3.1 Microsoft, the New Medici Merchants

Although disintermediation is often discussed as a modern phenomenon, using technology to eliminate intermediaries and bypass middlemen has been happening for a very long time. During the Middle Ages, rising levels of population fuelled agricultural growth, which was a prerequisite for a commercial revolution. For centuries, the amount of work required to generate sufficient quantities of food remained in a tight balance with the available labour. Technology slowly changed the amount of food that could be produced by a single agricultural worker. It would be difficult to tie the shift in agricultural productivity to any one technology during the medieval period. However, successive introductions of technology increased productivity gains until there was a shift in the balance between work hours and hours of rest. When food surpluses increased, effort was directed towards governmental, religious and cultural pursuits. Merchants and craftsmen discovered that there was a market for their goods beyond the aristocracy. As productivity increased, the workforce retooled and moved towards previously undefined opportunities.

In the 1990s, technology-based workers, who would later form the bedrock of the emerging knowledge society, began to consider the balance between work and recreation. As technology increases productivity – or at least gives the individual the ability to control when and how productive output is accomplished – knowledge workers (similar to their medieval counterparts) will find themselves with additional leisure time and the need to revise their skills. Unlike labourers in the Middle Ages, contemporary workers soon realized that more often than not, it was the skills relating to leisure time that needed improvement. Organizations such as CSC Index encouraged both employees and clients to develop balance contracts in which participants in a project would set quantitative and qualitative values to work and leisure. These balance contracts were set up at the onset of a project to identify the personal needs of each team member and the ideal environment in which he or she would be most productive. Ideally, the balance contract is a way for each team member to make other team members aware of the personal and business demands made on the individual’s time to enable others to incorporate some sense of sameness between each team member. By looking for similar needs, goals, problems and commitments, the entire team could identify opportunities to collaborate on a solution to make the entire team more productive. The lesson learned was that knowledge workers have similar needs and requirements to maintain a high energy environment and these similarities create opportunities to fulfil an individual’s need and raise the overall team productivity. Increasing the team’s productivity can be attributed to three factors: an economy of schedule, an economy of task, and a higher working morale. Scheduling economies are the product of an increased awareness of each team member’s commitment and through this heightened awareness team members often broker smaller meetings, often in coffee shops and other non-work areas, and teams seek out alternative forms of communication to avoid too many meetings. Economies of tasks in many cases are accomplished when team members realize that individual activities can be divided between team members. With a greater awareness of each individual’s skill, a team soon realizes that many tasks can frequently be accomplished more efficiently by breaking up tasks into smaller, discrete activities, which an individual can accomplish unfettered by the physical constraints of the workplace or work time. A higher working morale is a by-product of each individual’s greater awareness of personal demands and the formation of an esprit de corps. Put simply, a team of knowledge workers striving for a solution is more effective than an individual trying to solve multiple problems.

However, as knowledge workers move into the new millennium, there is a new examination of the nature of work itself. As individual knowledge workers reach new levels of economic security, there is a shift in thinking from having ‘a job that one may need’ in order to finance a lifestyle, to finding a job that ‘one wants to have’ to have more time to enjoy life. The important lesson is that today’s knowledge worker is re-evaluating the role of work and leisure, discovering that an individual must strike a balance (with or without a balance contract) between the demands of work time and the needs of personal time. This reassessment is often attributed to reaching a desired level of financial security. One thing that becomes apparent is the need for a continual process of reskilling and re-education while pursuing a balance between work and leisure activities. The knowledge worker now realizes that knowledge needs to be continually refreshed, and that it comes from many sources, not just traditional higher education institutions. Possessing a greater knowledge of technology, process and key business functions not only adds to the individual’s long-term wealth but also to increasing corporate profitability.

Our modern interpretation of business throughout history is that workers laboured merely to increase the profits of the enterprise. Businesses in previous centuries have been regarded as primitive, unsophisticated or even idyllic and the need to expand globally, increase profit margins, streamline distribution channels and negotiate labour relations are all complexities of modern business. The same basic problems of expansion, profitability, distribution and labour, which also existed in pre-modern times, without the luxury of mass communications technologies, are often overlooked. Imagine running a large multinational organization shipping thousands of tons of products to many countries, each transacting business in a local currency and negotiating trade with a plethora of indigenous peoples, without phones, computers or any of the technologies of the last century. The fundamental problems are there, but with a higher degree of complexity and uncertainty due to a lack of a communications infrastructure. It would be naive to say that business organizations of previous centuries operated with the same drive for short-term or next quarter profits in which later twentieth-century businesses have become accustomed. However, to claim that the idea of making a profit was alien to the feudal age is probably exaggerated. The instinct for acquiring material goods as an outward sign of prosperity is and has been typical in many societies throughout time. What has changed is contemporary society’s attitude toward prosperity and social class, which has become voracious in the accumulation of goods and disparate in the distribution of wealth. In the Middle Ages, the structure of society changed and a new merchant class emerged between the very rich and the poor. This new middle-class prosperity was a key driver in the economy of the later Middle Ages which contributed to the demand for more diverse products and indirectly raised the lifestyles of the majority of the medieval population. Today’s baby-boom generation, for the most part, moved into the workforce in the 1960s and 70s from humble beginnings, and over time accumulated physical and financial assets that will see the largest transition of wealth between two generations since the Black Death in the fourteenth century. Our contemporary attitude towards affluence is very different from our medieval counterparts, who often equated poverty with piety. As Lopez noted, ‘the paupers were more acceptable than merchants: they would inherit the Kingdom of Heaven and help the alms-giving rich to earn entrance’.^[100] Even though our contemporary attitude towards the accumulation of goods may be different, the desire to acquire goods as a reflection of status is the legacy given to us by our medieval forbears.

Today the Internet is redefining the structure of the relationship between consumers, middlemen and manufacturers, testing the very limits of the transactions that bond these groups into supply and retail chains. Many manufactures (or providers) are ill-equipped to offer the level of customer service that today’s society demands. Therefore, the opportunity for middlemen (or brokers) is to provide a collection of value-added services that will enhance the products or services they are distributing. As the market continues to disintermediate and organizations which provide middlemen services consolidate, a new class of middlemen will emerge, delivering a combination of products and services.

As the new class of broker merchant emerges, there will be a ‘reintermediation’ of the retail markets due primarily to the end consumer’s inability to contend with thousands of relationships with manufacturers and service providers. This market consolidation is represented today by Internet portals, places which bring together a suite of co-branded products and services. These portals can be anything from a loose association of products linked together by shared advertising fees, to orchestrated co-opetition ventures designed to establish a market between trading partners or even competitors.

In the Middle Ages, there was an advantage to being a citizen of more than one country (or swearing allegiance to more than one feudal lord) if you were engaged in trade across geopolitical borders. Having multiple allegiances was not considered dishonourable by medieval people. In many cases, geographic areas were controlled by several lords. Medieval peasants often had dual loyalties to both a king and a local lord as a matter of necessity in a town or district caught between two warring parties. This practice of dual allegiances was particularly true in Italy, where seaports maintained previously forged relationships with the Byzantine Empire after they themselves were conquered by the Lombards and the Franks.

In the sixteenth century, we can see the start of the formation of national states, that is, European states which were formed from the political coalition of different feudal states. The formation of national states was not completed until the nineteenth century, when Italy and Germany were finally consolidated into two political units. The modern concept of ‘nationalism’ emerges at this moment, when the pressure for unified territory met with the expansionist desire of some states (namely Germany and Italy) in their pursuit of rapid industrialization. Today, the concept of nationalism is under pressure as the effect of globalization takes place, virtually removing national barriers in order to allow a global economy to exist. The self-imposed barriers to trade, established along geopolitical boundaries, were originally formed to enhance trade but these are now an obstacle to Internet commerce. eCommerce gives us a chance to re-examine these fundamental socio-economic structures and question not only their function, but also their requirement. The primary goal of sales tax, for example, is the redistribution of wealth within a geopolitical boundary.^[101] Is the method of taxation, its collection process and the bureaucracy that enforces it the important factor, or is wealth redistribution the essential element? The Internet is increasing our awareness of these impediments to commerce, raising even more compelling questions, such as: Can another, more efficient process perform the same function? Is a global organization such as Microsoft in a position to collect and distribute taxes to nation states more effectively than the thousands of separate regulatory authorities?

Microsoft as the Glue

During the early part of the Middle Ages, the city of Amalfi in what is now Italy was an autonomous merchant seaport closely linked to the local landowners. Fierce competition for trade existed between it and the ports of Naples, Gaeta, Salerno and others along the western shore of Italy. The prime export commodity was olive oil. Amalfi forged strong trading relations with Constantinople and Egypt which continued even after the Normans conquered it in 1073. In the course of the eleventh century, the continuous growth of its trade in the Levant and Africa was accompanied and fostered by the slower development of a network of extraterritorial enclaves or colonies, whose importance hinged on the rebates on tariffs granted to them and the opportunities offered by the surrounding region.^[102] Today, hundreds of years later, the same business model of building a network of trading relationships occurs in today’s Internet economy. Consumers trading directly with manufactures and service providers soon realized that comparison shopping is not easily performed without the aid of a third party. These new third parties (resembling the medieval trading enclaves) or relationship brokers offer direct links to producers and provide a host of services designed to facilitate the purchasing process. The attributes of the new class of middleman merchants will be a continual forging of relationships with shared service offerings (Figure 3.1).

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Figure 3.1: Intermediaries

The new merchants will filter producers by price, quality and availability of their products and provide the customer with that most valuable commodity: Time. However, modern marketing methods ironically still reflect the trading mechanisms used by their medieval predecessors by offering customers rebates (or buying points) and governments tariffs (or taxes), acting primarily as a method of buying customers’ loyalty. One could argue that ultimately this practice results in promoting customer disloyalty by encouraging customers to switch to the next merchant who offers a better deal. By linking these factors and marketing gimmicks to attract customers, trading portals must also provide a mechanism to filter good producers from lower quality or even bad producers. Without these trading incentives, customers will find switching portals easy and will examine their brand loyalty. Various new merchants acting as shopping portals will co-brand products simply by association on their website.

It is amazing to think of how commerce worked during the Middle Ages compared to how modern society is defining the ultimate consumer nirvana, that is, buying direct from a manufacturer. This transaction between product developer and consumer existed in the twelfth and thirteenth centuries with the beginning of an evolutionary process that continues today. If one examines the dynamics of medieval economics, one becomes aware of a set of dynamic elements working in a supply and demand cycle. In the early medieval period, luxury goods played a large part in influencing what was produced. Craftsmen or merchants were interested in enlarging the profits on a limited number of sales as opposed to enlarging the number of sales with a limited amount of profit. In the larger market of selling to the peasant population, the continual pressure on profits made it impossible to increase the volume of products manufactured without mechanization. The inability to mass produce products kept the medieval merchant focused on regulating the profit margin to a consumer base of the gentry that could afford his products.

Medieval retail exchanges were often delivered without the use of a middleman. Craftsmen simply displayed their products in the front window of their own shops and passing gentry (later the rising middle class) merely stopped, looked and purchased. Advertising and marketing consisted of simply presenting a product to a mobile or passing audience, which bears a striking similarity to watching customers in a twenty-first century shopping mall. However, when the socio-economic conditions developed in the later part of the thirteenth century, the merchant class was transformed into an economic force of great proportions. It is never prudent to overgeneralize the activities of an entire continent during any century. As in today’s society, not all merchants and cities were created equal. In 1293, the volume of sea trade in Genoa was three times larger than the revenue of King Phillip the Fair’s entire kingdom of France.

Another factor to consider in medieval trade was that the cost of transportation was high and had a greater influence on the price of goods. Each time the product changed hands or location road tolls and other levies were paid, so the price of the product rose to recoup the additional expense. The high cost of transportation tended to keep goods in a local or regional market to avoid additional transportation costs. The two key factors that changed the dynamics of medieval exchange were the improvement in transportation technology (that is, bigger ships) and the transportation infrastructure (that is, the improvement of roads). If we examine today’s business-to-consumer eCommerce, the critical factor once again is controlling the transportation cost of the product as a percentage of the total price – a rising concern as products can be purchased from all corners of the globe.

Within the evolving cycle of disintermediation, Vikram Lund of the IBM Corporation noted that technology was making possible the formation of new classes of business interactivity:

Three types of emerging business models: utilities, infomediaries and brokers. Each takes a different approach to consumer empowerment in applying agent technology technologies. Utilities enable customers to research and compare products in order to make faster and more informed purchasing decisions. Their value depends on the depth of their research. Infomediaries are consumer advocates that provide market information and advice for a narrower range of linked products and providers. Brokers offer advice and market information, and they facilitate complex transactions by matching qualified buyers with sellers.^[103]

In sections 4.2 and 4.3, we will see that these three distinct forms of business activity (information utility, infomediary and transaction broker) can be applied to the three types of product/consumer behaviours emerging within cyberspace markets.

^[100]R. Lopez, The Commercial Revolution of the Middle Ages 950–1350. (Cambridge: Cambridge University Press, 1995) p. 60.

^[101]For a detailed discussion, see section 3.5.

^[102]R. Lopez, The Commercial Revolution of the Middle Ages 950–1350. (Cambridge: Cambridge University Press, 1995) p. 64.

^[103]V. Lund, ‘Virtual Agents: Expanding the Definition of “Customer Centric”’, IBM’s Building an Edge, September 6 (2001).