Emergence of Electronic Single-Source Sales Channels

The emergence of electronic single-source sales channels can presently be observed within industry and is well described in the popular business press and trade journals. Little, however, is being reported with regard to the larger picture of the developments, i.e., the overall expansion of electronic markets. We would like to offer several explanations:

1. Impact of interorganizational value chains. Firms readily envision opportunities in electronic interorganizational value chains for improving their respective competitiveness. Thus they choose hierarchical arrangements rather than lower cost market transactions with less control of the factors noted above. In an effort to integrate supply chains electronically, buyer-supplier links such as electronic data integration transactions produce inventory and coordination savings for large purchasers and the suppliers, in turn, are forced to accommodate. Well- known examples depicting this development can be found with Wal-Mart's supply chain, as well as in the relationship with auto manufacturers and their suppliers. Single-source sales channels for travel agencies such as Rosenbluth Travel have expanded their business through agency partnerships in countries where they share a common process and database for tracking customers around the world. In this fashion Rosenbluth can provide them with the lowest prices and emergency services (Miller et al., 1993). This travel agency then is an example of the last evolutionary stage predicted for electronic single-source sales channels, a shared data base between partners.

2. Fear of profit margin deterioration. Firms can be expected to be very cautious about giving up their single-source sales channel profit margins, at least until a virtual market has clearly been created with enough participants to force their entry. This is especially the case when an oligopoly of relatively large firms controls a market in which each would risk sizable market share and profit margin in an electronic market. In the case of electronic markets for travel reservation systems, there is evidence that the profits of former sales channels (the airlines) are drastically reduced, while the profits of the market maker (e.g., SABRE, APOLLO) remain high.

Bakos (1991) has analyzed why the electronic market effect drives profit margin from the supplier. In price-competitive markets, even a small cost of search on the buyer's part may enable sellers to maintain prices substantially above their marginal costs: in this scenario, the introduction of a market system providing price information can dramatically reduce seller profits and increase buyer welfare. According to Bakos (1991, p. 300), this effect, which is supported in economic theory, can be anticipated in undifferentiated markets such as commodity markets and is evidenced by the examples of Reuters, Quotron and Telerate, all with established markets in U. S. Government fixed-income securities, leading to a reduction in trader profits from large bond dealers.

Additional evidence is needed to demonstrate clearly the market maker effect, i.e., the phenomenon in which the consumer does very well, yet producers lose their profit margin and the market makers gain the remaining profits. This scenario suggests that producers may find it hard to generate sustainable profits without finding new strategies for product and service differentiation.

Even though such losses are widely recognized, electronic markets continue to proliferate and expand such as in financial markets, commodities and, as already noted, in the travel industry. Electronic markets have also encroached upon traditional niche markets where there are no large single-sources sales channel suppliers with high market share to protect, such as airplane spare parts.

Schwab's OneSource mutual fund market shows additional support of the market maker effect. OneSource's equity in mutual funds has grown rapidly to $10 billion in assets ("The Next Giant ...," 1994). Within the mutual fund industry, Schwab, the market maker, is perceived as threatening and growing too large and gaining control of a significant share of its operating margin. One must consider that a typical no-load fund receives a .5 percent fee for assets it manages for customers. To belong to OneSource, the fund pays Schwab half of its fee, i.e., about $0.25 for each dollar equity. Given that the largest four no-load funds currently have around $700 billion in assets under their control, movement of only the $10 billion under Schwab's current control represents a $25 million shift in operating margin to Schwab. Fidelity, the largest no-load fund, has set up for protection an equivalent market. Now no-load purchasers can buy from several smaller markets as well.

Consequently, the market maker effect may threaten the mutual fund industry's profits in the same way it did in airline reservation systems. It may require, however, competitive market makers in no-load funds to prevent market deterioration in no-load funds. Only time will tell how strong the market maker effect will be in the mutual fund industry.

A few examples that may actually be viewed as precursors of things to come will illuminate this future setting. Rapid growth in catalogue and cable shopping networks suggests that (1) there are many products meeting the criteria for electronic markets, i.e., low asset specificity and ease of description, and (2) consumers are willing to buy these products without going to a retail store. QVC, the highly successful cable television shopping channel, has been said to move goods at the rate of $39 per second by broadcasting pitches around the clock. These trends are causing retail market erosion and illustrate how electronic markets may affect consumer markets in time. Catalogue marketers such as Lands' End sell an enormous amount of merchandise. There were 10,000 mail order companies in the United States in 1992, selling $51 billion worth of goods through the catalogues (Brubach, 1993).

Until the appropriate technology opens its doors, electronic sales channels and, in turn, electronic markets will be unable to make significant inroads with the consumer. It follows that homes must be wired for interactive, high-quality video so consumers have a friendly, flexible way to access markets. These required technologies are evolving rapidly and the emerging NII is one organizer of these technologies. Current traditional retailing markets are not likely to change significantly until a critical mass of consumers will be connected via numerous channels to the evolving industry value chain.