Gaining the trust of your customers is important in business, particularly in the on-line world, where choices continue to proliferate and the ability to switch between them grows ever easier. Yet received wisdom has it that any players specializing in customer information will serve vendors, not customers. We believe that two key developments challenge this idea.

First, in a networked economy, the ability of customers to capture information about their own behavior and preferences implies a corresponding ability to withhold this information from vendors that seek it. Second, the sheer accessibility of such information has raised a host of concerns about privacy. These shifts in the nature of economic activity will force companies to negotiate with customers to gain access to information about them.¹ As a result, new entrants—"infomediaries"—will specialize in collecting customer information in a new information-intensive economy. We define an infomediary as a business whose sole or main source of revenue derives from capturing consumer information and developing detailed profiles of individual customers for use by selected third-party vendors.

Infomediaries will handle negotiations and payments and add value by processing customer information. After first emerging in networked sectors of the economy, they will eventually expand into physical business transactions, thereby transforming the competitive landscape for traditional and networked players alike. The scale of this transformation could be formidable.

The business model

Today’s vendor-oriented infomediaries fall into two basic types: audience brokers and lead generators.

Audience brokers, notably DoubleClick, capture user information across multiple World Wide Web sites to help advertisers reach the right audiences. Audience brokers also exist in the physical world: for example, print brokers in newspapers and magazines, and rep firms in radio and television, use their knowledge of audience composition to help place advertising packages. Although audience brokers may position themselves as media buyers, their primary value lies in their ability to find the best audiences for advertisers.

Lead generators aggregate potential customers according to individual profiles, preferences, and other criteria; translate these data into specific product and service needs; and then direct customers to vendors whose offerings meet those needs. A prime example on the Web is Autobytel.com, which provides a national network of 2,200 car dealers with consumer requests in return for a fee per lead. Similar services exist in the physical world too: FTD uses a phone and fax network to distribute orders for flowers, while mortgage brokers amass customer profiling data to place mortgages with appropriate lenders.

The new breed of infomediary, distinguished by its overt allegiance to customers, will do the following:

• Obtain maximum value from customer information profiles by using customers’ previous choices to deduce which product or service would best match their needs and then finding the vendor capable of delivering that product or service at the cheapest price (agent function)
• Represent the interests of customers in negotiations with vendors seeking access to information about them (proxy function)
• Screen commercial messages from vendors so that they are relevant to the customer (filter function)

The five infomediary types—audience brokers, lead generators, agents, proxies, and filters—will operate according to a variety of economic models.

Vendor-oriented infomediaries will be paid a commission to help vendors target and reach relevant customers, in effect charging for page impressions, click-throughs, and leads. Customer-oriented infomediaries are likely to operate under a radically different economic model, in which revenues consist of payments made directly by clients for services rendered or a commission on revenues accruing to clients from vendors as a result of those services.

An industry is born

As Web sites proliferate and generate an oversupply of advertising venues, the need to aggregate customer information across fragmented sites will grow stronger—thus providing an important intermediary function for audience brokers. Lead generators will play an equally valuable role by helping vendors exploit scale advantages in marketing and by aggregating profiles of sales prospects that can be parceled out to the most suitable vendors.

In time, however, the early success of vendor-oriented infomediaries will probably be undermined by new technologies that give customers more control over personal information. The main impact of these technologies will be to let customers visit Web sites and conduct transactions in total anonymity, creating a bargaining opportunity for customers to reveal information selectively to specific vendors in return for value. Information that was once a free good, automatically captured by vendors during interactions with customers, will become an economic good that must be "purchased" by vendors in exchange for cash or tangible value.

Technology is merely the enabler in this transformation, which is really driven by operational efficiencies. The computers of customers are a far more efficient place to capture integrated profiles of their activities and preferences than a fragmented set of vendors could ever be.

Needless to say, the transformation implies a major shift in customers’ beliefs and behavior and will take some time to play out. But customer-oriented infomediaries are likely to speed up the process by providing the necessary technology tools: a portfolio of services to maximize the value of the information captured and marketing that makes customers aware of the value of the information they are currently giving away. When this happens, vendor-oriented infomediaries will find it harder to survive, since customer-oriented infomediaries will preemptively capture the customer information on which they rely and deliver—more efficiently—the services they used to provide.

Proliferation followed by concentration

When the right technology tools become available, there will be a rush to set up customer-oriented infomediary businesses. In the early days, specialized niche players are likely to target specific opportunities to act as agents, filters, and proxies, as discussed above. Eventually, however, these niche players may find themselves at a disadvantage to full-service infomediaries because it is far less efficient for many specialized providers to capture and manage the same information (customer profiles) independently than for a single database to deliver the full range of services. This factor is likely to drive the first wave of consolidation.

Full-service customer-oriented infomediaries, prompted by economies of scope and increasing returns dynamics, will themselves begin to consolidate. Infomediaries with large, diverse customer bases will enjoy an advantage over those with narrower customer bases, thanks to new collaborative agent and filtering technologies that identify clusters of customers who display similar needs and interests. When certain customers within a cluster buy a particular product or service, the collaborative agent or filter suggests to other customers in that cluster that they might also like it. The broader the sample set of customers, the more accurate the clusters are likely to be and the more valid the recommendations. Further consolidation will be driven by a second economy of scope that comes from building a customer profile encompassing many product categories; a book buyer who purchases travel guides to Bali is probably intending to go on vacation there, for instance. Thus, product-focused infomediaries should give way to broad-based infomediaries serving the full range of their customers’ product and service needs.

Powerful increasing returns dynamics will also drive industry concentration over time. These increasing returns will result from the powerful interplay between trust and the value delivered to the client. Trust is difficult to build at the outset but deepens over time as the client base broadens.

Trust is also reinforced by the increasing value a consumer receives from an infomediary that understands not just one person but also others with similar tastes and habits. The more interaction an infomediary has with consumers, the more insight it gains into their needs and the more proactive and precise it can be in delivering agent and filter services. The information profiles an infomediary offers to vendors in turn become more compelling and thus generate larger revenues. The interplay between trust and value also serves to build barriers to entry.

The growth of an industry

The customer-oriented infomediary business is likely to generate substantial revenues for the winners in the consolidation game. We estimate that within the next decade it could generate $10 billion a year in the US consumer market alone, with only 10 percent of US households (roughly 10 million) subscribing.

Each household subscribing to a full-service infomediary will pay, according to our model, a basic fee of $55 (roughly equivalent to an annual credit card fee). The remaining infomediary revenue of roughly $950 per average client is commission revenue, a proportion of the value received by that client. This value has the following three components:

1. Cash revenue, averaging $730 per household, for the sale of customer information—a figure calculated on the basis of that household’s likely purchasing activity and the amount vendors currently spend on advertising and promotion to reach similar households
2. Net savings, averaging $1,250 per household (or 15 percent less a 21.5 percent agency fee) made on on-line retail purchases as a result of agent services
3. Big savings in the time households spend in searching for products, capturing and managing purchasing information, and similar activities

Aspiring infomediaries should invest in acquiring clients and building database-management capabilities well in advance of the inflection point—the point when the accumulation of clients and information profiles crosses a threshold of perceived value to current and potential clients. Early on, cash will be consumed and profitability depressed. If the business is highly fragmented, as might be expected in the early stages, the aspiring infomediary faces the prospect of spending heavily on marketing to differentiate itself from the pack while suffering intense pressure on prices and margins as other players seek to acquire market share preemptively.

However, once the inflection point is reached and the expected shakeout occurs, the value of these businesses should soar. The combination of improving margins and accelerating growth should generate substantial shareholder value. The leading infomediary ten years from now—with $4 billion in annual revenue, strong profitability, and high growth potential (since we assumed that only 10 percent of households would be penetrated in the first wave)—might conceivably represent a shareholder value of $20 billion. Two other leading players, each representing some 20 percent of the market, could account for $2 billion in revenue apiece.

The impact on physical markets

The rise of infomediaries will change the nature of business in the physical world too. Traditional businesses may well find themselves under pressure to profit by gathering customer information or exploiting it in their own operations. As consumers become accustomed to personalized service on-line, for instance, they will come to expect it in hotels, restaurants, airlines, and stores. These businesses will also find themselves in demand as collectors of data in their everyday interactions with customers. They too will call upon infomediary services. Eventually, the infomediary would no longer be confined by the boundary between network and physical space.

Who can play?

Existing players should determine whether they have the assets they would need to become infomediaries:

• Brand breadth. Do you have a sufficiently broad or flexible brand positioning among your target customers to market a diverse range of products and services? Only brands that enjoy broad, cross-category relationships with customers will furnish a context in which horizontal (as opposed to vertical, or single-category) patterns of consumer behavior can be observed and interpreted effectively.
• Emotional bond. Can you engender high levels of trust in your target customers?
• Transaction intensity. Do you process, or have access to, a large enough volume of transactions across a variety of products and services to extract the detailed profiles of customer preferences and purchases necessary to generate powerful insights?

Among existing players, five separate businesses may have the potential to play an infomediary role: fiduciaries, retailers, purchasing brokers, database players, and media players.

Fiduciaries

Companies with large, loyal populations of affluent customers who have grown accustomed to sharing personal information with them are fiduciaries. They can be found in financial, entertainment, community-oriented, and lifestyle services.

In financial services, American Express is a prime candidate. Amex has managed its customers’ access to purchasing power for decades, first in the form of traveler’s checks and later via charge cards and credit cards. Its customer base numbers tens of millions of people throughout the world. Through its travel and leisure services operations, Amex markets everything from package holidays to consumer products. More recently, it has moved into financial advice, small business services, and investment vehicles.

The company still performs its familiar role in the lives of travelers overseas: in cities around the world, Amex offices provide instant credit, replacement checks and cards, and a postal address for tourists and expatriates. It is thus well placed to harness the emotional bond, brand breadth, and transaction intensity needed to act as an infomediary in building, maintaining, and marketing detailed cross-category customer profiles.

Other firms that could aspire to an infomediary role include USAA, a property-and-casualty insurer; AT&T, the world’s leading telecommunications brand; and Disney, in family entertainment.

In theory, fiduciaries, as entrenched players, are ideally positioned to establish themselves as powerful infomediaries. Yet their scale and history also make them the least likely pretenders to the infomediary marketspace. Just as IBM unwittingly created Microsoft’s first market opportunity by licensing Microsoft’s original PC operating system, fiduciaries are more likely to outsource the role of infomediary than to take it up themselves.

Retailers

Another type of established player might have an easier time playing the role of infomediary: major retailers, whose success has always depended on acting as an intermediary between vendors and consumers. Becoming an infomediary would therefore represent a less radical departure for retailers than for fiduciaries. But few retailers have the necessary brand breadth or transaction intensity. Those that do may find the infomediary business a natural extension of their existing customer-loyalty programs, which already gather detailed transaction histories to build rich customer profiles.

Firms that might qualify include Wal-Mart, Kmart, and Sears in general merchandising; Tesco, a UK grocery chain; and Nordstrom in upmarket apparel. General merchandisers enjoy strong links with families or households and can track long-term buying patterns across many consumer segments. Moreover, their stock covers thousands of everyday products, from branded packaged goods to consumer durables. Similarly, grocery chains, with stores boasting an average of 35,000 stock-keeping units (SKUs), can use customers’ food choices to gain insights into the size of families, their members’ ages and needs, price sensitivity, brand loyalty by category, and possible future health risks. Such insights can be powerful, especially when linked to a loyalty program, like Tesco’s, that rewards regular shoppers in appropriate ways, such as giving them vouchers for discounts on frequently purchased goods.

Companies with loyal customers may possess the depth of trust needed to become infomediaries

Companies whose high-quality merchandise and outstanding service help them form intense, long-standing relationships with loyal customers are likely to possess the depth of trust to become infomediaries for their target markets. An obvious example is Nordstrom, which has become something of a legend for putting its customers’ interests before its own, even "taking back" products purchased from other stores. Indeed, so high is Nordstrom’s credibility in its customers’ eyes that it might even be thought to represent their interests better than they could themselves. What position could be better for a company seeking to act as a proxy in the infomediary world?

Retailers do, however, come with the same baggage as fiduciaries. It is difficult for firms that have earned their spurs in the world of retail sites and supply-chain management to compete in the market for pure information. But if they can overcome their historical bias, the rich consumer relationships they command would provide the right foundation for the infomediary business.

Purchasing brokers

Firms that exist primarily to aggregate consumer demand as power buyers or brokers are in an even better position to become infomediaries, since they already earn their living by gathering, processing, and exploiting information about individual people. One example is CUC International, which offers members of its purchasing service the lowest possible prices on a broad range of goods by selling at or just above cost in exchange for membership fees billed annually. With a claimed 350,000 SKUs of general merchandise inventory, supplemented by its apartment rental, grocery delivery, and travel services, CUC has already amassed a huge database of consumer buying histories.

HFS, a firm with which CUC has agreed to merge, has played a similar game in hospitality and travel services. With millions of customer profiles, the resulting company, Cendant Corporation, will represent a treasure trove of consumer insights. Were the company to expand beyond membership fees to collect other types of infomediary commission, it might come to dominate an even larger segment of the US population in this area.

Database players

Firms that possess core skills in managing customer information for risk management, payment processing, and other financial purposes are natural contenders in the infomediary marketspace.

Companies such as Equifax and Experian have collected decades’ worth of consumer credit histories, which they supply to the retail and banking sectors for credit card purchase approvals, loan authorizations, and mortgage applications. Their records of how much customers spend on what give them an inherent advantage in entering the infomediary fray.

Database marketing consultants such as Epsilon and Omnicom’s Rapp Collins Worldwide also have access to substantial cross-category purchase data in their customer records. Rapp operates one of the largest customer information systems in the world for Loyalty Management Group’s Air Miles Canada; its database contains more than 600 million items of data for a customer population numbering in the millions. Data warehousing firms such as Acxiom enjoy similar advantages. Firms like these would, however, come up against one distinct disadvantage in the infomediary role. Although they have access to masses of transaction data pertaining to numerous products and services, they have limited brand presence in consumer markets—and sometimes none at all. Insofar as they are known, consumers normally have quite the opposite of an emotional bond with them; many loathe credit-reporting agencies and are deeply suspicious of database marketers.

With such a reputation, database players are unlikely to succeed in establishing infomediary businesses on their own. Instead, they would have to form partnerships with companies that could bring consumer-friendly brands to "front" relationships with customers. Whether such a strategy is viable remains to be seen.

Media players

Last but not least among potential infomediaries are the media companies that aggregate audiences around content categories to market them to vendors for advertising purposes. Companies such as NBC (General Electric), News Corporation, and Time Warner in traditional media, as well as America Online, Yahoo!, and Cnet in new media, could in theory develop their existing mass-audience relationships into individual customer preference profiles. Such an approach would mean shifting the focus of the business from originating and packaging content to customer analysis and insight, so it is unlikely to come about other than through strategic alliances.

Among existing media players, the most probable winners are firms that combine several sets of characteristics: the brand presence of the fiduciaries; the emotional bond and transaction intensity of the retailers; and the customer information, access to transactions, and analytical methodologies of the purchasing brokers and database players. Companies such as Intuit (the developer of Quicken software) and Charles Schwab (with its on-line extension eSchwab) might be excellent candidates. Such firms have substantial brand equity, and customers, viewing them as reliable, trust them with sensitive financial information.

In all likelihood, existing players will form alliances to operate infomediary businesses.

The business opportunities and challenges implied by the infomediary role extend to the core of a firm’s existing businesses. Today’s corporate world is far too cavalier about customer information. The transformation we describe may take years to come about, but companies seeking to turn it to their advantage must act now. Building new skills and mind-sets takes time, and raising levels of trust among consumers is a slow process.

Senior executives who wish to alert their management team to these issues can find out where their company stands by answering two critical questions:

1. Would customers trust the company to act as a custodian of their most sensitive information?
2. Can the company extract the maximum economic value from the customer information available today?

Unless the answer to both questions is a resounding "yes," there is no time to waste in developing a plan of action. If senior management doesn’t get personally involved in understanding the possible implications of the rise of infomediaries and move smartly to reposition the business, the information and profits that are flowing freely today will almost certainly be at risk tomorrow.