Tuesday, March 31, 2009

Architecture in Recession: Germany

Architecture in Recession: Germany

It takes 12 hours to fly from Frankfurt to Hanoi, and Bernhard Franken is getting to know the route very well. Franken has a half-dozen projects in Vietnam. If his struggling Frankfurt practice has an angel looking out for it, she comes from the East. With startling speed, the German economy has turned sluggish and dyspeptic. Architects from Berlin to Bonn say small practices are shutting down or on life support. Larger ones are shedding staff, and Foster + Partners just closed its Berlin office.

"We can't survive by working in Germany alone," Franken says. "Practices have to be more specialized and globalized at the same time." A chance meeting through a friend led Franken to a pitch his firm's services to a Vietnamese real-estate concern working on a large, multiuse project called Tan Lab Green City in the coastal city of Nh Trn. Winning that project led to four others in Vietnam last year, and Franken soon opened a Hanoi office.

But at the same time, Franken's bread-and-butter work—interior installations for BMW and Mini at huge auto shows and dealerships—is drying up. BMW has already decided not to attend one of the big five shows this year and it is slashing budgets for the others. If Franken doesn't make up that business in the next two months, he's looking at cutting 10-to-15 percent of his 40-person staff.

These days, even a very young, two-person interior shop like KaiserSchnlein, based in Berlin and Hamburg, is looking to branch out, hoping to break into furniture design.

Demand remains steady, though, for green architecture, says Peter Kuczia, who is based in Osnabrck and works alone and with the firm agn Gruppe. "Almost every new client is demanding green elements in building," says Kuczia. "The main reason is not to save the environment, but to save their own purse." The Gruppe is also landing more school and state-sponsored projects, and Kuczia, who is from Poland, is picking up residential work there.

For her part, multidisciplinary Berlin designer Karin Ocker is doing theater set design and falling back on teaching. Ocker does a lot of work in Moscow and the east, but says that is no panacea. Private residences there are being postponed or cancelled, she reports, and a spa project she had in Kaliningrad fell through. A highrise office in Kiev, Ukraine, got through the design stage but then ground to a halt. Architects in Germany were just seeing rays of light last summer following a fairly fallow time, but then the markets turned sour in a matter of weeks, says Ocker. But she has found her own silver lining: the slowdown turns out to be a great time to have a baby. New German parents qualify for state subsidies. And by the time her new son starts sleeping regularly, maybe the Kiev highrise will start up again.

Architecture in Recession: ChinaArchitecture in Recession: Brazil

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  • Monday, March 30, 2009

    General Motors: 60 Days to Show Results

    General Motors: 60 Days to Show Results

    President Barack Obama has a clear message for General Motors (GM) and Chrysler: Come back with a better plan or the taxpayer funds are cut off.

    Senior Administration officials said on Sunday, Mar. 29, that after reviewing the plans submitted by GM and Chrysler, the President and his top advisers have determined that not only did the companies not finish the restructuring moves required of them to get more funding, but they need to go further than the Bush Administration originally demanded.

    But the Obama Administration won't cut the two carmakers off, either. The Treasury Dept. will give GM 60 days to negotiate further cuts from the UAW, reduce its unsecured debt, and show a plan that works, according to senior Administration officials. The President's auto industry task force also decided that, contrary to Chrysler CEO Robert Nardelli's claims that the company can stand alone, it needs a merger partner. The government has given Chrysler 30 days to seal its deal to give a minority stake to Fiat (FIA.MI) or it will be cut off.

    The government's intent is clear: President Obama won't throw money at two companies that have been lurching from crisis to crisis and losing ground to the Japanese and Koreans for years. They have to cut deep and show that they will be able to thrive. "It sounds like they figured it out," says Maryann N. Keller, a longtime industry analyst who now sits on the board of Dollar Thrifty Automotive Group (DTG). "They won't just put a feeding tube in these companies."

    GM's Viability Plan Too Rosy for Treasury

    In GM's case, the government wants a clean slate before it gives the company a substantially larger loan package. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his handpicked successor Frederick "Fritz" Henderson the CEO job. GM director and former Northrop Grumman (NOC) CEO Kent Kresa will become chairman of the board. GM will also have to replace more than half of its board, Treasury officials said. Picking Kresa, and not GM's current lead director and Wagoner supporter George M.C. Fisher, is a clear sign that the Administration wants change.

    It won't stop there. Treasury officials say that GM's updated viability plan, which was submitted on Feb. 17, had rosy projections for market share and pricing. GM said it could hold 19% share in the U.S. by 2014, but its market share is under 19% in the last two months. Every lost point of market share means $2 billion in lost cash flow.

    GM's plan also relies on improved pricing on its cars, but Treasury officials think that will be tough to get given the economy.

    Then there is GM's huge debt burden. GM owes the United Auto Workers $20 billion to start a union-led trust fund that will pay for retiree health-care benefits. The Bush Administration wanted the UAW to take $10 billion in cash and the rest in stock. That may still happen, but Treasury officials think GM needs to reduce its retiree costs. GM and the Treasury Dept. are negotiating deeper concessions from the UAW on retiree benefits.

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  • Marcial: Sara Lee's Makeover Is Turning Heads

    Marcial: Sara Lees Makeover Is Turning Heads

    Sara Lee is almost done with a multiyear plan to shed underperforming businesses and boost its core operations, and several investment pros already find the makeover quite enticing.

    Best known for its baked goods, Sara Lee (SLE) is a global consumer packaged-goods company that makes and markets a vast, diverse array of products. To consolidate and increase consumer focus on its more attractive product lines, the company has been busy in the past four years (as part of an ambitious five-year plan), transforming itself into a more profitable, cohesive, and efficient enterprise.

    It has been selling or spinning off product lines that are less profitable, and committing more attention to brands that it thinks have the best potential to grow faster over the long term. It also aims to introduce new products to beef up revenues.

    One of the areas Sara Lee wants to expand is healthier snacks. Management is committed to increasing sales by taking advantage of the growing popularity of such products. For example, demand for whole grain has been on the rise, so Sara Lee has introduced flour-blend breakfast items, including "Soft & Smooth" whole-grain white bread and English muffins. Other new products are Hillshire Farm Entre Salads, Senseo cappuccino, and more Soft & Smooth bakery products. Sara Lee is also launching Ultra Premium lunch meat, Caffiato iced coffee and tea, and Toastworks toasted sandwich.

    In making a clear investment in innovation and marketing, "Sara Lee has been executing well," says analyst Timothy S. Ramey of investment firm D.A. Davidson, which owns shares. He rates the stock, which traded at 8.50 a share on Mar. 27, a buy, with a 12-month target of 13. The stock has been on the rise since hitting a 52-week low of 6.80 on Mar. 9, 2009.

    Sara Lee is "building organic sales power," says Ramey, who believes it will continue shedding assets. One he predicts may be sold is Sara Lee's Household & Body Care unit, which he estimates is worth $3 billion. Who would be interested in buying? Ramey points out that either Unilever (UN) or Henkel would be logical buyers.

    Unilever, apart from making branded and packaged consumer goods, including food, detergents, and fragrances, also manufactures home and personal care products. So Sara Lee's household and body care products would fit well there. Henkel also makes, among other goods, skin care products, hair dye, and soap.

    $3.8 billion kitty

    "Sara Lee remains our single best idea for 2009," says Ramey, as "we like the strong cash generation, the 4.2% dividend yield, and the prospects for meaningful growth." He forecasts earnings of 93 a share on revenues of $12.9 billion in fiscal 2009 ending June 30, and 89 on $13.2 billion in fiscal 2010. The drop in the 2010 profit estimate reflects the company's downsizing.

    So far, Sara Lee has sold or spun off 40% of its businesses, generating $3.8 billion, which it has invested in product lines with more growth potential. It also expects to achieve cost savings in the range of $575 million to $800 million by fiscal 2010. The company forecasts that the transformation will expand operating margins to 12% by that year, from 7.7% in fiscal 2005.

    In 2006, Sara Lee sold its European meats business to Groupe Smithfield (SFD) for $575 million, and spun off its Branded Apparel business, which is now called Hanesbrands (HBI) and trades on the New York Stock Exchange. Sara Lee also exited several businesses that it deemed unattractive, including the DSD Bakery and DED Foodservice units. It pulled out of a joint venture in Mexico involving a meat products business as well.

    debt will get downsized, too

    Sara Lee's five-year transformation should benefit the company over the long term, says analyst Steven Ralston of Zacks Investment Research, who also rates the stock a buy, with a 12-month price target of 15. The restructuring, started in July 2004 when Brenda Barnestook over as CEO, has already succeeded in making itself a smaller but leaner, more efficient, and more profitable enterprise, he notes.

    Despite the global economic weakness, Sara Lee is on track to complete its restructuring this year, says Ralston, who points out that the company is also focused on cutting costs. The downsizing, he figures, will reduce its revenue base, from $19.6 billion in fiscal 2004 to about $13 billion in 2010. Concurrently, he estimates debt ought to be reduced from $4.8 billion to a range of $1.5 billion to $2 billion.

    However, the potential for accelerated growth the transformation is expected to produce hasn't fully convinced most of the analysts who track Sara Lee. Only three of the 13 rate the stock a buy. The other 10 recommend a hold or neutral. But what's more significant is that none of the Street analysts recommend selling the stock. Further signs of a successful makeover at Sara Lee may lure more Wall Streeters into the "buy" camp.

    Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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  • Toyota, Honda Heat Up the Hybrid War

    Toyota, Honda Heat Up the Hybrid War

    Given the parlous state of the auto industry, the rivalry between Honda's (HMC) new Insight and Toyota's (TM) third-generation Prius is proving to be an enjoyable diversion. Committed to increasing sales of gas-electric models, the companies are launching hybrid cars in quick succession—and neither one is skimping when it comes to generating hype. The Insight boasts a sub-$20,000 sticker price, fuel economy of 40 miles per gallon in the city and 43 mpg on the highway, and is arguably more fun to drive. The latest Prius is larger than its Honda rival, gets better mileage, and (unlike the Insight) has an EV mode, where the driver instructs the car via the touch of a button to run solely on battery power. However, the soon-to-be-released Prius is expected to be more expensive, with a U.S. sticker price starting at around $23,000.

    The battleground is nowhere more intense than in Japan, where the Insight went on sale in early February. Its initial success—Honda has received more than triple the 5,000 orders a month it was expecting—hasn't gone unnoticed at Toyota. At a recent test drive at Fuji Speedway for the near-final version of the Prius, Chief Designer Akihiko Otsuka said Toyota is planning a smaller, cheaper hybrid based on its Yaris platform to take on the Insight. "We are going to compete by expanding our hybrid vehicle lineup to smaller hybrids," Otsuka told reporters.

    And Toyota has another Insight killer in store. On Mar. 26, Toyota Chief Executive Katsuaki Watanabe said the company will take the unusual step of selling a cheaper version of the current Prius alongside the new one. "There will be demand for the two to co-exist," Watanabe said at the unveiling of the new car for the Japanese market. "That Honda has come out with a wonderful car like the Insight gives us a big impetus to try to be more competitive." According to the Nikkei newspaper, this cheaper Prius, like the Insight, will go on sale in Japan for less than $20,000. Watanabe didn't say if Toyota will pursue a similar strategy in other markets.

    A Wise Move?

    Analysts question, however, the impact of launching a cheap version of the old Prius alongside the new one. They worry the older Prius may eat into sales of the new Prius and similar-sized models such as the Corolla, or that it might force Toyota to cut prices of nonhybrid models. If that wasn't enough to boost hybrid sales, unconfirmed reports in the Japanese media say the new Prius may go on sale in Japan for as little as $20,900, which would be $3,000 cheaper than the current model—even though the new Prius has a larger engine and is more luxurious.

    With Toyota upping the ante, Honda is considering its next move. On Mar. 25, Norio Ano, who heads Honda's global Civic hybrid and Insight programs, said Honda will examine where it can make efficiency improvements in the production of the Insight. However, he warned against steps that eat into profitability. "I applaud Toyota if they can make it work as a business at the prices being reported," he said. "We will have to go back to scratch and review all our procedures from step one."

    Yet even as the sparks fly—albeit politely—between Japan's two leading automakers, it is feasible both can win the hybrid war. For one thing, the rivalry is helping to bring the "hybrid premium"—the incremental cost of making hybrids compared with regular vehicles—down to levels where owning is as much about economic sense as sending an "I'm green" message.

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  • The Pros of Planting Startups in Smaller Cities

    The Pros of Planting Startups in Smaller Cities

    Philip Eggers has started six medical device companies in his Dublin, Ohio, hometown. His last five followed a pattern: Eggers would develop the product in his Ohio lab, fly frequently to the Bay Area or Boston to raise money, then relocate the company to one of the coasts when ready to commercialize the product. But Eggers has a different plan in mind for his latest startup, Cardiox, founded in 2006 to develop a noninvasive way to detect heart shunts: He wants to find funding locally and keep his five-employee business in Dublin.

    As the economy reels, Eggers is one of many entrepreneurs quick to tout the ease of doing business in small or midsize cities. Plenty of factors make the city of 38,000 outside Columbus attractive for starting up: Abundant, inexpensive office and lab space; a major university, Ohio State, nearby; a growing population; and good local schools to attract workers with families. "It draws the highly skilled and educated people you need to bring in, especially to a high-tech startup company," Eggers says.

    In high-growth and more conventional businesses, many entrepreneurs find that bigger isn't always better when it comes to selecting a place to start a company. "People are being drawn by lower cost of living and better quality of life," says Jack Schultz, founder and CEO of industrial developer Agracel of Effingham, Ill., and author of Boomtown USA: The 7½ Keys to Big Success in Small Towns. He also says states and cities are beginning to recognize entrepreneurs as a "third leg" of economic development, as important as retaining existing jobs and attracting large corporations. While startup meccas like the Bay Area offer concentrations of talent and investors, new companies there face plenty of competition for those resources, and the cost of doing business is high. In smaller cities, new businesses enjoy lower costs and a higher profile to attract workers, and may be able to get government incentives to create jobs.

    In fact, places like Boulder, Colo., (population 91,000) and Fairfax, Va., (23,000) are just as favorable for startups as San Francisco (733,000) and New York (8.2 million), according to research conducted for BusinessWeek by GIS Planning, a San Francisco-based geographic data firm that helps companies select optimal sites via its online tool ZoomProspector. The analysis weighed 11 factors to gauge an area's entrepreneurial climate, including the number of small businesses and startups, the quality of the workforce, how many universities were in town, and measures of innovation such as the number of patents issued and the amount of venture capital invested.

    Fifty Cities

    GIS Planning used this criteria to identify the best small cities (with populations between 20,000 and 200,000) for startups in each state. With that data in hand, BusinessWeek asked entrepreneurs in each city what people should know about starting a business there. Many said factors such as affordability, availability of talent, existence of a thriving business community, and quality of life helped them choose where to open shop. What emerged is a picture of 50 dynamic cities, each with its own draw for new businesses.

    In many small or midsize cities, universities provided the resources of talent and infrastructure that helped them compete with metropolitan centers. Besides providing a steady stream of potential hires, big schools are often connected to startup incubators or programs to commercialize technology developed in academic research.

    Entrepreneurs said incentives from local governments eager to attract growth industries helped make their cities attractive. In Edmond, Okla., Charles Seeney has tapped half a million in economic development grants for his five-employee nanomedicine company, BioNanoMimetics. "When you start a small business, economy is key to everything you do—getting the most bang for your dollar," he says. The incentives, combined with the low cost of doing business there, made the city of 83,000 attractive.

    Startups also found skilled workers—especially younger ones—drawn to the perception of a higher quality of life. "A lot of people say, in rural areas, sometimes people are concerned they can't find employees, but my experience is that the quality of life and amenities actually draw people to the area, and they tend to be underemployed," says Bill Moseley, president of GL Suite, a Bend, Ore., 40-employee firm that makes software for regulatory agencies. "You have a really strong talent pool that's not nearly as expensive as in a big city."

    All these factors can add up to significant competitive advantages for entrepreneurs launching new companies in small or midsize cities that are sometimes overlooked, says Anatalio Ubalde, co-founder and co-CEO of GIS Planning. "Location in many ways is a gift, because it's not something that a CEO has to work so hard at," he says. "You don't have to start from neutral. You can start from an advantage."

    For a look at the top small city in your state, flip through this slide show.

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  • Saturday, March 28, 2009

    Can Geithner's Toxic-Asset Plan Work?

    Can Geithners Toxic-Asset Plan Work?

    The stock market enjoyed an explosive rally on Mar. 23 after Treasury Secretary Timothy F. Geithner at long last unveiled a detailed plan to team up with private investors to rid the banks of troubled mortgage assets. No mystery here: Bolstering major banks so they can start lending again is essential if the economy is going to recover. Will it work? It might, but that may require some sizable bank asset sales to come together by early summer, followed by a steady flow of deals through yearend to get the program off the ground.

    Geithner thinks he has the right mix of incentives in place to quickly ramp up the program. But it will take a sustained flow of deals to establish attractive prices for all manner of home loans and mortgage-backed securities, which have been devilishly tough for banks to unload since the credit crisis began back in late 2007.

    The Treasury's Public-Private Investment Program aims to create investment partnerships that will combine government cash with equity capital from private investors. Uncle Sam will then lend those partnerships money at below-market rates so they have more funds to buy up the banks' bad assets. By providing much of the funding—and limiting private investors' potential losses—Geithner hopes to spur competitive bidding that will establish realistic prices for the toxic assets and get them off the banks' balance sheets. "The goal is to provide liquidity to the market on reasonable terms," says Larry Summers, head of President Obama's National Economic Council.

    So far, private equity giant Blackstone Group (BX), bond mavens Pimco, and other investors have expressed interest in participating. Investors expect Treasury to line up a few high-profile deals by late May or June.

    William H. Gross, Pimco's co-chief investment officer, argues that if the government lends to the partnership at rates as low as 2%—which the market expects—investors could pay close to 60 cents on the dollar for the devalued assets with returns of around 15%. Sellers would still have to make concessions, but far smaller ones than if forced to sell at today's fire-sale prices. "Geithner's plan closes the gap significantly, but we'll still have to see if anything crosses the market," says Gross.

    With Treasury aiming to buy up to $1 trillion in bank assets, Gross wants to see a monthly deal flow of $150 billion in the second half. It will take that kind of volume to get a sustained lift in prices. "If this is working, you'll start to see housing and mortgage securities prices stabilize, and maybe even go up," says Steven D. Persky, managing partner of Dalton Investments.

    Money pros say it will be a month or even two before enough is known about the terms of the deal to decide if it's worth participating. Also, the backlash against AIG's (AIG) bonuses makes a partnership with Uncle Sam risky. "Until we see how the pricing mechanism works, the rates the government is offering, and the expected returns, [we won't know] where the deals are," says Robert A. Eisenbeis, the chief monetary economist for Cumberland Advisors.

    Another problem: Bankers are already complaining that they could be forced into big writeoffs if the prices for troubled assets remain too low. If the banks refuse to sign on, the Treasury program will tank. That's one reason why Obama plans to meet with the CEOs of JPMorgan Chase (JPM), Citigroup (C), and other banks on Mar. 27.

    So it will be critical that the bidding process narrows the gap between what buyers will pay for the assets and what banks will sell them for. The market is in a deep freeze now, in part, because the two sides don't agree on the value of the tainted mortgage assets. Investors, who don't want to overpay, think most mortgage assets are worth only around 20 cents to 30 cents on the dollar.

    But many banks argue that plenty of good mortgages have been knocked down to rock-bottom prices and they want 70 cents to 80 cents on the dollar; accepting less would lead to more ruinous write-offs. And if, as expected, U.S. accounting rulemakers meeting on Apr. 2 make it easier for the banks to avoid such write-downs, the banks may be even less willing to sell at a loss.

    Administration officials make clear they expect the banks to take the haircut given the economic stakes. Those that do poorly on the so-called stress tests currently under way may have little choice but to cooperate. If they don't, expect another market mood swing, this time to one of despair.

    With Theo Francis

    Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkPreventing the Next Crisis

    The Obama Administration has proposed giving Treasury the authority to reorganize financial giants if their collapse threatens the economy, a more expedient approach than relying on bankruptcy courts. New York University economist Nouriel Roubini, credited with predicting the current crisis, says that such authority is long overdue.

    To read Roubini's blog post, go to http://bx.businessweek.com/bailout/reference/

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  • Major Oil Companies Are Circling Iraq

    Major Oil Companies Are Circling Iraq

    With security in Iraq improving, international oil companies are quickly moving in, often with little or no fanfare. Hanter Gasser, Royal Dutch Shell's (RDS) top executive for Iraq, recently spent a week in Basra, site of the country's biggest fields, checking on a joint venture Shell is starting with the Iraqis to find commercial uses for the gas that is flared off during oil production. Gasser says Iraq burns off enough gas to power two countries the size of Jordan.

    Shell is one of about 30 oil companies, including ExxonMobil, Chevron, and BP, that are pursuing licensing agreements with Baghdad. Iraq intends to boost production in seven fields holding an estimated 44 billion barrels of reserves, more than a third of its total. Those agreements are supposed to be awarded in a few months. "We have high interest in Iraq, and we are waiting to see the terms," Gasser says. Iraqi oil production, at a low 2.5 million barrels a day, is just where it was before the war. If Iraq produced anywhere near its targeted 6 million barrels a day, it could change the industry's dynamics and curb talk of a looming shortage.


    The key player is Oil Minister Hussein Al-Shahristani, a Canada-educated nuclear scientist and chemical engineer who spent 11 years in Abu Ghraib prison for refusing to help Saddam Hussein build a nuclear weapon. He is feeling huge pressure to boost production to compensate for falling prices. In an interview in Vienna, where he was attending an OPEC conference, Al-Shahristani came across as impeccably polite. He's also a nationalist, determined that Iraq regain its rightful place in the industry and the Middle East, whatever the objections of Saudi Arabia and the Gulf states, which might not welcome the rise of another Shiite-dominated petropower.

    Al-Shahristani outlined for his fellow OPEC ministers an ambitious program to reach that 6 million barrel-per-day goal in the next six to seven years. That would make Iraq the world's fourth-largest producer, after Saudi Arabia, Russia, and the U.S. Al-Shahristani estimates that achieving his goal would cost $50 billion, which he hopes to raise almost entirely from the oil companies. Such a production surge would complicate matters for OPEC, which has cut output by 12%. "I am sure some [in OPEC] hope it doesn't happen soon," he says.

    Later Al-Shahristani added by e-mail: "By the time we reach 6 million barrels per day in five to six years there will so much demand for Iraqi oil as other countries will go through a declining phase, and we do not expect much restriction on our production ceiling."

    While skepticism remains about Iraq's ability to execute its plan on schedule, Baghdad's desire to boost production is no longer a pipe dream. The question is how fast Al-Shahristani can bridge differences with the oil companies to get some big deals rolling. Last year, several companies were close to agreeing to upgrade five fields when Al-Shahristani pulled the plug amid controversy that BP (BP), Shell, and other majors were close to landing contracts without competitive bidding.

    He's now soliciting bids to squeeze about 1.5 million more barrels a day from the eight major fields. In essence, the companies will be paid a fee of perhaps $6 for every extra barrel they can coax from the wells. The majors worry about stiff penalties being imposed if they don't hit agreed-upon production targets. They're also leery about forming joint ventures with local companies that are holdovers from the Saddam era. "I would suspect that when we go to the board of directors, there are going to be a lot of questions asked," says one executive. Al-Shahristani is listening to the complaints. He's also dangling the possibility of production-sharing agreements, which would let the oil companies enjoy the upside in profits from the oil they discover and produce.

    The major oil companies are taking their time with the bidding to make sure they get the best possible terms. To keep up the pressure, the Iraqis are cutting side agreements. Baghdad has negotiated, for instance, a deal with Chinese National Petroleum to develop the Ahdab field. "This showed the Iraqis could complete negotiations on a field," says Alex Munton, an analyst at Edinburgh consultants Wood Mackenzie. Al-Shahristani is also negotiating a deal on the 3.5 billion-barrel Nassiriya field with Italy's Eni (E) and others."Because bid rounds take a bit longer, we have decided to ask selected companies that have done their homework to submit an offer to us," he says.

    Despite the fits and starts, the Iraqis seem bound to gain traction sooner or later. With 115 billion barrels of reserves, Iraq's potential production capacity could eventually challenge Saudi Arabia's 12 million barrels a day, according to Helmut A. Merklein, a former senior U.S. energy official who is now a consultant. "The [only] limitation is what the market will bear," he says.

    Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkA Gusher of Information

    Wood Mackenzie, an Edinburgh-based oil and mining consulting company, has compiled a presentation that assesses the future prospects of the Iraqi oil industry. The 18-page document is packed with charts, maps, and other data. It also delivers a history lesson on Iraq's beleaguered oil sector.

    To view the presentation, go to http://bx.businessweek.com/iraq-business/reference/

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  • Bob Nardelli on the Future of Chrysler—With or Without Fiat

    Bob Nardelli on the Future of Chrysler—With or Without Fiat

    The Obama Administration's auto task force is set to report by Mar. 31 on the wisdom of continuing to bail out GM and Chrysler. Recent reports suggest that the deadline may not be D-Day for Detroit, as some have billed it. Instead, it may be the first step in a longer-term look at troubled U.S. automakers—and how much help they should get from the feds. The likelihood that Detroit will get more assistance got stronger on Mar. 19 when the Treasury Dept. released a plan to offer $5 billion in rescue money to auto-parts suppliers. Meantime, a deal under consideration could give Fiat a 35% stake in Chrysler and perhaps open the way for a larger ownership position later. Clearly, this is a defining moment for Chrysler, so I talked with Bob Nardelli, the CEO hired by private equity owner Cerberus to turn around the struggling carmaker.


    How would you rate the job the auto task force is doing?


    I certainly understand the learning curve they're on, having gone through it myself over the last 18 months. So I give them very high marks.

    The point men on that task force are Steve Rattner, a former journalist, private equity firm partner, and Democratic activist; and Ron Bloom, a labor restructuring expert. Have they spent any time with you, understanding the view from Chrysler's corner office?
    We've had two face-to-face meetings and countless exchanges of phone calls and information. I would say those two gentlemen are totally engaged. They bring unique experience, albeit different experiences, to the table, which is very helpful to our discussions.

    Do you truly believe that without Fiat, Chrysler has a long-term future as an independent car company?
    We do. We have a viable standalone plan. And Fiat enhances the viability of that plan. Fiat (FIA.MI) brings $8 billion to $10 billion of real product advantage. We really need to change the perception out there that Fiat is basically getting a free ride. They're bringing hard technology. They're bringing platforms with proven reliability and durability that not only have a very high market value but will leapfrog [Chrysler] four to five years. And most important, in regards to the environment, they have the lowest-emission engine in Europe.

    If the Fiat deal does not go through, is there a chance there could be some kind of merger with GM?
    No. General Motors (GM) took that off the table, and I don't believe there's any opportunity to reopen that decision. I don't mean to be a broken record, but if a Fiat deal doesn't go through, we have a viable plan. And we would still have the opportunity to do product alliances with Fiat like we did with Volkswagen (VLKAY), Nissan (NSANY), and Mitsubishi. But [the relationship with Fiat] would be on a much smaller scale and wouldn't enhance our ability to pay back the government loan sooner.

    How much money does Chrysler need to survive?
    If you'll remember, when we submitted our original plan, we asked for $7 billion. We received $4 billion in early January. From the time we made our original submission through Feb. 17 we saw unprecedented, continually downward-spiraling sales in the U.S. market. As a result of that, we raised our overall request from $7 billion to $9 billion—$2 billion of incremental dollars. If we receive the $5 billion, that will take care of the financial needs of our standalone plan.

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  • Cloud Computing: Understand the Risks

    Cloud Computing: Understand the Risks

    All the data that make up our lives seem to be heading for the clouds. From photos on Flickr (YHOO) to memos on Google Docs, we are entrusting more and more to computers in giant data centers—a model called cloud computing. It's certainly convenient to have access to our stuff wherever we are and on whatever device we choose. But is it safe?

    Yes, if you exercise reasonable care. The major providers of Web-based services have generally established an enviable record as stewards of their customers' data. Still, there are perils—just as there are with clouds of the atmospheric variety. A little thought and prudence may save you grief down the road.

    There are two kinds of risks in putting your data online. One is that you can never be quite sure who has access to your information once it has migrated beyond the hard drives and backup storage devices in your home. The other risk is that the information, and sometimes the applications you need to make use of it, may be available only when you are connected to the Internet and the service is up and running.

    These twin dangers are now abundantly obvious to users of a collaborative Web-based word-processing program called Google Docs. Google (GOOG) recently notified its users that a software glitch had allowed some subscribers unauthorized access to "a very small percentage" of these documents, which are stored on Google's servers.

    The security of data stored in the cloud varies with both the design of the system and how well the safety measures are implemented. Some services encrypt information both in transit and in storage in such a way that only the owner can decrypt it. These services are generally the most secure against either accidental or malicious disclosure—though your information can be lost forever if you lose the password. In general, services that allow Web access to data from any computer are riskier than more restrictive systems, and those that allow the information to be shared among a group of users pose even greater hazards.

    Sometimes you have control over this—for example, by declining an option that lets you access your data from a Web site. This choice is available on many online backup services and can be handy if, say, you are on the road and need to get a file that's on your home or business computer. But clearly that access increases the risk that your information could be exposed to third parties.

    The security practices of cloud storage systems are usually described in the fine print of their security and privacy policies, but in practice it's difficult to assess safety. Corporations run security audits to gauge the practices of cloud computing operations, but this is beyond the reach of individuals or smaller businesses. The simpler course for most of us is to think before committing data to the cloud. Those photos from the family trip to Disney World (DIS)? No problem. But the term sheet for a proposed merger or acquisition should probably stay encrypted on a hard drive that you control. Anything in between? Just consider how much embarrassment or trouble it would cause in the wrong hands.

    The issues of getting to your online data are less serious. The growing ubiquity of wireless services means there are fewer and fewer places where you can't get on the Net if you need to. Wi-Fi is even slowly creeping onto airplanes, the last wireless frontier.

    Of course, if you know you will have to work disconnected, you can load the files you need onto a hard drive or USB memory key. And new technologies, such as Google Gears and Adobe AIR (ADBE), make it possible for some Web-based programs to be used on a computer even when you're not connected.

    Will your cloud service be there when you need it? Google got a lot of unwelcome attention recently when its Gmail service was unavailable for about three hours. Back in the days of the Ma Bell monopoly, AT&T (T) promised 99.999% availability, which allowed a bit over five minutes of downtime a year. But "five nines" of reliability is fabulously expensive. Google promises its corporate Google Apps customers 99.9% uptime, which leaves room for outages of nearly nine hours a year. The fact is, most enterprises don't deliver higher reliability on their own systems; the difference is that outages on big public services get publicity.

    Ultimately, putting your data in the cloud involves choosing convenience and productivity at the cost of some security risk. In the real world, convenience almost always wins, and there's nothing wrong with that. What's important is that you understand the dangers.

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  • Wednesday, March 25, 2009

    Core Labs, a Prime Pick in the Energy Patch

    Core Labs, a Prime Pick in the Energy Patch

    Judging by its name alone, one would think that Core Laboratories (CLB) is a drug company or some other type of health-care outfit. It's not, although it does provide a form of "well care." The Netherlands-based company actually serves the energy industry, and it counts almost all of the global oil and gas producers among its customers. Core Labs' services boost their productivity by helping them improve the output of their oil wells and enhance their management of oil and gas reservoirs.

    That pivotal role has enabled Core Labs to cope with the recent drop in spending by Big Oil. In terms of share price, the company is doing better than its customers, whose stocks have been on the ropes since crude oil prices retreated from their peak of $147 a barrel last summer.

    In fact, Core's stock has run counter to those of such oil biggies as Exxon Mobil (XOM) and Chevron (CVX), which have been weak. Shares of Core have surged, climbing to 76 on Mar. 24, significantly up from their 52-week low of 48.41 reached on Dec. 12, 2008.

    But don't think that Core Labs' stock is peaking. Far from it. It's still way below its 52-week high of 145.47, hit on Jun. 9, 2008.The stock is cheap at its current price, says Ryan E. Crane, chief investment officer of investment bank Stephens. Core Labs' shares recently traded at 12.6 times Crane's 2010 earnings estimate of $6 a share, far lower, the analyst notes, than the stock's five-year price-earnings average multiple of 17, and a 2004 p-e of 27.

    An International Footprint

    "The stock could double in a year or two," figures Crane, noting that Core has no big rivals in the industry. Its major competitors are the research units operating within the major oil and gas producers.

    Crane says Core Labs is very well managed, with the company's earnings consistently rising. Core specializes in measuring the quantity and value of crude oil and natural gas in a company's reservoir, which accounts for about 47% of its operating income. Another part of its business (42% of operating income) aims at improving reservoir well completions and increasing production. The third part of Core's operations (11%) is reservoir management, specifically to solve reservoir-wide problems and to maximize daily production and total recovery.

    "While Core's business isn't immune to adverse changes in the global rig count, the company is less affected than most, given its technological edge and international footprint," says analyst Karen David-Green of Oppenheimer (OPY). She rates the stock outperform with a 12- to- 18-month price target of 80 a share. She figures Core will earn $5.25 a share in 2009 and $6 in 2010. Those forecasts are below Core's 2008 per-share earnings of $6.18, mainly because of lowered forecasts for North American and international oil and gas production. According to a consensus forecast compiled by Zacks Investment Research, Wall Street analysts see Core earning $5.49 a share in 2009 and $6.22 in 2010. Among the 11 analysts who track the company, nine recommend buying the stock and two rate it a hold.

    Mideast Strength

    David-Green notes that 70% of Core's revenues come from oil reservoirs located outside the U.S. The company sees West Africa, the Middle East, Asia Pacific, and South Caspian regions as areas where it could generate flat to slightly increased revenues in 2009. Because it reduced operations in Russia, Venezuela, Mexico, and Nigeria over the past few years, David-Green adds, the company is more insulated from recent production declines in those regions.

    Analyst James C. West of Barclays Capital (BCS) says that despite the challenging outlook for the industry as a whole, Core remains well-positioned to do better, in part because of its strong international franchise and good technology. West expects the Middle East to be a particular area of strength for Core in 2009. So he figures the company, which beat consensus earnings forecasts in the first quarter, deserves to trade at a higher price. Given what he considers "a solid outlook for Core Labs and the company's superior positioning relative to the oil-service group," he rates the stock overweight, with a 12-month price target of 87 a share. (Barclays has done banking for Core Labs.)

    Should crude oil prices turn around, as many analysts expect (they have recently fallen to about $50 a barrel), and start spurting higher again, the company's shares will certainly surge along with the currently sluggish Big Oil stocks. But while investors wait for that resurgence, Core Labs looks like a safe-haven energy play.

    Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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  • Tuesday, March 24, 2009

    Nespresso Pitches 'Luxury' Coffee for Lean Times

    Nespresso Pitches Luxury Coffee for Lean Times

    Nestl wants to help you kick your Starbucks habit. The Swiss food giant is mounting a major push into the U.S. with its Nespresso coffee system, which lets users make caf-style espresso at home. The company has opened six Nespresso boutiques in major U.S. cities—including three since January—in upscale locales such as New York's Madison Avenue and Boston's Newbury Street. More openings, in New York and Miami, are coming shortly.

    With the economy mired in recession, it seems an odd time to urge consumers to spend $200 to $800 for an espresso machine that can only be used with prepackaged capsules that cost 55 a serving. But Nestl (NESR.F) is betting that coffee lovers will do the math: Just one cup a day from a local coffee bar can add up to more than $1,000 a year, vs. less than $200 annually for Nespresso capsules, plus the cost of a machine. "People still want little daily luxuries, but there's a return to consumption at home," says Nespresso Chief Executive Richard Girardot.

    Starbucks (SBUX) clearly has been struggling, with U.S. same-store sales dropping 8% during the fourth quarter of 2008. The Seattle-based company has slashed more than 18,000 U.S. jobs and is closing 977 stores worldwide. But can Nespresso really pick up that slack?

    George Clooney's Continental Boost

    Nespresso has already established a strong base in Europe, which accounts for about 90% of its $2 billion annual sales. Indeed, it's now Nestl's fastest-growing brand, with sales up more than 30% annually for the past eight years. Nestl first introduced Nespresso in the 1970s, trying unsuccessfully to market it to offices and restaurants before relaunching it as a consumer brand.

    In the past few years the brand has gotten a big boost from advertising featuring George Clooney, including a lighthearted series of TV spots that show beautiful young women ignoring the actor as they reach past him for a cup of Nespresso. (Alas for Nestl, Clooney's contract doesn't allow the company to show him in U.S. ads.)

    Though Nestl doesn't disclose profits for individual brands, Julian Hardwick, a London-based analyst with ABN Amro, says Nespresso "certainly is profitable," and has helped Nestl widen its overall profit margins. These previously lagged those of European rivals Unilever (UN) and Danone (DANO.PA), but now are healthier.

    Nespresso on the Champs Elyses

    Worldwide, Nespresso is well ahead of competitors. The Senseo system from Philips (PHG) and Sara Lee (SLE) brewed up $547 million in coffee sales last year (Philips doesn't break out sales of the coffee machines alone). The current U.S. market leader, the Keurig system from Green Mountain Coffee Roasters (GMCR), booked revenues of $254 million from machines and coffee combined. Another rival, the Tassimo from Kraft Foods (KFT), saw sales near $300 million, Kraft says.

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  • Friday, March 20, 2009

    Pure Digital Flips the Script

    Pure Digital Flips the Script

    It's hard to imagine that Pure Digital Technologies, the company behind the popular Flip Video camcorder, wanted to design a "shy" product. But that's how Jonathan Kaplan, chief executive and founder of the San Francisco-based startup, describes the playful, inviting look of the device.

    With nearly 1 million Flips sold since the digital camcorder's May, 2007, debut, and with enthusiastic fans like Oprah and Rosie O'Donnell, Kaplan and his design team seemed to have struck a chord with consumers. In a cutthroat market dominated by global consumer electronics giants such as Sony (SNE), little-known Pure Digital and its 80 employees have changed the game by making a bare-bones, affordable camcorder (starting price: $120 vs. the average $314). To put the number of Flips sold in perspective: About 6 million camcorders were shipped to U.S. retailers in 2007, according to the Arlington (Va.)-based Consumer Electronics Assn. Getting close to the 1 million mark in less than a year is impressive for a new product in this category, says CEA economist Shawn Dubravac. "Before, companies flaunted technical features for nerds and geeks, but consumers are responding to the Flip's convenience and price."

    For years, the behemoths have been racing toward designing ever-more-complex video cameras. Then along came the Flip, daring to compromise video quality to offer a cheaper, simpler device. Its images lack the crisp resolution offered by big-name cameras. So should the likes of Sony and Panasonic be worried? Maybe: During the tough 2007 Christmas shopping season, Flip camcorders dominated the top five spots on Amazon.com' (AMZN)s list of most-popular digital video cameras. Kaplan says revenues have jumped 300% in the last year, though privately-held Pure Digital doesn't disclose sales figures. So how did this obscure upstart with no name recognition charm so many fans with a low-tech camcorder with subpar images?

    Pure Digital began in 2001 as a maker of throwaway digital cameras for both still pictures and video. The cameras were sold in drugstores and required users to have their images processed on the premises or at a designated digital-photo lab. Buyers started offering unsolicited feedback. "They wanted a more permanent, shoot-and-share video camera that was fun and easy to use," Kaplan says. He paid attention, and created a product for them—without hiring focus groups.


    Timed to tap the craze of homegrown videos posted on blogs and YouTube (GOOG), the Flip made it easier for users to become amateur filmmakers. It's a no-frills camera the size of a bar of soap—without cumbersome cables that connect to PCs ("A Sweet and Simple Camcorder", BusinessWeek, 6/04/07).

    Kaplan gave his designers a broad goal: strip away all control buttons and features from a typical camcorder and add back only the essentials. They began by eliminating the slot found on many digital cameras for extra memory cards needed to store lots of images. Instead, the Flip offers internal storage from a half hour to an hour, depending on the model. They replaced multiple controls with a simple series of buttons. The hardest part was replacing the unwieldy USB cables and chargers that come with most digital camcorders. First the team tried retracting power cables. But that didn't eliminate cords, which can tangle or get lost. Instead, they chose cheap AA batteries to power the Flip—so there's no need for a clunky plug or AC adapter.

    Pure Digital's solution to the messy cables often needed to attach a camcorder to a PC to upload files is a design breakthrough: the flip-out USB key. And it became the Flip's brand symbol. Kaplan's inspiration came not from Silicon Valley but from Detroit—from the key to his Audi.

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  • Thursday, March 19, 2009

    How Google Is Showing Off Chrome

    How Google Is Showing Off Chrome

    The Google (GOOG) home page has been ransacked. The familiar, colorful logo is upside down. The search box and the "I'm Feeling Lucky" tab have been uprooted and now point up at a rakish angle, jutting into white space. Other links have tumbled from the top navigation bar and lie in a heap on the side of the browser. What on earth is going on? Have the hackers taken over?

    Yes, actually they have. But they were invited to do so. The screwy design is part of a new series, Chrome Experiments, that Google is launching on Mar. 18 to demonstrate the potential of Chrome, the search giant's much-trumpeted yet little-adopted browser, which itself was updated with a handful of new features the day before.

    The jumbled home page is actually a program called Google Gravity. British interactive design firm Hi-Res! recreated the search giant's regular home page, giving users the ability to wreck the joint. With the mouse, a user can spin the traditional elements into space. They soar, they careen, they bounce, until they settle higgledy-piggledy at the bottom of the browser window.

    Whimsical, Fun—and Pointless

    There are a further 17 inventive devices displayed in Chrome Experiments, which was commissioned by tech lead Aaron Koblin, who works in Google's Creative Lab at the company's San Francisco office. He handed a simple brief to his chosen anarchists: "Here's this browser. Make something cool with it."

    In Browser Ball, you casually bounce a beach ball between different windows on the screen. Twitch loads a series of windows to guide you through the levels of an infuriatingly addictive game. In BallDroppings, the user plays around with an interactive sound-generation device to produce artistically atonal results. A couple of the experiments use data from the micro-network Twitter as a starting point to create intricate visualizations. Not all of the projects are entirely clear. The overall results are whimsical, fun and, well, ultimately fairly pointless.

    There is, however, a serious mission beneath the sense of play. Google wants consumers and advertisers to see the sophistication and reliability of Chrome's technology. These toys are built using the ubiquitous development language JavaScript, which has caused browser performance problems in the past. Given that many of Google's own Web programs, such as Gmail, rely heavily on JavaScript, Google is signaling that it's serious about building a strong, sturdy platform for cloud applications.

    "There has been a steady flow of new releases and features [for other browsers]," wrote Gartner analysts David Mitchell Smith and Ray Valdes in a paper published on Mar. 13. "But the speed is not enough to keep up with Google's rising goals for Web applications." With Chrome, the company has taken matters into its own hands.

    Slow Uptake of New Technology

    Still, it's early days for Chrome, which is available only for PCs and currently boasts merely 1.15% of the browser market share, according to the latest figures from Net Applications. In contrast, Microsoft's (MSFT) established Internet Explorer (IE8 will likely be announced soon) has nearly 68%.

    More serious for Google, as the company continues to build its case for cloud-based business apps, is the slow pace of enterprise adoption of new technology. According to Forrester Research, 60% of companies were still using Internet Explorer version 6.0 in the second half of 2008. That means they haven't upgraded to the latest version of the software they have, let alone contemplated shifting platforms altogether.

    "There's a lot of effort and potential risk in moving off a browser," warns Forrester analyst Sheri McLeish. "Upgrading your company to a new browser may break customized enterprise applications." Design-focused programs build buzz and goodwill from early adopters, and a consumer-driven push could even help to drive buy-in from the bottom of an organization upwards. But McLeish notes, "Chrome is certainly not secure enough for prime time."

    For now, Koblin says, he hopes the project will take on a life of its own and form a library of JavaScript experiments and a community of those constructing them—a "submit experiment" form is built into Chrome Experiments' interface. So is he volunteering to monitor the submissions personally? Koblin laughs. "The worst-case scenario of too many to look at would be wonderful."

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  • AIG's Liddy: 'I Asked for Bonus Givebacks'

    AIGs Liddy: I Asked for Bonus Givebacks

    Edward Liddy, chief executive officer of American International Group (AIG), sought to blunt the outpouring of criticism over $165 million paid in retention bonuses at the beleaguered company, by asking many of the people who received them to return at least half the money. Some have already volunteered to turn in their full bonuses, Liddy told a House panel in Washington on Mar. 18.

    Liddy, who took the job running AIG last September for $1 a year in pay, also said he expected a harsh public reaction to the retention bonuses but nothing like the firestorm he has seen. The fracas over them dominated a questioning at a hearing of a finance subcommittee, and President Barack Obama has urged that AIG be forced to rescind the payments.

    Liddy stopped short of saying he would pursue the payments if staffers decline to return the money. He argued that he had to make the payments both because of contracts—which he said he never would have O.K.'ed—and because they have been needed to keep people on to unwind a troublesome area that had the potential to throw AIG into bankruptcy. "We concluded the risk to the company, and therefore [to] the financial system and the economy, were unacceptable," the CEO said.

    Liddy sparred, mostly in polite terms, with congresspeople who repeatedly attacked the idea that bonuses should be paid to staffers at a company where bad market decisions have led to losses and the need for at least $80 billion in U.S. government support already—with more than $170 billion in potential exposure.

    Contentious Proceedings

    At times, however, he grew passionate. He declined to turn over names of the bonus payment recipients, for instance, and cited threats that have been made to AIG executives. One such threat suggested that they be killed with piano wire. He did, however, suggest that he would comply with subpoenas from the New York State Attorney General to reveal the names, so long as they are kept confidential. He said he would want assurances of confidentiality from the House before taking the same step there—to which Finance Committee Chairman Barney Frank refused to agree.

    Passions around the issue even crept into the hearing room. Subcommittee Chairman Representative Paul Kanjorski (D-Pa.) angrily ordered demonstrators to turn over to security officers signs urging jail terms for AIG executives. The demonstrators, which Kanjorski referred to as the pink ladies because of their bright clothing and signs, had been trying to get their signs in the sights of cameras that crowded the hearing room.

    The CEO suggested that the government will be paid in full for its loans and other support to AIG but that the process may take two to three years, depending on market conditions. Liddy is trying, for instance, to sell off insurance units—which other witnesses at the hearing suggested were healthy—but said there are no buyers for them at the moment.

    He suggested that improvements at AIG have been substantial already, but that the job is far from finished. The company's troubled financial products unit, which created complex obligations known as credit default swaps among others, still has some $1.6 trillion in obligations to wind down. While down substantially from what the tally was just last fall, Liddy said the company needs to deal with those, and it needs to keep the people who can manage the total down.

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  • Apple Raises Its iPhone Ante

    Apple Raises Its iPhone Ante

    For the past two years makers of powerful, Internet-connected smartphones have been racing to respond to the innovations unleashed by Apple's iPhone. While they've taken steps to narrow the gap, Apple may have just pulled further ahead.

    Apple (AAPL) is doing that through a series of capabilities unveiled on Mar. 17 that make it easier for software developers to create nifty iPhone applications. In a packed auditorium at Apple's Cupertino (Calif.) campus, the company presented both a major update of its iPhone software and details of a software developer kit.

    The likely result is that Apple will further solidify its position as the platform of choice for software developers—and as a result, many consumers. In just eight months programmers have created 25,000 applications that are available on Apple's online App Store. Of those programmers, 62% had never written anything for an Apple product. So far, consumers have downloaded more than 800 million of these apps, which include everything from games like Tetris to software that helps diabetes patients manage insulin levels. The wide range of apps is a major reason the iPhone quickly jumped to No. 3 in the cutthroat smartphone market.

    Playing Catch-Up to Apple Apps

    The App Store is also a key reason why rivals will have such a hard time closing Apple's lead. In recent weeks companies including smartphone leader Nokia (NOK), BlackBerry maker Research In Motion (RIMM), and Microsoft (MSFT) have announced plans to open their own app stores. While the three companies have sold far more devices than Apple, which has sold 17 million iPhones and 14 million iPod Touches, their products are used mostly for making calls and sending e-mail. People flock to Apple for other kinds of programs, including browsing the Web. "This will make Apple's big lead that much bigger," says Trip Hawkins, CEO of Digital Chocolate, a maker of popular iPhone games.

    Many of the new capabilities address shortcomings with the current iPhone software. For the first time, iPhone owners will be able to cut and paste text or pictures between applications—say, to include in an e-mail a photo of a home for sale or restaurant meeting place. Users will be able to write e-mails in landscape mode, so the phone's software-only keyboard is larger. IPhone software chief Scott Forstall said the company also made upgrades to its server farms so it can now reliably offer "push notification" every time a user gets an e-mail or an application update.

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  • Tuesday, March 17, 2009

    Who's Who on AIG's List of Counterparties

    Whos Who on AIGs List of Counterparties

    American International Group (AIG) broke the customary code of silence around financial transactions when it published a detailed accounting of its financial counterparties on Mar. 15. The pressure to do so had come from Congress, insistent upon learning the companies to which U.S. taxpayer aid had flowed. AIG explained its disclosure as a bid for "transparency," but the data were just as much an opportunity to demonstrate the systemic risk AIG had long claimed its demise would pose.

    If releasing the list was a surprise, the names on it were anything but. A Who's Who of global financial behemoths, the list included several European banks as well as U.S.-based giants like Goldman Sachs Group (GS) and Merrill Lynch (BAC).

    Of course, financial ties between Europe and the U.S. have been growing in recent years, and the flow of funds has hardly been a one-way street from the U.S. taxpayer to banks abroad. Brad Setser, a fellow at The Council on Foreign Relations, notes that the Bank for International Settlements has reported that European banks had an $8 trillion balance sheet going into the crisis, with a large share of that invested in U.S. corporate bonds and asset-backed securities. If the European banks dumped those holdings, it would exact a severe, negative effect on the price of U.S. banks and their balance sheets.

    Kentucky's Bunning Leads the Charge

    Further, if the government had not backed AIG, those who had borrowed securities from AIG and collateralized them with the company's debt surely would have sold the debt to cover their losses and brought more pressure on the insurer just as it was struggling most, notes one Wall Street source.

    Congress' demands for the names came to a head earlier in the month with the very public dressing-down of Fed Vice-Chairman Donald Kohn by Senator Jim Bunning (R-Ky.), after Kohn refused to name names. The prominence of foreign firms like Barclays (BCS), Deutsche Bank (DB), and BNP Paribas, once the list was released, stirred chat room debate over the logic of American taxpayers helping foreign banks. "In a world where financial institutions operate globally, bailouts are still financed domestically, and do ultimately rely on a backstop from the taxpayers," says Setser, of the Council on Foreign Relations. "There's a complicated set of issues around burden sharing. It's not just AIG."

    The transactions at the core of AIG's disclosure have little to do with its central insurance business. The counterparties named on this list were part of far more complicated financial dealings. Some were customers of its collateralized default swaps, in which AIG insured transactions between other parties, something those parties would pay to gain, due to AIG's then-sterling AAA credit rating. But when AIG's ratings were cut, the company had to come up with collateral to back those deals.

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  • Monday, March 16, 2009

    What Fadell's Departure Means for Apple

    What Fadells Departure Means for Apple

    At a company as tight-lipped about its inner workings as Apple (AAPL), changes at the top can be hard to gauge. But the Nov. 4 announcement that Tony Fadell, development chief for the iPod and iPhone, has been replaced by 26-year IBM (IBM) veteran Mark Papermaster underscored what's becoming a growing concern for many Apple investors: Is the company doing enough to nurture possible replacements for Chief Executive Officer Steve Jobs?

    Apple has many top-notch executives. Chief Operating Officer Tim Cook is considered an operations virtuoso. Retail chief Ron Johnson turned Apple into the world's most successful retailer by some measures. But while there's no indication that Jobs is going anywhere soon, when he does move on, finding a successor who combines his penchant for product, head for business, and sales savvy will be no mean feat. Industrial design chief Jony Ive is often mentioned as a candidate. But he's a great product designer—not a businessman, technologist, or marketer. "It looks like there's only one horse in this race [to potentially succeed Steve Jobs], and it's Tim Cook," says John Thompson, vice-chairman of executive search firm Heidrick & Struggles. "It's not obvious to me that there's another candidate there."

    Fadell, 39, wasn't necessarily tailor-made for the CEO job, either. Three people close to Apple say he wasn't considered a viable CEO candidate. He combines the engineering chops of an accomplished geek with the charisma and product sense of a marketer. He also excelled at managing engineers. But he lacked broader business experience.

    Father of the iPod?

    Fadell's departure may not have come as much of a surprise at Apple headquarters in Cupertino, Calif. One Silicon Valley executive says he got calls more than six months ago from companies where Fadell had applied for jobs. Some top Apple executives have bristled for years at the notion that Fadell was considered the "father of the iPod." Silicon Valley lore holds that while he was at Philips Electronics (PHG), Fadell came up with the idea for an MP3 player with a hefty hard drive that would synch to a music service, and that he left to sell the idea to other tech companies before joining Apple.

    But one former Apple manager says the iPod project was already under way when Fadell arrived. Another source says Fadell was considered too self-promotional within Apple. For example, the company once insisted that Fadell remove Apple-owned photos of iPods from a personal Web site, and demanded that he change language on the site that suggested the iPod was his brainchild. Apple declined to make Fadell available for comment.

    Apple insists Fadell will remain an adviser to Jobs. That may be, but it's common practice in Silicon Valley to grant departing executives a consulting gig that lasts as long as the clause in their initial contract that prohibits them from working for a competing company.

    Fears That Others Will Follow

    Apple remains a well-managed and well-positioned company, and may be one of the safest harbors for top tech talent. It's got $25 billion in cash, healthy margins, and its biggest product lines are growing faster than their respective markets.

    Still, some former staffers wonder whether more company veterans will follow Fadell out the door. It's one thing to work for Apple when the stock is flying high and the company is breaking out of its core market into exciting new realms. Now, the stock is priced at about half of its all-time high, and the company, renowned for being a place where people work extremely hard, is a much larger battleship than it used to be.

    Also, one former manager says the company isn't as focused as others at nurturing people's careers. At Cisco Systems (CSCO), IBM, and elsewhere, top performers are moved around the company in an effort to broaden their skills and groom them for bigger jobs. Apple's top executives have tended to move up the ladder in the areas where they were hired. Apple declined to comment on this specifically, but says it has a succession plan in place.

    From Big Blue to Cupertino

    Papermaster spent 26 years at IBM, where he developed chip architectures before becoming head of its blade-server effort in recent years. One Apple watcher believes Jobs intends to focus more on creating proprietary chips for its devices, to make it harder for rivals to copy its innovations.

    To thrive, Papermaster will need to stay comfortable in Cupertino longer than former IBM Chief Counsel Donald Rosenberg, who spent just 10 months at Apple before leaving for Qualcomm (QCOM). Fadell may not have been in line to succeed Jobs, but his departure nonetheless leaves a big challenge for a newcomer to Apple's very particular way of doing things. After the job changes were made public, Apple's former software chief Avie Tevanian mused on his Facebook page that he "wonders how a 25-year IBM veteran will replace Tony," according to one of his Facebook friends.

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  • Saturday, March 14, 2009

    China Worried After Lending 'Huge Amount' to U.S.

    China Worried After Lending Huge Amount to U.S.

    As China's slumping economy feels the impact of the global recession, Chinese leaders are showing their irritation with the U.S. That's obvious in the ongoing war of words following a near-clash between U.S. and Chinese naval vessels in the South China Sea on Mar. 8. Chinese gripes with the Americans extend to key economic concerns, too, such as U.S. complaints about the Chinese currency and Beijing's suspicion that the U.S. is lapsing into protectionist policies.

    On Mar. 13, China's Premier Wen Jiabao ramped up the rhetoric some more. Wrapping up the annual session of China's Parliament, Wen took a swipe at the U.S., which has depended largely on Chinese investment in Treasury bonds to fund its large budget deficit. Over the past few years, China has built up the world's largest foreign reserves, totaling $1.95 trillion, with some two-thirds of that held in U.S. assets, mainly Treasuries. As the global economy has weakened, the value of China's investments has decreased. "We have lent a huge amount of money to the United States," Wen said at a press conference in Beijing's Great Hall of the People. "I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises, and to guarantee the safety of China's assets."

    Another area of sensitivity is the value of China's currency, the yuan. With exports plunging in China, down 25.7% in February, and some 20 million in export factories out of their jobs, Beijing has slowed the appreciation of its currency. Chinese officials already reacted angrily to criticism that it was "manipulating" its currency made by U.S. Treasury Secretary Timothy Geithner during his late January Senate confirmation hearings. Signaling that Beijing has no intention of budging on the issue, Wen spoke out during the morning press conference. "I don't think the [yuan] is depreciating. Since we reformed the exchange rate in July 2005, the yuan has appreciated 21% against the U.S. dollar," the Premier said. "No other country can put pressure on our country to depreciate or appreciate the [yuan]."

    Trade Protectionism?

    China's leaders are also speaking out against what they see as "surging" protectionism, as Wen described it during the Mar. 5 opening of the National People's Congress. Over the past several months several of China's state-controlled newspapers have editorialized against "buy American" rules in the U.S. stimulus plan. "If a country only buys products that it produces itself, and forbids the import of other countries' products without reason, this suggests a move to trade protectionism," Chinese Commerce Minister Chen Deming said on Mar. 10. The most recent target of Beijing's ire: U.S. restrictions on the import of Chinese poultry. "I believe that any trainee with a preliminary knowledge of the WTO disciplines will tell that this section violates the basic rules of the WTO," a Chinese trade official said, referring to the ban, at a WTO meeting in Geneva on Mar. 12, according to official news agency Xinhua.

    Along with the tough talk, Beijing is expressing confidence about China's ability to weather the global recession. While conceding that China will face challenges in reaching a planned-for 8% gross domestic product growth this year, Wen said he expected ultimate success. And while Beijing did not announce plans to expand the size of its $586 billion stimulus as some had anticipated, China has the ability to spend more, since it has targeted a relatively small budget deficit of 3% of GDP for this year. "We have prepared enough ammunition and we can launch new economic stimulus policies at any time," Wen said.

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  • B-School in a Recession, With Family

    B-School in a Recession, With Family

    Libby Smith toured Emory University's Goizueta Business School when she was pregnant and arrived on the Atlanta campus this fall with her six-month-old baby, Jackson, in tow. In between changing diapers and playing with her son, she juggled schoolwork, an internship search, and a long-distance relationship with her husband, Rob, an army operations officer stationed two hours away at Fort Benning. Says Smith: "It's been harder than I thought it would be."

    Now a new worry is surfacing. With her husband's stint in the military set to end in six months, the couple, who recently purchased a home in the Atlanta area, soon won't have a paycheck coming in unless Rob finds a job fast—no mean feat in a crumbling economy. With mortgage payments to meet and looming student loans, Smith has taken to "living a little cheaper," clipping coupons and buying supermarket-brand paper towels instead of Brawny. Though she has a summer internship at consulting firm Booz Allen Hamilton, Smith, 29, is wary of the future. "It's stressful to think that nothing is guaranteed anymore," she says.

    Juggling school and family life has never been easy, but the economic downturn is adding a new wrinkle. In recent years, as B-schools have gotten better at helping families make the transition to academic life, more students with partners and young children have headed to campus. To accommodate the needs of these students and perhaps entice them away from rivals, B-schools have created organizations for spouses and partners, launched child playgroups, and offered job and relocation assistance. Some schools let spouses audit classes, invite them to school functions, and offer free counseling services and support groups—perks that will become more essential in lean economic times, particularly for partners of newly admitted students. "The networking and job assistance has been ramped up because people are a little more nervous," says Wendy Metter, associate director of student affairs at Northwestern's Kellogg School of Management. "They want help finding a job now, as opposed to June."

    As the economy unravels, that's not all they'll need help with. Long-distance relationships may become more common as partners stay behind to keep jobs rather than risk losing the family's sole source of income. And relationships could grow more strained as students struggle to find jobs in an increasingly grim market. Nearly 56% of B-schools reported a significant drop in recruiting activity on campus this winter, according to a survey by the MBA Career Services Council, an association of business school career officers.

    Schools are preparing for the worst. At Dartmouth's Tuck School of Business, where 40% of students have partners or young families, the therapist who runs the partner-support group will keep a closer eye on students this spring. And at the University of Virginia's Darden School of Business, which has 65 married students among this year's class of 333, the student affairs office is posting information about signs of depression and how to help friends struggling with it.

    For students with young families, the pressure can be intense. Richard Core, 27, a second-year student at Darden, is in the midst of a wide-ranging job search that so far has produced no offers. As he nears graduation, his search has taken on an "added layer of stress" because he feels responsible not only for himself but for his three-month-old son, Trip, and wife, Mandy, on maternity leave from her finance job. The couple has contingency plans to move in with Richard's parents in New Jersey if the search drags on. "There's a bit more urgency to finding a job now," says Core, who worked at Merrill Lynch (MER) before business school. "I'm at the stage of life where making sure I have things like health insurance is more important than I ever realized."

    Even students who land jobs feel insecure. Monte Searle, 39, at Indiana University's Kelley School of Business, moved 1,500 miles with his wife and three children, ages 10, 12, and 14, from their home near Salt Lake City to Bloomington. Searle's decision to go to B-school has strained family finances. His wife, Tanya, took on a 30-hour-a-week job as a teacher's aide to make ends meet. The couple has cut costly organized sports activities for the children, and their daughter pays for half of her piano lessons with babysitting money. Books come from the library, not Barnes & Noble. "We've cut back as much as we can without the kids feeling like they're really sacrificing a lot," Tanya says.

    The family was relieved when Monte got a job offer in the corporate finance department at Dow Chemical (DOW), but they have lingering concerns, from the stability of the job market to whether they'll be able to get a mortgage. "I've seen worry and anxiety on my children's faces, and I'm definitely still worried to see how this plays out," Searle says. "It's something that's always in the back of my mind."

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  • Thursday, March 12, 2009

    MySpace: A Playbook for Beating Facebook

    MySpace: A Playbook for Beating Facebook

    Hunched over a small conference table, MySpace CEO Chris DeWolfe is in full spin mode. MySpace, which DeWolfe co-founded before selling it to News Corp. (NWS), has been getting a lot of bad press of late. Key executives are fleeing, the social network's chief rival, Facebook, is signing up millions more new users while MySpace is essentially flat, and rumors are flying that Google (GOOG) next year will pull out of—or dramatically cut—an advertising pact that provides nearly 40% of MySpace's revenues.

    That's why DeWolfe, a resolutely earnest chap even in his trademark pointy-toed boots, is eager to talk about the new services being readied to help pump up MySpace's revenues. The year-old MySpace Music, he says, will soon allow its 18.1 million music customers to purchase concert tickets and band merchandise. MySpace is beefing up its game offerings, and will start selling "virtual" merchandise, including cupcakes people can send to friends and loved ones. "Too bad you're not here a month from now," says DeWolfe, 42.

    Of late, DeWolfe and his team have been focusing more on making money than attracting millions of new users. As such, he says he "has been too focused on creating a profitable site" to worry about the recent spate of bad news. "I don't know Facebook's profitability," he adds. "But if I could have 300 million people using MySpace or be profitable, I would take profitability."

    "A Huge Audience to Monetize"

    DeWolfe says MySpace is making money. But News Corp. acknowledges that hefty spending on new features and an international expansion crimped earnings, which it doesn't break out. What's more, Wall Street has been largely unmoved by the MySpace story for the last year, when the company's revenues came up short and News Corp. failed to reach the $1 billion goal it had set for its Fox Interactive Media group, of which MySpace is by far the largest piece. Analysts figured FIM came in at closer to $900 million. And if Google pulls out of the advertising deal, MySpace could find it difficult to find another search engine willing to match the $250 million MySpace will receive this year from Google.

    It's true that Facebook, with 236 million unique visitors worldwide in January, is now bigger than MySpace, which has 126 million globally. But MySpace maintains its edge on Facebook in the U.S., based on unique visitors and time spent on each site. As of January, each MySpace visitor spent an average 266 minutes on the site in a month, vs. 176 minutes on Facebook, according to the tracking firm ComScore Media Metrix. Marketers like that because it means people are hanging around long enough to see their ads. DeWolfe wants to keep visitors on MySpace even longer. His executives have been signing deals with TV producers to make more of the six-minute shows it needs to siphon off users from YouTube, and they are working on new video games to hike traffic on MySpace's game site.

    Down the road, DeWolfe is planning advertisements for the mobile world where MySpace has more than 50 deals worldwide. Meanwhile, MySpace Music is experimenting "with five or six things," including an online radio service for its users, says its president, Courtney Holt. "Everything we do now is focused on generating revenue," he says. "We have this huge audience that we intend to monetize."

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