Letter from the Personal Finance Editor: Cutting out the middle man could spell disaster for employees and consumers alike


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The Independent Online

The collapse of Phones 4u into administration yesterday left 5,596 workers facing unemployment. That’s a tragedy, but is the inevitable result when suppliers decide to – as it is known in business jargon – disintermediarise.

In plain English that means cutting out the middle man. That’s the fate of the 25-year-old mobile phone retailer whose supply was cut, first by Three, 02 and Vodafone, and then on Friday by EE.

In a statement, EE talked about a “strategy to focus on growth in our direct channels”. In other words it wants to sell more phones and contracts direct to consumers.

It’s a strategy that many suppliers crave. To bandy around some more business jargon, it’s the business dream of vertical integration, where everything in the supply chain is owned by one business, from production, to marketing, to distribution and delivery. When a business owns all those elements, it can pocket all the profits.

So while yesterday’s announcement is a tragedy for staff, it could also prove to be a tragedy for consumers. Why? Because squeezing intermediaries out of the market is likely to end up reducing price competition.

Intermediaries are not always simply an extra layer of people to be paid. They can also act as a check on an industry and negotiate keener prices. Without that layer there’s little to stop firms acting in unison and raising prices.

It’s a criticism that’s often been levelled at the energy industry, for instance. When one supplier raises prices they all do. The mobile phone industry is in danger of heading down the same anti-competitive path.