COMRADITY

How Open Innovation May Work

Many consultants and gurus claim to have "the blackbox" for innovation.  It is one thing to say, but an entirely different thing to make innovation work and to make money doing it. 

This Post is written by one who knows how difficult innovation is . . .  Having worked inside large corporations and small, I've seen how rare it is for all the resources inside a large corporation to move in the right direction at the right time, and, how rarely really good ideas in small, entrepreneurial companies make it to market.

This Post is about recognizing Open Innovation as a good idea but challenged and a proposal on how to make it better . . . The premise behind Open Innovation is to combine the resources of the big organizations with the resourcefulness of the entrepreneurial organisations to help the cream rise to the top and accelerate innovation. There are obvious hurdles. Big corporations are inherently afraid of change and entrepreneurs, legitimately, don't trust big corporations.   

To help Open Innovation overcome these hurdles, we contribute our experience managing the creative process to define the criteria for Open Innovation success and a plan of action.

Criteria for Open Innovation Success

When the Mission is not to "exploit" one's expertise, but offer a new and unique solution to a customer problem.

Most so-called innovation discussions today - in both large and entrepreneurial organisations - use the word "exploit" in the mission statement.  I understand why.  Corporation sit on vast amounts of untapped, dormant assets - technology, content, data, customers, raw materials, employees, etc.  Entrepreneurs fall in love, for example, with what they know technology could do.  But that's no place to start innovation.  Successful, sustainable brands did not get there with a vision to exploit an existing asset or expertise.  Capitalizing on technology, lower raw material costs, popularity among customers, or labor didn't happen until after they were successful.  The brand names with value today started and continue to focus on solving the customer's problem.

The Creative Process needs Order to solve the Customer's Problem.

Few have experienced managing the creative process successfully.  Training at Leo Burnett and learning about the creative process in other contexts gives me some reason and experience to have insights into the creative process and how to make money managing it.  I rarely hear an innovation expert talk about the need for order.  Not to eliminate conflict.  But to disarm individual conflicts of interests, so they can focus on solving the customer's conflict. 

Conflict, or the need for resolving it, is often cited when talking about creativity in storytelling, music composition, acting, and innovation in business.  In innovation, resolving customer conflict is what sparks new solutions.

But there's less understanding of the "order" needed to manage multiple cross-functional individuals in a creative process to resolve conflict. Think about it though. We all notice certain people can turn a negative into a positive better than others in life. Often these people cope well because they have a source of "order" in their lives.  For some it is faith, for others it is a family support system, etc.  The miracle of spontaneous improvisation among a Jazz quintet (thinking about Miles Davis' classic album, Kinda Blue, recorded in the first take) can only happen because they start playing in the same key and timing. ( A metaphor John Kao applies to business in "Jamming.")

Order is established when the terms for each individual stakeholder's contribution are realistic. 

The customer is a stakeholder.  They contribute the financing to support the long term operation of the innovation.  If it isn't clear the customer will pay for it, innovation success is dubious. 

When realistic about what the solution must perform to merit the customer payment, the Mission will steer the dynamic, often rough creative process on course. There's more confidence that there's enough to go around to attract a high quality innovation team. Each individual on the innovation team can confidently "riff" independently, the creativity is more vigorous, selling ideas isn't awkward, execution and results are more likely to exceed expectations. The creative process has integrity, increasing the chance that the innovation has sustainability. 

For example, it took a lot of cross-functional people to realize an idea at Burnett - creative, media, production, promotion, client salesforce, research, traffic, PR, etc.  When there was plenty of money to go around in the agency business, creativity flourished.  But when the profits got tight and individuals weren't confident their personal interests were being met, less time and energy were focused on the customer.

The Hurdles to Meeting the Criteria for Success. . . There are two hurdles to overcome.  One is being honest about what customers pay for.  The other is minimizing the number of stakeholders so there is enough to go around.

First, it is harder to find the "truth" because the amount of information is exploding. 

The instinct is to simplify.  There are two extreme examples.  One is to homogenize information for mass consumption which risks reducing creativity to the lowest common denominator.  The other is to limit information and influences to those which reinforce what a person already thinks.  An example of the latter is shared in a video presentation by Eli Pariser about his new book "The Filter Bubble."   He discusses how GOOGLE is "personalizing" information to echo what's interested you in the past to increase the chances you will "click."  The result is that when you think you have the "whole picture" you really don't!

Second, the number of "links" in the value chain are multiplying exponentially, but the end user isn't paying more for the process.

At one time the creative industry could afford to give talent job security, creating order in personal lives.  With each layoff, more and more individuals are freelancing, adding to the number of links.  Financial risk is being pushed down to the individual. When individuals are instinctively in a mode of self-interest, they are on the defensive.  Even if they say they care about the customer first, it is difficult to care more about the customer than your own financial security.

To maximize the chance that there is "enough to go around," it is critical to minimize the number of links in the value chain by identifying what roles are really needed. 

Although you may not know exactly how much a consumer will pay early in the creative process,  you can control how much it will cost to deliver what is worth paying for. 

Surprise - Big Corporations and Entrepreneurs may discover they have different strengths than they think

In a recent article, Malcolm Gladwell concludes that Steve Jobs excels at Application and others the Vision and Invention, but sure looks like its his Vision that determined success in his example.

In "The Creative Myth," published in The New Yorker, May 16, 2011, Malcolm Gladwell tells the story of Steve Jobs going to the XEROX PARC lab where he sees the first "mouse" and then returns to his partners and presents a design spec that goes something like: "Our mouse needs to be manufacturable for less than $15.00 and it needs to not to fail for a couple of years and I want to be able to use it on Formica and my blue jeans." 

Gladwell presents a theory proposed by military scholar, Dima Adamsky, that three revolutions are responsible for technology advancement in today's military: (here's how I distill them) Vision, Invention, and Application. The Soviet Union's centralized organizational structure is credited with the Vision.  The US's decentralized public private partnership is credited with the Invention.  And Israel's constrained resources and constant threat responsible for the Application of the technology.

Gladwell uses this theory to explain why it is a myth that Apple "stole" the personal computer from XEROX.  Instead he claims that a professor at Stanford, conceived of the mouse, the PARC lab of XEROX invented a very expensive version of it, and Apple's constrained resources and constant threat inspired the application - the Macintosh.

I would argue that Jobs is the one with the Vision and the Professor had "pre-validated" it.  And what if  XEROX/PARC had been the one to execute the Invention and the Application.  Maybe the brand would still exist and Jobs would never have had to leave Apple. 

"With his Macintosh team, Jobs set out to create a machine that would be a triumph not only for the company, but for himself, too. He instilled in his team a sense of creativity and rebellion—its said that he hung a pirate flag in their office (which was in a separate building from the rest of the company) and explained that it was better to be a pirate than to join the Navy. He grew increasingly antagonistic toward Apple's other groups, contributing to the fissure that would eventually lead to him leaving the company." (Gizmodo)

What if the Vision were the domain of the entrepreneur, the Academicians validated it, and the big corporation did the Invention and Application?

What if we could go back and set up the Professor, PARC, and Jobs on the same team with:

• Vision defined and action plan/budget by Steve Jobs, validated by the Professor, to bake in the resourcefulness and urgency of the entrepreneur and the realism of the Professor who has the independence and resources to research all the facts to avoid the "bubble." 
• Then XEROX resources execute Invention and Application.

Indeed PARC responded to Malcolm Gladwell's article by pointing out that they learned from this lesson that Jobs vision would have helped them to succeed:  "Adding limits or constraints can actually create more – and better – innovations."

But first big corporations need to adopt the criteria for Open Innovation success internally.

The rest of the PARC post reveals that big corporations experimenting with Open Innovation aren't necessarily improving their "batting average" for successful innovation.  The PARC post talks about the reasons they have adopted a framework for Open Innovation with outside entrepreneurs.  

"Simply put, open innovation institutionalizes and provides an alternative model for the uncharted do-we-or-don’t-we-let-him-in? model of a few decades ago. And why not? Drawing on one another’s strengths is a great way to not only reduce risk, but realize new opportunities, faster.

Instead of each party viewing “the problem from a different perspective” and carving off 'a different piece of the puzzle' (as Gladwell notes), within an open innovation framework, each party can combine their perspectives and share the results of realizing the whole puzzle."

But the PARC post does not report about the success of these projects.  Since the number two learning at PARC is that "Success requires failure" I suspect that these projects are still not significantly more likely to make it through the pipeline and get to market.  I suspect this is because PARC continues to be a silo, not integrated with the rest of XEROX resources, since the next two learnings are critical of management or defensive:

"3. Operational management often values the cost of a “shovel” over the possibility of a “gold mine."
4. Inventive creativity can’t be measured by spreadsheets."

Consider that today's companies are not one organization, but several silos: some are centralized, others de-centralized, and despite being a large company, some actually have constrained resources and constant threat.  For example, the CFO operations are centralized (profit driven), the marketing folks are de-centralized (brand driven), and the sales force has constrained resources and is under constant threat (no new resources and an increasingly fragmented customer base with abundant choices - i.e., competition).

Recommendations . . . validate Open Innovation Readiness with an internal experiment, then engage an entrepreneur to partner.

1. Engage a representative of each silo in the corporate silo to participate, with terms for their contributions which eliminate any individual conflict of interest.
2. Tap the salesforce as the Proxy for the entrepreneur to develop the Vision and the action plan, since they are the most likely to have "constrained resources and constant threat."
   
3. Validate the Vision and the action plan using the CFO as the proxy for the academician, since they are centralized and least likely to be deceived by the "Bubble"
   
4. If the Vision is a "go", bring in corporate product development resources to the team for the Invention and Application
5. The team executes the launch and "sells" to their peers to bring in additional resources as needed to scale.
6. Once the corporation has proven it can transcend the siloes, then bring in an entrepeneur and academician to learn how much more value they add at the Vision stage.

The New Business Model: Passive Aggressive

GOOGLE will do no evil.  FACEBOOK is making the world open and connected.  So when financial results reveal these companies are making their founders and management among the richest people in the world, everyone thinks their good intentions have been rewarded.

But press in just the last 24 hours reveals these mission statements mask aggressive, even criminal behavior.  GOOGLE is setting aside $500 Million to settle a complaint by the Department of Justice which “. . . would rank high among the criminal or civil penalties paid by companies in disputes with the U.S. government.”  FACEBOOK "inadvertantly" (ed. :}) shares individual data with advertisers. And FACEBOOK was disclosed as the secret client behind Burston Marstellar’s whisper campaign against GOOGLE. “Confronted with evidence, a Facebook spokesman last night confirmed that Facebook hired Burson” .

Why do these businesses act in such a two-faced way?  Because both companies are catering to a generation who believes that business, money, and competition are responsible for all the wrongs in the world.  So in order to succeed these businesses create the perception that their business is not motivated by money or competition and then do so surreptitiously.  And in the cover over darkness, people behave differently than they do in the light of day.

It is not money and competitiveness which turn a good business bad.  Money employs more people.  Competitiveness improves services and products and fosters innovation. When money is tight business looks for shortcuts.  When there are few competitors left (or what seem like competitors are actually co-dependent) the survivors will go to any extent to protect their domain.

A business model designed to look like it makes money passively is a wolf in sheep’s clothing. And the "uneducated are their best customers."

Editor's Note: Thanks to @dsearls and @megwith for links to articles above

What the Future Will NOT Be

NOTE: Mark Suster added a comment below pointing out that I advocate no alternatives.  Which is correct.  We design solutions for the problem.  Our use of digital tactics is limited by how weak the tools are, in effectiveness and integrity.  Which is the point of this post.  But since he asks for a direct marketer's alternative and its numbers to compare to his $22.00 acquisition cost, I have provided one with better quality and integrity that is $5.71.  Since I could not insert a jpeg of a chart into the comment, I'm inserting it here to make the comparison easier to see (albeit not as pretty as Mark's), but please see my reply to his comment for the rationale for the numbers estimated here:

DAILY PERFORMANCE

NOTE: Have not included the cost to create, customize and traffic "integrated advertising" in the 1.600 websites (multiplied by the number of days of the program) or developing conversation playbook, casting, costuming/equipment and rehearsing 22 Ambassadors (one time for the whole program)

Here's the post:

Mark Suster writes a guest post for Techcrunch: The Future of Advertising Will Be Integrated.  Kudos to this VC for admitting the truth - that his customers are wasting 99.9% of their digital advertising, in general, or that social media advertising wastes even more. There must be a reason he is sharing this shocking information. But when you consider his info in the context of other news stories about brands shifting marketing dollars to proven high ROI alternatives, his recommendation to improve such low Click Through Rates by integrating advertising into editorial content seems irrelevant at best or just plain desperate.

Other news stories to consider are Unilever and Pepsi (#2 to P&G and Coke, respectively, so must do more with less) emphasizing marketing return on investment.  Digital advertising's .09% response rate couldn't meet the minimums for any ROI analysis, could they?  Not even if Mr. Suster's recommendation doubled its response rate to .18%  - which is doubtful since "clicking" on an ad is so fundamentally contrary to what the customer wants to do: "They Don't Want to Be Diverted From Their Current Online Activity"

Then there are the two stories in the last month about Pepsico which suggest that better marketing ROI is outside the US, especially in emerging nations.  Brand Pepsi-Cola lost its #2 position to Diet Coke in the US.  But Pepsico beat street expectations due to rising food sales oversees, following a year of increasing marketing spending in emerging markets, but not in the US.

When you think about it, it makes sense that marketing ROI for US brands is higher in emerging nations.  First, US brand penetration is lower, so there is an opportunity to find new customers. Second, US brands are reliable.  If a new customer likes the performance, they will get the same each time they buy it again.  Since US brands have had a long lead time to develop processes to assure customers they will get the same thing everytime time they buy, they may have an advantage over local, newer competitors.  So US brands are more differentiated vs competitors in emerging countries.

With better results from increasing marketing spending in emerging nations and the lack of new marketing tools to improve success in the much more competitive US market, it is more than likely that marketing dollars will continue to flow to emerging markets. 

The only way marketing dollars will remain and increase in the US is if new marketing tools emerge which do more with less. 

Unfortunately, digital advertising performance does less with more.  And tactics like integrated advertising into content lowers integrity of the medium.  Following Mark Suster's advice to "integrate" advertising is not only futile, it creates a potential for conflict of interest.  Which is the tragic flaw to new media's business model to sell low cost content.  For example, AOL's Arianna Huffington is allowing Michael Arrington of TechCrunch to invest in the companies he writes about.  As we comment to the Atlantic article, "Arianna Huffington's Legitimacy Problem":

Follow the Money.

Managers get paid more for getting content for less and selling advertising for more. One way is to be in denial about the potential for conflict of interest when editorial and commercial interests are not separate. An objective analysis would probably find a correlation between a decision that risks conflict of interest with unhealthy company financials - in other words a desperate act.

Warren Buffet apologized to shareholders for waffling when his heir apparent lapsed, reminding us that conflict of interest should be a black and white issue for any company with integrity.

 

 

 

 

A generation discovers it is not a victim after all

This morning, as the Media covers the killing of Osama Bin Laden, a second, potentially transformative story is emerging. Unexpectedly, Young Americans filled the streets to celebrate all night long. 

This generation was just becoming aware of the outside world when planes attacked the World Trade Center about 10 years ago. As they've matured, they watched their parents, teachers, and political/business leaders- whom they want to admire, aspire to - appear helpless against bullies in every aspect of their lives - from school playgrounds, to Wall Street, to terrorists. 

Yes the end of Osama Bin Laden will represent a turning point militarily. "VE Day" (Victory in Europe Day) was also a turning point for America's military position in the World. But it also redefined a potentially hopeless generation, which grew up during the Depression, to aim so high both in competitive spirit and integrity, to be called the Greatest Generation. 

Now these young people have proof, as Obama says, that "America can do whatever we set our mind to."  And some support for believing that it is worth it to stand up to bullies rather than becoming one them: "We can do these things not just because of our wealth or our power, but because of who we are: one nation, under God, indivisible, with liberty and justice for all."

Here's an editorial in TIME which echoes this "meme" Read more: http://swampland.time.com/2011/05/02/osama-bin-laden-is-dead-why-it-matters/#ixzz1LI7mSz8g

Break from the Pack

Business downturns are good for one thing - critical thinking about choices made and lessons learned. 

This economic collapse is particularly substantial because it was instigated and grew exponentially due to a “follow the herd” mentality.  Companies which participated in credit default swaps based on the “everyone else is” rationale, ignored three mega warning signs:

1)      Potential for conflict of interest.

2)      Corporate Leadership didn’t understand the business.

3)      The “experts” were perceived as arrogant by associates, internally.

That's because, before the collapse, instead of warnings, these rationalizations hid the truth:

1)      Wow! Multiple revenue streams from the same assets.

2)     The Media thinks our management team is ahead of the curve.

3)      Whatever you do, don't let the competition “steal” our experts.

In these days of rapid innovation, instead of following the herd, a great company breaks from the pack and asks the questions to assure a good idea doesn't turn bad:

1)      Does the idea risk a conflict of interest with the fundamental reason we are in business?

2)      How are the links in "chain of execution" designed, which are the weakest links, and what is the plan to repair them when they fail?

3)      Is this idea building new camaraderie inside the company, between say, marketing and sales, because if not, it won’t improve relationships with anyone outside the company.

Many companies and politicians are investing in Social Media without answering these questions.  



Here they go again . . .

The SEC is considering changing the rules regarding raising funds for early stage companies from  private investors to satisfy the Venture industry which prefers private funding alternatives to IPO's.

Currently, when stockholders of private companies reach 500, the SEC requires public disclosure regarding the financial picture of the company. The purpose of this rule is to protect investors.  This is speculation, but the logic is probably that once the number of shareholders reaches 500, it is more than likely that they are either outsiders or the company has grown so much that the investors do not have access to information about the financial health of the company. 

The Wall Street Journal reports that the SEC is considering allowing private companies to add more shareholders without public disclosure of financials.

SEC disclosure requirements have grown increasingly onerous and expensive for a small company to finance growth through an IPO. Alternatively, VC's want to take advantage of deals, such as Facebook's deal with Goldman. Goldman's intends to sell its Facebook shares to high net worth clients. The value of these shares go up if clients are not limited by the number of shareholders and can sell their shares on a private market.  That private market looks like the public market, because share prices are driven by popularity. But there are no financials to back up the puffery which drives popularity.  The rationale is that the qualified investors in the private market are savvy enough.  (Note private investors' qualification is based on the presumption that they have enough money to lose - which based on the repercussions of the market collapse for mortgage backed securities can be a false illusion - not that that they passed some test accrediting them with the knowledge to not make dumb investments.)

One wonders why the SEC is not considering more reasonable disclosure requirements for small companies who want to raise money through private investors, rather than only raising the threshold of shareholders before requiring public disclosure of financials.

More reasonable disclosure requirements might be less deep or frequent reports compared to public companies. For example, the disclosure could be limited to backing up publicly reported claims which could impact perceived future value and share price. For example, number of active users or the success of advertiser experiments upon which future revenues are projected.

It is ironic that the SEC is considering a change that protects the privacy of startups whose source of revenue is based on exploiting the lack of privacy boundaries protecting individuals' personal information, behavioral data, content, and images. It may be naive to think that government can eliminate the responsibility for the "buyer to beware," but government should not advantage commercial interests vs the individual.

Escape the Puffery

What if baby boomers, considering a home in Florida, wanted to retire from a life of puffery.

What if the baby boomer's idea of the "good life" in retirement wasn't about richly decorated, big houses, fast cars, and high tech entertainment centers, or, only spending time outside on a golf course.

What if their idea of the "good life" was reducing the stress caused by spending too much time taking care of lots of things, sitting at a desk, or driving to everything, by - instead of taking pills to reduce anxiety and blood pressure - spending more time outside, walking to places, hearing birds in the trees, floating in salt water, or learning and socializing unplugged (without media).

What if they appreciated the value of using today's low maintenance recycled building materials, solar and wind power, a water conservation and composting system, and a home vegetable, herb, and fruit garden to take advantage of an 8 month growing season.

What if they'd pay more to have enough open green space and trees to support diverse birds and wildlife, instead of paying extra to go to a zoo to see the exotic plants and animals which used to be native to Florida.

And what if they'd pay more in taxes to support public transit to the beach to minimize the impact of dense car traffic on the experience for both humans and nature.

Real Estate developers on the West coast of Florida have copied what's been done before on the East Coast. Because copying someone else's "marketing puffery" is a common business practice. They could have catered to a more relaxed lifestyle than the east coast of Florida where each new community is a derivative of the Palm Beach lifestyle, where everyone dresses for dinner, shops, and swims in a pool instead of the ocean.

West Coast Florida real estate development could have offered an alternative and been about preserving wildlife and the natural resource of the water, capitalizing on the sun, the wind, and rainwater, and supporting existing local farmers instead of supplanting them. Marketing this kind of real estate wouldn't have been a puff job, but a compelling, relevant, and refreshingly honest marketing program.

What I learned about economics while on vacation.

Our extended family is on a long overdue break, getting back to the basics of family bonding and a simpler day to day life, after a stressful year.

Characteristically unable to sit around and do nothing, we have been trying our hand as amateur fishermen.  We brought a fly rod, reel, and flies (for sea bass and stripers which probably won’t even work here, but what do we know), we’ve invested in a crab trap, a couple of spinning rods, a box full of bobbers, weights, and paraphernalia and lots of bait.  After a couple of days of feeding the fish, in one day we caught one crab and one Spanish Mackeral.  Boy, were we excited. 

Not quite enough for dinner for the whole family, we also grilled a steak.  So when you add together what we spent on bait, the latest technology and equipment, plus the rest of the dinner we had to buy, this was probably the most expensive meal we’ve ever had. 

Ironically, this adventure made me think about the factors effecting economics today.

To limit our risk, we decided to go to Walmart.  We figured everything would be cheapest there, so if we weren’t cut out to be fishermen, we’d have less to lose.  With an amazing array of rods, and no idea how to choose among them, we grabbed the cheapest one, some bait, a box already stocked with paraphernalia, and a book about fishing.

When Walmart looks at that data, our behavior will be interpreted as a predictor of our future demand for bait, equipment, technology, etc., but as you’ll see this is an illusion.

We fed a lot of fish a lot of bait.  But our experiment failed.  We didn’t catch anything.    

Frustrated, we found a specialty retailer.  We told them we wanted a cheap rod and we were beginners.  They sold a rod, slightly more than the Walmart rod, but spent at least a ½ hour educating us about the local fish bait preferences, the paraphernalia to rig the rod and how to rig it.   

That’s how we caught our first fish and crab.

But here’s what I expect Walmart will do. Not knowing our whole story, they’ll misinterpret our data as meaning increased demand.  And their marketing department, eager to capitalize on the latest marketing tactics, will anticipate we’d  search on-line to figure out how to use all this stuff and would advertise more stuff.  Further, to increase the likelihood of our response, they will offer a free sample of bait with registration, planning to build a relationship with us by following up with emails.  

We will interpret this offer as an opportunity to recoop our wasted dollars at Walmart and take the “bait,” registering, with no intention of opening those emails.  In other words, just like the fish we’ve been “feeding,” we’d nibble around the hook hidden in the bait.

The result is the creation of more “false” data encouraging Walmart to waste more time and money on marketing to us.  Believe me, I understand how compelling those nibbles can be.  The more nibbles we get at the end of the fishing pole, the more time and money we are spending (to the benefit of the specialty retailer, by the way).  But I’d bet we’d increase our success rate and waste less on bait and technology, if we invested in some time with a fishing guide who thinks like a fish and understands how they make choices.

An Open Letter to Arianna and Tim

I was invited by you, Arianna, to submit to the Huffington Post because of an email I sent to you about innovation.  My first submission "Turning a Loss into a Positive" introduced the importance of “disrupting ambiguity” to innovate. 

Now that Huffington Post has merged with AOL, many Huffpo bloggers and “power commentators” are threatening to stop contributing their time, data, and content.  Instead of avoiding this conflict, Arianna and Tim, you would benefit by confronting the ambiguity and announcing a plan to disrupt it by turning the loss of the trust of your writers and readers into a positive.  

So far, the mainstream internet business model replicates traditional media: exploit creators who attract audience and exploit the audience by selling advertisers access. 

As long as new media mimics the business model of traditional media competitors, innovation is about lowering costs: paying nothing for content, using automated technology to reduce the cost of gathering audience information to sell to advertisers.

Arianna and Tim, the truth is creators are willing to contribute for free and audience not object to their data being collected only as long as Huffpo did not make money. But $315 Million dollars shines a spotlight on the ambiguity/the conflict that plagues the media market, just as Newscorp’s purchase of MySpace did: There is nothing innovative about the results.  The best content and creators are absent. Consumers are inundated with abundant information with little confidence in what/whom to trust. Advertisers pay rock bottom prices for internet advertising, because, reportedly, the average response rate is less than .001%.   The only stakeholder benefitting are the institutions who invest in these start-ups.

A big idea “disrupts the ambiguity” that is the weakness of established competitors and raises the bar of integrity standards in the marketplace.  Since NewsCorp was an established (albeit a relative newcomer) media company it may be difficult for them to be the trailblazer.   But Arianna and Tim, you are in a position to change the game instead of exploiting creators and audience and hope to be the next investors to enjoy windfall profits (which I'm sure Newscorp will point out is unlikely).

Consider that since AOL is a public company, with a relativly low individual stock price, you have a card to play which no privately held renegade like Facebook or Twitter has. Consider what the content and the audience data would look like if creators and the audience willingly invested money, time and their personal data/content assets in order to share in the financial dividends of the operations.

COMRADITY has a plan to recommend to you.  It is designed disrupt the ambiguity of a new media company mimicking the traditional media model, leap frog new and old competitors alike, and innovate the marketplace not just technology. 

A Review and Response to the Commerce Department’s “Internet Privacy Task Force” Green Paper

Who would argue with the intent of the Internet Privacy Task Force, broadcasted in the December 16, 2010 press release of a green paper: “Commerce Department Unveils Policy Framework for Protecting Consumer Privacy Online While Supporting Innovation.”  But we all know how difficult it is to establish a framework to execute potentially conflicting objectives.   And the green paper fails to overcome this challenge.

The “Dynamic Policy Framework” is comprehensive and thoughtful, but fails to offer “a clear lens through which to assess current policy” (Foreward by Cameron Kerry, pp. iv) because the leadership level communication is contradictory and confusing relative to the detail discussion. While policies need to be "dynamic" to leave room for future unanticipated consequences, the framework should be consistent and clear about which comes first, innovation or the consumer.

For example, there are contradictions in the goals set in Secretary Locke’s introductory letter and the Foreword from General Counsel Kerry.

The paper begins with a letter from Secretary of Commerce, Gary Locke, in which he clearly states there is a problem from the consumer point of view, compelling a “fresh look:”   

New devices and applications allow the collection and use of personal information in ways that, at times, can be contrary to many consumers’ privacy expectations. Addressing these issues in a way that protects the tremendous economic and social value of the Internet without stifling innovation requires a fresh look at Internet policy (emphasis mine).

However, Cameron Kerry, General Counsel, asserts that the current model builds trust and protects consumers:

The United States has developed a model that facilitates transparency, promotes cooperation, and strengthens multistakeholder governance that has allowed innovation to flourish while building trust and protecting a broad array of other rights and interests.

As a result of the task force’s satisfactory assessment of the status quo, Kerry asserts that the goal of the task force is to maintain consumer trust:

Privacy protections are crucial to maintaining the consumer trust that nurtures the Internet’s growth.

And instead of taking a fresh look, the recommendation is to “reinvigorate” transparency:

. . . the green paper recommends reinvigorating the commitment to providing consumers with effective transparency into data practices, and outlines a process for translating transparency into consumer choices through a voluntary, multistakeholder process.

In other words, Kerry presumes that consumer trust is “good enough” when third parties are transparent about taking raw data without consumers’ express consent, interpreting it without consumers’ corroboration and participation , yet representing that interpretation as actionable and expected by consumers to Vendors, for commercial purposes.   

The assertion that consumer trust is satisfactory contradicts both Secretary Locke and the body of the greenpaper, which cites research revealing consumers of all ages do not trust these commercial uses of their information.  Separately, despite the representation of consumer marketing companies in the list of inquiry respondents, there is little reference anywhere to the industry’s desired improvement in the effectiveness of internet marketing tools and media.  How can the Commerce Department ignore that the fastest growing segment of the Internet is “custom digital publishing”?  Marketing companies like Procter and Gamble are taking a detour around media companies to connect with consumers and are producing their own media properties to build relationships.   This is specifically because marketing professionals realize that growing the business through short term promotions is not as effective nor as efficient as building long term relationships with consumers.  

Instead of advocating for the status quo and endorsing current practices through regulation and policy – as if this is the best business can do to both build consumer trust and promote innovation - the government should “disrupt ambiguity” with policies which encourage innovation that IMPROVES consumer trust, relationship building with commercial enterprises, and consequently the value of information to develop, market, and communicate with consumers.

There are many initiatives working to achieve these objectives. For example, Project VRM, and the Personal Data Ecosystem.   It is hard enough for entrepreneurs in these communities to raise investment dollars and educate consumers in today's highly competitive market.  We wonder why the government would endorse or sanction existing practices as "best" making it even more difficult for these initiatives to overcome hurdles for success.

In the spirit of promoting innovation to improve consumer trust, here’s Comradity's opinion on the greenpaper’s recommendations and response to the questions posed in the green paper.     

As background, the paper’s “Dynamic Privacy Framework” makes 4 recommendations:

1. Fair Information Practice Principles (FIPPs): “clearly articulated purposes for data collection, commitments to limit data uses to fulfill these purposes, and expanded use of robust audit systems to bolster accountability.”
   
2. Privacy Policy Office in the Department of Commerce (PPO): ”work with the FTC in leading efforts to develop voluntary but enforceable codes of conduct. Companies would voluntarily adopt the appropriate code developed through this process. This commitment, however, would be enforceable by the Federal Trade Commission. Compliance with such a code would serve as a safe harbor for companies facing certain complaints about their privacy practices.”
3. Encourage Global Interoperability: “build on accountability, mutual recognition and reciprocity, and enforcement cooperation principles pioneered in the Organisation for Economic Cooperation and Development (OECD) and Asia-Pacific Economic Cooperation (APEC)."
4. Ensure Nationally Consistent Security Breach Rules: “Federal commercial data security breach notification (SBN) law that sets national standards, addresses how to reconcile inconsistent State laws, and authorizes enforcement by State authorities.  . .The FTC and individual States should have authority to enforce this law.”

Here is Comradity's response to each of these recommendations:  

1. The value of the FIPPs is directly related to whether the goal is to maintain consumer trust or improve it.  For example, we believe that if the default were “opt-in” instead of “opt-out”, companies would be naturally inclined to be transparent and limit data uses to those that clearly and directly benefits the consumer in order to increase "opt in" rates.  To avoid potentially deceptive or empty promises, we believe an independent multi-stakeholder agency review (e.g., the Privacy Impact Assessment (PIA) ratings) would assure audit systems are used to prevent drops in PIA ratings.  To encourage new companies or existing companies who are innovative to make such a dramatic shift, why not give companies a free pass on regulations or favorable tax incentives when they make the default "opt-in" and volunteer for the PIA ratings? (For more of our thoughts about FIPPs, see our responses below to the detailed questions posed about FIPPs by the Task Force in Appendix A).
2. Why recommend adding the PPO, another representative to represent business interests?  If there’s a need for a new government agency, shouldn’t it be a multi-stakeholder representative agency with representatives from Commerce, the FTC, the new Consumer protection agency, individual States Attorney Generals, the State Department, and others?
3. If the objective of the Department of Commerce is to encourage global interoperability, why does it fail to acknowledge the existence of Privacy Commissions in Europe and Canada?  In fact, another example of the contradictions between different sections of the greenpaper, in the body of the discussion about FIPPs, Privacy Impact Assessments (PIAs) are recommended, following the example of the European Commission:

An industry standards organization pointed to the example of PIAs for radio frequency identification (RFID) tags, readers, and writers; 106 the European Commission recommended that EU Member States and RFID users develop a framework to assess the privacy risks (and safeguards) of using RFID applications.

4. It’s expected that the Department of Commerce will advocate nationally consistent rules across all states, but instead of mandating state compliance, why not engage the states to participate in the collaborative process the Department of Commerce purports to be executing through the Internet Privacy Task Force?

Here are Comradity's specific responses to the Department of Commerce Internet Privacy Task Force Green Paper questions regarding the FIPPs:

(From Appendix A: pp. 70-71)

2.  To meet the unique challenges of information intensive environments, FIPPs regarding enhancing transparency; encouraging greater detail in purpose specifications and use limitations; and fostering the development of verifiable evaluation and accountability should receive high priority.

a.  What is the best way of promoting transparency so as to promote informed choices? The Task Force is especially interested in comments that address the benefits and drawbacks of legislative, regulatory, and voluntary private sector approaches to promoting transparency.

RESPONSE: The hurdle to transparency is the ultimate exit strategy for most internet start-up companies.  In order to maximize value, investors want open-ended terms to use personal data in the context of both time and re-sale to multiple levels of parties.  That’s why most privacy policies assert the broadest possible terms and the default is opt-out (consumers must opt-out if they do not want to participate).  In my opinion, legislating an opt-in default (consumers must opt-in for their data to be used), requires companies to be identify terms of use and purposes which are compelling and relevant to the consumer. 

b.  What incentives could be provided to encourage the development and adoption of practical mechanisms to protect consumer privacy, such as PIAs, to bring about clearer descriptions of an organization’s data collection, use, and disclosure practices?

RESPONSE: In lieu of a Privacy Policy Office in the Department of Commerce, representing business interests, wouldn’t a new independent multi-stakeholder representative agency that publishes PIAs be more valuable to everyone?

c. What are the elements of a meaningful PIA in the commercial context? Who should define these elements?

RESPONSE: In a market where the goal is to improve consumer trust, the bar should be constantly improving and therefore the rating system needs to be dynamic enough to reflect changing standards both in the US and Internationally.

d.  What processes and information would be useful to assess whether PIAs are effective in helping companies to identify, evaluate, and address commercial data privacy issues?

RESPONSE: A new independent multi-stakeholder representative agency should have representatives from the Dept. of Commerce, the new Consumer protection agency, the FTC, and the State Department’s liaison with International Privacy Commissions.  An annual state of consumer trust report should be published, generating ratings for overall consumer confidence as well as specific companies and institutions.  The criteria for the ratings should be dynamic reflecting continuous improvement in standards.

e.  Should there be a requirement to publish PIAs in a standardized and/or machine-readable format?

RESPONSE: This should be the responsibility of the new agency and be consistent across other International Privacy Commissions.

f. What are consumers’ and companies’ experiences with systems that display information about companies’ privacy practices in contexts other than privacy policies?

RESPONSE: This is almost laughable as an objective given the current constant revisions to privacy policies and terms of use and lack of standards.

g. What are the relative advantages and disadvantages of different transparency-enhancing techniques in an online world that typically involves multiple sources being presented through a single user interface?

RESPONSE: When we know what the different transparency-enhancing techniques are we can assess these.

h. Do these (dis)advantages change when one considers the increasing use of devices with more limited user interface options?

RESPONSE: See above response.

i. Are purpose specifications a necessary or important method for protecting commercial privacy?

RESPONSE: Purpose or intent is essential to protecting everyone’s assets – commercial or personal.

j. Currently, how common are purpose specification clauses in commercial privacy policies?

RESPONSE: See next response.

k. Do industry best practices concerning purpose specification and use limitations exist? If not, how could their development be encouraged?

RESPONSE: There are no best practices.  Since the default is opt-out no one is compelled to devise purposes and limitations which both benefit the consumer and generate profit, they only consider commercial benefit to themselves or others. As discussed above the best way to encourage transparency to improve consumer trust is to legislate/regulate opt-in as the default for using consumer information.

l.  What incentives could be provided to encourage companies to state clear, specific purposes for using personal information?

RESPONSE: When they make more money by doing it.

m. How should purpose specifications be implemented and enforced?

RESPONSE: By making opt-in the default and using PIA’s to publicize participation rates and performance ratings.

n. How can purpose specifications and use limitations be changed to meet changing circumstances?

RESPONSE: By asking customers if they would opt-in to a change.

o. Who should be responsible for demonstrating that a private sector organization’s data use is consistent with its obligations? What steps should be taken if inconsistencies are found?

RESPONSE: The multi-stakeholder agency which reports the PIAs should be responsible.  Companies should be required to make their PIA rating accessible on every page of their website along with their privacy policy and terms of use.

p.  Are technologies available to allow consumers to verify that their personal information is used in ways that are consistent with their expectations?

RESPONSE: There has been no reason to create this application, but technologies exist to build from.

q. Are technologies available to help companies monitor their data use, to support internal accountability mechanisms?

RESPONSE: Same as above.

r. How should performance against stated policies and practices be assessed?

RESPONSE: The proposed PIAs should do this to build its ratings.  And consumer research should be done to verify.

s. What incentives could be provided to encourage companies to adopt technologies that would facilitate audits of information use against the company’s stated purposes and use limitations?

RESPONSE: If the default is opt-in rather than opt-out and an independent agency were generating PIA ratings on a regular basis that are accessible on every page of a website and could impact opt-in rates, companies would be very incented to monitor performance to avoid a surprise.