Google Settles with Authors

After more than two years of negotiation, Google (GOOG) has settled lawsuits filed by the Authors Guild and five publisher members of the Association of American Publishers against a Google program that has scanned millions of library books.

The agreement, subject to approval by the U.S. District Court for the Southern District of New York, provides for the establishment of a book-rights registry, through which scanned books can be viewed in part or in whole and payment made to copyright holders. As part of the deal, Google will pay $125 million to rights-holding plaintiffs and to cover legal fees. Of that amount, $30 million will go to set up the registry.

Google ran afoul of book publishers and authors when some of the libraries participating in its book-scanning program opted to scan full texts of copyrighted books (BusinessWeek.com, 10/20/05). Publishers argued that scanning an entire book without permission, and storing it on a Google server, violates copyrights. Google argued that because it's creating what amounts to a massive card catalog and would let users view only brief excerpts of books, it shouldn't have to get express permission to scan the books.

"A 21st-Century Solution"

All parties to the agreement expressed enthusiasm about the settlement during a conference call with reporters. "This could be the biggest book deal in U.S. publishing history," Authors Guild Director Paul Aiken said. "Millions upon millions of books will find a new home among readers online."

"This is an innovative, 21st-century solution," added Association of American Publishers Chairman and Bertelsmann Co-Chairman Richard Sarnoff. "The registry will function as an authoritative rights-holder database, distribute money, and mediate disputes."

David Drummond, Google's chief legal officer, noted that "7 million books are now searchable through Google Book Search, and we're looking forward to many times that number."

Payments Split Three Ways

The registry will manage two types of online book searches. Individuals will continue to view samples of in-copyright books much as they can today, and purchase the work online. Institutions such as colleges and universities can pay for subscriptions to the registry and have complete digital access to millions of scanned books. Participants in the conference call noted that the program will make it possible for small colleges and universities to have access to the trove of books in major research libraries at such institutions as the universities of California, Michigan, and Wisconsin, and Stanford University.

In all cases, payments will be split three ways, with Google getting 37% of the revenue and, after the subtraction of an administrative fee by the registry, the publisher and author splitting the remaining monies. Certain advertising revenues will also be shared with the rights holders, Drummond said, according to the same proportional split. But no ads will appear in the actual pages of books, he noted.

The registry is several months away from being a reality. Overall, the development seems likely to encourage the sale of books in bits and pieces, or "chunking," as the practice is coming to be known among book publishers, along with "transforming," or delivery of books in a variety of formats, including downloads to e-book readers or for print-on-demand. "The real victors are the readers," Google co-founder Sergey Brin said in a prepared statement. "The tremendous wealth of knowledge that lies within the books of the world will now be at their fingertips."

Lawsuits Date to 2005

The publisher plaintiffs, who filed suit against Google in October 2005, included Pearson Education, Penguin Group, John Wiley & Sons (JWA), Simon & Schuster, and the McGraw-Hill Companies (MHP), publisher of BusinessWeek. The Authors Guild class action was filed in September of that year.

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Marcial: FPL Group, an Attractive Power Play

Who among the beleaguered investing community would be so bold as to predict the market's bottom at this point? Not very many, that's for sure. It's foolish, at best, to make such a prediction amid the current financial and economic turmoil, argue many of the best strategists on Wall Street.

But several stouthearted pros don't buy that, and they're now placing their money behind their forecasts that the market is finding a floor. (While it may not be a sure signal that stocks have touched their bear-market lows, the Dow Jones industrial average posted its second-biggest point gain ever—889 points, or nearly 11%—on Oct. 28.) "We have become more aggressive in buying stocks because we strongly believe the market is beginning to turn around and starting the process of pulling ahead to much higher ground," says Carl Birkelbach, president of Birkelbach Investment Securities.

Birkelbach has made several prescient market calls in the past. In September 1981, when the Dow was hovering at around 800, he placed ads in newspapers calling himself the "Lone Bull" and predicting the market had hit bottom and would rise to much higher levels. His forecast: The Dow will hit 8,000. Birkelbach did not specify the timing of the market's move, but 10 years later, in 1998, the industrial average shot up to 8,000—and then surpassed that level some months later.

Signs of a Bottom?

Birkelbach uses both fundamental measures and technical indicators in gauging the direction of the Dow. In September 2002, when the Dow stood at 7,900, he made another daring prediction: The Dow would hit 14,000 in the years ahead. True enough, in early October 2007, the benchmark index soared to more than 14,000. (Birkelbach, however, didn't predict whether stocks would retrench after such big moves.)

That brings us to October 2008 and the market's stunning fall from its year-earlier peaks. Here is Birkelbach's brief analysis of why he assumes stocks are reaching a trough. He notes that the European and Asian markets have retreated from their highs by about 40% to 50%, and the Dow has lost nearly 40% this year. In the past, he says, such huge declines presaged a market bottom. "Much of the financial distress and economic meltdown have already been discounted by the market, given such a massive market decline worldwide," he says.

If the worst of the bear's rampage is behind us, as Birkelbach figures, what is he buying? His current favorite: FPL Group (FPL), a public utility company that generates, sells, and distributes electric energy using natural gas, nuclear energy, and wind power. "It is the best and safest bet in these times of economic dislocation and financial stress," he says.

FPL's Florida Power & Light unit is the largest utility in Florida, serving about 4.5 million customers in the southern and eastern parts of the state. Its other unit, the unregulated FPL Energy, is the largest producer of wind power in the U.S., with a 30% share of the market at the end of 2007, generating 5,077 megawatts of wind power. FPL Energy is one of the largest U.S. independent power producers, generating roughly 16,000 Mw.

Core Holding

One other thing Birkelbach likes about FPL: its dividend yield of nearly 4%. "That is a comforting payout to shareholders" amid the current turmoil, he says. So the stock deserves to be a core holding in every portfolio, he says.

The stock, which climbed to a high of 72 a share in 2007, has been clobbered along with other equities and struck a low of 37 on Oct. 10. It has since edged higher, to 45 on Oct. 28. The company posted a 45% jump in earnings in the third quarter, to $774 million, on revenues of nearly $5.4 billion, in spite of the deteriorating economy, housing slowdown, and hurricane conditions in Florida that adversely affected its utility operations there.

But the stock's drop may indicate investors have discounted the weakness in the Florida market, where the growth in electric usage has slowed. "The stock is attractive for total return," says Justin McCann, an analyst at Standard & Poor's Equity Research, who recently upgraded his recommendation on FPL to a buy from a hold, although he reduced his earnings estimates by 5 a share for both 2008 and 2009. He now projects earnings of $3.84 a share for 2008 and $4.15 for 2009. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

"At the current share price, we consider FPL to be an attractive buying opportunity for investors with a 12- to 18-month time horizon," says Timothy Winter, senior analyst at investment firm Jesup & Lamont (JLI). He figures the shares are worth 55 a share. FPL has added 499 Mw of wind power generation capacity so far this year and continues to expect 1,300 of new wind capacity in operation by yearend 2008, Winter notes. However, the company scaled back its growth plans for 2009 because of the poor capital-market and economic conditions. Its approach to the problems will be to maintain flexibility to quickly ramp up projects should conditions improve and further reduce investment should conditions deteriorate, says Winter. He believes the annual dividend of $1.78 a share is "secure and growing."

Because of the economic and housing problems in Florida, says Winter, investors should "look beyond the valley of the next 12 months." They will be rewarded, he figures, when the economy improves. Given the company's growing investments in renewable energy, FPL "is the best-positioned power company to capitalize on the long-term macrodynamics of a future green-energy world," he says.

With the shares down some 40% from their all-time high of 73.75, the prospect of the stock recovering a lot of lost ground is part of FPL's appeal at its current price. You might say it's poised for regeneration.

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Testing for Tech Literacy

On a recent Monday morning, the eighth graders in Chris Malanga's technology class at Riverhead (N.Y.) Middle School were hard at work constructing Web pages. Scattered across computer screens in this classroom about 75 miles east of Manhattan were Web pages reflecting students' distinct personalities and interests. One blared rap music. Others boasted purple text over garish background images. These were no mere MySpace (NWS) profile pages, constructed with a few clicks of the mouse from a menu. These students built their pages from scratch, writing pure HTML in a text file. "They like that it's something they learned in school that they can take home and use to jazz up their MySpace [pages]," Malanga says.

Before they embarked on Web pages, the students crafted tiny cars complete with bumpers, airbags, and seat belts designed for an especially fragile passenger—an egg. They watched videos on auto design, drafted 3D models of their cars using Google (GOOG) Sketchup, a free online application, and spent hours gluing together pieces of wood, cardboard, rubber bands, and balloons.

Technology classes like this are entering the curriculum in schools around the country, but they're not common enough, say educators, company executives, and policymakers. In a bid to make technology literacy more widespread, the National Assessment Governing Board this month announced plans to develop the first nationwide assessment of technological learning in U.S. schools. NAGB, a government-commissioned independent council, awarded nonprofit WestEd, a 40-year-old educational research and service group, a $1.86 million contract to work with educators, school officials, the business community, and the public on constructing the test, set to hit schools in 2012.

Laying a Foundation

NAGB officials and others hope the test will help reverse the slide in U.S. test scores and enrollment in such subjects as science, math, and engineering, and ultimately address the more generally waning competitiveness of the U.S. in technology. "If you look at the business community and post-secondary work, those sectors really need students who have science, technology, and engineering backgrounds to fill jobs in these new and dynamic fields," says NAGB Executive Director Mary Crovo.

Enrollment in graduate-level computer science and engineering is dropping, says the National Science Foundation. The number of full-time graduate enrollments in computer science and engineering courses decreased 11%, to 29,800, in 2004, the last year for which data is available, since peaking in 2002, according to the foundation. The number of foreigners with bachelor's degrees holding jobs in U.S. science and engineering almost doubled, to 19%, from 1990 to 2005.

No standardized test alone can reverse those trends, but backers hope it will lay a foundation for renewed and deeper emphasis on science and engineering at the earliest levels. To ensure the test's efficacy, San Francisco-based WestEd in December will convene a panel of advisers that includes instructors and representatives of such tech bellwethers as Intel (INTC) and Google as well as other yet-to-be-named companies in manufacturing, civil engineering, and other areas. "Our world is changing, the way we do business is changing, our reliance on each other is changing," says Paige Kuni, worldwide manager of K-12 education for Intel's Education Initiative and a member of the panel. "Kids have to be able to master those types of skills to be ready for a U.S. economy when they come out of the school system."

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Focus Stock: Tough Times Favor Family Dollar Stores

In a difficult economic environment, we look for retailer Family Dollar Stores (FDO; recent stock price, $25) to increase sales to its predominantly lower-income customers by expanding its assortment of daily necessities, including refrigerated and shelf-stable foods, and by improving product quality.

We also expect Family Dollar to benefit from higher-income customers trading down to lower-priced basic goods. In addition, we note easier same-store sales (sales results for stores open more than 13 months) comparisons for the company over the next few quarters and expect to see a lift in average customer transaction value, a same-store sales driver, from Family Dollar's planned acceptance of credit cards in about half of its stores this holiday season.

By providing customers with compelling values and shopping convenience while aggressively managing its cost structure, we expect the company to maintain its historical record of stable sales and earnings growth, which is reflected in its S&P Quality Ranking of A+. From fiscal 2005 (August) through fiscal 2008, earnings per share increased at a compound annual growth rate (CAGR) of 8%. We project 7% EPS growth in fiscal 2009 and a forward three-year CAGR of 12%. We look for the company to generate sufficient free cash flow to fund its operations, growth initiatives, and dividend program.

Prices Range from $1 to $10

The stock carries Standard & Poor's highest investment recommendation of 5 STARS (strong buy).

Based in North Carolina, Family Dollar operates a chain of over 6,500 retail discount stores in 44 states. The company describes its typical customer as a woman in her mid-40s who is the head of her household and has an annual income of under $30,000. Family Dollar stores are operated on a no-frills, self-service basis, and carry an assortment of consumables such as snacks and food, household chemicals, paper products, health and beauty aids, and pet food and supplies; home products, including blankets, housewares and home decor; family apparel and accessories; and seasonal merchandise and electronics.

Unlike some dollar stores that are constrained by a maximum $1 price point, prices in Family Dollar stores range from under $1 up to $10. The once cash-only stores now accept PIN-based debit card payments in most locations. Food stamp and credit-card acceptance is also being rolled out. Family Dollar expects to accept credit cards in about half its stores this holiday season. In our view, broader tender options offer the company an opportunity to improve its share of customer spending as shopping is more convenient and available cash does not limit basket size.

Increasing Its Marketing

Store inventory is made up of both regularly available merchandise, which provides consistency in product offerings, and a frequently changing selection of brands and products that Family Dollar acquires through closeouts and manufacturer overruns at discounted wholesale prices. Low product costs and store overhead enable the company to sell its value-priced merchandise profitably.

Family Dollar's primary growth drivers are same-store sales and chain expansion. In fiscal 2008, same-store sales rose 1.2%, reflecting an increase in average customer transaction value and flat customer traffic, as measured by the company in number of register transactions. By quarter, same-store sales were down 1.0% in the first quarter, flat in the second quarter, up 0.1% in the third quarter, and up 5.6% in the fourth quarter. In our opinion, customers are spending more due to an expanded assortment of consumables and "treasure hunt" items that add an element of excitement and interest to the shopping experience. Family Dollar has also increased its marketing efforts to emphasize the value and shopping convenience it offers.

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Yen Keeps Rising as Japan Stocks Hit 26-Year Low

The global credit crunch and market rout are clearly scaring Japanese officials. On Oct. 27, Tokyo took the unusual step of rallying the world's richest nations to warn investors that the Japanese currency's rise to its highest level in years poses a threat to the global economy. In a statement, the Group of Seven specifically singled out the yen's "recent volatility" as a possible factor in undermining "economic and financial stability."

The G-7's show of solidarity came hours after Japan's Finance Minister, Shoichi Nakagawa, used strong language condemning the yen's sharp rise last week to a 13-year high against the dollar and six-year high against the euro. Traders viewed the remarks as a signal that Japanese financial authorities stood ready to intervene for the first time since early 2004.

Action can't come soon enough in the view of many market watchers. "This massive strengthening in the value of the Japanese yen," Standard Chartered Bank (STAN.L) currency analysts wrote in an Oct. 24 report, "is coming at exactly the wrong time." They predicted "it may not be long before we see the Japanese authorities intervene to limit the slide."

Nikkei Index Falls 6.4%

Help may be on the way, but it didn't arrive today. With critics complaining that the comments from Nakagawa and the G-7 had little impact, the yen kept on gaining strength against the dollar, trading at around 93 yen and the euro at 116 yen. The rising yen, combined with concern that plans by Japanese banks to raise capital may dilute shareholdings, knocked Japan's benchmark Nikkei 225 stock index to its lowest level in 26 years. The index finished 6.4% lower, at 7,162.90, a level not seen since October 1982. This month alone, the Nikkei has given up 36%; since January, it has fallen 53%.

The concern is that a strong yen and global slowdown will end up hurting Japanese exports, which have long been the one bright spot in the domestic economy. In the past three months, the yen has risen 19% against the dollar, 32% against the euro, 33% against the British pound, and 37% against the Brazilian real. By contrast, the Korean won is down more than 45% against the dollar this year, giving Korean exporters a leg up (BusinessWeek.com, 10/24/08) on the Japanese.

Unless the yen suddenly retreats, economists think Japan's economy is headed for a recession. "Over the next 12 months, we now expect Japan's gross domestic product to shrink by 0.4%," says Japan Research Institute senior economist Hideki Matsumura.

For months it seemed that Japan's biggest banks had largely avoided the U.S. subprime mortgages-related losses, especially as Japanese financial institutions were buying up ailing rivals. After the collapse of Lehman Brothers, Nomura Securities bought its European and Asian operations, while Mitsubishi UFJ spent $9 billion on a 21% stake in Morgan Stanley (MS).

Bleak Profit Outlooks

But last week, Sony's (SNE) profit warning highlighted the problems Japan Inc., and especially its exporters, faces. The technology giant slashed its annual operating profit forecast (BusinessWeek.com, 10/23/08) by 57%, and said there could be more currency-related pain if the yen holds steady.

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The Housing Crisis Spreads to China

Autumn is usually the busiest time for real estate salesman Wang Yaodong. Last September and October, for instance, he sold more than a dozen luxury townhouses in western Shanghai, but this year he has sold only one. "Everybody is waiting for prices to fall," Wang says.

Wang's lament is a common refrain in China these days. During the Golden Week holiday in early October, normally peak season for home buying, sales in the southern city of Shenzhen fell by a third from the previous week and the average selling price was nearly halved. In Beijing, software developer Answer Li has been looking at houses in the $100,000 to $200,000 range, but he's holding off because he fears further declines. "I don't dare take the plunge and buy a home," Li says.

Across China, property sales fell 15% in August over the previous year. They're off more than 55% in Beijing and by 39% in Shanghai, reports the National Bureau of Statistics. Prices across the country registered a slight decline in August, the first time in years they haven't increased. In the south, where the downturn began last year, prices are off by 30% in the past 12 months. "There is a big likelihood that next year will be even lower," says Li Yong, general manager of real estate brokerage Century 21 China in Changsha, an industrial city located 700 miles west of Shanghai.

That's a dramatic shift. Since 2005, Beijing had sought to rein in housing prices with measures such as mandatory down payments of at least 30% and a steep tax on profits earned from flipping homes within five years of purchase. Those measures are starting to bite and—with economic growth slowing and the stock market down by more than 60% this year—there's less demand for housing than developers had anticipated.

EASING THE RULES

Beijing is scrambling to keep prices from falling too fast. On Oct. 22 the government exempted land sales from value-added tax; cut down payments for first-time home buyers to 20%, from 30%; and slashed a property transfer tax for new buyers to 1%, from as much as 3%. After five years of tightening credit, the central bank has cut interest rates twice in the past two months and eased reserve requirements at banks to promote more lending. And some cities have introduced subsidies for buyers of small homes and allowed mortgages of up to 30 years, compared with a previous maximum of 20 years.

A prolonged drop in property prices could create big problems for China. Real estate accounts for 25% of all investment and roughly 10% of gross domestic product in the mainland, about double the level in the U.S. Because cities in China often pay for infrastructure by selling land to developers, property-related income accounts for as much as a third of government spending, Merrill Lynch (MER) estimates. "Beijing cannot afford a collapse in the housing sector," declares Jing Ulrich, China equities chief at JPMorgan in Hong Kong.

The slowdown in sales already is taking a heavy toll on China's more than 60,000 developers. Many borrowed heavily to finance growth as real estate values skyrocketed. Now, with prices headed south, dozens have gone belly-up in recent months. Typical of the more troubled companies is Zhejiang Zhonggang in the eastern city of Jinhua. Its chairman skipped the country in October, leaving behind some $20 million in debt and dozens of angry families locked out of homes they had paid for. (The company couldn't be reached for comment.) Next year is looking very tough," says Christopher Lee, director of corporate ratings at Standard & Poor's (MHP) in Hong Kong. "We could see some high-level defaults."

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The End Is Not Here

How does today's financial crisis compare with the beginning of the Great Depression and the 1930s? — Landon Romano, Johannesburg

Without doubt, you can pick a statistic here and a data point there, lump them together, and cook up a case that it's 1929 all over again.

But you shouldn't.

Yes, the current crisis is dire and will certainly worsen. In previous columns, we've predicted tough economic conditions for the next several quarters as the financial system's deleveraging is followed by a consumer deleveraging. But for many reasons, we don't see a second Great Depression looming. To paraphrase Franklin Delano Roosevelt, we believe the main thing to be pessimistic about today is pessimism itself.

To repeat: We know that real pain lies ahead. But we believe that when the pain eases—and it will—the global economy will be stronger and sounder than ever. We just have to get there—and we will—provided we stop fixating on, well, the exact question you pose.

Not to criticize you for asking! You're not alone, and we appreciate the chance to counter some financial journalists and all-purpose pundits who, like weather forecasters in a hurricane, are becoming giddy as they describe the biggest "storm" of their careers. Their excitement is understandable, but some perspective has been lost in the fray.

Let's start with the comparisons to the conditions that surrounded the decade-long collapse some 80 years ago. Sure, current times hold similarities to this period, but they're dwarfed by the differences. In 1930 the protectionist Smoot-Hawley Tariff Act ushered in years of international retaliation and discord. Today's crisis is marked by a high degree of free trade and global cooperation. In 1933 the National Industrial Recovery Act encouraged labor and industry cartels. The result was a decline in U.S. competitiveness—again, hardly the current case: American companies have never been in better fighting form. Finally, a second Great Depression is unlikely because of the institutions created to prevent one, foremost being the Federal Deposit Insurance Corp., with its authority to insure deposits, critical to stabilizing the banking system.

Instead of another Depression, some doomsayers predict a deep recession like in the early '80s, when U.S. GDP shrank in five quarters over a two-year span, with the worst quarter posting a 7.8% slide. Inflation neared 15%, the prime rate was at 21.5%, and unemployment hit 11%. Our indicators will worsen, but such numbers are miles from where we stand.

Others say we're marching into French-style socialism. Au contraire. The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois National Bank but sold it just 10 years later to Bank of America. In 1989 it created the Resolution Trust Corp., which cleaned up the savings and loan crisis, then quickly packed up. TARP, the federal bailout plan, looks to be no exception, as its loan terms give banks flexibility and strong incentives to pay off the government within five years.

Our bottom line is this: Managers should stop looking back in search of the future. It's counterproductive, if not dangerous. To get through this crisis, leaders need to talk about reasons for confidence. America is loaded with energy and creativity; it's a culture that exalts entrepreneurs, who drive every recovery. Its system of higher education is envied worldwide. The country is brimming with strong companies with sustainable cash flows. And as daunting as the downturn is sure to be, it will also create vast opportunity as people heed Warren Buffet's advice: "Be fearful when others are greedy, and greedy when others are fearful."

Look, we're not Pollyannas. It's human to view your own difficulties as "the worst of times." But this painful but necessary correction will result in a healthier, deleveraged society with a renewed focus on productivity, innovation, and better governance. The end is not here. A new beginning awaits.

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