The Challenge Dividend

Could Silicon Valley Use a Downturn?

Last week I wrote about the rise of investment bubbles and suggested that they can be strong net positives - the Challenge Dividend on steroids.  This week the question arises: are we headed into Internet Bubble 2.0?

People inside and outside of Silicon Valley are increasingly wondering aloud if the rapid pace of investment activity and decadence is signaling a return of the recent past.  An interesting post by Michael Arrington at Tech Crunch suggests that the rise of a party atmosphere in Silicon Valley means the end of the party is near.

Arrington speaks of his experience way back in 2005, when the region was still hung over from the late 90s.  Smart startups began emerging and modest investments were made.  But now an old pattern is emerging: money is flowing everywhere, copycat companies abound, and the "scene" is more about consumption and PR than building the next great business.  Arrington longs for this bubble to pop and for a return to the good old days.  In other words, time for the phoenix to burn again so something better can rise again.

Other recent activities raise serious threats that another burst of irrational exuberance is upon us.  The recent billion-dollar acquisitions by Google (YouTube, Doubleclick) and Microsoft (aQuantive) recall the days of AOL/Time Warner.  And there seems to be plentiful VC dollars available for companies that have anything to do with Social Networking or Mobile Marketing - even while their businesses models are unproven.

I don't believe we will see an Internet bubble as large as that of the late 90s.  We simply remember the past too well.  These living memories will challenge investors and entrepreneurs to avoid the temptation of quick returns on poor ideas.  In addition, it's more difficult to conduct an IPO in today's regulatory environment, meaning that fewer, more profitable companies will reach a big payday.

The challenge of recent memory should give us many of the innovations and improvements of a bubble, with less investor and employee pain and suffering...we hope.

Challenge Breeds Confidence

Back in October I wrote about DVD rental service Netflix and its open, $1 million reward for advancement in its recommendation engine.  In this week's Fortune magazine (link not available yet), a Q&A with Netflix founder Reed Hastings suggests an example of how personal challenge can lead to improvement.

The first question asks not of the company's strategy to defeat Blockbuster or move to an Internet download model, but rather: "What in your life raised your risk tolerance to the level that you were comfortable starting out on your own?"  The answer:

"I was a Peace Corps volunteer right out of college in rural Africa, in Swaziland...Once you have hitchhiked across Africa with ten bucks in your pocket, starting a business doesn't seem too intimidating."

Hastings added that he isn't sure if this experience developed his risk tolerance or was symptomatic of it.  But either way, this life experience gave him confidence to forge ahead in something as comparatively simple as starting a DVD delivery business. 

I personally have found a parallel to Hastings' story in my own life.  While I have not hitched through the plains of Africa, there have been two broad challenges that continue to guide my confidence in business and organizational challenges:

• Marketing at P&G - Working at arguably the most successful marketing company in the world exposed me to the biggest brands and some of the smartest business people in the world.  I learned from the failure of Fit Fruit & Vegetable Wash, got to shape the long-term strategy of Tide, and helped resurrect the Mr. Clean brand and successfully propel it into the auto care category.  More than once I had to "bet my career" on a key recommendation or decision.  Success gave me the confidence to move onto my next challenge...
• Growing Bridge Worldwide - I joined the advertising agency business in Fall '04, suddenly running a 25-person Account Services staff amid a high-growth business in the heart of the digital revolution.  In the first 6 months I was challenged more than in my previous 6 years combined.  I've had highs and lows, but in my nearly three years we have more than doubled sales and staff.  We sold our company to the largest advertising network in the world, and were later named the 9th-best small business to work for.  The challenges keep coming but the future remains bright.

I often tell friends and co-workers that my work experiences have "prepared me for any challenge."  What I mean is that I have seen a broad range of business and management challenges.  Whatever comes next, chances are I have experienced it before.  If I stayed at P&G all this time, instead of joining Bridge, I would have learned some, but mainly done more of the same.  In leaving a successful career for an unproven new opportunity, I built my confidence further.

The challenge of personal experiences not only leads to improvement in the form of new skills and lessons learned, but they bring confidence.  This confidence, in turn, feeds a pursuit of new challenges and opportunities.   

A Potential Challenger for President '08

The big trends in discussion today around the race for President in 2008 focus on issues like how the race is earlier than every, or that "she with the most money will win."  But there is a third trend that just won't die, even though its impact has been far from strong - the growth of third party alternatives. 

The recent history of third party candidates is probably best summarized as one of "freaky spoilers".  Ralph Nader infamously split off enough voters to hand Bush the election over Gore in 2000, and Ross Perot similarly opened the gates for Clinton to ascend in 1992.  Both third party candidates felt an opportunity in the form of frustrated voters who wanted a break from politics as usual.  But neither had the mainstream skills to close the deal.

But now a new attempt to elevate an alternative is making its way into the national scene.  A group called Unity '08 has a very innovative approach.  The overall goal of the group is to represent "the centrist majority" at a time when Democratic and Republican nominees are inciting passion and making promises to their fringes in order to win the primaries.  Some of Unity '08's innovative tactics include:

• Open to all nominees - in fact, Guiliani, Gore, Bloomberg and Romney are the caliber of candidate they expect.  They have a common challenge of unseating candidates who have done a better job of winning over the fringes.
• To be eligible for nomination, contenders must agree to name a running mate from their opposite party.
• After the convention, the expected 10 million delegates will be asked to contribute $100 each.  If only a quarter do, the result is a $250 million bankroll that could be very competitive.

Overall, I think there is an interesting concept and strategy here.  Unity '08 is trying to build a third party that has a focus on the unheard majority of Americans in the center.  I also like that it could be a "fall back" for a major candidate who finishes to second in the primaries (e.g. Romney, Obama), or one who is still on the fence about joining the race at all (e.g. Bloomberg).  In fact, with primaries decided so far before the general election, there is plenty of time for voters to sicken of their options and look for a third way.

In terms of execution, I believe Unity '08 has a very long way to go in order to reach 10 million members.  For example, its site is pretty basic and clunky, and about half of its "Founders Council" consists of college students.  These limitations make it hard to convince everyday voters that this attempt at a new party is legit.

Nevertheless, it is great to see another attempt to challenge the system and improve both the election process and its results.  I'm a registered Unity '08 delegate and will keep reporting its progress here.

The Bubbles That Build America

Last week one of my loyal readers challenged me to address the rise and pop of bubbles in the history of the U.S. and global economy.  Most people today probably think of the Internet stock bubble of the late 90s, or tulip mania in 1600s Holland.  But they seem to be - ahem - popping up all over the place.  Today, real estate and environmental start-ups now seem to be in the middle of bubbleness.

As featured in an article on CNNMoney.com, Daniel Gross, author of Pop! Why Bubbles are Great for the Economy, argues that the dramatic rise and fall of economic bubbles adds a lot of value.  Bubbles seem to help by:

• "The roll-outs of new technologies in other developed economies have proceeded at a slower and more orderly pace than in the United States - and as a result they have created far less collateral economic activity and spurred less innovation."
• "The competition created by excess capacity - too many e-retailers, too many railroads competing for too few customers - inevitably leads to vicious price competition.  Post-pop, the infrastructure - housing and telegraph wire, fiber-optic cable and railroads - doesn't get plowed under. It gets reused, and quickly, by entrepreneurs with new business plans, lower cost bases and better capital structures."

At the end of the day, bubbles are cauldrons of intense competition, opportunity, innovation and improvement.  It's the Challenge Dividend on steroids.  The highs are highest - billions in gains among smart investors and entrepreneurs, and the lows are lowest - job and college savings losses.  But the winners by and large get there by building a strong business, and the losers usually didn't deserve victory in the first place.  Think Google vs. Pets.com.   And investors usually know what they're risking when they get into a bubble - high risk with potential for high reward.

In the end, the strong survive, the weak try again, and consumers win thanks to a burst of investment and innovation.

Lessons from European Football

No, not American Football, the real football - aka "soccer".  Most readers probably didn't pay attention this past weekend, but while we are watching baseball, racing and golf, much of the world is anxiously watching the outcome of this year's elite soccer matches. 

I know very little about soccer and much less about whatever is going on over there.  I prefer to take an Olympic-like approach: ignore the sport until every four years when country teams form up for glory.  But I heard an interesting comment on ESPN radio recently.  The reporter spent the requisite 15 seconds to talk about the latest in global sports and mentioned that teams in Britain are fighting to stay in or join the Premier League.  In one of the weekend's top soccer stories, Sheffield United was relegated to the Champions League, while Wigan retained its status in the Premier.

I have to admit, it took me about 30 minutes of reading and searching to figure out what's happening over there, but my research paid off with a pretty novel example of the Challenge Dividend at work.
The short story is that in Britain there are scores of soccer teams, each of which plays in a particular league. 

But this is no National vs. American League or East vs. West Conference.  Rather, the different soccer leagues are ranked, and teams can move up or down in the leagues depending on how they play.  The Premier League (Barclays Premiership) is the first ranked, and holds 20 teams.  Next down is the Football League Championship.  And this pyramid goes down to a total of 24 levels.

So as the seasons end for teams, they are not only playing for league and tournament championships, but they are scrapping to stay in or reach "the majors".  To compare to our baseball, imagine it is September 2007.  Kansas City and Tampa Bay are dwelling in the seller of the standings as the Yankees and Tigers fight for playoff spots.  But the Triple-A Durham Bulls and Buffalo Bisons are in front of their leagues, and have a shot to enter the majors and send the Royals and Devil Rays down to the Minors. 

Suddenly those meaningless games at the end of the year have a purpose.  Players are busting their tails to stay in or reach the Major League.  Fans well up with pride and get their fannies into seats more often.  And the next season brings fresh opportunities; for the team that fails to move up or gets relegated to the tier below, they know that they will have another change next year.

I'm not a fan of any soccer, but count me as a fan of the English football league system.  A little extra challenge provides dividends in the form of better matches and more opportunity for the underdogs.

Wi-Fi Fun & Games

There's probably nothing more interesting for a "Chief Marketing Strategist" like me to read about than a brilliant competitive chess move.  One of my favorite examples is the story of a new pizza shop that offered a two-for-one special for anyone who brought in its competitor's torn out Yellow Pages ad (thanks, Guy Kawasaki). 

This week I read about another brilliant challenge in the market for Wi-Fi service.  A start-up company called Fon is working to break into the crowded market with a pretty buzz-worthy and challenging approach.  It is offering a free router to individuals who live near Starbucks stores, which allow its coffee drinkers to dial up with Fon's service at $2 per day, instead of the Starbucks/T-Mobile rate of $10 per day.  The kicker is that Fon also splits the $2 evenly with those who place the routers in their homes and apartments. 

So far, over 6,800 people have joined as router hosts in less than a month.  The company aims to build a critical mass of at least 250,000 hot spots in the U.S.  Fon is backed by top-tier venture capitalists, as well as companies like Google and Internet phone service, Skype.  Why the latter two?  Well, they happen to benefit from ubiquitous Internet access.  Google is trying to expand its Local footprint, for example, and Skype's phone service must meet mobile as well as land-line needs.  Count these companies and their customers as other benefits of this new challenge.  The want access for everyone, not just the latte-sippers with silver spoons or expense accounts.

This is a pretty smart competitive move that is leading to improvement for all.  Fon has found a smart way to penetrate the market and is offering a compelling value for both Starbucks customers and Fon "affiliates".  I think even Starbucks benefits - as customers may favor it over other cafes with low-cost or free Wi-Fi service (shout out to Panera, my favorite free Wi-Fi hang out).  The only loser is T-Mobile, but this may pressure the firm to improve its service - or discover that cheaper access will lead to more daily sign-ins.

So next time you're in Starbucks and boot up the laptop, look for Fon and enjoy some dividends of its challenge.

More Proof of Brain Discussion

Loyal readers know that I believe the Challenge Dividend theory goes way beyond business and other organizations - that it seems hard wired into all facets of human life.  One great example is the structure and workings of the brain itself.  Rather than being a perfect, logical, computer-like instrument, our brains are more like the British House of Commons - where dozens of different perspectives are offered up, and through the challenge of considering multiple options from multiple "voices" we chose the best response.  Most of the time.

New research has discovered a "new" voice in our heads.  The WSJ reported last Friday on a new "morality center" of the brain.  Like most brain research, this study focused on individuals who had suffered brain damage in a similar section of the pre-frontal cortex.  In research, they answered hypothetical moral dilemmas such as: "Would you throw one person overboard in a life raft to save yourself and the rest?"  For most people, these questions illicit a pained response.  But for the test subjects, there was no emotion.  They lack the moral voice that weighs in on tough decisions.

So millions of years of evolution resulted in a very strong, non-logical, and at least somewhat unselfish mind.  A mind that weighs multiple options and even the lives of multiple people before coming to important decisions.  But we already knew this, right?  Because whether Harvard biologists prove it or not, we all hear our minds' internal debate everyday.  Whether it's the decision to have a snack before dinner or what to wear in the morning, we are blessed with the dividends of internal challenge.

Come to Richmond for the Challenge

Sometimes you have to take your biggest disadvantage and turn it into an advantage.  That's the Challenge Dividend at work.  One great example I recently heard about is the backstory of The Martin Agency, a leading advertising agency located in Richmond, Virginia.  Founded in 1965, The Martin Agency came from the creative backwater of a mid-sized southern city to become one of the most successful creative shops in the country.

Legend has it that a sign went up in the creative department of The Martin Agency about twenty years ago that read: "No one comes to Richmond for the restaurants."  The purpose of this sign was to remind the staff that they have an added, constant challenge in convincing clients that it is worth going out of their way to trek to Richmond.  Further, it shows the challenge of importing and growing top creative talent at a location far from the glamor of New York City or Miami.  The company's web site best summarizes the resulting Challenge Dividend:

"It was a stark reminder that if the leading marketing companies in the world were going to bring their business to us, we'd have to make it worth the trip.  The only way to do that was with strategic and creative thinking and an approach to collaboration not available anywhere else."

The results have been pretty good for employees and clients alike.  The Martin Agency has created an excellent environment to work in, and they have done strong work for national clients like GEICO, UPS, Wal-mart, and Hanes.

In my own advertising agency, Bridge Worldwide, we have seen a similar story play out.  Our location in Cincinnati is far from the usual agency hot spots like New York City, Chicago, and San Francisco.  So we have to work harder to attract and retain top clients and talent.  As a result, we have built a people-focused culture based on close teamwork, frequent feedback, and a lot of heart.

Our results have been great.  We have grown to over 150 people, we are increasingly taking on client work and new hires outside of the Midwest, won a boatload of national awards, and we were recently named the 9th-best small business to work for in the U.S.  Rather than being a revolving door agency where the same group of people move from agency to agency for inflated titles and small raises, we have built a unique culture and achieved growth that allows unrestricted opportunities for everyone.

The dividends of challenge for both The Martin Agency and Bridge Worldwide include better work and happier employees and clients.  And the restaurants aren't bad either.

(P.S.: A great new restaurant in Cincinnati is Hugo in Oakley, across from Boca.  Friends of ours opened the restaurant this week and we had a chance to attend a pre-opening preview over the weekend.  It's great southern-inspired cuisine from a young, up-and-coming staff.)

09f911029d74e35bd84156c5635688c0

09f911029d74e35bd84156c5635688c0.  There, I posted it.  And in doing so am joining over 100,000 web sites that have posted an illegal code for unlocking the copy protection of HD-DVD and Blu-Ray discs.

While most news organizations remain focused on the War in Iraq, another civil war exploded in the blogosphere last week.  This war pits a mob of tech-savvy consumers who want freedom to watch media when and where they wish, against a corporate legion of control freaks backed by high-paid lobbyists.

One of the best descriptions of the events last week comes from The New York Times.  Here's the short version:

• Back in February, a "hacker" discovered the secret code that unlocks copy protection and playing limitations of HD-DVD and Blu-ray discs.  The main benefit is that you can use the code to play these discs on Linux PCs.
• People started posting the code on various web sites back in February, and were quickly hit with cease-and-desist letters.  Most took the code down.
• On Tuesday, May 1 (aka "May Day" - the global Communist/Marxist holiday, but I digress), someone posted the code on digg, a startup site in which users vote for the best links, and those with the most votes rise to the top.
• The secret code quickly rose to the top, but Digg moderators took down the link, fearing legal threats.
• The entire digg community revolted, sending in and voting for hundreds of posts with the code.
• Digg founder Kevin Rose gave in and posted the code himself - essentially saying that digg is a democracy, and the company will go down swinging.

This isn't Iraq, but it sure is more interesting.  Overall, it is a fascinating view of the new democracy (or new anarchy) that the web brings into our homes.  With this kind of sharing, there really are no secrets anymore.  Further, there's not much you can do to stop hundreds of thousands of people from discovering and sharing these secrets. 

And the benefits of open information are many-fold.  Real estate agents can't monopolize home value information.  Politicians can't hide from their inappropriate comments.  And child molesters can't move next door without you knowing.

I believe in this specific case, challenge will lead to improvement.  Movie and recording studios have used technology (copy protection) and lobbying dollars (DMCA) to restrict freedoms that once were clearly ours.  We could buy a tape, make copies, and listen to it on multiple machines.  Now, copies are limited can only be played on 5 devices.  But a movement of technology literate and creative loving individuals now have power to tear down the defenses of corporations and governments. 

I believe their challenge will eventually pressure studios and government to provide the freedoms their customers demand, and in so doing will unleash a new golden age of creativity.  If you can't beat 'em, join 'em.  Apple and EMI already figured that out.

So I'm joining the revolution by posting the code on my blog.  At the end of the day, I have to stand up for what I believe - both the right to freedom of using the media I have purchased as well as the central tenant of the Challenge Dividend.  Viva 09f911029d74e35bd84156c5635688c0!  Viva la revolution!

Student Lenders Get Failing Grade

Another new financial scandal is sweeping the nation.  I'm not talking about back-dated options or rich exit packages that mainly impact rich CEOs, but rather a scandal that impacts millions of students who are trying to get an education and prepare to earn a living.  It seems that colleges and universities across the nation may have hurt the students they are supposed to support by taking illegal bribes and payoffs from lenders.

The investigation is being led by New York State Attorney General Andrew Cuomo. It seems that for years lenders have been providing payments to schools for being named "preferred lenders" and appearing at the top of the list.  But students and parents have not known that these recommendations come with a price, and the "preferred lenders" do not necessarily have the best rates.  After all, those kickbacks have to be paid for somehow.  So students are screwed and trust is lost.  Money magazine and others now have guidelines for navigating through universities' suspect recommendations.

Cuomo's team has already received settlements from colleges like the University of Pennsylvania, Washington University, and NYU (my MBA alma mater) and lenders like Sallie Mae and Citi.  More settlements are likely on the way.  While I suppose the students affected will receive some compensation, it makes me wonder "Why?"  Why would non-profit institutions with centuries of dedication to serving students choose to do anything that even resembled taking advantage of their customers for monetary gain? 

Some might claim that schools are under pressure to uncover any possible dollar in order to overcome rising costs and halt tuition increases.  But I don't buy this.  Tuition hikes are an annual rite at nearly every university across the country.  And total college enrollment is increasing due to a surge in college age population (the Echo Boomers) and our society's growing belief in the importance of a college education.  That means more full-paid seats in the same classrooms and dorm rooms.

I believe this violation of student trust comes from the inverse of the Challenge Dividend; lack of pressure leads to a fall in service.  By lack of pressure, I mean that universities have never had it so easy.  Here are some of the non-challenges at work:

• They work in a non-profit business that does not have to show firm results.
• Continuous government funding for research or tuition subsidies brings a steady flow of dollars with little ROI expectations.
• Tuition increases are passed with no real change in enrollment.
• Many schools turn away more applicants than they approve. 
• Once they join the school, students are basically "locked in" for four years.
• Student loans themselves reduce pressure, as the "customers" don't feel the pain of the rising cost of education right away.

At the end of the day, I don't think financial aid officers or the schools themselves are greedy or evil.  They just don't have the same pressure to serve customers like many of the rest of us in the increasingly challenging business world.  Just the same, it is unfortunate to see an institution trusted with the important role of educating our young people end up failing them outside the classroom. 

The lesson learned by millions of student borrowers is that they cannot trust their colleges to look out for their financial interests.