By:Sarah Lacy

There’s a reason that healthcare and public education are the least functional parts of our economy. In neither is the person receiving the treatment the one actually paying the bill.

First off — calm down, crazy Libertarians — I’m not suggesting we abolish either. But it’s certainly a problem that in both healthcare and public education there’s inherent confusion over who the customer actually is.

Think about how much the battle over public education doesn’t revolve around the students. The fact that teachers aren’t able to be fired for poor performance, for instance. That has to do with political officials allocating money and making rules, and basing those rules on what messages well to parents and the unions that support their campaigns. The kids themselves literally and figuratively don’t get a vote.

Healthcare is even more convoluted. We have a system where the doctors sell treatments to patients who don’t pay for them. For people with generous insurance, doctors are economically incentivized to order excess tests and treatments a patient doesn’t need, and the patients have no economic incentive to push back. For those with lousy insurance, they frequently can’t get the care they need, because the system is priced for a deep pocketing third party to pay steep medical fees that few individuals can absorb and avoid bankruptcy.

This even affects drug discovery. Only things that insurance will pay for — and pay for en masse — get green lit on the long, expensive track of human trials and FDA testing.

These may be two of the most egregious cases of a weird triangle of people who provide a product or service, those who pay for it, and those who should be the customer being somewhere weirdly in the middle. And in both health and education there are convoluted social safety-net reasons why things can’t be simplified.

But many other industries display a similarly weird disconnect between provider and customer, with far less justification beyond a vestige of a pre-Web era when sales channels were rooted in a brick-and-mortar, physical distribution system. Media is a big one: The end customer — the reader — doesn’t pay the bills in most media. Think about music: The transaction is really between the label and the artist, which is why many individuals felt fine about piracy.

Slowly but surely the Internet is smashing down a lot of these bizarre triangle-economies into flat, straight lines between the company providing a good or service and the person consuming it. Or at least straighter lines. There will still be ad-supported media businesses, but other methods of “tip jars” and Kickstarters are springing up alongside them.

We saw this flattening of the supplier-customer early on with some things like travel agents, but mobile is pushing it aggressively in many industries because now the Internet goes with us everywhere.

I got into a fascinating conversation about this last week with Dan Rosensweig, and I haven’t quite been able to look at the world the same way since. Rosensweig — once a senior executive at Yahoo, private equity partner, and head of Activision’s “Guitar Hero” franchise — has been quietly building text book rental company Chegg into a juggernaut that aims to solve every pain point college students have.

Think of it like AngelList. The way AngelList seeks to help entrepreneurs solve the hassles of funding, electronic term sheets, and hiring, Chegg wants to help students pick their schools, rent students textbooks cheaper and easier, and help get them homework help. Rosensweig has been aggressively acquiring companies and building a professional management team as it builds this big vision out.

But at the core of every reason that Chegg works is one thing, says Rosensweig: It’s totally reinvented who the customer actually is in this transaction. “Textbooks used to be for professors, not students,” he says. Books were bought and sold a certain way, because it was convenient for the book stores and teachers and publishers, but never the students. Chegg has changed all of that in both small and dramatically large ways.

Chegg’s textbooks are not only cheaper, but more convenient. They will send students a new textbook if they complain for any reason about the one they’ve received. They’ll take any textbook back within 21 days for any reason. If a students waits until the last minute to order one, they’ll make the material available online until the book arrives. If you just need the damn first chapter for that week’s class, they make it possible to just get the damn first chapter. It’s all about need it now, not buy it forever.

I remember in college cramming for an exam and looking furiously for one sheet of paper with one day’s lecture notes on it. It was the only sheet of paper that mattered to me in the world at that moment, and I couldn’t find it. As a turned over my dorm room, it occurred to me that at that time I would have paid any amount of money for that sheet of paper — the same one I would happily throw away the day after the exam.

This insight is why Chegg’s business is up, and Barnes & Noble’s college publishing division is down 7 percent this year, Rosensweig says.

Beyond textbooks, schools recruit students over Chegg, and it connects them with other people taking their course for free and paid homework help and note-sourcing. It helps them plan their course schedule, telling them what their school requires and who else is taking each class. Rosensweig wants Chegg to be a third “graph” of the Web — similar to LinkedIn’s professional graph and Facebook’s social graph. It’s the education graph.

I should note a lot of people want their company to be the third graph of the Web. MyHeritage and other genealogy sites want to be your family graph; many companies want to be a “taste graph.” The utilities of all of these are still up for debate.

Clearly everyone doesn’t need an education graph. But every year there is a huge number of incoming freshman who do. And it just so happens, they’re people a lot of businesses want to market to. “You’ve found the perpetual fountain of youth,” a marketing executive looking to sell stuff through Chegg recently said to Rosensweig.

In that sense, Chegg will start to become less about the classroom as it dominates everything connected with the classroom. Earlier this year, it did a promotion with Taylor Swift’s new album to pick a college for her to do a televised concert. Students voted — and rallied votes for their schools — on Chegg. Swift’s people knew Rosensweig from his “Guitar Hero” days, but they came to him for the promotion, because they wanted to reach exactly that college demographic. Few places have it. Facebook gave up that concentration long ago.

Rosensweig sees this trend not just at Chegg but everywhere. He sees three big trends playing out in the digital world right now. One is about the end of ownership. The second has to do with location. But this third trend — a radical reshaping of the relationship between companies and their real customers — is the biggest he sees and the biggest he has ever seen. “I am 51 years old and have been in the industry since 1983, and this is the biggest change I’ve seen yet,” he says. “We are selling to a whole generation that has never gone a day without the Internet. They want to pay what they expect to pay, and they don’t understand why they can’t.”

You may call it millennial entitlement — the very same generation that wonders why HBO can’t just put “Game of Thrones” episodes online ignores the realities of what that may do to legacy businesses. This is the generation who stole music rampantly. This is the generation that will likely never buy a newspaper. But love them or hate them, this is the growing consuming class in this country. And as my kids’ generation grows up with the Internet in their pockets, the trend will become more extreme. The good news is this: In many cases they are happy to pay — and even pay more on a per transaction basis — to get what they want in a more convenient and per-slice way.

Done right, this is an entirely new way to make money online. A lot of money, in many cases.

It’s not simply about taking a middleman out of the equation; sometimes it’s about inserting a new middleman. Spotify, Apple, and Pandora inserted themselves as additional middlemen when it came to music. Similarly, Uber connected drivers directly with passengers, whereas in the past town cars used to deal with corporate accounts. But it made itself the conduit in every transaction at the same time.

Cloud computing has allowed individuals to pick the software they want to use, making the worker bee the customer, not the IT manager. But they stay in the transaction, they don’t ship the software and let consultants worry about the rest. Consumer software has had a similar revolution with less and less of it appearing shrink wrapped on a shelf at BestBuy. The focus is 100 percent on whether someone wants to play your game, not on the shelf space it may get.

This one in particular has not been lost on Rosensweig. The reason he left Activision was that he wanted to expand “Guitar Hero” into online versions, and the company was resistant to it. They knew how to sell through retail channels; that’s what they were optimized for, and that’s what they were good at. But Rosensweig wanted to design products for all those would-be thrashers out there, not constantly worry about what BestBuy and Wal-Mart wanted. He wanted to price the software at what he wanted people to pay, not leave it up to the retailer to discount it heavily to get people in the store. He wanted to put out a new version with explicit lyrics if that’s what users wanted, without Christian groups boycotting Wal-Mart, and Wal-Mart telling him what his customers want.

There’s danger of this trend making a generation of spoiled brats even more spoiled by giving them exactly what they want at that moment in the way they want it. But there’s also a beauty to using the Web and mobile devices to make our daily lives so much better.

Imagine if Starbucks knew my order as I was pulling into the parking lot, and it was ready the second I walked in. Or better yet, if a barista could automatically run it out to my car the exact second I pulled up. I may not pay more for that everyday, but I sure as hell would if I were late to a meeting with a screaming baby in the car. A lot more. Imagine if my neighborhood restaurants knew my local, big-tipping self was the one who wanted a reservation at 8 pm, not just an anonymous user on OpenTable. They might find some room. And odds are, I’d tip much bigger to make sure I got the preferential treatment the next time. This is why Uber’s surge pricing is genius when it’s not gouging victims of a natural disaster. There are select times when I’ll pay double for a cab. Simply allowing me to do so makes everyone happy.

In a world where the computer knows where we are and who we are and can seamlessly charge us, the world might get more expensive. But it could also get a whole lot less annoying. ”This is what big data means to me,” Rosensweig says.


Reuters