Middlemen in a Digital Age

I am apartment hunting in New York City for the first time, and an interesting experience. When I moved into my current place, my roommates had already done all the legwork, so I just signed the lease. Now, I'm getting a real understanding of the NYC housing market. The process is time-consuming, expensive, competitive, and difficult enough on its own, so we enlisted a broker's help. And then on top of rent, fees, and moving costs, you're expected to pay a 20% of your annual rent as a broker fee. Essentially, for someone to send you StreetEasy links, unlock a door, and give you a 10-minute tour of an apartment.

In Chris Paik’s Frameworks, he defines the atomic value swap as the measurement of the sustainability of repeated core transactions in an ecosystem. It gets me thinking about “The Broker Economy” and how middle men are able to extract significant profits across various industries, often without adding the commensurate value.

In NYC alone, the real estate brokerage industry is estimated to be worth billions annually. Brokers typically charge 20% of a year's rent for rental properties and 5-6% of the sale price for home sales. But it obviously goes much further beyond real estate. Consider investment banking. These firms act as intermediaries in large financial transactions, charging 4-7% of the total amount raised for IPOs. The global investment banking industry revenue was estimated at $339 billion in 2023. Insurance brokers are another example, with the global insurance brokerage market valued at $450 billion in 2023 and projected to reach $597 billion by 2027.

It is interesting to think about are these intermediaries adding value commensurate with their fees? In some cases, yes. A skilled investment banker might indeed help structure a deal that creates more value for both parties. A knowledgeable real estate agent can help you navigate a new market.

However, in many cases, it seems that brokers are profiting more from information asymmetry, a competitive market, and entrenched systems than from genuinely adding value. In the internet age, when information is readily available and direct connections are easier than ever, do we really need to pay such high fees for intermediaries?

This brings us to an intriguing paradox: why do brokers continue to thrive in industries where technology should, in theory, make them obsolete? Take real estate, for instance. Despite platforms like StreetEasy providing easy access to listings, brokers in NYC continue to dominate the market. Several factors may contribute to this: local expertise, access to off market listings, negotiation skills, time-saving, and psychological comfort.

This phenomenon isn't limited to real estate. In the entertainment industry, despite the internet allowing direct artist-to-fan connections, record labels and management companies remain powerful gatekeepers. In a growing competitive pool they offer valuable industry connections, sophisticated promotional strategies, and financial resources for upfront investments. The persistence of brokers in the digital age reveals deep-seated economic and psychological factors that go beyond mere information access. Trust, expertise, convenience, and the ability to navigate complex systems continue to provide value, allowing broker-like businesses to thrive even as technology evolves.

As we look to the future of the creator economy, it's likely that new forms of specialized intermediaries will emerge, adapting the broker model to new technological and market realities. We are already seeing audience matching services that connect creators with their ideal audience segments, collaboration facilitators that broker partnerships between creators and brands, or cross-platform managers that help creators maintain consistent revenue streams across multiple platforms.

Ultimately, the endurance of the broker economy teaches us that human factors – trust, expertise, and convenience – remain crucial in economic transactions, even in our increasingly digital world. As technology continues to evolve, successful brokers will be those who can effectively blend human touch with technological efficiency.

The broker economy is a fundamental property of our economic universe, one that we often mistake for a personal failing or a temporary inefficiency. But like other fundamental properties – gravity, evolution, market forces – it is persists despite our attempts to circumvent it. The challenge, then, is not to fight against it, but to understand it, adapt to it, and where possible, leverage it to create new value. (I still really don’t wanna pay that broker’s fee though…)