Infomediaries help consumers rule online Who will control the data?

July  1999

In Net Worth: Shaping Markets When Customers Make the Rules, two McKinsey management consultants invent the idea of the infomediary, a type of business that collects information about consumer behavior online, but -- surprise -- does so for the benefit of consumers, not vendors. (2,500 words)

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hen the world first began to wake up to the commercial possibilities of the Web, marketers must have cursed the severe limitations that HTML poses to the mechanics of capturing information about users and what they do online. Technologists had to invent various kludgy schemes to make up for these limitations -- things like cookies, clickstream analysis, and those dreaded user-registration forms. All of this has been done for the benefit of vendors. On the Internet, unlike in the physical world, all commerce is represented as digital data that flows over a common network. The idea of all that information being available in one place has led sellers of consumer products to fantasize about a future utopia in which information about consumer behavior flows freely and plentifully, and it's finally -- finally -- possible to use that information to maximize sales and customer loyalty.

Various visions of this cybermarketing utopia exist. One is Don Peppers and Martha Rogers's one to one marketing, as expressed in their book, The One to One Future, which preaches using technology to market to individuals instead of demographic groups. Vignette Corp.'s StoryServer software enables a variation on this theme, called customer relationship management. Another is permission marketing, the brainchild of Seth Godin of Yahoo!, which advances the idea that vendors should ask consumers' permission before marketing to them. Yet another is the celebrated cyberguru Esther Dyson's assertion that information about consumers is consumers' property and that vendors should compensate them for providing it.

Notice a pattern here: the above ideas start with the traditional marketing notion of collecting data about consumers -- treating them like lab rats, if you will -- and move toward accommodating consumers' rights and the value of their personal information. John Hagel and Marc Singer take this trend to its logical conclusion in Net Worth: Shaping Markets When Customers Make the Rules. This is an intriguing book. It posits the idea of the infomediary, a new type of business that gathers information about consumer behavior and brokers it to sellers, but does so in the primary interests of the consumer.

The authors work for McKinsey & Co., that Rolls-Royce of management consultancies. One of them (Hagel) coauthored the book Net Gain (reviewed in Bill's Bookshelf, April 1997, see Resources), which explored the idea of virtual communities, but did so in a dry, consultantese style. In Net Worth, Hagel and Singer define the infomediary idea and examine it from many different angles, including its merit as a business opportunity, its implications for the business strategies of existing consumer product companies, and its eventual effect on consumer markets in general. They do so in a considerably less dense, more readable style than in the previous book.

What is an infomediary?
An infomediary is a radically new type of business idea, much more revolutionary than the sober tone of this book (they are management consultants, after all) manages to convey. Infomediaries don't exist today, but let's say one did; how might it work? Say you're an average consumer and you buy things on the Web regularly. You sign up for a membership with an infomediary. The infomediary gives you a piece of software to run on your computer, which tracks everything you do on the Web -- which sites you visit, which pages you view, what products you look at, and what you buy. The infomediary collects this information and adds it to thousands or millions of other consumer profiles. It slices, dices, folds, spindles, and mutilates all this data in ways that are meaningful to consumer product vendors, who use it to do a better job of offering you products and services that you actually want.

This may sound like Big Brother, but it's not. The most important thing to understand is that, in this scheme, you are the ultimate controller of information about yourself. The infomediary acts in your interest, not that of vendors. You decide what you want the infomediary to do or not do with the data. Furthermore, the infomediary makes it worth your while to participate. To vendors, the mass of data the infomediary holds is like a supermarket to a starving glutton; therefore the infomediary can use it to get various concessions out of vendors. For example, the infomediary can bring you discount prices on mundane products that you use all the time, like toilet paper or breakfast cereal.

Because the infomediary has such complete information about your buying habits, it can also save you time and hassle when you want to make a big, complex purchase, such as health insurance, a computer, or a vacation. Meanwhile, vendors can use the information to identify likely buyers with a much greater degree of precision than ever before -- leading to increased sales as well as drastically reduced marketing expenses. Ultimately, if you feel that the infomediary isn't acting in your interests and giving you value, you can simply cancel your membership.

Sounds wonderful, doesn't it? Of course, as with all idealistic propositions, there's a catch. For an infomediary to exist, it must meet a set of conditions that aren't very realistic. First of all, you need a critical mass of data about consumer behavior. Therefore, it would not be possible for a startup company to be an infomediary, at least in the immediate sense. To be successful, the startup would have to convince millions of people to join and contribute information -- on the expectation of seeing benefits a couple of years down the road.

But you also can't create an infomediary from an existing company that already has a lot of data, because such companies act in the interest of vendors, and therefore consumers don't trust them. Would you trust a credit card company like Visa, a phone company like AT&T, or a credit reporting agency like Experian to act in your interests? Didn't think so. Trust is hard-won. Companies that currently provide information for buyers, like Consumer Reports, JD Power, and Moody's bond rating agency, take enormous pains to avoid even the faintest whiff of conflict of interest. (JD Power analysts are required to drive a different brand of car every year; Moody analysts aren't allowed to trade in securities.) Any question about integrity would shatter these firms' franchises irretrievably.

The result is a Catch-22 situation: startups don't have the data; existing companies with lots of data aren't trusted. Therefore, Hagel and Singer spend a lot of time speculating on how an infomediary could come into being despite this dilemma. They suggest, for example, that an existing company could form a joint venture with a nimble, entrepreneurial startup. (They don't, however, say much about how that would solve the trust problem.)

Gold mine or mirage?
Hagel and Singer even devote an entire chapter to estimating how much money an infomediary could make and how long it would take to become profitable. This chapter, which resembles a section of a business plan, shows that an infomediary is a big bet indeed. It must lay out an investment of $380 million before becoming cash-flow positive during its eighth year of existence, and by year 10, it can expect revenues of $5 billion and a market cap of $20 billion. To put this into some perspective: after 10 years, an infomediary could reach the size that Sun Microsystems had at about the same age, but with far, far more up-front investment and an Amazon.com-like wait for profitability. Now, I'm not an MBA (and I invite any finance and strategy types who may be reading this to rebut me via e-mail), but this doesn't seem to me to be the most compelling business proposition on earth. Big companies generally want to see cash-flow positivity much faster than that, and venture capitalists never invest that much money. Hagel and Singer even admit that "... well-established companies looking to form infomediaries may have difficulty navigating the early years."

The authors also devote an inordinate amount of space to describing how an infomediary could build up its business over time. They define three phases in an infomediary's growth, which they express in terms of the kinds of information to be collected from consumers, the types of benefits to be offered (e.g., agent searches and product discounts), and the types of products and services on which to concentrate. These three phases would take place over a period of years. Again, I wonder about any business plan that depends on specific things happening over the course of a number of years.

Yet infomediaries are a good idea. They benefit consumers, but they also benefit vendors. Because the numbers aren't all that attractive, it may take acts of faith, hope, and charity to bring them about. (Perhaps that's why Net Worth is a book, not a business plan in the hands of the CEO at a big McKinsey client or a consortium of venture capitalists). More likely, e-commerce businesses will appear over time that have more and more infomediary-like characteristics, yet make the bulk of their money in some other way.

I can even imagine Amazon.com doing this. It's in keeping with the company's strategy of being the ultimate, cross-category retailer that adds value through the Internet. (Unfortunately, Amazon has to work on the trust thing: its reputation got damaged when it sold "Amazon Recommends" slots to book publishers. Oops.) In general, with competition on the Web getting stiffer and stiffer, e-commerce sites will have no choice but to motivate consumers to give up information about themselves. And for every piece of new technology that assists vendors in collecting information about consumers without their permission, there will be an equal and opposite piece of technology that foils vendors' attempts to collect such info. In other words, at the end of the day, consumers will end up in control of their own information.

Towards the end of the book, there's a chapter called "Consumer Unbound," in which Hagel and Singer finally allow themselves to wax rhapsodic about unleashing the power of the consumer. Unfortunately, this chapter comes long after the meat of the book is past. There are also a couple of chapters of arid b-school navel contemplation about the nature of interdependent markets (as far as I can tell, the same territory as much other writing about value networks, but with different terminology) and how infomediation affects business strategy and markets in general.

Nontrivial technologies
The final chapter is an Appendix called "The Technology Toolkit." This is an excellent guide to current technologies for capturing consumer behavior online, complete with names of vendors of key components like collaborative filtering and custom content delivery, and relevant technology standards like Extensible Markup Language (XML), Open Profiling Standard (OPS), and Information and Content Exchange (ICE).

Yet this Appendix seems like it was written by a different author than was the rest of the book. The body of Net Worth shows a distinct lack of technological depth. Either the authors don't understand it or they chose to gloss over it. I have to believe it's more the former than the latter. Infomediaries' success depends on a few key technological elements that are nontrivial. One is the need to standardize on tagging schemes for products sold on the Web. For example, if an infomediary is going to get you the best price on a PC that meets your needs (i.e., a home PC that the kids can do their homework and play games on, as opposed to a 400-MHz Pentium II with 64 MB RAM, 6 GB disk, 4 MB video RAM, 24x CD-ROM, etc.), it needs a common language for specifying PC components, in which all PC sellers on the Web can express their offerings.

Hagel and Singer do get this one right. They mention that XML is the most promising technology for expressing tagging schemes and say that the tough part is getting everyone to agree on them. They even offer some insightful suggestions about how infomediaries can use their power in the marketplace to strong-arm vendors into adopting standardized tagging schemes.

However, one big technological piece that Hagel and Singer miss is the infrastructure for storing and analyzing all that consumer data. They talk about the million ways that infomediaries can slice and dice the data to come up with conclusions -- say, about the kinds of vacations that city-dwelling married couples in their mid-30s with household income over $100,000 like to take, how likely they are to buy digital cameras to take along, and what kinds of souvenirs they bring back for the kids -- and treat the process as a magic black box. Moreover, they give the impression that the infomediary can come up with lots of clever ways of mining this data on the fly at the request of consumer-product companies.

It might even be okay to treat an infomediary's data mining infrastructure as a black box, but at least it's necessary to acknowledge how expensive and complex it is to set such a thing up. Market researchers like Nielsen and Simmons spend tens of millions of dollars and years of time building their database capabilities. Hagel and Singer don't acknowledge this. In particular, they don't figure the time and cost into the numbers in their putative business plan.

There are other examples in this book of the authors' lack of understanding of the technological requirements of infomediaries (US Web is an "infrastructure management business"? Err, no.) But that's a quibble from an admittedly biased source. Net Worth may not represent the business plan that a dozen firms will implement this year, but it does represent a powerful idea that should become currency in the e-commerce world. It represents an end-state in the inexorable march of online commerce toward embracing the rights of consumers and empowering them while also helping vendors. As I said before, e-commerce Web sites are likely to evolve toward infomediary principles. It's also worth noting that the infomediary is a more revolutionary idea than the virtual community, the subject of Hagel's previous book. With Net Worth, Hagel and Singer should take their places in the pantheon of cyber-business thinkers.

Title: Net Worth: Shaping Markets When Customers Make the Rules
Authors: John Hagel III and Marc Singer
Publisher: Harvard Business School Press
ISBN: 0-87584-889-3
List price: $24.95

Resources

• Net Worth: Shaping Markets When Customers Make the Rules, John Hagel and Marc Singer (Harvard Business School Press, 1999):
  http://www.amazon.com/exec/obidos/ASIN/0875848893/sunworldonlineA
• Net Gain: Expanding Markets Through Virtual Communities, John Hagel, Arthur G. Armstrong (Harvard Business School Press, 1997):
  http://www.amazon.com/exec/obidos/ASIN/0875847595/sunworldonlineA
• "Virtual communities: the benchmark for success online?" Bill Rosenblatt (SunWorld, April 1997):
  http://www.sunworld.com/swol-04-1997/swol-04-bookshelf.html
• "XML and the IT architect," (SunWorld, June 1999):
  http://www.sunworld.com/swol-06-1999/swol-06-itarchitect.html
• Full listing of previous Bill's Bookshelf columns in SunWorld:
  http://www.sunworld.com/common/swol-backissues-columns.html#bookshelf
• Bill Rosenblatt's Client/Server columns in SunWorld:
  http://www.sunworld.com/common/swol-backissues-columns.html#cs

• The SunWorld Topical Index -- a comprehensive listing of all SunWorld articles by subject:
  http://www.sunworld.com/common/swol-siteindex.html
• Visit sunWHERE -- launchpad to hundreds of online resources for Sun users:
  http://www.sunworld.com/sunwhere.html
• Explore SunWorld's back issues:
  http://www.sunworld.com/common/swol-backissues.html
• IDG.net, your one-stop IT resource:
  http://www.idg.net

About the author
Bill Rosenblatt is vice president of technology and new media for publication services at The McGraw-Hill Companies.

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URL: http://www.sunworld.com/swol-07-1999/swol-07-bookshelf.html
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