BlackBerry needs to enter with, 1) a radically better device, which they seem to have created by having a touch screen that really does work like a keyboard too;  2) a radically better price — $0 comes to mind; and 3) a fluid market for innovation – the way that Apple does with its App Store.  

The early reviews say that the Blackberry Storm has a touch screen that mimics a keyboard in feel, sound, and performance.  We have not had the chance to use it ourselves, but if the reports are right – check off their first Challenge. 

On the price—Challenge number two —our Diamond Fellow colleague Professor Dan Ariely has a wonderful research paper, Zero as a Special Price: The True Value of Free Products in which he and his co-authors show that if you decrease price from 1 cent to zero you can radically change the uptake of one product over another.  If BlackBerry’s Storm enters the US with a zero price for the device, it is our prediction that it will gain significant adoption.  This zero price should be made available to both new customers and as an upgrade for existing ones.   When people are considering smart phones, they will easily choose free products of equal or better value to all other options, encouraging adoption. 

The third leg of Blackberry’s business design challenge is to create a facile market for innovation which unlocks the creativity of end users, and has an interface that is as easy to use as the Apple App Store, which I have written about before.  Creating a market in innovation lowers cost of creation, lowers risk for the manufacturer, and drives participation and commitment of users.  What’s not to like? They have begun this process, but the quality and depth of their user generated applications has a long way to go, and their store pales by comparison to the Apple App Store.  

We think the most interesting potential of the Storm is that BlackBerry may have finally looked at the entire business system – device, price and market – instead of simply painting their old device pink, giving it a new name, and hoping for growth (see the Curve strategy).  The useful lesson for us all is that it is at times like these, when the blood flows through a veins a bit faster, and the fear of gyrating markets disturbs our sleep, that it is easier – for the bold – to look at the entire business design, and capture the high ground while others are busy dodging financial bullets.

In your email is a latent network of most of the people you know, and how often you talk with them. The Outlook add on – not made by Microsoft – called Xobni (pronounced ZOBNEE, and named for Inbox spelled backwards) looks through all the mail on your machine and figures out who knows whom by who is copied on which emails. In other words, your emails naturally contain your social network. It would be easy for Microsoft to simply ask your permission to contact the people in your email list, and Outlook contact database, and ask them if they were willing to join your Microsoft social network. Microsoft could either build Xobni-like functionality, or simply buy the firm and they would sprint to the head of the social networking wars.

Who cares? Well, if we look at the history of the internet. First we had the browser wars – Netscape and Internet Explorer – which Microsoft won by a combination of brilliant strategy and brutal tactics. Then came the search wars. Remember Alta Vista, Lycos, Excite? Today they linger today, marginalized by Google who decimated everyone except the struggling Yahoo! and quirky Ask.com. Today search engine marketing is integral to every company’s communications plan and firms dispatch staff to buy search words and study the Google search algorithm in that hope that their link comes back on the first page –what is ironically termed “above the fold” – quaintly reminiscent of the newspapers that Google eviscerates so efficiently.

While Google and Microsoft are busy trying to mine your behavior to serve up ads and figure out who you are, LinkedIn’s 27 million (and growing) users disgorge reams of personal information, including where they worked, where they now work, who they are, who they know, what their interests are, whether or not they are in the market for a job. Jigsaw and Spoke compete with to be the resource for business contacts.

These companies will not go away, as we are only at the beginning of the social network wars. Eventually, every company will have to work with the winning social network firm or firms, just as almost all companies work with Google and Yahoo! The social network firms have superior access to talent, polling, research, and create a platform for the most targeted advertising on the net with messages aimed at the exact the demographic, title, and industry the advertiser wants to reach.

So, are you using the power of these social networks, or is your company stuck in the pre-network world of Microsoft?

On June 3, the Wall Street Journal reported on Wal-Mart’s quiet launch of Oodle.com, a free classified service that carries 30 million items – from Madonna tickets to houses.  Of course this will give them even more traffic to Walmat.com, and provide service to their 130 million weekly customers.  But the more interesting angle is how it allows Wal-mart to better understand consumer demand.  They already dominate all other retailers in their ability to spot trends, analyze data, and capture demand – from Hurricane stock ups, to college car washes, they see them coming.  My bet is that they have ramped up Oodle.com so that they can get access to the new frontier of insight which will come as they analyze the used market, and items they don’t carry.  They can see the used price for things they sell, for things that complement things they sell, and for things they don’t sell, but may be good indicators of consumer sentiment – like cars.  Wal-Mart now has a view into an entirely new set of transactions that helps them to run their core business even more powerfully.   The advantage has migrated from analyzing just purchasing behavior of the new to the new and used. 

They are not alone in creating such an information advantage.  In December Goldman Sachs bought Litton Loan Servicing, which is a mortgage servicing company that services high yield loans.  They used Litton to buy Fremont General’s loan servicing rights for $12.2 billion in loans as well.  Not only will Goldman make money on servicing the high priced loans, but as importantly, by buying this asset, they are able to get superior access to information about the mortgage market more broadly.  The information premium can be found by understanding not only the sourcing, structuring and trading of assets, but also in the servicing behaviors too.

Likewise, back in 2005, Aetna bought Active Health Management a healthcare data analytics company for $400 million to help them better understand consumer behavior, and early indicators of problems so that they could design superior health management plans.  For Aetna to take the next step in accurate pricing and better client servicing, the needed a more complete predictive model of customer health behaviors so that they could intervene with a diabetic by having a nurse call him to take his insulin shot – and they know to make the call due to behaviors tracked by Active Health’s data.  The competitive battle ground is not just in pricing and claims anymore, it has moved to predictive analytics and health management. 

So the questions are:

Where is the information advantage in your industry?

Are you making the strategic moves to capture it and use it to drive value?

Because of habit, most firms never consider increasing the size of the digital window, or windows, that we work within.  If Henry Ford were around you can be sure that his employees would have at least two screens – and often more.  Most people don’t know that you can add an additional screen to any laptop and by changing the desktop settings – which takes less than 15 seconds, creating a continuous work space from one screen to the next.  The mouse moves across; you can drag applications to the other screen seamlessly.  (Windows can drive up to ten screens if you want to get fancy!)Why bother?  Well, two screens allows you to open two full sized windows or applications at once, so if you are looking at your email, you can also see your calendar, or open a written document.  With the trivial cost of 15-19 inch screens (many under $100), every knowledge worker should have at least two screens – because they will pay for themselves almost immediately.This handy tip is part of a larger concern I have.  With the exception of extreme knowledge work jobs like bond trading, or flying a combat aircraft, companies have not thought creatively about the interface of their knowledge workers and the information tools.  For those familiar with “The Bloomberg” – the information utility designed and delivered by Mayor Michael Bloomberg’s eponymous company, it usually comes two side by side screens in the typical installation. 

It is not news that the world of user generated content is exploding – blogs, wikis, and the wisdom of crowds are all the rage. Yet, there are only some things for which the crowd is wise. One need only look at the current mortgage crisis to see that crowds can be very wrong in their judgment, and the great thing about the capital markets is that they keep score. Those who are truly wise make more money and get a bigger voice in the opinion market and in the capital market. Warren Buffet gets more votes because he is better at it than I am. The problem with Wikipedia, and blogs, and user generated content is that many of them don’t have a strong reputation management process. Put another way, any idiot can have an opinion. The most important thing is does the person who is giving an opinion have a good reputation? Is that reputation attached to his or her opinion? Does the person own the downside risk of the adverse effects of their opinion? On eBay, people who are lousy merchants bear the reputation risk. On Amazon, those who generate bad reviews are rated poorly and have less influence. Best yet, on stockpicker sites such as Motley Fool’s CAPS, individuals are rated by the number and quality of their picks over time. So, robust reputations evolve as a consequence of the recommendations of the individuals.

You need three elements to create a robust reputation management system:

1. a persistent identity, so that you are always you when you participate in an end user generated forum;

2. a rating mechanism to vet “high quality” and “low quality” opinions or predictions; and

3. a robust quality process to evaluate and adjudicate conflicts of aberrations.

This three-pronged approach is the essence of scientific inquiry. Experts review experts to see if there is new knowledge created. It is the reputation management mechanism that creates the quality. Almost all businesses are embracing – one way or another – user generated content, but few of them are doing a good job of implementing a reputation management system. Are you willing to live at the mercy of the mob, or do you want to take action to make sure that only true experts have influence when rating your product or service?

First, Donahoe has muffled the ability of sellers to rate buyers. At the same time, he has created volume discounts for his larger sellers while raising prices on the little guys. These are all typical moves for a bricks and mortar player: give discounts for volume and default to “the customer is always right” — even when he or she is a jerk. On top of that, he is pushing more fixed price product through the eBay Express site, giving less emphasis to bidding, and thus, undercutting eBay’s true distinguishing characteristic as the world’s dominant auction site.

There are new protests emerging by the thousands and even YouTube videos from disgruntled community activists. What Donahoe apparently misses in all these changes is that eBay is not a retailer, but rather a social organism that created a way to find latent demand and link it up to sources of supply. To that end, he should not be focusing on new modes of retailing as a means of growth but pursuing new ways to discover even more nascent forms of demand and even more innovative supply methods.

Here’s one idea: Do a deal with Fundable — a company that helps anyone collect money for anything — creating a new movie, buying airline tickets in bulk, or supporting a charitable cause. To understand how it works, consider the example of bulk airline tickets. A seller posts a “collection” on Fundable to raise, say, $5,000 to buy 20 round-trip tickets from New York to Fort Lauderdale at $250/each. The tickets are $300 when bought individually. The seller is tapping into latent demands that simply need funding to be realized. Funders are just buyers shifted in time – they “buy” before the supply exists.

For this retail form of fund raising, Fundable charges 7%. With Fundable in the fold, eBay could extend its vast audience’s desire to acquire well beyond what’s available through sellers — to pretty much anything they can think of. In essence, this will allow eBay to create new supply with the demand already baked in.

This is a natural extension of the original eBay business model – finding new sources of supply and demand and lowering the transaction and search costs that keep those buyers and suppliers apart. Fundable’s 7% would be great for eBay’s bottom line. Moreover, there are also enormous social benefits for eBay here as they would take Fundable’s powerful tool to raise money for charitable causes to an enormous new audience.

Would a deal with Fundable solve all of eBay’s growth challenges? No. But it’s the type of move I believe eBay should be making: extending its model of organic, social commerce to new markets — rather than sliding ever closer to the e-retail space dominated by Amazon.

(This post can also be seen at coversationstarter.hbsp.edu)

IT makes up 7% of the operating expenses in the average firm and up to 18% of the cost base in information-intensive industries such as financial services. Given its size, IT must be considered for reduction; but the temptation to blindly cut must be resisted. Research by MIT’s Center for Information Research, as well as work done by Rubin Systems and Diamond Management, our companies, shows that businesses with well-targeted IT investments outperform their peers by 2-5% of gross profit. At the very time when profit is most dear, firms must keep their wits about them.

So what do you do?

Build bottom-up investment models of where IT is driving key levers in your business. These include customer service and sales support. In a downturn, investment in demand creation is key.

Understand your “IT cost of goods.” Many organizations don’t know how much IT is embedded in their products or services or what impact it has. Before cutting, understand the whole picture.

Be aware of the health of the IT organization. IT expense should remain a steady percentage of revenue. As IT is used to automate other parts of the business and lower total cost, IT itself should be increasing as a larger piece of a smaller overall expense budget.

Use the downturn to find the very best IT talent. For example, Wall Street is currently awash in great technology talent, and the very best IT talent is hard to find. Now is the time to find the team to take your organization to the next level.

That team will help you through the hard times. Sometimes, of course, cutting is unavoidable. In that case, you must have an IT team that can recommend to management what can be cut and what can’t be touched — in business terms, not just technology mumbo jumbo. You must be sure you are cutting the right things and investing in the right things.

What are you doing to make sure that the economic downturn doesn’t cripple your IT platform in ways that will limit your business’s future growth?

How have you protected the long term investments in IT?

(This post can also be found at http://conversationstarter.hbsp.com/2008/02/dont_cut_it_during_a_downturn.html)

What many pundits miss is that communication – email, instant messaging, and to a growing extent the mobile phone, are as important as search.  Email, after all, was the original killer app that launched the internet.  By combining Microsoft with Yahoo! they grow their email base (Yahoo! is the most popular web based email site, and combined with Microsoft’s Hotmail, they will be even bigger.)  They also get Yahoo!’s instant messenger – which is much more popular than Microsoft’s messaging client.   Google is weak in both email and instant messaging. Portals are vital as well, with Yahoo! being the leading portal, with MSN in third after AOL.  (I am in debt to http://pietersz.co.uk/ for a great analysis of the merger.)  A combination will yield a portal well larger than any other. 

That’s the offensive part – now to the defense.  Of course, it is a protective move against Google in search.  In addition, last September Yahoo! bought Zimbra (www.zimbra.com), a company with an excellent enterprise email package that could give Microsoft’s Outlook/Exchange combination a run for its money.  Moreover, Zimbra is more open and integrates well with other web applications from Flickr to Yahoo! Maps.  We know from the long history of commerce that open systems innovate and evolve faster than closed ones – and Zimbra was a potential threat Microsoft’s dominance in corporate email.  By buying Yahoo!, Microsoft will blunt this dangerous upstart – and I imagine begin to hamper its openness if not shut it down completely.

Another open versus closed area is the handset/phone.  As I wrote about earlier, Google is leading the open handset alliance.  (See my previous blog to understand more about the importance of the open cell phone.)  Both Microsoft and Yahoo! have significant market share of mobile devices, and are not part of this open consortium.  So the acquisition – if it goes through – will make it easier for Microsoft to assert strategic control in the next growth market — mobile.

Will slamming together 18,000 Yahooligans and 80,000 Microsoft employees be difficult? – Sure.  Will the integration of the technology platforms be a nightmare – Of course!  Is there risk?  Absolutely!  But, remember this is a company that was willing to spend over $7 billion dollars on XBox before they turned a profit in the game industry – because they saw it in their strategic interest.

The questions to ask yourself are:

* Do we really understand where value is migrating in the near and distant future in our market the way Microsoft does in theirs?  (See also Andrian Slywotsky’s brilliant book on Value Migration.)

* Are we fighting tomorrow’s battle or yesterday’s? 

* Do we have the courage to make the big bets necessary to win?

(This post is also at conversationstarter.hbsp.org)