What do Customers Want, and How Can Social Media Help?

The Twitter #scrm group is a wonderful place to pick up new threads around the whole Social CRM movement.  But as I’ve remarked before, it is so tough to wring a conversation out of Twitter’s fabric (this is a problem for Twitter, not those valiantly trying to have the conversation), that I generally watch without trying to join in. 

Recently, there has been a great back and forth on customer loyalty.  Does it exist anymore?  Don’t people just buy on price?  Can Social Media affect loyalty?

What had been troubling me about the discussion was its fairly one dimensional nature.  Loyalty either existed or it didn’t.  Blogger Glen Ross put it into a better context for me, by writing about customers that are loyal, versus customers that will always buy the cheapest offering no matter what the service levels are.  Exactly!

I was immediately reminded of one of my all time favorite business books, Michael Porter’s classic on Competitive Strategy.  If you’ve never read the book, you should, because it crystalizes competitive strategy in an extremely powerful way.  In this case, Porter says there are three ways that companies can compete:

-  On price

-  By having the best product

-  By focusing on a particular underserved market segment

Porter is at great pains in the book to point out that businesses have to pick just one of these focuses, and that they cannot afford to try to straddle the fence.  Resources are scarce and all the wood must go behind the winning arrow to succeed lest some competitor do a better job appealing.

If we turn that around to the customer’s perspective, and ask ourselves how it applies to customer service and how Social Media can help, it makes total sense.  These three competitive positions reflect 3 broad categories customers fall into.  They buy for value, quality, or because they are part of some special needs market that isn’t seeing the love.  Companies that successfully tap into the right competitive strategy and focus are simply connecting with one of these broad customer types.

There is a continuum of service experiences companies can provide that range from just enough service to avoid destroying the brand to Four Seasons and Ritz Carlton level pampering. 

Companies on the first part of the continuum are all about the cost savings.  For them service is a necessary evil.  BTW, their customers are very likely the ones who only care about price and service is a necessary evil for them too.  That doesn’t mean bad service can win or survive for this segment, BTW.  It means that at best, service done well for the value segment is service that creates no negatives.  Investing to create positives for this audience probably does not have the same benefit as returning that investment as further cost savings.  Really bad service destroys the notion of value, which is paramount.  If I can’t get the value from the product because of bad service, then no matter how cheap it was, that product cost too much and I”m going to talk about by disatisfaction.  Ironically, the value sellers may have less room for bad service than the other two categories because they already refuse to invest much in service, having passed that investment along as savings.  Hence they have little margin for error.

At the other end of the spectrum, service is part of the customer experience.  It is part of the product you are buying because it is the best possible product.  You’re going to Zappo’s not only because they have the great shoes you want, but because their service makes the “product” of buying shoes that much better than your other shoe buying customer experiences.  I liked Denis Pombriant’s recent description of this kind of service:

Customer experience has come to mean a literal experience had by a customer with a vendor, product or service rather than a product or service cultivated — through value add — to be an experience.

One has a sense that the “literal experience” side is very much reactionary.  It’s all it really can be in the case of a value sale.  The process of delivering service is one of reacting to service needs of customers in as inexpensive a way as possible that avoids doing too much damage.  The other end of the spectrum, the Zappo’s/Ritz Carlton end, is the service that is “cultivated through value add” until it becomes something uniquely valuable itself.

The focused competitive strategy deals with the needs of an underserved market.  It is often a vertical market, rather than a broadly horizontal market.  Yes, the major motorcycle makers may all have off-road bikes, but there are makers dedicated strictly to the off-road market.  That’s all they do, and it is a passionate focus.  They can afford to do better than a maker that wants to cater to all.

Moving back to Social Media and Social CRM, we can see how to mesh up our strategies there with these competitive strategies:

The value player wants to provide service that minimizes the negatives enough that costs are conserved and can be passed on to the customer.  Spending any more than that means they have to raise prices to pay for better service.  Spending any less than that on service means they have to raise prices to pay for marketing, refunds, and whatever else is needed to repair the damage.  The customers are pretty tolerant.  They just need answers when they have a problem that they don’t have to work too hard to get (the link is a hilarious Customer Service story by Zoli Erdos, BTW).  Social CRM is extremely effective at lowering service delivery cost while getting the customer the information they need.

The “most differentiated product” player wants service to be a part of the differentiation.  Prompt, attentive, and friendly service that does the unexpected in the customer’s favor is the order of the day.  Social Media is again, very effective at delivering personalized service experiences.  It’s also effective at helping customers to get together with one another.  Being a part of the group is often something this segment desires, which is why Porsche, Ferrari, and similar marques have owner’s clubs and driver’s course and other “team” activities for their customers.  This is where brand is so important because often brand is not just the indicator of value (that’s thinking for the value segment), but is instead a signalling device that says, “I’m a member of this group.”  Hence that polo player looms as large on the breast of you shirt as the big gold Rolex does on your wrist.  These sorts of customers want to display their affinities, and what better place to do that than Socially on the web?  They will also want more access to your experts and perhaps even celebrities within the organization than you can provide except by means of the Social Web.

The focus category also fits very well.  After all, what underserved community wouldn’t like a special place just for them?  A place that engages in the way they want to think about your products and markets, and that only engages that way, instead of making their world a tab on the side of some larger world they’re not really interested in.

So then what is Loyalty in the context of each one of these categories?  It should be easy to see that the category will determine the nature of the loyalty to an extent.  Loyalty is a measure of the conviction the customer has that your product is a good fit for their mode of buying.  For Walmart, loyalty is a conviction that the best prices can be had in those stores.  That conviction means they tell others about the great purchases they made there.  Like other forms of loyalty, it is emotional, not rational.  Most value customers do not have total awareness of prices from every venue for every product.  They have to let their guard down once in a while, and they will do so wandering the halls of a place like Walmart because they’ve gotten enough deals in the past that they would like to believe all the deals around them are good deals (BTW, they’re not!).

For the differentiated product customer, Loyalty is a conviction that the product is the best.  They are willing to pay more for it as a result and will defend that decision to the death.  It’s always entertaining to watch a value enthusiast (Corvette) locked in a discussion with a differentiated product enthusiast (Ferrari).  The former will remark that their car goes just as fast and costs 1/4 as much, so only an idiot would spend that much on the Ferrari.  The latter will shake their head and somewhat look down their nose at the pooly informed value buyer who thinks they know the soul of an automobile by reading a few road tests in magazines.  They know in their bones that there is more to their Ferrari than the 0-60 times.

I could spell out the meaning of Loyalty for the focused niche customer, but you get the idea.  In each case Loyalty exists and can be accessed by an appropriate strategy.  In each case there is a price to be paid when the company lets their customers down on expectations.  Remember that the same person may be a value buyer for some things, a best product buyer for others, and a focused niche person on still others.  I recall trying to buy a Fax machine one time.  I could care less about a Fax machine, but we had to have one for my startup.  So I was a value buyer.  I had always kind of thought Fry’s was a value seller (they aren’t really, they’re an underserved market seller for Geeks) and I was terribly disappointed when I went next door to Staples (which is a value seller) and saw the same Fax for less money.  Fry’s was never the same for me after that.

Customer Service Segmentation in a Social World

Esteban Kolsky writes a great account of Paul Greenberg’s keynote for CRMe09.  By all means, give it a read to get a sense.  Paul has always done a fabulous job of boiling down what’s really important whenever he writes or talks about CRM.

The part that caught my attention was the discussion of segmentation.  It was only a short paragraph, so I’ll repeat it here:

First, Paul rightly mentioned how each of us want to personalize the experiences, and expect the organization to deliver that. The solution is not to personalize on a one-by-one basis but rather to use segmentation wisely.  And that segmentation should not be done on financial value, but rather on the concept of Referral Value.  I would have spent more time talking about segmentation as critical to the success (which I think it is).

This one got my attention because it goes to the heart of a very sensitive yin and yang Social CRM has to delve in to:

-  We must personalize the Social Experience so it is authentic and compelling.  An un-authentic experience is going to do more harm than good.

-  We can’t afford to personalize the experience for everyone when there are so many.  We have to pick and choose using some segmentation strategy.

These two are at odds with one another, at least they seem to be.  Yet, I am not easily comfortable with the notion of segmentation.  For want of a better word, segmentation just seems deflective.  Recall that deflection is the practice of trying to push customers away so they service themselves.  It cannotes the Bad Old Days of Customer Service.  Deflection is anti-Engagement, and Engagement is the watchword of Social CRM.

I recently went back over one of Paul G.’s posts on creating that personal connection, and I remember thinking, “This is perfect, but how many companies will be able to execute it?”  And then I realized it really doesn’t matter if the company can execute or not.  Companies have become peers of their customers.  If a peer can’t execute they’re soon forgotten about and new peers take their place.  Companies really don’t have a choice but to find a way to execute.  It isn’t that the market is unforgiving (though it certainly can be), it is that the market is indifferent.  It is so hard to get the market’s attention these days through any means but word of mouth that you simply can’t succeed otherwise.

Which brings me back to Esteban’s thoughts of segmentation.  Perhaps there is some sanity there, a way to succeed if only it were executed well and with care and respect for the customers.

Segmentation is all about rationing your available engagement to the places where it will do the most good.  Sorry, rationing is a strong word, but that’s what it is.  If you had unlimited resources relative to your customer’s needs, you would not need to ration. 

Now before we talk further about how to segment, let’s consider that Social CRM does tremendously extend our resources.  My customers at Helpstream tell me very commonly that their agents are able to handle 3 times as many customers as they could before Helpstream.  The beauty is that Social is a one-to-many or many-to-many interaction.  If I close a case for a customer, I have only helped that customer.  If I help someone in a Social forum, I have not only helped that person, but I have created visible public content that can help many others.  At Helpstream we routinely measure that Social Help can be worth as much as 16x more than writing another incremental Knowledge Base article. 

So before you consider segmentation, consider how much more powerful you Customer Service will be if you can convert as much of the effort spent today on cases as you can to Social Interaction in your Community.  Those 3x and 16x Social Force Multipliers leave you a lot of headroom before any rationing is necessary because you already have the resources in place to engage.

That’s a beautiful thing, but let’s continue under the assumption that at some point we still do not have enough resources to achieve the best possible Social Engagement without some sort of triage help from segmentation.

How might segmentation actually work in a Social World? 

In the Customer Serviec 1.0 world, segmentation was based on the value a customer brought to the organization.  Your best customers got better service.  The definition of “best” could be derived from your CRM system through a complex organization-centric equation that weighed factors such as:

-  How much business have they done with us in the past?

-  How much business will they do with us in the future?

-  Are they in a happy state of mind or have there been a series of crises such that we had better tread carefully?

-  Are they an important reference for us?

Interestingly, the last two points are very Social in nature.  Maybe there is hope after all!

Esteban talks about the new segmentation as being based on the concept of Referral Value.  That’s interesting to contemplate.  Perhaps it is a function of Social Reach.  Can our Social CRM system dynamically determine the Social Reach of an individual?  Is there some score based on how many channels they use (blogger, Facebook, Twitter, etc.) and how often they speak?

Here is a crude Straw Man attempt to create a set of Referall Value segmentation criteria.  The idea is to segment based on the avoidance of negative word of mouth and the maximization of positive word of mouth:

-  What is the Social Reach of the person?  (Measured by channels and followers of those channels)

-  What’s their Social history?  How much ink do they have out there?  (Never mess with the United Guitar Man again, people!)

-  Do they comment on products?  Have they commented on our products?  Recently?  How broadly?  Positive or negative?

-  What is their Org Credibility in Face Space?  e.g. Does their LinkedIn profile or our CRM record show they are powerful in the Real World?  They could be a 15 year old kid otherwise.

Of course we should also be grabbing some of the original segmentation metrics (such as how much business they’ve done with us) and blending those in as well.

This is all doable, and ultimately, perhaps essential, though we are some ways from needing it urgently today.  My problem is that while I can engage in the academic exercise, I am still deeply concerned about too little engagement moreso than I am about too much and any need to ration engagement.

Today companies are behind the eightball.  They need to prove good intentions.  They need to over-perform on the engagement front.  Many of the more famous brands from a Customer Service standpoint have made over-performance a powerful tool.  Zappo’s goes to insance levels of engagement.  Nordstrom once refunded a customer for a set of tires even though Nordstrom doesn’t sell tires.  There is that crazy notion again that being successfully Social pays back more than it costs, even in situations like these.  That same unfair advantage of being positively Social works negatively.  The cost of getting a segmentation strategy wrong is very high, and we have not yet clearly established the minimum norms needed for customers that segment low on the scale.  This latter is as important as the segmentation itself and leads to what ought to be the subject of another discussion: 

What are the minimum norms of engagement needed in a Social World?

The Web Makes All Ice Cubes Icebergs

Ross Mayfield just launched a long but interesting blog post entitled, “The CRM Iceberg and Social Software.”  The gist of it is to talk about how little listening companies do to customers and contrast that with how much power there is to be gained by being social.  Ross is a member of the Enterprise Irregular group I belong to, so his post started some discussion flowing.  Another of our members pointed out that being too social can also be a bad thing.  He liked being able to rent a Hertz car without speaking to a single employee, or going through self-checkout lanes at Walmart.  Moreover, he emphasizes that making every customer interaction a one-off social event is not only not what the customer wants, but it is also outrageously expensive to deliver.

I’m absolutely on board about not wanting interaction lots of times.  I would go out of my way and pay more to use a gas pump with a credit card reader rather than go in and pay a cashier.  Same with an ATM.  BTW, I think the web is the best possible place to do that self-service and things like interactive voice menus are just too maddening.  Some kinds of self-service are too hard and they piss more off than they help.  I’m also on board with the idea that being too social can be expensive to service.  We’ve spent a lot of time at Helpstream working on that side of the equation until we have a system for customer service that leaves our customers way ahead on the ROI front.

However, I absolutely don’t want to throw out the Social Baby with the Efficiency Bathwater.  Vinnie Mirchandani commented on the thread that he would avoid social interaction, “Unless the customer wants interaction.”  Excellent refinement, Vinnie.  I would augment that with, “Unless the efficient minimal customer interaction is not working.”  If I have a problem with my self-service gas pump, I want some social interaction right now.  I’m impressed when the operator gets up out of his booth, walks over, and makes the pump work for me.
 
The problem is that so many companies have been intent on making customer interaction efficient, that they have forgotten to keep score via customer satisfaction.  They’re cutting expenses by analzing call center metrics without enough regard to what is happening as a result. There is a second problem as well.  Since Ross brought up icebergs, let’s talk icebergs.  The Old School thinks in terms of triage when it comes to customer interaction.  Give the high value customers lots of interaction.  Minimize the cost associated with low value customers.  Assume that we can actually view these customers as some being icebergs (that one will sink the ship if we hit it) and some being ice cubes.
 
Unfortunately, the web has changed that calculus quite a lot.  Communication between customers and prospects used to be a pretty high friction proposition.  Many markets went out of their way to make it even higher friction.  You have those companies where everything is a total one off, because they don’t want everyone to know what’s going on.  The web, unfortunately for that mindset, gives everyone a pretty darned big megaphone.  Every ice cube can get on Twitter or Facebook, reach out to their network, and start a viral bad mouthing meme that turns that little ice cube into a full blown iceberg.
 
Suddenly, a random airline passenger can be trouble.  The guy may not be in charge of corporate travel for a Fortune 500.  They may not run even a travel agency.  They may never even have flown first class or overseas.  They are not frequent fliers.  Yet, if you break their guitar, suddenly you have a viral PR disaster on your hands.  What is the cost of the damage that little ice cube of a customer did to your brand?
 
At the same time, you have a world where surveys indicate people don’t trust companies at all, they barely trust the pundits, and they are turning increasingly to their peers to understand what’s really going on.  They’ve just been taken advantage of too many times as companies preyed on the lack of good communication.  What is the value of being able to leverage the word of mouth of your happy customers to drive more sales?  The reduced friction of communication that the web brings has both the advantage of communicating value much faster, and the disadvantage of communicating negatives more quickly too.
 
So you can’t just motor along in your big ocean liner, secure that you have enough water tight compartments that even a small iceberg won’t sink you.  There are no water tight compartments.  Any leak fills the whole ship rapidly.  There are also no lifeboats.  Suddenly you need to take care to listen to any customer that might be a problem, if that customer wants to be heard.  You have another choice to make too.  You can force them to go somewhere else to get the word out, or you can welcome them into your own community to talk about it.
 
Either place is going to be pretty public.  That isn’t a choice you get to make.  But at least if you’re making every effort to welcome their opinion and show them you’re listening, you have a better shot at demonstrating to them (as well as to all the onlookers) that you’re trying to do a good job.  If you’ve been good to your customers, they’ll help you in this social setting to convince the unhappy customer to get happier.
 
Companies can really no longer afford to compartmentalize Customer Service and customer interaction.  They can’t count on keeping customers and prospects separate either.  That’s a pretty radical paradigm shift.  But it’s why I love Paul Greenberg’s short form definition of what Social CRM is: “The company’s response to the customer’s control of the conversation.”  Paul is exactly right, which I guess is why I sometimes hear him referred to as the ”Godfather of CRM.”

This loss of control is a scary dynamic that the vast majority of companies have not begun to internalize and deal with.  OTOH, it is a huge opportunity and competitive advantage for those that move ahead of the curve to embrace it while their competitors flounder.

Microsoft Has Started the Clock Ticking on Web Office Apps

By now, you’ve heard Microsoft Office 2010 will include web versions of the Office apps.  Some speculated that Monday’s announcement by Microsoft was what led Google to upstage them with the ChromeOS announcement.  But did ChromeOS really upstage Microsoft, and what will be the impact of a thin client MS Office?

Having been a General in the Office Wars of the 80’s and early 90’s, I can tell you it is about to get ugly for the upstarts and their Webby Office Wannabes.  Zoho, Google Apps, et al have not yet achieved sufficient traction to be anywhere near critical mass players.  They’re not even as far along as the long line of players (including my own Borland with Quattro Pro) that Microsoft dispatched the first time around.  Guys, fair warning: this is the kind of down and dirty competitive fighting that Microsoft does extremely well.  Your days are numbered or at least your growth is capped unless you can find a way around the Redmond Horde, and a lot of folks have tried before you with a lot of resources in the form of dollars and IQ points.

Microsoft will be fighting from their competitive strength.  They own the Office market.  Wannabes have so far failed to even match Office functionality, have many serious incompatibilities (leading to adoption barriers), and have failed to introduce much in the way of innovations short of running in a browser.  Microsoft will shortly eliminate that point of differentiation and at the same time they’ll be adding a whole raft of juicy looking new functionality.  You already weren’t caught up to them on functionality and the bar is about to go higher.  This feature war game is something Microsoft can play all day long, holding your heads underwater until you’re just tired of it.  Even if you one up them on some apps, they have a whole suite and the power of inertia.  Whatever you build, they will deliver their own version of it very shortly thereafter.  It’s an arms race where they bury you much the way Reagan did the old Soviet Union.

The best news is that it’s all good for customers.  It’s all good for us.  At least for as long as it lasts.

This is Microsoft as we haven’t seen them in years.  They are only at their best when they get their backs against the wall.  Bing showed up after years and years of failure against Google and even Yahoo.  Now we’re getting Office 2010.  Real new functionality of interest has been lacking for an extremely long time.  Office 2010 is blowing out all sorts of cool stuff: it runs in a browser, lots of new visual coolness (take that Apple!), and lots of new collaborative functions.  Heck even Scoble is excited.  As he points out, those that declared MS Office dead four years ago turn out to have been very wrong.

So keep it up competitors.  This is good stuff.  You bring out the best in Microsoft.  We know you’re likely to fall on your swords (or theirs) doing it, but it is a valuable service.  Complacent monopolies are a bad thing.  And guess what?  You do have a chance in the war.  It ain’t over and the fat lady hasn’t sung.  But you had sure better get your acts together in a hurry because the sleeping grizzly bear is wide awake and she’s pissed you’re in her territory.

Microsoft: Bad User Experience Is Cultural

I just lost an hour of work to Microsoft Word because it clears the clipboard every time you start it up fresh.  It’s been doing it for years.  I knew about it, but I simply forgot.  I was working on a blog post in WordPress, and decided I wouldn’t finish and wanted to transfer it to Word.  I often transfer posts to Word because it gives better spelling and grammar checking.   I would leave the doc on my Windows desktop at home, and finish when I returned.  An additional complication was that I had accidentally published the article prematurely, and so I thought I’d kill two birds with one stone.  So I copied it to the clipboard, deleted it from WordPress so it would no longer be published, opened up a new Word document, and…  Shite.  It was lost.  Word cleared the clipboard.  I knew this as soon as I saw Word starting to come up, but there was no way to stop it at that point.

What idiot at Microsoft thought this would be a good idea?  What group of idiots let it continue for years?

I have a dim recollection that this is done for some sort of security reason.  There is a hack or exploit that is thwarted by deleting the clipboard’s contents before the app comes up.  But I don’t use any other app that has this behaviour.  Clearly there are better ways to avoid the security problems, because other apps have found them.  A search of the web will tell you everything from, “Word doesn’t do this, what are you talking about?” to “It only happens if you have Works installed” (I don’t), and on to, “Oh yeah, it’s stupid behavior, but you can install a pop up app that captures the clipboard for you so Word can’t destroy it.”

The great mystery to me is that this isn’t accidental behavior.  It isn’t some newly introduced bug that will be fixed shortly in a patch.  Microsoft thinks this is better, or at the very least, doesn’t care enough about the User Experience to do anything about it.  They have made a conscious and well-reasoned by their lights decision that Word should work this way.  So, probably a couple of times each year, I manage to lose some data because of it. 

That brings me to the cultural question on User Experience.  What sort of a culture would do this kind of thing?  More importantly, what sort of culture is needed to avoid it?

Microsoft is hugely driven by product management.  With a few notable exceptions (Anders H. and C # would be a good one), the PM’s make all the key customer facing decisions.  This dates back a long time ago to someone telling Bill Gates he desperately needed to get some business expertise into the company and not just let the geeks run it.  So he led with product management, and with Steve Ballmer, who came out of Consumer Packaged Goods product management.  Product Managers run the show there.  And that is the fabric of the culture that let’s Microsoft Word delete the clipboard (which is, after all, intended to facilitate integration between apps!), among many many other terrible user experience discussions.

Don’t get me wrong, I think Product Management is extremely valuable.  Product Managers are the only people in most organizations whose full time job it is to listen to customers.  That’s important!

However, that job is different than the job of a product designer.  To use a Hollywood movie metaphor, the Product Manager should be the Producer, not the Director and not the Screenwriter.  The PM will decide, “The market is ready for a good Western, because it has been a while.”  Then the Director and Screenwriter will put together Unforgiven.  They’ll get a very small group of fantastic actors (corresponding to the developers) like Clint Eastwood and Gene Hackman.  Each group has to give the other group’s sufficient “turf” and artistic freedom to be successful.  Can you imagine it working if the Director had to micromanage Eastwood or Hackman too much?  Likewise, if the Producer got to far into the details of the movie, the Director could not succeed.

But there is a school that companies like Microsoft subscribe to that view User Experience as being a function of debits and credits.  If we make this change, will we sell any more copies of Microsoft Word?  There is a big deal on the table, and if we agree to change the product to suit them, even if it is a bad idea for others, we can close that deal today.  That problem does not affect enough users, so we don’t need to worry about it. 

That’s the language of dollars and cents as it applies to product design, according to this school of thought.

Thanks to Techmeme, I came across a nice article about Jonathan Ive, who is one of the key designers at Apple responsible for the iPhone and iPod.  Though they seem to surprise the writer, there are fantastic insights into what it takes to create a culture that delivers great user experience.  Trying to calculate user experience with debits and credits is most decidely not how it is done:

Ive was insistent that the key to Apple’s success was that it was not driven by money – a claim that may raise eyebrows amongst shareholders and customers – but by a complete focus on delivering just a few desirable and useful products.

Total focus.  Total focus on building insanely great products.

So how did the company decide what customers wanted – surely by using focus groups? “We don’t do focus groups,” he said firmly, explaining that they resulted in bland products designed not to offend anyone.

Christopher Frayling reminded us at that point of Henry Ford’s line about what his customers would have demanded if asked – “a faster horse” – and it’s surely true that the point of innovative companies is to come up with products that customers don’t yet know they need.

Focus groups and prioritized customer driven feature lists are not the answer.  They’re too tactical and do not create conceptual integrity.  The involve detailed placement of trees rather than creation of a beautiful and healthy forest.  I touched heavily on this idea recently and on how it is insidious for Enterprise Software.  But it is even more dangerous for consumer products.

But it was the physicality of design work that Jonathan Ive was keen to stress – from the Apple design workshop full of machines, throwing off a lot of noise and dust, to visits to Japanese aluminium craftsmen to learn how that material could be crafted into a laptop casing. Yes, of course he and his team use all the latest computer-aided design tools – but he also likes to knock out a physical prototype and feel the weight of it in his hand.

He told a story about how, as a boy, he’d taken apart an old-fashioned alarm clock, and inside the spare outer casing found a mass of workings, “an entire watch factory”.

I read that as the designers are steeped in personal contact and use with the product.  Personally, I just can’t take a job working on a product unless I relate to it.  I’m an engineer, but a creator of things moreso.  There are lots of kinds of engineers, but the best love to create many things.  My own leisure time activities almost universally involve creating things–blogs, web sites, computer controlled machine tools, music, and a number of other things.  The tactility and physicality of design that Ive talks about reflects an aesthetic sense.  It’s less engineer and more like an architect (one who creates buildings, not code) in terms of the feel.

Until you have a culture with those sorts of values, and that empowers those sorts of people, your products will lack great user experience.  It doesn’t mean you can’t succeed, but don’t kid yourself that your success will be built on great user experience.  It will come from some other source.

Years ago I had a discussion with a Microsoft Product Manager who had come to a company I worked at about this.  He wanted to establish the same culture.  I described for him what I am describing here.   He responded, “Bob, you’re a great product designer, but as a company, we can’t count on being able to find enough Bobs.  So we need to use product managers instead.” 

It is much easier to use product managers to create a repeatable process.  After all, there is much less passion involved.  For many markets, it may not be worth Apple-style design.  People often wonder for Enteprise software whether it matters, for example.  But I don’t buy my PM friend’s argument.  Talent of all kinds is always scarce.  A decision to eschew finding talent for a repeatable process creates mediocrity.

Related Articles

Zoli Erdos always has a humorous but wise take on the issues he blogs about.

Talk about a bad user experience:  Microsoft ad has woman vomiting.  These things would never see the light of day if the user experience cops were effective.  Valuing user experience has to be built in to the culture or it doesn’t happen.

Maybe its just Evolutionary Hardwiring that makes it so easy to get upset with Microsoft.

What Was the Real Value of Newspapers in their Heyday? (Distribution not Content!)

The newspaper industry has had a disasterous downturn, largely due to the web.  Not surprisingly, many don’t want to take it laying down.  WSJ publisher Les Hinton recently called Google a “digital vampire.”  He suggests that if newspapers had never offered their content free on the web, there would be no problems.  He goes on and on with odd language about the “charitable view” of how this all got started, as though somehow everyone but the newspapers was to blame.  He vows that it isn’t too late to reverse the trend. 

Barry Diller echoes a similar theme when he talks about the days of the free Internet being numbered.  Just like Hinton, Diller says things got slapped up for free out of fear of being left behind not out of any conscious strategy.  And then Google outfoxed everyone and stole the value from this free content.  Woe is us!

Hogwash.

Hinton, Diller, & Co. would only be right if the real value of newspapers and the other media was in the content, and that said content was scarce and controlled almost entirely by them.   Do you believe that these Old School media have the monopoly on the content?  Do they even produce the best content you read these days? 

I don’t think so.  There is no monopoly on the content.  For a newspaper, much of it is just regurgitated newswire without significant editorial or journalistic effort or even much value added from good writing.  Sure, the AP is on this same bandwagon about how the Internet stole their gravy train, and is vowing to change that too.  But it’s too late.  Twitter is leading the front lines in terms of serving as the “AP” of the new age.  We saw that recently with all the activity in Iran.  We saw it again with the passing of Michael Jackson. 

Local news seems like an important niche for the papers, but aggregating local news on the Internet is also not a problem, as the AC example shows.  Delivering restaurant reviews is just a Yelp away.  The Internet understands hyper-local content even better than any newspaper, radio station, or TV station could.

If you follow the stock market, you’ve seen multiple articles get published immediately after a company releases results that purport to explain what happened and that make no sense at all.  That’s because what happens is there are bureaus of bright eyed and bushy tailed young writers who crank those stories out en masse as soon as they see the press release.  These are not insightful reports.  The human bots from the third world.  That’s no value added and I stopped looking at them ages ago, preferring to read what the blogosphere or twittersphere has to say about the news.  There at least you have a shot at finding real people with real insights doing the commenting.

Let me give another related example.  I love live music.  If you live in an area where it is readily available, and you like music, you probably love it too.  No second generation recording can compare to good first generation sound.  But I often feel bad for the musicians.  I’ve heard countless renditions of very famous pieces.  My tastes trend towards rock, so I’ve heard lots of people playing Jimmi Hendrix or Eric Clapton, for example.  They sound just as good or better than the recordings.  Yet they are working for tips and clearly can’t make a living from it.  I’m not saying they’re literally as good as Hendrix or Clapton, and they didn’t write the songs (though even that isn’t always true), but you must know what I’m talking about.  There is more talent available than the market is able to pay through traditional distribution and record labels.  So these incredibly talented folks are playing clubs, restaurants, and other low buck venues for tips just for the sheer joy and passion of it all.

Doesn’t that remind you of all the bloggers and other Internet content creators who are every bit as insightful, and just as good a writers as 99.99% of what you read in the newspapers?

What the web has done very very successfully is provided distribution for these people.  First, they are able to produce and deliver their content on the web.  Second, companies like Google deliver traffic to that content.  The Social Web has taken traffic delivery to a whole other level.  And, as that whole extended community riffs back and forth with each other, the conversation gets even better.  There is the potential to participate. 

None of that exists for newspapers.  Once upon a time they uniquely owned distribution.  Because of that, they controlled the purse strings.  Hinton and Diller think they can just reassert control of distribution and the problem goes away.  Just quit making their stuff available for free and the world will desperately pound at their big bronze doors, begging to be let back in.  Will you be there pounding?  I know I won’t.  These guys already tried this approach, and it didn’t work.  How can they have forgotten?  They didn’t give away all their content.  WSJ and NY Times had for years insisted on charging for it.  That only helped people find their way to other sources.

The remaining conventional scarcities that exist are of a limited nature:

-  So far, mobile has not fully caught up.  Yes, I can get a lot from my iPhone, but I’m talking about FM Radio and Satellite (Sirius/XM) Radio.   That continues to be a form of limited distribution until the Internet can seamlessly stream to mobile devices without dropping out.

-  Stardom.  Properties like American Idol are all about Stardom.  Stardom is scarce, and the profusion of content on the Internet makes it even harder to stand out.  This is why the Satellite Radio people pay so much for a Howard Stern.  There are other guys just as funny (watch some of the stuff on YouTube if you doubt it), but he is the star.  In a way, this is a branding issue.  You can only keep so many star names in your head, and when you hear one is doing something, you want to go see.  But it is more than that.  People want stars to worship.  And as American Idol shows, they love having a roll in annointing those stars.  But this is also a short lived scarcity.  The Internet is fully capable of delivering the American Idol experience in spades.  We’ve already seen contests on Twitter to see who can get the most followers that amounts to stardom.  Moreover, the stars want to own the value and cut out the middle man.  And many of them are content that they can do it on their own.

-  The experience.  Some just like the feel of a newspaper in their hands.  I’ve moved on.  I always liked the WSJ’s front page news digest, which is just like what I get on the Internet, so it wasn’t unique.  I suspect the group that loves the newspaper for the experience is an aging demographic, and therefore it won’t last.  Susan Scrupski put me on to an interesting article that suggests half the people that don’t have Internet don’t even want it.  I’d hate to be trying to build a media empire around such people.

The best advice I can give to Hinton and Diller is to invest in talent and stardom.  Lock that up.  Find scarcities.  Avoid commodities.  Add real value.  Because if you don’t, people are just going to ignore you.  I am afraid that you’d better also get used to the idea that your franchises are never going to be as big as they once were.  Those days are over.  Use the time you have left to figure out what the new scarcities of the Internet might be and how to get a stranglehold on them.  As for Google, forget about it.  They own that one.  You can’t touch them.

Travelling With a Kindle: It’s an Industry Changer

My wife and I recently bought each other Amazon’s Kindle e-book readers as gifts for our 25th anniversary.  We now have quite a lot of cockpit time with these beasts and I can say with some confidence that the Kindle is a huge event for the world of books.  It changes everything in very fundamental ways.

Let me start out saying that the two of us are voracious readers.  We basically can’t go to sleep at the end of the day without having buzzed through a few chapters of whatever we’re reading.  Our house is filled with so many books that we have an annual spring cleaning where we give away several large boxes of them every year, and we still never seem to have enough room.  We’re the sorts of people that would wind up at a Borders every week and a half.  Or, the sorts who would pack a couple of knapsacks (his and hers) with books for a trip, and still have to go to Borders at some point on the trip while leaving behind in the hotel room a stack of paperbacks.  We regularly skip the inflight movie unless it’s really good and we haven’t seen it to keep reading our beloved books.  We were delighted when one of our favorite vacation destinations, Kona, Hawaii, got a big Borders for that reason.  Our annual expenditures at the book store are too scary to ever tote up.  Did I mention we love to read?

So imagine the convenience of being able to carry all of those books in a slim little reader that is actually more comfortable to hold than most any paperback and all hardbacks.  It’s incredibly easy on the eyes–I have yet to find a situation where it wasn’t at least as good as an actual ink and paper book, with the exception of its relatively poor graphical rendering.  You’ll want to stick to books that are mostly print.  The user experience is quite simply, wonderful.  Until you actually try reading an entire book, you really can’t imagine how good it can be.  If not for the fact that I hate the thought of buying a second copy of books I’ve already read and may never read again, I would be going through the whole house and just tossing anything I could get on the Kindle that was mostly text.

Amazon says that where a title is available on both Kindle and in their bookstore, about 35% of the sales are going to the Kindle version of the book.  That number is only headed up, as I can’t imagine buying a book I would like to read on the Kindle and can get on the Kindle.  Every Kindle buyer is likely to be a one-way wholesale adopter of buying Kindle books at the expense of paper.

Our kids don’t (yet) have Kindles, and there are publications we don’t like to read on the Kindles (I for one am also a magazine fiend and the mags I read have lots of pictures), so we still go to bookstores.  However, we go a lot less often than we used to (approximately monthly since getting the Kindles), and my wife and I often leave the store with very little purchased.  OTOH, we can be seen feverishly taking notes on what to buy in the Kindle store as we come across physical books that seem interesting.  That has to be galling for any book store owner that is aware that’s happening, but it is going to get a LOT worse.  Amazon just acquired SnapTell, which is an app that lets you take a digital picture of any book, CD, DVD, or video game and it will later tell  you what the item was.  Imagine walking through the local book store, camera snapping away at anything you like, and finding its all on your Kindle by the time you get home.  The book store paid for your browsing experience, but Amazon got all the revenue.  Look for bookstores to become hyper-sensitive about people taking photos inside their four walls.

If you don’t think Kindle is a phenom, consider this.  On our recent trip to New York all sorts of people spotted us with Kindles and wanted to check them out.  They were all quite favorably impressed and wanted one.  This is not unique to us.  Amazon has started a volunteer program where Kindle owners meet folks who want to see a Kindle for coffee.  That’s some brand loyalty for you!

Things to Love About Kindle

-  The overall user experience when reading a book is great.  Screen readability is excellent, and the navigation experience is very good. 

-  The browsing experience in the Kindle store is not bad, but more on that later. 

-  The savings when buying Kindle books are pretty compelling.  It will take a little while to offset the cost of the Kindle itself, but getting hardbound editions hot of the press for $9.99 is cool.  Especially if you follow a gaggle of authors for whom you must always have their latest title and can’t wait for the paperbacks.

-  The device even looks and feels pretty sexy.  Though it isn’t up to Apple’s standards, I would say it beats a lot of PC’s.

-  Battery life is good, and the Kindle charges fast.

-  The wireless connection also seems excellent.  Frankly, it was better than my Apple iPhone 3G, probably because it doesn’t use AT&T.

-  Being liberated from carrying around the weight of books is awesome.  Being able to instantly get more books when you finish what you have read is awesome.

-  There are free books and really really cheap books there.  I picked up the original Sherlock Holmes series for free.  It’s very cool to see these titles out there and you really feel like you got something of value when you can pick one up and enjoy reading it.

-  I love the iPhone Kindle reader.  It isn’t a substitute, it’s a way to keep reading a few more pages during your down time.  For example, I would pop it out during a cab ride, or while waiting for a movie to start.  It’s very readable, and very usable–much more than I would have guessed given the screen size.  The best part is it is linked online to the reader.  Read further on either and the alternate devices still knows what page you are on.

Less Positive Thoughts

The user experience of the Kindle as a reader and its associated shopping experience for buyers are excellent for newcomers.  But we are already getting to a point where the UI’s are less than ideal.  Some examples:

-  How do I manage having a large number of titles on the Kindle?  It’s pretty crude.  Kindle has search, but it could also use some form of foldering.

-  How do I trade my Kindle back and forth with my wife’s and keep track of which things each of us has read?  Foldering would save us there too, but I’m even thinking of some online facilities to coordinate such collaborative family ownership.  After all, it’s very common for bookreaders to share books.  Amazon and the publishers aren’t going to lose much money here.  I’m not suggesting they let the book move to another Kindle, but make it possible for more than one person to read on a Kindle.

-  Related to this task of who has read what, and on how to keep all my titles organized, is the need for better tools for the iPhone app.  I don’t want to download all the books onto the iPhone.  The app knows how far I have read in the Kindle, why doesn’t it also know what I am reading?  If it did, it would simply download the latest thing automatically if it wasn’t already on the iPhone.  And then I’ll want it to clean up when I finish a book.  I don’t want to clog up my iPhone’s memory with books already read.

-  Shopping on the web is better than shopping on the Kindle.  In some ways, I even like the iPhone Kindle reader shopping experience better.  Color matters to me when looking at book covers even though inside may be black and white.  It’s an odd little psychological quirk, but one I’m sure publishers know all about as they design covers to help sell books.

-  Shopping is skewed to helping me find the best sellers of the moment.  Once I get tired of that, I get very little help unless I go to Amazon’s web site on a real computer.  The best sellers don’t change that often, and once I go through the list for the third or fourth time I get tired of seeing titles I don’t want and know I will never want.  I wish it was easy to make them disappear with one click.  Knowing what I made disappear would help Amazon make better recommendations to me as well.  This is one of the aspects I alluded to where things work well for newcomers but start to bog down when you’ve used a Kindle for a while.

= I like the idea of a list of things to think about buying but not buy, but they need to take it further.  First thing is I can’t find a way to add to my list when I am on the Amazon web site.  It only seems to work on the Kindle itself.  Second is I will want ways to categorize that list.  Amazon is great about letting people make lists on their web site, why not let people have multiple lists on the Kindle and carry them over to the web site?  That would also simplify my problem of organizing my titles for my wife to read.  I’d simply have a list called “Kathy”.

-  How do I reconcile Kindle with my paper books?  I want to tell it what I own and have already read and have it know those titles so it can warn me not to buy them again.  If I had that feature I really would get started giving away the paper books.  As it stands, physically possessing them is my record keeping system.

-  How do I subscribe to an author?  I have a list I follow but I always forget a few.  Any book I read I should be able with one click to indicate I want to be told any time they publish a new book.  This is a big opportunity to sell more books Amazon has missed.

The list goes on, but these are improvements, not tragic flaws.  They will come with time.  Go get a Kindle.  You won’t be sorry!

Effective Search Trumps Brand: Glimmerings of a Digital Renaissance

I’m just back from a week long family vacation in the Big Apple to celebrate our 25th anniversary.  It was a blast, and as always, its great to get out into the world, see new things, meet new people, and think new thoughts.  I’ll have several blog posts to share on these new thoughts, and this is the first.  It begins with a brief observation by my kids. 

We stayed at a wonderful little hotel right on Central Park South called the Helmsley Park Lane.  Lots to see and do within walking distance, and we also availed ourselves of the excellent mass transit the City has to offer.  Along the way, we wanted to maximize our sampling of the great restaurants Manhattan has to offer.  Having made sure to select choices that appealed both to adults and kids (well heck, I enjoyed our quest for best Pizza too, I must admit!), I was surprised when my kids actually started to register pity for the mega-brands.  “How can McDonalds or Burger King survive here with all this great food?” they asked.

I never thought I’d hear that.  Normally we battle to avoid having them drag us into those places.  Now they were actively pitying the mega-brands of all things.  What was up with that? 

It got me thinking about the nature of what a brand is, and kids are a great microcosm from which to think of it.  Brands are largely about two things.  One is the safety and security of knowing you’ve chosen a brand that is a known quantity.  That McDonald’s hamburger or Starbucks coffee will taste just the same no matter which store you wander in to, all over the world even.  The experience is predictable, and if you like it, you know you can seek it out almost without thinking.  The second things brands do is signal to others that you have good taste.  Brands are very much a social thing, in this respect.  We want to know our choice is a popular choice.  It makes it that much sweeter in many cases.  It allows the brands to charge a premium that is out of proportion to the real value of the product, in fact.

But somehow, this process broke down, at least a little bit, in our Manhattan soujourn.

I’ve always been a person who loves to find new things, loves choices, and in general, has been a little less brand conscious, perhaps.  But my kids are all about brand, especially when it comes to food.  Their fear is that they will be taken somewhere that has nothing they want to eat.  If you’re a parent, I’m sure you’re familiar with that concern!  They’re all about the safety, security, and predictability, which is ironic when you consider they’re young and should be trying everything under the sun before getting set in their ways.  Nevertheless, their behaviour is very obvious and easily understood, and it doesn’t just pertain to kids.

So what happened to break that mold?

They developed confidence in my iPhone, and in the research I had done in advance via Google.  Effective Search had trumped brand.  Let me explain how.

First was the research.  I spent a few hours on the Internet with Google and enrolling the whole family in the process of tracking down some great places to go for dinner.  I was respectful of the family’s preferences, and didn’t venture too far out on a culinary limb.  We only planned dinners that way, and relied on spontaneity for breakfast, lunch, and the inevitable snack or coffee when it was time to rest our weary feet.  But that spontaneity was fed by Effective Search as well.  Wherever we found ourselves, I was able to conjure up a list of food choices using Google Maps with search or the Yelp iPhone app.

The beautiful thing about Yelp is the ratings, and the ability to combine that with geo-awareness (i.e. it tapped into the iPhone’s GPS to know what was nearby) was brilliant.  Google needs to either start doing Yelp-like ratings or just buy Yelp.  It immensely adds to the whole search experience to have those ratings.  The other point I will add about the ratings is that they represent, almost subconsciously, that other function of brands, which is to signal what is popular.  

Of course this sort of approach is critical when you’re strangers in a strange land like we were in Manhattan.  And one could argue that dense urban environment begets more usefulness.  The latter, I think, is very true.  In the Pre-digital/Pre-mobile Age, people have to discover your business through either wandering in one day or hearing by word of mouth.  A dense urban environment facilitates both.  There are quite simply more people nearby than in the dispersed suburbia more common of other areas.  In the latter, we go out of our way to recreate a dense environment through the artiface of the shopping mall.

But let’s not think that the value of Effective Search ends outside that dense environment.  As a matter of fact, I’ll argue it’s even more important.  Manhattan is so competitive, and so dense, that it is hard not to find at least a few good restaurants.   As the fighter jocks like to say, it is a “target rich environment.”  Suburbia is not so blessed.  Mediocre establishments do better than they should precisely because there is less competition.  They can be big fish in small ponds.

I figured as soon as we returned to our small surfing community of Santa Cruz, California, the kids would forget all about the iPhone and Yelp.  But they didn’t.  We were sitting at breakfast the next morning (incidentally at a local pattiserie that beat anything we were able to find in Manhattan), and my son suddenly wanted to use Yelp to resolve a long running family dispute over where the best pizza in the area came from.  There’s that brand property of wanting to be seen as having made the popular choice.  As a 15 year old, my son is particularly keen on what’s popular and fashionable, or not.  Imagine his disappointment when his favorite scored lower than the rest of the family’s.  But imagine all of our surprise when we learned that the consistently best rated pizza place in the area was one we had never heard of that was not much further from our house than the other two!

I am convinced there are some essential takeaways for new ventures and small businesses from all of this.  First, your “brand” is going to be determined more by word of mouth (especially as enhanced by Social Media like Yelp) than it is by advertising.  That’s a good thing, since small businesses can’t afford much advertising.  A close corrollary is that Customer Service is going to be more important than ever, precisely because of that word of mouth.  The Internet will democratize the selection of who is good or bad, and it will spread the news like wildfire.  Make sure your news is good by treating all of your customers exceptionally well!

Second, it behooves you to spend some time thinking about how to get an Effective Search Advantage.  SEO is not going to be the answer.  Everyone is doing SEO.  You’re going to have to be more clever than that.  Ideally, you need a strategy of some kind right from your very beginnings.  For restaurants in Manhattan, geo-aware search is the thing that defines the pond’s boundaries and lets you be a big fish in that smallish pond.  It cuts through the spam.  What are other kinds of boundaries that will help you stand out in Effective Searching?

Real Time.  There is a tremendous amount of talk about Real Time on the Internet.  It’s pretty unfocused, but time establishes a boundary just like location.  What sort of business can you create where time becomes critically valuable?  The obvious one is tickets and other perishable inventory.  What do you have right now that won’t be available tomorrow to sell to those who need something right now?

Social Media:  What communities can you join and really stand out in?  Tackling this challenge can convey the dual benefits of creating boundaries to focus search in your direction as well as annointing your offerings as the popular choice by letting others weigh in with their opinions.  Social Boundaries can come in many forms.  They can be as a result of targeting a focused service like Yelp.  I’ll tell you right now I’d give a discount at my restaurant in exchange for a Yelp review no matter whether it was good or bad.  Just encourage the participation and make sure your service or product is good enough that the reviews are good.  I’d go out of my way to make sure I was plugged into every geo-aware tool I could find, in fact.  The beautiful thing is that reviews beget reviews and they’re pretty permanent.  Once you get the ball rolling it picks up speed.  You don’t have to incent reviews for very long to win.

There are bound to be lots of other ways to create boundaries like this.   Boundaries for the purpose of reducing the search space to a small enough dimension that your business can really stand out.  Seth Godin wrote a great piece today about avoiding the big domino and making sure the first small domino falls with the money and resources you have available today.  I think it captures this idea of reducing boundaries perfectly.  You don’t have the resources to start out trying to brand yourself like Coke.   The good news is that in the Digital Renaissance, it probably doesn’t even make sense to try.

Postscript:  NYC Dining Experiences, Good and Bad

Best Pizza:  We tried Totonno’s and one of the Original Ray’s (the one in Little Italy, on Prince St.).  Both were great, but Totonno’s was a revelation.  They were one of a list of pizza restaurants we had uncovered that seemed to be good candidates for the best.  What swayed me to choose Totonno’s was hearing about it in my favorite pizza cookbook “American Pie“, so I didn’t exclusively use the Internet.  Ray’s got picked so we could get a slice one day at lunch, and we knew we wanted to tour Little Italy and Chinatown, so it was convenient that this Ray’s was also one of the most highly rated.

Daniel:  My wife and I had dinner at Daniel because it was one of the top half dozen or so restaurants in Mahattan at the time I searched.  We were not disappointed!

The Good (Mitchel London), The Bad (Beauchon), and The Ugly (Fika):  As family, we love to go for pastry and coffee in the mornings.  I have to say, we had a hard time finding good pastry in Manhattan (I’ll be amazed if I don’t get lots of comments on this!).  Seemed like life would be good with Thomas Keller’s (he of the French Laundry) Beauchon nearby.  But despite the delightful appearance of the pastries, imagine our surprise to discover they were very stale.  Think Starbucks pastry stale (sorry Starbucks, love your coffee, but your pastry is terrible!).  Here is one where Yelp failed us, as Beauchon has a huge number of fabulous reviews.  Perhaps it was just a bad day.  Lucky for us, while pawing through the Beauchon reviews and trying to understand whether it had recently gone bad, I discovered a great little place right around the corner called Fika.  Great pastry and perhaps the best coffee we had in Manhattan (and we had a lot of great coffee!).  Fika was highly rated but much less well know.  It is a Swedish coffee place, and a wonderfully quaint little spot in an out of the way place.  I shouldn’t call it ugly, because it isn’t, but that fit my title.  The real outstanding choice though was Mitchel London.  The bad news is there is no place to sit, but this bakery had some amazing eats.  The kids made us get French Creullers there twice.  No place to sit?  No problem.  Buy a bag of doughnuts and head over to a nearby Starbucks for the coffee.  They don’t mind!

A tale of two Italians:  Nanni’s and Trattoria dell’Arte.  This was another surpise.  A good friend who has lived in NYC suggested Nanni’s.  Awesome little place.  I had been to Trattoria several times in the past on business trips to NYC, and loved its Antipasti–best I’ve had outside Italy.  Trattoria was a bit disappointing this trip though.  The service was indifferent, and while the Antipasti was good as always, the veal marsala and the pizza my kids ordered were good but not world-class. 

We wound up going back to Totonno’s a second night rather than try another new place.  We had a great conversation with our waitress the second time who it turns out was from San Diego and understood our mindset coming to NYC.  We chatted about what was great in NYC (pizza!  Italian) and what was still better in California (sea food, and especially sushi).  We brought up our pastry plight with her and her response was that she saw people in NYC as being more into bagels (so we had Murray’s and loved them) and saving the pastry for late night dessert rather than breakfast.

eBay Dying Because It’s No Longer Fun? Hogwash!

So I’m reading this Techcrunch guest post by Keith Rabois on eBay.  He apparently was at the Social Graph Symposium and was asked (by Dave McClure?) what the Social Graph could do to revitalize eBay.  His response was, “nothing.”  He thinks the Social Graph is what killed eBay, because people were largely coming to eBay because it was once.  Once the Social Graph provided other sources of online fun, eBay was toast.  In his words:

Over the years, it has lost online ground and eyeballs to pure entertainment destinations such as YouTube and social networking sites like MySpace and Facebook.

As someone who spent a lot of time with eBay, its buyers, and its sellers as part of founding a startup with a service called PriceRadar, I can tell you this is pure hogwash.  Rabois doesn’t give a shred of conclusive evidence in his post either for why this idea that eBay died over lack of fun has any legs at all.  He even points out that an internal eBay campaign aimed at restoring the fun called “windorphins” failed.  Why did it all fail?  Again, in Rabois’s words:

Chad Hurley and Steve Chen of YouTube fame, Peter Thiel (Facebook), Jeremy Stoppelman (Yelp), Max Levchin (Slide), David Sacks (Geni and Yammer), Reid Hoffman (LinkedIn, board member of Zynga) and others, myself included, were all too alienated by eBay’s bureaucratic and political MBA culture. So we decided to create our own fun elsewhere instead.

Oh come on.  LinkedIn is fun?  PayPal was fun?  Yammer is fun?  Really?  No.  They’re useful services that are differentiated.  eBay is too, but it was much more so back in the day than it is today.

So what really happened at eBay?  It’s pretty simple, really.  eBay benefited for many years from being a low friction way to list all kinds of things for sales on the web.  Amazon didn’t sell anything but books.  There was no Craigslist.  And creating a storefront of any kind was incredibly painful before the LAMP stack and Open Source software had come along not to mention PayPal for credit card processing.  The reality is that an eBay auction was the hardest possible way to buy anything.  Having to deal with an auction and to win that auction to get you merchandise was a lot of pain and trouble to go through.  At PriceRadar we heard eBay buyers ruefully shaking their heads that only eBay would call something “winning” whose definition was that you had agreed to pay more money for something than anyone else was willing to. 

The natural reason to use eBay today is because you like the auction format.  That is the only differentiated feature of the service.  All of the “Buy it Now” listings have to compete with Amazon, Craigslist, and a web that has a lot more merchants with real storefronts.  In other words, they are not a destination reason to go to eBay.  Who prefers the auction format?  Well there is no question there are a large number of people who do.  Auctions are perenially popular, in fact.  But not for everyone.  Some buyers think auctions mean bargains.  Many sellers think auctions mean elevated sales prices.  My startup, PriceRadar, was in the business of using some potent data mining algorithms to deciper the truth of what things were selling for on eBay.  To make the long story short, it was possible to list many items (certainly not all, perhaps not even the majority, but close to 50%) and sell them for more on eBay than they could sell for at retail.  We sold our service to companies like Sharper Image to help them do just that.

How could such a thing work?  Why would people pay more?  As I used to say back in my PriceRadar days, I think there is a gene that sits right next to the compulsive gambling gene (why play a game when the odds are rigged in the house’s favor?) for those who prefer buying from auctions.

The thing is, there are not enough people who prefer to buy at auction.  As I say, it is the hardest possible way to buy.  So for a time, eBay benefited because even those who wouldn’t normally buy at auction were going there to buy things that were otherwise hard to find on the Internet.  This is exactly how eBay got started.  Pez dispensers and other offbeat items were certainly hard to get any other way.  Particular comic book issues and items associated with exotic hobbies.  Industrial surplus items.  Fashion collectibles like Louis Vuitton.  Used items, for when you wanted something but were unwilling to pay retail.  All of that stuff and more was on eBay, and it was only on eBay. 

And then the world started changing.  Used items were readily available on Craigslist.  Especially for people afraid of being ripped off by unscrupulous eBay sellers, Craigslist put you in contact with people nearby who had what you wanted.  You could go look at it before buying.  And you didn’t have to go through one of those blasted auctions.  The WSJ says use of online classifieds has doubled to 49% of Internet users from 22%, and that 9% of all Internet users visit these sites daily.  That 49% is the same number Rabois quotes for eBay’s reach Back in the Day.  These people did leave eBay because it wasn’t fun, but not because eBay made it less fun.  They left because they were never power auction participants anyway.  Auctions are the hardest possible way to buy things.  These people left because they just wanted classifieds, and they killed not just eBay, but newspapers too.

Amazon now accounts for 1/3 of all US e-commerce transactions according to RBC analyst Stephen Ju.  That’s truly a staggering number.  It represents the great sucking sound made by people who used to have to go to eBay to buy a lot of new items moving over to Amazon.  Amazon makes it trivial to create a storefront, just as easy as eBay.  They deliver tons of visitors to their search.  If you have a product that people want to buy, they’ll make sure your customers find you if you joing their ecosystem.  Back in the day, eBay was the only game going for this. 

At PriceRadar, we interviewed all kinds of sellers in this category.  Yes, there were the people that ran around garage sales, estate sales, and flea markets buying merchandise to resell on eBay.  But there are not enough goods, and buyers of those goods, to make for a very large eBay if that’s all there is.  People selling new merchandise are very much the majority.  We talked to no end of people who got started with mall stores and other bricks and mortar store fronts, and then found their margins were better if they sold out of their houses via eBay.  They liked their hours better too–work was at their pace, not their store front’s business hours.  But why would you sell your new merchandise only on eBay when it is so easy to list on Amazon too?  And having done so, it then becomes a battle over who has a search engine better suited to the task.  This has always been an Achilles Heel for eBay.  Their search is terrible even today.  Back in the day, you got different results if you search for “binocular” versus “binoculars.”  Merchandising of the kind that Amazon understands so well (people who bought X, also bought Y, so they make sure X buyers see that Y is available too). 

But it isn’t just Amazon.  PayPal is darned near as big as eBay’s selling business.  That tells you there are a lot of PayPal transactions that have nothing to do with eBay.  People are doing e-commerce in all sorts of places.  It’s dead easy to create a web site, and PayPal makes it dead easy to process credit cards there too.  That took away one more advantage for eBay being the easiest place to create a storefront.

Then there was the unsavory aspect of eBay.  A lot of people were defrauded.  I lost $1000 myself on the purchase of a welder.  For years eBay completely favored sellers, even sellers ripping off buyers, because only the sellers were paying eBay fees.  I went through their whole dispute process on the welder, they adjudicated in my favor, but I never saw a dime and the seller was allowed to continue to sell on eBay.  When I brought that to their attention, they ignored me.   This went on a lot, and is something I never have seen happen with Amazon.  With Craigslist, you go see the merchandise because it is local, so it doesn’t happen there either.

So eBay didn’t die because it wasn’t fun, at least not in the sense that Rabois intends.  People didn’t go there for entertainment, except for the dyed-in-the-wool-yes-I-have-the-compulsive-auction-gene players.  They went there to buy.  And there simply got to be better places to buy.  Places that were focused around the kind of non-auction buying most people prefer.  Places that had better merchandising and other amenities.  Places that had just as much or more traffic than the old eBay did.

Forget competition from Facebook or YouTube for fun.  Think about it like a buyer.  eBay stopped being unique and started being one of the harder places to buy from instead of the only game in town.

Unfortunately, I have a hard time seeing how the Social Graph will fix that, so Rabois and I agree on that much.  It may already be too late for eBay to get ahead.  Back in the day we tried to sell eBay PriceRadar as a better search engine that would give them the kind of merchandising capabilities that Amazon had.  They were completely uninterested.  Hard to invest in the future when the franchise you’re sitting on is growing by leaps and bounds without any effort at all.

What Now, Microsoft? (Pssst, It’s Not Too Late, and It’s Not About Yahoo!)

What should Microsoft do now?

Clearly, it is fighting a rear guard action where search is concerned.  Any deals with Yahoo are stopgap at best.  Microsoft probably believes they only need to slow the erosion to buy time for their own technologies to kick in against a large enough installed base, but that isn’t it.   That’s an incremental strategy that won’t get them anywhere very helpful.  Google will just keep peeling away share.  This strategy of hooking up with Yahoo is a classic violation of Sun Tzu’s (and every strategist since) ideas.  When you are the weaker player, don’t attack the strong one in their strength!

It’s about out flanking.  Doing the unexpected.   And realizing that your days of leveraging existing monopolies to reach into new spaces are about done.

Think about what the reaction would have been if Microsoft had bought Sun instead of Oracle.  For starters, they could have bought them for cash using a little more than 1 quarter of EBITDA.  Yes, Microsoft is cash machine.  But just imagine the signal they could have sent:  We are tearing down our walls!

No more anti-open source.  No more anti-Java.  Can you imagine what a ripple that would have sent?  That would have been some outflanking. 

And because it would be such a radical move, you’d have to believe it, unlike Oracle where it is easier to assume they’re just the glue factory and the race horse is done.

Think what such a move could have done in terms of reseating Microsoft at the head of the development tools table, which is where they started.  A jumpstart on Cloud Computing.  Throw in RedHat, market cap half that of Sun’s purchase price (another 1/2 quarter of cash generation for MSFT) and you’ve got Linux too.  Now Microsoft would’ve had a truly amazing platform story.  Almost scary amazing, in fact.

How can a Yahoo search deal even begin to compare to that?

Lots of strategic upset in such a move.  Imagine putting the internals of SQL Server behind MySQL.  Microsoft has always staked out the low end.  The don’t risk nearly so much cannibalization as Oracle does with MySQL.  Lots of organizations would love to have a paid (though admittedly still cheap) version of MySQL that just ran a lot faster when they needed it too.

But that deal is done.  Oracle got Sun.  It’s not something to be unwound.  It was a once-in-a-few-decades strategic alignment of the stars that went unnoticed in Redmond.  The old strategic religion is too strong for them to have ever considered it seriously.

What else should they be looking at with similarly game changing?

Twitter  ($1B might do it).  Clearly Twitter is pretty darned game changing, and some are saying its just the right thing for Microsoft.  But it will be awesomely expensive, and it isn’t clear how to use it as a beachead to build out nearly so horizontally as Google has. 

Facebook  ($10B?  Less?).  Another good example, even more awesomely expensive.  Would Microsoft build something out of it that would ever justify the cost?  Unclear.

Amazon (Too much!).  This would’ve been my favorite from a technology perspective, but it has all sorts of problems though  Hard to catch Microsoft + Amazon for Cloud Computing.  Their market cap is $35B, which is probably too painful to swallow, and it would take a significant premium above that.  The Cloud business is still a tiny portion of that, so MSFT is buying the world’s most successful e-tailer.  Margins are lousy on this stuff compared to MSFT’s core business, so it is dilutive to the franchise.

How about a bevy of SaaS Companies?

I like this idea.  They are not cheap, but the most expensive of all, Salesforce.com, is $5B or so.  Say they wind up paying $7B, but they’ve now bought by far the biggest SaaS player.  Let’s pick up a few more to round out the suite.  I’ll take Successfactors for HR at $500M (peanuts with Microsoft’s cash flow).  Let’s add RightNow for Customer Service at circa $300M.  We’ve got room for one more, and I’d round out the CRM suite potential with either Xactly Corp or Callidus Software.  Xactly is a pure play and cheaper, but might not be willing.  Callidus has a lot of baggage, but has built a good sized SaaS business.  Let’s kick in NetSuite for another $1B (or a little less after they somewhat missed).

Whoa!

Salesforce, SuccessFactors, RightNow, Xactly, and NetSuite.  In one fell swoop Microsoft becomes the biggest SaaS player on the planet.  They block Oracle and SAP from acquiring these companies, and I’m not too sure they wouldn’t love to annoy those companies anyway.  As a matter of fact, there should be any antitrust issues here because of SAP and Oracle.  These SaaS companies would totally sew up MSFT’s domination of the low end business software world too.  And the total price tag?  Maybe $9B and they totally dry up the well of companies that have any scale at all in the business model that is the coming thing.  Heck, round up to an even $10B and pick up whatever remains of the SaaS world.  Then launch a classic Microsoft all-out hypercompetitive battle against Oracle and SAP for world domination.  It’s a clear opportunity to destroy the fat maintenance margins of this group while maintaining their own margins in unrelated business units. 

That would liven up the Enterprise world again for sure!  Best of all, it’s got nothing whatsoever to do with Google.  Let them eat cake over there, trying to grow a market they already own most of.  Wait for Carol Bartz to show up with her metaphorical hat in hand.  You can still buy that search business a whole lot cheaper. 

Not bad for a few months cash flow.  Mr Ballmer, when are you going to get on with doing something exciting over there?  Or will Oracle steal a march on you again?