There was a time, not long ago, when De Beers called itself a “monopoly of an unusual kind.” It was the classic “big ship”: It didn’t move fast and was clumsy when it tried. But like so many other aspects of De Beers, that’s no longer true. This month, the company formally kicks off “Supplier of Choice,” the strategy that radically reshapes De Beers—and, by implication, the industry.

Even before its launch, “Supplier of Choice” has had a profound impact. Every time you hear about a sightholder launching another initiative—and expect to hear even more such announcements in coming months—credit “Supplier of Choice” and the new demand-directed De Beers. But what does the strategy mean for jewelers? Why is De Beers suddenly so high on brands? How can the mining company go retail? And why are sightholders so nervous?

Following are answers to some of the most frequently asked questions about De Beers’ new direction. The information presented here is drawn from three years’ worth of interviews with sightholders, diamond dealers, retailers, and De Beers executives since the SOC program was announced.

Q: What is “Supplier of Choice”?

A: The title is a nod to the new reality of the market. With two major mines in Canada and one in Australia marketing independently, De Beers is no longer the only game in town. The strategy is aimed at making De Beers the “supplier of choice” for rough. Along those lines, it’s become more customer-service oriented, appointing “account executives” to work with sightholders, giving sightholders regular allocations, and pricing its goods so that they actually make a profit.

But lately it’s more common to hear “Supplier of Choice” called “a suite of strategies to increase demand.” And to understand that, we must go back in time to when De Beers first realized it had to change.

In the 1990s, the cost of maintaining De Beers’ famed monopoly spiraled out of control. Following the fall of the Soviet Union, control of the Russian diamond industry fell to a succession of not-always-reliable bureaucrats, and new contract negotiations became a drawn-out soap opera. Australia’s Argyle mine was offered what executives thought was a very generous deal to remain in the cartel but bolted anyway.

The investment community grew tired of the company’s elaborate contortions to keep the cartel together, and its stock price languished. De Beers’ price-protecting stockpile was particularly unpopular. The company valued it at $5 billion, but the market saw it as a virtually worthless pile of rocks. By 1998, even the diamond industry had had enough. Tired of shrinking margins, the major diamond associations declared at a conference in Singapore that “single-channel marketing had failed.”

But if single-channel marketing had failed, what would replace it? And if the diamond industry is built on the idea of one company as tent-pole, what happens when that company’s control begins to weaken?

In 1998, soon after current chairman Nicky Oppenheimer took over the company, De Beers enlisted Boston-based consultant Bain and Company for a “strategic review.” (Some critics of the new direction say De Beers has been “Bain-washed.”) The review was intended to boost De Beers’ languishing share price, although that goal became moot in 2001 when De Beers went private. But it quickly turned into an exercise in corporate soul-searching meant to chart the future.

Bain’s answer was simple yet ingenious: If managing supply was no longer profitable or even possible, De Beers would focus on the other end of the equation—demand. If global demand steadily increased, oversupply would no longer be an issue. No longer could the whims of a Russian bureaucrat capsize the diamond industry. No more would De Beers be the “buyer of last resort,” forced to vacuum up every last piece of stray rough at great cost to its balance sheet.

De Beers always thought of demand as a strong point. Its skill at creating markets almost from scratch is legendary. But Bain told De Beers it could be better, noting that, during the 1990s, diamond jewelry sales stayed flat while sales of many other luxury goods doubled.

The strategic review divined three reasons for this “opportunity gap”:

1. The diamond industry does not advertise enough.

2. The diamond industry does not have many brands.

3. The diamond industry has a complex and inefficient pipeline.

A fourth factor—consumer confidence, which involves issues such as conflict diamonds and treatments—has not hurt the industry now, Bain said, but could do so in the future.

De Beers always said diamonds were a unique product that required special handling. The strategic review made executives realize they could learn from other industries, particularly other luxury goods that compete with diamonds for market share.

One statistic was especially revealing: Other luxury industries devote 10% of sales to advertising. The diamond industry spends only 1% to 2%. The conclusion: If the diamond industry matched other luxury goods in marketing spending, it would match them in sales growth.

The message was similar regarding brands. In the perfume industry, the top 13 brands account for 80% of sales. In the diamond market, the top 15 brands account for 13%. Executives point to vodka as an example of how brands can transform an industry. Absolut’s advertising helped its market share at the expense of Smirnoff. So Smirnoff followed suit. And in the end, the increased “noise” boosted the vodka market overall. That’s why De Beers is in favor of brands, even ones—like those in Canada—it has nothing to do with. The advertising plants the idea of diamonds in a consumer’s mind, and that helps the industry as a whole.

De Beers also sees this new gospel of marketing as a way to fight the much-lamented “commoditization” of diamonds. Right now, many people offer the same product, so margins suffer. But when many people offer different products, with different features, there’s room for margin, plus the chance to spotlight beauty and romance—the things diamonds have always stood for.

The third growth inhibitor—the “complex and inefficient” diamond pipeline—has stirred controversy. De Beers has long been ambivalent about the industry’s vast web of middlemen, which it now calls “spaghetti junction.” Bain told the company that the disconnect between wholesalers and the consumer impedes growth and noted there is no equivalent structure in any other industry. The major diamond associations, however, have expressed reservations about any attempt to trim the pipeline. De Beers execs now say there will be room for any link that “adds value.” But they clearly believe that much of “spaghetti junction” does not.

Q: How will De Beers accomplish its plan?

A: The way it always has—by using its sheer power and size.

De Beers’ market share has tumbled from its former Microsoft-level chunk of 80%-90% to a mere 60%-66% of the market. Of course, only with De Beers would the word “mere” and “two-thirds of the market” go together. It may be a shrunken giant, but it’s still a giant, and there remains a several-football-fields-sized distance between De Beers and its nearest competitors, which is why De Beers’ clients are jumping through hoops to become DTC “sightholders of choice.”

As price-sheet publisher Martin Rapaport put it at the American Gem Society Conclave: “If De Beers wanted its sightholders to line up on Charterhouse Street, jump up and down on one foot and go ‘Woo-ooo!’ you’d see a bunch of middle-aged Jewish men jumping up and down doing that. They have to.”

A key component of “Supplier of Choice” is De Beers’ formalization of relations with clients, which until now were conducted in the grand old diamond industry tradition of a word and a handshake. Because of the informality of these arrangements, sightholders shorn from the list immediately filed lawsuits. “Supplier of Choice” makes the process more professional, transparent, and—in an oft-used phrase—”legally robust.” Under SOC, sightholders sign two-year contracts that spell out the criteria for being a sightholder. De Beers is so eager for these criteria to be seen as objective that it’s having a computer analyze them.

Naturally, these criteria go hand in hand with De Beers’ focus on demand. Sightholders must demonstrate marketing ability (which targets the first and second growth inhibitors—a lack of advertising and brands); take “an efficient route to market” (which targets the third, the pipeline); and agree to “best practices principles,” a list of strict ethical guidelines (meant to preempt problems with consumer confidence).

All this explains the flood of sightholder marketing initiatives. De Beers now wants its diamonds in “the hands of people who will market them.” It’s looking for new diamond products, new diamond markets, diamonds in places they never were before—anything that helps expand the market. Ultimately, sightholders may have to justify every stone they get by telling De Beers exactly where it will go.

To prove it means business, De Beers is radically revising its sightholder list in light of the new “objective” criteria. The new list will be announced this month. The word has gone out that sightholders not involved in marketing will find themselves out in the cold.

Keep in mind that sightholder status isn’t just about bragging rights, though that’s undoubtedly part of it. For manufacturers, a steady source of supply is critical—although dropped sightholders will get stones through the end of the year, a provision the EU insisted upon. Still, some fear negative repercussions if De Beers does what everyone expects it to do—let half of those on the list go. (Of course, it’s likely that new sightholders will be added as well.)

In its own attempt to add value, De Beers also is touting the benefits of sightholder-hood. It has underwritten several ad campaigns sightholders have carried out with (mostly big) retailers. And since all sightholders must adhere to the “best practices principles,” De Beers argues that buying only from these sightholders gives retailers full assurance. It has also developed a new “signature” that incorporates the diamond-shaped Forevermark.

Q: Does all this mean De Beers is no longer a monopoly or cartel?

A: No one is sure. In some ways, “Supplier of Choice” gives De Beers more power than ever, at least over the people it deals with. But De Beers executives now carefully keep their distance from the “M” and “C” words. The name of its sales arm has been changed from the Soviet-sounding “Central Selling Organisation” to the “Diamond Trading Company.”

But legally, the question remains unresolved. In its attempt to become “legally robust,” De Beers gambled and voluntarily ran “Supplier of Choice” by the European Union’s antitrust authorities. The move delayed its launch by two years but eventually paid off, as the EU okayed the policy after certain changes. These stipulations may not have much impact on the overall industry, but in the world of De Beers they are seismic shifts. Having an independent ombudsman oversee disputes with clients is common in Europe but not something you’d expect from the control junkies on Charterhouse Street.

Even with the EU’s green light, De Beers still has a problem in the United States: To avoid running afoul of antitrust laws, it hasn’t operated here for more than 50 years. Today, De Beers clearly would like to set up shop in its largest market.

But the issue is clouded by an outstanding 1996 indictment for price-fixing industrial diamonds. Since De Beers has no legal presence in the United States, it never answered the indictment, even after the charges against co-defendant General Electric were thrown out. As a result, the indictment stands, which explains the widely held belief that De Beers executives would be arrested if they ever set foot in the United States. (Lately, a De Beers executive has made several trips here on conflict diamond business and came and went without issue.)

Q: Speaking of legal issues, how—and why—is De Beers going retail?

A: If De Beers’ new guiding principle is that brands increase demand, the new De Beers retail chain is “putting our money where our mouth is,” in the words of one executive.

De Beers has ambitious plans for its new chain, including a spot on Fifth Avenue in New York. De Beers thinks it can do this legally by leaving day-to-day operations to French luxury chain LVMH and remaining a “passive investor” in the project.

The new chain will be called “De Beers” because of widespread consumer recognition—at least by jewelry industry standards—of the name. The name “De Beers” has been licensed to LVMH, and the company will no longer use it commercially. The “Diamond Trading Company” is now the entity that oversees the marketing of “generic” products such as diamond engagement rings and three-stone jewelry.

Q: What does all this mean for diamond prices?

A: That’s another open question. The thinking is that if demand keeps rising, prices will stay firm. (In fact, demand has held up so well that there’s talk of a serious shortage of certain sizes.) But if demand does not rise, De Beers may again stockpile, though not with any great enthusiasm. So there may be more fluctuations in diamond prices, but probably not major ones.

Q: Will the plan work?

A: Some of it already has. The trend toward branding in the diamond market is several years old, but “Supplier of Choice” changed it from a light breeze to a tornado. At a recent presentation at Basel, De Beers showcased a whopping 200 “sightholder initiatives.” Executives noted with pride that in 2002, growth in diamond jewelry sales not only matched but also outstripped the gains of other luxury goods.

That said, there are many unanswered questions. Diamond brands remain an unproven concept; many retailers distrust them. Others worry that the “noise” about diamonds is growing so fast, consumers may hear only an incomprehensible din.

Others argue that marketing is simply not suitable for every company. Already there’s talk of sightholders throwing away money on pricey consultants. And when the brands and initiatives fail—and undoubtedly some will—it could have major repercussions for some very big businesses.

But most of the attention—and anxiety—is focused on the revised sightholder list. For nearly three years, sightholders have worried about their future and have had to contend with an endless series of presentations, questionnaires, and slide shows. Even some supporters of the new direction are upset at the sometimes heavy-handed way it’s been carried out.

Still, De Beers deserves credit for guts. “Supplier of Choice” is a bold break with the past. De Beers today is a company of a no-longer-so-unusual kind, one that’s changed much that needed changing, rethought many notions that needed rethinking, and is working to clean up its leftover messes, from conflict diamonds to antitrust. For too long, De Beers seemed stuck in the 19th century. Now it’s ready for the 21st.