InformationWeek
Defining The Business Value Of Technology
March 27, 2000
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In suppliers' rush to sell directly to consumers over the Web, sales agents, distributors, and other channel partners worry that they'll be pushed out of the picture
By Alorie Gilbert and Beth Bacheldor
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s competition forces companies in every industry to steamroll their way onto the Web, business partners--resellers, retailers, distributors, dealers, and even internal sales organizations--are sometimes pushing back. Channel conflict, aka disintermediation, is turning into a battleground."Manufacturers and distributors face the possibility of eating their own children in order to survive," says E-commerce analyst Vernon Keenan. "We're looking at the dismantling of some existing distribution and sales channels."
The threat of disintermediation isn't new. Fear of alienating resellers runs deep among manufacturers and suppliers that are establishing E-commerce sites--especially those that will reach consumers directly for the first time. The only deeper fear is having no E-commerce story at all. That's why businesses are forging ahead with E-commerce strategies regardless of the consequences, which can include cannibalizing sales channels and alienating sales agents, even amid threats of recrimination from channel partners such as lockouts or lawsuits. All are indications that E-commerce is dramatically altering the sales equation.
Some industries are more vulnerable than others. Analyst Bob Parker of AMR Research refers to "zones of disintermediation," where the Internet can give consumers new choices and expose intermediaries that don't add much value. He says the PC and automobile industries are particularly vulnerable, as are service industries such as insurance and travel.
Airlines are making tremendous headway selling tickets online. In its first disclosure of Internet revenue, Southwest Airlines Co. said last month that more than 25% of its January passenger revenue came through its Internet site. And the airline sees itself flying toward more than $1 billion in E-commerce revenue by year's end.
The direct-sales model lowers the cost of airline tickets partly by eliminating the commission airlines pay travel agents, which has dropped in the past few years from about 10% to 5%. John Bailey, president and owner of Bailey Travel and Cruises in York, Pa., which deals primarily with business travel, recently negotiated air fares for two separate groups only to lose the business when the customers found cheaper fares, known as E-savers, directly from the airlines. "We didn't have access to those flights," Bailey says. He's sometimes able to negotiate fares with carriers "that supercede any deals a customer might get on the Internet." For that reason, E-savers haven't cut into his business too much--yet. "While it's a small part of my business," he adds, "it is annoying."
When several major airlines, including American, Continental, Delta, Northwest, United, and US Airways, revealed in January their intention to create an online travel consortium, it was more than annoying. The American Society of Travel Agents filed a complaint with the Department of Justice, charging that the joint Web site--which will sell airline tickets as well as hotel and car rental services next year--violates antitrust laws and will lead to price fixing.
"There's no reason why 70% to 75% of the domestic airlines have to collaborate to do this. It's anti-competitive,'' says Paul Ruden, senior VP of legal and industry affairs at ASTA. He says the site will not only threaten brick-and-mortar agencies, but also sites such as Travelocity and Expedia. "The goal of the airlines is to control it all themselves," he says. "Discounts will be a thing of the past."
Nonsense, maintain the airlines, which have tapped the Boston Consulting Group to manage its site. "The Web site will provide consumers with more choices and more information, which will increase competition in the industry," the group said in a prepared statement about the complaint.
The entertainment industry is also being jolted by channel conflict. Sony Corp. of America and its subsidiary, Sony Music Entertainment Inc., were slapped with lawsuits last month charging that aggressive marketing and promotions unfairly pull customers from retail channels to a proprietary online channel. The National Association of Recording Merchandisers Inc. charged that Sony is forcing retailers to sell CDs that include embedded hyperlinks and promotions directing consumers to Sony-owned online retailer CDNow.com.
The group filed the lawsuit after expressing its concerns for nearly a year with no results, says Pamela Horovitz, president of the 1,000-member association. Sony's Web sites aren't the problem, Horovitz says. "Sony is abusing its power of copyright in such a way that it forces retailers to direct their customers to a site owned by Sony that sells music," she says. "We need to get some of the ground rules laid out for competition in an online world." Sony is seeking to have the case dismissed.
Lawsuits of this type are still relatively uncommon. But they show that E-commerce is creating real shifts in power between suppliers and their retailers and distributors. For instance, auto dealers are feeling the pinch from both manufacturers and Internet startups inching toward direct sales online. While online auto sales are still fulfilled through local dealers, Autobytel.com Inc. recently moved closer to direct sales with its AutobytelDirect program, which includes real-time inventory, instant up-front pricing, and at-home delivery. Similarly, CarsDirect.com Inc., which launched in May, also lets buyers select cars online and name their price without haggling, though dealers still finalize the transaction. Last fall, Microsoft's CarPoint site joined with Ford Motor Co. to create a build-to-order system that lets online shoppers order directly from the factory. The car is then shipped to a dealer, which finalizes the sale.
The auto dealers are a powerful lobby: Some states have franchise laws that prohibit auto manufacturers from selling directly to consumers. When General Motors Corp. last fall attempted to buy back 700 franchises and sell cars direct--mostly to build out a possible Internet channel--the plan backfired, upsetting dealers and prompting discussions with GM. At the annual National Automobile Dealers Association convention in Orlando, Fla., in January, GM reassured dealers that it wouldn't cut them out of the loop or buy the dealerships.
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Illustration by Gary Baseman
Photo of Robinson by Robert Campell
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