstores solely because of warehousing advantages; it killed them off because the Internet made it possible for four people in Jeff Bezos’s garage to fulfill the functions that thousands of bookstore clerks were performing. Travelocity didn’t put the smack down on travel agents because airline seats are commodities; it did so because technology made it possible for a few programmers to deliver a similar service (a “substitution” good) that thousands of travel agents were doing.

The Internet, and more broadly, technology won’t save real estate agents because what they’re selling is so damn unique. In fact, technology makes it far easier for smaller brokerages and individual agents to deliver services that previously required giant brokerage firms or massive banks of computers at the MLS.

Because technology, like any tool, simply makes things more efficient. Technology displaces labor. Lower value activities can be automated, or made easier to do — what might have taken ten days can now be done in ten minutes because of technology. (Like writing this blogpost. I wrote my first long article on the first graphical Internet in 1996 using vi to churn out handcrafted HTML code; it took a week. This blogpost will have taken no more than half an hour or so.)

As Technology Grows Efficiency, Survivors Must Climb the Value Chain

The deal is that as technology continues its unrelenting march, human beings have to keep climbing the value chain. Automation in factories destroyed a whole lot of brain-dead assembly line manufacturing jobs; but that same automation made designers and CNC machine programmers far more valuable.

The same holds true in real estate. Doing low-value, repeatable, commoditized activities isn’t going to get you far. “I will search Zillow for you!” isn’t a strong selling point. But providing the high-value, difficult to automate services (whatever you think that is) remains valuable still. As yet, there isn’t a software system that can automate negotiations, for example. (Although one now exists to enable buyers and sellers to negotiate directly, without middlemen. Whether that’s a good or a bad idea is up to you.)

Zillow, Trulia, Realtor.com, et. al. often come in for a beating for a whole lot of stated reasons. But the plain fact is that technology displaces labor, and those companies provide technology that pretty much makes the “labor” of finding a house for a buyer not worth very much. (“But they’re so inaccurate!” — Yeah, but that’s an industry-created problem that could be solved tomorrow if people weren’t so worried about their labor getting displaced.) What I look at instead is that the same technology deployed by a brokerage, or a MLS, has the exact same effect: displacing labor.

One way to think about this: NAR has roughly 1 million members. NAR reports that about 5 million homes were sold in 2012. That’s five sales for each member. Given the technology available today, if NAR lost 80% of its members, would the remaining 20% find it impossible to do 25 sales a year? Yeah, I didn’t think so either.

Cutting Out the Middleman Leads To…

In the final analysis, I guess I think that technology inevitably cuts out the middleman, since technology inherently displaces labor. But that leads not to the extinction of an industry, but to a whole new breed of middlemen rising up, who have figured out how to climb higher up the value chain.

And those new middlemen leverage the efficiency of technology to gather up more and more marketshare for the high-value services and products, taking it away from their low-value cousins providing commoditized services. In the case of real estate, some of those new middlemen won’t be real estate licensees at all; instead, they will be web programmers and graphic designers. But others will be real estate brokers and agents who have adapted, figured out the low-value stuff they can outsource to machines or to the first group of new middlemen, and focused on the high-value stuff where the money really is.

It’s not revolutionary change, like so many tech vendors like to claim about their new widget. It’s evolutionary change.

But people often forget one thing about evolution: Nature is red in tooth and claw. It isn’t a peaceful process, nor is it mean to be. So choose: predator or prey. And may that choice guide your way.

-rsh