The internet was heralded as providing ‘disintermediation’, enabling everyone able to connect with everyone else directly. Yet, somehow, gatekeepers have emerged, controlling the ability to connect, and in many cases the potential to extort revenues for connecting people, with these additional additional fees resulting in increased prices and resultant inflation. Do we risk having legalised ‘protection rackets’?
What Is A Gatekeeper? Controlling Access.
Gatekeepers control entry or participation, and collect revenue from all who enter or participate.
In Monty Python and the Holy Grail, the black night is an unusual gatekeeper, who declares “none shall pass”. In the real world, gatekeepers typically allow those who pay to pass.
Examples:
- A ticket inspector at the movies who only allows those with a ticket to enter.
- Organised crime “protection rackets”, where only those who can continue to operate their business without disruption, making operators of the racket gatekeeper on who can conduct business.
- Ferry Operators.
- Governments and with taxation and permits.
In the ‘Holy Grail’, as is often the case in real life, the ‘gate’ not physically present, but the concept still applies. While there are times when it is justified and reasonable to have gatekeepers, as the gatekeepers represent the interests of those beyond the gate, there are also times, as with the protection racket example, when gatekeepers are self appointed other otherwise highly problematic.
The Threat Of Extortion By Gatekeepers.
The threat of extortion arises when someone gains the right to ‘gatekeep’, or control access, to the property or assets of others.
The Black Knight of the ‘Holy Grail’ could extract a fee from people needed to pass by him to reach their destination, yet if he was no there, the passage would be free.
For a real world example, consider an island community connected to the mainland by a car ferry of the type in the picture to the left, with no other way for vehicles to get to the island. To those choosing to live on the island, it would be important to have confidence that the operator of the ferry could not suddenly raise the cost of travel.
Otherwise, an unscrupulous operator could extort those who have urgent need to travel.
The ferry operator becomes the gatekeeper for those needing to access the island by vehicle, and if unscrupulous, could extract a fee many times higher than the cost of operating the service, as those on the island have no alternative.
In the real world, unless there were viable alternatives to the access by ferry, some mechanism to ensure ferry charges were reasonable would be required.
However, as the internet takes over the way many services are accessed, the risk arises of new gatekeepers emerging with without any mechanism to control them.
Gatekeepers in the physical world: Is Extortion Eliminated?
From tickets to protection rackets and taxation.
Using the examples from ‘what is a gatekeeper’ above, there is the clear difference between the role of someone checking tickets required for movies, and the unjust behaviour of an organised crime protection racket. But then, there is taxation, which has to the potential to be at the ‘just’ extreme or the ‘unjust’, or somewhere in between. The categorisation of taxation depends both on the implementation and the views of the observer.
‘Own Gate’ keeping vs outsider intermediary gatekeepers.
If the Monty Python black knight representing those beyond the where he is preventing passage, then this would be ‘own gate’ keeping, where the gate is being ‘kept’ by those responsible for what is within.
But if the black knight is blocking passage without representing those within the gated area, then it is unlikely his gatekeeping is justified.
The theatre ticket gatekeeping gatekeeping is a real world gate being kept by those responsible for what is within, and therefore is acceptable gatekeeping. Even if entry is overpriced, potential patrons can choose either another venue, or even to not what the movie as it is not really essential. The theatre is enforcing rules for entry into the theatre, which is keeping its own gate.
For the organised crime syndicate, the protection operators are outsider intermediators, as they have no right to control who can conduct business within ‘the gated area’, but have placed themselves between city authorities who have the right to control who operates, and the businesses.
Further traditional world examples: how do we prevent gatekeeping extortion?
Gatekeepers For Society: Customs and Immigration.
Most countries in the world today have keepers at their gates in the form of customs and immigration. The general principle is, pay a fee, follow some specific rules and you are allowed entry. This could be the classic modern day gate keeping that society accepts.
Book Publishers vs Critics.
If you want to publish a book in print, you need a publisher. Although book publishers are gatekeepers, they do add value by printing and distributing books, and even provide advances to authors that can help fund books being written. The internet has also allowed self publishing, which in theory removes the gatekeeper, but lack of ability of authors to promote themselves is still a barrier. Book, movie and drama critics are gatekeepers that do not help with printing or production, distribution or the provision of advances.
Toll Roads, and Parking Fees.
These are all categories of gatekeeper we normally accept, however they become unreasonable, when there is no alterative. For example, a toll road can provide a new alternative travel route that consumers will elect to pay for, but there have been times when exiting travel routes are shut down once the toll road opens in order to force more people to pay the toll.
Internet gatekeeping and gatekeepers.
What is gatekeeping on the internet?
There is benevolent ‘own gate’ keeping on the internet, such as the registrar of domain names, and the top level name servers, but the focus here is the intermediary outsider gatekeepers gain their position through market share, in the same way Google ‘owns’ searches on the internet, even thought it was never appointed as the search engine of the internet.
The good news about google and their search monopoly, is that Googles business model is not to charge a fee for everything that is found on the internet. The bad news is that if you, and your competitors, make money out of being found on the internet, then Google can extort a fee for allowing people to find you.
However, it not just Google, and Facebook that have managed to install themselves at ‘gates’ and control who passes through, but an entire cast of actors from Amazon to Wikipedia, with a hugely variation on what they do with their status as a gatekeeper.
Disruption vs Gatekeeping Intermediary?
New, technology/internet businesses have recently arisen to become multi-billion dollar companies. Many of these businesses are in some way ‘disruptors’.
“Harvard Business School professor and disruption guru Clayton Christensen says that a disruption displaces an existing market, industry, or technology and produces something new and more efficient and worthwhile. It is at once destructive and creative.”
Forbes.
For example. Google and Facebook have disrupted the broadcast and print media businesses, and now earn a huge share of the advertising revenue that was previously dominated by broadcast and print media.
A special class of disruptor is the intermediary. Unlike google, which excelled in a new field of ‘product’ (internet searches) to attract consumer attention and enable selling advertising, the intermediaries business model reseller for the products consumers find through their sites.
Trivago is a classic example, selling hotel rooms with the promise that deals found through Trivago are the best deals available, with the goal of becoming the gateway of choice for consumers looking to but hotel rooms. In the end, companies like Trivago are intermediary gatekeepers who manage to ‘extort’ a ‘tax’ on accommodation bookings that increases the prices to consumers and drive inflation.
Internet gatekeepers and the potential for extortion.
Travel Industry Example: How Gatekeepers Increase Prices and Feed Inflation.
The booking websites or Online Travel Agents (OTAs).
You might think there are a whole host of these companies, but as a result of mergers and acquisitions, the world is dominated by just 4 players:
- Booking Holdings
- Priceline.com, Booking.com, Agoda, Kayak, Cheapflights, Rentalcars.com, Momondo, and OpenTable, among others.
- Expedia Group
- Expedia.com, Hotels.com, Hotwire.com, Orbitz, Travelocity, trivago, Venere.com and vrbo.
- Ctrip ( the dominant travel site in China but operates globally).
- Skyscanner, Trip.com and others.
- Airbnb,
- Airbnb, Hotel Tonight and still growing.
See this hotel industry page for more details and history.
The fairy-tale of the advertisements is not real.
You have possibly seen advertisements for online travel bookings where the customer has managed to book a room at a bargain price far lower than other guests are paying for the same room. The scenario portrayed is now a fairy-tale, and the reality today is that these web businesses increase accommodation prices, ensure everyone is paying more, and that the only true special deals are no longer available online.
The fairy-tale advertised relies on only a very small minority of people booking through the advertised service, despite the service being widely advertised. The next sections explain.
The fairy-tale for the hotels and other accommodation providers.
At one time, when almost no-one was using the booking websites, and therefore the sites could not afford to advertise on television or other widely viewed media, hotels etc these new start-ups as a possible way of selling some of the rooms that otherwise would go unsold. The idea was that as all regular people would still book rooms the traditional way, and the small number of rooms sold through these sites, would be rooms that would have otherwise gone unsold. Just extra sales. For these rooms, sharing the revenue with the website, and still giving a price cut could be ok. It would only be rooms that would otherwise go unsold. The whole scheme worked for all participants, as long everyone who booked through normal channels, kept booking through those channels, and the number of rooms sold through the websites remained a tiny fraction of sales that could be considered ‘bonus sales’.
How the fairy-tale ended for the hotels and other accommodation providers.
Then the world went online and today, the majority of travellers book rooms from hotels etc. online through through booking websites or ‘Online Travel Agents‘ (OTAs) as they are known in the industry. This means the hotels are now paying a commission of around 30% to these OTAs on most rooms nights they sell, making the commission parts of the cost structure for all rooms. Note this not 30% of profits on the room, but 30% of the entire price. Mortgages or site rental, staff costs, maintenance and consumables must all be paid from the remaining 70%, which means the OTAs will often make more profit on the room than the hotel operator. This situation is a hot topic in the industry as seen from the story quoted below in an industry magazine.
On one hand, the hotel booking sites like OTAs provide a steady source of hotel bookings that reliably puts heads in beds, all without that much effort on the part of suppliers. On the other, this “effortless demand” comes at a hefty cost: up to 30% commissions on each booking. Take a quick read of any hotel management magazine or hospitality industry publication and you’re likely to read about the direct booking wars.
That steep price can be either seen as a marketing cost (something hotels would spend regardless to generate demand) or a tax (something imposed unwillingly on hotels by a powerful intermediary). Whichever the perspective, the cold, hard truth is that commissions are often a hotel’s second largest expense after labor. In fact, one of the core focuses in revenue management is decreasing reliance upon OTAs with smart pricing strategy.
Hotel Tech Report, 2022: The Evolution of OTAs in the Hotel Industry.
The fairy-tale also became a story of wolf gatekeepers and increased prices for consumers.
The internet makes finding a hotel room in a distant city much easier, as instead of looking at phone listings etc, there are now these travel websites or “OTAs”. However, the phone listings never charged the hotel 30% of their revenues, and as the hotels now have to meet all their costs with only the remaining 70%, of what you pay, they needed to raise their prices. So now you pay more for the convenience of using the OTAs.
Why not just avoid the cost of the OTA / booking website? Because you can’t !
The whole idea of a gatekeeper is that they are perfectly acceptable as long as their are other gateways. Unfortunately, legally binding agreements block those other gateways. All the OTAs require the hotels etc to enter into agreements to not advertise or offer any room at a price below the price of booking through the OTA. If a room was $100 previously and now to allow for the commission it is $140 when sold through the travel website to cover the cost of the commission, then it has to be no less than $140 everywhere.
The OTAs always try to insist hotels cannot sell rooms at a lower price, thus ensuring they can guarantee to offer the lower price, even though it is an inflated price, but in some states or countries these agreements are against free trade laws, and then accommodation providers are only blocked from advertising a lower price.
If you speak with the hotel directly, they may be happy to give you the room for $110, giving them a little extra an you paying less, but they cannot advertise that price, or in many cases would even be breaking their contract to even offer you a discount for booking directly.
The agreements, make the OTAs true gatekeepers, and block less expensive paths to avoid them, or a least less expensive paths being advertised.
So as consumer, you must fund the profits of the booking website, even if you do not use them, and it is more convenient to use them given you are paying extra anyway.
Can’t the hotels and other accommodation providers just say ‘no’?
The problem becomes that the travel websites now effectively own the customers. In a sense, a hotel operator becomes merely a supplier to the business that own the customers. While they can try and go it alone, it becomes very difficult when potential customers are all shopping on the web, and only finding the websites that can pay search engines to be highly ranked. As indicated here, big chains can fight back, but for the smaller operators, it is almost impossible.
Resulting inflation and economic impact.
Not all bookings go through travel websites, just most bookings. This means at a national level, the accommodation industry is not paying the full 30% “tax” to the OTAs as not all booking have the “tax”, but closer to an average of 15% of all revenue. The impact on profits is far more significant. If you consider a country where tourism is very important such as Fiji or New Zealand, then 15% national economy that arises from tourism, has just been appropriated by these travel websites, which are all based outside the nation.
But it is not just hotels.
Gatekeepers in the restaurant market.
Uber Eats etc, are all becoming the same type of intermediary in the prepared meals market as the OTAs in the accommodation market. Again, the margin charged by the gatekeepers are very significant, and do not go to the industry but instead to a consolidating industry of intermediaries.
Not to single out Uber Eats as they are just a typical example, but if you watch an advertisement, it is typically about a certain cuisine from Uber Eats, effectively reducing the local restaurant to a supplier to Uber Eats.
Again, food outlets signed up to the concept of incremental business often to find, particularly with changes in behaviour accelerated by the pandemic, that the margins are now applying to a significant part of their business.
Again, for many countries, the result is part of revenue for an industry has effectively moved offshore, and worldwide, there are now significant revenues withing the food intermediary/delivery business that previously did not exist.
While the fees of the new industry bundled are usually hidden within the food prices, the money must come from somewhere, which means the price of the produce must increase, creating another source of inflation.
Amazon: A gatekeeper for retail?
Amazon, was not created to produce books, simply resell books. An while this makes them already an intermediary, not an new type of intermediary, as the books were typically sourced from publishers who do not normally sell to the public, but instead delegate that role to retailers.
An intermediary is where the products or services supplied to consumers by the intermediary, are available to the consumer from the same supplier used by the intermediary.
To book retailers, Amazon was a competitor, but not a gatekeeper on the industry.
Amazon expanded by becoming not just a retailer of almost anything, but an intermediary for businesses that are themselves already retailers. Technically, a large percentage of what you can buy through Amazon today, you could buy directly from the business who ‘fulfills’ the order, or supplies the goods to Amazon.
Amazon provides acts an intermediary, even whether an intermediary is required on not. In theory, Amazon could become the only retailer in the world. Perhaps this could be efficient, but it would also be a disturbing concentration of power.
I know someone who already buy literally everything from Amazon. They live in Seattle whether this is possible as you can buy even groceries from Amazon and have a coffee in an Amazon café in Seattle.
in business beyond books, and now, many products than can be purchased online through Amazon, are actually supplied or even ‘fulfilled’ by another ‘supplier’ retail business. Amazon owns the customer relationship, for sales through Amazon.
I do not see Amazon as increasing prices, but it is reducing the income of many others and must be creating unemployment. Society is funding the enormous wealth of Amazon, and is this all through savings, or is the funding of this wealth also represent more from out pockets than is reasonable?
I suspect the same rule applies with Amazon as with other gatekeepers: when it seems the service being provided is free, be suspicious.
The media gatekeepers.
Facebook, Google, Twitter, Tick-Tock, YouTube etc..
I suggest the rule about a need for suspicion of free services, reaches another level with the media, or ‘influence industry’ players.
How do they earn revenue: advertising.
But it should not be forgotten that the cost of that advertising becomes a component of the products we buy, just as the cost of booking websites becomes a component of the cost of staying in a hotel.
Yes, some of the revenue of Google and Facebook etc is simply a result of advertising moving from television and newspapers to social media, but looking at the revenues of Google, Facebook etc., I cannot help feeling the total amount spent on advertising is rising as a result of their presence.
If so, then the percent of all our expenditure on products which goes via advertising back to Google etc is rising, and less and less of what we spend actually is for the product itself.
Further, as the abilities of the these companies to influence consumer behaviour increases, so does the need and importance for any company to allocate whatever prices these companies demand for advertising such that the product sells. In effect, as gatekeepers of information, the media companies who influence our decisions may reach the point where then can demand whatever they like. We may end up paying more in ‘advertising tax’ to Google etc than in sales tax/vat/gst or whatever the relevant government calls their tax. These companies could become more wealthy than governments.
The Dream Vs The Dystopia.
The Dream: total disintermediation.
In the dream, everyone can directly contact anyone else. Whatever you wish to buy, you can purchase directly from the producer. Of course, without something like Wikipedia functioning as a source of product data, we would never find out about products, but it could be done if people with the right motives took the right steps. Of course a problem can be that people who can make the biggest profits, and therefore cost us individuals the most, have the most to spend on promoting their way to do things.
The Dystopia: Gatekeepers rule the world.
Of course it won’t happen, but if gatekeepers were able to collect enough in gate fees, perhaps they could become unstoppable. Just as running for President of the USA has become extremely expensive, so could the launch of any new product. In the end, just as consumers end up paying for the cost candidates in elections, consumers end up paying for costs companies face in bringing the products consumer buy to market. they buy to market.
In the dystopia, if we travel, where we stay is determined by ratings by the ratings of OTA group we buy our accommodation from, and that industry exists solely to provide rooms to the OTA. What percentage what we pay will go to the providing of the room?
Our meals all come from food delivery services, who now also operate dining venues, and who provide cuisines and price points, but where the food comes from has ceased to become important, as all the chefs now effectively are just suppliers to the food services.
There is only one retailer, and that is Amazon.
For whatever product you buy, most of the price is allocated to influencing you to make the purchase.
Conclusion.
When you look at all the earnings of the various new gatekeepers, who all earn huge revenue streams without charging us directly and instead require almost everything we buy to incorporate their fees, even when we do not buy through them, is it any wonder there is inflation?
Of course the dystopia is the extreme, and we will all get together to block it before it gets to this, as it is not like the media companies can get masses of people supporting totally illogical ideas, or can get people so polarised into opposing groups that action becomes just too difficult.