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The Internet Evolution

Jun 6, 2005 11:30 AM   By Martin Rapaport
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My father told me a story about his father — the original Martin Rapaport. He owned the grain mill in Satmar, Hungary. The mill made money by buying up large quantities of wheat, grinding it and selling the flour. Every year my grandfather would travel to a very wealthy landowner, a several days’ journey, and negotiate the purchase of the landowner’s entire grain production. One year, my grandfather arrived as usual and the landowner very apologetically explained that he had already sold his wheat to a company in London. He took my grandfather into a room and showed him a telephone, proudly explaining how that the deal was negotiated over the phone. Greatly disheartened my grandfather returned home and told my father “the telephone will kill the wheat business.”


Obviously, the telephone did not kill the wheat business but it did kill my grandfather’s idea of what the wheat business was or should be. While the physical aspects of advancing technology are new, there is nothing new about the fact that technology changes our world in ways that empower and “depower” different segments of society. Sometimes technology does not merely advance us, it hyperspaces us to a new reality with unlimited opportunities and consequences. The printing press, electricity, telephones, air travel and computers did not just advance us, they put us in a different world. A world where the young challenge the old, where revolutionary thinkers displace the establishment and where it becomes increasingly difficult to balance the need to adopt new ideas with the need to maintain order and the success provided by well-established tested and tried ways of doing things.

New technology is G-d’s way of democratizing opportunity. Established firms with large investments in the old way of doing things are misplaced by new firms that are able to adopt change and innovate quickly. The older and more powerfully entrenched you are and the greater investment you have in the old, the harder it is to adopt new ways to do things. Technology shocks provide an elementary form of social justice as they limit the dominance of the powerful establishment and make room for new innovators. New technology is Darwinian as it provides for survival of the best adapters and elimination of those that resist change.

While many established firms took pleasure in the “boom-bust” collapse of the early internet and the justified fall of the arrogant gurus who predicted the imminent demise of traditional retailing and distribution, in fact the internet is continuing to develop and change the way we do business. A primary goal of this article is to try and understand how the internet will impact the diamond and jewelry business in the near to medium future so that we may develop strategies that optimize our strategic positioning.

Internet is an Evolutional Process

We must recognize that the internet is not a revolution but an evolutionary process. Like the telephone the internet does not change the world by itself, but by how it interacts with existing systems. The impact of the internet process will continue for a long time and fundamentally change how we evolve. The internet today is the telephone of yesterday and the electricity of yesteryear.

Many of the early internet advocates mistakenly believed that the advent of the internet signified a singular technological leap forward that would obliterate existing systems. They thought everything was going to change at once. They were wrong, not because the internet is a less powerful force than they estimated, but because it is more powerful than they estimated. The internet is slowly and consistently changing the very roots of our society and the way we will communicate and do business in the future. How fast things change is not as important as how fundamentally they change.

To a large degree, the internet is about how we develop and use information. Initially firms maintained information systems for purely internal purposes with many buying their first computer at the insistence of their accountant. Once the information was available for internal purposes, firms began to question how they could optimize its use not only to manage their company better, but also to increase sales. A number of business-to-business (B2B) trading systems such as RapNet® and Polygon developed to enable the efficient sharing of diamond availability and the evolution of inventory databases into trading networks began. The idea that sharing information was an important benefit to have took root.

Practical Considerations

The fact that diamonds come in thousands of size/quality combinations and that demand is very specific creates a situation where buyers are often looking for a needle in a haystack. The ability of the internet to aggregate information from thousands of sources and quickly find the exact diamond the customer needs is unparalleled. Furthermore, the internet is capable of ranking the diamonds by best prices, thereby creating a competitive marketplace.

The aggregation of real-time competitive internet availability and pricing information has created an unprecedented level of transparency in the diamond sector. Companies and consumers are able to shop the internet and easily obtain best prices for fine-quality laboratory-graded diamonds. Armed with internet prices and printouts of grading reports, consumers are demanding same pricing from traditional retailers. The consumers want the added-value services provided by retailers but they do not want to pay for them. Instead of supporting and promoting trade, the internet is coming between retailers and their customers.

It is obvious that retailers provide valuable and greatly desired value-added services to their customers. Most consumers do not want to buy diamonds sight unseen over the internet. It is also obvious that retailers cannot provide a retail shopping experience at prices that are competitive with internet prices, which are based on a 7 percent to 20 percent markup. Retailers are entitled to fair compensation for the added-value services they provide.

We know that a consumer prefers to see and compare diamonds before they buy. They also prefer the education and personal advice provided by a trained salesperson. But how much are consumers willing to pay for these and other added-value services provided by retailers? Can retailers live in a world where their customers know their cost prices? If consumers know the cost of the steak, how much will they be willing to pay for the sizzle?

When confronted by internet consumers, it is important that retailers not be shy about clearly communicating to the consumer what their added-value services are and what they will cost. Internet transparency is driving added-value services transparency. Retailers must be as transparent about the cost of their added-value services as the internet is with the cost of commoditized diamonds.

The internet will not replace traditional retailers for the same reason that McDonalds has not replaced fine dining and fine restaurants. And this is because many consumers want more than a commodity diamond. The challenge for retailers is to clearly define just what they are giving the consumers and to charge a fair price for it. Most consumers do not want the lowest commodity price when buying a diamond. They do, however, demand good value. Good value for the diamond and good value for the added-value services provided with the diamond.

It is up to the retailers to create real added value for the diamonds they sell. Retailers that flip diamonds the way McDonalds flips hamburgers better be offering a great price because there is no other reason for anyone to buy from them. In the words of Jack Trout, “If you don’t have a differentiating idea to drive your product or brand, then you better have a terrific price. There is nothing in the middle. It’s an idea or a price — take your pick.”
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Tags: Consumers, Jewelry, Production
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