Sunday, August 31, 2008

Extreme Experience: Septuagenarian CEOs

Extreme Experience: Septuagenarian CEOs

When Senator John McCain takes the stage at the Republican National Convention in Minneapolis on Sept. 4, he will become the oldest candidate ever to accept his party's nomination for a first-term President. McCain, who will be 72 when he formally accepts the nod, has sought to turn his advanced years into an attribute (he is wise) and a counterpoint to the message being championed by his 47-year-old rival, Senator Barack Obama (he is for a fresh start). This election, at least on one level, is a national referendum on change vs. experience.

A similar dynamic is at work in business. It often seems as though young people rule the world, especially since the dot-com boom (Hello, Google (GOOG) and Facebook guys). But you might be surprised at how many senior citizens—media moguls, casino kings, Chinese tycoons—are cutting deals, starting new businesses, and generally kicking boomer and Gen Y butt.

If 60 is the new 40, then 80 is the new 60. Mellowing with age simply doesn't compute for these folks. Every morning, Sumner Redstone, the 85-year-old chairman of Viacom (VIA) and CBS (CBS), rises at 5 in his Beverly Hills manse, swims, rides an exercise bike, runs on a treadmill, and peruses financial reports until the markets open. Rupert Murdoch, 77, goes a few rounds with a boxing coach before setting off to run his global media empire. Playboy Editor-in-Chief Hugh Hefner, 82, may get a workout from exercising the fabled prerogatives of his job.

We decided to take the measure of these people. We surveyed our global network of correspondents and came up with a list of folks who range in age from 75 to 100 and run their companies or wield real influence in business. We ranked them from oldest to youngest and called our list Twenty-Five Over Seventy-Five. (There were so many, we opted to list another 25 on

The first thing you'll notice about our list is that for the most part these people are founder-entrepreneurs. From Hong Kong's Li Ka-shing to Wall Street's Muriel "Mickie" Siebert to Belgium's Albert Frre, they answer to no boss. And even when they have shareholders watching their every move, many of these seniors control their companies through supervoting stock. Does extreme experience pay off? Not always. A back-of-the-envelope calculation shows that most of the seniors on our list who run public companies failed to beat their respective indexes over the past five years. There are exceptions. Warren Buffett's Berkshire Hathaway (BRK.A) is up 59% over that period, vs. 40% for the S&P 500.

Septuagenarians running the show is not the norm in the corporate world. At most companies, 65 is the cutoff. At that point merit and years served are meaningless: It's time to take the gold watch, hit the golf course, and start collecting the pension. People who'd prefer to keep working feel robbed, of course. Veteran auto executive Robert A. Lutz recalls Chrysler letting him go 10 years ago because he had reached that milestone. "I'm finally getting pretty good at this and have learned many lessons the hard way," he recalls. "So they throw this asset away and send me home."

Management gurus have long argued that companies need to be more flexible in matters of retirement. Jeffrey A. Sonnenfeld, who teaches management at Yale University, acknowledges executives should face "regular, brutal assessments," whatever their age. "But just as race isn't used as a proxy, age shouldn't be, either."

We know what you're thinking. Older people resist change. They are prone to "senior moments." They are always fighting the last war. Sometimes that's true. But they also have historical perspective, as well as impressive contacts built up over a lifetime.

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  • The Candidates Are Monitoring Your Mouse

    The Candidates Are Monitoring Your Mouse

    Barack Obama and John McCain are tracking what you do online. The Presidential candidates are so eager for votes this November that their campaign staffs are turning to behavioral targeting, a sophisticated though controversial strategy to pinpoint voters and volunteers online with advertising tailored to their interests. It's the first election in which White House hopefuls are using the approach. "The growth will be substantial this year," says Thomas Gensemer, managing partner at Blue State Digital, a political Web shop working with Obama.

    Behavioral targeting gives campaigns a potentially powerful new way to slice up the electorate. In the past, politicians used surveys and demographics to target voters with mailings and local TV ads. But much of the effort was wasted. Campaigns had to assume that individuals shared the values of a large group—say, the National Rifle Assn. or a Zip Code on Chicago's West Side. Now the advertising arms of Yahoo! (YHOO), Microsoft (MSFT), and others help politicians uncover people's interests by tracking their Web surfing and searches. By mixing these profiles with data such as age or gender, they can build thousands of voter profiles, each a target for a customized pitch.

    The Obama campaign, at the Democratic convention this past week, wouldn't discuss its strategy. But the nominee is using the technology to woo voters, donors, and volunteers, say sources familiar with the effort. For example, when people visit the volunteer section of the Obama Web site but click away without signing up, the campaign puts a cookie on their Web browser. Then, as surfers move around the Web, the campaign looks for opportunities to bring them back. If they go to a parenting blog, Obama can deliver an ad about education policy. If they read a story on a tech news site, the campaign can serve up something about technology policy.

    McCain's campaign says it's working with Yahoo and Google (GOOG) on similar efforts, though it won't share details for competitive reasons. One strategy is to track down military veterans online, on the assumption they're more likely to give votes and money to the Vietnam vet. Once staffers identify these people, they deliver ads with taglines such as "Experience Money Can't Buy."


    Such targeting used to be quite crude. But it's gotten better as people spend more time online. AOL (TWX), which recently rolled out behavioral targeting across all its sites and those of 4,000 partners, says it can track 82% of Americans online. It collects around 70 data points per person each month. "The companies—AOL, Google, Yahoo—have gotten really good," says R. Rebecca Donatelli, chairman of Campaign Solutions, the agency running McCain's Internet campaign.

    Behavioral targeting is still relatively small, about 3% of total online advertising. But it has become one of the fastest-growing segments as companies and candidates step up their spending. Revenues are expected to rise 48% this year, to $775 million, and hit $4.4 billion in 2012, estimates researcher eMarketer. Darren Beck, vice-president of marketing at LendingTree (IACID), says the mortgage company has continued to use the technology despite the tight real estate market because it's so effective.

    Still, as the practice gains prominence, it's stirring privacy concerns. Congress and the Federal Trade Commission held hearings during the past year. In August, Congress initiated a further inquiry, sending letters to 33 companies asking for information on their practices. The industry is responding by adopting new policies, such as deleting search data after a certain time period and not advertising based on certain medical conditions.

    Advocates say that as politicians see the potential in online targeting, they may be reluctant to push for more safeguards. "On the one hand, it's great that Congress is concerned about privacy," says Jeffrey Chester, executive director of the nonprofit Center for Digital Democracy. "But they haven't come to terms with the idea that their candidates are doing targeting."

    Join a debate about whether online advertising is effective.

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  • Getting a Better Deal on Commercial Real Estate

    Getting a Better Deal on Commercial Real Estate

    Sitting in his new office overlooking Austin's bustling 6th Street, Spacial Audio Solutions CEO Bryan Payne can't help but see a silver lining to the topsy-turvy economy: cheap rent. Last year, Payne hunted for office space in this same area and came up empty-handed.

    It wasn't enough for Payne to be in Austin. He wanted to be on 6th Street, Austin's main thoroughfare for clubs, restaurants, and live music. "Our business is all about music, so it made sense to be in the thick of it," says Payne. His company, which sells streaming and advertising software for Internet radio, has gone from 7 employees to 20 in the past year. Revenue, at $1.7 million in 2007, is on track to double in 2008. Payne wanted space that was raw, but not too raw to have clients in, and he needed room for up to nine people. He could spend $4,000 a month, but at that price all he found were old bars and restaurants that needed to be converted.

    Payne took his time. He moved from Lubbock, Tex., to Austin, working out of a home office while he continued to search. Eventually, his patience was rewarded. In April, Spacial moved into a 1,680-square-foot office in historic Hannig Row renting for $2,200 a month. "They even gave us three weeks of free rent," says Payne.

    While commercial real estate hasn't been hit nearly as hard as residential, the market is still probably weaker than it was the last time you shopped for space. Nationally, the vacancy rate for all office space was about 11.7% in the second quarter, according to CoStar Group, a commercial real estate reporting agency. That's up slightly from 11.1% in the second quarter of last year, but a lot lower than in the mid-1980s, when vacancy rates reached 20%. Nationally, office rents are holding steady at about $25 a square foot for full-service rent, which includes utilities, taxes, insurance, and cleaning. In some markets, rents are even going up. Still, higher vacancy rates are an early sign that "the market is moving from a landlords' market to a tenants' market," says Rick Davidson, president of Coldwell Banker Commercial. If you're a business owner looking for space, thinking of moving, or renegotiating your terms, it's time to start flexing some muscle.

    For many entrepreneurs, real estate is a huge cost, second only to payroll. So moving is not a decision to be taken lightly. Start by thinking about the relationship between your business and the roof over your head. How much space do you need, and what kind of space should it be? Then there's location. In retail, it's everything; for a high-tech startup it may not matter. What features are key? Control of the thermostat might seem like an afterthought until you work a long weekend in August. And you'll need a good broker—one who knows the market, has good relationships with landlords, and understands your business. When it's time to negotiate, you'll want to pick your battles; landlords are willing to make some concessions, but not all.

    Most important, take your time. "In this market you shouldn't feel pressured to make any decisions," says John Gates, president of brokerage for the Americas at real estate company Jones Lang LaSalle. "If anything, the market will continue to advance in your favor."


    No space, at any price, is likely to be perfect. "Make sure you have a 'gotta have' list and a 'like to have' list," says Michael Harrity, an adjunct professor at Babson College and managing director of Boston-based Matrix Real Estate Advisors. Refer to that list as you're looking, and don't be too quick to settle for space that doesn't work as is. Air conditioning, heat, parking, storage, natural light, and noise can each mean the difference between a great space and a big fat compromise. And while you can always change a space to make it work, that's going to cost you. Even if the landlord is willing to shell out some cash for tenant improvements, says Coldwell's Davidson, he'll rarely kick in enough to cover all of the costs of outfitting a new place.

    Location—whether on the "gotta have" or the "nice to have" list—is likely a top priority. Anna Gervait, CEO of Agile Communications Group, recently decided that a short commute trumped a swanky address. In June, she moved her six-employee tech startup from a 1,500-square-foot executive suite in downtown Tampa to a prewar building just south of there. When she moved into the executive suite in 2006, she says, it was all she could find. The building, with its enormous glass atrium and prestigious address, was impressive. But at $5,400 a month, rent was a big drain, and clients rarely saw the place. What's more, "We had no control of the air conditioning," says Gervait. Hardly ideal for a startup whose employees often work odd hours supporting customers who use its software to send mass text messages to clients.

    This spring, Gervait and COO Rick Bowen set out to look for new space. They had three main criteria: They wanted cheaper rent, shorter commutes, and control of the thermostat. "One day when I was pulling out of my home garage I saw a tiny sign saying office space for rent," says Gervait. She saw the building with her broker, "and we immediately knew it was almost perfect." They got more space, cut their rent by more than half, and now Gervait walks to work.

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  • Saturday, August 30, 2008

    Coke's New Design Direction

    Coke's New Design Direction

    When David Butler joined Coca-Cola (KO) almost five years ago, he was given, as he tells it, "the Post-it Note mandate: We need to do more with design. Go figure it out." Butler, who had come from a gig as director of brand strategy at the interactive marketing and consulting firm Sapient, had soon written up a 30-page manifesto laying out a design strategy for the company. But if Butler, who's now vice-president for design, has made an impact at the beverage giant, it's not because of some heady proclamation. Instead it's because he has learned the most effective way to implement design strategy at a company as large and complex as Coca-Cola: avoid the word "design" as much as possible.

    "If I'm at a meeting with manufacturing people, I'll say: 'How can we make the can feel colder, longer?'," he says as an example. "Or, 'How can we make the cup easier to hold?'" In other words, he talks about the benefits of smart design in a language to which those he's talking to can relate. Based on several recent brand redesigns—including the new Coke identity work that won the Grand Prix at the Cannes Lions awards program in June—and innovations such as an aluminum bottle and a new family of coolers, this surreptitious approach seems to be working. Butler leads a team of 60 designers—a mix of graphic and industrial designers, some poached from companies such as Apple (AAPL), Nike (NKE), MTV (VIA), Target (TGT), and Electrolux—at four centers around the world. All are focused on what Butler describes as a "fix the basics" strategy.

    The Old Simplicity Gone

    While there are few companies with a richer design heritage than Coca-Cola, in recent years the company seemed to have lost its design savvy. The iconic Coke "contour" bottle, adorned with the globally recognized script and the simple ribbon graphic, for instance, had given way to a plastic bottle or aluminum can on which the logo had to compete against random bubble graphics, extraneous marketing messages, or seasonal images. When Butler reviewed the state of design at Coca-Cola on his arrival, evaluating everything from the branding created for the then-recent 2004 Olympics in Athens to the process that the company's 300-plus bottling partners went through to get approval for new bottle designs to the customer experience of buying a Coke from a vending machine, he found a lot that needed fixing. Coca-Cola was a global company with 450 brands, more than 300 different models of vending machines, innumerable bottling and retail partners, and no consistent global design standards.

    It wasn't that the company had forgotten about design altogether. Former president Steven Heyer, who resigned in 2004 after being passed over for the CEO job, helped start Studio Red, a collaboration with hip New York design and architecture firm, Rockwell Group. As Tucker Viemeister, then creative director of Studio Red says: "Our mission was to be innovative in any aspect that we could. We had this gigantic canvas." Studio Red came up with lots of interesting projects: the Coke Cruiser (a scooter with a cooler at its front conceived as a mobile vendor at festivals or concerts) as well as a tasting salon, a retail environment where people could sample a new drink like Coke Zero. But many of them never made it beyond the concept stage.

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  • Palin No Pushover on Pipeline Project

    Palin No Pushover on Pipeline Project

    To most Americans, Senator John McCain's (R-Ariz.) choice of running mate, Alaska Governor Sarah Palin, is a new face. To Alaskans, however, she's the woman who got a giant natural gas pipeline project off the ground, in part by telling big oil companies they'd get no sweetheart deals. Despite the national debate about drilling in the Arctic National Wildlife Refuge (ANWR), Alaskans largely favor development of their natural resources, a huge source of revenue for the state. For years, Alaskan officials have been dickering with the state's largest producers, ExxonMobil (XOM), BP (BP), and ConocoPhillips (COP), over construction of a pipeline that would bring the nation's largest untapped natural gas reserves to consumers in the Lower 48 states. The producers wanted long-term commitments from the state on what their tax obligations would be for producing the gas.

    In 2006, then-Governor Frank Murkowski championed legislation that would have gotten a new pipeline going. Independent consultants hired by the state, however, concluded that the royalty and lease incentives in his proposal were worth some $10 billion to the oil companies. The deal would have also hampered the state's ability to raise taxes on the producers for decades. "Governor Murkowski had proposed a truly abysmal deal," says state Representative Beth Kerrtula, the Democratic Party's minority leader. Palin criticized the Murkowski bill as one negotiated in backroom dealings and as a giveaway to the big three producers. In August 2006, she beat Murkowski in a Republican Party primary.

    After winning the general election in November 2006, Palin pushed for a gas deal of her own. Rather than negotiate with the big three producers, Alaska legislators passed a bill offering inducements to pipeline operators. Initial expenses of up to $500 million would be reimbursed by the state. Late last year, five companies submitted proposals. Palin championed one from TransCanada (TRP), a Calgary-based company that is North America's largest pipeline operator. State legislators officially awarded TransCanada the license on Aug. 1, and Palin formally signed the bill on Aug. 20.

    Big Oil Falls into Line

    But a funny thing happened on the way to the independent pipeline award. In April, BP and ConocoPhillips announced plans to construct their own giant pipeline, called Denali. The $30 billion project would be North America's largest construction project. It would supply 4 billion cubic feet of gas per day—about 7% of U.S. demand—through a 2,000-mile line snaking from Alaska's North Slope to the border of Canadian province Alberta. It was exactly what Alaskan officials wanted from the producers. "One time they were talking about locking up taxes for 25 years," says Kurt Gibson, deputy commissioner of Alaska's Oil & Gas Div. "Now the story they're telling is 'We'll figure out the taxes later.' That's a pretty stark departure."

    In Alaska, where energy companies wield power as in few other places, Palin's independence was seen by many as radical—and caused abundant consternation among many in her own party. "She is not in bed with them, she's not adversarial with them," Gibson says of the governor's relationship to Big Oil. "She's acting as any responsible chief executive would in managing an asset in your portfolio. Under Murkowski we were beholden to the major energy company interests."

    ConocoPhillips spokesman Charlie Rowton said in an Aug. 29 e-mail that the Houston company had, with BP and ExxonMobil, spent more than $125 million to date studying the project and that "Denali represented the next stage in advancing a gas pipeline."

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  • Mori's 'Vertical Garden City' Opens Far Above Shanghai

    Mori's 'Vertical Garden City' Opens Far Above Shanghai

    On Aug. 30, Japanese visionary real estate developer Minoru Mori will unveil his latest project: the 101-story Shanghai World Financial Center (SWFC). The 1,614-foot tall, bottle opener-shaped skyscraper, which towers over Shanghai's other skyscrapers in the Pudong financial district, holds the title of tallest building in China.

    For Mori, SWFC's ribbon cutting will be a moment of triumph and vindication. He first started work on what was planned to be the world's tallest building in 1994, when there were more farmers than bankers living in Pudong district. The project was put on hold, first by the Asian financial crisis, then by September 11, then SARS. Some of the original Japanese investors got cold feet and bailed out. Mori bought out their equity, raising his stake in SWFC to 80% from 30%. In the meantime, Taipei and Dubai have erected taller skyscrapers.

    Each crisis forced Mori back to the drawing board. Building plans were revised so the SWFC's roof would be taller than the Taipei 101. (Taiwan still has the taller building when its spire is included.) And the revisions didn't stop after construction started. During the anti-Japanese protests in 2005, architect Kohn Petersen Fox's original design—a circle with a Ferris wheel inside the top of the building—was criticized by Chinese nationalists for placing a Japanese flag in Shanghai's skyline. Mori changed the circle to a rectangle, whose top houses the world's highest observation deck.

    Persistence Paid

    "It never crossed my mind to abandon this project," says Mori, president and chief executive officer of Mori Building. "During the time the construction had been suspended, we upgraded the design and specifications of this building to meet expectations in size and quality as a world-class landmark in Shanghai. What you see today is the final achievement that overcame all these obstacles and turned them into opportunities."

    Mori made his name developing Tokyo's famed Roppongi Hills project (BusinessWeek, 11/4/02), bringing office towers, luxury apartments, and museums into one complex so salarymen wouldn't have to spend hours commuting home to the suburbs every evening. The SWFC marks the first time he is carrying this "vertical garden city" concept outside of Tokyo. The SWFC will house shops and restaurants from its basement to the third floor, commercial office space for the next 70 floors, and an upscale Park Hyatt hotel from the 79th to 93rd floors, making it the loftiest hotel in the world.

    And it looks like Mori's bet on Shanghai has paid off. While sky-high prices in Shanghai's residential property market have kept potential buyers and luxury home real estate developers on the sidelines (BusinessWeek, 10/10/05), the supply of high-quality, Grade A office buildings has exploded to cater to banks, brokerages, and law firms expanding in Shanghai. SWFC already has a 45% occupancy rate, which includes Morgan Stanley (MS), BNP Paribas (BNPP.PA), and Sumitomo Mitsui Banking as tenants, despite charging a pricey $3 per square meter for rent. Hiroo Mori, chairman of SWFC and Mori's son-in-law, expects to have a 90% occupancy rate one year from now, putting Mori Building on track to recoup its $1.1 billion investment in SWFC in 12 years. "We are confident that we will attract further office demand," he says.

    Subprime Opportunities

    However, it may be a while before Mori starts another project outside of Japan. He has been approached by investors to bring Roppongi Hills-style projects to Singapore, Bangkok, and Seoul. Mori says that he is considering taking on these projects, but wants to see how the situation in the world economy plays out before making a decision. "We're waiting for the dust to settle. In Tokyo, we're pursuing whatever we decided to do. For the rest, we are waiting for a while," he says.

    The problem is that America's subprime crisis has started to spread to Tokyo. During the real estate bubble, a number of real estate firms started popping up in Japan to help privately held investment funds find properties to invest in. But when the investment funds went belly up from the subprime mess, credit stopped flowing to these Japanese real estate firms. A string of Japanese real estate firms have gone bankrupt, including Urban Corp. earlier this month and Sohken Homes this week.

    Mori is taking this opportunity to buy up companies in distress, albeit in a planned, systematic manner. He is currently developing seven large projects in Tokyo, including a second Roppongi Hills. It took him 14 years to acquire the 28 acres needed to build the first Roppongi Hills. Now, he is buying distressed properties, mainly in the areas he is planning to develop—or in good locations that can be traded for properties in areas he wants to develop. Mori Building plans to purchase $3.3 billion in property assets in this fiscal year, which ends in March 2009, and an equal amount next fiscal year. He notes: "So in a way, these problems are leaving us good problems to speed up larger projects, because people who were bidding against us even until a few months ago are now coming to ask us to buy these properties."

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    Universities Try Out New Digital Devices

    Universities Try Out New Digital Devices

    Duke University made headlines in 2004 when it handed out Apple (AAPL) iPods to every incoming freshman. The Durham (N.C.) school began giving away the popular digital music players to see whether it made sense to record lectures and make digital copies available outside the classroom.

    The university still provides iPods to students who need them, but in most cases, first-year students already have one when they arrive, says Julian Lombardi, Duke's assistant vice-president for information technology. "Back then, it was still a little bit of an exotic item," Lombardi says. "Now they receive one as a high school graduation gift." In fact, many get their first iPod long before that.

    Now Duke is considering a new tech experiment to aid learning. The school may soon dole out handheld video cameras, such as Pure Digital Technologies' Flip Video, to students in courses where creating video can be used as a teaching tool, Lombardi says. The school already has 100 of the easy-to-use Flips and other video cameras that students and faculty can check out—and they're borrowed regularly, he says.

    Teaching Video News

    Far from banning tech from the classroom as potential distractions, colleges across the country are toying with an array of cutting-edge products and services for entering freshmen, who have grown up immersed in technology and rely on all manner of advanced tools to collaborate and learn.

    Like Duke, Roger Williams University in Bristol, R.I., is also experimenting with video as a learning tool. Last year, communications professor Michael Scully added the $150 Flip camera to the requirements for his course on digital journalism. "When I first showed them the camera and how easy it was to put a video on YouTube, they looked like I had just pulled a rabbit out of my hat," Scully says. By the end of the day, students had produced their first video news story and started posting items on a class YouTube page called The Feed.

    A later class project shed light on a controversial new campus smoking policy. "A lot of students watched, and we got a lot of feedback from people who were angry about the policy," says Lorin Richardson, 20, one of Scully's students. "A lot of kids told me later they used that video in discussions in other classes."

    Richardson and her peers were in kindergarten when e-mail and the Internet started gaining cultural currency. For most of the time they've been able to type, the Web's trove of information has been a mere Google (GOOG) search away. Friends and family have always been as close as an e-mail, instant message, or a text. Many gave presentations using Microsoft's (MSFT) PowerPoint in high school.

    Like Eating a Meal

    By the time they arrive at college, they've already amassed hundreds of friends on their Facebook and MySpace (NWS) accounts. Some have been blogging for years and even experimenting with Twitter and other microblogging tools. Viewing video online is as normal as watching TV. "This is a generation that has never known anything else," says Kenneth Rogerson, a professor of public policy at Duke who teaches a class on technology and politics. "Technology is so much a part of their conversation and their understanding, and they expect people to understand what they're talking about. It's as much a part of their lives as dinnertime."

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  • Boeing: More Heat Over Tankers

    Boeing: More Heat Over Tankers

    After meeting with Pentagon officials on Aug. 12, Boeing (BA) seemed to be trying to pressure the U.S. military to change the terms and timetable of its trouble-plagued competition for a $35 billion contract to build airborne refueling tanker planes.

    The Chicago-based aircraft maker, which in June got the military to void an initial award (, 6/18/08) of the contract to rival Northrop Grumman (NOC) and Airbus-maker European Aeronautic Defence & Space (EAD.PA), said it is pressing for a "realistic timetable" for a new award—suggesting that the Pentagon's plan to have the contract sewn up by New Year's Day is not practical. Striking a high-handed note, the company also said it hoped the meeting was just the beginning of a "continuing dialogue" that will lead to a formal Pentagon request "that prescribes the right aircraft."

    Leading executives from Boeing and Northrop met separately for several hours Tuesday with Pentagon officials at the Wright Patterson Air Force Base near Dayton, Ohio. The Pentagon had made arrangements for the meetings last week, when it formally reopened the competition for the tanker contract and laid out a timetable calling for an award by New Year's Day.

    Protesting the First Round

    The meetings were described as a chance to discuss changes in the competition. In February, the Northrop-EADS team won the contract (, 2/29/08) with its bid to build tankers based on the Airbus 330 plane. Boeing had protested that contract award, and the Government Accountability Office, agreeing with the company, found the first round of the competition deeply flawed.

    In statements released after the Ohio meeting, Boeing officials seemed to be pressing for more time and for specifications in a request for proposal (RFP) by the Pentagon that would be more likely to suit the plane Boeing would like to offer the Air Force: a variation on its 767 commercial jetliner, which is smaller than the plane Northrop/EADS is offering. The rival plane is based on the Airbus A330.

    "We hope that it was just the beginning of a continuing dialogue as we move toward a final RFP that prescribes the right aircraft and gives appropriate weight to all of the capabilities that will be required for the evolving mission over the next several decades," Boeing spokesman Daniel Beck said in an e-mailed statement. Echoing politicians, particularly Democrats from Washington State who have rallied to Boeing's side in the fight, Beck added: "Boeing remains committed to providing the Air Force with a next-generation tanker that meets real-world mission requirements and that is selected through a fair, open, and unbiased competition that follows a realistic timetable."

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  • Medical Bills You Shouldn't Pay

    Medical Bills You Shouldn't Pay

    As health-care costs continue to soar, millions of confused consumers are paying medical bills they don't actually owe. Typically this occurs when an insurance plan covers less than what a doctor, hospital, or lab service wants to be paid. The health-care provider demands the balance from the patient. Uncertain and fearing the calls of a debt collector, the patient pays up.

    Most consumers don't realize it, but this common practice, known as balance billing, often is illegal. When doctors or hospitals think an insurer has reimbursed too little, state and federal laws generally bar the medical providers from pressuring patients to pay the difference. Instead, doctors and hospitals should be wrangling directly with insurers. Economists and patient advocates estimate that consumers pay $1 billion or more a year for which they're not responsible.

    Yolanda Fil, a 59-year-old McDonald's (MCD) cashier in Maple Shade, N.J., got tangled up with balance billing after gall bladder surgery in 2005. She and her husband, Leon, a retired state transportation worker, have coverage through Horizon Blue Cross Blue Shield of New Jersey. Horizon made payments on Fil's behalf to the hospital, surgeon, and anesthesiologist. Then, in 2006, Vanguard Anesthesia Associates billed Fil for an unpaid balance of $518. Soon, a collection agency hired by Vanguard started calling Fil once a week, she says. Although she thought her co-payment and insurance should have covered the surgery, Fil eventually paid the $518, plus a $20 transaction fee. "I didn't have any choice," she says. "They threatened me with bad credit."


    Luckily for Fil, her insurer decided to get tough with Vanguard. In December 2006, Horizon Blue Cross sued the medical practice for balance billing Fil and more than 8,000 other policyholders who received invoices for a total of $4.3 million for service from 2004 to 2006. A New Jersey judge last year ordered Vanguard to stop billing the patients and provide refunds to those who had paid. Fil is awaiting her $538 refund. Vanguard didn't respond to requests for comment.

    National statistics aren't available, but there's little doubt that many consumers unwittingly fall victim to balance billing. The California Association of Health Plans, a trade group in Sacramento, estimates that 1.76 million policyholders in that state received such bills in the past two years, totaling $528 million. The group found that 56% paid the bills. "Patients think they owe this money, and it causes tremendous stress and anxiety for people," says Cindy Ehnes, director of the California Managed Health Care Dept. "It is inappropriate to put the patient in the middle of this."

    Balance billing most frequently occurs when medical providers participating in a managed-care network believe the plan's insurer is imposing too deep a discount on medical bills or is taking too long to pay. California, New Jersey, and 45 other states ban in-network providers from billing insured patients beyond co-payments or co-insurance required by the plan. Similarly, federal law prohibits providers from billing Medicare patients for unpaid balances.

    These laws require medical providers to seek payment only from the insurer for services covered by the plan. Many states also shield insured patients from balance billing by out-of-network hospitals and doctors in emergencies, since patients usually don't control who treats them in those situations. (Bans on balance billing generally don't apply when a patient gets an elective procedure, such as cosmetic surgery, or seeks out-of-network, non-emergency service without a referral.)

    Some physicians, hospitals, and labs take advantage of consumer befuddlement, argues Jane Cooper, CEO of Patient Care, a Milwaukee firm that employers hire to help insured workers fight billing mistakes. "Medical providers count on the fact people will pay these bills because they don't have time to figure it out," Cooper says.

  • Behind Rising Health-Care Costs
  • Wednesday, August 27, 2008

    McCain and Obama on Small Business Issues

    McCain and Obama on Small Business Issues

    Who do you like for President in 2008? Or, to put it another way, how's business? Those looking to launch a new company and those doing business in the inner city may be interested in Senator Obama's plans to cut the capital gains rate for investments in small companies and to launch new business incubators. Business owners making more than $250,000 annually or looking to pass a substantial business on to their heirs may find more to like in Senator McCain's tax policies.

    Despite recent outreach efforts by both men, some 80% of entrepreneurs could not name any ways in which either candidate says he will help small businesses, according to a poll of 400 business owners conducted by Suffolk University for turnaround specialists American Management Services. With small business owners and their employees representing 32% of all registered voters, that's hardly a block of voters either candidate can afford to lose.

    For a look at the candidates' stances on taxes, health care, trade, and startup incentives, click on this table.

    Back to BWSmallBiz August/September 2008 Table of Contents

  • Obama, McCain, and the Stock Market
  • Job One for McCain or Obama: Jobs
  • Georgia War Hits Russian Investment

    Georgia War Hits Russian Investment

    Out of the frying pan and into the fire. When Russia recognized the independence of the breakaway Georgian regions of Abkhazia and South Ossetia on Aug. 26, the benchmark Russian Trading System (RTS) stock index dropped 4%, sending the market to its lowest level in almost two years. The Russian move seriously exacerbates the strain in relations between Russia and the West, already in a state of crisis following the war between Russia and Georgia (, 8/22/08).

    Even before Russian tanks rolled into Georgia on Aug. 8, investors in Russia were shaking their heads in gloom. Since peaking in the middle of May, the Russian stock market has plummeted 36%, with two-thirds of the decline occurring before the war began. Currency and bond markets also have taken a hit: Official figures released on Aug. 21 show that Russia's foreign exchange reserves fell $16.4 billion in the week beginning Aug. 8, the largest outflow since the ruble crisis and financial meltdown of 1998.

    The outflow follows a barrage of shocks to investor sentiment that has revived old fears about the stability of Russia's investment climate. "It has certainly been a crescendo of bad news," says Erik De Poy, chief strategist at Russia's Alfa Bank. "It's just one bad thing after another."

    Drumbeat of Troubles

    In the weeks leading up to the war, investors in Russia were perturbed by other problems. Not least among them was the raging shareholder dispute (BusinessWeek, 7/31/08) at Anglo-Russian oil venture TNK-BP (TNBPI.RTS), one of the largest foreign investments in Russia, which is 50%-owned by British energy giant BP (BP).

    Then there were the alarming fraud allegations by Hermitage Capital (, 4/4/08), a portfolio investment fund managed by the British bank HSBC (HBC). Most recently came a scandal involving Mechel (MTL), one of the largest Russian steel companies. When Russian Prime Minister Vladimir Putin on July 25 accused Mechel of price-fixing, it raised fears of a state crackdown, causing the RTS to shed 5% in a single day.

    No one could have guessed that these upsets were just the prelude to an even bigger crisis. The ongoing diplomatic fallout from the Georgia dispute may yet see Russia expelled from the Group of Eight club of the world's largest economies. Russia's bid to join the World Trade Organization (WTO), meanwhile, seems to have been put on ice. Little wonder that investors are now bolting for the exits.

    Time to Buy?

    Yet most market analysts remain bullish on Russia's longer-term potential—and attribute some of the investment chill to broader global economic concerns. Indeed, many argue that the precipitous fall in Russian stock prices creates attractive buying opportunities. "Short-term, foreign investors are clearly taking fright and leaving. Does that mean that the investment story is over? I don't think so," says Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog.

  • Is Wal-Mart Stock Peaking?
  • UBS: Preparing to Dump Its Investment Bank?
  • Business, and Startups, in Second Life

    Business, and Startups, in Second Life

    Robert Curet, the owner of Little Wonder Studio in Burbank, Calif., has all the high-powered software you'd expect a modern toy developer to use: Rhino 4.0 for industrial modeling, Autodesk 3ds Max for animation, ZBrush for digital sculpting, and Maxon Cinema 4D for graphics, for starters. But one of his most recent creations didn't require any of them. Instead, Curet turned to the free tools available in the virtual world called Second Life, sketching out a model and mechanisms for a windup toy and making a rough estimate of the size of the parts. "It took me about half an hour to create the 3D model, where it would have taken me a week to do it before," says Curet. In the next hour and a half he took some pictures of the model, cleaned them up in Photoshop (ADBE), and sent them on to a factory in Hong Kong.

    Soon he was meeting an engineer from the factory in Second Life, answering questions about the toy while the two men—each represented by animated avatars—looked at the virtual model, rotated it, and took it apart piece by piece. After that meeting the engineer was able to fabricate a real model and give Curet an accurate estimate of how much the toy would cost to manufacture.

    The result: Noggin Bops, plastic windup toys that shimmy side to side while bopping their heads. In January, Curet sold the license to make and distribute the toys to California Creations in Tustin, Calif. Curet is sold on working in Second Life. "It's free, it's fun, and it's social," he says. "It allows you to work quickly and answer tons of questions about your design in three dimensions that you wouldn't be able to answer as well by drawing it out on a board."

    Virtual worlds, of which Second Life is the most populous, are becoming more than just a place where Web surfers socialize, play games, or sell nonexistent products to imaginary people. Increasingly, tech-savvy businesses are using virtual worlds to design, create, and even test product concepts before they make their debut in the real world.


    Already, larger firms have made news with their forays into virtual worlds, particularly Starwood Hotels & Resorts (HOT), which tested a new hotel concept called Aloft. After a trial in Second Life, Starwood decided to put more seating in the lobby and install radios in the shower, among other changes.

    The crucial advantage to working in virtual worlds is that they offer much more potential for customers to interact with new products, even ones that don't exist yet, says Brian Mennecke, associate professor in information management systems at Iowa State University. The cost of entry is low, too. "It's open to everyone from day one," says Paul Jackson, principal analyst with technology researcher Forrester Research (FORR). In a report that was co-authored by Jackson and released earlier this year, Jackson points out that, even with collaboration software, sharing 3D or CAD models "has proven tricky, especially when much of the required data lives in proprietary design systems." Working in virtual worlds helps solve that problem.

    Curet is a fan of Second Life because it saved him time and money and made it easier to meet with his engineer in China. But other businesses are using Second Life to offer services not readily available in the real world or to build products they couldn't otherwise afford to prototype. And some entrepreneurs are using Second Life to test ideas—such as a mass transit system with individual pods for riders—that aren't feasible to prototype any other way.


    Second Life has its drawbacks, of course. Some find its design tools too crude for their purposes. "The level of detail may not be there if you want to design a microprocessor or the details of an engine, for example," says Fred Fuchs, owner of FireSabre Consulting, which provides services for people who want to do business in Second Life. There are privacy and security concerns. It can be difficult to translate ideas developed in Second Life into more mainstream design software. And it can be especially tough to get a sense of scale in Second Life, because avatars come in all different sizes. But entrepreneurs experimenting with Second Life insist that the prototyping possibilities and ease of collaboration it offers just aren't available anywhere else.

    Crescendo Design, a husband-and-wife architecture firm focusing on environmentally friendly designs, has built dozens of models for its clients. They're mostly of cardboard, and they take about three days and $600 to complete. Once finished, it's hard to make changes without taking an X-Acto knife to the whole thing. To see them, clients must visit Crescendo's offices, or someone from Crescendo has to come see them. But the firm is based in Madison, Wis., and its clients are scattered throughout the Midwest. "We were driving a lot to get to clients and show them designs," says co-owner Jon Brouchoud. "Driving so many miles to build an environmentally sound home was counterintuitive."

    So Brouchoud and partner Kandy Jentz-Brouchoud began meeting with clients in Second Life, where they can not only view plans for homes but also walk through lifelike 3D models. "We can invite clients inside the design concept instead of just showing them two-dimensional drawings," Brouchoud says. "It gives customers a whole new kind of visualization. There's nothing like being able to walk into what could be your home." Making changes is a whole lot easier, too. Moving a kitchen to gain a southern exposure or putting a stairwell in a more convenient location can be accomplished in just a few minutes. Brouchoud can even incorporate indigenous species into the landscaping and account for the exact topography of the building site. "Second Life has transformed the way I think about design," says Brouchoud. "Even though I can pen-and-ink a design I come up with, I often find myself jumping into Second Life to model it.... The designs are free, and it takes half the time to make the models with the in-world set of building tools." While there is architecture software that lets him make 3D models, they don't allow him to visit with multiple people "inside" the models, and they're not free.

  • Should You Tell Clients You Work from Home?
  • Tough Times for eBay Entrepreneurs
  • Mom-and-Pop Multinationals
  • Tuesday, August 26, 2008

    The Final Fate of Fannie and Freddie

    The Final Fate of Fannie and Freddie

    The market's pummeling of Freddie Mac (FRE) and Fannie Mae (FNM) eased up a bit on Aug. 21, after four days of selling. But with the stocks both down more than 85% year-to-date, investors appear to believe it's a question of when, not if, the Treasury Dept. will be forced to use its newly acquired powers to bail out the mortgage giants.

    Of course, the authority Congress granted to Treasury Secretary Henry Paulson to invest in Fannie and Freddie's shares—or make loans to the troubled companies—was supposed to strengthen them. It's had the opposite effect. The stocks are now both trading under 5, a sign that investors believe the companies' common equity will be wiped out in any bailout package.

    But the pain goes deeper. Preferred shares of the government-sponsored enterprises (GSEs) have lost roughly 80% of their value, as Wall Street ponders their fate. Even their subordinated debt, which historically traded at a similar yield to the GSE's senior debt, now trades at historically wide spreads of three to four percentage points above the senior debt. Only senior creditors seem completely assured of getting their money back. But neither Treasury officials nor Fannie and Freddie executives are giving their plans away just yet. "It's kind of [like] radio silence," says one credit trader familiar with the situation.

    Holding the Status Quo

    Of course, some argue that a bailout can wait. As of early August, both Fannie's and Freddie's capital holdings were above their mandatory levels, with Freddie possessing a capital requirement surplus of $2.7 billion and Fannie holding $9.4 billion in additional cash. Credit research outfit CreditSights estimates that Fannie and Freddie could lose $17.3 billion and $8 billion, respectively, before breaching government-mandated capital levels. Meanwhile, both continue to be able to service their debt at a reasonable, if historically high, interest rate about 30 basis points below the London interbank offered rate.

    Paulson is probably just hoping the status quo holds for a while longer. When he argued in favor of Treasury's increased power over Fannie and Freddie in July, Paulson claimed that just having the ability to act would prevent him from needing to. The Bush Administration is hoping to steer clear of another high-profile bailout after the Bear Stearns mess, and if Fannie's and Freddie's capital positions hold up reasonably well, Treasury could wait for the GSEs to burn through their cash before making any moves. The "key players would likely prefer to delay action until after the November elections if possible," Richard Hofmann, an analyst at CreditSights, wrote in a recent research report.

    Treasury, however, may not have the luxury of time. While Fannie was able to raise $7.4 billion during the second quarter, Freddie held off on seeking the $5.5 billion it announced it would raise. With its stock at 3.16 and speculation high that a bailout is inevitable, it may be difficult to coax additional capital into Freddie's coffers, either with common stock or preferred shares. Without the cash, Freddie could breach its mandatory surplus threshold in the third quarter of this year.

    The Olympics of Finance

    And so, the GSE watch has become the financial world's version of the Olympics—no one can take their eyes off it. Part of this is practical, as banks hold enormous amounts of Fannie and Freddie preferred shares and subordinated debt on their balance sheets. If the preferred equity is wiped out, banks will have to take more capital writedowns, adding to their already enormous troubles, says Dory Wiley, CEO of Dallas-based Commerce Street Capital.

    Fannie and Freddie make up about half of the U.S. mortgage market, and with them on the ropes, there's little chance for a housing recovery. Without a housing recovery, the credit markets will continue to be jammed up. And things promise to get worse before they get better. Fannie and Freddie have about $250 billion in debt to refinance in September, and everyone will be watching to see if they're successful. As long as their futures are uncertain, much of the credit market will remain in the doldrums. "They're the pivot point of the whole credit market," says Samson Capital Advisors' Benjamin Thompson.

    Of course, there's one simple solution to the GSE problem: nationalize them, says analyst Chris Whalen of Institutional Risk Analytics. He says the Treasury should go ahead and wipe out the common equity, which the market has pretty much done on its own anyway, and promise to make holders of preferred stocks and subordinated debt whole. And financing? If the two mortgage financiers are taken over by the government, notes Whalen, "you don't have to worry about financing."

  • What’s Comfy About Convertible Bonds
  • The Future of Fannie and Freddie
  • London Games 2012: Lessons from Beijing

    London Games 2012: Lessons from Beijing

    The over-the-top pageantry of the 2008 Beijing Olympics has left many Londoners wondering how Britain's capital can live up to expectations when it hosts the next summer Olympiad in 2012. The city's mayor, Boris Johnson, summed up the mood: "We've been dazzled, impressed, and blown away by these Beijing Games," he says, adding, "but we've not been intimidated."

    Brave words, but the London mayor knows he's got his work cut out to match what International Olympic Committee Chairman Jacques Rogge rightfully called an "extraordinary Games." The British capital has a budget of just over $17 billion to deliver London 2012, compared with the $44 billion that Chinese authorities spent on the Beijing Games. China bulldozed neighborhoods to make way for the Games and throttled factories and driving in a scramble to clean up Beijing's polluted air, but British officials enjoy no such impunity. Indeed, they're already coming up against taxpayer outcry over plans for the Olympic site in East London.

    All the more reason for London to pay close attention to where Beijing succeeded—and a few areas where it could have done better. For instance, although Beijing's operations worked with clockwork precision, many events were surprisingly short on spectators (, 8/15/08). London has already said it aims to avoid that by making more seats available to Londoners at discount prices.

    Party-Loving Britain

    "London definitely could take lessons from how the [Beijing] Games were run," says James Kennell, senior lecturer in tourism and urban renewal at the University of Greenwich east of London, who figures investments made in the runup to London 2012 will add more than $3 billion to the country's gross domestic product over the next four years.

    Perhaps the most important difference, London officials say, will be the overall atmosphere and attitude of the event. Beijing 2008 was a statement from Chinese authorities about the country's rising global stature and economic power. But many visitors felt that the tight security and prickly, protest-wary officials made Beijing the "no fun" Games. Leaders in party-loving Britain already are talking of a more laid-back approach for 2012.

    "The best parties aren't always the ones that cost the most money," says Tim Parr, head of capital programs and major events for Deloitte's consulting practice, who was part of a team sent by the London Organizing Committee of the Olympic Games to learn from Beijing. "The challenge for London is to create a party atmosphere with a great sporting experience."

    History of Project Delays

    Of course, that means pulling off the planning and construction on time. Unfortunately, the British capital doesn't have the best track record for managing multibillion-dollar projects. Most recently, the new Wembley Stadium—the country's national soccer arena—was completed a year late and roughly $200 million over budget. The so-called Millennium Dome similarly cost $1.3 billion to build in the late 1990s, but after a brief series of events around the turn of the millennium, it sat unused for years before American billionaire Philip Anschutz bought the tent-like structure at a huge discount and turned it into a successful concert venue (, 7/20/07).

    Ahead of London 2012, experts figure Britain also must match China's success in transport and security. An estimated $1.3 billion of London's $17 billion budget will be spent on upgrading the city's 100-year-old underground and rail system. A further $407 million is earmarked for Olympic policing, a 15% budget increase since the city won the right to host the Games back in 2005.

    Where London really could make its mark, though, is in offering a quirkier and more intimate Games compared to Beijing's flashy facilities and choreographed mega-spectaculars. That spirit was on show during the Beijing closing ceremonies, when beloved Led Zeppelin rocker Jimmy Page and soccer superstar David Beckham were featured in the handover from Beijing to London. In sharp contrast to China's big-budget productions, British officials said they had wanted to put on a more understated and casual show.

    More Tickets for Locals

    How will that translate into the London 2012 Olympics? According to Deloitte's Parr, the next Summer Games will be a more social event, with big TV screens and food vendors spread throughout the Olympic site. That will allow spectators to continue the party even after the sports have stopped—as well as letting those without tickets to get into the Olympic spirit. "The key is to create atmosphere at the venues," Parr says.

    London aims to eliminate Beijing's problem with empty seats by making more tickets available to locals. Running legend Sebastian Coe, the chairman of the London Organizing Committee, has suggested that unused tickets held by sponsors—a source of many of the Beijing no-shows—could be resold to the public if they're not allocated by a certain date.

    All that should help create more of a carnival atmosphere than the Beijing Games provided. Formerly imperial Britain—now more laid-back than ambitious, upwardly mobile China—will be hosting its third Olympics and has less to prove to the world. As long as security is effective but not heavy-handed, London should manage to provide Olympians and guests a great time.

    As for attitude, the famously dry British humor was on display when reporters asked Boris Johnson if he had any criticism of the 2008 Games. No, the mayor responded, and then added jokingly in reference to the controversial dubbing of a young singer in Beijing's opening ceremonies: "Had it been us, I don't think we would have necessarily done the switcheroo with the girl."

  • Olympics Security Is No Game
  • Newark and the Future of Crime Fighting

    Newark and the Future of Crime Fighting

    One recent spring day, two cops in the Newark Police Dept. watched a shoot-out erupt in broad daylight. Two suspected drug dealers started blasting away at each other in the middle of an apartment complex. The cops didn't witness the violence on the beat, though. They watched it from the city's new communications command center, which collects live video feeds from more than 100 surveillance cameras scattered across the crime-ridden city.

    As the shooting broke out, the policemen zoomed in on the scene with a joystick controller. They saw one gunman flee, while the other dragged himself into a nearby apartment, one blood-soaked leg trailing behind. Because of the camera network, the Newark police were able to dispatch a team to the crime scene immediately—90 seconds before the first 911 calls. The gunman who crawled into his apartment was arrested on the spot. "Those complexes are like mazes, but we knew exactly where to send the unit," says Sergeant Marvin Carpenter, commanding officer of the communications post.

    The surveillance system is the centerpiece of Mayor Cory Booker's ambitious plan to use cutting-edge technologies to slash Newark's violent crime rate. This August, Newark finished its initial deployment of 111 cameras, adding 76 to the 35 that were in place last summer. Newark is investing in a whole range of tools, everything from mundane PCs to more novel technologies such as a new citywide broadband wireless network that will let cops fill out police reports from their squad cars instead of schlepping back to the station house. By late fall, Newark expects to complete the deployment of an audio sensor system to pinpoint gunshot locations that cameras fail to catch. "We are trying to leave the Flintstones and get to the Jetsons," says Booker.

    Major cities such as London, New York, and Chicago have rolled out larger video surveillance networks. But technology experts say Newark, New Jersey's largest city, is the first metropolis to combine an array of technologies on a large scale. "I haven't seen a city with this mix of technology all in one place," says Kevin Kilgore, president of Let's Think Wireless, a New York company that has built wireless networks for several hundred cities, including Newark.

    Bangalore Across the Hudson

    With a nod to New York City's revival, Booker is betting that crime reduction will trigger the economic rebirth of Newark, a city of about 280,000 with a proud industrial history that has never fully recovered from the upheavals of the 1960s. In a slowing economy, the charismatic 39-year-old, a Rhodes Scholar and graduate of Yale University Law School, is pitching Newark as a sort of Bangalore across the Hudson: a low-cost place to do business 10 miles from Manhattan, with the second busiest U.S. port, many transportation hubs, sports arenas, and a cluster of schools such as Rutgers University and Seton Hall University School of Law. "You can work your tail off on economic development, but businesses won't come if it's not safe," says Hans Dekker, president of the Newark Community Foundation.

    Newark is also a test bed for the tensions between surveillance and privacy. Privacy advocates have raised concerns over the aggressive rollout of video cameras, audio sensors, and other technologies. Critics argue that such surveillance is susceptible to abuse, can have a chilling effect on public life, and hasn't been proven to reduce crime. "The costs are high, and the benefits in terms of law enforcement are low," says Deborah Jacobs, executive director of the New Jersey chapter of the American Civil Liberties Union (ACLU). Whether Newark can strike an acceptable balance between crime-fighting and privacy may determine whether other cities follow similar strategies in the future.

  • Olympics Security Is No Game
  • Honda Goes Whole Hog for Hybrids
  • Marcial: The Once and Future Citi
  • Sunday, August 24, 2008

    Tough Times? Rent, Don't Buy, with Erento

    Tough Times? Rent, Don't Buy, with Erento

    Covet a Ferrari? Dream of impressing your date with a flashy Rolex or the latest Balenciaga bag? As the global economy weakens, fewer Europeans can afford to buy such luxury goods. So they are renting them instead.

    Short-term rental of all sorts of products (excluding real estate and holiday apartments) already represents an estimated €108 billion ($160 billion) annual market in Europe. And it looks poised to become a lot bigger.

    A host of factors, including economic and environmental concerns, fast depreciation of goods, and a more transient workforce, means that consumers are increasingly searching for rentals online. But many suppliers can't afford to build sophisticated e-commerce and online marketing organizations, so prospective clients often struggle to find what they need.

    That is where erento comes in. Some 8,000 European rental companies have elected to use erento, which is headquartered in Germany and rapidly expanding across the Continent, as a sales channel. The company's Web site acts as a one-stop shop for leasing everything from wedding dresses and Apple (AAPL) iPhones to karaoke machines and heavy construction equipment. It even offers dogs for rent, a service that's proving popular with men who think walking a canine might help them pick up women, and for working couples who find it difficult to look after a pet full-time.

    In all, erento now lists more than one million items across 2,200 product categories and claims up to 50,000 visitors a day. "People are coming to the conclusion that it's more important to rent goods then to own them," says erento's co-founder and chief executive, Chris Mller. "It is a new way of dealing with investments."

    "An eBay for Rentals"

    The company, privately funded by Mller and co-founder Uwe Kampschule when erento was launched in Germany in 2003, has since raised more than $2 million in venture capital. Investors include Germany's Holzbrinck Ventures, which has taken a 13% stake, and the Samwer Brothers, founders of online auctioneer Alando, which they sold to eBay (EBAY) in 1999 for $54 million.

    The three Samwer brothers also were behind Jamba, a mobile content company they sold to VeriSign (VRSN) for $273 million in 2004. In 2006, the Samwers established a European Founders Fund with their own fortunes to support and fund early- and later-stage Internet businesses in Europe and the U.S. "We invested [in erento] because we liked the founder and thought of it as an eBay for rentals," says Marc Samwer. "We like marketplaces; it's what made eBay so successful."

    The funding from Holzbrink and the Samwer brothers will help erento expand its existing service in Europe. The U.S., where online rental services are also growing, might be next. The U.S. has had online luxury-car rentals for some time. More recently, companies that rent out designer handbags, such as Bag, Borrow or Steal and From Bags to Riches, have started up in the U.S. A U.S. dog rental company called Flexpetz has been expanding in major U.S. cities and to London.

  • How to Get Rich_and Notorious
  • Tough Times for eBay Entrepreneurs
  • India Olympic Hero Gets Boost from Mittal

    India Olympic Hero Gets Boost from Mittal

    For a country that pretends not to care about the Olympics, India certainly threw itself a heck of a party the night of Aug. 11, when a 25-year-old with a bad back and steady aim won India's first individual gold medal. TV channels provided wall-to-wall coverage, families danced in the streets, and political leaders tried to outdo each other in handing out hundreds of thousands of dollars in prize money.

    Here, give him a prize of $60,000, said India's richest sports body, the Board of Control of Cricket in India, which had nothing to do with the 10-meter air rifle event in which Abhinav Bindra won the gold. Here, said India's Railways Minister, handing out a free lifetime railway pass to Bindra, whose family is privileged enough that it's doubtful he will ever take a train.

    If only all that support had come before the event. Every four years when the Olympics come around, India hangs its head in shame, with public finger-pointing and consternation that a nation of a billion people cannot find one athlete to bring home a little piece of gold. The country's sports stadiums are crumbling relics from the 1950s and '60s, with training facilities so ancient that athletes beg for opportunities to train overseas. Because of political problems among the country's sports federations, athletes have to cobble together money for training regimens from as many as nine different organizations.

    "I think the whole question is how does everything function," says Bindra, speaking with BusinessWeek from Beijing. "In today's day and age, things have to be run professionally, and unfortunately, that's not how things are done."

    Finally, Someone to Cheer for

    So it's no surprise that when Bindra, who is now the toast of the nation, ran out of bullets for practice he had to turn to an unlikely source for help: Lakshmi Mittal, one of the richest men in the world and another of India's celebrated sons. Mittal, who is chairman of ArcelorMittal (MT), the world's largest steelmaker, left India many decades ago, but maintains a keen interest in the country. At sporting events—like the 2004 Olympics in Athens—he and his family found themselves cheering for teams picked at random because no Indians had even managed to make it past the qualifiers.

    But at the 2005 Wimbledon tennis tournament, he met India's Mahesh Bhupathi, a player who has had considerable success in mixed doubles. Bhupathi and a friend convinced Mittal to put up $10 million to help support a few athletes with an eye toward the London Olympics in 2012, when the Games will be held in Mittal's backyard—he lives in Kensington and can sometimes be seen riding a bicycle in Hyde Park. Regarding Bindra's Beijing triumph, "I am absolutely delighted," says Mittal, whose Mittal Champions Trust got Bindra a physical therapist, a mental trainer, and on that day when the bullets ran out, cartridges to practice with. "This is a great day for Indian sports."

    Mittal's trust is administered by his son-in-law, Amit Bhatia, and this year it supported 14 Indian athletes at the Olympics. Many, unlike Bindra, are from less affluent backgrounds, reflecting the kind of conditions under which most of India lives. Archer Laishram Bombayla Devi, who picked up a bow and arrow after seeing people hunt in the fields near her home in rural India, said she spent two years without a coach until the trust stepped in. Now she trains with a foreign coach, for which the trust pays, and has a structured and disciplined training process. "The trust is a lifesaver for a lot of athletes who are not getting any help," she says.

    Eye on the Commonwealth Games

    But the fact that India's corporate houses have to step in where the government has failed rankles some Indians. Bindra, whose family is well-off, has an MBA, runs his own company, and has extensive training facilities in his house at Chandigarh. Yet, according to Manisha Malhotra, an administrator at the Mittal Champions Trust, there was a behind-the-scenes tug-of-war between the trust and the government.

    While Mittal is looking forward to 2012, M.S. Gill, India's Youth Affairs & Sports Minister, and the rest of India officialdom have their sights set on 2010, when Delhi will host the Commonwealth Games. "The credit goes entirely to the player," says Gill. "We are only here to provide support." Indian officials hope the Commonwealth Games will lead to even bigger things. They have watched with some envy as Beijing hosts China's multibillion-dollar coming-out party, and with even greater envy as Chinese athletes compete neck and neck with perennial favorites like the U.S. and Russia.

    The goal in Delhi is simple: Just as Beijing is having its moment now, in 2010 the world's eyes will turn to India. India will be only the third developing nation to host the Commonwealth Games, after Jamaica in 1966 and Malaysia in 1998. The government has managed to earmark nearly $12 billion in infrastructure improvements for New Delhi, including sports stadiums, new highways, a brand-new metro rail system, and a new airport. If things go well, the Indian Olympic Assn. wants to bid for the 2020 Olympics to be held in Delhi.

    For more, see's slide show.

  • What Will the Olympics Do for China?
  • China Olympic Hero Liu Xiang Quits Games
  • Marketing to Millennials

    Marketing to Millennials

    Ask Dan McDonald about millennials—those elusive 12- to 26-year-olds raised among text messages and Twitter—and he'll chuckle emphatically. "They're the perfect customers," says McDonald, 51, who owns seven Jersey Mike's sandwich shop franchises in Nashville. "They travel in packs, they eat like fiends, and they have tons of disposable income."

    Indeed, America's 80 million millennials (and their folks) shell out roughly $200 billion annually, according to Chicago-based investment firm William Blair & Co.. Yet they're tough to reach through traditional marketing: Despite the prominence of Jersey Mike's billboards, flyers, radio spots, and newspaper ads, McDonald says he struggles to attract teens and 20-somethings.

    Samantha Skey, an executive at Alloy Media + Marketing, which specializes in younger demographics, is not surprised. Weaned on cell phones, e-mail, and round-the-clock Internet, millennials are just as media-savvy as the marketers who target them. Occasionally, they'll flip for a viral marketing campaign: Last year, Folgers' (PG) bizarre "Tolerate Mornings" ad logged more than 500,000 hits on YouTube (GOOG). But more often, Skey says, they'll just "ignore messages that don't seem relevant."

    A Refined Approach

    Edo Interactive, a Nashville-based firm that deals with Web 2.0 technology, is trying to change the game. After spending a year studying young consumers, they developed Facecard, a prepaid credit card aimed squarely at millennials and the businesses that court them.

    Launching nationally Sept. 1, Edo's gimmick works like a fiscal Facebook: After applicants create profiles on, they get a card in the mail that allows them to borrow, lend, or give away money to buddies electronically. For a fee, retailers can send them "prewards," small denominations of instant store credit, based on their age, location, and personal interests. Because the $2 to $3 gifts are redeemed via credit card, tracking consumer response is a cinch.

    Such niche marketing is "a hot idea," says David Robertson, publisher of the Nilson Report, a newsletter that covers consumer payment systems. Unlike billboards, TV spots, and neighborhood flyers, prewards allow advertisers to reach a specific audience, in a specific location, at a specific time. It's "a better way to attract prime customers," says Jonathan Dyke, Edo's chief operating officer.

    Profit Potential

    During a June test run in Nashville, more than 5,000 millennials signed up for Facecard, including 16-year-old Ben Sutter. Sutter likens prewards to "free money," and he says he's more inclined to frequent outlets that offer them, such as Jersey Mike's. "I usually bring my friends, too," he adds.

    The benefits work both ways. When Jersey Mike's McDonald sent prewards to 300 high school seniors, his expectations weren't high, since 18- and 19-year-olds are notoriously nonresponsive. But the gamble yielded an "overwhelming" 17% return rate, he says, which is "way above" the numbers direct mailings produce. Moreover, it cost Jersey Mike's less than $150: $2 for each redeemed preward, plus a 5% processing fee. (As of press time, Edo's final pricing plan was still being fine-tuned.)

  • Meet the Antipreneurs
  • Ford: A Toyota Vet to the Rescue
  • Saturday, August 23, 2008

    Nintendo Hit by Another Wii Lawsuit

    Nintendo Hit by Another Wii Lawsuit

    Could a patent fight force Nintendo (NTDOY) to pull its popular Wii videogame console from U.S. store shelves? That's how some investors seem to have interpreted Hillcrest Labs' announcement on Aug. 21 that it was suing Nintendo in a district court in Washington, D.C.

    Hillcrest alleges that the wand-shaped remote controller for the Wii uses technology that infringes on the Rockville (Md.) company's patents for a "handheld three-dimensional pointing device" and software that works with it on a TV. Hillcrest has also asked the U.S. International Trade Commission to ban import of the Wii. A Nintendo spokesman declined to comment, saying the company had not been contacted by Hillcrest Labs.

    The news triggered a sell-off of Nintendo's shares in Japan. By the close of trading in Osaka, investors had knocked 3.6% off Nintendo's shares, which have fallen by nearly 25% since the start of the year. The Nikkei 225 Stock Average ended the day just 0.8% lower. The Nintendo slide suggested investors are bracing for the worst.

    Suspicious Timing

    But analysts say Nintendo has little to worry about. For one, Hillcrest's claim comes two years after the Wii has established a commanding lead over Sony's (SNE) PlayStation 3 and Microsoft's (MSFT) Xbox360—making Hillcrest appear to be an opportunity-seeking Johnny-come-lately. In July, Nintendo sold 555,000 Wii consoles in the U.S., while Sony sold 224,900 PS3s, and Microsoft 204,800 Xbox 360 machines, according to market research firm NPD. "You have to wonder about the timing of this," says KBC Securities analyst Hiroshi Kamide. "I think it's unrealistic to think [Hillcrest] can succeed at having Wii shipments to the U.S. banned."

    Hillcrest Labs isn't the only company to take legal action against Nintendo since it pulled the wraps off the Wii in early 2006. And patent fights aren't unheard of in the video game industry. Nintendo, Sony, and Microsoft have spent years and invested vast sums to develop, license, and mesh all kinds of cutting-edge technologies into the gaming machines they sell. Every year they go to court to defend the hundreds of patents related to the video game hardware and software that bring in billions in revenues annually. Most cases take years to resolve.

    Two years ago, Tyler (Tex.)-based Anascape sued Nintendo of America, saying the Japanese company violated patents in three different Nintendo console controllers. Last month a U.S. District Court ordered Nintendo to pay $21 million in damages and $2 million in prejudgment interest to Anascape. (Anascape had asked for $50.3 million.) Nintendo has appealed the ruling. Last December, Pittsburgh-based Copper Innovations Group took Nintendo and Sony to court for patent infringement over handheld controllers. In June 2007, tiny Lonestar Inventions sued Nintendo in Texas, claiming semiconductor-technology-related patent infringements. And in late 2006, Los Angeles-based Interlink went after Nintendo in Delaware for alleged patent violations in its Wii console's remote controller.

    A Modest Payout, At Best

    The Wii controller has been key to Nintendo's rising fortunes. Shaped like a TV remote controller, the gizmo combines gyroscopic motion sensors and an infrared pointer. Gamers swing the controller like a bat or flick it like a fishing rod instead of having to master a dozen buttons. (In July, Nintendo announced a new add-on to the Wii remote, dubbed MotionPlus, which plugs into the controller and is designed to improve the accuracy of the motion-sensing technology inside.) When Nintendo released the Wii in late 2006, the controller won fans beyond just hard-core gamers.

    Hillcrest licenses its technology to Logitech for the MX Air Mouse. But the privately held company hasn't had a huge amount of success in getting its technology adopted by consumer electronics companies. One possible conclusion of Hillcrest's lawsuit is a settlement with Nintendo. Even if the courts uphold Hillcrest's patent claims, the company's payday is likely to be in the millions, not the billions. That might sound like a lot. But for Nintendo, which expects an 8.8% gain in operating profit, to $4.8 billion, on a 7.6% rise in sales, to $16.3 billion, in the current fiscal year through March 2009, that's not a huge writeoff.

  • What’s Ailing Sony Ericsson?
  • Marcial: Two Thumbs Up for RIM
  • iPhone: More Fun Than Phone

    iPhone: More Fun Than Phone

    Andre Charland just bought an iPhone 3G, the phone from Apple (AAPL) that hit the market on July 11. But the Canadian software executive isn't giving up his BlackBerry Pearl. He says that the BlackBerry is a "workhorse" for e-mail and phone calls, while the iPhone isn't as reliable. "I’ve just had dropped calls and issues like that," says Charland. "I have the iPhone mostly for fun," like watching video or browsing the Web.

    The iPhone has been a huge financial success for Apple, with sales outstripping most expectations. But some users, such as Charland, have found that the iPhone 3G, for all its benefits, isn't that great a phone. In recent days people have filled blogs about Apple, as well as the company's own site, with complaints of dropped calls and failed attempts to get connections for their new iPhones. On Aug. 12, Nomura Securities analyst Richard Windsor flagged the issue in a research note, calling it a "worrying sign." He said the development would give breathing room to rivals such Nokia (NOK) and BlackBerry maker Research In Motion (RIMM) .

    Back to a BlackBerry

    The reason for the iPhone's reception problems is in dispute. Two sources, including one close to Apple, say the issue is a chip from Infineon that manages wireless communication. But a spokesman for Infineon (IFX), Guenther Gaugler, says the chip performs smoothly with some Samsung phones. The two sources, who estimate the glitch affects less than 3% of iPhone 3G calls or Web sessions, say Apple expects to fix the problem by sending a software upgrade to each iPhone.

    It's too late for Ryan Shaw. The salesman bought the new iPhone shortly after it came out. But he says he couldn't get service in his house near Cleveland and that 40% of his calls were dropped. His wife is expecting a baby, so he couldn't afford to miss a call. He ultimately switched back to a BlackBerry and Verizon Wireless. "[The iPhone] was a cool toy," says Shaw. "But it's a phone, and that's what I needed it to be first."

    Plenty of people are taking Charland's approach. They buy the iPhone as a portable computer for Web surfing, video, and music. But they carry a second phone to make calls. "People use the iPhone as a PC in their pocket," says analyst Trip Chowdhry of Global Equities Research. "[Apple] should change the name to iTablet. It's slightly mispositioned."

  • A Stroll Through the iPhone App Store
  • Why iPhone Wannabes Don’t Cut It
  • iPhone 2.0 Takes on the World
  • Obama, McCain, and the Stock Market

    Obama, McCain, and the Stock Market

    Here's one way to figure out how the 2008 election will affect the stock market: Look at the Presidential candidates' platforms and speeches, and decide whether they would hurt or help particular industries.

    Stock strategists and analysts try to carefully calculate the possibilities. For example, Illinois Senator and Democratic hopeful Barack Obama's ambitious proposal to reform health care is widely expected to squeeze profit margins in the health-care industry, particularly for big insurers such as UnitedHealth Group (UNH) and Humana (HUM). His environmental proposals may help alternative energy companies, while his plans to spend more on infrastructure and universal Internet access could help construction firms and technology companies.

    By contrast, Arizona Senator and Republican hopeful John McCain's health-care plans are more modest. He generally favors less regulation, which may help the beleaguered financial sector avoid new strict rules, and lower taxes on the wealthy, which may help upscale retailers and investment firms.

    The policy-focused approach has its merits. Major policy changes can turn the stock market on a dime. In the eight months after President Bill Clinton's election in 1992, the S&P 500 Healthcare index dropped 25%, Credit Suisse (CS) analyst Kristen Stewart noted recently. The reason? At the time, First Lady Hillary Clinton was developing a national health-care reform proposal. Stocks in the sector rebounded when it was clear the plan wouldn't be enacted.

    However, there's a problem with stock-picking based on a candidate's speeches or policy proposals. "Investors interpreting each campaign proposal as definite will be mistaken come '09," Daniel Clifton of Strategas Research Partners wrote recently.

    Disappearing Gridlock?

    It's easy to say things on the campaign trail, but it's hard to get those ideas enacted as law. Judging by history, many campaign proposals might never be mentioned again when a politician takes office.

    Investors do "tend to be skeptical about rhetoric," says Brad Sorensen, senior sector analyst at the Schwab Center for Investment Research (SCHW). It's not rhetoric, but the threat of real policy changes, that riles investors, who tend to prefer stability and fear new rules and regulations. "The market tends to like gridlock," Sorensen says.

    However, the market doesn't always get what it wants. And, strategists who track Washington closely say the biggest change to come out of the 2008 election may be a big reduction in gridlock.

    Whether McCain or Obama wins, there is a "near certainty of dramatic gains for Democrats in the House and Senate," says Gregory Valliere, chief political strategist at Stanford Financial Group. Frank Kelly, Deutsche Bank's (DB) North American head of government affairs, says the market isn't paying enough attention to congressional races, which he calls "the real election." He says: "We're looking at the potential for gridlock disappearing."


    Democrats, now with a bare majority of the 100-member Senate, could win five or more seats, getting them close to the 60 votes needed to push through bills despite filibusters. "On health care, climate change, and taxes, there will be moderate Republicans who will cross the aisle," Kelly says.

  • Job One for McCain or Obama: Jobs
  • What’s Comfy About Convertible Bonds
  • Is Wal-Mart Stock Peaking?
  • Thursday, August 21, 2008

    There's Something About Denmark

    There's Something About Denmark

    Three years ago, if you had asked a person from Denmark the secret to happiness, you probably would have gotten back a blank stare. The same question today, however, likely would be answered with knowing laughter and any one of several explanations.

    Being recognized as the world's happiest people simply takes some getting used to.

    Since 2006, Denmark, a largely homogenous country of 5 million people on Europe's stormy northern coast, has been anointed the happiest place on earth by two very different surveys. The studies' findings have upended dated international perceptions of Denmark as a quaint but chilly dairy exporter with a high suicide rate, recasting the country instead as a model of social harmony that is thriving in an era of globalization.

    The country's improbable new standing—and the significant media attention it has engendered—may have had an even more profound effect on the Danes themselves by prompting a national conversation about how they live their lives. "It has given us a chance to reflect on how well-balanced a country we really are," says Dorte Kiilerich, the managing director of VisitDenmark, Denmark's official tourism organization.

    In early 2006, Denmark was what it had been for ages: a quiet, stable country, better known as the home of Hans Christian Andersen, Tivoli Gardens, and the setting for Shakespeare's Hamlet than for being an epicenter of bliss. Tourism had been in decline for a decade, and an international controversy was raging over a series of cartoons depicting the prophet Mohammed, which months before had been printed in a Danish newspaper.

    Social Safety Net

    Then in July of that year, a researcher at England's University of Leicester released a ranking of the world's happiest countries after analyzing data from various sources. The report concluded that economic factors related to health care, standards of living, and access to basic education were determining characteristics of a nation's overall attitude. Denmark, with its free universal health care, one of the highest per-capita GDPs in the world, and first-rate schools, came in first ( 10/11/06).

    The news spread quickly. Niels Martiny, a 26-year-old social anthropology student at the University of Aarhus in Denmark's second-largest city, spent last year in Peru doing research. Even there, word about the survey had gotten around to locals. "They were quite surprised," Martiny says with a laugh. "They had this idea about Nordic people being very reserved and very serious."

    Foreigners weren't the only ones scratching their heads at the results. Danes were equally confounded. "A lot of my friends were surprised," says Martiny, who considers himself quite happy in his own life but thought that the study must have made some mistake. Danes, he says, tend not to express their emotions outwardly the way people in some other cultures do.

    Achieving the Right Balance

    But the results were no fluke. Earlier this summer, the Stockholm-based World Values Survey, which uses a very different methodology, reported that it also found Danish people to be the world's most contented. That study concluded that the surest measures of a country's well-being are the freedom to choose how to live one's life, encouragement of gender equality, and tolerance for minorities. Once again, on every count, Denmark took top prize.

    What is it about Denmark that the rest of us have failed to grasp?

    Achieving the right balance is probably what most sets the country apart, suggests VisitDenmark's Kiilerich. Happiness in most Nordic societies, all of which ranked high on both studies' lists of happiest countries, hinges on an ineffable combination of economic strength and social programs. Denmark's approach relies on high taxes and aggressive redistribution of wealth—anathema to many free-market Americans—which results in a broad range of social services like health care, retirement pensions, and quality public schools. Yet remarkably, the country has managed to make this model work without crushing economic growth or incentives to succeed. "Denmark has a head and a heart," Kiilerich says.

    The strong social safety nets that cradle Danish citizens from birth until death are welcoming to foreigners, too. Kate Vial, a 55-year-old American expat who has lived and worked in Denmark for more than 30 years, passed up opportunities over the years to return to the U.S., choosing instead to raise her three children in Denmark. Vial knows she will never be rich, but says that she valued family, the ability to travel, and simple economic security above all else. "I just chose a simpler lifestyle, one where I could ride my bike all over and where I don't have to make a great living to survive," she says.

    Some people attribute the prevailing attitude among Danes to something less tangible, called hygge (pronounced "hooga"). Danes say the word is difficult to translate—and to comprehend—but that it describes a cozy, convivial sentiment that involves strong family bonds. "The gist of it is that you don't have to do anything except let go," says Vial. "It's a combination of relaxing, eating, drinking, partying, spending time with family."

    Whatever the reasons for Denmark's apparent happiness, the two studies clearly indicate it must be doing something right. Economic strength and social support aside, Kiilerich says that there is just something in the blood of the country that other Scandinavian countries are missing. "Our neighbors love us for it, but they just can't get it," she says.

    See's slide show for a look at the world's 10 happiest countries, according to the World Values Survey.

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