Onsale: Kamikaze pilot or Voodoo economist?

Opinion This article was first published in January 1999 Everywhere, middlemen are under threat from their suppliers. And not just in the computer industry. Travel agents, for example, are starting to look increasingly threatened, with airlines squeezing commissions by up to half in recent years. Now, Delta Air Lines is imposing a two per cent surcharge on all bookings for domestic flights that are not made through its own Website. The computer industry is less hostile to its middlemen. But it doesn't take a genius to forecast that increasing amounts of business will be conducted over the Web directly between vendor and consumer. There is little reason why, say, Apple should not transact most of its commodity hardware business over the internet. With a more or less closed user base and weak reseller channel, Apple would have no trouble redirecting more customers to buy off its Website. Especially if it sold third-party software from the likes of Adobe and Quark and - even better - if it gave discounts to customers buying through AppleStore. The economists' rather clumsy term for this is disintermediation - cut out the intermediary and go direct to the consumer through the Web. The idea is that you strip out costs while improving service. There will still be room for intermediaries on the internet, only they might look a little different from traditional outlets. For example, look no further than the unholy alliance between Onsale, the loss-making but biggish internet auctioneer and Tech Data, the profitable and gigantic distributor. Onsale is now selling PCs at zero margin over the Web. On offer are 35,000 PC and accessory stock keeping units (SKUs) for the price Onsale pays Tech Data. It will eke out its operating margin from maintenance and leasing contracts, banner advertising on its Website and a handling charge. And presumably, Onsale will swipe customer credit cards before it shells out money to Tech Data, giving it operating cashflow benefits. Channel conflict rears its ugly head, of course. You could argue that trade-only distributor Tech Data is effectively selling PCs direct to the general public - with Onsale providing the retail veneer. And you would be right. Sensibly, Onsale should account for only the agent element - the bit that generates the operating income - of each PC sales transaction as turnover. But with internet stocks trading on heady multiples of turnover, it will be very tempting for the company to record each PC sale in its entirety as revenue. It gets the asset value (in the form of rising stock price) while Tech Data books the sale. Is Onsale a voodoo economist or a kamikaze pilot? Only time will tell. I suspect it is onto a winner. Last month, it took up a tenancy on Yahoo, which will result in higher traffic and - hopefully - higher sales. If Onsale has got it wrong, we can mark it down as an interesting failure. If Onsale has got it right, the implications for resellers - especially the direct response guys - are very serious indeed. ®