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Your Guide to “Disintermediation,” the New “Disruption”

Tesla cars

Car dealers seem to be the only people not enamored with entrepreneur-at-large Elon Musk.

Musk’s car-manufacturing concern Tesla Motors is trying to enter state markets and sell its electric vehicles directly to consumers in a model of vertical integration, just as Apple shills its iPads. But the nation’s entrenched army of car dealers is getting in the way. New Jersey’s Motor Vehicle Commission, with the backing of Chris Christie, recently joined Texas and Arizona in ruling that Tesla would be forced to go through local franchise dealers to sell its cars.

Musk is crying foul on these enemies of innovation. Car dealers “have an inherent conflict of interest in selling electric vehicles,” he says, given that they have no incentive to push his Teslas when gas-driven cars make up the majority of their revenue. But maybe the dealers also want to keep their jobs rather than becoming the next brand-integrated Apple Geniuses?

The dealership fight happens to be a symptom of a larger phenomenon: disintermediation, which is quickly disrupting disruption’s status as Silicon Valley’s buzzword of choice. Disintermediation is the “elimination of gatekeepers” who “slow innovation,” per Amazon founder Jeff Bezos, who is busy disintermediating cultural industries from books to television and movies, after having successfully done the same to big-box stores.

Tesla cars

Tesla cars, seen here “disintermediating”
the concept of parking. / deinspanjer

Disintermediation eliminates the tastemakers who choose which books to publish or TV shows to produce (democracy is cheaper), the salesmen who advise customers on which car to buy, and the taxi companies that manage and regulate professional drivers (safety be damned). The term connotes the breaking down of barriers to entry, the ability to freely compete with the traditional stakeholders of a given industry. It’s the crystallization of the capitalist ethos that free competition will—obviously, eventually—solve all of our problems.

In bastions of free-market commentary like Forbes’s online “community” section and the Wall Street Journal, disintermediation is being closely associated with disruption as a synonym for that other Silicon Valley bugbear, innovation. Here’s the grammar of our new favorite word as it has taken hold over the course of early 2014:

• In a Harvard Business Review article on Tesla, disintermediation is described as part of the equation for success: “The process of intermediation and disintermediation in different industries is an essential part of innovating business models.” The Wall Street Journal also underlines the inevitability of the crumbling of traditional industries in its gloss on Tesla, “Car dealers fight disintermediation, but for how long?” The process has “wreaked havoc on one industry after another,” writes the Journal.

Business Insider notes that Comcast has avoided the “kind of disruption and disintermediation that the Internet has already performed upon the news, music and books business.”

AdAge reiterates the sexy capitalist danger of the Double D’s. “Disruption and disintermediation . . . poses a huge threat to some of the world’s leading brands and the rest of the ecosystem.”

Forbes lauds the public-minded entrepreneur Gregory Miller, who “developed a passion for disruption by disintermediation, upending industries that had become protected by technological, scale or regulatory barriers.”

This growing trend suggests that disintermediation is the next arrow in Silicon Valley’s quiver, the new verbal strategy that nimble start-ups will use to build hype and billion-dollar valuations. And the weapon is being drawn just in time. Companies like Uber, AirBnB, Tesla, and Facebook are growing so large that “start-up” doesn’t apply any more. The golden age of disruption, when tiny businesses triumphed over entrenched large ones, is over, and a new label is needed.

If disruption is what happens when a start-up’s business plan is to vampirically attack an industry and make everyone ask themselves why they’d ever paid so much for books or taxis or hotels in the first place, then disintermediation is the drawn-out process that follows. Disintermediation causes outmoded companies to close up their brick-and-mortar shops and retreat into their R&D labs to disrupt themselves.

Sure, many big corporations are too big, and they deserve competition from more efficient businesses. But what does disintermediation mean for consumers?

Some disintermediation can be good. The digital currency Bitcoin removes the gatekeepers that have usually made transferring money around the world a difficult and expensive process. Western Union getting disintermediated allows individuals to retain more control over the global value of their money. But then, no single company controls Bitcoin, so no single company profits from its growth.

In other cases, disintermediation also means removing the layers that previously served to protect customers and promote competition. When Tesla executives say they want to sell directly to drivers or Amazon marketers argue that the company is allowing writers direct access to their paying readers, these companies are promoting the vertical integration of a chosen industry as a single ecosystem under their control.

Therefore, the companies doing the disintermediating are in fact becoming the new gatekeepers. They determine what’s published in the ebook marketplace (no monster erotica, sorry), what shows up in the app store (no drones, thanks!), or how safe new cars are guaranteed to be (they might catch fire, don’t ya know). Taxis might be cheaper if medallions weren’t an issue, but then forget about policing the quality of the cars and drivers. Oh, and good luck getting those sex-party stains out of your condo after you rented it out on AirBnb.

In the era of disintermediation, we’ll just have to embrace the American spirit of independence and all look out for ourselves. When things get messy, it will be no one’s fault but our own. RIP car dealerships, and good riddance. Now who will star in those awful local TV car commercials—Elon?