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Sally shows off her ring to her friends at work. Paul proposed just last night. The stone sparkles in its setting as only a diamond can. Her friends are surprised at its size, since they know that Paul isnt exactly the most well-to-do guy around. "Is it real? One sheepishly asks. "Yes, it is a real diamond. Sally says, smiling.

Somewhere else Paul thinks about all the attention Sally is surely getting. He smiles, knowing that he never would have been able to afford such a ring if the diamond had come out of a mine.

Does this sound like a common experience?

Several companies, including Florida-based Gemesis and Massachusetts-based Apollo Diamonds are betting that it will be. Over the past few years theyve improved synthetic diamond technology to the point where they can now produce gem-quality colored and even colorless diamonds. And they can do it for substantially less than it would cost to process the approximately 250 tons of ore required to find a single, one-carat, natural diamond.

What remains to be seen is whether these synthetic, or "cultured diamonds, as producers at Apollo and Gemesis prefer to call them, are good-enough for consumers. Diamond simulants such as cubic zirconia and Moissanite still beat synthetic diamonds along the dimension most important to low-end customers: price. Will mid-tier consumers be willing to accept the trade-offs these higher quality synthetics offer relative to the real thing, gaining performance along the dimension of price for some loss of authenticity? Or perhaps synthetics have an edge along another dimension: as environmentally friendly and conflict-free?

The giant diamond producer and former monopolist DeBeers doesnt think so. The first "diamond fact on their website adiamondisforever.com reads: "Every diamond is immensely old, formed long before dinosaurs roamed the earth." This renewed marketing focus and their recent push to develop sophisticated machines capable of detecting synthetics indicates that they are committed to defending their main source of competitive advantage, creating scarcity via control over diamond mining and stockpiles. But how can DeBeers harness this disruptive development? One way is to look for how to grow the overall market. DeBeers has experience creating and selling synthetic diamonds for industrial purposes. One approach would be to take a stake in the disruptive entrant and use its marketing and research resources to expand that market by finding new applications for diamonds like heat-resistant wafers for semiconductors. Another is to find a new dimension of performance for natural diamonds. Emphasizing the exotic or historic origins of the stone as wine and food makers have done is one way to command a premium as lower cost substitutes enter the market. But in the end, DeBeers may find that they have been backed into the wrong part of the value chain.