Monday, August 01, 2005

July 2005 Early Indications II: Virtual Trust

[Business notice: I have officially formed a company, Still River Research, to deliver consulting and analysis services. The website ( is now out of beta after generous suggestions from several newsletter readers. I am now booking projects for the fall; please notify me if I can be of service.]

Security stories currently dominate much of the news. Between London, the Patriot Act, data thefts and losses, and renewed efforts to mandate identity cards for immigrants, it's difficult to help but feel that the world is a scary, dangerous place. My focus here, however, is on a near neighbor to security: trust, and how it can be both reinforced and undermined in new ways via digital networks.

It doesn't take long to see how various online efforts attempt to prove their trustworthiness:

-eBay relies on collated word of mouth to label bad apples and reassure good citizens. The company's institutionalized reputational currency ("view my 100% positive feedback!") is not patentable yet constitutes an enormous barrier to competitive entry.

-Some social network and dating sites use acquaintances as proxies: "you don't know me, but you know Mike, and Mike knows me, so I'm probably OK." As the Spokes and Friendsters of the world have discovered, trying to scale friend-of-a-friend trust is neither obvious nor cheap. When was the last time you used one of these services and could honestly say it was overwhelmingly positive?

-Other dating sites rely on the objective authority of social science. At eHarmony, potential daters are greeted by "relationship expert Dr. Neil Clark Warren" who has built a "detailed questionnaire measures the intricate facets of a person, including the 29 dimensions that are most important in relationship success." Not only that, an American Psychological Association conference included a paper that suggests that eHarmony marriages are happier than marriages built on other matchmaking techniques.

-Some entities have had a difficult time recreating the trust they built offline in new media. According to Lawrence Baxter, chief e-commerce officer at Wachovia quoted in the July 21 Boston Globe, the bank can no longer use e-mail to communicate with customers because phishing attacks so skillfully recreated the look and feel of official correspondence that customers routinely delete real messages. Cost structures used in the online bank's business case, meanwhile, almost certainly are rendered obsolete by the need to revert to physical mail.

-Amidst all of the 10-year celebrations of e-commerce sites (eBay, Amazon, CNet), some longtime readers may recall our discussion of Encyclopedia Britannica, which was nearly wiped off the map after over 225 years of operation. The company still exists, still publishes multi-volume hard-copy products, and recently announced it had re-formed and upgraded its panel of experts. That body, once home primarily to white males, now includes four Nobel laureates, two Pulitzer Prize winners, and a much more representative cultural makeup. Significantly, the last meeting of the board was ten years ago.

Several conclusions emerge:

1) Trust pays: eHarmony says they get 10,000-15,000 new members a day, each of whom has spent between $50 and $250.

2) Trust is expensive to build. As I searched for a new cell phone, Staples referred me to an outside vendor, but the vendor's site retains a Staples logo at the top, with the reminder that Staples will stand behind any transactions. The vendor's own site, with no such guarantee, sells the exact same service plan and phone for $50 less. Given the failure rate and overall dissatisfaction with U.S. wireless carriers, that $50 insurance looks very appealing.

3) There's a fallacy that identification can routinize trust: TSA screenings assume that someone with a driver's license that matches her face won't try to do anything bad to the aircraft. Conversely, someone who doesn't provide ID is kept off the plane: former Sun Microsystems employee John Gilmore is in federal court challenging the unwritten and/or secret law (nobody has yet produced it) that states that an "internal passport," as he calls it, is a condition for public transportation. (Here's the Gilmore site.)

4) The Britannica case, in its contrast with Wikipedia, highlights a particular dynamic on the Net, that of open vs. closed credibility, or trust if you will. Much as "many eyes make bugs shallow," as Eric Raymond argued in The Cathedral and the Bazaar in reference to open-source software, Wikipedia establishes trust in the volume of researcher-reader-editors who will spot and fix errors. Unlike the Staples model, money is less effective than reputational currency - the same stock of "funds" that makes eBay work.

Britannica, on the other hand, seeks the credibility of the few: the Encyclopedia's editor stated that "At a time when vast quantities of questionable information are available on the Internet and elsewhere, rigorous and reliable reference works are more important than ever." They are, but Britannica has a lot to answer for: the BBC reported that a 12-year old boy in London found five errors in two entries. Add to the errors the cost to fix paper editions, and the lag between error detection and correction - how many readers will propagate errors in the interval?

5) In the physical world, institutions can convey cues that reassure patrons of their solidity and presumably good intentions: marble pillars on a bank, brightly lit colorful plastic in a strip mall, even flight attendants' and pilots' uniforms. Online, Wells Fargo, Target, or Delta can't convey the same kind of authority in pixels, so the task becomes twofold: connecting to the existing credibility through branding, and capturing various kinds of word of mouth.

In the coming months, several trust stories will bear watching:

-Pharmaceutical companies, particularly in the COX-2 (Vioxx) neighborhood, have suffered major reputational damage, much of it related to online behavior, and the legal proceedings will be only one element of a fight to regain public trust.

-The 2008 presidential race will begin heating up, particularly the early-stage fundraising. Watch for the lessons various candidates learned from the Howard Dean experience.

-After the "golden age" of the CEO as hero, the past few years have reversed the public reception of business leaders. Huge severance packages following poor shareholder results, lawsuits, criminal guilty verdicts, and general tarnish on the aura make for a tough time to be a leader. Will Mark Hurd fare better at HP than did Carly Fiorina? Can Ford and GM rise to the challenge of viability and profitability? Will Boeing build a lead on Airbus? In each case, much will hinge on how much trust the leader can generate in his or her own company, the market, and the financial community. So far, by the way, it appears that Hurd understands the power of e-mail better than Harry Stonecipher at Boeing, who apparently let it become his undoing.