Connect with us

Technology

Building a Better Middleman

Published

on

What comes to mind when you hear the term “two-sided market?” Maybe you imagine a Party A who needs something, so they interact with Party B who provides it, and that’s that.  Despite the number “two” in the name, there’s actually someone else involved: the middleman.  This entity sits between the parties to make it easier for them to interact. (We can generalize that “two” to some arbitrary number and call this an N-sided market or multi-sided marketplace. But we’ll focus on the two-sided form for now.)

Two-sided markets are a fascinating study. They are also quite common in the business world, and therefore, so are middlemen. Record labels, rideshare companies, even dating apps all fall under this umbrella.  The role has plenty of perks, as well as some sizable pitfalls.  “Middleman” often carries a negative connotation because, in all fairness, some of them provide little value compared to what they ask in return.



Learn faster. Dig deeper. See farther.

Still, there’s room for everyone involved—Party A, Party B, and the middleman—to engage in a happy and healthy relationship.  In this first article, I’ll explain more about the middleman’s role and the challenges they face.  In the next article, I’ll explore what it takes to make a better middleman and how technology can play a role.

Paving the Path

When I say that middlemen make interactions easier, I mean that they address a variety of barriers:

  • Discovery: “Where do I find the other side of my need or transaction?” Dating apps like OKCupid, classified ads services such as Craigslist, and directory sites like Angi (formerly Angie’s List) are all a twist on a search engine. Party A posts a description of themself or their service, Party B scrolls and sifts the list while evaluating potential matches for fit.
  • Matching: “Should we interact? Are our needs compatible?” Many middlemen that help with discovery also handle the matching for you, as with ride-share apps.  Instead of you having to scroll through lists of drivers, Uber and Lyft use your phone’s GPS to pair you with someone nearby.  (Compared to the Discovery case, Matching works best when one or both counterparties are easily interchangeable.)
  • Standardization: “The middleman sets the rules of engagement, so we all know what to expect.”  A common example would be when a middleman like eBay sets the accepted methods of payment.  By narrowing the scope of what’s possible—by limiting options—the middleman standardizes how the parties interact.
  • Safety: “I don’t have to know you in order to exchange money with you.” Stock market exchanges and credit card companies build trust with Party A and Party B, individually, so the two parties (indirectly) trust each other through the transitive property.
  • Simplicity: “You two already know each other; I’ll insert myself into the middle, to make the relationship smoother.” Stripe and Squarespace make it easier for companies to sell goods and services by handling payments.  And then there’s Squire, which co-founder Songe Laron describes as the “operating system for the barber shop, [handling] everything from the booking, to the payment, to the point of sales system, to payroll,” and a host of other frictions between barber and customer.  In all cases, each party gets to focus on what it does best (selling goods or cutting hair) while the middleman handles the drudgework.

Nice Work, If You can Get It

As far as their business model, middlemen usually take a cut of transactions as value moves from Party A to Party B. And this arrangement has its benefits.

For one, you’re first in line to get paid: Party A pays you, you take a cut, then you pass the rest on to Party B.  Record labels and book publishers are a common example.  They pair a creator with an audience.  All of the business deals for that creator’s work run through the middleman, who collects the revenue from sales and takes their share along the way.

(The music biz is littered with stories of artists getting a raw deal—making a small percentage of revenue from their albums, while the label takes the lion’s share—but that’s another story.)

Then there’s the opportunity for recurring revenue, if Party A and Party B have an ongoing relationship.  Companies often turn to tech staffing agencies to find staff-augmentation contractors.  Those agencies typically take a cut for the entire duration of the project or engagement, which can run anywhere from a few weeks to more than a decade.  The staffing agency makes one hell of a return on their efforts when placing such a long-term contractor. Nice work, if you can get it.

Staffing agencies may have to refund a customer’s money if a contractor performs poorly.  Some middlemen, however, make money no matter how the deal ultimately turns out.  Did I foolishly believe my friend’s hot stock tip, in his drunken reverie, and pour my savings into a bad investment? Well, NYSE isn’t going to refund my money, which means they aren’t about to lose their cut.

A middleman also gets a bird’s-eye view of the relationships it enables.  It sees who interacts with whom, and how that all happens.  Middlemen that run online platforms have the opportunity to double-dip on their revenue model: first by taking their cut from an interaction, then by collecting and analyzing data around each interaction.  Everything from an end-user’s contact or demographic details, to exploring patterns of how they communicate with other users, can be packaged up and resold.  (This is, admittedly, a little shady. We’ll get to middlemen’s abuse of privilege shortly.)

Saddling Some Burdens, Too

Before you rush out to build your own middleman company, recognize that it isn’t all easy revenue.  You first need to breathe the platform into existence, so the parties can interact.  Depending on the field, this can involve a significant outlay of capital, time, and effort.  Then you need to market the platform so that everyone knows where to go to find the Party B to their Party A.

Once it’s up and running, maintenance costs can be low if you keep things simple.  (Consider the rideshare companies that own the technology platform, but not the vehicles in which passengers ride.) But until you reach that cruising altitude, you’re crossing your fingers that things pan out in your favor.  That can mean a lot of sleepless nights and stressful investor calls.

The middleman’s other big challenge is that they need to keep all of those N sides of the N-sided market happy.  The market only exists because all of the parties want to come together, and your service persists only because they want to come together through you.  If one side gets mad and leaves, the other side(s) will soon follow.  Keeping the peace can be a touchy balancing act.

Consider Airbnb.  Early in the pandemic they earned praise from guests by allowing them to cancel certain bookings without penalty.  It then passed those “savings” on to hosts, who weren’t too happy about the lost revenue.  (Airbnb later created a fund to support hosts, but some say it still fell short.)  The action sent a clear—though, likely, unintentional and incorrect—message that Airbnb valued guests more than hosts.  A modern-day version of robbing Peter to pay Paul.

Keeping all sides happy is a tough line for a middleman to walk.  Mohambir Sawhney, from Northwestern University’s McCormick Foundation, summed this up well: “In any two-sided market, you always have to figure out who you’re going to subsidize more, and who you’re going to actually screw more.” It’s easy for outsiders to say that Airbnb should have just eaten the losses—refunded guests’ money while letting hosts keep their take—but that sounds much easier said than done.  In the end, the company still has to subsidize itself, right?

The subsidize versus screw decision calculus gets even more complicated when one side only wants you but doesn’t need you.  In the Airbnb case, the company effectively serves as a marketing arm and payments processor for property owners.  Any sufficiently motivated owner is just one step away from handling that on their own, so even a small negative nudge can send them packing.  (In economics terms, we say that those owners’ switching costs are low.)

The same holds for the tech sector, where independent contractors can bypass staffing firms to hang their own shingle.  Even rideshare drivers have a choice.  While it would be tougher for them to get their own taxi medallion, they can switch from Uber to Lyft.  Or, as many do, they can sign up with both services so that switching costs are effectively zero: “delete Uber app, keep the Lyft app running, done.”

Making Enemies

Even with those challenges, delivering on the middleman’s raison d’être—”keep all parties happy”—should be a straightforward affair.  (I don’t say “easy,” just “straightforward.” There’s a difference.) Parties A and B clearly want to be together, you’re helping them be together, so the experience should be a win all around.

Why, then, do middlemen have such a terrible reputation?  It mostly boils down to greed.

Once a middleman becomes a sufficiently large and/or established player, they become the de facto place for the parties to meet.  This is a near-monopoly status. The middleman no longer needs to care about keeping one or even both parties happy, they figure, because those groups either interact through the middleman or they don’t interact at all. (This also holds true for the near-cartel status of a group of equally unpleasant middlemen.)

Maybe the middleman suddenly raises fees, or sets onerous terms of service, or simply mistreats one side of the pairing.  This raises the dollar, effort, and emotional cost to the parties since they don’t have many options to leave.

Consider food-delivery apps, which consumers love but can take as much as a 30% cut of an order’s revenue.  That’s a large bite, but easier to swallow when a restaurant has a modest take-away business alongside a much larger dine-in experience. It’s quite another story when take-away is suddenly your entire business and you’re still paying rent on the empty dining room space. Most restaurants found themselves in just this position early in the COVID-19 pandemic. Some hung signs in their windows, asking customers to call them directly instead of using the delivery apps.

Involving a middleman in a relationship can also lead to weird principal-agent problems.  Tech staffing agencies (even those that paint themselves as “consultancies”) have earned a special place here.  Big companies hand such “preferred vendors” a strong moat by requiring contractors to pass through them in lieu of establishing a direct relationship. Since the middlemen can play this Work Through Us, or Don’t Work at All card, it’s no surprise that they’ve been known to take as much as 50% of the money as it passes from client to contractor.  The client companies don’t always know this, so they are happy that the staffing agency has helped them find software developers and DBAs. The contractors, many of whom are aware of the large cuts, aren’t so keen on the arrangement.

This is on top of limiting a tech contractor’s ability to work through a competing agency.  I’ve seen everything from thinly-veiled threats (“if the client sees your resume from more than one agency, they’ll just throw it out”) to written agreements (“this contract says you won’t go through another agency to work with this client”).   What if you’ve found a different agency that will take a smaller cut, so you get more money?  Or what if Agency 1 has done a poor job of representing you, while you know that Agency 2 will get it right?  In both cases, the answer is: tough luck.

A middleman can also resort to more subtle ways to mistreat the parties.  Uber has reportedly used a variety of techniques from behavioral science—such as the gamification of male managers pretending to be women—to encourage drivers to work more.  They’ve also been accused of showing drivers and passengers different routes, charging the passenger for the longer way and paying the driver for the shorter way.

It’s Not All Easy Money

To be fair, middlemen do earn some of their cut. They provide value in that they reduce friction for both the buy and sell sides of an interaction.

This goes above and beyond building the technology for a platform.  Part of how the Deliveroos and Doordashes of the world connect diners to restaurants is by coordinating fleets of delivery drivers.  It would be expensive for a restaurant to do this on their own: hiring multiple drivers, managing the schedule, accounting for demand … and hoping business stays hot so that the drivers aren’t paid to sit idle. Similarly, tech staffing firms don’t just introduce you to contract talent. They also handle time-tracking, invoicing, and legal agreements. The client company cuts one large check to the staffing firm, which cuts lots of smaller checks to the individual contractors.

Don’t forget that handling contracts and processing payments come with extra regulatory requirements. Rules often vary by locale, and the middleman has to spend money to keep track of those rules.  So it’s not all profit.

(They can also build tools to avoid rules, such as Uber’s infamous “greyball” system … but that’s another story.)

That said, a middleman’s benefit varies by the industry vertical and even by the client.  Some argue that their revenue cut far exceeds the value they provide. In the case of tech staffing firms, I’ve heard plenty of complaints that recruiters take far too much money for  just “having a phone number” (having a client relationship) and cutting a check, when it’s the contractor who does the actual work of building software or managing systems for the client.

A Win-Win-Win Triangle

Running a middleman has its challenges and risks.  It can also be tempting to misuse the role’s power.  Still, I say that there’s a way to build an N-sided marketplace where everyone can be happy.  I’ll explore that in the next article in this series.

(Many thanks to Chris Butler for his thoughtful and insightful feedback on early drafts of this article.  I’d also like to thank Mike Loukides for shepherding this piece into its final form.)

This Article was first live here.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published.

Technology

Qualcomm unveils the Snapdragon 8 Plus Gen 1, says it will offer 10% faster CPU performance, 10% faster GPU clocks, and have up to 30% better power efficiency (Sean Hollister/The Verge)

Published

on


Sean Hollister / The Verge:

Qualcomm unveils the Snapdragon 8 Plus Gen 1, says it will offer 10% faster CPU performance, 10% faster GPU clocks, and have up to 30% better power efficiency  —  Bragging rights (and battery life?) for gaming phones  —  Qualcomm’s Snapdragon 8 Gen 1 set the stage for the biggest Android smartphones …

This Article was first live here.

Continue Reading

Technology

Geoff Keighley teases what’s to come at Summer Game Fest

Published

on

Placeholder while article actions load

Summer Game Fest is around the corner, and media entrepreneur Geoff Keighley hints at a month of news starting on June 9.

“First couple of weeks of June are going to be a good time for gamers as always,” Keighley said.

The host of the Game Awards and Summer Game Fest said people might look back at June as an exciting start to the year’s game release news, which has been on the quieter side when it comes to big titles. When asked whether that means people can expect major game announcements, Keighley demurred.

“June is definitely a good time for people to ramp up, get people excited about things coming in the future. So yes, there will be some good announcements. They’ll be good, meaningful updates on games,” Keighley said, adding that, for example, in 2021, the Summer Game Fest showed off gameplay of “Elden Ring,” a previously announced game that still drew a lot of interest. “Will you get everything you want? No. But I think there’ll be some good stuff this year.”

The 2022 gaming news event is mostly digital, though it will feature an in-person component. Imax movie theaters will air the Summer Game Fest in the U.S., Canada and United Kingdom starting on June 9, live from Los Angeles. Viewers can tune into the exact same show on Twitch. (Twitch is owned by Amazon, whose founder, Jeff Bezos, owns The Washington Post.)

While individual game companies will do their own events, as they have in past years, Keighley said he plans to organize things so that they don’t heavily overlap. In another major gaming showcase, Xbox will hold its live-streamed event on June 12.

The Game Awards: How Geoff Keighley helped create The Oscars for gaming

In light of the Russian invasion of Ukraine, Keighley said he has been in conversations with several Ukrainian studios whose game titles — such as GSC Game World’s “S.T.A.L.K.E.R.” — have been impacted.

“There have been a number of teams, honestly, that we were talking [with] about content for our show, that are in Ukraine, and they’ve had to relocate and can’t finish their trailer, can’t finish their game, because they’re in the middle of a situation,” Keighley said. “We’re conscious of those games and actively trying to think about what’s the right way to recognize some of those teams and the hardships that they’ve been through.”

Keighley made headlines in 2020, when he announced he was skipping E3 for the first time in 25 years, saying the event needed to evolve.

This year, Summer Game Fest will take place in the backdrop of another canceled E3, just as it did in 2020.

“You’ll find no bigger fan than me of what E3 represented to the industry. And I went to it for 25 years,” Keighley said. “I still think E3 needs to figure out its place in this new digital, global landscape. Game companies have figured out there are lots of great ways to program directly to fans. With Summer Game Fest, we’re very cognizant of that; we’re not just trying to be an E3 replacement. We’re doing something very different and approaching it as a free, digital-first celebration of games. The great thing is we can build it from the ground into something completely new. And we don’t have the baggage and legacy of trying to sell booze to people or hotel rooms.”

From 2021: For years, E3 has been gaming’s biggest event. Is that still true?

Keighley told The Post last December that the other event he hosts, the Game Awards, would take a “thoughtful, measured” approach toward non-fungible tokens (NFTs). For this year’s Summer Game Fest, Keighley similarly said he had no plans to have anything NFT or blockchain-related.

“Some people are like, ‘Oh Geoff, I see you following an NFT account on Twitter.’ And it’s like, I’m interested to learn about that stuff. But I’ve yet to see anything that really crosses over to content that would be accretive to the experience. Look, if I see a game or experience that I think is really going to be compelling and interesting and leverages those technologies in a meaningful way, we’ll of course look at it,” Keighley said.

As for whether Activision Blizzard, a company facing multiple lawsuits and government investigations, will be present at Summer Game Fest, Keighley said the situation was evolving. Activision Blizzard did not immediately respond to a request for comment.

“In the back of our minds, obviously, is the zeitgeist of what’s going on at both of these companies but also, in the community,” he said. “Everyone’s opinions continue to evolve among all these topics, so it’s hard to put a pin in something and say, ‘Hey, this is exactly how we’re going to treat this throughout the entire year.’ ”

Another hotly discussed industry topic is unionization. When asked whether organizing labor would impact Summer Game Fest, Keighley said, “Trying to make our show is ultimately to support creators of games and let them showcase their work. I hope we empower game creators, through our shows, to reach audiences and feel like they can reach those audiences directly.”

This Article was first live here.

Continue Reading

Technology

Why I Prefer an eReader to a Real Book

Published

on

dean bertoncelj / Shutterstock.com

Okay, I’m really doing this. Ahem. I prefer eReaders to real books. Now, before you report me to your local library for crimes against literature, let me explain. Maybe you’ll hear a new reason to give eReaders a chance.

This is a pretty touchy subject among readers. People who prefer physical books are often very passionate about that. It feels like people who like eReaders are the ones who have to defend their position. So allow me to defend my position.

RELATED: How to Borrow eBooks from a Library on a Kindle for Free

Temporary Is Okay

kindle in case on canvas bag with phone and sunglasses

First, let me start by saying I am not anti-physical books. I love real books. I love looking at cover art and I love the feel of a physical book in my hands. I think eReaders and books can peacefully co-exist.

My perspective on the place for eReaders vs real books is similar to how I view other forms of media. I might see a movie on Netflix that looks interesting and only watch it once. I don’t need to own a physical copy of it. Some things can be temporary.

Now, if there’s a movie or an album of music that’s important to me, then I want the physical copy. That’s the same philosophy I have toward books. There are so many books that I’ve read once and haven’t thought much about since. Owning the physical copy would just be adding clutter to my home.

Important, meaningful books are the ones I want to have in my possession forever. For everything else, the temporary feeling of an eBook makes an eReader the perfect option.

RELATED: How to Delete Books and Documents from Your Kindle Library

Streaming Books

There are very literal “streaming” services for books—such as Amazon Prime Reading—but even the general experience of an eReader is similar in a lot of ways to how we use streaming services.

Streaming services are great for browsing and easily switching between media. One day you’re in the mood for comedy, the next it’s drama. When you finally find something to get into, you can easily jump right into it every day until you’ve finished it.

That’s what I like about eReaders. I can easily browse through my library and decide what I’m in the mood to read. If a book doesn’t grab my attention quickly enough, I can easily switch to something else. I don’t have to bring a stack of books to my bed.

Physical media is a much more deliberate experience. Choosing a Blu-ray and putting it on is a commitment. Taking one book to the couch is a commitment. eReaders give you flexibility.

RELATED: How to Download Free eBooks with Amazon Prime

More Books, Less Weight

That flexibility also comes with some real-world benefits. Books are heavy, there’s no getting around that. If you want to take multiple books somewhere, you’re going to be carrying a lot of weight around.

The average eReader—such as the Kindle Paperwhite—can hold around 1,000 books per gigabyte of storage. That’s a lot. You can essentially go on vacation with your entire library of books in a device that weighs less than 8 ounces.

It’s really hard to overstate just how amazing that is. People love phones and streaming services for this same reason when it comes to music. It’s awesome to have all your music with you all the time. So what’s wrong with doing the same with your books?

Best eReader Overall

Kindle Paperwhite

The Kindle Paperwhite Signature Edition improves on the previous generation with more storage space, USB-C charging, and an adjustable warm light.

Can We All Get Along?

There are a lot of things to get passionate about in life, especially when it comes to technology. iPhone vs Android. Windows vs Mac. Overused fonts. How to say GIF. I don’t think the eReader vs. real books debate needs to be one of them.

Nothing is ever going to replace physical books. Streaming music services are extremely popular, yet music is still being released on CDs and vinyl records. Movies still come out on Bluray and DVD. eReaders have been around for a long time and real books are still here.

An eReader is a handy device that every avid reader should consider. You don’t have to stop reading physical books, but you’ll appreciate the convenience in many situations.

This Article was first live here.

Continue Reading

Trending