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The Power to Destroy

In 1819, Supreme Court Chief Justice John Marshall penned the famous phrase, “the power to tax involves the power to destroy.” This insightful commentary came as part of the Court’s ruling in the case of McCulloch v. Maryland. The case involved a move by the State of Maryland to favor in-state banks by taxing the bank notes of the federally chartered Bank of the United States. In a unanimous decision, the Court ruled that Maryland couldn’t try to run the federal bank out of town through clever tax schemes.

This famous phrase pops into my head every time I see data and software companies get too arrogant or too greedy and start to abuse their market dominance. This is because software and data companies that dominate their markets have some of the same coercive power as governments with their ability to make rules and set prices.

I got a direct taste of this earlier in the week when an email arrived from QuickBooks to tell me that they were more or less doubling my annual subscription fee. The rationale for this massive increase? The folks at Intuit (parent company of QuickBooks) feel they work very hard and deserve more money. You may recall that Intuit has recently been hard at work with its fleet of lobbyists trying to get legislation passed to prohibit the IRS from offering an online tax filing service. In its annual report, Intuit specifically calls out the threat of federal and state “encroachment” on its business. A touch of entitlement, perhaps?

My email from QuickBooks was followed by an email from DropBox announcing a 20% price increase. At least DropBox doubled my online storage in exchange, not that I really needed it.

It’s not just in the software industry where market power is being abused. As just one example, StreetEasy, the dominant real estate listing platform in New York City, stopped accepting automated listings feeds from several major real estate brokers in a fit of arrogance and competitive gamesmanship. Try not to laugh when you read StreetEasy’s justification for suspending automated feeds:

“Sending a feed sounds simple and seamless. It’s not. Continuing to receive listings in such an inefficient way wasn’t doing anyone — agents or consumers — any favors. So, we innovated.”

StreetEasy’s innovation? Data entry screens that require brokers to re-enter all their listings … manually. You can’t make this stuff up.

Often what damages or even kills great data and software companies with dominant market positions is the abuse of their market power. They forget why they exist and who the customer is. In many cases they get lazy, finding it easier to raise prices than continuing to innovate. Sometimes these companies impose big price increases, as in the case of QuickBooks, simply because they can.

Market dominance creates coercive power that can destroy. With taxation, the party that can be destroyed is the taxpayer. But with private companies, coercive power comes with the ability to destroy … themselves.

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Data.Gone

On May 4, 2019 it’s official: data.com connect is shutting down. You may remember data.com connect in its original incarnation as Jigsaw.com. Salesforce.com acquired Jigsaw in 2010, paying huge dollars to kick-start an ambitious plan to not only be a software platform to manage sales activities, but to help companies maintain and grow their sales leads as well.

Lest you think Salesforce was lacking in ambition, it then acquired the data.com domain name for $1.5 million. Jigsaw moved over to data.com, and Salesforce began to execute on its vision of a data marketplace, where its software users could discover, purchase and seamlessly import third-party data into Salesforce. It was a big, slick and arguably brilliant idea.

But an idea falls far short of a successful strategy, and data.com never appeared to be much more than an idea, or more accurately, a series of ideas. And Salesforce, for all its success, never figured out decisively what it wanted data.com to be when it grew up. Add in competing corporate strategies, office politics, a high-growth core business and a go-go culture, and it’s perhaps not surprising that data.com quickly became a corporate orphan.

 More fundamentally though, we see once again that software companies – despite lots of brave talk – just don’t “get” data. In particular, a good database needs care and feeding using processes and techniques that are messy, imperfect, never-ending and perhaps most importantly of all, impossible to simply automate and forget.

 Jigsaw probably looked like a light lift to Salesforce. After all, the brilliance of Jigsaw was it was crowd-sourced data. The people using the data committed to correcting it and adding to it. On the surface, it probably looked like a perpetual motion machine to Salesforce. But that perception couldn’t be farther from the truth. Crowdsourcing is an intensely human activity, because you have to motivate and incent users to keep working on the database. You have to construct a structure that rewards top producers and pushes out bad actors. You have to relentlessly monitor quality and comprehensiveness. It’s endless fine-tuning, lots of trial and error, and a deep understanding of how to motivate people.

This is where Salesforce failed. It either didn’t understand the commitment required or didn’t want to do the work required. And just as a crowdsource database can grow quickly, it can also decline quickly.

I’ve said it before: I see more success among data providers that develop software around their data than software companies trying to develop their own databases.

Choose Your Customer

From the standpoint of “lessons learned,” one of the most interesting data companies out there is TrueCar.

Founded in 2005 as Zag.com, TrueCar provides consumers with data on what other consumers actually paid for specific vehicles in their local area. You can imagine the value to consumers if they could walk into dealerships with printouts of the lowest price recently paid for any given vehicle. 

The original TrueCar business model is awe-inspiring. It convinced thousands of car dealers to give it detailed sales data, including the final price paid for every car they sold. TrueCar aggregated the data and gave it to consumers for free. In exchange, the dealers got sales leads, for which they paid a fee on every sale.

 Did it work? Indeed it did. TrueCar was an industry disruptor well before the term had even been coined. As a matter of fact, TrueCar worked so well that dealers started an organized revolt in 2012 that cost TrueCar over one-third of its dealer customers.

The problem was with the TrueCar model. TrueCar collected sales data from dealers then essentially weaponized it, allowing consumers to purchase cars with little or no dealer profit. Moreover, after TrueCar allowed consumers to purchase cars on the cheap, it then charged dealers a fee for every sale! Eventually, dealers realized they were paying a third-party to destroy their margins, and decided not to play any more.

TrueCar was left with a stark choice: close up shop or find a new business model. TrueCar elected the latter, pivoting to a more dealer-friendly model that provided price data in ways that allowed dealers to better preserve their margins. It worked. TrueCar re-built its business, and successfully went public in 2014.

A happy ending? Not entirely. TrueCar, which had spent tens of millions to build its brand and site traffic by offering data on the cheapest prices for cars, quietly shifted to offering what it calls “fair prices” for cars without telling this to the consumers who visited its website. Lawsuits followed.  

There are four important lessons here. First, you can succeed in disrupting an industry and still fail f you are dependent on that industry to support what you are doing. Second, when it comes to B2C data businesses, you really need to pick a side. Third, if you change your revenue model in a way that impacts any of your customers, best to be clear and up-front about it. In fact, if you feel compelled to be sneaky about it, that’s a clue your new business model is flawed. Fourth, and I’ve said it before, market disruption is a strategy, not a business requirement. 

Models for Being the Best

There is endless innovation and variety in what I call the “best guides” segment of the market. These are guides, print and online, that help consumers find and select the best of something – from hotels to restaurants to contractors to consumer electronics.

It’s a huge market segment. Consider such vast scale businesses as Yelp and TripAdvisor that largely focus on restaurants and hotels respectively, though you can find on their platforms crowd-sourced reviews for just about anything. If you have huge ambitions, it’s pretty well established that the fastest way to develop massive amounts of content is via crowd-sourcing. If you build it, the crowd will comment on it and rate it for you. The downside to crowdsourcing has always been lack of control. Too many people posting ratings and reviews have malign motives. More fundamentally, two people can honestly have diametrically opposed opinions about a restaurant, for example, and it’s close to impossible to reflect this in an overall rating. Crowdsourcing depends on sheer volume for accurate reviews to drown out inaccurate and biased reviews. It works, more or less.

Knowing the limitations of crowdsourcing, there have been many who have tried to refine the concept. Angie’s List was an early pioneer, aggregating reviews but only fromits members and only forits members, what we call a “closed pool” model in our Business Information Framework. The concept worked, but was difficult to scale, in large part because members didn’t want to pay for ongoing memberships. Angie’s List has since shifted to a lead generation model. I also wrote in 2016 about a company called BestPickReports.com, that’s building its business both online and with expensive print guides mailed to consumers. It appears to be a long-term play, and is backed, somewhat surprisingly, by EBSCO.

 We all know about Consumer Reports. For decades, Consumer Reports was the first place to check before making a major consumer purchase such as a car or a dishwasher. Consumer Reports did all the testing and rating itself, and understood that its reputation was everything, so much so that it prohibited manufacturers from citing its reviews, and the owner was a non-profit organization. In the days of print, Consumer Reports did very well selling subscriptions to its print magazine. It wasn’t an ideal way to distribute information (how do you buy that new car in March when the new car reviews didn’t come out until the May issue?) but it worked for a long time because there weren’t a lot of options. That’s why Consumer Reports had some struggles when it moved online because consumers didn’t want an online subscription as much as they wanted to be able to buy just dishwasher reviews and only when they were in the market for dishwashers. Consumer Reports continues to flourish, the result of momentum, its pristine reputation and quality reviews, but it’s quite possible its business model will come under increasing pressure for the same reason as Angie’s List: selling a continuous information service to consumers who don’t continuously need information is just plain hard.

Finally, let’s look at the original arbiters of what’s good, better and best: newspapers and magazines. 

Hearst Magazines has a review site called BestProducts.com. While the name might imply product testing, the site recommendations appear to be closer to the traditional “editor’s picks.” There is heavy use of the phrase “what welike,” and the site overall seems to be much more about informed personal preferences of the writer – more taste-making than research. Indeed, aside from a great (and arguably misleading) domain name, these are product recommendations that would not look out of place as print magazine articles from ten or twenty years ago. Online forced a change in business model, however. Hearst links to vendors of all the items it recommends, hoping to profit from online referral fees.

 The New York Times blends a few models together through its Wirecutter.com site, a business it acquired in 2016. Wirecutter offers much more than the personal opinion model of Hearst, but less than the rigorous product testing of Consumer Reports. It walks a middle ground, doing real product research, but not actual product testing. In terms of business model, Wirecutter follows Hearst, generating revenue from product referral fees.

 Depending on product referral fees is a risky business because of “leakage.” Simply put, it’s too easy to take your recommendation but not click your link. When that happens, the business generates no revenue. The only real solution to the leakage problem is sheer traffic volume, something both Hearst and the New York Timesalready have and can easily leverage. The New York Times, for example, is increasingly citing Wirecutter in its own news stories, albeit with full disclosure of its ownership.

 There is no single best model, and here’s a rundown of the tradeoffs. Crowdsourcing works, and it is cheap, but the quality of the content is uneven. Closed pool crowdsourcing yields a huge step-up in quality, but it’s a tough model to execute. 

 You can generate your own reviews to guarantee the quality, but you have to fight the trend towards unbundling. Consumers will pay for reviews and recommendations, but only the ones they want when they want them. It’s tough to generate adequate revenue on that basis.

 Online referral fees are an inherently dicey business because it’s too hard to mask the name of the manufacturer, and there are far too many sellers, all a click away. You can make it work if you have gobs of traffic, and this is even a better business if you can leverage your existing traffic and not start from scratch.

 If I was trying to build a “best guide” site, I’d select Wirecutter as my starting point. It has the benefit of offering true product research without the huge testing costs incurred by Consumer Reports. It totally controls both the research process and resulting recommendations. It can leverage the brand and traffic of its parent, the New York Times. What would I change? First, I’d see if I could sell recommendations on an a la carte basis. Buying a dishwasher? Then buy our dishwasher reviews. I might also be able to generate some additional revenue from national retailers or manufacturers who could offer special deals along with the recommendations, though I would need to be careful to make it clear nobody had paid for a preferential rating. I’d ditch the referral fee model because it’s catnip for free-riders. Finally, I’d wrap the New York Timesbrand more aggressively around Wirecutter to reinforce the quality of the recommendations. I understand why the New York Times is moving cautiously here, but at some point, if you want to be in this business, you need to be in this business. You can’t hold it at arms-length. 

If you’re considering getting into the business, leverage your strengths, choose the right content and business model, and plan for the worst and hope for the best, because as of yet, there is no clear pathway to success in this huge and tantalizing area.

AI in Action

Two well-known and highly successful data producers, Morningstar and Spiceworks, have both just announced new capabilities built on artificial intelligence (AI) technology. 

Artificial Intelligence is a much-abused umbrella term for a number of distinctive technologies. Speaking very generally, the power of AI initially came from sheer computer processing power. Consider how early AI was applied to the game of chess. The “AI advantage” came from the ability to quickly assess every possible combination of moves and likely responses, as well as having access to a library of all the best moves of the world’s best chess players. It was a brute force approach, and it worked.

Machine learning is a more nuanced approach to AI where the system is fed both large amounts of raw data and examples of desirable outcomes. The software actually learns from these examples and is able to generate successful outcomes of its own using the raw data it is supplied. 

There’s more, much more, to AI, but the power and potential is clear.

So how are data producers using AI? In the case of Morningstar, it has partnered with a company called Mercer to create a huge pool of quantitative and qualitative data, to help investment advisors make smarter decisions for their clients. The application of AI here is to create what is essentially a next generation search engine that moves far beyond keyword searching to make powerful connections between disparate collections of data to identify not only the most relevant results, but to pull meaning out of those search results as well.

 At Spiceworks (a 2010 Model of Excellence), AI is powering two uses. The first is also a supercharged search function, designed to make it easier for IT buyers to more quickly access relevant buying information, something that is particularly important in an industry with so much volatility and change.

Spiceworks is also using AI to power a sell-side application that ingests the billions of data signals created on the Spiceworks platform each day to help marketers better target in-market buyers of specific products and services.

As the data business has evolved from offering fast access to the most data to fast access to the most relevant data, AI looks to play an increasingly important and central role. These two industry innovators, both past Models of Excellence m are blazing the trail for the rest of us, and they are well worth watching to see how their integration of AI into their businesses evolves over time.

For reference:

Spiceworks Model of Excellence profile
Morningstar Model of Excellence Profile