BusinessWeek (August 8, 2005)

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GOOGLE’S TALENT GRAB (P. 28) l COOL TOOLS FOR COLLEGE (P. 74)

AUGUST 8, 2005

www.businessweek.com

THE STATE OF SURVEILLANCE BY CATHERINE YANG (P. 52)

AND NOW FOR OUR NEXT ACT. HEADLIGHTS THAT SEE AROUND CORNERS.

TH E PASS I O NATE PU RSU IT O F PER FECTI O N

No, it’s not the latest in espionage equipment. Just our way of helping you see whatever may lie around the next bend. These ingenious headlights* respond to curves by pivoting up to 15 degrees as you turn, acting in much the same way as your peripheral vision does. Allowing you more of a chance to respond. At Lexus, we stay ahead of the curve, so you can, too. To learn more about our pursuit of perfection, please visit lexus.com.

*Available on select models. © 2005 Lexus.

August 8, 2005

52

Cover Story 52 The State of Surveillance

STATE OF SURVEILLANCE

Not even George Orwell could have imagined a world filled with camera phones, nanny cams, and satellite photos. And new tools on the way will identify and track just about anyone, anywhere. Forget fingerprints—iris scans, DNA probes, and systems that recognize gaits and odors are in the works

Since the London bombings, projects to improve security technology have a new urgency

57 In Dataspace, No Word Goes Unheard

News: Analysis & Commentary 28 ‘Coolest Problems, Smartest People’ Google and Yahoo! are luring hundreds of top engineers from high tech’s best laboratories

31 Microsoft: More Payouts, Please It declared the largest one-time dividend ever. Now investors are clamoring again

32 States vs. the Feds: All Eyes on Roberts

74

28

The tops in high tech for the college-bound

Google and Yahoo! are on a talent hunt

DORM HAUL

STAR SEARCH

The fractious debate over federalism will be be center stage at the Supreme Court nominee’s confirmation hearings

34 Who the Heck is Harriet Miers? The White House counsel had a strong voice in picking Roberts, sources say

35 Where Labor Goes from Here The unions that are leaving the afl-cio will focus on low-wage service jobs that can’t easily be shipped overseas BusinessWeek (ISSN 0007-7135) Issue number 3946, published weekly, except for one week in January and one in August, by The McGraw-Hill Companies, Inc. Executive, Editorial, Circulation, and Advertising Offices: 1221 Avenue of the Americas, New York, N.Y. 10020. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Canada Post Publication Mail Agreement Number 40012501. Return undeliverable Canadian addresses to: DPGM Ltd., 2-7496 Bath Road, Mississauga, ON L4T 1L2. Email: bwkcustserv@cdsfulfillment.com Postmaster: Send address changes to BusinessWeek. P.O. Box 8418, Red Oak, IA. 51591-1418.

2 | BusinessWeek | August 8, 2005

(cover) eye by digital vision Ltd./superStock; iris by dennis cooper/zefa/corbis; composite by david rudes/bw; (bottom right) david paul morris/getty images

Echelon eavesdrops on cell calls, e-mail, and Web uploads, looking for clues

64

36 Delphi and GM: High-Stakes Poker How far will the parts maker go to force gm’s hand?

38 Head of Steam on the Factory Floor

GOLDEN OLDIES

Warner Music’s all-star crew has racked up some 160 years of hitmaking

Profits are up, capacity’s tight, and companies are building new plants

39 Sony: Bothered and Bewildered Bewitched and others haven’t done the trick this summer. Can Stealth?

40 In Business This Week

International Business They’re wildly popular, but sensitive subjects still face state scrutiny

Information Technology

44 Commentary: The Yuan Grows Up

68 How Motorola Got Its Groove Back

42 China: Blogs Under Its Thumb

Now untethered from the dollar, it could develop into a major world currency

45 Greece: Shipping’s Young Tycoons They’re bringing transparency to an industry long shrouded in secrecy

46 Russia: The Young and the Patriotic A large percentage of the country’s under-30s are Putin-loving nationalists

The Corporation 48 A Bind Over Stents A rare glitch with drugcoated stents could hurt Boston Scientific and Johnson & Johnson

50 THE BUSINESSWEEK FIFTY

The Best Performers

Finance 60 The Exchanges Duke It Out Revenues are the prize as the nyse and nasdaq battle for listings

62 Wall Street’s New Alchemist How buyout specialist Glenn Hutchins is shaking up the securities industry

Entertainment 64 Warner Music’s Oldies But Goodies Can legends Ertegun, Holzman, and Stein find stars to make Warner sing?

Sports Biz 66 The Golden Boy’s New Bout Oscar De La Hoya builds a business empire

Columnists 21 Wildstrom: Technology & You

Inside the creation of a new rival to the ubiquitous BlackBerry

Student 2006: Microsoft’s education software comes up short

22 Fine: Media Centric Visible World’s micro-targeted ads aim to do an end run around TiVo. Too late

Management 71 B-School: Sidestepping the GMAT Many Executive mba programs waive the test. Will that water down the degree?

Social Issues 72 Radical Surgery for Medicaid? South Carolina Governor Sanford has a plan to slash costs—but a battle looms

Personal Business 74 Laptops for the College-Bound

23 The Barker Portfolio Molson Coors is suffering the summer blahs, but don’t expect them to last

25 Cooper & Madigan: Business Outlook U.S.: Don’t underestimate the consumer Britain: As growth slows, a rate cut ahead?

85 Marcial: Inside Wall Street

Ideas

88 Simpson: DAM! Water, Power,

The best of today’s notebooks

Politics, and Preservation in Hetch Hetchy and Yosemite National Park

77 All-in-One Printers

89 Viewpoint

These models can copy, scan, and sometimes even fax

Hubbard: Happy 70th, Social Security— but you need to grow up a little

78 The Desktop Option It can pay to give up portability

80 LCD Monitors, Cheap With flat panels selling for under $600, who needs a tv?

Outside Shot BACK TO 90 Rattner: How the rich have gotten SCHOOL (much) richer

TECH

GUIDE Features

81 Tiny Cameras That Work Hard The latest ultracompacts’ nifty features

84 Compact Snapshot Printers They’re lunchbox-size and easy to use

7 UpFront 14 Editor’s Memo 16 Readers Report 17 Corrections & Clarifications 86 Index of Companies

www.businessweek.com America Online Keyword: BW August 8, 2005 | BusinessWeek | 3

WWW.BUSINESSWEEK.COM Updated every business day. BusinessWeek magazine is available online free to subscribers: Go to www.businessweek.com and follow instructions to register. Find links to the online-only highlights below at www.businessweek.com/magazine/content/05_32/online.htm

Special Report: The CEO Guide to Technology From smart phones and podcasts to smart networks and rfid tags, check out our picks of the 10 new technologies that should be on the radar of every chief exec. In this Special Report, you’ll find out the secret of using information technology to boost your company’s revenues 30% faster than rivals. And peer into the future with Mark Anderson, whose influential newsletter is read by Bill Gates and Michael Dell. Plus: Tips on finding the right cio. And a slide show

NU ME

Coming Up Next: SpongeBob SquareMeal? With childhood obesity under the microscope, children’s tv shows and food giants have begun promoting healthy eating to kids. Even the Cookie Monster is getting in on the act

Observers say the main event is not the most interesting part of this merger. The wireless carriers may be forced to buy some, or perhaps even all, of their affiliates, adding billions to their combined debt

Overworked? Here’s How To Get Even Author Corinne Maier discusses her subversive book—Bonjour Laziness—about life in big companies, and why small biz is different Tune in This Weekend for: | Whiskey’s Growing Popularity | Pricing College Student Gear Check your local TV listings for program dates and times. For video clips go to www.businessweekweekend.com 6 | BusinessWeek | August 8, 2005

(top to bottom) alberto mena/bw; courtesy nickelodeon; prnewsfoto; sipa press

The Sprint-Nextel Sideshow Battle

THE RESILIENT INFRASTRUCTURE: A GUIDE FOR THE FEARLESS. For today’s enterprise, the only constant is change. And keeping up with change is the ultimate challenge for a business faced with an endless series of paradoxes: making information both secure and available; being reactive and proactive simultaneously; responding quickly to both new threats and new ideas. The solution? A resilient infrastructure that lets you respond as rapidly to opportunity and innovation as you do to threats and disruptions; and where the elements that help keep your company up, running and growing — security, storage and recovery — are firmly in place. This is the ideal that has brought together Symantec and VERITAS to form a single company with a single goal: to help you build a fearless enterprise. For more information visit www.symantec.com/RI.

BE FEARLESS.

Symantec, the Symantec logo, VERITAS, and the VERITAS logo are U.S. registered trademarks of Symantec Corporation or its subsidiaries. Copyright ©2005 Symantec Corporation. All rights reserved.

It’s time to downsize downtime. It’s time for work to have a flexible address.

It’s time for Treo. TM

For the first time, Treo, Sprint, and Good come together to deliver an end-to-end mobile solution for business. The Sprint PCS Vision Smart Device Treo 650 – powered by Intel® Mobile Media Technology – combines phone, email and web access* with the Sprint Nationwide PCS Network. Plus, GoodLink means real-time wireless access to Microsoft Outlook for all email, calendaring, notes, and attachments.

Call 1-888-730-3282 by Sept. 10 to take advantage of special offers.

*Wireless service plan required. Email and web require wireless data services and additional charges apply. Coverage not available everywhere. Devices available from participating markets and may change depending on availability. Offer subject to change. May not be combinable with other offers. Screen image simulated. ©2005 Palm, Inc. All rights reserved. Palm and Treo are among the trademarks or registered trademarks owned by or licensed to Palm, Inc. Sprint, the diamond logo, and all Sprint trademarks are property of Sprint Communications Company L.P. Good, Good Technology, the Good logo, and GoodLink are trademarks or registered trademarks of Good Technology, Inc. All other marks are property of their respective owners.

“We’re running out of phrases to describe our results in recent quarters, but clearly they are unacceptable.” –Northwest CEO Doug Steenland, warning that the carrier may have to seek bankruptcy protection

EDITED BY DAN BEUCKE

WEB WORLD

was deliberate following Virtual Earth’s July 25 launch. The more likely culprit: musty satellite photos. Virtual Earth’s Silicon Valley images can be as old as 1991, explains general manager MICROSOFT HAS Stephen Lawler. never been keen to Google didn’t return acknowledge compcalls seeking the age etitors. But would it of its images. But go so far as to wipe Chris Sherman, Apple Computer off editor of SearchDay the earth? If you use newsletter, says msn’s new Virtual they’re newer. After Earth mapping site Google Earth to search for Apple premiered in June, headquarters at 1 Microsoft “rushed to Infinite Loop in get its beta version Cupertino, Calif., the of Virtual Earth out campus is consthe door. It definitely has rough edges.” picuously absent Lawler says from the aerial TWO VIEWS Microsoft will upphoto. Instead you Google vs. MSN date photos as users see the circular complain. Some shape of the street updates will come in the fall, superimposed over a nearly empty lot. Apple had built and when it rolls out photos taken at a 45-degree angle, moved in there by 1993. Put revealing more than rooftops. similar info into the rival Google Earth program and up But until Apple’s headquarters come into pops Apple headquarters. focus, conspiracy theorists Mac enthusiasts on Web won’t quit. –Dana Goldstein sites assumed the omission

(top right) photograph by brandtner & staedell/getty images

WISHING APPLE INTO OBLIVION?

THE BIG PICTURE

ON GUARD Here’s what a private security detail

costs for execs traveling to the Middle East. Multiply by three if you’re traveling to Iraq.

$1,000 $3,000 $6,000 Data: The Bordes Group Inc.

Airport pickup in an armored Cadillac Escalade. English-speaking driver and armed escort. All of above, plus a separate surveillance vehicle with driver and “shooter” for eight hours. Add a third “chase” car, and bodyguards in hotel room and hallway, for 24 hours.

NET LOSSES

Cyberfraud’s Hefty Price Tag THE BILL, OR PART of it, has come due for May’s big credit-card

heist. Fraudulent charges from the computer hack at Atlantabased credit-card processor CardSystems so far have cost JPMorganChase, the nation’s No.3 bank, up to $4 million, according to a source familiar with the matter. Chase execs won’t confirm or deny the figure, and CardSystems didn’t respond to requests for comment. While dwarfed by Chase’s $1.2 trillion in assets, the losses are the first to be revealed for a big bank from the recent spate of cyberscams. That’s not surprising. Outfits such as Chase, Bank of America, and Citigroup fear that acknowledging even small losses will undermine confidence in online banking. And criminals aren’t boasting. “Hackers and virus writers are not looking for big splashes,” says Gregg Mastoras, senior analyst at security firm Sophos. The CardSystems break-in allegedly compromised 40 million credit cards, though executives told Congress only 239,000 unique numbers were actually pilfered. Visa and American Express said on July 18 they will stop using CardSystems, though talks are expected to resume. The threat to CardSystems could increase as more banks tote up their losses. –Brian Grow August 8, 2005 | BusinessWeek | 9

THIS POD IS BROUGHT TO YOU BY... AL GORE SAYS he is trying to

democratize tv by involving viewers in creating shows. But the former Vice-President’s approach to advertising is just as radical. When his Current TV cable channel launches on Aug. 1, it will replace traditional halfhour or hourlong shows with 15-second to fiveminute GORE programs, or “pods,” to appeal Less ad clutter? to the thin attention spans of 18-to-34-year-olds. Advertisers sign up for 15month exclusive sponsorship of the 40 pods, which run in

groups of 10 every hour. Their logos will appear at the start of each segment, and a message of up to a minute runs at the end. Every hour, one sponsor runs a threeminute message. The idea is to sweep away ad clutter by cutting the number of messages, while breaking free from the 30second format. Advertisers say the approach is refreshing. But some are balking until they know more about the programming, how ads are structured, and how well cable systems respond. “Current is pretty forward-looking, but we’re taking a wait-and-see attitude,” says Jason Maltby, a co-president at ad agency MindShare. Gore’s revolution still needs to find some true believers. –Heather Green

MASS MARKETERS

LEVI’S DANGEROUS JEAN THERAPY LEVI STRAUSS launched its Signature discount jeans in 2003, insisting they wouldn’t cannibalize Levi’s Red Tab department-store jeans. But that distinction may be fraying. Under pressure to boost sales, Levi’s is rolling out Authentics, a line of $25 trendy jeans for Wal-Mart and other discounters. That’s dangerously close to similarlooking $30 Red Tabs. Sears and J.C. Penney say they’re not worried, and Signature chief Scott LaPorta insists the jeans “will not compete.” But Levi’s strategy may look threadbare if buyers flock to the knockoffs. –Louise Lee 10 | BusinessWeek | August 8, 2005

AFTERLIVES

WELL-HEELED Steve

Madden can afford more than prison shoes these days. Released in April after 41 months in federal prison for stock fraud and insider trading, Madden has a hefty 10-year contract from the shoe company bearing his name. An SEC filing, posted on Footnoted.org, says Madden’s salary as creative director drops $100,000, to $600,000. But he gets an “expense allowance” of $200,000, at least 2.5% of revenues for new ventures, and at least 10% of new licensing revenue above $2 million. The company says Madden’s pay is directly tied to performance. “Who better to guide the brand but the visionary himself?” says brand manager Robert Schmertz.–Jessi Hempel

DRAWN & QUARTERED

oliver stratmann/afp/getty images; cartoon by steven lait/oakland tribune/ang; frederick m. brown/getty images

AIRWAVES

FACE TIME DAVID SIFRY

PETROL PATROL

BIG OIL, FRIEND OF THE EARTH GASOLINE PRICES are sky-

David Sifry is relentless in evangelizing the importance of blogs to business. “You can either choose to listen or choose not to listen,” says Sifry, 36, CEO of Technorati, the leading blog search engine. “Either way, people are talking about your company, they’re talking about your product, they’re talking about your competitors.” In August, Sifry will press the point when he rolls out a subscription service for customized searches so users can track buzz about their companies. But with giants Google, Yahoo!, and MSN seemingly poised to enter blog search, it’s not clear whether Technorati, with its relatively tiny server capacity and name recognition, can compete. Despite big growth in the number of blogs it tracks— now 13.3 million—Technorati is slow and erratic, bloggers complain. Sifry attributes that to the ambitious task of tracking both relevance and timeliness. Sifry, a serial entrepreneur, says his goal “is to build something great.” Users, he’s betting, will follow. –Dana Goldstein

COME CLEAN The image oil is pushing

with goodies. bp’s “bp on the Street” campaign features interviews with reallife consumers saying things such as: “I’d love a clean environment. But give up my car? That’s like asking someone to give up chocolate.” On July 5, Chevron introduced a global campaign directing viewers to a Web site that counts off the number of barrels of oil consumed while you visit it. Environmentalists say the

ads amount to “greenwashing.” Jessica Coven, a global warming campaigner at Greenpeace, would rather see the millions spent to cut greenhouse gas emissions. Spokesman Tom Cirigliano says Exxon hasn’t increased its image-related ads, but says it has cut greenhouse gas emissions: “Since these figures aren’t ‘sexy’ enough to be picked up by the mainstream media... we’ve had to go to advertising to get our message to the public.” –Christopher Palmeri

THE STAT INN BUSINESS

WAKE UP WITH SHARES IN THE HOTEL MOST HOTEL CHAINS reward loyal guests with points toward a free stay. Jameson Inns is going one better: Patrons who stay more than three nights a year at its 123 Jameson or Signature Inns, in the Midwest and South, earn Jameson Inns shares worth 10% of their nightly room rate. The Atlanta hotelier thinks the program, launched with Securities & Exchange Commission approval on July 1,

12 | BusinessWeek | August 8, 2005

can generate more traffic: “I’ve heard enormous interest from customers, guests at hotels, people who are already staying with us, [and] people who have never tried us,” says David Vining, vice-president of marketing. The program already may have helped boost Jameson’s stock price. The shares trade at around $2.40— about a quarter of their 1998 high, but up more than 22% from Jan. 1. Jameson has also started a separate plan to sell stock, commission-free, to customers. Hey, if the hotel guests consider themselves shareholders, maybe they won’t steal towels. –Rishi Chhatwal

266 The percentage by which applications for trademarks containing the word “poker” increased in 2004. Gambling and casino-related trademark applications increased 42% and 28% respectively. Data: Dechert LLP’s 2005 Annual Report on Trends in Trademarks

(top right) allover photography/alamy; (bottom) ray vella/bw

WHO’S SAYING WHAT IN BLOGVILLE

high, and so are oil company profits. Maybe that’s why Big Oil seems so self-conscious these days. Industry ad spending is up sharply, which includes some imagepolishing public awareness campaigns. The four largest international oil companies, ExxonMobil, Chevron, BP, and Royal Dutch Shell, hiked their combined ad purchases by 37% through May, to $138 million, according to research firm TNS Media Intelligence. That’s after a healthy 15% increase for 2004, to $330 million. Oil companies say they are just trying to raise awareness of energy issues during a period of high prices. It doesn’t hurt, of course, that Congress has been mulling over an energy bill loaded

www.scm.com.ua

SCM. Rich in natural resources. Ukraine is one of the world’s richest sources of coal and iron ore. But there’s one other natural resource we attribute our success to. Our people. The 160,000 of them who have made System Capital Management one of the leading companies in Ukraine in less than five years and whose skill, hard work and determination have turned our country into one of the fastest growing economies in Europe.

HEAVY INDUSTRIES, RAW MATERIALS, ENERGY, BANKING, INSURANCE and much more...

Editor’sMemo

One Talented Trio

indispensable news, analysis, insights, and tools for business professionals worldwide, in whatever formats and frequencies serve them best. With this in mind, I’m pleased to introduce a trio of talented executive editors, whose areas of responsibility line up with this new approach. JOYCE BARNATHAN becomes executive editor for the global franchise, responsible for extending BusinessWeek’s reach. She will oversee existing line extensions, including our award-winning new SmallBiz magazine; manage editorial product launches; and ensure the integration of all BusinessWeek offerings across delivery channels. Simply put, Joyce will focus on the future. She has served as assistant managing editor since 1999, responsible for the Finance, Economics, and Personal Business departments. Before 1999 she was Asia regional editor and Hong Kong bureau manager. She has won five Overseas Press Club Awards and the National Headliner Award. Joyce is already working on some exciting new projects, so watch this space. JOHN A. BYRNE rejoins BusinessWeek as executive editor of the magazine, after more than two years as editor-in-chief of Fast Company magazine, where he oversaw both its print and online editions. In nearly 18 years at BusinessWeek, most recently as a senior writer, John wrote a record 57 cover stories—many focusing on management and leadership issues —and introduced important new features. He developed the idea of a monthly best-seller list, launched our industry-leading business school rankings, established and managed our ranking of best and worst corporate boards, and created our list of the most generous philanthropists. I’m confident that readers will benefit greatly from John’s proven commitment to journalistic excellence at both BusinessWeek and Fast Company. KATHY REBELLO becomes executive editor with responsibility for BusinessWeek Online. In this role, she takes the full-time job of directing the Web site’s excellent editorial team, a task she has been handling on a “part-time” basis for nearly a year. Kathy and her team have already improved the Web site dramatically, making it an essential daily read with fastbreaking news, sharp analysis, newly designed Tech and SmallBiz channels, reader reviews of products and books, and lively columns, blogs, and podcasts. Her latest offering is a beautiful and informative Innovation & Design channel, 14 | BusinessWeek | August 8, 2005

A-LIST New which is attracting lots of positive Executive Editors attention and which I urge you to Rebello, Byrne, check out. Kathy has served as an and Barnathan assistant managing editor since May, 2002, with responsibility for the magazine’s technology coverage. She is passionate about the Web and about the important and growing role of BusinessWeek in the online world—and it certainly shows (at businessweek.com). We’re also fortunate to have a talented group of assistant managing editors to direct the magazine’s week-to-week coverage of business. I’m delighted that Mary Kuntz and Ciro Scotti, formerly senior editors, are moving up to join Frank J. Comes and Robert J. Dowling on this team. Congrats to all. Now, back to work!

editor-in-chief

casaburi.com

In the four months I’ve had the privilege of guiding BusinessWeek, we’ve focused a great deal on how to serve readers better. We’ve studied the changing ways businesspeople get information in the Digital Age—from print to television, online, mobile phones, and beyond. And we’ve moved toward a broader, more reader-focused understanding of our mission: not only producing the best possible weekly magazine but also providing

> With Sprint, BMW is beautiful.

Innovation is at the heart of BMW, which is why they partnered with Sprint to help roll out the all-new 3 Series in a way that was as innovative as the car itself. Together, they introduced wireless kiosks to find hard-to-reach, first-time buyers in unexpected places. Powered by Sprint PCS Connection CardsTM, these kiosks let potential customers experience and interact with BMW, then instantly relay their contact information to dealers. And to date, Sprint has helped generate more than 56,000 leads for BMW. With Sprint, more people experience BMW, and more cars roll off the line. Engineering a new way to drive sales – now, that’s beautiful. With Sprint, business is beautiful. SM

> Visit Sprint.com/beautiful for case studies or call 877-777- 5568 > Wireless. Data. Voice. IP.

©2005 Sprint. All rights reserved. Sprint and the diamond logo are trademarks of Sprint Communications Company L.P. The BMW “Roundel,” “Kidney Grill” and “3 Series” are registered trademarks of BMW AG.

ReadersReport In its quest for taxpayersubsidized illegal labor, our government is destroying the United States of America.”

EDITOR-IN-CHIEF: Stephen J. Adler EXECUTIVE EDITORS: Joyce Barnathan, Kathy Rebello ASSISTANT MANAGING EDITORS:

Frank J. Comes, Robert J. Dowling, Mary Kuntz, Ciro Scotti ART DIRECTOR: Malcolm Frouman CHIEF OF CORRESPONDENTS: James E. Ellis EDITORIAL PAGE EDITOR: Bruce Nussbaum CHIEF ECONOMIST: Michael J. Mandel SENIOR EDITORS: James C. Cooper (Bus. Outlook), Peter Elstrom, Mike France, Neil Gross, Jeffrey M. Laderman, Christopher Power, Jane A. Sasseen, John Templeman, Lee Walczak (Washington), Elizabeth Weiner NATIONAL CORRESPONDENT: Mark Morrison SENIOR WRITERS: Catherine Arnst, Stephen Baker, Robert Barker, Aaron Bernstein, Anthony Bianco, Diane Brady, Nanette Byrnes, Steve Hamm, David Henry, Tom Lowry, Gene G. Marcial, Otis Port ECONOMICS: Peter Coy (Economics ed.). Kathleen Madigan (Bus. Outlook ed.). James Mehring. Seymour Zucker (Sr. contributing ed.). Christopher Farrell (Contributing ed.) INTERNATIONAL: Patricia Kranz (European Edition ed.); Michael S. Serrill (Sr. ed.); David Rocks (Sr. news ed.); Pete Engardio, Rose Brady (Sr. writers); Cristina Lindblad (Europe), Chester Dawson (Finance) ASSOCIATE EDITORS: Robin Ajello, Susan Berfield, Dan Beucke, Michelle Conlin, Amy Dunkin, Hardy Green, Toddi Gutner, John Koppisch, Eric Schine, Christine Summerson (Business Development), Anne Tergesen, Emily Thornton MEDIA COLUMNIST: Jon Fine PICTURE EDITOR: Larry Lippmann MANAGING ART DIRECTOR: Jay Petrow SENIOR ART DIRECTOR: Steven Taylor INTERNATIONAL ART DIRECTOR: Christine Silver GRAPHICS DIRECTOR: Joni Danaher MULTIMEDIA PRODUCTION DIRECTOR: James Leone SMALL BUSINESS EDITOR: Kimberly Weisul, Susan Price (Assoc.) DEPARTMENT EDITORS: B-Schools: Louis Lavelle. Computers: Spencer E. Ante. Corporate Strategies: Brian Hindo. E-Business: Timothy J. Mullaney. Finance & Banking: Mara Der Hovanesian. Industries: Adam Aston. Internet: Heather Green. Marketing: David Kiley. Personal Business: Carol Marie Cropper, Lauren Young. Science: Arlene Weintraub. Scoreboards: Frederick F. Jespersen. CONTRIBUTING EDITORS: Mark Hyman (Sports Business) STAFF EDITOR: Jessi Hempel COPY EDITORS: Prudence Crowther, Harry Maurer, Marc Miller, Jim Taibi (Deputy chiefs); Aleta Davies, David Pengilly, Doug Royalty (Sr.); Monica Gagnier, Joy Katz, Barry Maggs, Anne Newman, Lourdes Valeriano. Researchers: Maria Chapin, Gail Fowler, Aida Rosario PRODUCTION COPY EDITORS: Larry Dark (Chief); Céline Keating, Robert J. Rosenberg (Deputy chiefs); Alethea Black, Sarah B. Davis, Robert S. Norman, David Purcell, Victoria Rubin ART: Don Besom, Alice Cheung, Jamie Elsis, Gary Falkenstern, Edith Gutierrez, Ron Plyman (Assoc. dirs.); Annie Russinof (Asst.). Graphics and Animation: Rob Doyle (Deputy dir.); Laurel Daunis-Allen, Joe Calviello, Alberto Mena, David Rudes, Ray Vella; Eric Hoffmann. Multimedia Production: Alan Bomzer (Asst. mgr.), Neal Fontana, Rich Michiel, Joseph Rhames, Shakena Thornton, Adam Wiesen PHOTO EDITORS: Scott Mlyn, Ronnie Weil (Deputies); Kathleen Moore, Andrew Popper (Sr.); Anne D’Aprix, Sarah Greenberg Morse (Assoc.); Mindy Katzman (Asst.); M. Margarita Eiroa (Traffic mgr.); Burte Hughes, Lori Perbeck (Researchers) EDITORIAL OPERATIONS: Susan Fingerhut (Director); Ken MachlinLockwood (Mgr.). Karen Butcher, Francisco Cardoza, Thomas R. Dowd, Stephen R. Lebron, Peter K. Niceberg, Jane M. Perkinson, Karen Turok, Ilse V. Walton (Edit map mgr.), Mark Lang EDITORIAL TECHNOLOGY: Y. Steve Ben-Ari, Yo-Lynn Hagood, Steven McCarthy, Craig Sturgis, Mauro Vaisman ONLINE: Michael Mercurio (Managing. ed.); Douglas Harbrecht (Executive ed.); Arthur Eves (Creative dir.); Martin Keohan (Content dir.); Beth Belton , Patricia O’Connell, Ira Sager (News eds.); A. Peter Clem, John A. Dierdorff, John Johnsrud; Will Andrews, Jaime Beauchamp, Roger Franklin, Pallavi Gogoi, Burt Helm, Olga Kharif, B. Kite, Matt Kopit, Rod Kurtz, James Kutz, Sarah Lacy, Karyn McCormack, Justin McLean, Tzyh Ng, Stacy Perman, Rebecca Reisner, Steve Rosenbush, Jessica Sanders, Jessie Scanlon, Amey Stone, Kathy Vuksanaj CORRESPONDENTS: Atlanta: Dean Foust (Mgr.), Brian Grow. Boston: William C. Symonds (Mgr.); Aaron Pressman. Chicago: Joseph Weber (Mgr.), Roger O. Crockett (Deputy mgr.), Michael Arndt (Sr. correspondent), Robert Berner, Adrienne Carter. Dallas: Wendy Zellner (Mgr.). Detroit: David Welch (Mgr.), Kathleen Kerwin (Sr. correspondent). Los Angeles: Ronald Grover (Mgr.); Larry Armstrong, Christopher Palmeri (Sr. correspondents). Philadelphia: Amy Barrett (Mgr.). Seattle: Jay Greene (Mgr.), Stanley Holmes. Silicon Valley: Robert D. Hof (Mgr.), Peter Burrows (Computer ed.), Cliff Edwards, Ben Elgin, Justin Hibbard, Louise Lee. Washington: Mike McNamee (Deputy mgr.), Richard S. Dunham (Washington Outlook ed.); Rich Miller (Sr. writer); John Carey, Howard Gleckman (Sr. correspondents); Amy Borrus, Stan Crock, Eamon Javers, Paul Magnusson, Stephen H. Wildstrom (Tech. & You), Lorraine Woellert, Catherine Yang. Beijing: Dexter Roberts (Mgr.). Bombay: Manjeet Kripalani (Mgr.). Frankfurt: Jack Ewing (Mgr.), Gail Edmondson (Sr. correspondent). Hong Kong: Brian Bremner (Mgr.), Frederik Balfour, Bruce Einhorn. London: Stanley Reed (Mgr.), Kerry Capell, Laura Cohn. Mexico City: Geri Smith (Mgr.). Moscow: Jason Bush. Paris: Carol Matlack (Mgr.), Andy Reinhardt. Seoul: Moon Ihlwan. Tokyo: Ian Rowley. EDITORIAL SERVICES: Broadcasting: Ray Hoffman. Business Manager: Barbara Boynton. Communications: Kimberley Quinn (Director), Heather Carpenter. Information Services: Jamie B. Russell (Director), Susann Rutledge (Deputy mgr.), John Cady (Technology mgr.), Fred Katzenberg, David Polek, Susan Zegel. Office Managers: Roselyn Kopit, Gloria Kassabian (Washington). Readers Report: Yvette Hernandez. Reprint Permission: Nancy Johnson.

16 | BusinessWeek | August 8, 2005

–Haydee Pavia Laguna Woods, Calif.

ILLEGAL IMMIGRATION: PASSIONS RUN HIGH “embracing illegals” (Cover Story, July 18) made me absolutely furious. Illegal aliens sneak into the U.S. in defiance of our laws; they take our jobs and lower our wages. To add insult to injury, we, the American taxpayers, have to pay for their health care, education for their children, help with the rent, and food stamps. Now our federal and local governments are rewarding illegal aliens by making it possible for them to buy homes. Meanwhile, my newlywed daughter and her husband, both American citizens, are paying off their school loans, and it will be a freezing day in hell before they can afford to buy a home of their own! In its quest for taxpayer-subsidized illegal labor, our government is destroying the United States of America. By the way, I’m Hispanic. –Haydee Pavia Laguna Woods, Calif.

have been applying for a green card for the past five years. I have spent almost $10,000 of my own money and am still at least two years from achieving my goal. If I lost my job tomorrow, I would have to sell my house and tell my two American sons that we were moving back to Europe because the U.S. government won’t let us stay here. I have a graduate degree from an Ivy League university and am a highly paid professional, yet I have to jump through burning hoops to stay here. The immigration policy of this country needs to be radically changed to reflect the reality that immigration is good for the economy. –Ben Shaw Beverly, Mass.

there are hundreds of thousands of workers like me who are trying to immigrate to this country legally and are having to go to ridiculous cost and inconvenience to do so. I am on an H1 visa and

the real white-collar criminals of this country are not the Lays, Skillings, Kozlowskis. The criminals are the chief executives and small-business owners who hire illegal aliens, provide them financial services, and otherwise create an incentive for them to force their way into America in violation of a raft of state and federal laws. These white-collar criminals are driving down wages and in the process destroying local economies

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CORRECTIONS & CLARIFICATIONS In “Get creative!” and the sidebar “Mr. Metrics” (Special Report, Aug. 1), the correct name of Larry Keeley’s company is Doblin Inc., not Doblin Group. And the table accompanying “Tomorrow’s B-school? It might be a D-school” incorrectly named a “D-school” alternative. It is Institute of Design, Illinois Institute of Technology. In "The taxman takes a breather" (Personal Business, Aug. 1), we incorrectly stated that Atlanta residents would pay a 1% city tax on otherwise exempt items during the Georgia state sales tax holiday, July 28-31. All Georgia counties will waive their local taxes during the holiday, so Atlanta residents will pay no sales taxes on exempt clothing, school supplies, and computers priced under $100, $20, and $1,500, respectively. A table and map accompanying “Detroit East” (International Business, July 25) mistakenly placed Renault’s Nove Mesto factory in Slovakia. The plant is in Slovenia.

while simultaneously driving up costs for local taxpayers. –Rick Cunnington Tucson as president and ceo of the American Hotel & Lodging Assn. (ah&la) representing 10,000 properties across the country, and having been a part of the lodging industry for more than 40 years, I must take exception to the statement that “farms, hotels, restaurants, small manufacturers, and other employers have continued to hire the undocumented with little regard to the federal laws intended to stop them.” Hotels and other U.S. employers are required by federal law to complete and retain an Employment Eligibility Verification form (U.S. Citizenship and Immigration Services Form I-9) for each worker. Form I-9 requires, among other things, the employee to present certain documents verifying eligibility for employment. Employers must walk a very fine line with regard to our nation’s immigration laws. According to the U.S. Citizenship and Immigration Services, if the documents “appear on their face to be genuine and relate to the person presenting them,” employers must accept them. Questioning the validity of such documents is considered to be “an unfair immigration-related employment practice” that could result in fines of up to $10,000, while hiring an employee without proper documents or accepting documents that clearly are not genuine is a serious violation of federal laws and will re-

sult in fines of up to $11,000 and up to six months in prison. Your article also points to the need for legislative reform to help address a very serious issue driving the problem of illegal immigration—a shortage of workers, especially in lesser skilled, essential positions. Currently, the ah&la’s career center lists more than 6,300 available lodging industry jobs in the U.S. While the federal government should closely oversee immigration to verify the identity and intentions of those entering the U.S., there is a great need to increase the number of legal immigrant workers who enter the U.S. through programs such as the H-2B visa for temporary and seasonal workers. –Joseph A. McInerney President and CEO American Hotel & Lodging Assn. Washington i live in an agricultural area. All of the tree pruners, apple pickers, and onion field workers are Mexican or Latin Americans. There are no white, middle-, or lower-class people who will work those hard, physically demanding jobs 10 or 12 hours per day (certainly not your Harvard mbas). These people are performing a valuable service to our nation. Let us give them green cards to come and work here. Let us give those who have settled here citizenship. We need positive action to help those among us who work so hard to make our lives better. –Roy A. Zingmark Quincy, Wash. your story reflects a one-sided pro-illegal immigration bias. Illegal immigrants cost federal, state, and local taxpayers tens of billions of dollars per year in health-care, education, and law-enforcement resources. Hospitals are going bankrupt; school systems and jails are severely strained. American taxpayers ought to have more say in how their tax dollars are spent. Instead, they are being forced to subsidize the businesses that promote and profit by illegal immigration. A day of reckoning is coming. –Bill Terry The Woodlands, Tex. thank you for highlighting the economic contributions undocumented workers make to the American economy. It is time for a rational and sane process to allow these workers to become legal. In addition, children of undocumented parents, who are themselves not documented, should be entitled to change their status and be allowed to enroll in college and

receive in-state tuition and some form of state and federal aid. Many of these children graduate from high school with good grades but have no access to higher education. As a result, American companies are missing out on a pool of potentially talented employees. –Philip Kellerman President Harvest of Hope Foundation Gainesville, Fla. the average illegal alien buys comparatively little in the U.S. compared with what he takes out of the economy. Aliens’ use of social services and infrastructure are far in excess of the taxes they pay. Immigrants send much of their wages out of the country. Mexicans, for example, send home $20 billion annually. That is money that doesn’t get recycled here! – Joan K. Smith Mt. Morris, Mich.

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August 8, 2005 | BusinessWeek | 17

Technology&You BY STEPHEN H. WILDSTROM

DoYour Homework,Microsoft

photograph by ethan hill; illustration by michael witte

With all the pressure to achieve that students must endure, parents jump at technology that claims to help kids do better in school. Little wonder it’s a hot category for software publishers. Microsoft’s back-toschool offering, Student 2006, is in this vein. But despite some nice features, parents would do better to spend the $100 on some books. Student, which requires a dvdequipped machine running Windows and Microsoft Office xp or 2003, comprises three main pieces. One is a collection of information resources that draws heavily on Microsoft’s Encarta encyclopedia. Another is a set of tools, called Learning Essentials for Office, designed to make Word, Excel, and PowerPoint easier to use for school chores. The third is a simulated graphing calculator for math and science projects. The information resources are a mixed bag. Much of the Encarta material is available online from encarta.msn.com, though menus and toolbars make access easier on Student. Some of the content feels thrown together. For example, the English section offers quotations that you can browse by topic or author, but you can’t search the text. Kids would be happier with a paper copy of Bartlett’s, or better, the online version at www.bartleby.com. High school students, alas, will probably consider the most useful part of the English section to be the summaries of dozens of works of literature, a sort of condensed CliffsNotes. Each subject area includes an extensive list of encyclopedia articles. This is fine for younger children, but by the time students get to middle school they should be doing more serious research than looking up articles in an encyclopedia, online or otherwise. LEARNING ESSENTIALS FOR OFFICE also seems a hodgepodge. It has a handy feature for students of French or Spanish. Choose a language, and the program automatically converts the spell checker and other tools to it. This capability is a standard part of Office, but few users know about it. Learning Essentials also gives you a panel that lets you enter accented characters by clicking on them, and it provides quick access to a translating dictionary. Another major feature is templates and tutorials designed to help students prepare PowerPoint presentations and written material, such as essays and lab reports. Most

tutorials are too vague to be of much use, and all seem to begin with the self-evident advice: “Select a topic for the assignment.” The templates give students a head start on prettylooking reports, but I have heard complaints from parents and teachers that encouraging kids to get fancy, especially in PowerPoint, tempts them to focus on looks rather than content. The graphing calculator drove me crazy. It’s nice enough as on-screen calculators go, but it has a fundamental problem: Most U.S. high schools base much of their math curriculum on the use of a specific calculator, typically the Texas Instruments ti-83 Plus or 84 Plus. If students do their homework on Microsoft’s on-screen calculator, they not only will have to translate ti-specific instructions from school materials but also will not develop proficiency on the calculator they’ll have to use when it’s time to take the test. Some programs leverage pc technology to truly benefit students. For example, sas in Schools, sponsored by business-software company sas Institute, gives students and teachers resources and tools tied to curriculum and state standards. Unfortunately, too much educational software seems designed to play on a public sense that any technology is good for students, and more must be better. Sadly, Student 2006 seems mostly to fall into that class. ❚❚ E-mail: [email protected]

The Student 2006 package seems like a hodgepodge

For a collection of past columns and onlineonly reviews of technology products, go to Technology & You at www.businessweek.com/go/techmaven/ August 8, 2005 | BusinessWeek | 21

MediaCentric

BY JON FINE

Media, Marketing, and Advertising in the 21st Century

End Run Around TiVo? to reach fine slices of the broadcast and cable-tv market. A broadcast ad promoting tropical vacations, for instance, can switch background music from disco when targeting young singles to something more restrained for baby boomers. Auto ads can direct viewers to special sales at the local dealer, and be updated as offers change. “I knew, when clients saw it, they would see it as a solution,” says Executive Chairman Bill Katz, formerly ceo of ad giant bbdo Worldwide. “To their concerns about target fragmentation. To concerns about roi. To their concerns about TiVo.” At Visible World’s Manhattan offices, Katz taps on a keyboard and within seconds transforms an ad that shouts out to one Midwestern suburb into one that names a different suburb a few miles down the road. AMONG THE BIG ADVERTISERS playing with the technology are United Airlines and 1-800-Flowers.com. This spring, Fox Broadcasting Co. began offering Visible World’s capabilities to its clients. And Visible World is winning kudos from the commentariat. “It will conquer,” trumpeted Advertising Age columnist Randall Rothenberg. “Quickly emerging as a solution,” said TheStreet.com Inc. Visible World’s investors include the likes of Reuters Group, Comcast, and ad conglomerate Grey Global Group. Sure, the technology is interesting, but can it derail the DVR express? For big advertisers, it promises flexibility and cost containment. Think of the video-editing man-hours that previously went into creating and distributing hundreds of locally targeted car commercials, which now can be customized via a few pecks at a keyboard. Sharply targeted ads can provide advertisers with much more detailed information about what was seen when and thus better address return-on-investment concerns. And imagine what election-year air wars will be like once Democrats and Republicans can finely target ads to infinitesimal degrees. 22 | BusinessWeek | August 8, 2005

But that’s not the big game. The real prize is getting consumers to pay attention to tv ads at all. Visible World and its rivals are betting that ad relevance matters and that viewers will see customized ads as a sort of programming. But with 10 million households expected to have digital video recorders by yearend, says Forrester Research Inc., that premise is under pressure from the get-go. You don’t buy TiVo because ads don’t speak directly to you. You buy TiVo because ads are nuisances. (Possible exception: the rare breed of compelling commercials.) If that’s the case, how do insertyour-small-town-here ads change that? “If someone edits out the commercials, it doesn’t matter how relevant they are,” concedes Seth Haberman, Visible World’s bushy-haired founder and president. “But if people know the commercials have changed, if they are more relevant, we believe the skip rate will be lower.” In an ever more consumerdriven landscape, Visible World is still a top-down solution to an end-user problem, and one that bets on a shift in consumer perceptions. The problem isn’t insufficient relevance, it’s that ad-skipping is now a learned behavior. Had Visible World hit broadcast tv before ad-skipping technologies did, it might have influenced consumer behavior. Viewers might have grooved on the novelty of ever-more-micro-targeted ads. But DVRs came first, and the remote long before. To save one cliché for the end: These horses are distant dots on the horizon. It’s a little late to be shutting the barn door now. ❚❚ E-mail: jon_fi[email protected]

Visible World is being touted as the antidote to ad skipping. But consumers are long gone

photograph by ethan hill; illustration by omar lee

Let’s get the clichés out of the way: On-demand world. Consumer control of media. Audience fragmentation, gnat-sized attention spans, no patience for commercials. Hello to ad-skipping technologies such as TiVo. The mass-marketing model withers. ¶ All this angst begets Visible World, a company with technology that digitally customizes ad content

TheBarker Portfolio

BY ROBERT BARKER

Brews at Bargain Prices

(l to r) photograph by ethan hill; jason alden/newscast.

Ah, summertime, when even financial writers’ thoughts turn to baseball, the beach, barbecues, and, most swiftly, to beer. This year, with a bear market in beer prices, it’s getting harder than ever to resist. On sale at a supermarket near me: 12-packs of Anheuser-Busch Natural Light and Natural Ice, just $4.99. Price-cutting is only the most obvious symptom afflicting the world’s brewers. Younger drinkers more often are choosing wine or liquor over beer. Per capita U.S. beer consumption in 2004 fell to 21.6 gallons, from 22 gallons in 1996, according to New York consulting firm Beverage Marketing. Amid this, even the stock of stalwart AnheuserBusch is near its 2002 lows. Shares of the newest global combine, Molson Coors Brewing, which touched 76 on Feb. 9 as the Canadian and Colorado brewing dynasties merged, now sit near 63 after a poor first quarter. One reason: the National Hockey League’s lost season, which drained demand in Canada. Angry at not learning of weak sales before the merger vote, some investors are suing, and the Securities & Exchange Commission wants to know what happened. Molson Coors says it did nothing wrong and is cooperating. So don’t count on a beach party on Aug. 2, when Molson Coors reports second-quarter results. If you ask me, though, the bearishness is overdone. It’s not that the brewers, Molson Coors very much included, don’t face problems. But most of their troubles seem reflected in the stock prices, Molson Coors’s especially. On a pro forma basis—that is, had the merger been done last year—Molson Coors in the last four quarters took in $6.1 billion in sales. Yet its enterprise value (net debt plus equity value) barely tops $8 billion, or just 1.3

The Barons of Beer COMPANY

ENTERPRISE VALUE/ REVENUE RATIO

KEY BRANDS

Molson Coors Brewing

1.3

Carling, Coors Light, Molson Canadian

Heineken

1.6

Amstel, Heineken, Murphy’s Irish Stout

InBev

2.5

Beck’s, Brahma, Stella Artois

SABMiller

2.6

Miller Lite, Peroni, Pilsner Urquell

Anheuser-Busch

2.9

Budweiser, Bud Light, Michelob Ultra

Data: Company reports, Capital IQ, BusinessWeek

times sales, lower than rivals’ multiples (table). Some of that discount is deserved since Molson Coors is less profitable. Last year, for example, its pro forma operating margin came to just 11%. Anheuser-Busch’s 2004 operating margin was more than twice as wide. An obvious problem has been the $765 million purchase Molson made in 2002 of Brazil’s No. 2 brewer, Cervejarias Kaiser. It’s now Brazil’s No. 3 player and at last report still was losing money. In May, however, Molson Coors signaled that it won’t throw more cash at MOLSON COORS Kaiser and may instead push Coors Light in The hockey Brazil as it does elsewhere abroad and in the lockout U.S., where Coors Light is the No. 4 brand, slammed sales according to Beverage Marketing. For investors, management’s focus on cash flow is important since consumption trends may continue to bedevil the industry. Consolidation is the key. In North America one of Coors’s three breweries is closing, a big step toward annual cost savings of $175 million it expects to squeeze out of the merger by 2007. Molson Coors estimates it will have upwards of $450 million in annual free cash flow, after capital spending and dividends (the stock yields 2%), with which it can buy back stock and reduce debt. One patient and usually smart shareholder is Longleaf Partners Funds, run by Southeastern Asset Management, a $31 billion Memphis (Tenn.) firm. Morningstar reports that Longleaf holds positions nearly six years on average; its flagship fund beat the Standard & Poor’s 500-stock index by an annual average of 3.2 percentage points in the past decade. Early in 2004 two Longleaf funds bought into Coors and held on through the Molson merger. After the stock tumbled this spring, what did they do? They boosted holdings by 44%. On June 30 the funds owned more than 4 million shares. Don’t expect the stock to be revalued this summer. But with the nhl on July 22 ending its player lockout and looking to a new season, you just might see it heat up next winter. ❚❚ E-mail: [email protected] August 8, 2005 | BusinessWeek | 23

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Putting Their Money Where Their Mouths Aren’t Despite a dip in confidence, consumers are spending on big-ticket items Let’s see if we can get this straight. The economy is experiencing the weakest job recovery on record, but wages and salaries of workers are up nearly 8% over the past year. Gasoline prices are well over $2.50 per gallon in many areas of the country, but people are buying more gas, not less. They are buying a lot more of U.S. ECONOMY

everything else, too. Real household spending is up about 4% from last year—and home sales hit another record. Consumers may have said they were less confident in July, but they sure aren’t acting that way. The bottom line: Don’t sell consumers short, or you may end up underestimating the economy’s performance in the second half. The latest data tell the story. They show not only strong overall demand, but they also indicate that any inventory problems earlier in the year, especially in the auto industry, are now fully redressed. General Motors Corp. said on July 27 that it was ending its highly successful employee discount program, because it had basically sold out its 2005 models. The combination of leaner stockpiles and steady spending is adding renewed strength to the manufacturing sector (page 36). Factory orders, outside of aircraft, turned up sharply in June, as did business ordering for new equipment, suggesting that companies remain upbeat about future sales. With consumer-led demand providing the power, the economy may well be on its way to beating the 3.3% pace for the second half now generally expected by forecasters.

charts by eric hoffmann/bw

WHAT’S BEHIND CONSUMERS’ FORTITUDE? First of all, workers are more productive than in past recoveries, meaning the same pace of job growth now generates more output growth—and thus more income growth— than it used to. Moreover, with inflation historically low, incomes stretch a lot further. Through the second quarter, real income from wages and salaries was growing just shy of 5%, very close to the average performance during the boom years of the late 1990s. Second, low interest rates—the main fuel for housing— and past gains in household wealth have enhanced consumer finances. True, since the end of the recession, household liabilities have increased by $2.9 trillion. But assets have grown by $10.6 trillion. Household net worth began 2005 some 12% higher than it was at the peak of the stock market bubble in 2000. Rising home equity has accounted for about 70% of that increase. Lastly, households in general are able to service even the higher pace of borrowing. Despite rising mortgage debt, overall debt service as a percent of aftertax income

is no higher than it was two years ago. That’s because the share of income required to service nonmortgage debt is declining. Also, delinquency rates on mortgages are falling, and they are down across a broad range of other consumer loans. All this explains, to some extent, the disparity between how consumers are behaving and how they say they feel about the future. To be sure, high gas prices and CONFIDENCE: UP AND terror bombings in DOWN, BUT MOSTLY UP London and Egypt are INDEX: 1985=100 weighing on their 110 psyches. The Conference 100 Board’s index of 90 consumer confidence dipped to 103.2 in July, 80 from 106.2 in June. Still, 70 SIX-MONTH MOVING AVERAGE this gauge has been in a CONSUMER CONFIDENCE INDEX 60 rising trend for the past JAN. '03 JULY '05 Data: Conference Board, Global Insight Inc. two years (chart). The board said consumers are still wary about employment conditions. Their assessments of job prospects slipped a bit in July, with a slightly higher percentage perceiving jobs as “hard to get.” That caution remains despite some encouraging signs from the labor markets. The unemployment rate has slipped from 5.4% in February to 5% in June, nearly a fouryear low. And new claims for unemployment insurance dropped sharply in mid-July, with the less-volatile fourweek average falling to the lowest level since early March. Job seekers are also spending less time finding work. In the second quarter, the hunt was shorter for the third quarter in a row, down to 3.1 months, says a survey by Challenger, Gray & Christmas Inc. That’s 18% shorter than a year ago. That result jibes with similar patterns in government data. Past trends in the consumer confidence numbers suggest that, given continued labor-market improvement, perceptions about jobs will catch up with reality in the second half.

PERHAPS THE BEST MEASURE of consumers’ attitudes is how they spend their money. Even on the heels of June’s blockbuster 1.7% increase in retail sales, store August 8, 2005 | BusinessWeek | 25

Business Outlook

BY JAMES C. COOPER & KATHLEEN MADIGAN

Business Outlook

reports so far in July suggest continued strength. In particular, Wal-Mart Stores in late July reaffirmed its projection that July sales will post a gain from a year ago in the range of 3%-5%. Moreover, look at consumer outlays for big-ticket items, such as new homes and cars. Those are major commitments households make when they are confident about their employment and financial future. Car companies will report their July sales on Aug. 2, but early estimates based on sales through the first twothirds of the month suggest that the annual rate of car sales will end up in the neighborhood of 19 million to 20 million, in response to generous sales incentives. That pace would follow June’s hefty 17.4 million rate, which had matched the strongest showing of the year.

AND, OF COURSE, CONSUMERS remain hot on housing, helped by still-low mortgage rates and strong income growth. In June, sales of existing single-family homes and condos rose another 2.7%, to a peak annual rate of 7.33 million. Sales of new homes rose 4%, to an annual pace of 1.37 million, also a new record. Housing remains affordable because the average rate on a 30-year fixed mortgage stands well below 6%. So after expectations that housing would slow this year, it now appears as if sales will set another record high in 2005. What’s even more important to the consumer outlook are the high prices being fetched by homes on the market. For existing homes, the median price in June hit $219,000, a gain of 14.7% from prices in June, 2004

(chart). The median price of a new home sold in June was essentially flat from a year ago, but so far this year, prices are up 5.9% from the first half of 2004. The sharp rise in home prices is fueling this year’s rise in household wealth, a major support under spending. The latest Federal Reserve data show that the equity in homes jumped 16.4% in the year ended in the first HOME PRICES quarter, even with the CONTINUE TO SOAR money taken out through PERCENT CHANGE FROM A YEAR AGO home-equity loans and 16 U.S. MEDIAN SALES PRICE cashed out in FOR EXISTING HOMES 12 refinancings. That gain was far larger than the 8 8.2% rise in total net worth and the 4.9% 4 increase in stocks and 0 mutual funds. JAN. '03 JUNE '05 Data: National Association of Realtors Also fueling economic growth is the money homeowners are putting into remodeling and repairs. According to the Joint Center for Housing Studies at Harvard University, spending on home improvement for the year ended in the second quarter rose 4.5% from yearago levels, to $133 billion. So if you’re worried about the economy’s prospects for the second half, stop losing sleep over the job markets, oil and gas prices, and measures of consumer attitudes. Look at what consumers are doing. Their actions speak volumes about the outlook. ❚❚

BRITAIN

Bit of a Rate Cut in the Works? THE BRITISH ECONOMY slowed this year. After posting almost no sharply in the second quarter, growth in the four months ended in perhaps by more than policymakers May, retail sales did jump 1.3% in at the Bank of England would prefer. June. But analysts are waiting to see Real gross domestic product was whether the two terrorist attacks in up 0.4% from the first quarter, or London in July curtailed shopping in just 1.7% from the year-earlier level. that month or dragged down That was the smallest annual gain in consumer confidence, which had 12 years. already posted declines in each Two main sectors are holding month of the second quarter. back growth. Consumer spending Policymakers had been expecting a has been dragged slowdown in down by high energy consumer demand, in ECONOMIC GROWTH prices, uncertain job part because of a SLOWS SHARPLY prospects, and the flattening out in home PERCENT CHANGE FROM A YEAR AGO leveling out of the prices. But a larger4 once-robust housing than-expected dropoff BRITISH REAL GDP market. The jobless 3 could add more woes rate has been to the already 2 trending higher, faltering factory hitting 4.8% in the sector. Compared to 1 three months ended year-ago levels, in May, and job manufacturing output 0 '02 '03 '04 '05 vacancies have been was down in the first Data: Global Insight Inc. virtually flat so far quarter, and the 26 | BusinessWeek | August 8, 2005

decline continued into April and May. And on July 27, the Confederation of British Industry reported a dip in new orders in the three months ended in July. That marked the third quarterly drop in ordering activity. British manufacturers are facing higher energy costs, lackluster capital spending at home, and most importantly less demand from a struggling euro zone, Britain’s largest export market. With the factory sector in recession, the cbi has called for the boe’s Monetary Policy Committee to loosen monetary policy soon. Against this slowing economic backdrop, the mpc looks extremely likely to cut interest rates by a quarter-point at its upcoming Aug. 34 meeting. Minutes from the July 7 policy session showed a very close 5-4 vote to hold the benchmark rate steady at 4.75%. In addition, investors are starting to think that another rate cut by yearend is a possibility. ❚❚

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A year of OnStar safety, on every Cadillac.** Details at cadillac.com. *MSRP. STS V8 as shown $62,735 MSRP. Tax, title, license, dealer fees, gas guzzler tax and other optional equipment extra. **Standard one-year OnStar service varies by model. Call 1 888 4ONSTAR (1 888 466 7827) or visit onstar.com for system limitations and details. 1 December 31, 2004. ©2004 Dow Jones and Company, Inc. All rights reserved. ©2005 GM Corp. All rights reserved. Break Through® Cadillac® Cadillac badge® OnStar® STS®

News Analysis & Commentary TECHNOLOGY

REVENGE OF

THENERDS –AGAIN

Search engines Google and Yahoo! are hiring away hundreds of top engineers from high tech’s best firms BY BEN ELGIN

28 | BusinessWeek | August 8, 2005

ent from academia, startups, and venerable tech companies that a decade ago would have flocked to Microsoft Corp. or Sun Microsystems Inc. are now more than willing to switch teams and join Google or Yahoo. In the second quarter alone, Google snapped up about 230 engineers. Recent additions include software superstars Louis Monier, director of eBay Inc.’s advanced technology research, and Kai-Fu Lee, a top-flight researcher at Microsoft—which prompted the software giant to sue Google and Lee to keep him from going to work there right away. Yahoo, meanwhile, has recently hired dozens of top engineers, including Larry Tesler, former vice-president for shopping experience at Amazon.com Inc. And the company is expected to announce on July 28 that its

new head of research is Prabhakar Raghavan, former chief technology officer at search-software outfit Verity Inc. and an authority on algorithms. What’s behind this talent raid? Another dot-com gold rush it’s not. Eager investors already value these businesses at a combined $130 billion, up from about $63 billion last August when Google went public. That means the share prices reflect much of the companies’ promise, suggesting stock options could be in for a slower climb from here.

“A WILLY WONKA EFFECT” of course, these top-level search engineers are still among the most wellcompensated techno-nerds out there. But there’s more than money at work here. These guys—and they are truly mostly

anita kunz

S

ome call it the “giant sucking sound” emanating from Silicon Valley. For others, it’s a migraine in the making. But whatever they’re calling the hiring binge at Google Inc. and Yahoo! Inc., just about everyone is a bit astonished at the fearsome force that’s swallowing up some of tech’s best and brightest. “High-profile researchers are now flocking to the search engines,” says Marti Hearst, associate professor at the University of California at Berkeley’s school of information management and systems. The migration of software-engineering talent to Google and Yahoo is a testament to how high these search companies have risen in the tech firmament. Coveted tal-

ALSO IN THIS SECTION: investors Roberts and 31| Microsoft want more of its cash 32| Judge states’ rights 35| SoNowlong,what?AFL-CIO.

Bewildered at 39| Sony: the box office

News Analysis & Commentary

Talent Wars

Tech luminaries are flocking to Google and Yahoo:

other vendors can’t match.” Once top talent starts to move, it can be a force unto itself. At Google, for instance, staffers marvel at passing in the hallways such luminaries as Rob Pike, one of the creators of the Unix operating system; Adam Bosworth, a pioneer of the xml programming language; or Monier, who helped create AltaVista, one of the Web’s most popular search engines in the 1990s. The chance to work alongside tech gurus, who in some cases authored the textbooks that young employees studied in college, can be a powerful draw. That’s half the story. At Google, much of the magnetism is also generated by a zany culture perfectly synced to the geek lifestyle. Engineers are encouraged to spend the equivalent of one day per week on their own pet projects. When they’re not staring into their computer monitors, Google employees will often gather for roller-hockey games in the underground garage or race remote-control blimps through their cavernous offices. Free

CALIFORNIA HQ Some 230 new engineers in the second quarter

perks range from gourmet meals at the company cafeteria to bathrooms equipped with digital toilets, where the seat temperature and bidet pressure can be controlled with a remote. “They have created a Willy Wonka effect,” says James E. Pitkow, ceo of Moreover Technologies Inc., whose former company, Outride Inc., was purchased by Google in 2001. “Engineers want to work on the coolest problems with the smartest people.” Yahoo also carries substantial geek cred. Each day the company generates 10 terabytes of data—equivalent to all the print collections in the Library of Congress. By sorting this unrivaled data pile, engineers quickly can begin to discern how products and features are used as well as how people behave online. Adjustments, then, can be made in a matter of minutes, with improvements quickly felt by the company’s 400 million monthly users. “I saw an opportunity to take the user interface to a new level for a huge number of people,” says Yahoo’s Tesler, who joined in May to spearhead the company’s Web design. While the Internet leaders snatch up top

KAI-FU LEE

LOUIS MONIER

FORMERLY

Microsoft vice-president

NEW JOB

President of Google China

CLAIM TO FAME

A leading expert in natural language; founder of Microsoft Research Asia

Director of eBay’s AdVerity’s chief vanced Technology Group technology officer Google, duties to be Head of determined research at Yahoo Search pioneer; An authority on algofounded AltaVista rithms; spent 14 years a decade ago doing research at IBM

30 | BusinessWeek | August 8, 2005

PRABHAKAR RAGHAVAN

LARRY TESLER Amazon.com VP for shopping experience Yahoo head for user experience and design User interface guru; cut his teeth at Xerox PARC and Apple

paul sakuma/ap/wide world

men—are also attracted to the massive, unsolved technical challenges facing search companies, which affect hundreds of millions of people daily. In years past, pcs, operating systems, and databases were viewed as core technologies where engineers could work on problems and change people’s lives. Today, more techies view search on the Internet as among the most important services. “The Internet is touching everyone’s lives,” says Usama Fayyad, chief data officer and senior vice-president at Yahoo, who joined the company last December. “A new science is being defined in an area that will take over much of what we do commercially and socially.” Indeed, Google—and, to a lesser degree, Yahoo—has become what Microsoft used to be: a young, vibrant company working on the bleeding edge of the day’s vexing technical issues. Before the Internet became the phenomenon it is now, Microsoft was a magnet for top talent interested in solving the toughest tech problem: making personal computing easy. Today, though, the gravitational force at the center of techdom is no longer the pc—it’s the Net. And while msn holds its own with Google and Yahoo in terms of worldwide use, its engineers can’t develop products that would undermine Microsoft’s monopoly businesses, Windows and Office. Some researchers say privately that restricts creativity. If Google and Yahoo are able to maintain their position on the crest of innovation, their current hiring push could lay the foundation for the next generation of corporate labs, following in the footsteps of companies such as Xerox, HewlettPackard, ibm, and Microsoft. Sure, these members of the tech Establishment boast research and development budgets several times larger than those at Google and Yahoo. But the Internet companies are just starting to ramp up their research efforts, while some incumbents, such as hp, are downsizing their labs. “ibm and hp have some very interesting projects,” says Yahoo’s Raghavan. “But there’s an undeniable sense of excitement here that

tech talent, that creates headaches elsewhere. Some startups, for instance, say the talent drain has made their own hiring more difficult. Joe Kraus, a co-founder of early portal Excite Inc. and now the ceo of collaborative software startup JotSpot Inc., says Google has been especially tough to go up against. “If you’re talking to someone great, they’re invariably talking to Google, and they often have an offer.” It can be equally difficult for technology mainstays, including Microsoft. Not only has the software giant lost several top minds to Google in recent years, the Redmond (Wash.) company is also facing tougher competition for talent coming out of universities, even in its own backyard. Oren Etzioni, a professor of computer science at the University of Washington in Seattle, says Google has hired most of the top one-third of his search class in each of the past two years. Microsoft is hardly standing still. With both boundless cash and massive industry influence, the software giant can pay what it needs to hire the leading lights of industry. But clearly, it’s feeling stung. It has filed suit against Google and recently departed Kai-Fu Lee for allegedly breaching a noncompete clause in Lee’s contract with Microsoft. Google has filed a countersuit against Microsoft. Neither company would comment on the legal battle. Clearly, Microsoft’s motives reach far beyond Lee. Although it is not the only company feeling the hiring pinch of its search competitors, it desperately needs to hire and retain top talent if it wants to gain ground on Google and Yahoo. The company’s recently released search technology has been met with praise. But with only about 15% of the U.S. search market, Microsoft badly trails its rivals. It needs to come up with innovations to set itself apart from the pack. By going after Google and Lee, it may help deter other talented techies with similar ideas. Such moves appear to be stopgap measures at best. With torrid growth and booming profits, Google and Yahoo clearly have the cachet to keep their hiring momentum going. Frustrated rivals shouldn’t expect that sucking sound to abate anytime soon. ❚❚ –With Robert D. Hof, in San Mateo, Calif., and Jay Greene in Seattle

illustration by david rudes/bw; photograph of bill gates by randall scott/aurora; chart by alberto mena/bw

Talent is following the sexier problems posed by the Net

DIVIDEND PAYOUTS

Please, Sir, I Want More

M

So will Gates open up the corporate icrosoft Corp. Chairman wallet once again? It took immense pressure William H. Gates III for Microsoft to issue its first dividend in marveled a year ago when January, 2003—an annual 8¢-a-share strangers came up to him payout. An iconic growth stock through the at the movies to say thank 1990s, the software maker hesitated to you. At first, the world’s most recognizable stoop to a strategy that suggested businessman wasn’t quite sure what he had done to merit the gratitude. But it soon otherwise. What’s more, it needed to keep enough cash on hand to cover potential became clear. Microsoft had announced liabilities from its epic antitrust battles. But plans to dole out $33 billion to shareholders, the largest one-time cash dividend with those days seemingly gone, Microsoft has increased that dividend to 8¢ a share in history. And investors—who also got each quarter, putting its yield at 1.2%. While more than $3 billion in regular dividends and $8 billion in stock buybacks in the past in line with tech peers such as Intel Corp. and Hewlett-Packard fiscal year—couldn’t Co., the payout is still have been happier. well below the 1.8% Turns out it wasn’t average yield for enough. Shareholders companies in the are beginning to press Standard & Poor’s 500for more dough. After stock index. “At this the special dividend in point, it makes sense to December, Microsoft’s MICROSOFT’S go right to that level,” cash holdings fell from MONEY MACHINE says Goldman, Sachs & $64.4 billion to $34.5 BILLIONS Co. analyst Rick billion. But with its twin 70 Sherlund. He argues this monopolies—the would bring Microsoft a Windows operating 60 new breed of system and the Office 50 shareholders—value productivity software— investors who’ve been generating roughly $1 40 cool to the smallish billion a month in excess current dividend. cash, the money is piling 30 CASH Yet even if Microsoft up once again. Even raised its quarterly after spending $756 0 dividend to 12 cents a million in the past III '03 IV I '04 II III IV I '05 II share, roughly in line quarter on private Data: Bloomberg Financial Markets with the S&P yield, it antitrust claims, Microsoft’s cash hoard had bounced back to would spend about $1.3 billion a quarter on dividends. That only begins to curb the flow $37.8 billion by June 30. “People expect of cash flooding its coffers. Last year the another dividend increase pretty soon now,” company committed to buy back $30 says Mark Demos, an analyst for Fifth Third billion worth of stock over four years, Asset Management. including the $8 billion it repurchased in This isn’t simply a case of greed. the fiscal year that ended last June. Investors have long pressed for a piece of Sherlund believes the company should Microsoft’s stash, arguing that they could continue buying back $7 to $8 million in earn better returns investing the money themselves. Now shareholders are growing stock per year even after that plan expires, to keep the money from piling up. If impatient with Microsoft’s stock as well. It closed at $25.72 on July 27—roughly where Microsoft plans to shell out more to shareholders, it’s not letting on: Executives it was three years ago. With Microsoft’s declined to discuss their plans. But with lackluster growth tempering its price Wall Street starting to push for the appreciation, investors are demanding company to reopen the vault, Gates could returns from elsewhere. “Shareholders are once again find himself on the receiving getting frustrated with the stock trading end of many a thank-you. sideways,” says Mark A. Lebovitz, portfolio –By Jay Greene in Seattle manager for the Munder Internet Fund. August 8, 2005 | BusinessWeek | 31

News Analysis & Commentary

THE SUPREME COURT

STATES VS. THE FEDS: ALL EYES ON ROBERTS The fractious debate over federalism will be center stage at his confirmation hearings

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ho exactly is Supreme Court nominee John G. Roberts Jr., and what does he stand for? Some Washington Democrats see the answer in Roberts’ association with the conservative Federalist Society, which advocates states’ rights and limits on federal power. But the White House has gone out of its way to insist that Roberts, currently a judge on the U.S. Court of Appeals for the D.C. Circuit, has never been a member of the society. The spat may seem to be just another Beltway brouhaha, but don’t be fooled. It 32 | BusinessWeek | August 8, 2005

is at the center of a heated debate over Roberts and the sort of Supreme Court Justice he would make. In the last decade the federalist movement, made up of conservative lawyers and legal scholars who believe that Washington has run roughshod over the powers that the Constitution reserves for the states, has grown increasingly influential. The movement’s record before the Supreme Court is mixed, but the court has shifted more sharply toward reining in congressional power in recent years. Given Roberts’ limited record, everyone from corporate executives and environmentalists to abortion-rights activists wants to know whether he’ll push the cause of states’ powers further.

Business has a huge stake in that question. For decades, Congress has invoked its Constitutional authority “to regulate Commerce...among the several States” to intervene in everything from employment practices to protections for endangered species. As a rule, corporations abhor regulation. But when regulation is inevitable, they would rather have a single national standard than 50 diverse state rules. States’ rights are “a double-edged sword for business,” says Robert Gordon, senior vice-president of the liberal Center for American Progress. “Companies would like to be rid of a lot of federal regulation, but if Congress lost the power to regulate in a lot of these areas, you’d have a patchwork.”

HIGH STAKES no one expects Roberts’ views on states’ rights vs. federal powers to derail his candidacy. Yet figuring out where he comes down will be a central focus of his confirmation hearings. His leanings will have big implications for a host of hotbutton issues, from economic regulation to abortion to civil rights. And while the tussle over federal power encompasses several legal principles, much of the debate will come down to how Roberts might interpret the Constitution’s commerce clause. Says Douglas T. Kendall, executive director of the Community

(l to r) mannie garcia/getty images; carol t. powers/the new york times

ONE FOR THE FEDS The court denied the states’ right to allow medical marijuana

Rights Counsel, a Washington-based public-interest law firm: “The stakes in the direction of the commerce clause could not be any higher.” The last time the commerce clause took center stage was in the late 1930s: President Franklin D. Roosevelt was threatening to pack the Supreme Court to dilute the power of conservative justices who struck down New Deal legislation as an overreach of Congress’ authority. After fdr’s 1936 reelection the court finally saw things his way, upholding the National Labor Relations Act in 1937. Since then successive courts have allowed Congress to expand the commerce clause to promote Social Security, the minimum wage, the Civil Rights Act, and other programs. When the 1960s civil rights movement discredited “states’ rights” as a euphemism for segregation, federal power reigned supreme. But 10 years ago, Chief Justice William H. Rehnquist hit the brakes. In 1995, the Supreme Court struck down a federal law requiring states to maintain gun-free zones around schools, ruling that the statute had nothing to do with interstate commerce. In 1997 the court invalidated the federal Religious Freedom Restoration Act, which was meant to protect religious worship from such “undue burdens” as restrictive zoning imposed by state and local governments. The court delivered a double whammy in 2000 when it weakened the Age Discrimination in Employment Act and watered down the Violence Against Women Act. The following year the justices limited the scope of the Clean Water Act and gave a nod to state sovereignty with a decision that stripped state workers of their right to sue under the Americans with Disabilities Act (ada). But the states’ rights backers aren’t winning them all—which makes Roberts’

role as a replacement for retiring Justice Sandra Day O’Connor all the more crucial. In recent years, O’Connor moderated her long-held support of states’ over federal power. In 2003 she joined a 63 majority that stunned court watchers by upholding congressional authority to pass the Family & Medical Leave Act. This past June advocates of a limited federal role were dealt another blow when the Supreme Court ruled that the Justice Dept.’s authority to police illegal drugs trumped a California law that allowed seriously ill patients to use marijuana for medicinal purposes.

ROBERTS As an attorney in federalism cases before the high court, he has argued both sides

Local landowners had argued that the state was unconstitutionally depriving them of higher returns on their property. As a judge, Roberts has faced the states’ rights question only once. In his now-famous opinion on the arroyo Southwestern toad in Rancho Viejo v. Norton, he was skeptical of how the Endangered Species Act could invoke interstate commerce to protect a toad that lives only in California. But while Roberts dissented from the majority, which decided in the toad’s favor, he A BIG QUESTION MARK didn’t join fellow judge David B. Sentelle, democrats already are grilling who slammed the majority for upholding Roberts on his view of the commerce regulation of “an activity that is neither clause, and they have won some assur- interstate nor commerce.” Roberts ances. After a private July 26 meeting “could have gone with Sentelle to indicate with the judge, Senate Judiciary Commit- he was part of the brigade of fire-breathtee member Charles E. Schumer (D-N.Y.) ing conservatives, and he didn’t,” says Siwas cautiously optimistic. “I think a lot of mon Lazarus, public policy counsel to the people are going to be happy with his National Senior Citizens Law Center. views on the commerce clause—at least Conservatives hope Roberts will people of my philosophy,” Schumer says. breathe more fire once he has donned the Still, Roberts’ ultimate stance in the Supreme Court’s robes. In today’s expanstates-vs.-feds struggle looms as a big ques- sive view of the commerce clause, “Contion mark. Before he became a judge in gress has the power to regulate anything 2003, Roberts had argued both sides before and everything,” says Roger Pilon, vicethe Supreme Court. As a lawyer for the U.S. president for legal affairs at the libertarian Chamber of Commerce, he supported fed- Cato Institute. “The result of that is you’ve eral marine safety standards when a state got a leviathan instead of the limited govcourt wanted to punish a boat maker for ernment that James Madison envisioned.” not installing propeller guards. But in 2002 Liberals are just fine with that. And he successfully defended California’s right conservatives have been known to put to temporarily prevent building near Lake pragmatism over their states’ rights Tahoe to protect against overdevelopment. principles, as when business pushes Uncle Sam to preempt state regulators or when congressional Republicans snatched the Terry Schiavo right-to-die case out of ENDANGERED SPECIES Several federal appeals courts have weakened Congress’ authority to protect endangered species that never cross state the Florida courts. So lines. The Supreme Court hasn’t taken up the issue. when Roberts faces senators in September, both AGE DISCRIMINATION In 2000 the Supreme Court ruled that Congress sides of the political specoverreached when it tried to prohibit age discrimination in hiring. trum will be eager to try to DISABLED WORKERS The high court has narrowed employment protections pin the Supreme Court for individuals with disabilities, particularly for state employees. nominee down. Given the MEDICAL MARIJUANA In a blow to conservatives, the Supreme Court ruled wide swath that federalthis year that federal drug regulation trumped state laws allowing patients ism cuts through Amerito use locally grown marijuana. can life, his answers could reverberate for a generaFAIR LABOR STANDARDS The Supreme Court so far has defended the tion and beyond. ❚❚ granddaddy of New Deal regulation, in which Congress established a –By Lorraine Woellert minimum wage and a maximum workweek. in Washington

A Judicial See-Saw Since the New Deal, Congress has used its constitutional power over commerce to assert federal authority. Now conservatives are using the courts to push back. Some flashpoints:

August 8, 2005 | BusinessWeek | 33

News Analysis & Commentary THE SUPREME COURT

A STRONG VOICE IN BUSH’S CHOICE White House counsel Harriet Miers had a central role in selecting Roberts

H

sible for reviewing every piece of paper that crosses the President’s desk. She took the counsel’s spot when Alberto R. Gonzales was promoted to Attorney General. In the first few months on the job, she was a key player in the developing strategy for the Administration’s showdown with Senate Democrats over the stalled judicial nominations and will be the point person on future court openings. Despite her influence, friends say Miers is shy and uncomfortable with small talk. Several colleagues from her days on the Dallas city council describe her as “a loner.” Democrats complain that Miers did not visit the Senate Judiciary Committee’s top Democrat, Patrick Leahy of Vermont, during her first six months on the job. After learning of the perceived slight, Miers trekked to the Hill in late June to meet Leahy and Senate Minority Leader Harry Reid (D-Nev.). A stickler for detail, Miers doesn’t have much time for social calls. White House colleagues say that she arrives for work as early as 4:30 a.m. and often departs after 10 p.m., leaving little time for her favorite diversions—tennis, running, and opera. But Senator Kay Bailey Hutchison (RTex.) remembers persuading Miers to see Plácido Domingo sing Wagner. “I went to sleep twice,” Hutchison recalls. “She never even bobbed her head—and she had come to work at 6:00 that morning.” Hutchison says she expects Miers will someday have even more power. If Bush has the opportunity to make additional Supreme Court nominations, “she will definitely be on the short list,” predicts the Texas senator. If so, Bush may be hard-pressed to find someone to match her skills as a vetter. ❚❚ –By Richard S. Dunham in Washington

arriet e. miers was Roberts’ selection was announced, Bush the first person at the gave Miers the sensitive job of telling U.S. White House to learn Fifth Circuit Court Judge Edith Brown that Supreme Court Jus- Clement that she had been passed over. tice Sandra Day O’Connor was stepping down. HIGH IMPACT, LOW KEY And she was at President miers, who declined to be interGeorge W. Bush’s side when he inter- viewed for this article, was a trailblazer viewed prospects, including his ultimate in Lone Star legal circles. She was the pick, Judge John G. Roberts Jr. As the first female partner at a major Texas law President’s lawyer and trusted friend, the firm and the first woman to serve as pres59-year-old Dallas attorney is at the cen- ident of the Dallas Bar Assn. and the ter of Administration strategy on judicial State Bar of Texas. Her list of clients innominations. Says former Texas Republi- cluded Microsoft, Walt Disney, and can Chairman Fred Meyer: “The Presi- Bush, whom she met socially in the dent doesn’t make any big decisions with- 1980s. She joined his 1994 gubernatoriout chatting with her.” al campaign as counsel—and later repBut the same characteristics that en- resented him in a title dispute over his dear Miers to Bush—loyalty and discre- East Texas fishing cottage. Governor tion—make her one of the capital’s least- Bush rewarded her by giving her the known Very Important Players. “She high-impact job of cleaning up the scannever seeks the limelight,” says Educa- dal-tarred Texas Lottery Commission. Miers followed Bush to D.C. and was tion Secretary Margaret Spellings. “She’s just extremely devoted to the President.” assigned one of the most sensitive jobs in That’s just what Bush wanted when he the White House: staff secretary, respontapped Miers, a workaholic with a soft Texas drawl, to oversee the BIO top-secret mission of choosing a replacement for O’Connor. Her task, associates say, was to give the President the pros and cons of each of the dozen or so conThe least visible of Bush’s cadre of powerful women tenders—and find any skeletons AGE 59 FRIEND OF BUSH CREDENTIALS in their closets. “Her job was to Moved in same Dallas social circles EDUCATION B.S. in math and J.D. turn everything upside down to as then-Texas Rangers managing from Southern Methodist University. see what might fall out,” says general partner George W. Bush. former White House deputy JOB Counsel to the President; Served as Bush’s personal lawyer formerly Deputy Chief of Staff for counsel David G. Leitch. and counsel to his 1994 Policy and Staff Secretary. As Roberts moved up the list, gubernatorial campaign. After five Miers reported that he was less LEGAL CAREER Partner at Locke, years as chair of the Texas Lottery vulnerable to liberal attack than Liddell & Sapp LLP in Dallas. Clients Commission, she resigned to work more prominent conservative included Microsoft and Walt Disney. for his 2000 Presidential campaign. judges. On the down side, some FIRSTS First woman to serve as hard-right groups would have to FAMILY Single, no children. president of the Dallas Bar Assn. be convinced that he was not a and State Bar of Texas. PASTIMES Tennis, running, opera. soft centrist. And on the day 34 | BusinessWeek | August 8, 2005

richard a. bloom/corbis

Harriet E. Miers

STERN Aiming to recruit tens of thousands at global giants

middle class in the 1930s. To do so, Stern argues that labor needs to merge into a dozen or so powerhouse unions capable of taking on the giant multinationals that dominate many of these sectors. “We need to set high standards in whole industries,” Stern said when he announced the split-up. He has managed to bulk up the seiu to 1.8 million members by recruiting just these kinds of employees. So far, though, most of his growth has come from easyto-enroll public workers, such as homecare employees. It’s by no means clear that Stern and the other five dissident unions, all poised to quit the afl-cio, can fare better in the private sector.

LABOR TRUE TEST

SO LONG, AFL-CIO. NOW WHAT?

still, they aim to try. One of the largest campaigns involves a joint effort against France’s Sodexho Alliance, Britain’s Compass Group, and Philadelphia-based Aramark, by the seiu and unite here, which represents needletrades and hotel workers. All three companies are global service giants with a total of more than 1 million workers engaged in institutional food preparation and other service work that mostly can’t be sent abroad. The two unions, which already represent workers at the three companies, have been trying to persuade hen two of the operate primarily in services—the 70% management to remain neutral during country’s largest or so of the economy in which jobs can’t new recruitment drives. The unions are unions made histo- easily be sent abroad. close to deals with all three that will likery in Chicago on Within this world, opportunities for or- ly add tens of thousands of new members. July 25 by breaking ganizing are plentiful. Stern’s goal is to foThe dissidents’ true test will come at with the afl-cio, cus on the fast-growing, low-wage service companies such as Cincinnati-based Cinthey were voting jobs that are filled by the bulk of the coun- tas Corp., which has few existing relawith their feet. The two unions, the Service try’s working poor. If labor can recruit tionships with labor and wants to keep it Employees International Union (seiu) enough of these workers, it could lift their that way. unite here has mounted an and the Teamsters, are part of a six-union wages and benefits in much the way aggressive campaign to sign up the $3dissident group that has staked its future unions brought factory workers into the billion-a-year uniform company’s 20,000 on the idea that recruitment eligible workers. So far, is the key to survival. Cintas hasn’t given an The question the dramatinch. unite here has ic rupture raises is whether “done whatever they can the dissidents have a better to hurt the company,” CURRENT EMPLOYMENT PROJECTED way than their foes to resays Cintas Vice-ChairJOB (IN MILLIONS) GROWTH* Seven of the 10 verse the decades-long slide man Robert J. Kohlhepp. Cashier 3.4 13% occupations that has cut union rolls to As U.S. union memberwith the largest just 12.5% of the U.S. workship has declined, ecoCustomer service 1.9 24 force. seiu President Annomic mobility has stagexpected Food preparation 2.0 23 drew L. Stern and his comnated for many on the employment patriots think they do. Most bottom. The breakaway Janitorial 2.2 18 growth through manufacturing unions, such unions hope to put a dent 2012 are in Nursing aide 1.3 25 as those in autos and steel, in that trend, but the odds low-paid have no real plans for coping against them are steep. ❚❚ Retail sales 4.1 15 local services: with globalization. Advan–By Aaron Bernstein, Waiter/waitress 2.1 18 * Projections of job growth tage one for Stern & Co.: with Joseph Weber, from 2002 to 2012 Most of the dissident unions in Chicago

The unions that split will focus on service jobs that can’t easily be shipped overseas

W andrew lichtenstein/corbis

Targets of Opportunity

Data: Bureau of Labor Statistics

August 8, 2005 | BusinessWeek | 35

News Analysis & Commentary BANKRUPTCY IS DELPHI’S TRUMP CARD Will the prospect of Chapter 11 for the parts maker force concessions from GM?

A

t first glance, you’d think Delphi Corp.’s recent hiring of turnaround specialist Robert S. “Steve” Miller Jr. as its chairman would be good news for General Motors Corp. After all, gm still buys gear worth $15 billion annually from its troubled former parts unit. But in recent years, Miller was quick to restructure distressed parts maker Federal-Mogul Corp. and Bethlehem Steel Corp. by seeking bankruptcy protection for both. And the last thing gm Chairman and Chief Executive G. Richard Wagoner Jr. needs right now is for his biggest supplier to head into Chapter 11. Indeed, a bankrupt Delphi would only add to gm’s own financial woes. Miller claims that many of Delphi’s parts contracts with gm are unprofitable—and if Delphi were to file for bankruptcy, Miller says he could cancel the money losers. Plus, if Delphi could no longer fund its obligations to its 12,000 union retirees until September, 2007, it could stick gm with up to $9 billion in pension and health-care benefits that are guaranteed under the spin-off agreement, says analyst Brian Johnson of Sanford C. Bern-

stein & Co. gm says its Delphi-related liabilities aren’t that high, and Delphi is obligated to pay gm back. Still, it’s clear the auto maker faces huge exposure if Delphi fails. Says Miller: “Wagoner needs to think about how he is going to manage the Delphi situation.” Consider that an open offer to begin negotiations. Miller would likely only take Delphi into bankruptcy if he and Wag-

A Record of Toughness Chairman Miller’s earlier turnaround tactics may illuminate his Delphi strategy

ON THE BLOCK He sold Bethlehem Steel to Wilbur Ross and

merged Waste Management into USA Waste in an effort to make them viable. At Delphi, he’ll speed up the sales of factories that make low-margin goods such as air filters. TAKE NO PRISONERS Miller, who wrestled with the United Steelworkers in the past, will likely pressure GM to take back or buy out UAW workers so he can cut jobs and reduce wages. PULL THE PLUG As he did at Bethlehem Steel and Federal-Mogul Corp., Miller could file for bankruptcy to eliminate obligations, including union benefits and some GM parts contracts.

36 | BusinessWeek | August 8, 2005

THREE-WAY TALKS at delphi, look for Miller first to speed up the unloading of poorly performing units; already a dozen plants are marked for sale, closure, or restructuring. Several make low-margin goods such as suspension components and air filters, and more than 80% of the products from those factories go to gm. “Some of these businesses are commodities and are better off being run by someone else,” says Miller. Instead, he wants to focus Delphi’s resources on high-margin areas, so he will likely keep operations such as consumer and auto-electronics products, as well as the medical devices, auto interiors, and propulsion systems businesses. But to do that, he needs gm’s help. Miller can only close plants or sell them if

jimwestphoto.com

AUTO PARTS

oner can’t strike a deal. Delphi lost $408 million on $6.9 billion in revenues in the first quarter. Its pension plan is underfunded by $4.3 billion. Since Delphi took out $2.8 billion in loans before Miller arrived, in part to help cover its pension payments, he has time to talk. The new chairman says Delphi’s board has ordered him to steer the company out of trouble without going into Chapter 11. But he is clearly not afraid of taking such a step. After joining Bethlehem Steel in 2001, he said bankruptcy wasn’t his only option—then filed three weeks later. Miller later sold the company to investor Wilbur L. Ross Jr. “He’s not a bluffer,” says Ross. “I would take him quite seriously, and I would assume gm would as well.” If his past is any indication, Miller is likely to quickly start selling off assets. His career as a crisis manager started in 1979 when nearly bankrupt Chrysler Corp. hired him to help write its government-backed recovery plan. Miller, DELPHI PLANT who later became About a dozen chief financial officer, are marked for sold off jet maker sale, closure, or Gulfstream Aerospace restructuring Corp. and some finance and defense businesses. In 1997, Miller took over at Waste Management Inc., where he had to clean up after an accounting scandal, slash costs, and reduce debt. He sold it the next year to competitor usa Waste. The transaction eliminated $900 million in overhead for both companies.

©2004 Toshiba America Business Solutions, Inc. Electronic Imaging Division. All rights reserved.

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News Analysis & Commentary ever, gm is hardly keen on simply handing cash to Delphi. Johnson estimates that buying out Delphi’s workers today could cost gm $2 billion to $3 billion. “We don’t have any easy solutions,” says gm Vice-Chairman and Chief Financial Officer John M. Devine. “Frankly, subsidizing suppliers is not one of them.” Yet gm has little choice but to bolster Delphi’s health: It needs the company’s parts and could get them cheaper if the supplier can cut labor costs. Says analyst

MANUFACTURING

A Head of Steam On the Factory Floor

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nly a couple of months ago, it looked like the manufacturing sector was losing steam. Profit growth had slowed from 2004’s scorching pace. Worries about the exodus of production to China and the loss of jobs had resurfaced as payroll figures sank lower and inventories began piling up. Add in rising interest rates and high energy prices, and it’s easy to see why investors were cashing out. Turns out U.S. manufacturing still has plenty of spunk. A gust of investment spending, led by the transportation and EATON It’s boosting capital expenditure energy sectors, has boosted demand for industrial gear. Orders for nondefense capital climb 19% this quarter and 22% in the next, excluding one-time items. That comes after a goods excluding aircraft—a good proxy for projected 19% increase in the second business investment—jumped 3.8% in June, quarter, a growth rate twice that of the index. vs. a 0.6% decline in May. The big winners: Only energy and materials did better. Just as communications gear, computers, and impressive, the surge came despite the machinery. “Some of these guys who were weakness in domestic autos. basically going out of business are getting Among manufacturers, makers of a shot in the arm,” says James V. Gelly, industrial equipment and transportation chief financial officer of Rockwell gear are the stars. Automation Corp. Thanks to strong It’s a virtuous cycle STILL GOING STRONG demand in the U.S. and that pushed the group PERCENT overseas, Caterpillar to the top of the 30 Inc. reported a 34% earnings heap in the jump in secondsecond quarter, and 20 quarter profits, to $760 one that will power CHANGE IN million, on a 23% rise growth throughout 10 MANUFACTURING in sales, to $9.4 billion. 2005. According to SECTOR EARNINGS* Both are records—and analysts’ consensus 0 Cat execs promise estimates, earnings at more, boosting its the 54 industrial –10 '04 '05** '03 2005 earnings forecast companies in the *FOR THE 54 MANUFACTURING COMPANIES IN THE S&P 500 CONSENSUS ESTIMATES Q 2-4 to $2.85 billion. Boeing Standard & Poor’s 500- **ANALYSTS’ Data: Thomson Financial Co. also hiked its stock index should

38 | BusinessWeek | August 8, 2005

Maryann N. Keller, principal of consultant Maryann Keller & Associates: “It’s not a question of whether gm helps Delphi, it’s how gm helps Delphi.” True enough. As Wagoner sits at the bargaining table trying to pry concessions from the uaw for gm’s own problems, he must launch into an another thorny set of talks with Delphi. And in Miller, gm faces a tough and seasoned negotiator. ❚❚ –By David Welch in Detroit, with Michael Arndt in Chicago outlook, while other industrial-equipment makers such as Ingersoll-Rand Co. and Eaton Corp.surprised Wall Street and upped their full-year numbers, too. The roots of these returns go back to the industrial recession that stretched into 2003. To survive, most manufacturers cut costs to the bone by eliminating inefficient equipment and slashing headcounts. Today, with limited production capacity and strong worldwide demand, companies have been able to raise prices. At Cat, for example, price hikes of around 5% added $470 million to revenues this quarter. In the second quarter, 3M Co. jacked up prices by 2% in the U.S. Companies are using the money from price hikes to pay for new equipment and plants and to hire employees. Manufacturing investment in the second quarter grew to an annualized rate of $15.1 billion, up 26% in a year, according to Economy.com. Indeed, tightness on the factory floor is forcing Eaton to spend around $400 million on capital expenditures this year. Eaton is hiring too, with 400 jobs posted on its Web site. At Cat, U.S. payrolls are up by 10,000 over the past year, to 82,250. Despite those gains, however, the strong profits are not generating overall job growth. Offshoring continues, and new domestic factories often require a fraction of the headcount. Manufacturing jobs in the U.S. fell by 60,000, to 14.3 million in the year through June. More will be lost. In recent months Eastman Kodak Co. has said it will lay off over 20,000 and Kimberly-Clark Co. plans to let go of 6,000. Still, even as the industrial recovery enters its third year, manufacturers remain upbeat. Though analysts expect profit growth will slow to 13% in the first quarter of 2006, China’s July revaluation of the yuan by 2.1% has increased hopes that exports will grow anew and the sector will surprise again. For a long-suffering group, good news of any size is welcome. –By Adam Aston in New York and Michael Arndt in Chicago

photograph by ann states; chart by eric hoffmann/bw

he gets a nod from the United Auto Workers and a deal with gm to take back workers or buy them out. If Wagoner, Miller, and the uaw can agree to major labor cuts at Delphi, an existing union pact would let Delphi hire workers at $14 an hour, one-third less than current wages. The lower wages would make some plants more salable. “We have labor costs that are noncompetitive,” says Miller. “We’re looking for assistance from gm.” Given its own financial problems, how-

year based on our first quarter and what we have coming up in the fall,” says Sony Pictures Entertainment Chairman HOLLYWOOD Michael Lynton. The problem for Sony is that most of the first-quarter strength came from strong comedies like Hitch and Guess Who. That was before the current string of summer flops. Indeed, full-year numbers could be off substantially, figures Standard & Poor’s. On July 16, s&p’s equity unit urged a “strong sell” on the company’s shares, based on “expectations of weak profitability in the electronics and movie businesses.” Oddly enough, some of Sony studio’s current problems may stem from the cost-cutting measures ince a certain webthat Stringer put in place crawling character swung back in 2001 and that into movie theaters in helped propel him to the OPENING BUDGET BOX OFFICE TAKE FILM DATE IN MILLIONS IN MILLIONS* 2002, few studios have top corporate job. In a flexed their muscles more money-saving move, $87 xXx: State of the Union Apr. 29 $21 than Sony Pictures. Riding Sony cut a deal to share $25 Lords of Dogtown June 3 $11 Spider-Man’s heroics, production expenses with Sony Pictures topped studios in both marformer Fox studio chief $85 Bewitched June 24 $57 ket share and profitability. Last year, Sony Joe Roth’s Revolution *As of July 22 Data: The Movie Times, imdb.com Pictures unit earned a nifty $597 million, Studios. But the move roughly half the operating earnings of its Coming later this year is a sequel to the backfired when Sony got stuck with xXx: struggling electronics parent company. 1998 The Mask of Zorro, starring Antonio State of the Union, a sequel to xXx, but But now the studio that Spidey built Banderas, followed next year by The Da without the original star, Vin Diesel. seems to have crashed to earth. In recent Vinci Code, starring Tom Hanks. But the Sony nevertheless paid $40 million in months, Sony has churned out such next Spider-Man won’t swing by till 2007. marketing costs and will probably take a mediocre, money-losing fare as xXx: State Sony executives aren’t professing wor- writedown after the $85 million film of the Union and Lords of Dogtown. Even ry, at least not yet. Indeed, results for the grossed a mere $25.6 million. Nicole Kidman’s star power hasn’t been fiscal first quarter, ended in June and Sony’s tv production unit has also enough to charm Bewitched. Sony’s mar- scheduled for release on July 28, were ex- suffered from ill-timed cost-cutting. Afket share this summer has fallen to 3.4%, pected to show a nice jump. “I’m very ter scaling back on pilots, it has few hot way down from last year’s 15.6%. That comfortable where tv shows to syndicate, as was the case leaves it last among the top eight studios, we are for the earlier with Seinfeld and The King of says Nielsen edi, down from No. 4 last full fiscal Queens reruns. It managed to place only summer. For the whole one of seven pilots on networks this year, Sony comes in fourth, KIDMAN Duds like year: Emily’s Reasons Why Not on abc. Bewitched are its lowest in four years. “It was a lousy year for them,” says Maybe it’s just Sony’s putting a hex Horizon Media Senior Vice-President time in bombsville. But on the studio Brad Adgate. He says that Sony cut new Sony Corp. ceo Howback just as the networks were scramard Stringer can hardly afbling for new and unusual products. ford a stumbling studio just To attempt to boost profits, the companow. He faces plenty of ny rushed out Seinfeld tv shows on dvd other big problems in and has also shipped dvds of its gritty Japan, not least curbing a cable crime drama The Shield. But recyslide in consumer electroncling hits will only get you so far. That’s ics, partly brought on by why Sony is banking on future hits warring hardware and softfrom its September purchase, in ware units. “Howard needs consortium, of the old mgm a misfiring studio like a studio. That has given it a hole in the head,” says a top potential gold mine—the studio executive. James Bond franchise. That’s why so much is Now, if only a new crop riding on Sony’s next batch of 007 flicks can just sell of movies. It’s newest entry, like Spidey. ❚❚ the special-effects flick –By Ronald Grover Stealth, opens on July 29. in Los Angeles

BOTHERED AND BEWILDERED AT SONY

Bewitched and other movies haven’t done the trick at the box office. Can Stealth?

everett collection

S

Sony’s Summer of Discontent

August 8, 2005 | BusinessWeek | 39

News In Biz This Week EDITED BY MONICA GAGNIER

JEFF BEZOS

NOW COMES THE FLOOD For the past four quarters, Amazon.com CEO Jeffrey Bezos has disappointed Wall Street with tepid earnings, a cautious outlook, or both. Not this time. Although higher income taxes cut net profit from a year ago, the e-tailer beat expectations, as operating profits rose 21%, to $104 million, on sales of $1.75 billion. Amazon also hiked profit and sales forecasts for the year. Investors responded by bidding up its shares by 12%, to $42.45, on July 27. What was behind the surprise? Free-shipping offers and sales by other merchants, from Target Stores to mom-and-pop outfits. Highly profitable fees from those merchant services, which Amazon combines with revenues from a credit-card offer, doubled for the second quarter in a row, to $50 million. Bezos is hardly home free, though. Tech costs shot up 49%, and he added three new distribution centers recently to handle growth. But the latest results hint that maybe, just maybe, Bezos’ ambitious strategy could pay off. –Robert D. Hof

ORACLE’S BANK SHOT Just months after it planted a flag in the retailing software market with its acquisition of Retek, software giant Oracle is on the move again. It’s in talks to buy Citigroup’s 43% stake in i-flex Solutions of India, one of the world’s leading banking software suppliers, according to a source familiar with the talks. If Oracle succeeds in buying Citicorp’s share, it is expected later to acquire a controlling interest in the publicly traded company. Oracle is bolstering its presence in industryspecific software to get a leg up in its battle with corporate applications rival SAP.

WHO’S WHO IN HAPPY MEALS

Ronald McDonald has a new sweetie. After linking up with Walt Disney in 1996 in a 10year exclusive crossmarketing deal, McDonald’s said on July 27 that it will hook up with rival animation studio DreamWorks in 2007. The two-year pact will commence with the release of Shrek III and could be extended. The partnership is likely to bruise Burger King, which used Shrek and its first sequel to boost kids’ traffic. As for Disney, the impact isn’t as clear. McDonald’s executives say they still might promote Disney characters

40 | BusinessWeek | August 8, 2005

after their contract expires at the end of 2006. But they also say they will no longer be tied down to a single partner. Indeed, Ronald is flirting with Pixar, too.

A GENERIC JUGGERNAUT Generic drugs may not be sexy, but they’re certainly hot. Teva Pharmaceutical Industries on July 25 acquired Ivax for $7.4 billion in cash and stock, marrying two of the world’s top makers of generic drugs. Nearly $40 billion worth of branded drugs are slated to go generic in the next two years, and Israel-based Teva is now in prime position to grab a chunk of the new business. The newlyweds could get a big boost from insurance companies and the upcoming Medicare prescription-drug program— both of which are expected to push the idea of inexpensive generics to patients. Investors pushed shares of Miamibased Ivax up 11.2%, to $25.45, in the two days following the merger. Teva’s shares stayed relatively flat at $31.92.

MISSPENT ENERGY? Breaking a long logjam, on July 26, House and Senate conferees agreed on the final details of a sweeping energy bill. The measure reduces the chances of another blackout by mandating reliability standards for the grid. It requires more efficient air conditioners and other appliances, and it includes tax breaks or incentives for everything from hybrid cars and nuclear energy to wind and solar power. But the majority of the $14.5 billion in tax subsidies go to increasing supplies of oil,

gas, and electricity and boosting coal use. That’s why Democrats and enviros say it’s a giveaway to big energy companies and won’t reduce America’s dependence on oil imports or spur renewable fuels. The full House and Senate are expected to approve the bill quickly.

ET CETERA . . . >>

Dupont lowered its 2005 earnings forecast, due in part to higher energy costs. Lockheed Martin’s net earnings soared 56% to $461 million on a 6% rise in sales to $9.3 billion. GMAC will sell Bank of America $55 billion in auto loans over the next five years.

>> >>

CLOSING BELL

Shares of Corning rose 5.3% to $19.17, on July 27, their highest level since the telecom bubble burst in 2001. Strong sales of the company’s liquidcrystal-display glass for flat-panel TVs and computer monitors helped push up secondquarter earnings 53%. 20.0

DOLLARS

19.5 19.0 18.5 18.0 17.5 0

CORNING STOCK PRICE JULY 22, '05 Data: Bloomberg Financial Markets

JULY 27

bezos: frank micelotta/getty images; shrek: getty images

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News International Business CHINA

BLOGS UNDER ITS THUMB How Beijing keeps the blogosphere from spinning out of control

Good Blogger/Bad Blogger

42 | BusinessWeek | August 8, 2005

quentin shih/asia images

T

hese are busy times are looking to cash in on the craze. Fang for Li Li, a 27-year-old pio- himself is chairman of Beijing Blog neer of the Internet in Times Information & Technology Co., a China. Using the pen startup that operates Bokee, a blogging name Muzi Mei, Li started portal that claims to have some 2 million writing a Web log about users. Its main rival, Hangzhou-based her romantic adventures Blogcn, claims 2.5 million bloggers, and back in 2003. Today, she is working to like Bokee has just launched blogging via promote blogs—Web sites where people cell phones. And both have attracted bigpost their musings and opinions—at name support: Blogcn is backed by home and abroad: Last November she Boston-based International Data Group, was a judge at a blog competition in Ger- while Bokee got money from the Softbank many, and she’s helping organize one in Asia Infrastructure Fund, a partnership China. But Li has given up trying to pub- between the Japanese company and U.S. lish her own sexually charged blog in her networking giant Cisco Systems Inc. home country and last year shifted it to a Chinese-language site in the U.S.—far TAIWAN TABOO from China’s cybercops. “With a blog, it’s beijing is depending on sites such as very easy to get attention from everyone,” Bokee and Blogcn to keep the Chinese she says. But having her blog hosted in blogosphere in control. Political blogs in possible to have that sort of thing.” China was “too much trouble,” she adds. the U.S. have challenged both the governThe limits are clear. Chinese bloggers Millions of Chinese, it turns out, are ment and mainstream media, something can’t promote the banned Falun Gong trying to get some attention—though Bei- China’s Communist Party rulers aren’t movement, advocate Taiwanese indejing is doing its best to keep undesirables about to let happen. “The U.S. has many pendence, or call for China’s withdrawal such as Li out of the virtual conversation. famous bloggers, and they have a big in- from Tibet—and the government is reChina today has about 3 million bloggers fluence,” says Hu Zhiguang, the 27-year- markably good at keeping such thoughts and could have as many as 7 million by old chairman of Blogcn. “In China, be- out of China’s blogosphere. Both Blogcn the end of 2007, according to market cause of the political environment, it’s not and Bokee have filtering systems that preresearcher Analysys vent users from writInternational. “Blogs ing about taboo topwill go through an exics. A Blogcn user, for plosive growth periinstance, who tries to od,” predicts 37-yearwrite “Falun Gong” As more TOLERATED BANNED old Fang Xingdong, will find the term ■ Exploits of pop stars Chinese enter the ■ Calls for democracy whose writings about converted to gibbertechnology and the Inish on screen. If a forblogosphere, they’re ■ Criticism of top leadership ■ Fashion dos and don’ts ternet have made him bidden phrase makes ■ Taiwanese independence ■ U.S.-China relations finding strict rules one of China’s top it past the filter, the ■ Tibet’s Dalai Lama ■ Economic critiques on what they bloggers. company might get a ■ Nudity and explicit sex ■ Mildly erotic writing No wonder locals call from the police can write about and foreigners alike demanding that the

YANG limits his blogging to issues concerning business and info tech

who has been blogging since 2002. In March, he quit his job at a media company to care for his ailing mother and blog full-time, following issues such as the development of blogging in China and Internet technology. “At work, I had to write about things related to the news,” he says. “With my blogs, whatever I want to write, I write.”

LETTING OFF STEAM

offending post be removed. “We can immediately fix it,” says Hu, who adds that he has gotten only “four or five” such calls in the past two years. It’s not just Chinese companies that cooperate with the censors. A joint venture operated in China by Microsoft Corp.’s msn blocks words such as “democracy” in the subject lines of blogs on its site. Microsoft says it is simply complying with Chinese laws and norms. And China’s censors can intercept traffic from overseas servers such as the one that carries Muzi Mei’s blog. For instance, San Francisco-based Six Apart, which hosts Chinese-language blogs, has been blocked from the mainland twice. “China would be an opportunity for us if a Western company could go in and have a dialogue, but right now that’s not the case,” says Anil Dash, a Six Apart vice-president. So it’s no surprise that most Chinese bloggers focus on safer topics. Among the

most famous is a 28-yearold native of rural Shaanxi Province who calls herself Furong Jiejie (or Sister Hibiscus) and posts mildly provocative photos of herself—though showing more skin would likely be banned. Blogcn offers a “lovers blog” where couples can include romantic background music and whisper sweet nothings into the blogosphere. Others concentrate on travel, cooking, and culture. For instance, 30year-old Liu Yuan started a blog three years ago when she lived in Paris and has since covered topics ranging from French monetary policy to Chinese tv shows. Other fairly safe topics include business and information technology. Shen Yang is a 44-year-old Beijing resident

as long as bloggers toe the line, the government seems to tolerate their musings as a way for ordinary folks to let off steam—and is even giving blog companies a hand. Blogcn is headquartered in a Hangzhou municipal building for digitalmedia companies. And Bokee recently invited Xie Haiguang, vice-director of Shanghai’s Office of Public Opinion and Propaganda Leading Group, to give an address at a company event. “With blogs, 1.3 billion people can all speak,” Xie says. “They can very freely express their thoughts.” China’s emerging blog companies are trying to figure out the next step. Bokee plans to install equipment allowing it to handle 10 million users by yearend and is about to close on $10 million in new funding. Blogcn gets most of its current revenue from advertisers including eBay, but it will soon charge companies for blogs where they can post internal communications. And it plans to start charging for other services, such as additional storage for bloggers who find the 10 megabytes they get for free isn’t enough to handle audio and video content. Still, it’s unclear whether anyone will actually make money from China’s bloggers. Without the politically charged blogs that are popular in the West, China’s sites may find it tough to keep readers from drifting away once the novelty wears off, says Analysys researcher Sun Lilin. He thinks growth will slow next year. “Just doing blogs is not enough, because of the restrictions,” he says. Maybe so, but with so many Chinese taking to the Internet, there’s no shortage of entrepreneurs betting that even a censored blogosphere is a pretty good place to earn a profit. ❚❚ –By Bruce Einhorn in Beijing, with Heather Green in New York

A blogger who writes “Falun Gong” will find it converted to gibberish

August 8, 2005 | BusinessWeek | 43

News International Business C O M M E N TA RY BY BRIAN BREMNER

The Yuan Is Growing Up Now free of the dollar, it could develop into a major world currency

C

all it one small step for China, one very big step for the world. While it’s always hard to see the long-term consequences from an event, financial historians may mark July 21 as the real start of China’s development as a global monetary power. That was the day China offered up a modest revaluation of the yuan, and said it would begin to adjust the value based on

a basket of currencies, ending the peg that had been in place since 1994. In itself, that’s no big deal. Plenty of economies peg their money to a basket of currencies. So why is China any different? It’s still carefully managing yuan exchange-rate movements. Its ultratight capital controls mean money can’t move freely into the country—or out. And it’s certainly not interested in making its exports expensive enough to slow down a rip-roaring economy. So in practical terms, little changed between July 20 and July 22. But the reason the move to revalue has attracted so much attention is simple. It involves China, a $1.6 trillion economy that punches way above its weight when it comes to trade, global commodity consumption, and capital flows. More revaluing will come. China has some $700 billion in currency reserves, mostly dollars, in its treasury, the secondbiggest stash after Japan’s. That gives it a lot of heft in global foreign exchange markets. Unlike tiny Singapore, which also uses a basket, when China decides to tinker with the value of its currency vis-à-vis others, it will be felt around the world. Beijing’s decision to allow the yuan to rise about 2% against the dollar in July may be only the opening salvo of a carefully managed, multitiered appreciation over the next couple of years, although Governor Zhou Xiaochuan of the People’s Bank of China (pboc) denies that. David Malpass, Bear, Stearns & Co. chief economist in New York, expects a 6% gain by the end of 2006 while Nouriel Roubini, an associate economics professor with New York University’s Stern School of Business, sees a 10% yuan appreciation vs. the dollar in the next 12 months. Here’s why China’s move could

The People’s Bank of China gets to act like a real central bank now

44 | BusinessWeek | August 8, 2005

be a step toward the yuan becoming a major world currency. First, the People’s Bank now can act like a central bank, not just a foreign outpost of the U.S. Federal Reserve. Until now, the pboc had to stabilize the yuan by buying huge amounts of dollars from exporters in exchange for the Chinese currency every time the dollar weakened—often in response to Fed moves. Also, China has been powerless to stop its currency from moving in lockstep with the dollar against other major currencies such as the euro and yen. But with a basket system that includes, say, the dollar, yen, euro, and key Asian currencies, it can juggle the weightings more flexibly. The yuan might rise against the dollar but fall against the euro or yen. After all, China’s biggest trading partner as of mid-2005 was the euro zone, followed by the U.S.

China Talks, Asia Listens second, china now has an arsenal to use against speculators. By not disclosing the contents of its basket, it leaves markets uncertain about the timing of future yuan revaluations. True, this may open the door to more currency speculation among those expecting a further pop in the yuan-dollar rate. But speculators used to making big one-way bets on the currency based only on dollar movements will need to think twice. After all, Beijing still sets the foreign exchange rate—not the open market. Big multinationals and Chinese companies with international operations will also need to brace for more cur-

photographs by ap/wide world

rency risk. The offshore market for nondeliverable forward currency derivatives used by foreign investors to bet on the yuan’s future value will surely grow. Businesses are sifting through the implications of China’s move, as are its Asian neighbors. Some already seem to be resetting their clocks to the Chinese sundial. It’s no coincidence Malaysia dropped its seven-year peg to the dollar moments after the People’s Bank made its announcement. The Bank Negara Malaysia began managing the ringgit against a similar currency basket. Now that China has allowed the yuan to appreciate, other Asian nations can follow suit without worrying about losing price competitiveness. “It was a radical move if you look at the impact on Asian currencies,” says nyu’s Roubini. Will all this turn the yuan into a global supercurrency? Not yet. But with so much intra-Asian trade being driven by China, its notes have begun to emerge as a key proxy currency for regional central banks. China’s growing trade clout may also mean mainland companies will insist on being paid in yuan—and let others worry about exchange risk. Longer term, DEPEGGED The yuan the yuan may is linked to a basket catch on as a viof currencies able dollar alternative among Asian central banks in a way the yen never did. “Within a year or two, many Korean and Chinese companies will use the yuan and the won to settle trade between them,” says Hwang Yoon Jin, senior researcher at the state-funded Korea Institute for Industrial Economics & Trade. To really get yuan circulating internationally—and qualify as a big league currency—Beijing will need to lift its ban on overseas investment by private Chinese citizens. Until then, the yuan shift by Beijing will look like a modest development. Yet the death of the yuandollar peg may well be remembered as a defining moment in China’s economic ascendancy. The age of the yuan may come sooner than anyone thinks. ❚❚ –With Chester Dawson in New York, Assif Shameen in Singapore, and Moon Ihlwan in Seoul

GREECE

SHIPPING THAT’S NOT ALL IN THE FAMILY

A new generation is bringing transparency to an industry long shrouded in secrecy

I

n the u.s., children grow up wanting to be professional basketball players; in most of Europe, soccer stars. But Evangelos J. Pistiolis is Greek, so he dreamed of running his own shipping company. “I liked shipping the way [Salvador] Dalí liked painting,” he quips. So by the time he was 27, in 2000, Pistiolis had bought his first ship, with help from his father, a wealthy contractor. Last July he took his company, top Tankers Inc., public on the nasdaq, raising more than $146 million. Forget about Aristotle Onassis and Stavros Niarchos—there’s a new generation of Greek shipping tycoons in the making. Besides Pistiolis, it includes Nikolas P. Tsakos, 42, of Tsakos Energy Navigation Ltd.; Victor S. Restis, 36, of Restis Group; and Angeliki Frangou, 40, of International Shipping Enterprises. These guys are just as comfortable around PISTIOLIS, 32 balance sheets as they He earned a are around ballast master’s tanks, and they hold degree in degrees from foreign shipping operations universities. Also unlike their in Britain predecessors, they generally keep a low profile. Just about the only Greek shipping scion who is making headlines these days is Paris Latsis—and that’s only because the 27-yearold heir to a reported $7.5 billion shipping fortune is engaged to hotel heiress Paris Hilton. “The new generation of shipowners is better-educated and better-trained than Onassis and Niarchos were when they got started,” says Nicholas Gage, author of Greek Fire, a biography of Onassis. “And they are running their companies on more sound business practices,

while seizing the opportunities the current shipping boom is providing.” The boom is being driven by surging demand for oil and other commodities in fast-growing economies such as China and India. That demand—coupled with a short supply of sturdier, less polluting vessels—has propelled oil-tanker rates to their highest level since the oil crisis of the 1970s. These trends have in turn bid up the shares of tanker companies, a business in which Greeks control close to one-third of the world’s tonnage. top Tankers’ shares are up over 50% from their initial offering price of $11, and other shipping stocks are soaring, too.

CHINA-FUELED BOOM the trend toward public listings—a half dozen Greek shippers have gone public in the past 12 months—is bringing new transparency to what was previously a murky business dominated by powerful families. “Family money and family management are no longer competitive with public markets,” says James Christodoulou, chief financial officer for Prime Marine Management Inc., an unlisted Athens-based company. There are those who fear that a recent retreat in shipping rates could signal an end to the two-year-old, China-fueled boom. But those who track the industry say that with China’s economy forecast to roar ahead at a 9.6% growth rate this year and India growing at 6.9%, demand will remain strong. For the new generation of Greek shipping executives, it looks like a smooth cruise ahead. ❚❚ –By Alkman Granitsas in Athens August 8, 2005 | BusinessWeek | 45

News International Business ernment. A recent poll by the Public Opinion Foundation found that 80% of Russians approved of the President’s policies. The proportion among those under 35: 87%. “Young people regard Putin as one of their own. They constantly see him skiing, driving around in tanks, piloting planes, and talking to young people,” says Konstantin Chistyakov, 22, a project manager for marketing firm itm in Moscow. NASHI RALLY Fostering nationalist pride

SHARP CONTRAST

RUSSIA

such patriotism was on parade at the celebration of the 60th anniversary of Russia’s victory in World War II. A May 15 Nashi-organized street march in Moscow to honor war veterans drew 60,000. In contrast, youth demonstrations against Putin’s curbs on the media or the war in Chechnya rarely lure more than a few hundred. Nashi member Andrei Moiseenko pines for the days when the Soviet Union was a superpower. “There was a great deal of patriotism,” says the 19year-old accounting student from Kursk. But nostalgia for the glories of the old Soviet Union goes only so far. Unlike older Russians, who often believe life was better under Communist rule, a majority of young Russians say the market constitutional coup,” Gleb Pavlovsky, an reforms and democratization of the adviser to Russian President Vladimir V. 1990s were necessary. They’re also more Putin, told enthralled campers. They are interested in advancing their own caalso instructed to stay vigilant against reers than in politics. “In Soviet times it manipulations from the West. Asked if was fashionable for kids to want to bethe U.S. is a threat to Russia, camper come cosmonauts. Then they wanted to Dasha Ninova, an 18-year-old public-re- become gangsters. Now they want to be lations student from Kaluga, in western bankers and lawyers,” says Alexander Russia, answered: “The U.S. is a country Zhludnev, 17, who traveled to Camp Seliger from Kursk, that wants power over where he is studying other countries.” public relations. Ninova and other Putin, whose rhetoNashi followers don’t ric combines nostalgia come across as scary nationalists. Most say Young Russians earn more for the Soviet past with calls for political they joined up out of a than their parents... and economic modpatriotic desire to help AGE GROUP AVERAGE MONTHLY ernization, has capout in their communiINCOME tured the contradictoties. And although 18-29 $225 ry mood of the Nashi claims it has 50+ $180 nation’s youth. But his 100,000 supporters naliberal critics hope tionwide, one survey that the resurgent nafound that only 15% of ...and are more supportive tionalism represented Russians under 25 have of reforms by groups such as heard of it. Still, Nashi Should economic reforms continue? Nashi is a passing taps into attitudes that phenomenon on the are widespread among AGE GROUP YES NO road to a more mature Russia’s youth. Young 18-29 41% 11% political future. ❚❚ Russians are more likely 50+ 20% 34% –By Jason Bush in than their parents to Data: Levada Center, May, 2005 Lake Seliger, Russia support the Putin gov-

PATRIOTISM AND PUTIN ROCK!

To Russian youth, the President embodies reform and longing for the superpower past

46 | BusinessWeek | August 8, 2005

Generational

Divide

alexander natruskin/reuters

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t’s 7:30 on a saturday morning in July. On the scenic shores of Lake Seliger, about 220 miles northwest of Moscow in the Tver region, some 3,000 young Russians are emerging sleepily from their tents, summoned to morning assembly by the booming strains of the Russian national anthem. Camp Seliger offers its teenage denizens hiking, swimming, sports, and cookouts. But this camp has a twist. It’s run by a new political youth movement called Nashi (“Our Own” in Russian). Its purpose, along with outdoor summer fun, is to build up patriotic fervor in young people through a series of lectures and seminars. Nashi was born earlier this year as the Kremlin’s answer to Ukraine’s Orange Revolution, in which thousands took to the streets to back pro-Western opposition leader—now President—Viktor Yushchenko. The Kremlin fears that the revolutionary bug may be contagious, which is why it has openly backed Nashi’s creation. Not since the days of the Komsomol, the Soviet-era youth movement, have Russia’s leaders lavished so much attention on the nation’s young people. “Your task is to physically resist any attempts to carry out an un-

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The Corporation Strategies TAXUS STENT Boston Scientific’s device, like J&J’s, has a drug coating

post-Vioxx world, companies that fail to address potential safety problems as quickly as possible face severe repercussions. In fact, plaintiffs’ lawyers are already sniffing at this problem. Blood clots have always been a risk with stents, since clotting is a natural bodily defense against a foreign object or injury. Both Boston Scientific and Johnson & Johnson say their ongoing clinical trials do not show that drug-coated stents pose a greater risk of late clots than the bare-metal versions. “We don’t see anything going on with Cypher that you wouldn’t see with a bare-metal stent,” contends Dr. Brian G. Firth, vice-president for medical affairs and health economics with Cordis Corp., the j&j stent unit. But Dr. Joerg Koglin, senior medical director for Boston Scientific, notes: “Nobody has a definitive answer. Is there a hidden more frequently occur with drug-coated problem? We have to pay a lot of attenstents. Dr. Mark J. Eisenberg, associate tion there.” professor of medicine at McGill University, Researchers are focused on two likely says those clots almost always cause a heart culprits: the materials that hold the drug attack—and in 20% of cases the attack will on the stent, and the drug itself. The drugs be fatal. “These are catastrophes,” he says. are held on the stent by artificial materials known as polymers. Dr. Jeffrey W. Moses, LOST REVENUES director of the Center for Interventional if drug-coated stents—now used in Vascular Therapy at Columbia University nearly 9 of 10 stent procedures in the Medical Center, theorizes that these polyU.S.—are proven to be more dangerous mers may cause a reaction in some pathan bare-metal ones, it could be a finan- tients or may flake or crack on the stent. cial blow to both j&j and Boston Scientif- That may cause inflammation, which sets ic. Boston garners 41% of its revenues off the body’s immune responses—and from its Taxus stent. And even widely di- possibly a blood clot. Scientists also point versified j&j said its Cypher stent drove to the drugs as possible causes. The drugs 25% of second-quarter sales growth. are designed to slow the growth of cells Those products helped propel both com- that cover the inside of the stent. That prepanies onto the BusinessWeek 50 list of vents reclogging, a common problem with top corporate performers. bare-metal stents. But that also slows the The stakes could very well go beyond normal healing process that walls off forlost revenues. Competitors eign objects like stents and fixTHE such as Medtronic Inc. and BUSINESSWEEK es injured vessels. So when the FIFTY Abbott Laboratories are deblood-thinning therapy, given veloping their own stents feafor a few months after stents turing a coating made of a are put in, is stopped, the synthetic copy of the outside body’s healing response can of a red blood cell that may include forming a clot. reduce clotting risk. And, in a The Best Performers Dr. Renu Virmani, medical

In a Bind Over Stents Safety concerns about

D

rug-coated stents have been a bonanza since their U.S. debut in 2003. Close to 21⁄2 million of the tiny devices, which help clear blocked coronary arteries, will be implanted this year around the world. According to Citigroup analyst Matthew J. Dodds, Boston Scientific Corp. and Johnson & Johnson, which own the market, will rake in $5.5 billion in sales from the so-called drug-eluting stents this year—a 36% gain from 2004. But there’s growing concern about these medical marvels: Do the drug-coated versions pose a higher long-term risk of life-threatening blood clots than the oldfashioned bare-metal variety did? Several papers have been published in medical journals examining cases of patients who experience blood clots more than one month after getting the stent, and in some instances a year or more after the procedure. The incidence appears to be rare— maybe a few patients out of a thousand, according to studies by the companies. While there’s no hard data to prove it, some cardiologists think the late clots

48 | BusinessWeek | August 8, 2005

50

ho, boston scientific/ap/wide world

the devices from J&J and Boston Scientific could open the way for rivals

The CorporationStrategies Stents that could lower the risk of clots may take years

director of a research service of the International Registry of Pathology, has long suspected these drugs could pose a problem. A pathologist who has received funding from Cordis, consulted for Boston, and is now doing work for Medtronic, Virmani has seen heart vessels from 40 deceased drugcoated stent patients, 14 of whom died because of a late blood clot. She says that in most of those cases she saw evidence of delayed healing in the area around the stent. Showing slides from tissue taken from one 68-year-old woman who died from a heart attack brought on by a clot on her stent, Virmani points out that “the vessel is not healed properly.” Boston says there are many possible reasons for clots but says they are extremely rare. j&j says its trial data indicate healing is occurring.

stents are comparable, a perception lingers among some that Taxus is riskier. That has helped j&j gain share, says analyst Dodds. He figures that Boston, which still holds 59% of the U.S. drug-coated stent market, has lost six share points to j&j since the third quarter of last year. Ultimately, physicians may never get a definitive answer to whether the drug-eluting stents are riskier than the bare-metal ones. Boston and j&j will spend five years following more than 5,000 patients who got either type of stent in their clinical trials. Problem is, those studies aren’t large enough to give a solid answer because the later clots are so rare. Neither company is planning a massive trial to nail down the clotting risk. “We are stuck in this foggy situation,” laments Dr. Eric J. Topol, chief of cardiovascular medicine at the ClevePERCEPTION PROBLEM land Clinic Foundation. early signals from research have alEven though doctors don’t foresee a ready had an impact on the market. One study that definitively addresses the latestudy has shown a higher overall risk of clotting risk, Boston and j&j are expected clotting with Boston’s Taxus than with to try to develop safer models. Boston’s Cypher. But it wasn’t large enough to de- Koglin says the company’s next-generation termine with certainty that Cypher is safer. technology is aimed both at lowering the Still, while plenty of cardiologists think the reclogging rate of arteries and reducing the risk of clotting. He says Boston is working CYPHER on making polymers—or J&J’s stent even whole stents— biodegradable, so they disappear over time. j&j declined to comment on its next-generation stent projects. But according to a cardiologist familiar with the project, j&j has tested a drug-eluting stent Drug-coated stents have become a that also contained the $5.5 billion business for Johnson & drug Heparin in an effort Johnson and Boston Scientific. But to reduce clotting risk. Of course, there’s no questions about long-term clotting risks guarantee that these techcould shake up the market. Here are the nologies will pan out. In players and their positions: the meantime, physicians are growing frustrated. BOSTON SCIENTIFIC With a 59% market share, its Taxus Although stent-related stent is dominant in the U.S. But it suffered a costly recall deaths don’t appear to be last summer due to an unrelated problem, and now may numerous, “this isn’t trivlose share as new studies raise safety questions. ial,” says Cleveland’s J&J Its Cypher stent (above) holds 41% of the U.S. market Topol. With millions of and could make further gains as a result of the safety these devices being imquestions surrounding Taxus. But some doctors believe planted every year, even a the clotting risk is the same for the rival products. relatively rare problem UPSTARTS Medtronic and Abbott Laboratories are will be hard to ignore. ❚❚ readying their own stents and could benefit from the –By Amy Barrett in controversy surrounding Taxus and Cypher. Philadelphia, with John Data: BusinessWeek Carey in Gaithersburg, Md. 50 | BusinessWeek | August 8, 2005

johnson & johnson/via bloomberg news

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COVER STORY

wardrobe stylist: Allyson vieira; clothing courtesy issey miyake

THE STATEOF

SURVEILL ARTIFICIAL NOSES THAT SNIFF EXPLOSIVES, CAMERAS THAT I.D. YOU BY YOUR EARS, CHIPS THAT ANALYZE THE HALO OF HEAT YOU EMIT. MORE SCRUTINY LIES AHEAD. BY CATHERINE YANG photo-illustrations by aaron goodman

ANCE August 8, 2005 | BusinessWeek | 53

COVER STORY

james p. gilman, c.r.a./phototake

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ost in the recent london bombings, along with innocent lives, was any illusion that today’s surveillance technology can save us from evildoers. Britain has 4 million video cameras monitoring streets, parks, and government buildings, more than any other country. London alone has 500,000 cameras watching for signs of illicit activity. Studying camera footage helped link the July 7 bombings with four men—but only after the fact. The disaster drove home some painful reminders: Fanatics bent on suicide aren’t fazed by cameras. And even if they are known terrorists, most video surveillance software won’t pick them out anyway. Tomorrow’s surveillance technology may be considerably more effective. But each uptick in protection will typically come at the cost of more intrusion into the privacy of ordinary people. For now, the public seems to find that trade-off acceptable, so scientists around the world have intensified efforts to perfect the art of surveillance, hoping to catch villains before they strike. Research laboratories envision tools that could identify and track just about every person, anywhere—and sound alarms when the systems encounter hazardous objects or chemical compounds. Many such ideas seem to leap from the pages of science fiction: An artificial nose in doorways and corridors sniffs out faint traces of explosives on someone’s hair. Tiny sensors floating in reservoirs detect a deadly microbe and radio a warning. Smart cameras id people at a distance by the way they walk or the shape of their ears. And a little chemical lab analyzes the sweat, body odor, and skin flakes in the human thermal plume—the halo of heat that surrounds each person. All of these projects are on a fast track since September 11. Meanwhile, consumer demand is speeding their development by lowering the cost of the underlying technologies. Camera phones, nanny cams, and even satellite photos are commonplace. Biological sensors are flooding into households in the form of tests for hiv, pregnancy, and diabetes—some of which can relay data to a doctor—and soon there will be far more sensitive dna-based tests. Next up are radio-frequency identification (rfid) tags. They’re showing up in stores to help track inventory, and 50 people in the U.S. have had them planted under their skin to broadcast their id and medical data, in case of an emergency. Together these developments herald a high-tech surveillance society that not even George Orwell could have imagined—one in which virtually every advance brings benefits as well as intrusions. Rapid dna-based probes, for example, could help protect us from bioweapons and diagnose diseases, but they might also reveal far too much about us to health insurers or prospective employers. The trade-offs are uncomfortable, in part, because corporations and governments will continue to wield the most advanced surveillance systems. But ordinary citizens will also gain capabilities to monitor their surroundings with consumer technologies, from Web cams to Net search and tracking tools, allowing the watched to observe other watchers. One great worry is that those who stand out from the norm or express unpopular views, minorities, the poor, or just the illmannered, may get stomped in new and surprising ways. A re54 | BusinessWeek | August 8, 2005

cent incident in South Korea shows how this can play out. A subway commuter posted on the Internet some cell-phone photos he took of a passenger who had refused to clean up after her dog relieved itself during the ride. In no time, a vigilante mob on the Web identified her by her face and the purse

NOWHERE TO HIDE AVAILABLE TODAY

» SURVEILLANCE CAMERAS

These are sold in every shape, size, and price range, from Web cams up to networked closed-circuit cameras programmed to spot abnormal behavior, such as people entering restricted areas.

» BOMB SNIFFERS

General Electric and Smiths Detection provide the newest bombdetection portals to airports for $150,000 and up. They use puffs of air to dislodge traces of explosives on a person’s clothes or skin.

» BASIC BIOMETRICS

Fingerprints help nab criminals and control access to computers, buildings, and bank ATMs. Iris scans are gaining popularity. Face recognition is available, but the results are spotty.

» CHEMICAL AND BIO DETECTORS

Inexpensive carbon dioxide sensors are in millions of homes, and some cities deploy sensors for chemical toxins and bioweapons. But the sensors are too expensive for widespread use, and each one handles just a few potential threats.

TO TELL BAD GUYS FROM GOOD, SCIENTISTS ARE PRYING INTO THE CORE OF IDENTITY—WAY BEYOND FINGERPRINTS—TO EYES, ODORS, AND SALIVA she was carrying, and she became the object of national vilification. “You can move into a surveillance society one tiny camera at a time,” says Deirdre Mulligan, director of the Samuelson Law, Technology & Public Policy Clinic at the University of California at Berkeley. If terrorism becomes endemic in Europe and America, emerging surveillance tools may be abused in even more egregious ways. At the same time, the overhead burdens of a police state, from the dossier-building to the endless security checkpoints, could impose crippling costs on a free-market economy. Witness the U.S. clampdown on foreign student visas, which could end up crimping universities’ ability to do advanced research. “We could bankrupt ourselves, much like the Soviet Union did,” notes Kim Taipale, executive director of Manhattan’s Center for Advanced Studies in Science & Technology Policy. Experts disagree about when the most visionary tools to thwart terrorist acts will arrive on the market—and whether they will deliver on their promise. Sensors that can detect bombs, radiation, and toxins exist today, and will be far more sophisticated a decade from now. But strewing them across every city in America would cost untold billions of dollars. High-tech electronic eavesdropping on communications networks can be effective, but only if terrorists use telecom systems. And even with improvements in cameras, biometric devices such as iris scans, bomb sniffers, and tracking software, it will be years before they can pick a terrorist out of a crowd. In

short, the march toward a surveillance society may be inevitable, but no simple cost-benefit equation can assure us that the sacrifices will be worth it. We’ll be debating the point for decades to come.

Gin or Tequila? in the quest to sort bad guys from good, scientists are poking ever more intimately at the core of each person’s identity—right down to the dna. One day people’s distinctive body odor, breath, or saliva could serve as an identifier, based on the subtle composite of chemicals that make up a person’s scent or spit. One’s smell “is a cocktail of hundreds of molecules,” says Frank V. Bright, a chemistry professor at the University at Buffalo, the State University of New York. “The question is whether it’s a gin and tonic or a margarita.” While some of these sensors perform well in the lab, he adds, the real world may be different: “The technology is still in its infancy.” Science today is hard put to identify smells a beagle could nail in an instant. “We want to show there is a set of underlying odors in people independent of perfume and what they ate that day,” says Gary K. Beauchamp, director of the Monell Chemical Senses Center at the University of Pennsylvania, a pioneer of odor prints. But for Beauchamp, Bright, and others, surveillance is just one objective. The more immediate goal is to use

In the emerging surveillance society, technologies will converge to identify and track every facet of daily existence. But tools designed to detect bombs and bioweapons could also tear the fabric of our private lives.

JUST COMING TO MARKET

ON THE FAR HORIZON

» MILLIMETER-WAVE CAMERAS

» REMOTE IRIS TRACKING

These passively receive the low-energy waves that emanate from all matter. They can handily reveal hidden guns and knives, but the cameras are expensive, and some say they show too much personal detail.

» VEIN MAPS

Fujitsu equipped Mitsubishi bank’s ATMs with scanners that identify customers by the vein patterns in their palm, which are harder to fake than conventional fingerprints or palm prints.

STILL A FEW YEARS OUT

» T-RAY CAMERAS

Sarnoff and others are working on technology to track known terrorists based on iris prints stored in a database, but commercial systems may be 10 years away.

» EARS AND GAITS

Researchers are training camera-based software to distinguish individuals from a distance based on the shape of their ears, or the characteristic swinging of shoulders and hips as they walk.

» ODOR SENSORS

It may be possible to ID individuals based on their odors— combinations of chemicals thought to be distinctive for each person. The work is confined to basic research labs.

These emit short signals at high “terahertz” frequencies, causing molecules to resonate at signature wavelengths to reveal weapons, explosives, and also the human body. NASA bought some systems for the Discovery shuttle.

» SALIVA SCANS

» TINY CHEMICAL SENSORS

The goal is networks of inexpensive probes, each of which can ID any known pathogen or toxin. While still as much as 10 years away, the research gets a boost from breakthroughs at commercial biotech and pharmaceutical labs.

Sandia National Laboratories is readying a new generation of fiveinch-long detectors with chips that sample the air or water for a variety of toxins and pathogens.

A droplet of human saliva may carry thousands of genetic markers, which could distinguish one person from another.

» UNIVERSAL SENSORS

August 8, 2005 | BusinessWeek | 55

COVER STORY biometric applications, too. Spit contains many of the proteins, nucleic acids, and other substances that are found in blood. While they are present in fainter quantities, they can also be sampled less intrusively. Scientists at the University of California at Los Angeles have found that they can detect in human saliva some 3,000 messenger rnas, molecules that carry genetic information within a human cell. These molecules perhaps can serve as markers for disease, or perhaps for identity, just like dna. And they are often easier to detect. About 180 rna markers are common across all individuals, but the remainder can differ. “We don’t know how constant these are to the individual on a Monday vs. a Friday, but they could possibly serve as fingerprints for that individual,” says David T. Wong, associate dean of research at the ucla School of Dentistry. Last December his team identified four rna markers in saliva that may indicate the presence of oral cancer. The use of bodily scents and secretions as biometrics presents an intriguing antiterrorism weapon. But if the science isn’t rock-solid, it can lead to a nightmare of mistaken identities. That’s a problem even with mature biometrics, such as fingerprints. The fingerprints of Oregon lawyer Brandon Mayfield were erroneously matched to those of a suspect in the Madrid train bombing last year. This cast a cloud over the innocent man for weeks. Biometrics bring a host of other troubles. As they become used more and more in office access, atm passwords, passports, and id cards, their value increases, and so do efforts to steal or spoof them. And because biometrics are cloaked in science, matches may acquire an unearned aura of dependability. Recently, cryptographers in Japan showed that common fingerprint-based systems can be easily duped using simple molds of melted Gummi Bear candies. In hopes of precluding such scams, Albuquerque’s Lumidigm Inc. captures images of not only the fingerprint itself but also the terrain beneath the skin. This includes the swirling patterns of active capillaries, which help indicate that the finger is alive. Fujitsu Ltd. has just installed palm scanners that read vein patterns at Mitsubishi bank atms. Despite the many failings of biometrics, the federal government is encouraging scientists to fashion them into covert sur-

ENGINEERS ARE TRYING TO BUILD SYSTEMS THAT COULD SPOT A KNOWN TERRORIST BY HIS GAIT, AND SUMMON THE POLICE their biochemical understanding of human odor to diagnose diseases. Specific chemicals are associated with certain illnesses—carbon disulfide with some forms of mental illness, for instance, and nitric oxide with cancer.

Messengers in your Mouth in bright’s lab at the University at Buffalo, scientists are creating super-sensors to pick up myriad molecules released at low concentrations that constitute human scents, including carbon dioxide, acetone, ethanol, and sulfur. To capture them, they poke tiny pores into glass—as many as 10,000 on a chip the width of a pencil eraser—each tailored to the size of the molecule. Excited by a laser, the chemicals trapped in the pores emit different colors, and computers can then analyze the resulting pattern. Dental researchers are attacking the challenges of identification and diagnosis from another vantage point—the mouth. They’re studying whether saliva contains markers for various diseases. If the technology works, it has additional potential for 56 | BusinessWeek | August 8, 2005

veillance tools. Face recognition—the most obvious way to track people because it’s how humans do it—is still dogged by problems matching images that may be distorted by a smile or illplaced shadow. While scientists work out those glitches, others are improving iris-based technology for surveillance at a distance. Though computers can easily find eyes on a face, today’s systems can’t scan irises from afar as people rush through a crowd. Sarnoff Corp., a contract research outfit in Princeton, N.J., hopes to unveil a solution to that later this year. Another hope is that certain characteristic movements may be recognizable at a distance. Taking a page from Monty Python’s Ministry of Silly Walks, the U.S. Defense Advanced Research Projects Agency, the research body credited with inventing the Internet, funds work on software that could identi-

fy individuals by their strides. Researchers measure the silhouette of the torso, the swinging of the shoulders and legs, and the time it takes to move through a single step, says Mark Nixon, a professor in computer vision at Britain’s University of Southampton. Right now, people can still trick the system by wearing Manolo Blahniks, but there may be signature rhythms that are harder to disguise. Such “gait recognition” systems may be 5 to 10 five years from commercialization. Many people in building security welcome advances in surveillance. In New York, two-thirds of Class A residential and commercial buildings use some combination of biometrics and surveillance for access control or checking time and attendance, says Robert Tucker, ceo of security consulting firm t&m Protection Resources. Incidents of mistaken identity are rare, he

IN THE DATASPHERE, NO WORD GOES UNHEARD ince September 11 more than 3,000 al Qaeda operatives have been nabbed, and some 100 terrorist attacks have been blocked worldwide, according to the FBI. Details on how all this was pulled off are hushhush. But no doubt two keys were electronic snooping—using the secret Echelon network—and computer data mining. Now, these technologies are getting tune-ups— but nagging privacy concerns won’t be put to rest easily. Echelon is the global eavesdropping system run by the National Security Agency (NSA) and its counterparts in Australia, Britain, Canada, and New Zealand. For decades, Echelon’s electronic ears have been scooping up all communications relayed by satellite, microwave towers, and even some fiber-optic and copper cables. Each day’s intercepts—phone calls, e-mails, and Web uploads and downloads—would fill the Library of Congress 10 times. The NSA’s supercomputers strain to sift though this flood of data to spot clues of terrorism. Those documents go to human translators and analysts, and the rest is dumped. But the humans aren’t as efficient as Echelon. Two Arabic messages collected on Sept. 10, 2001, hinting of a major event the next day, weren’t translated until Sept. 12. Now, the intelligence agencies vow to do better, and the FBI says it has already shrunk translation delays to under 12 hours. Long term, the goal is near real-time analysis. That would set the stage for datamining systems that could look through multiple databases and spot oblique correlations that together warn of plots in the hatching. The Terrorism Information

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Awareness (TIA) project was supposed to do that, but Congress killed it in 2003 because of privacy concerns. In addition to inspecting multiple commercial and government databases, TIA was designed to spin out its own terrorist scenarios—an attack on New York Harbor, say—and then determine effective means to uncover and blunt the plots spawned by computers. It might have considered searching customer lists of diving schools and outfits that rent

various methods have emerged to keep personal and company-confidential information under wraps during such database sharing. Most of these are explored in a massive 2003 report from a blue-ribbon commission convened by the Markle Foundation think tank. Members of the group included Netscape Communications Corp. founder James L. Barksdale and Craig J. Mundie, a Microsoft Corp. chief technologist. The Markle study recommends ways to ensure that personal data won’t normally be revealed, even to intelligence and lawenforcement types with proper clearances. One tool is “anonymization.” Using what’s called hashing in cryptography, names and Social Security numbers can be converted into a meaningless jumble of letters and digits. Datamining software would still be able to search and correlate separate databases—spotting suspicious financial transactions in bank databases, for example. But personal details would remain cloaked until an agent marshals enough corroborating evidence to justify a warrant to decrypt them. Technology will never eliminate terrorism, but techniques such as advanced data mining are some of the more powerful tools available right now for preventing future attacks. –By Otis Port in New York

CELL CALLS, E-MAIL, AND WEB UPLOADS ARE RICH SOURCES OF CLUES ON TERRORISM scuba gear, then looking for similar names on visa application or airline passenger lists. TIA is dead, but the concept lives on. Most companies involved in database management, big and small, now offer tools to quiz the database of a willing partner. And to forestall another privacy panic,

August 8, 2005 | BusinessWeek | 57

COVER STORY

A DOG’S NOSE STILL KNOWS BEST NATURE’S WAY For sniffing out explosives, illicit drugs, or the trail of a fugitive, nothing equals a canine snout. With each inhalation, molecules are sucked into the nasal cavity—a labyrinth of tiny passageways filled with air—then absorbed into membranes and ID’d by olfactory receptor cells, which relay the information to the brain.

THE ARTIFICIAL SNIFFER In the lab of Frank V. Bright, chemistry professor at the University at Buffalo, tiny spots of porous “xerogel” glass capture molecules in odors such as breath or sweat. These fluoresce in distinct patterns when excited by a laser. The patterns could someday ID people or diagnose diseases. Just by sniffing, Bright’s sensor can tell a woman who is pregnant (right) from one who isn’t.

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This is just one of many measures that trigger a Big Brother alert. One of the hot buttons is eavesdropping. An emerging wireless technology called software-defined radio has the power to make cellular phones compatible with any network standard, but also opens new frontiers of snooping. The commercial merits of the technology are self-evident: Say goodbye to dead zones and lack of interoperability between police and firefighter radios. But the technology also enables superscanners that can be tuned to pick up the images on your neighbor’s computer. That’s possible because all computers emit stray radiation. With software-defined radio even amateurs could probably design equipment that could spot somebody porn-surfing in the next apartment. The technology can also make it easier to turn the cell phone of a spouse into a bug when it’s not in normal use.

Pores and Wrinkles advances in many surveillance technologies piggyback on progress in fields such as wireless signal processing, nanotechnology, and genomics. Even plain old digital cameras are hotbeds of innovation. The imaging sensors in consumer cameras have been achieving ever-higher resolutions, while plunging in price. Because the gadgets are so engaging, crowds end up participating in surveillance efforts. Witness spectators holding cameras and phones aloft whenever news breaks—an act that may aid investigations, or hold police misbehavior in check. And in biometrics, today’s high-res imaging chips “are an answer to our prayers,” says Mohamed Lazzouni, chief technology officer of Viisage Technology Inc., a Billerica (Mass.) maker of face-recognition software. “Now we are able to do things that we couldn’t do three years ago.” Improved picture quality has given a boost to Viisage rival Identix Inc., allowing it to add in minute details of the skin to increase the accuracy of facial recognition. It divides a small area on the face into a 400-block grid, and then inspects each block for the size of skin pores, wrinkles, and spots. And using an infrared camera, researchers at A4Vision Inc., a Sunnyvale (Calif.) startup funded in part by In-Q-Tel, the cia’s venture fund, cooked up a 3D approach. Its system creates a topographical map by projecting a grid pattern of infrared light onto a face, and matching the features. Strides in wireless signal processing are bringing the power of astronomical instruments to homeland security. Giant radio telescopes today listen to the faint energy waves emanating from stars billions of light years away. The first earthbound applications of this electronic wizardry will be airport scanners that scrutinize passengers’ bags. The principle is simple: All matter gives off so-called background radiation, or millimeterwave heat, whether it’s a supernova or a switchblade. Brijot Imaging Systems Inc. recently unveiled a $60,000 system that, Brijot claims, can distinguish between the heat coming from a human body and that from a metal or plastic object—and can pull this off from distances of up to 45 feet. (The company says its system doesn’t capture anatomical details.) A kindred technology can “see” the molecular composition of matter using extremely short wavelengths of energy. When a machine made by Picometrix Inc. shines these terahertz waves on a target, its molecules resonate at a telltale frequency. One plastic explosive, for instance, vibrates at 800 gigahertz. T-rays pose no radiation hazard because they don’t penetrate human skin. But people being scanned will appear naked on the monitor unless the system is programmed to cover up private parts.

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says. Biometrics can also vindicate an innocent person by establishing a correct id, notes Raul J. Fernandez, ceo of Object Video Inc., which makes software for intelligent camera surveillance: “Highly accurate technology is a friend to privacy.” The most serious privacy breaches are almost all linked to the proliferation of fast and inexpensive data processing and storage systems. The worst problems arise when each bit of information an individual gives up over the course of a day—from the e-zpass scans on the morning commute to the credit card purchase at Starbucks to the logging of pc keystrokes at work— get tied across various databases to create a detailed dossier of an innocent Joe’s daily activity. “We’re a couple generations away from the technology that makes it possible for a computer to save everything you do,” says Bruce Schneier, chief technology officer at Counterpane Internet Security Inc. But in info tech, the generations can fly by at superhuman speeds. Ever since September 11, the U.S. government has been striving through the power of software to extend its investigatory net over an elusive enemy lurking among the populace. The idea is to rifle through multiple databases using algorithms that categorize and rank documents—ranging from airline manifests, car rental records, and hotel guest lists to credit, court, and housing records compiled and sold by private companies such as ChoicePoint. In this way, machines might recognize relationships among human beings that humans themselves can miss.

rescent dye, those sequences light up, and a photo detector compares the pattern of illumination with a library of known bioagents. These systems may not be in place in time for the next attack in a Western country— let alone in Egypt or Iraq. And if terrorists hit the U.S. again, the authorities are bound to strike back. Among other things, today’s restraints on racial profiling are likely to crumble. Then what? In the arms race against suicide bombers, will surveillance technologies prove their worth? Some already have. Electronic monitoring has foiled some terrorist plots, and portals that spot guns and explosives make airports safer. Unfortunately, many of the most powerful technologies are simply too green. It may take a decade or more before networks of biochemical sensors are ready to blanket a whole city. And it could take as long before camera systems can pick a known face— terrorist or otherwise—out of the throngs. For now, only a combination of electronic monitoring and human intelligence stands a chance of holding radicals at bay. In the meantime, scientists who labor on surveillance prototypes are encouraged that their innovations can bring benefits in health care and food safety. Over time, people may get smarter about how to live with threats and make use of technology without undermining their most basic values. They must. A country that sacrifices its citizens’ freedom in the fight to protect them is no victor. ❚❚ –With Kerry Capell in London and Otis Port in New York

POLICE WOULD LIKE SENSORS THAT CAN DETECT BOMBS, TOXINS, AND EVEN PICK UP TRACES OF DNAYOU LEAVE BEHIND Airport safety is just a small facet of the security challenge that lies ahead. Biological and chemical attacks can be ignited in any location, and spread with alarming speed. “If we could put sensing devices everywhere, maybe we could stop such attacks,” says Thomas Thundat, a senior scientist at Oak Ridge National Laboratory in Tennessee. But the cost is now prohibitive.

Elusive Goals the holy grail is a universal sensor, small and cheap enough to scatter in public places, and smart enough to sniff out anything that comes its way, without being preprogrammed to find specific molecules. Nobody is close to that goal yet, but Sandia National Laboratories has designed a lab-on-a-chip that detects a variety of both chemical and biological agents. It has skinny microchannels etched in its surface. When a gas or liquid moves through the tiny pipes, it collides with special material, and how much that slows the flow betrays the identity of the fluid. Sandia is now developing this technology to monitor the Contra Costa County (Calif.) water supply. U.S. Genomics Inc. in Woburn, Mass., claims that it is hot on the heels of a universal sensor. Its prototype uses particular molecules to tag important dna sequences in the genes of lethal pathogens, such as anthrax. Then, primed with a fluo-

More on The State of Surveillance, only at BusinessWeek.com Privacy Matters: Experts talk about everything from digital camera snooping to the unbearable costs of a police state Slide Show: Surveillance’s high tech future, from facial recognition to palm scanning Big Brother Britain: The debate over national ID card proposals that would create the world's biggest biometric database Everybody’s Listening: U.N. diplomats are already living under the world's most intensive surveillance—a preview of what may be in store elsewhere

http://www.businessweek.com/extras August 8, 2005 | BusinessWeek | 59

Finance Stock Exchanges

Frantic to Lure Stock Listings

NASDAQ and the NYSE can’t compete on stats alone, so they’re turning to shtick

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luring more than $90 billion in assets in 61 Barclays iShares exchange-traded funds away from the American Stock Exchange—long the dominant player in etfs. The nyse also plans to launch a second listing brand to compete with nasdaq stocks once it merges with Chicago’s Archipelago Holdings Inc., scheduled for yearend. Its ArcaEx trading exchange will target new ipos and some 1,100 nasdaq companies—about a third of the stocks the tech exchange lists—that currently don’t meet the nyse’s market cap and other standards. Catherine R. Kinney, co-chief operating officer of the nyse, says the aim is to graduate small companies to the Big Board once they hit higher thresholds, such as revenues of

$75 million and a global market cap of $750 million. nyse is also eyeing some 675 large-cap nasdaq companies that meet its listing requirements already. There’s no clear winner yet in the ding-dong battle. nasdaq is heavily lobbying for some of the nyse’s most prestigious companies, aiming to win over the 28 blue-chip Dow Jones Industrial Index stocks that list there. Before 2003, nyse rules made it practically impossible for companies to delist voluntarily. But since January, 2004, seven have also listed on nasdaq—including WalIn the fight for company listings, the green, Charles Schwab, and Hewlett-Packard—while just three single biggest source of their nasdaq companies have defected revenues, the NYSE and NASDAQ so far this year, down from a peak are pulling out all the stops: of 43 in 2002. nasdaq is also heavily courting international ■ The NYSE sells its prestige and history, while companies, and it has hired new NASDAQ emphasizes growth and innovation sales people to scour China, India, and Russia for new company list■ Listed companies can use the NYSE’s classy ings. Says James J. Angel, associate Wall Street building for meetings and functions; professor of finance at Georgetown NASDAQ companies can advertise on the University’s McDonough School exchange’s seven-story digital screen in New of Business: “Both [exchanges] York’s Times Square will stop at nothing to get listings from other markets.” ■ The NYSE holds executive seminars on Once, the exchanges mainly used governance and regulation, while NASDAQ market statistics to fight for listings. offers low-cost executive liability insurance for small companies They would trot out reams of studies to prove they were more efficient Data: BusinessWeek

Distinction With A Difference?

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ong before salesforce. com, a fast-growing customer-relations software firm, filed to go public, representatives from the New York Stock Exchange and the nasdaq stock market came calling. They were desperate to snag one of the hottest initial public offerings of 2004. nasdaq promised to feature it in splashy ads as they had for tech giants Intel Corp. and Yahoo! Inc.—and broadcast the stock’s debut live from the digital face of its seven-story Times Square office tower for 1.5 million viewers to see. The nyse countered: Not only would it feature Salesforce.com in ads, but also host a lavish party for 500 on the trading floor with the doo-wop band Papa Doo Run Run. There would also be a bell-ringing ceremony in its historic 103-year-old Wall Street building. “It was a bare-knuckled competition,” says a Salesforce.com person involved in the dealings. “[nasdaq and nyse] kept offering more and more little goodies.” Not so long ago, nasdaq, a mecca for dot-com companies, would have been the obvious choice. Instead, Salesforce.com opted for the nyse. Company officials said they felt the Big Board’s prestige would impress customers. Meantime, the dowdy Chicago retailer Sears Holding Corp., which had held a coveted singleletter nyse ticker symbol (S) for 100 years, jumped ship to nasdaq in March after merging with Kmart Corp. A Sears spokesman said the new listing better fit its emerging image. Competition for listings—the most lucrative source of revenue for stock exchanges—has kicked into high gear. On July 20, the nyse scored big points by

Listings produce a scad of other revenues, too. Trading in listed stocks generates price and other data, which the exchanges package and sell to professional investors or data providers such as Bloomberg Financial Markets. nasdaq has licensed listings to create proprietary products that garner royalties, such as the nasdaq 100 Index—a benchmark used by 400 mutual funds worldwide. The 100 index is also the basis for the qqqq funds’ etf, the most heavily traded equity-based security in the world, on which nasdaq earns commissions. Says Bruce Aust, executive vice-president of nasdaq’s corporate client group: “Listings are the ultimate goal.”

PLAYING THE FIELD

and offered better prices for less volatility. That strategy is no longer enough. “Both the nyse and nasdaq do great jobs at trading stocks,” says Georgetown’s Angel. “You need a microscope to tell them apart on transaction costs.” To be sure, they still trumpet their distinctive features. The 213year-old nyse, the world’s largest equities market, sells itself as an emblem of tradition and prestige. nasdaq boasts that it’s the home of choice for innovative companies. These brand images still have drawing power: Google, for instance, was lobbied by the nyse for its ipo last August but chose nasdaq. In fact, of last year’s 235 initial public offerings by companies, nasdaq got 147, nyse landed 79, and Amex just 9. Still, the nyse’s corporate ipos raised a total of $33.9 billion, more than twice as much as nasdaq’s, according to data provider Dealogic.

RING CEREMONY but these days, the exchanges are more Madison Avenue than Wall Street as they drum up slick pitches and launch new services. “This is a new phase in the war; it’s marketing shtick,” says Roger McNamee, co-founder and partner at privateequity outfit Elevation Partners in Menlo Park, Calif. Both exchanges arrange face time with big investors for companies. Each has a team that keeps tabs on existing companies and trolls for new

prospects among investment bankers and venture capitalists. nasdaq counters with offers such as low-cost executive insurance. On June 7 it launched a venture to distribute independent research paid for by member companies that don’t have a big following by analysts. nasdaq’s latest gimmick: free listing for the first year. And as for those market ceremonies spotlighting the new companies, an nyse spokesman boasts: “We have a real bell.” Far more than bragging rights are at stake. The 2,774 companies that trade on the nyse generated 30% of the exchange’s $1.08 billion in revenues last year; nasdaq’s 3,247 listings generated about 33% of its $540 million. The revenues come primarily from fees of all stripes. First-time listing fees, for example, are as high as $500,000 on the nyse and $75,000 on nasdaq. There are also annual renewal and trading fees, and others for transactions such as stock splits and mergers. Larry Tabb, chief executive of financial markets consultants Tabb Group, says that while exchanges are under enormous pressure to cut trading costs, “listing fees are a little less pressured by market influences and hence more lucrative.”

of course, companies realize that being courted by competing exchanges gives them negotiating clout. OptionsExpress Holdings Inc., the fast-growing online brokerage, which focuses on options trading, went public in Jan. 2005. It listed on nasdaq in part because the fees were cheaper at $150,000 vs. the nyse’s $250,000. But the Chicago outfit wanted more exposure, so it also listed on ArcaEx. As a sign-up bonus, it got hundreds of thousands of dollars worth of free advertising and free access to a proprietary database that tracks which pension and mutual funds own in its stock. Chicago’s Morningstar Inc. had no choice but to debut its ipo on nasdaq on May 5. Not only did the fund-tracker’s market cap fall below the nyse’s minimum, but its profit numbers were also too low because it expenses options. Now, with $1 billion in market cap, it’s a live candidate for an nyse listing. Ultimately, the decision about where to list “comes down to economics and making sure that our stock is ...available to the people who want to buy it,” says Morningstar Chief Financial Officer Martha Dustin Boudos. “nasdaq is doing that for us right now, but I would never turn down a better deal.” The exchanges are in no mood to let any prospect slip from their grasp. For years, the nyse has kept in reserve a handful of its coveted single-letter listings for potential large-cap converts. Among them are M and I—just in case one day Microsoft Corp. and Intel change their minds and defect from nasdaq. ❚❚ –By Mara Der Hovanesian in New York, with Justin Hibbard in San Mateo, Calif., and Adrienne Carter in Chicago

Listing fees earn 30% of NYSE’s revenues, 33% of NASDAQ’s

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Finance Dealmakers SOUND BETS The first fund initiated by Hutchins and his Silver Lake Partners had annual returns of 21.8%

Wall Street’s New Alchemist

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irectors of sungard Data Systems Inc. sat around a conference table on Mar. 22 at a midtown Manhattan law firm and listened to some bad news. A consortium of seven private-equity firms had been pursuing a buyout of SunGard, which processes transactions for Wall Street firms, for four months. Now five of them were balking at the price. The lead firm, Silver Lake Partners, had agreed to the amount but needed more time to convince co-investors. But James L. Mann, SunGard’s 70-year-old chairman and a former bomber pilot, is not one to haggle. Mann and the board delivered an ultimatum: accept the price within 48 hours, or the deal is off. The same day, Silver Lake co-founder and managing director Glenn H. Hutchins began working the phone. Compared with the other consortium

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members, which included Kohlberg Kravis Roberts & Co. and the Blackstone Group, the $5.8 billion Silver Lake was small fry. Still, Hutchins could draw on 20 years of relationships in private equity. By the deadline, only two original consortium members, Thomas H. Lee Co. and the Carlyle Group, had dropped out and Silver Lake had helped persuade Goldman Sachs Group Inc. and Providence Equity Partners Inc. to replace them. “It’s a tribute to the credibility that Glenn has in the sector that people wanted to be partners with him,” says Jane Wheeler, senior managing director at New York investment bank Evercore Partners Inc.

FINANCE POINT MAN today, the tall 49-year-old Virginian, who habitually punctuates his sentences with a folksy “you know what I mean,” is reshaping the securities industry. Hutchins not only led the SunGard deal but also is deeply involved in the merger

of discount brokerages Ameritrade Holding Corp. and td Waterhouse, the merger of the nasdaq Stock Market Inc. and electronic securities exchange Instinet Group Inc., and the spin-off of Instinet’s institutional brokerage Instinet llc. The deals will bring Hutchins much more than money. When they close by the first quarter of 2006, he will occupy the cat-bird seat in financial technology. He and his Silver Lake colleagues will likely serve on the boards of SunGard, nasdaq, a retitled td Ameritrade, and Instinet llc. Consider the links: Ameritrade and Instinet llc execute orders through the Instinet exchange, soon to be owned by nasdaq; nasdaq’s Brut ecn electronic exchange processes transactions through SunGard; nasdaq Chief Executive Robert Greifeld formerly ran Brut; and Instinet ceo Edward J. Nicoll—who managed online brokerage Datek Online Holdings Corp. when Silver Lake owned a stake—will be ceo of Instinet llc. The

barbel schmidt

Buyout specialist Glenn Hutchins is behind discount brokerage and electronic exchange deals that could reshape stock trading

result: Silver Lake will be better positioned than most in the business to spot trends and new deals. Already this dense network is drawing scrutiny. Some Instinet Group shareholders have questioned whether the $207 million that Silver Lake and Nicoll are paying for Instinet llc is too little. “There was concern that Silver Lake had come in the back door,” says analyst Harrell Smith with financial consultants Celent Communications llc. Silver Lake declined to comment. How did a partner at a small, six-yearold buyout firm that specializes in technology suddenly emerge as a top player in finance? Since its inception, Silver Lake has set out to prove that large buyouts can succeed in technology and related industries such as finance. Traditionally, private-equity firms have steered clear of tech, fearing its risk and complexity. But the approach has enabled Silver Lake to rack up 21.8% annualized returns on its initial $2.2 billon fund founded in 1999, putting it among the top 25% of its peers. However, the SunGard deal—one of the largest leveraged buyouts in recent years—will put the thesis to a severe test. Hutchins declined to be interviewed formally, but people close to him gave details of his dealmaking. Hutchins is Silver Lake’s point man in New York’s financial world. After graduating from Harvard College in 1977, Hutchins began his career as a credit analyst at the then-Chemical Bank in New York. He returned to Harvard to earn an mba and law degree simultaneously in 1984, then helped build pioneering private-equity firm Thomas H. Lee Co. In 1992, Hutchins joined the transition team of newly elected President Bill Clinton, focusing on economic policy. Two years later, he returned to private equity at the Blackstone Group in New York. David Stockman, budget director under President Ronald Reagan, who worked with Hutchins at Blackstone, says: “He played an important role as a steadying influence. He had a temperament where if other people got more excited, he could listen, absorb, and remain calm.” At the end of any long meeting, Hutchins could be found looking for his shoes, which he had invariably kicked off. Hutchins’ co-founders— David J. Roux, James A. Davidson, and Roger McNamee—were all steeped in tech and based in Silicon Valley. Back in 1999, at the

leagues had gotten wind of a regulation the Securities & Exchange Commission was drafting. Due to go Silver Lake is parlaying a small initial investment into effect in April, 2006, it aims to in online brokerage Datek into a financialguarantee that investors get the technology empire best prices that can be executed auCOST tomatically. This, says Sang Lee, an COMPANY STAKE (MILLIONS) analyst with Boston financial-servicSunGard Data* 15% $540 es researcher Aite Group, will “instiTransaction-processing and data storage tutionalize electronic trading as the major method of trading.” NASDAQ Stock Market*15% $232 Silver Lake believed the rule Automated stock market would spark a wave of mergers in electronic trading venues. Hutchins Ameritrade 3% $227 acted fast. In November, 2004, he Online retail brokerage told SunGard that Silver Lake wanted to buy it for $9.3 billion, a 20% preInstinet* 100% $207 mium over its market value. The bid Electronic institutional brokerage sounded audacious. But SunGard * Deal not yet closed Data: Thomson Financial, companies stood to gain value in the new environment. After studying SunGard for height of the tech boom, their principles four months, Silver Lake and its co-inseemed heretical: They believed the tech vestors announced on Mar. 27, 2005, they industry was maturing and that hundreds would acquire the company for $11.3 bilof its big, lumbering companies would lion. The sale will likely close in August. Meanwhile, Instinet decided to field ofsoon need to be fixed. Eschewing traditional ideas about diversification, the firm fers from potential acquirers. nasdaq aimed to specialize in one industry. Al- wanted to buy only part of the company, though Silver Lake is very hands-on in the Inet electronic exchange. But Instinet trying to improve its companies’ per- wanted to unload Instinet llc and anformances, the partners don’t take man- other business, too. In April, nasdaq agement positions. The firm remains an struck a deal to buy the two for $1.1 bilinvestor, mainly seeking to profit by even- lion and then sell Instinet llc to Silver Lake and Nicoll, with Silver Lake lending tually selling its stakes. nasdaq $205 million to finance the VANTAGE POINT transaction. As part of the bargain, silver lake made its first finance in- Hutchins joined nasdaq’s board in May. vestment in 2000, when Boston’s ta As- The deal will close by early next year. sociates approached Hutchins about joinOn the heels of the nasdaq-Instinet ing a $700 million buyout of Datek. With transaction, Hutchins was dragged into the Internet bubble by then deflating, trad- the consolidation of online brokerages. In ing volumes were falling. But Datek had a May, E*Trade Financial Corp. bid to buy hidden gem: an 85% stake in electronic se- Ameritrade for more than $5.5 billion. curities exchange Island ecn. Although Ameritrade’s board, including Hutchins, such traditional markets as the New York mulled the offer. “He was very much inStock Exchange still dominated trading, volved with helping us try to make the Hutchins believed it was only a matter of right decision,” says Ameritrade ceo Joe time before electronic markets rivaled Moglia. In the end, the company opted to them. As part of the deal, four firms in- buy rather than sell, and on Jun. 22 Amercluding Silver Lake got majority owner- itrade announced it would acquire td ship of Island. In 2002, the partners sold Waterhouse for $3 billion. Datek to Ameritrade for $1.3 With the knowledge and contacts it’s billion and Island to Instinet gaining, Silver Lake can move into other for $568 million, nearly financial services. A likely next step: indoubling Silver Lake’s initial vesting abroad. On Jul. 19, the firm hired investment. More impor- Asia whiz and former head of ibm Global tant, Hutchins joined the Services, John Joyce. And partner Egon boards of the acquiring Durban, a key player in the SunGard deal, companies. From that van- now heads Silver Lake’s London office. As tage point, he could spot global capital markets fuse together, trends and learn of potential Hutchins and his firm will be ready to deals before rivals did. provide the connective tissue. ❚❚ —By Justin Hibbard By February, 2004, in San Mateo, Calif. Hutchins and his col-

Sterling Collection

Hutchins expects electronic markets will rival the big exchanges

August 8, 2005 | BusinessWeek | 63

Warner’s Oldies But Goodies

Can legends Ertegun, Stein, and Holzman find new stars to make Warner Music sing?

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hen warner Music Group ceo Edgar M. Bronfman Jr. needed some help running his new company, where did he turn? To a trio of balding and gray-haired music veterans, the youngest of whom was born back when Franklin Delano Roosevelt was still President. Over their careers they have signed some of the most profitable and enduring acts of the last half-century, including Ray Charles, Led Zeppelin, Cream, The Doors, the Rolling Stones, Madonna, the Ramones, and the Talking Heads. There’s the granddaddy of them all, Atlantic Records co-founder Ahmet Ertegun, 82, the son of a Turkish diplomat who fell in love with music through jazz. Jac Holzman, 73, founded Elektra Records and is a self-described techie and studio rat who still exudes laid-back, 1970s California (though the lamb-chop sideburns are history). The third is Sire Records co-founder Seymour Stein, 63, a onetime Billboard magazine researcher and later a fixture at New York punk club cbgb’s, who still prides himself on being “in the street.” Together their time in the business adds up to more than 160 years. Still, in an industry obsessed with the tastes and behaviors of gadget-loving 15year-olds, how much can three guys who came of age listening to scratchy lps really offer in a post-Napster world? “You can’t underestimate the successes those gentlemen have had,” says Michael McGuire, a media analyst at Silicon Valley research outfit Gartner Inc. “But you have to wonder how applicable that is today, when the big label chiefs aren’t driving the industry. Consumers are.” 64 | BusinessWeek | August 8, 2005

Still, to the extent that the industry’s long-term swoon is rooted in a dearth of good music, Bronfman’s move to tap the expertise—and ears—of Ertegun, Holzman, and Stein makes sense. “The nature of the music business is that anyone over 30 is seen as suspect and a little ancient,” says media investor Harold Vogel of Vogel Capital Management. “But these guys have proven they know what sells. New acts are what the business needs now.” Certainly, music companies are in critical condition. Album sales by unit fell by 7.6% in the first half of this year after four gloomy years of similar numbers. (Digital sales were up 195%, but they still account for about 5% of total sales.) Bronfman moved quickly after he and his privateequity partners bought Warner Music from Time Warner Inc. in early 2004 for $2.6 billion. They cut hundreds of millions in annual costs, laid off thousands of workers, and slashed a bloated artist roster by a third. Still, Warner Music’s revenues for recorded music this year are projected to be flat, at about $2.8 billion. Publishing will be up slightly, to about $560

million, according to analysts. But Warner stock is off 7% from its offering price of $17, when it went public in May. This is precisely why, say Bronfman and his top deputy, hip-hop impresario Lyor Cohen, the three legendary hitmakers were called into active duty. “It’s important to respect and celebrate a company’s culture. Over the last 10 years, that culture dissipated because Time Warner never really found the handle on how to manage this division,” Bronfman told BusinessWeek in his first extensive interview since Warner went public. “We will rediscover how incredibly talented these three executives are and how much they still have to offer a young, entrepreneurial management team in which they can see themselves so many years earlier.” Adds Cohen: “These guys are treasure, American treasure.” So Cohen and Bronfman have put them to work. Holzman is leading a group to develop a new all-digital, still-unnamed label (no cds, only music for downloads), to be announced in October. And he helped in the selection of a new ceo, Richard Black-

casaburi.com

Entertainment Music

stone, for publishing arm Warner/Chappell Music Inc. Stein, a veteran of artist development who has ferreted out stars from clubs all over the world, is showing new chops, signing as many new acts as any other a&r (artists and repertoire) executive since Bronfman took over. His next project: scouting talent in South Africa and India. And Ertegun? After spending several weeks in the hospital this spring with pneumonia, he’s back in the office every day, working on a compilation of Ray Charles’s Atlantic recordings and a project with former Led Zeppelin guitarist Jimmy Page. (This one does not involve vocalist Robert Plant.) Says Bronfman of Ertegun, who has known Bronfman’s father, Edgar Sr., for years and first met Edgar Jr. when he was a youngster: “Ahmet is the ultimate crap detector.” Of course, not everyone at Warner’s Rockefeller Center offices in New York requires an afternoon nap. Warner has its share of younger executives, too. Kevin Liles, the executive vice-president who was recruited from Universal Music

Group’s Island Def Jam the world’s largest music THE STAT (co-founded by Cohen), outfit. Time Warner ceo is 37. Michael D. FleishGerald Levin then sold er, the chief financial offiWarner’s Interscope cer brought in from Records, now one of the Gartner, is 40. So is Atindustry’s most successlantic Records’ co-chair ful companies, to UniverCraig Kallman. Atlantic sal over a flap about rap Change in unit sales of President Julie Greenlyrics. Then one ceo afalbums in the U.S. in wald is 35. Bronfman, ter another quit or was 50, tapped Cohen, 45, forced out. Under presthe first half of 2005 Data: Nielsen SoundScan who was running Island sure to pay down debt Def Jam, soon after the and fearing the shortsale. Today Cohen is charged with keep- term prospects for music, Time Warner ing a flow of communication between the boss Richard D. Parsons decided to sell the two distinct camps within the company. unit in 2003. Bronfman, looking for a new “It’s bunker-frontline warfare,” he says of gig after his ill-fated sale of the family busihis younger team, “vs. hilltop strategy for ness, Seagram, to Vivendi, teamed up with Ahmet, Jac, and Seymour.” private money and swooped in to win These are relatively peaceful times at Warner Music. Warner despite music’s woes. Back in the 1990s, under music ceo Robert Morgado, AN INCUBATOR SYSTEM internecine warfare was fierce. Highly re- that unrelenting tumult kept spected music man Doug Morris fled to Holzman away from the company over the Universal Music Group, recruited by past decade or so other than doing a little Bronfman, who built that company into consulting work for its Rhino Records division. But the prospect of Warner’s new beginning as an independent company drew him back. He sent an e-mail of congratulations to Bronfman, whom he had never met. Twenty minutes later, on a Sunday afternoon, Bronfman’s return e-mail popped up on Holzman’s computer. Bronfman wanted to meet and discuss the possibility of Holzman’s return. “Recordmaking is a chronic obsession,” says Holzman. “You don’t die from it, but you can die from not doing it. I can’t help myself. It’s what I do.” This from a guy whose Elektra Records label Bronfman quickly shuttered and merged with Atlantic. “It had become something very different than what I created,” says Holzman. Bronfman, who grew up seeking counsel from older relatives in the family business, immediately dispatched Holzman to oversee a crucial new project: an “e” label for all-digital music. The idea is that artists will be signed for, say, a six-month term and produce three tracks to be sold VINTAGE HITMAKERS Stein, Holzman, in various downloadable forms. Dependand Ertegun (above), ing on how well the songs sell, the artist with Cohen and could be signed to do a full-fledged cd. Bronfman (left). It’s part of an incubator system Cohen Stein is scouting acts has established at Warner. The company is overseas, Holzman partnering with small record labels, offeris developing an ing small doses marketing support at the all-digital label, and start. Cohen wants to give artists a chance Ertegun is working to develop more slowly, creating good buzz on a Ray Charles compilation without splashy radio debuts while keeping Warner’s financial exposure to a minimum. If sales begin to percolate, Warner will offer artists the opportunity to “upstream” to one of its bigger labels. Hip

-7.6%

August 8, 2005 | BusinessWeek | 65

Sports Biz Boxing

For a Q&A with Warner CEO Bronfman and musings from the hitmakers, go to businessweek.com/extras 66 | BusinessWeek | August 8, 2005

DRIVEN De La Hoya vs. Bernard Hopkins in 2004

The Selling Of the Golden Boy As his career wanes, Oscar De La Hoya aims to build an Hispanic business empire

I

n his heyday, oscar de la Hoya was almost unstoppable. Combining a jolting left hook with dogged determination learned on the mean streets of East Los Angeles, De La Hoya compiled a 37-4 record, winning six world titles. But from his days as a 1992 Olympic champ, Oscar was always more than lightning in silk trunks. A pretty boy in a brutal sport, he became an icon to Mexican Americans, generating mountains of fan mail from lovesick Latinas, grabbing hefty ratings for his bouts on hbo, and cutting a Grammynominated album of bilingual songs. Now the sexy boxer is trying to transform his 100-watt smile and record in the ring into a business empire focused

on the fast-growing Hispanic market. That’s the fight plan devised by Team De La Hoya, a group of Los Angeles investors who intend to take Oscar where no boxer—or Hispanic athlete, for that matter—has gone before. The plans include restaurants, health clubs, storage facilities, even a bank with De La Hoya as lead investor and headliner. In April, De La Hoya’s Golden Boy Enterprises announced a $100 million deal with L.A. developers Highridge Partners to build commercial and residential real estate projects in the Hispanic inner-city neighborhoods of Southern California. John Long, a partner in Highridge, says having Oscar on board is like having the Good Housekeeping Seal because of his standing in local Latino communities.

(middle left) ellen jaskol/los angeles times; (above) matthew minard/ap/wide world

hopper Mike Jones, on SwishaHouse Records out of Houston, is the most successful artist so far to emerge from this system. His album Who Is Mike Jones? premiered at No. 3 earlier this year on the Billboard 200 chart. He’s now signed to Warner Bros. It’s this kind of new, lowercost approach to artist development, complains Bronfman, that Wall Street doesn’t get when it criticizes Warner for cutting a&r budgets too deeply. Still, traditional a&r—find a band, sign it to a multialbum deal, and put out cds—is the route Stein likes to take. “Right now I am having so much more fun than I have had in the past five years,” says Stein, who still travERTEGUN AND PLANT els to the grittiest clubs around the world. He recently signed the band him, a Finnish rock group that’s big in Europe. The three men also help keep Warner’s Young HOLZMAN AT ELEKTRA Turks in line. At a recent a&r meeting, after listening to one executive make an over-thetop cheerleading speech about one of his acts, Ertegun shot back: “How are they live?” The MADONNA AND STEIN executive, Cohen recalls, turned white as a ghost and sheepishly replied: “I haven’t seen them live.” Says Ertegun: “I have more experience than anybody around. If I can’t really give a good answer, I can give an informed answer.” So it might be that a bunch of guys who long ago became rich and successful by turning people on to new music will get a chance to do it again. Riffing on the 2000 movie Space Cowboys, about geriatric astronauts called back into orbit, Holzman jokes: “We are Edgar’s Spaced-Out Cowboys.” Now that would be quite a sequel. ❚❚ –By Tom Lowry in New York

Following in the athletic shoes of bas“Fighting is what I do, and it keeps me age, his career hasn’t always been so goldketball great Earvin “Magic” Johnson, in front of my fans,” says De La Hoya, sit- en. As a teen boxer, Oscar fought hard and who turned his celebrity into a $500 mil- ting in his paper-free office in a Los An- partied harder. Mike Hernandez, an L.A.lion empire of movie theaters and real es- geles building he bought in 2002 for $15 area Chevy dealer who gave him a Corvette tate, won’t be like two rounds with a million and christened the Golden Boy when he won the gold, managed Oscar’s stumblebum, however. Johnson “crossed Building. (His nickname has been Golden career from a spare office and landed enover to a much wider audience than just Boy since his gold medal in Barcelona.) dorsement deals with McDonald’s, ChamAfrican Americans,” says Los Angeles pion Shoes, and B.U.M. Equipment sports marketing consultant David A BANK OF THEIR OWN clothes. To raise his profile in the commuCarter. “You see him pushing T.G.I. Fri- golden boy enterprises plans nity, Hernandez staged fund-raisers for day’s, not soul food restaurants.” De La restaurants and perhaps De La Hoya hospitals and schools in De La Hoya’s Hoya’s first crossover promotion, the tv health clubs in partnership with the 24 name and created a youth center for unshow The Next Great Champ, was yanked Hour Fitness chain, which has previously derprivileged kids. “We wanted to make by Fox after only four episodes. And the teamed up with Johnson and tennis star him someone that neighborhood people hottest boxer in De La Hoya’s stable of Andre Agassi. De La Hoya and Schaefer would look up to,” recalls Cindy Villarreal, fighters, 40-year-old Bernard Hopkins, say they will even open a bank and are De La Hoya’s former assistant and Herlost his middleweight title to Jermain Tay- close to getting a license. “There are Asian nandez’ longtime companion. banks, Cuban banks, [but] no banks for lor in a close fight on July 17. That wasn’t easy. A Santa Barbara De La Hoya’s focus is less mainstream Mexican Americans,” says De La Hoya. woman brought civil charges against De Despite his nickname and current im- La Hoya for allegedly raping her at his than Magic’s, too. And while the per capita income of the more than 40 condo in Cabo San ICON Huge Lucas, Mexico, in million Hispanics in the U.S. is exappeal for pected to rise 8.2% annually 1996 when she Mexicanthrough 2009—nearly twice as was 15. And severAmericans fast as the non-Hispanic rate—the al managers have Latino population still shells out sued him over broonly about 84% per capita of what ken deals, including Hernandez other ethnic groups spend on and veteran promoter Bob Arum. goods and services, according to a Manager Shelly Finkel, who says 2004 report on buying patterns by he gave the fighter’s family the University of Georgia. $100,000 to help care for De La “There’s a Hispanic middle class, Hoya’s dying mother before the no doubt, but it just doesn’t spend Olympics, claims he was stiffed as much as other groups,” says when Oscar turned pro. Finkel Roberto Suro, director of the Pew and Hernandez have resolved Charitable Trust Hispanic Center. their differences with Oscar and “And Oscar De La Hoya is by no have no ill feelings toward him. means alone, or even early.” Arum didn’t return calls. De La BIO Still, De La Hoya is scoring Hoya denies the rape but says he business points. Guided by settled with the woman “for a Richard Schaefer, a baby-faced very low amount of money.” former executive at Swiss bank As he has matured, De La Following in the athletic shoes of another ubs Warburg, De La Hoya’s GoldHoya has moved from the barrio en Boy Enterprises had revenues to gentrified Pasadena, where he charismatic athlete, “Magic” Johnson of $50 million last year, which inlives with his wife of five years, commercial real estate in BORN Feb. 4, 1973, in cludes $38 million in Oscar’s Puerto Rican pop singer Millie New York and L.A. East Los Angeles earnings from the ring. Its Golden Corretjer, and has honed a 10Investments in Equal EDUCATION Graduated from Boy Promotions manages 17 handicap golf game. Says Latina sweetener and high-tech Garfield High School fighters (and Oscar) and stages as magazine founder Christy startup Pay By Touch. many as 50 fights a year, many on Haubegger, currently a HispanPATH TO GLORY At 17, Designs own line for B.U.M. Hispanic network Telefutura or on ic-marketing consultant with won the U.S. National clothes. Just launched a $100 hbo Latino, which telecasts the Creative Artists Agency: “He Championship in the 125million real estate monthly show Oscar De La Hoya represents the aspirations of pound division. Pro record development fund with Presenta Boxeo De Oro. The 32many Hispanics to live the of 37-4; world titles in five Highridge Partners. year-old De La Hoya says he is American dream while holding weight classes. Negotiating to open a bank for contemplating two more fights, inon to their Hispanic heritage.” CASHING IN Operates Mexican-Americans and cluding a possible November bout “I understand the Hispanic Golden Boy Promotions, with fitness centers in Hispanic against junior middleweight market, I have lived it,” De La 18 boxers under contract, neighborhoods. champ Ronald “Winky” Wright in Hoya says. His skills on the canincluding former middleweight PERSONAL Married to Los Angeles. De La Hoya, who has vas may be waning, but Oscar still champ Bernard Hopkins. Puerto Rican singer Millie earned more than $150 million has plenty of fans. And these days, Owns a 5% stake in SpanishCorretjer; three children; lives from his own matches, would likelots of them are investors. ❚❚ language papers in Chicago, in Pasadena and Puerto Rico. –By Ronald Grover ly get $20 million from the fight, Los Angeles, New York, and He’s a 10-handicap golfer. in Los Angeles according to Schaefer.

(right) jeff tran/abaca

Oscar De La Hoya

August 8, 2005 | BusinessWeek | 67

InformationTechnology Design

How Motorola Got Its Groove Back

Inside the creation of a hit new phone as CEO Zander tries to remake the company into a master of innovation

I

t’s a muggy friday morning in mid-July and a group of Motorola Inc. designers are gathered on the 26th floor in the company’s downtown Chicago design center. They’re looking over prototypes for a new mobile phone when ceo Edward J. Zander pokes his head in the door: “Can I come in?” Dressed casually, in jeans and a polo shirt, he quickly gets down to business. The models on the table are for the Q, a phone with a full qwerty keyboard designed to compete with the wildly popular BlackBerry, from Research in Motion Ltd. (rim). No detail is too small for Zander’s attention. He and the employees put one Motorola prototype alongside a competitor’s. “Ours is longer,” Zander worries out loud. “Yeah, but it’s half as thick,” retorts designer Sean Daw. Zander picks up another model and starts poking keys. “I don’t know,” he says. “The Good feels

better to me,” referring to a device that uses software from Good Technology Inc. The Q prototypes look alike but have infinitesimal differences: keys raised a few millimeters more, buttons that require a tad more forceful punch. Finally, Zander finds one he thinks has the right feel. “Now this one feels pretty good,” he says. Zander seems to have found just the right touch at Motorola, too. At a time when rivals Nokia Corp. and Samsung Electronics are reporting lackluster results, the once-troubled Motorola is on a tear. On July 19 the company reported that secondquarter sales had zoomed 17%, to $8.8 billion, while earnings hit $933 million, compared with a $203 million loss the previous year. The biggest driver? The cellular-phone business that shipped a record 34 million units. That gave it 18% share— its highest in seven years and a big step closer to Nokia, which holds 33% of the market. “We’re a stronger No. 2,” Zander

told analysts on the earnings call. “We’ve now set our sights on No. 1.” At the heart of Motorola’s pursuit is a radically revamped strategy for new products: Design leads, and engineering follows. Ever since its founding in 1928 as Galvin Manufacturing Co., the company had been dominated by engineers. That led to loads of innovation, including the invention of the modern cell phone. But in the late 1990s, the approach began to misfire, with a string of unpopular phones and missed deadlines. Now Zander has helped shift the balance of power so that Motorola’s designers hold sway. “It used to be the engineers threw us a chunk of circuit boards and said: ‘Put some plastic around that,’ ” says Daw. “Now we base everything on some experience we want to project and then have the engineering team help us get there.” Motorola has been trying to improve its design for years. Christopher B. Galvin,

Smartphones on Parade MODEL

STRENGTHS

WEAKNESSES

BOTTOM LINE

MOTOROLA Q

At 0.45 in. thick and 4 oz., it’s pocket perfect. It has Windows OS, and a dazzling camera.

The keyboard is a bit cramped, there’s no Wi-Fi, and e-mail integration is unproven.

It has the potential to give the BlackBerry a scare.

RIM BLACKBERRY 7290

Compact. e-mail function is top-notch. The keyboard and scroll wheel are easy to use.

Phone quality is spotty, and multimedia perks such as a camera are absent.

The standard in e-mail devices works like a charm until you dial a call.

PALMONE TREO 650

Excellent e-mail support, a brilliant 320x320-pixel color screen.

No built-in Wi-Fi, the integrated memory is stingy, and the camera has low resolution.

A strong smartphone with good call quality, but stubby antenna makes it a bit clunky.

68 | BusinessWeek | August 8, 2005

Zander’s predecessor and the founder’s grandson, hired a series of talented creatives, including James Wicks, a well-respected Sony Corp. executive who is now head of design for Motorola’s phone group. Yet the genteel Galvin rarely got involved in day-to-day decisions. Zander, though, plays a hands-on role in encouraging workers to come up with the latest in cool. He spends about half his time at the downtown design center, rather than the Schaumburg (Ill.) headquarters, and he constantly pushes, prods, and makes himself a general pain in the neck. In addition, Zander promoted former Nike Inc. executive Geoffrey Frost to the vacant position of chief marketing officer and charged him with making sure that designers’ best ideas get aired among the top brass.

KOREAN KUDOS the changes have earned Motorola recognition from carriers—even in South Korea, home to several of its strongest rivals. “Motorola has certainly gotten its act together,” says You Jong O, senior manager of product planning for sk Telecom, the country’s top wireless carrier. “Their product management is excellent.” Still, the mobile-phone business is more treacherous than ever these days. Zander and Motorola’s good fortune could be fleeting if they miss a step or two. Besides Nokia, Motorola must stay ahead of Korea’s Samsung and lg Electronics Inc. Some carriers say Motorola still has to prove it can move as swiftly as the Korean duo to incorporate extras such as cameras and games into its phones. “They still have a ways to go,” says Dick Lynch, chief technology officer at Verizon Wireless. Success won’t come from one phone, no matter how slick. Yet what Zander seems to be developing is a process of innovation, to crank out hit after hit. The ultrathin Razr phone, introduced last year, has become a big winner, despite a price tag that started at a lofty $500. Consumers are already buzzing about the yetto-be-introduced iTunes phone, which will download and play music from Apple Computer Inc.’s online music store. And the Q phone that Zander put through its paces made its debut on July 25 to loud applause. A scant 0.45 inches thick and a feathery 4 ounces, the Q could be another big hit, analysts say. “It’s got all the goods,” says Ed Lewis, a general partner at consultant RelevantC Business Group. “With this device, Motorola could outsell BlackBerry within 24 months.” The changes at Motorola are part of a broader movement in American business (BW—Aug. 1). From General Electric Co. August 8, 2005 | BusinessWeek | 69

matthew gilson

BLACKBERRY KILLER? The Q will go on sale in 2006

InformationTechnology Design ganization. Ultimately, Lynch resigned When Wicks explained the yin-yang and took a job at Tyco International, while idea last October, a lightbulb clicked on in Zander started looking for his successor. he head. Just as Razr transformed the He found the right guy in Ronald G. clamshell phone, he felt Motorola could Garriques, a hard-charging 41-year-old reinvent every major phone category: the who had turned around Motorola’s phone candy bar style, the slider—and the qwbusiness in Europe. A mechanical engi- erty devices dominated by rim. neer by training, Garriques understood the Motorola’s designers quickly embraced guts of phones but also the idea of a BlackBerry CONVENTIONAL THINKING had a knack for design. killer. In the Chicago dethe tale begins during the chilly days Named phone division sign studio, they hashed of January, 2004. Zander had come from chief in September, out a range of options. Silicon Valley, where he had worked for 2004, Garriques set out They code-named the years. There, the sight of techies tapping to develop what he now phone Franklin, after out messages on the BlackBerry was as calls “wickedly cool and Benjamin Franklin, but common as snowplows scraping Chicago compelling” products. many referred to it as the streets after a storm. Zander figured Mo- He and Zander quickly “Razrberry.” By January, torola had to have its own version of the agreed that neither Garriques and Zander BlackBerry. But during an early visit to DaVinci nor MPx cut it. were convinced they had Libertyville, Ill., where Motorola’s mobileGarriques turned to a legitimate rival to the phone business makes its home, he was Wicks, head of design, BlackBerry device. stunned to learn otherwise. He took one for help. Wicks’s team Since then, designer look at the product road map and asked: had just finished workDaw and other team “Where is the rim-type device that we’re ing on the Razr, the thin members have been fixatgoing to have?” Tom Lynch, then head of clamshell phone, and ed on Franklin’s all-imthe phone business, had to admit the com- Garriques was looking portant keypad. First pany wasn’t developing one. for something with the they designed a flat keyZander changed course in a nanosec- same eye-popping ele- ZANDER “We’re a pad similar to the Razr’s. It looked ond. He thought mobile e-mail would gance. Wicks listened stronger No. 2” good, but was a pain to use. Each catch on with everyone from traveling and promised Garriques key controlled two letters and was salesmen to stay-at-home moms. The last he’d come up with some ideas. more annoying than helpful. Then they thing he wanted was for Motorola to miss A few days later, Wicks raised the chal- tried raised keys, with one dedicated to a revolution on his watch. “I just believed lenge with his top design colleagues, Pe- each letter. Much better. As they worked, that this was a tipping point,” he says. ter Pfanner and Marco Susani. They they kept the blinds on the room’s winEngineers and designers hustled to ful- started brainstorming about how to put dows drawn. Zander stopped in regularly fill Zander’s command, and, by spring, the Razr’s pizzazz into Garriques’ device to check progress. they came up with several concepts. One, when they landed upon a bigger idea. Rivals that just got a look at the new code-named DaVinci, unfolded like a Why not use the Razr as the patriarch for phone aren’t giving any ground. rim took clamshell. Another, ultimately called MPx, generations of phones? With its hard particular issue with the device’s software, was wider and unfolded like a taco. Zan- edges and masculine feel, it could be the which comes from Microsoft Corp. “Big der’s take? Not good enough. He consid- father, or yang, for future phones. The deal,” says James L. Balsillie, rim’s coered the ideas, particularly the MPx, ex- Pebl, a clamshell phone with soft, round- ceo. “I’m at a loss to find the game breakamples of conventional thinking. “If we ed edges, would be the mother, or yin. ingness of this.” Plus, he says rim plans to can’t innovate, forget it,” Zander recalls That would give Motorola’s phones license its e-mail software to Motorola for thinking. Frustrated by the sluggish bu- much-needed consistency—and allow use in devices similar to the Q. reaucracy, Zander began plotting a reor- the company to plan years in advance. But at the unveiling of the Q phone, at a convention hall in suburban Chicago, the enthusiasm bubbled over. Steven A. CHANGING COURSE Ballmer, Microsoft’s chief executive, joined via a live video feed and said Q Introducing nifty cellular phones based on similar platforms has helped would “revolutionize mobile phones.” Motorola gain market share while also boosting profits at its phone business Zander says the Q and the Razr are signs As Motorola market ...operating earnings of the innovation that lies ahead. “We are share has grown... have taken off far from finished building on [their] sucBILLIONS OF DOLLARS PERCENT 3 cess,” he says. He’s determined to make 20 sure of that. Even if it means poking his 2 18 nose into many more design meetings. ❚❚ 16 1 –By Roger O. Crockett in Chicago, with Cliff Edwards in San Mateo, Calif., and 14 0 Spencer E. Ante in New York 12

–1

0 '01

'02

'03

'04

Data: Gartner Inc., Deutsche Bank, company reports

70 | BusinessWeek | August 8, 2005

'05

EST.

–2 '01

'02

'03

'04

'05

EST.

For a Q&A with Ed Zander and a slide show of Motorola’s new phones, go to businessweek.com/extras

photograph by michael l. abramson; chart by alberto mena/bw

to Proctor & Gamble Co., companies are increasing their emphasis on creativity and innovation, as globalization brings lowcost rivals from abroad to their doorstep. The development of the Q provides a look inside one company’s efforts to remake itself for a more competitive world. It’s the story of how Motorola got its groove back.

Management B-School grams. Some now waive the test on a case-by-case basis; others have cut it from their admissions criteria altogether. That development—the subject of a raging debate inside the closed-door world of B-schools—comes at a time when emba programs and applications to them are on the rise. That leads some to suggest that the waivers are motivated by profit, since full-time mba offerings, which require the gmat, are struggling to attract students. Says Maury Kalnitz, managing director of the Executive mba Council, an emba research group: “It’s a matter of competing for students.”

REFRESHER COURSES

Sidestepping The GMAT Many executive MBA programs waive the test. Will this water down the degree?

christophe vorlet

Y

ou’re buying a circular rug for a square room, and you want to calculate how much floor space will be left bare once the rug is in place. Do you know how? This is a question much like one you might see on the Graduate Management Admissions Test, for years the gatekeeper to an mba education in the U.S. If you’re in midcareer and want to get into an mba program tailored for busy executives, and you can’t summon the college math, don’t fret. Try this one: How many executive mba programs in BusinessWeek’s top 25 require the gmat? The answer: 12. That’s right, you can get into emba programs at 13 top-ranked Bschools without taking the gmat. In the last few years, scores of B-

schools—including such top-ranked institutions as University of California at Los Angeles’ Anderson School of Management—have quietly abandoned the gmat as a requirement for emba pro-

it’s the nature of the emba itself that makes this a contentious issue. A weekend degree offered to upper-level managers but otherwise identical to its mba counterpart, such programs draw students with an average age of 37 and 14 years of business experience. For that reason alone, advocates of the waiver argue, the gmat is not a valid test of the applicant’s strengths. Instead, they say, schools should base decisions for enrollment on academic records and work history— something the gmat can’t gauge. At No. 1 ranked Northwestern University’s Kellogg School of Management, emba applicants aren’t required to take the test but may be asked to take a refresher course if their quantitative skills are rusty. Julie Cisek Jones, the program’s director, says students who are admitted are precisely the kind of successful executives who will enrich the educational experience for their classmates—gmat or no gmat. Says Cisek Jones: “We are much more concerned with the professional career and the value and diversity that those experiences bring into the classroom.” Schools like the University of Pennsylvania’s Wharton School and Duke University’s Fuqua School of Business take a hard line the other way, arguing that by

No GMAT? No Problem

In a controversial move, some top-ranked B-schools, including UCLA, cut the GMAT requirement TO WAIVE...

AND NOT TO WAIVE...

■ Business experience is more important than test scores for EMBA programs

■ Without testing, students may lack analytical skills needed in first year

■ Test is unfair to applicants who have been out of school for 10 years or more

■ Exam is the only way to compare applicants of different backgrounds

■ Rejecting for low test scores would reduce the diversity of backgrounds

■ An EMBA is still an MBA, and the requirements should be the same August 8, 2005 | BusinessWeek | 71

Social Issues Medicaid

GMAT fans say they need a single standard

For Q&As with EMBA directors and sample GMAT questions, please go to businessweek.com/extras 72 | BusinessWeek | August 8, 2005

WAITING Treating an asthma attack at a New York emergency room

Radical Surgery For Medicaid? South Carolina Governor Sanford has a plan to slash costs—but a political battle looms

T

he 40th anniversary of Medicaid is on July 30, but few will celebrate. The state and federal program that provides essential health benefits for the poor is in big trouble across the country—under fire for providing often substandard care even as it breaks the budgets of many states. Now, in what could be the first step toward a fundamental remaking of the huge public program, South Carolina’s Republican governor, Mark Sanford, has quietly

asked the federal government for permission to redesign Medicaid for the 800,000 low-income residents of his poor, largely rural state. Under Sanford’s proposal, Medicaid would be dramatically transformed. It would no longer provide unlimited care, instead offering beneficiaries— mostly mothers with children—a fixed amount of money each year to buy insurance and pay out-of-pocket costs. If they run through their accounts, they would have to pay for additional care on their own. But if they hold spending

mario tama/gerry images

itself, work history, though important, is a poor test of an applicant’s analytical skills. With no standardized measure, these schools argue, programs may end up taking students unable to keep up with classmates, especially in mathheavy first-year core courses, thus dragging everyone down. “The students are constantly working in teams,” says Daniel Nagy, associate dean for Duke’s emba program. “If you add a weak link, it takes away from the value of the class. And you’re going to hear about it.” Since schools often claim their emba and mba degrees are identical, gmat supporters want admissions standards to be, too. By waiving the gmat for emba applicants, they say, schools may need to dumb down the curriculum for those lacking math skills, ultimately muting the degree’s prestige. Says Wharton emba Director Howard Kaufold: “The bottom line is that at the schools not requiring the gmat, there has to be an impact on the technical content of their mba.” Schools worried about the consequences of a full-scale waiver have carved out a middle ground, granting waivers on a case-by-case basis. ucla dropped its gmat requirement after it received a slew of applicants with graduate degrees in other areas or jobs in fields requiring quantitative skills, such as engineering. But it recommends that applicants without such backgrounds take the test, and last year nearly 25% of the class did. The University of North Carolina’s Kenan-Flagler Business School requires the gmat but waives it for applicants with advanced degrees or technical jobs. About a third of students skip it. “The test doesn’t measure their determination, their drive, their leadership, those things that are critical in the application process,” says Penny Oslund, director of unc’s emba program. “It’s a piece of a much bigger puzzle.” Is the gmat a piece of the admissions puzzle that emba programs can do without? As more B-schools answer in the affirmative, emba admissions are becoming more art than science. ❚❚ –By Geoff Gloeckler in New York

lou krasky/ap/wide world

Liberals will fight changes they see as shifting the cost burden onto the poor

down, they could bank the leftover money to pay future medical costs—or even use it to buy private insurance if they leave the program. “This is the biggest change ever for Medicaid,” says Cleveland State University finance professor Michael Bond, who helped design the plan. Republican governors in “red states,” such as Florida and Georgia, and in “blue states,” such as Massachusetts and Vermont, are mulling similar proposals. The rethinking is part of a move by states to lighten the burden of rising medical costs for the poor. Those obligations have doubled over the past decade as the ranks of the uninsured have risen, high-tech care has increased, and nursing care for the elderly has exploded. Because Washington splits the cost of this spiraling health-care burden, it must approve a plan such as South Carolina’s. But that won’t be a big hurdle given the Bush Administration’s interest in “ownership society” ideas, such as trying to create markets by replacing open-ended benefits with vouchers and other one-time payments. The Centers for Medicare & Medicaid Services, which oversees Medicaid, already backs the concept. “These kinds of approaches can lead to lower costs and more effective treatment,” says cms director Mark B. McClellan. “You can’t treat chronic illness without active patient involvement. And you can’t get that through some government pricing program.” A green light from the feds will spark two huge political battles. Liberals will object to any plan that turns Medicaid from a guaranteed benefit into the same sort of defined-contribution program that many employers now use. Such cost shifting is especially unfair for the poor, they say, and for those who have little experience with private insurance. “All Medicaid beneficiaries would face a significant increase in out-of-pocket costs,” says Judith Solomon, a health-policy analyst at the Center on Budget & Policy Priorities, a liberal Washington think tank. But the plan could also pave the way for an overhaul in the way Medicaid is funded, which is sure to spark more controversy. Instead of Washington reimbursing states for a fixed percentage of their costs, President George W. Bush wants the feds to contribute a fixed dollar amount, leaving states on the hook for big unanticipated hikes. Faced with opposition from the National Governors

Assn., the White House is no longer pushing a nationwide change. But some governors, including Sanford, may accept such a deal in exchange for the flexibility to run Medicaid their way. The benefit, says Robert M. Kerr, director of South Carolina’s Health & Human Services Dept., is that patients will become better consumers if they have to pay for part of their care. “People are going to manage their accounts more carefully,” he says. “We’re exposing beneficiaries to the type of market the rest of the population has to deal with.” The plan would work like this: A 45year-old would receive say, $3,800 from the state; a 5-year-old might get $900. The funds—called personal health accounts—would be distributed as vouchers or debit cards, not cash. Accounts would be adjusted based on a beneficiary’s age, sex, and health. For now, seniors in nursing homes would remain in traditional Medicaid.

Beneficiaries would have several ways to pay for their health care. If they have insurance at their jobs, they could use the accounts to pay their premiums. If they do not have such coverage, they could buy hospital insurance through Medicaid and use remaining funds to buy care from any doctor they choose. Or they could use a portion of their account for private managed-care insurance and for copayments and deductibles. Another option: They could use the entire account to join a medical home network—a group of local doctors who serve as gatekeepers for specialty care, pharmaceutical drugs, and the like. Those additional services would be paid by Medicaid, though patients would still be responsible for small out-ofpocket costs.

A GAPING HOLE

the south carolina plan will require wide use of managed-care plans. The problem is, fewer than 10% of poor South Carolinians have such coverage. There are no plans in 16 counties and competing plans in only one. Even backers say that must change for the idea to work. “You’ve got to have competition,” says Cleveland State’s Bond. It’s no surprise that states such as South Carolina are desperate to hold down Medicaid costs. The program is Sanford’s plan aims to use now the biggest single individual accounts, an idea expense for most that echoes President Bush’s states—and costs are push for an “ownership rising at close to dousociety,” to transform South Carolina’s Medicaid ble-digit rates. South Carolina spends $1 billion a year on program, which provides health care for the Medicaid benefits, or about poor. His goal: Unleash market forces to help 14% of its budget. So state ofrein in costs. Recipients would get an account ficials say they have only two they could use to buy one of the following: options: slash benefits for all but the poorest patients, or MEDICAL NETWORK The poor would use their boost costs modestly for all. entire accounts to join a network. Patients would The jury is still out on still have modest deductibles and copayments. whether health accounts— A primary-care gatekeeper would coordinate which are increasingly treatment. common in the employer setPRIVATE INSURANCE Beneficiaries would purchase ting—can save money or ima managed-care plan with conventional premiums, prove care. But with Medicaid copays, and deductibles. Insurance companies or costs threatening to overHMOs could offer extras such as dental or vision whelm his budget, Sanford is coverage. willing to roll the dice on private accounts. And if, as anticSELF-DIRECTED CARE Patients would use their ipated, the feds give him the accounts to buy limited insurance for hospital care O.K., expect other governors and pay out-of-pocket costs for all other services. to follow suit. ❚❚ The state might still negotiate discount rates with –By Howard Gleckman in Medicaid doctors. Washington

Blueprint for a Revolution

August 8, 2005 | BusinessWeek | 73

Also in this guide:

some users, printers desktops still rule 78| For that skimp on space PERSONALTECH 77| Multipurpose

IT’S AUGUST ALREADY—time to start thinking about work and school again. Our writers and those from partner cnet.com have picked the best computing basics to outfit a dorm room, not to mention a smallish apartment, or home office. We tested laptops and desktops, printers that copy, and monitors that double as tvs—all with an eye to saving space and maybe a little money. Space not a problem? Stick around for the Nov. 7 issue for our guide to the digital home.

SCHOOL

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BACK TO

screens for those 80| Big small dorm rooms

keep getting 81| Cameras smaller and better

printers you can 84| Photo take almost anywhere

LAPTOPS

C

The stylish PowerBooks, which feature both WiFi wireless networking and Bluetooth short-range wireless, are ideal for students, with the midsize 15-in. model the best all-around choice. As long as you don’t depend on some Windows-only software and can handle the fairly steep price, Macs are a great choice for the college-bound. Those who choose Window notebooks have a much broader range of both features and price to choose from. Wi-Fi wireless networking is standard in nearly all models. And all—except for a few large notebooks that use desktop processors—are powered by Intel Pentium M or Celeron M mobile processors, or the Advanced Micro Devices alternative, the Turion 64. Whatever you may have heard, the type of chip probably won’t make much difference to most users. As for peripherals, all the machines include cd/dvd drives that can write disks as standard equipment or are available as an option. Students tend to avoid subcompact notebooks, which are highly portable but lack storage capability and processing power. Most opt for either the thin, light laptops that are popular in the business world or bigger desktop-replacement mod-

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ramming a bulky desktop computer and an even bulkier monitor into the minivan used to be part of the off-to-college ritual. But now that seems as 20th century as the Walkman. Today, students typically head off to school with flexible, convenient, space-saving laptops. To get a sense of what’s in the backpacks of the college-bound, I talked to four recent graduates of Walt Whitman High School in Bethesda, Md., each headed to a different college with a different laptop. The first and most critical choice is Windows vs. Macintosh. While Apple Computer’s share of the total market remains in the low single digits, Mac’s popularity on campuses is much greater. When Becca Eskin leaves for Stanford University in September, most likely it will be with a 15-in. PowerBook. (Prices start at $1,999.) “I talked to a lot of Stanford students, and a lot of them have Macs,” she says. “They get fewer viruses and are more user-friendly.” Mac notebooks come in two varieties: the iBooks, which are aimed mainly at the K-12 crowd, and the 12-, 15- and 17-in. PowerBooks.

August 8, 2005 | BusinessWeek | 75

taka

Today’s notebook computers are so muscular, affordable, and packed with features, who needs a desktop? BY STEVE WILDSTROM

PERSONALTECH BACK TO SCHOOL els, which offer high-end graphics, huge displays, and desktop-like storage. Greg Ihrie is going to the University of Maryland with a Dell Inspiron 600M (starting at $749), a first cousin to the corporate workhorse Latitude D610. It weighs a bit more than 5 lb. and comes with a 14.1-in. display and a hard drive with up to 80 gigabytes of storage. Ihrie wanted a notebook he could carry easily. A Dell discount through the university sealed the deal. Others worth considering include the Lenovo ThinkPad R52 (from $979) and the Hewlett-Packard Compaq nx6110 (from $799).

COOL TOOL CRUZER PROFILE $120 SanDisk www.sandisk.com USB memory keys offer a handy and cheap way to store your life on a gizmo you can keep in your pocket. But if you lose it, the finder has access to your files. The SanDisk Cruzer Profile combines 1 gigabyte of memory with a fingerprint reader that keeps the contents private. The memory and reader pieces come apart for ease of use.

SCREENS FOR MOVIES raman gupta will be taking a different kind of thin, light notebook to the University of Pennsylvania. The hp Pavilion dv1000 (from $749) has a 15.4-in. widescreen display, an increasingly popular design that is ideal for watching movies and also is excellent for spreadsheets. Weight was important to Gupta, but he was willing to accept a bit of extra poundage—the dv1000 weighs just under 61⁄2 lb.—in exchange for “more emphasis on multimedia features, because that’s what I use my home desktop for.” One convenient feature: You can play a dvd or cd without booting up Windows. Like most widescreen models, it is available with a polished display that increases brightness and contrast. The downside—such displays are more prone to glare. Students shopping for wide-screens in this class have many good choices. These include the Dell Inspiron 6000 (from $649), the Toshiba Satellite A70 (from $788), the Sony Vaio fs (from $1,000), and the WinBook W (from $1,199).

Siddharth Jain wasn’t much worried about size and weight, but he sought a laptop with strong multimedia capability, a big hard drive, and good graphics features for his photographic work. His pick, a Gateway 7426 gx, is a relatively highend notebook starting at around $1,500. One factor in Jain’s choice of Gateway: His school, Lehigh University, offers service for it. Like Gupta’s hp dv1000, the laptop has a 15.4-in. wide-screen display. If you want something bigger, the Dell Inspiron 9300 (from $1,099), hp Pavilion zd8000 (from $1,099), and Toshiba Satellite P30 (from $1,119) have 17-in.wide screens. Anyone buying a laptop for college should follow some general rules. Check with the school for its requirements and recommendations. For example, many suggest Windows xp Pro, typically about $100 more than the Home Edition, because it offers superior networking and security features. Ask whether the school provides extended support for certain

brands and what promotions are available. Avoid buying any software before learning what your school offers for download from its network and at deeply discounted prices from the bookstore. Laptops from different manufacturers are built from the same components and are more alike than different, so features are more important than brand. The prices in this article are the lowest quoted for each product line, but you should be wary of them. Manufacturers often include an underpowered, stripped-down model just to show an attractively low starting price, but these lowball offers are rarely your best choice. And for performance, worry more about memory than processor speed. You want a minimum of 512 mb, and a full gigabyte is better. Unless you have special requirements that only a desktop can meet, a laptop is the way to go for campus computing. The vast array of models available makes it certain you can satisfy your needs and your budget. ❚❚

THE PICKS OF THE LITTER

These puppies offer something for anyone looking for power and flexibility you can put in a backpack THIN & LIGHT

DESKTOP REPLACEMENT

MODEL

Apple 15-in. PowerBook

Dell Inspiron 600M

HP Pavilion dv1000

Lenovo ThinkPad R52

HP Pavilion zd8000

Dell Inspiron 9300

PRICE

from $1,999

from $749

from $749

from $979

from $1,099

from $1,099

THE GOOD, THE BAD, AND THE BOTTOM LINE

The G4 processor is showing its age, and it’s pricey, but this wide-screen beauty is still the king of style. The real star, though, is the software— especially the elegant Mac OS X.

A solid, businesslike performer with a 14.1-in. display. Its relatively light weight is an advantage, but that portability comes at the price of only average battery life.

This slick-looking notebook is sensibly priced, with a 15.4-in. wide-screen display. A neat feature: You can play CDs and DVDs without booting up Windows.

Far from flashy, the ThinkPad R52 is a sturdy, portable workhorse with a 14.1-in. screen, enough oomph to tackle most tasks students face— and the best keyboard in the business.

With a 17-in. widescreen TV, a digital recorder, a stereo, and—oh, yes—a powerful computer, the HP Pavilion zd8000 is one of the best multimedia powerhouses on the market.

Gamers and bookworms alike will enjoy the 9300’s advanced multimedia features, blazing performance, and 17-in. wide-screen display—all in a relatively light package. Data: CNET.com, BusinessWeek

76 | BusinessWeek | August 8, 2005

PRINTERS

All your printer does is print? What a one-trick pony. Today’s all-in-one models scan, copy, and sometimes fax. And they won’t hog your whole desk. BY LARRY ARMSTRONG

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f you’re cramped for space—trying to squeeze all your electronic gear onto a dormroom desk or setting up a home office in a studio apartment—it’s time to consider an all-in-one printer. These multifunction machines can print, scan, copy, and sometimes fax, and they hog a lot less desktop surface than the array of standalone machines that do the same things. I looked at a handful of all-inones, from the $100 HewlettPackard psc 1510 to the much more capable $250 Canon Pixma mp760. In between, I tried out Brother’s mfp-420cn and the Epson Stylus cx6600, either of which can be had for about $140 to $200, depending on how diligently you shop. I tested only inkjet models. You won’t get the crisp, clear text of a laser printer, but it’s good enough for most purposes. The bonus with inkjets is that you get color prints and copies without breaking the bank. That includes color photos, which color laser printers can’t really handle. If you haven’t shopped for multifunction printers lately, you’ll be surprised at how much they can do. To use them as copy machines or photo printers, you

don’t even need to hook them up to a computer. You undoubtedly will, though, since you’re buying a printer mostly to churn out text documents. Still, you don’t have to fire up your computer if all you want to do is make an occasional copy or print a snapshot.

FAT BRIEFCASE where space is really tight, you’ll want to see the hp and Brother models. They’re each about the size of a bulging

briefcase. These two are best if you mainly want a multifunction printer for copying and printing text and graphics. They can do all the tricks, such as reducing and enlarging copies, even photos. But I wasn’t impressed with the picture quality of either. The hp prints are a little fuzzy and lack detail; the Brother’s look grainier than those from the other printers. Neither has a display to preview individual pictures before you print them. The hp has no slots for camera memory cards, so you have to hook up your camera or boot up your computer to print a photo. (The psc 1610 model, for $20 more, has card slots.) Despite its just SLEEK The Epson Stylus CX6600 O.K. snapshots, the does a pro job Brother has a couple on color photos of features hard to find on a printer in its price range. It has a built-in fax machine, and it can be networked to two or more computers, handy if you have a roommate and want to share a printer. It’s also the only one I looked at with an automatic document feeder to copy a stack of papers instead of doing them one at a time. If you need a digital darkroom that also can handle the other office functions, you’ll be better off getting the Canon or Epson printers. These are not space savers— they’re taller and bulkier than the hp or Brother models—but the quality of their photos is much closer to that of professionally printed images. The pricey Canon printer can even scan film negatives and slides—which means you can print photos directly from processed film. So if space is your issue or if you want to unclutter your desk, take a look at an all-in-one model. It won’t set you back much more than an ordinary inkjet printer, and you’ll find yourself using it a whole lot more. ❚❚

COMPACT PRINTERS HANDLE EVERYTHING

Multifunction inkjets can copy, print and scan–sometimes without booting up the computer

MODEL

Brother MFC-420cn

Canon Pixma MP760

Epson Stylus CX6600

Hewlett-Packard PSC 1510

PRICE

$138 – $166

$219 – $266

$130 – $210

$89 – $104

THE GOOD, THE BAD, AND THE BOTTOM LINE

This compact all-in-one packs in a lot of features: It can network and fax—and has an automatic document feeder. But it’s slow, and photos are a bit grainy.

This digital darkroom prints top-notch photographs and stands out from the crowd by scanning slides and negatives. Prepare to pay a premium, though.

Superb scanning and ease of use give the CX6600 high marks, although it lacks an LCD for previewing photos. Print quality, while good, is not the best.

This budget model does fair scans and photos. It has no display to preview pictures or slots for memory cards, and you have to swap in a special ink tank for photo-quality prints. Data: CNET.com

August 8, 2005 | BusinessWeek | 77

PERSONALTECH BACK TO SCHOOL horsepower as much as gamers, while multimedia enthusiasts will love their smooth and speedy multitasking. Because desktops are a lot cheaper than comparable laptops, it can pay to give up portability. A basic, name-brand pc with a crt monitor and printer can be had for as little as $299 now—an entire system for the price of an iPod. For less than $550 (including flat-panel monitor), the eMachines T4010 will hold up admirably through four years of college. If you want to stick to a budget without cutting corners, consider the iBuyPower Value-Pro ($999 also with monitor), which easily does every computing job except for extreme gaming.

DESKTOPS For young engineers, multimedia mavens, or just plain gamers, these systems’ firepower and lower prices can make it worthwhile to sacrifice portability. BY ANDREW PARK

M

ost freshmen show up on campus with slim laptop pcs tucked into their backpacks. Not Ian Axelrod. When the 18year-old Atlantan enrolls at Georgia Institute of Technology in the fall, he’ll have a $3,600 desktop tower that won’t leave his dorm room until school is out. Axelrod’s passion is Quake

78 | BusinessWeek | August 8, 2005

III, an online game in which a few megahertz can make the difference between life and a grisly virtual death. “I couldn’t see myself gaming on a laptop,” he says. “It’s just not enough power.” Don’t stress, parents. Just because your kids want desktops doesn’t mean they share Axelrod’s priorities. Choosing a desk-bound pc can be a smart move even in this age of wireless mobility. Budding engineers can use desktops’ superior

a low-priced pc doesn’t have to be plain vanilla. Take the WinBook PowerSpec mce 410, which stands for Windows xp Media Center Edition. Housed in a slim black cabinet no bigger than an audio receiver, it comes with a sexy 30inch hdtv-ready wide-screen display, making it also an entry-level home theater system for only $1,898. The software records tv shows à la TiVo, burns music onto the 160-gigabyte hard drive or the double-layer dvd drive, and shows off slide shows of digital photos—all via an easy-to-use remote control. Of course, there are Media Center laptops on the market. But aspiring media mavens demand the powerful processors, huge hard drives, and expansion and connection options that let them create digital content as well as view it. “For media, consumers feel more comfortable using a desktop,” says Giovanni Sena, marketing manager at Hewlett-Packard. hp’s $1,150 Media Center m7170n Photosmart pc is one of the best, thanks to several nifty features. Behind a sliding door on top of the mini-tower is a well that holds a dock for an iPod or digital camera. In front, there’s a slot for hp’s $189 personal media drive, a book-size 160 GB hard disk that’s great for backing up your photo, music, or video library. When you pop it out, you can connect it to other pcs by a cable. But the coolest gizmo is LightScribe, which prints words, photos, or album art onto special cds that run $6 for a pack of five. That’s about two or three times the cost of generic cd-rs that you write on with a Sharpie pen. The m7170n also comes with the only true advancement in desktops this year: a dual-core processor. Both Intel and Advanced Micro Devices have rolled out new chips, the Pentium D and Athlon 64 X2, respectively, with two computing en-

photo illustration by roger kenny; (tuscany) sergio pitamitz/zefa/corbis

CREATING CONTENT

gines inside instead of the usual one. That makes simultaneously doing more than one demanding task, such as editing digital video while running a virus scan, faster and smoother. Choosing a Pentium D adds $75 to the $899 base price of a Dell Dimension 9100, one of the best all-around desktops on the market because of the seemingly limitless ways that you can configure it and a new design that is cooler, quieter, and more attractive. Unfortunately, the most serious gamers now demand another kind of dual power: two graphics cards. Thanks to technology from chipmaker Nvidia, twin video processors can now work together to render 3-D images faster and more realistically for movie-like effects in games. Be prepared to pay through the nose for this feature. The Overdrive pc Torque sli, one of the fastest such systems, costs $5,000—not including the optional cost of custom painting by a Ferrari body shop. A slightly less expensive option is the Velocity Micro Gamer’s Edge DualX for $4,350. Most desktops are dull and utilitarian in appearance, but one alternative boasts enough aesthetic appeal to interest a psych class. Apple Computer’s eye-catching iMac G5 isn’t for hard-core gamers or media freaks, but it’s still the best-looking computer of any kind. And the gleaming white all-in-one design, which houses the guts of the computer behind an lcd screen, has all the power most

COOL TOOL GO 2.4 GHZ CORDLESS OPTICAL AIR MOUSE $80 Gyration www.gyration.com The wireless mouse liberated you from your computer. With the GO mouse, forget the desk. It translates the movements of your hand into programmable commands from up to 30 feet away, even on a Media Center PC. You’ll get less repetitive stress, but expect some strange looks.

>>

students will need. Apple has made two flavors of wireless networking standard in the Mac: Wi-Fi and Bluetooth, which makes it a breeze to wirelessly sync up many handhelds and cell phones or connect cordless peripherals. At $1,799, the 20-inch wide-screen version isn’t cheap, but it easily displays two pages of a term paper at a time or quietly show dvds at high resolution. If a smaller display will suffice, the 17-inch is a good value at $1,299. If you want the zen of Apple at a budget price, consider the $500 Mac Mini, though the processor is slower than the iMac and you’ll have to supply your own monitor, mouse, and keyboard. Still, looks are only skin deep. It’s the software that makes the Mac difference. Macs are sold bundled with an assortment of excellent multimedia programs, called

iLife, and the os x 10.4 operating system, known as Tiger. A new feature called Spotlight allows you to instantly search your entire computer for files based on a range of criteria while working in any application, and the iChat av video-conferencing software can smoothly connect up to four people via Webcam. At the touch of a button, the new Dashboard application overlays an array of Web-based utilities called Widgets, such as an English dictionary for defining words and another for translating them into a foreign language. Apple released Tiger with just 14 Widgets, but made them easy to write so there are now some 900, including one that converts any sentence into the backward syntax used by Yoda, the diminutive green hero from Star Wars. As the Jedi master himself might say, “Cool, that is.” ❚❚

DORM-ROOM DYNAMOS

Desktop computers remain the right choice for many students—and they still pack the most power for the price. GODS OF GAMING

MEDIA MONSTERS

ALL-AR0UND ALL-STARS

MODEL

Overdrive PC Torque SLI

Velocity Micro Gamer's Edge DualX

WinBook PowerSpec MCE 410

HP Media Center m7170n Photosmart PC

Apple iMac G5

Dell Dimension 9100

PRICE

from $3,912

from $1,675

from $999

from $1,150

from $1,095

from $974

THE GOOD, THE BAD, AND THE BOTTOM LNE

Boutique brand Overdrive is the gaming PC to beat, thanks to its relentless tweaking of high-end components for the most realistic graphics. This souped-up system, however, costs a pretty penny.

Currently one of the fastest PCs around, the DualX's name refers to its two graphics cards, which can handle anything a 3-D game throws at them. One would do well to throw away the wheels on the bottom of the case.

A home theater PC and a 30-in. LCD for less than $2,000? WinBook isn't a well-known brand and it doesn't offer the most advanced components, but for the price of some displays, you can get the whole package.

The HP’s mini-tower might not make it in the living room, but it comes with all kinds of options for connecting digital devices and creating and storing your own multimedia productions.

Apple's elegant all-in-one PC now has a bigger screen, built-in wireless networking, and Tiger, the best version of the Mac operating system yet. Still, it lacks the TV connection that would turn it into a TiVo.

While pricey for Dell, the 9100 is one of the bestperforming namebrand PCs around. It sports Intel’s new dual-core Pentium D chip, loads of memory and storage, and seemingly limitless configurations. Data: CNET.com, BusinessWeek

August 8, 2005 | BusinessWeek | 79

PERSONALTECH BACK TO SCHOOL When I tested Sony’s aerodynamic mfmht75w in my office recently, I couldn’t resist flipping out of pc mode to catch the Tour de France live or a rerun of The Daily Show I’d missed the night before. Multipurpose monitors like these have been around for a while, but their prices were high enough to kill the kids’ college fund. Now they can be had for under $600. With high-def displays selling for under $600, The best all-around pick is the Sony. there’s no need to take up precious dorm-room space Below the extra-wide 17-inch screen, its with a separate TV. BY ANDREW PARK wide silver frame curves forward gently at an adjustable angle until it touches down on your desk. Inside the sloping nose: a subwoofer and stereo speakers that generate high-quality sound. All the s teenagers in the up to an antenna or set-top box and controls are hidden on the side, so you 1980s, my friends and I they’ll handle high-definition television, see only the elegant round power button. dreamed of going off to col- too. And with lcds’ sharp, sweeping pic- One downside: Despite producing an exlege and blasting the tures, spreadsheets and presentations cellent image in tv mode, the Sony can’t stereo, watching tv, and have never looked better. display it in widescreen format, unlike studying all at the same The only downside is the distraction. most lcd televisions. time. This, to us, was the On the other end of the ultimate expression of freedesign spectrum is the minidom from parental control. malist ViewSonic vp201b, We never imagined that we could do all another hdtv-ready monithese things with the help of a computer tor that sells for under $600. monitor. With built-in tuners, models ViewSonic framed the 20.1with liquid-crystal displays double as stylinch lcd in a simple black ish, flat-screen tvs—looking good and bezel that’s less than an inch saving space at the same time. Hook them thick and mounted it on a sturdy adjustable base. Also included: a usb hub for connecting peripherals. While the vp201b isn’t the best in its class for professional video editors and graphic designers, its sharp picture and excellent contrast are more than good enough for the rest of us. College digs may not acVIEWSONIC’S commodate the giant televisleek and SONY is sturdy sion screens students are a great design choice used to at home, but there’s no need to settle for a tiny set. The Philips Brilliance 230w5vs gives you a spacious 23-inchwide picture that can easily display two The best flat-panel displays now do double duty as desktop television pages of text. sets—a tempting distraction from working on your PC But at nearly $1,500, you’re not going e ODEL Philips Brilliance ViewSonic M Sony MFMto buy the Brilliance for the wide screen 230W5VS VP201b HT75W alone. So Philips put it in an attractive silver case that will spruce up any dorm $1,458 - $1,521 $595 - $895 PRICE $540 - $600 room or apartment and loaded it with lots of consumer-friendly frills such as a While pricey and not THE The gently sloping design The sleek, highly built-in memory-card reader for viewing very adjustable, the adjustable ViewSonic makes this Sony elegant GOOD, digital media as well as a picture-in-picPhilips offers 23 inches includes a useful THE BAD, enough for the living ture feature that allows you to surf the of screen real estate, USB hub for attaching room, while the excellent THE Web or write papers and watch high-defplenty of inputs for cameras, but the 17-inch wide-screen BOTTOM inition tv at the same time. Dream as we memory cards and 20.1-inch display’s display toggles easily LINE might, my friends and I couldn’t have enperipherals, and good video quality and color between TV and PC visioned how far computer monitors image quality. aren’t best in class. output. would take multitasking. ❚❚

MONITORS

A

VIEWING PLEASURE

Data: CNET.com

80 | BusinessWeek | August 8, 2005

CAMERAS The latest digital ultracompacts not only look good, they also work hard. Smaller than an Altoids tin, they boast big screens and nifty features. BY BURT HELM

L

iz gunnison is ready for a new digital camera. The 22year-old art history graduate from Yale University, who carries her camera everywhere, wants a model that can slide easily into a pocket or purse— and has a high enough resolution to fulfill dozens of multimedia uses. Unfortunately, her two-megapixel Canon PowerShot S200, a Christmas gift from two years ago, is about the size of a deck of cards and feels too heavy and bulky for everyday use. She also wishes it would fire up faster between snapshots. Gunnison needs to go shopping. Any one of the latest ultracompact fivemegapixel cameras, five of which we tested, could fit the bill. Priced from $258 to $440, each packs a 3x optical zoom and a big liquid-crystal display (lcd) screen. Best of all, none is bigger than a tin of Altoids, with the slimmest and sexiest-looking of the bunch— the smooth-contoured Casio Exilim

ex-s500—measuring only 3.5 by 2.3 by 0.6 inches. These ultracompacts are strictly for the snapshot crowd, as they don’t incorporate many features, such as interchangeable lenses, for advanced photographers. Each includes at least a few presets such as “portrait” and “landscape,” a red-eye flash, and the ability to tweak the exposure and white balance. Like most digital cameras nowadays, each can record short videos, but the images are so grainy and eat up so much memory that the feature is hardly worth using.

ALL LIT UP each camera has some standout features. The Nikon Coolpix S1 has 16 scene presets, some of them innovative. An “indoor/party” mode, for instance, fires off a carefully timed series of five flashes, illuminating the background of a dimly lit bar or party as well as the people in the foreground. Three other cameras also have 2.5-inch lcds, but the Konica Minolta Dimage X60 seems bigger because the

CASIO EXILIM It’s easy to move photos to a computer

camera is less wide than the others—its dimensions are 3.3 by 2.2 by 0.9 inches. I found its screen looked sharper and more vivid, and so it was more striking. And all the cameras are speed demons—able to boot up and snap a picture within three seconds. The small size of these cameras does necessitate a few sacrifices. Only the Canon PowerShot SD400 offers a viewfinder in addition to an lcd screen, and the hole is so tiny that few will find it comfortable to look through. The ultracompacts have a tiny sliver of real estate for buttons. Those on the feature-heavy Coolpix and PowerShot are crowded to-

SVELTE SNAPS

These five-megapixel digital cameras are easy to slip into a pocket or bag. MODEL

Canon PowerShot SD400

Casio Exilim EX-S500

Fujifilm FinePix Z1

Konica Minolta Dimage X60

Nikon Coolpix S1

PRICE

$319 – $400

$376 – $409

$264 – $400

$258 – $440

$280 – $400

THE GOOD, THE BAD, AND THE BOTTOM LINE

Snapshot photographers get all the tools they’re likely to want, though the image quality is just okay

It's especially slim and endowed with more shooting options than many competitors, but it doesn't handle low light as well

A stylish ultracompact, especially strong in low light situations. Still, it only has a modest set of features

Light on photo features, but it can select an automatic scene mode for you, and it costs less than many competitors

Innovative features and shooting aids set the S1 apart, though it’s slow to autofocus when lighting is low

Data: CNET.com, BusinessWeek

August 8, 2005 | BusinessWeek | 81

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The power of versatility. The ability to adapt to your surroundings is a key component of success. The Tecra
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Innovation by design. of Microsoft Corporation in the United States and/or other countries. Wi-Fi is a registered certification mark of the Wi-Fi Alliance. All other trademarks are the property of their respective owners. While Toshiba has made every effort at the time of publication to ensure the accuracy of the information provided herein, product specifications, configurations, prices, system/component/options availability are all subject to change without notice. Toshiba is not liable for pricing, typographical or photography errors. Prices listed are based on products listed at toshibadirect.com at time of publication printing. Reseller/Retailer pricing/products may vary. © 2005 Toshiba America Information Systems, Inc. All rights reserved.

PERSONALTECH BACK TO SCHOOL gether, and it takes a while to figure out how to navigate around them. With the flash and all auto settings turned on, the ultracompacts consistently took supersharp, vivid photos without much trouble. Some took less time to auto-focus, which is important when you want a quick candid shot. Almost every ultracompact struggled in those situations when the flash is turned off. Since none use sophisticated image-stabilizer technology or have the superfast shutter speed found in larger

cameras, images often appeared shaky at the edges in flashless shots. It takes an impossibly steady hand to prevent blurriness, making these cameras poor choices for use in museums or other places where flash photography is prohibited. The Fujifilm FinePix Z1 was an exception. It has a special setting for natural light, and it did a much better job with the flash turned off than the others. Moving photos to a computer is a snap. The Coolpix and the Exilim have docks that connect and charge the cameras at

SNAPSHOT

PRINTERS

These lunchbox-size digital darkrooms are easy to use— and their photos beat the drugstore kind. BY LARRY ARMSTRONG

A

portable snapshot printer is just about the cutest toy a shutterbug can have. They’re not the cheapest photo printers you can buy, nor are they the best: You can get desktop printers for less than $100 that produce passable snapshots, or you can pay hundreds more for printers designed specifically for professionals. But at around $200, these lunchbox-size photo labs don’t need a computer to work. Just plug in your camera or a memory card, and they’ll turn out high-quality 4x6 snapshots anytime, anywhere.

They’re also improving. Epson and Hewlett-Packard have just introduced new versions of my two personal favorites. I tested hp’s Photosmart 385 GoGo Photo Printer, a minor upgrade from last year’s 375 that now can handle 4x12 panoramic shots as well as snapshots. But within weeks hp will have a slightly larger version, the Photosmart 475, which can print 5x7s, too. At $280, about $80 more than the 385, the 475 also will have 1.5 gigabytes of memo-

PORTABLE PHOTO LABS

These compact printers allow you to turn out 4x6 snapshots at home or on the go MODEL

Epson PictureMate Deluxe Viewer Edition

Hewlett-Packard Photosmart 385

PRICE

$222 – $250

$181 – $206

THE GOOD, THE BAD, AND THE BOTTOM LINE

Its six-color prints are sharp and brilliant—and can cost less those from the drugstore. But it’s a bit slow.

This easy-to-use printer can handle panoramas as well as snapshots, and it’s smaller and lighter than most. Data: CNET.com

84 | BusinessWeek | August 8, 2005

once. You can use Windows to drag the photos from the camera onto your hard drive. All the cameras we tested include their own photo-editing software. The applications are similar and let you edit, print, and organize your photos, although for more advanced image editing it would be best to use Adobe Photoshop. As chips continue to shrink, these trim cameras should slim down more—becoming even smaller than a credit card. In the meantime, this lot offers power and performance in very petite packages. ❚❚

ry built in, enough to store and organize up to 1,000 photos. Epson’s PictureMate Deluxe Viewer Edition is a big improvement over its original PictureMate: It now has a color display for previewing and selecting pictures, which hp has always had. It’s faster, too, printing a snapshot in 90 seconds instead of the former 21⁄2 minutes. But here’s the dilemma: Epson’s older model is now a bargain, if you don’t mind picking the shots you want to print from an index sheet rather than from a color display. You should be able to find it for $150 to $180, and there’s a $50 rebate on it that’s good through September. That means that you can get the older model for half the price of the new one. To my eye, there’s not much difference in photo quality between the hp and Epson prints. When viewed at an angle, the Epson snapshots are perfectly smooth, while the hp HANDSOME snapshots show little PRINTS HP’s ridges where two colors colors are true meet. Some people object to that. Both are better than what you’ll get at a drugstore. For one thing, they’re printed on heavier stock, and without the yellow or purplish cast you sometimes see on prints from a photo lab. On the Epson and hp printers, paper and ink run less than 25¢ per 4x6 print. That’s competitive with discount store prices, and much less than snapshot printers from Kodak, Sony, Canon, or Dell. It’s easy to get hooked on these takealong digital darkrooms. I even carried the 3-lb. hp printer on vacation this summer. In the end, everyone pooled their best shots, and each of us went home with an album’s worth of prints. ❚❚

Personal Business Inside Wall Street BY GENE G. MARCIAL

BAD NEWS AT SYMBOL TECHNOLOGIES MAKES IT BUYOUT BAIT. STARBUCKS AND OTHER CHAINS ARE HOT ON TURBOCHEF OVENS. STRATAGENE’S DIAGNOSTIC LAB TESTS ARE SHOWING PROMISE.

Symbol Looks Vulnerable

photograph by ethan hill; charts by eric hoffmann/bw

S

ymbol technologies (sbl) is giving off bad vibes: In six months the shares have slumped from 19 to 11. U.S. and European sales are weak for its laser-scan engines, bar-code readers, mobile computing, and radiofrequency id (rfid) technology. In three weeks, Symbol twice cut its STRAIGHT second-quarter forecast. And the July DOWNHILL 14 resignation of cfo Mark Greenquist DOLLARS added to worries. But David Katz of 19 Matrix Asset Advisors has snapped up 17 15 5.2 million shares for clients. He 13 believes Symbol may be bought out. 11 “The depressed stock makes it SYMBOL 9 TECHNOLOGIES vulnerable to a takeover,” says Katz. 0 JAN. 18, '05 JULY 27 26 “It makes enormous sense” for a big Data: Bloomberg Financial Markets wireless and mobile computing outfit to own Symbol. He figures Symbol is worth 19. ceo Bill Nuti turned Symbol around after a tumble two years ago under previous management. (It was featured in this space on Aug. 26, 2003, at 9.10.) But Symbol has failed to beef up its sales force, says Katz. Symbol’s products, he notes, have huge potential in homeland security, rfid, and health care. The company has been slashing costs, and that helped offset revenue weakness—and should boost margins and profits, says Kevin Starke of investment firm Weeden. He cut his earnings forecast for 2005 from 32¢ a share to 29¢ on sales of $1.79 billion (down from a previous $1.82 billion), and for 2006 from 60¢ to 54¢ on sales of $1.90 billion (vs. $1.93 billion). But the stock, advises Starke, is still a buy.

Set to Sizzle At TurboChef

S

peed cooking is heating up, and so are the shares of TurboChef Technologies (oven). It makes the highspeed, cook-to-order ovens in use at 20,000 Subway fast-food eateries. And Starbucks is testing the ovens at 100 stores. The company says feedback from the tests has been favorable. “It is very possible that Starbucks and other major chains will sign up for the TurboChef ovens,” says Robert Stovall, managing director at Wood Asset Management, which owns shares. TurboChef’s patented technology cooks food 10 to 12 times as fast as conventional ovens—and at equal or superior quality to, say, a microwave oven, says Adrian Pace of hedge fund Pace Capital Management, which

owns shares. He sees the stock, now at 16, hitting 30 in a year. Another big boost: speed ovens for the home, which TurboChef expects to launch next year. The U.S. potential market, Pace figures, is $6 billion. The commercial market is estimated at $1.5 billion. TurboChef had earnings of 37¢ a share in 2004. Pace sees it earning only 4¢ in 2005, because of expansion costs, but jumping to 70¢ in 2006.

TEMPERATURE IS RISING AGAIN 25

DOLLARS

20 15 10 0

TURBOCHEF TECHNOLOGIES JAN. 18, '05

JULY 27

Data: Bloomberg Financial Markets

Big Strides At Stratagene

L

ittle-known stratagene (stgn), which was recently added to the Russell 2000 small-cap index, isn’t your ordinary microcap. It is making money where the giants thrive—supplying life-science research and diagnostic products. Its research arm (75% of sales) includes products used in biochemical analysis, cloning techniques, and the search for new drug therapies. Its clinical diagnostic tools include tests to detect allergies and autoimmune disorders such as lupus and rheumatoid arthritis. The company is in talks with a big U.S. and a European drugmaker, according to an investor THRIVING close to management, to team up on a ON RESEARCH key Stratagene product—the mx3005p, DOLLARS an instrument that analyzes the dna or 19 10 rna makeup in a sample test. ceo 179 15 Joseph Sorge says in five years he 8 13 expects to garner upwards of 20% of 7 11 the $1.5 billion molecular diagnostic STRATAGENE 96 market. Adam Chazan of Pacific Growth 0 26 JAN. 18, '05 JULY 27 Equities projects earnings of 43¢ a Data: Bloomberg Financial Markets share in 2005 on sales of $99.7 million and 49¢ in 2006 on $106.6 million. The company earned 36¢ in 2004 on $84 million. Chazan rates the stock, now at 8.80, “overweight.” Michael Corbett of Perritt Micro Cap Opportunities Fund, which owns shares, says it’s “our kind of microcap—it’s in a niche business and has cash flow and a strong balance sheet.” ❚❚ Gene Marcial’s Inside Wall Street is posted at businessweek.com/ today.htm at 5 p.m. EST on the magazine’s publication day, usually Thursdays. Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

August 8, 2005 | BusinessWeek | 85

Index

The Companies This index gives the starting page for a story or feature with a significant reference to a company. Most subsidiaries are indexed under their own names. Companies listed only in tables are not included.

Abbott Laboratories (ABT) 48 ABC (DIS) 39 Adobe Systems (ADBE) 81 A4Vision 52 Aite Group 62 Amazon.com (AMZN) 28, 40 AMD (AMD) 74, 78 American Express (AXP) 9 Ameritrade (AMTD) 62 Anheuser-Busch (BUD) 23 Apple (AAPL) 9, 68, 74, 78 Aramark (RMK) 35 Archipelago (AX) 60

Celent Communications 62 Challenger Gray & Christmas 25 Champion Shoes 66 Charles Schwab (SCH) 60 Chevron (CVX) 12 ChoicePoint (CPS) 52 Chrysler (DCX) 36 Cintas (CTAS) 35 Cisco Systems (CSCO) 42 Citigroup (C) 9, 40, 48 Comcast (CMCSA) 22 Compass Group 35 Cordis (JNJ) 48 Corning (GLW) 40 Counterpane Internet Security 52

B

D

Bank Negara Malaysia 44 Bank of America (BAC) 9, 40 Barclays (BCS) 60 BBDO Worldwide (OMC) 22 Bear Stearns (BSC) 44 Beijing Blog Times 42 Bethlehem Steel 36 Beverage Marketing 23 Blackstone Group 62 Blogcn 42 Bloomberg Financial 60 Boeing (BA) 38 Boston Scientific (BSX) 48 BP (BP) 12 Brother 77 Brut ECN 62 B.U.M. Equipment 66 Burger King 40

Datek Online 62 Dell (DELL) 74, 78, 84 Delphi (DPH) 36 Doblin 16 DreamWorks (DWA) 40 DuPont (DD) 40

HBO (TWX) 66 Hewlett-Packard (HPQ) 28, 31, 60, 74, 77, 78, 84 Highridge Partners 66 Horizon Media 39

E

I

Eastman Kodak (EK) 84 Eaton (ETN) 38 eBay (EBAY) 28, 42 Economy.com 38 Elevation Partners 60 Enterprises Shipping & Trading 45 Epson 77, 84 E*Trade Financial (ET) 62 Evercore Partners 62 ExxonMobil (XOM) 12

IBM (IBM) 28, 62 Identix (IDNX) 52 i-flex Solutions 40 Ingersoll-Rand (IR) 38 Instinet 62 Intel (INTC) 31, 60, 74, 78 International Data Group 42 International Shipping Enterprises 45 Interscope Records 64

A

C Canon (CAJ) 77, 81, 84 CardSystems 9 Carlyle Group 62 Casio 81 Caterpillar (CAT) 38

F Federal-Mogul (FDMLQ) 36 Fifth Third Asset Management 31 Forrester (FORR) 22 Fox (NWS) 22, 39, 66 Fuji Photo Film (FUJIY) 81

86 | BusinessWeek | August 8, 2005

Fujitsu (FTJSY) 52

G Gartner 64 Gateway (GTW) 74 General Electric (GE) 68 General Motors (GM) 36 GMAC (GM) 40 Golden Boy Enterprises 66 Goldman Sachs (GS) 31, 62 Good Technology 68 Google (GOOG) 9, 12, 28, 60 Grey Global Group 22 Gulfstream Aerospace (GD) 36

H

J Jameson Inns (JAMS) 12 J.C. Penney (JCP) 10 Johnson & Johnson (JNJ) 48 JotSpot 28 JPMorgan Chase (JPM) 9

K Kimberly-Clark (KMP) 38 Kmart (SHLD) 60 Kohlberg Kravis Roberts 62 Konica Minolta 81

L Lenovo (IBM) 74 Levi Strauss 10 LG Electronics 68 Lockheed Martin (LMT) 40 Longleaf Partners Fund 23 Lumidigm 52

M Matrix Asset Advisors 85 McDonald’s (MCD) 40, 66 Medtronic (MDT) 48 Microsoft (MSFT) 9, 21, 28, 31, 34, 42, 57, 60, 68 MindShare 10 Mitsubishi 52 Molson Coors (TAP) 23 Moreover Technologies 28 Morningstar (MORN) 23, 60 Motorola (MOT) 68 MSN (MSFT) 12 Munder Internet Fund 31

N Napster (NAPS) 64 Nasdaq Stock Market 62 Netscape (TWX) 57 Nielsen EDI 39 Nike (NKE) 68 Nikon 81 Nokia (NOK) 68 Nvidia (NVDA) 78

O Object Video 52 1-800-Flowers.com (FLWS) 22 OptionsExpress (OXPS) 60 Oracle (ORCL) 40

Pixar (PIXR) 40 Prime Marine 45 Private Equity Intelligence 62 Procter & Gamble (PG) 68 Providence Equity Partners 62

R RelevantC 68 Renault 16 Research In Motion (RIMM) 68 Retek (ORCL) 40 Reuters Group (RTRSY) 22 Rockwell Automation (ROK) 38 Royal Dutch/Shell (RD) 12

U S Salesforce.com (CRM) 60 Samsung Electronics 68 Sanford C. Bernstein 36 Sarnoff 52 Sears (SHLD) 10, 60 Silver Lake Partners 62 Six Apart 42 SK Telecom (SKM) 68 Sodexho Alliance (SDX) 35 Softbank 42 Sony (SNE) 39, 68, 74, 80, 84 Sophos 9 Southeastern Asset Management 23 Standard & Poor’s (MHP) 39 Starbucks (SBUX) 85 Steve Madden 10 Stratagene (STGN) 85 Sun Microsystems (SUNW) 28 SunGard Data Systems (SDS) 62 SwishaHouse Records 64 Symbol Technologies (SBL) 85

T P Pace Capital Management 85 Pacific Growth Equities 85 Perritt Micro Cap (PCRGX) 85 Philips (PHG) 80 Picometrix 52

Texas Instruments (TXN) 21 T.G.I. Friday’s 66 TheStreet.com (TSCM) 22 Thomas H. Lee 62 3M (MMM) 38 Time Warner (TWX) 64 TiVo (TIVO) 22 TNS Media Intelligence 12 TOP Tankers (TOPT) 45 Toshiba (TOSBF)74 Tsakos Energy Navigation (TNP) 45 TurboChef Technologies (OVEN) 85 24 Hour Fitness 66

Tabb Group 60 T&M Protection Resources 52 Target (TGT) 40 TD Waterhouse 62 Telefutura 66 Teva Pharmaceutical (TEVA) 40

UBS (UBS) 44, 66 United Airlines (UALAQ) 22 Universal Music Group (V) 64 U.S. Genomics 52

V Verity 28 Verizon Wireless (VZ) 68 Viewsonic 80 Viisage Technology (VISG) 52 Visa International 9 Visible World 22 Vivendi (V) 64 Vogel Capital Management 64

W Walgreen (WAG) 60 Wal-Mart Stores (WMT) 10, 25 Walt Disney (DIS) 34, 40 Warner Music Group (WMG) 64 Waste Management (WMI) 36 Weeden 85 Wood Asset Management 85

X Xerox (XRX) 28

Y Yahoo! (YHOO) 12, 28, 60

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IdeasBooks Valley of the Pols DAM! Water, Power, Politics, and Preservation in Hetch Hetchy and Yosemite National Park By John Warfield Simpson; Pantheon; 356pp; $28.50

Every day during the summer tourist season, an estimated 7,000 vehicles bring some 25,000 people to Yosemite National Park. The stark cliffs, great waterfalls, panoramic views from canyon rims, and the grandeur of El Capitan rank among the natural highlights of the world. Yosemite’s purple-mountain majesty evokes the same kind of awe in tourists today that it did a century ago from an earlier visitor, President Theodore Roosevelt. “This is bully,” he declared on his first day in the park. Later, camped on the southern edge of Bridalveil meadow, he was moved to declare: “This has been the grandest day of my life.” A lot has happened in the 103 years since tr was guided around Yosemite by John Muir, the famous author and pioneering preservationist— and the invasion of international tour buses and camera-toting city slickers is just the beginning of it. As John Warfield Simpson points out in Dam! Water, Power, Politics, and Preservation in Hetch Hetchy and Yosemite National Park, the Yosemite Valley once had a sister called the Hetch Hetchy Valley 25 miles to the north. Smaller and often mosquito-infested, the Hetch Hetchy Valley still was an awesome sight with its gray granite walls, cascading waterfalls, and narrow valley floor. Muir described Hetch Hetchy as “a grand landscape garden, one of nature’s rarest and most precious mountain temples.... No holier temple has ever been consecrated by the heart of man.” If things had turned out a little differently, thousands of vacationers would probably be traipsing through the Hetch Hetchy Valley on this summer day. But they can’t. The reason: The valley no longer exists. Despite being part of the famous national park, it was dammed up and buried beneath several hundred feet of water to provide drinking water to San Francisco. In his book, Simpson, a professor of landscape architecture and natural resources at Ohio State University, takes a dry but pointed look at the debate that led to the destruction of the valley. He also describes the corruption, moral and political, that drove California politicians and tycoons to ignore public opinion, congressional mandates, and even a Supreme Court decision as they sought to turn Hetch Hetchy into a source of water, electricity, and profits. Simpson has a clear point of view and a policy agenda: He thinks it was a terrible idea to flood the valley and dreams of dismantling the dam. Still, it’s possible to say objectively that the story is one of the hugely underplayed political scandals of the 20th century—and cost the U.S. a wilderness treasure. 88 | BusinessWeek | August 8/15, 2005

Despite Simpson’s obvious bias, he gives readers both sides of the debate over damming Hetch Hetchy. This was the dawn of the environmental movement, and activists were divided between the conservationists, led by Gifford Pinchot, the chief forester of the U.S., and the preservationists, led by Muir and his friends at the Sierra Club. Pinchot believed, as did tr, that the public interest of the nation required the “highest possible beneficial use” of natural resources for the maximum number of Americans, a justification for logging, mineral exploration, tourism, and economic development. The preservationists believed that certain natural wonders were so vital to the nation’s soul that they should be exempt from cost-benefit analyses and political intrigue. In the end, however, the future of Hetch Hetchy wasn’t decided on the basis of either view. Power politics carried the day, Simpson argues—intending the double meaning. President Woodrow Wilson signed Hetch Hetchy Valley’s death warrant in 1913, though the first water didn’t flow to the Bay Area until 1934. “Politics and economics dictated the outcome more than the philosophical and environmental issues,” the author writes. One drawback to Dam! is that it is not more compelling, given its dramatic subject matter and colorful cast of characters. Simpson sometimes reverts to an academic style, when a topic like this demands rich character development and colorful exposition on the scenery. Still, Dam! will make you ponder the current state of the environmental movement, particularly the debate over energy drilling in the Arctic National Wildlife Refuge. Just as politicians a century ago talked about the economic benefits of providing a steady supply of water to San Francisco, politicians today talk about creating a reliable supply of oil to free the U.S. from dependence on foreign sources. Progress, the argument still goes, will mar only a small and insignificant part of a national treasure. So the debates sparked by the battle over Hetch Hetchy remain, even as environmentalists expend their political capital on modern-day issues ranging from suburban sprawl to the caribou of the Alaskan tundra. Thanks to Simpson, we can be reminded of what started it all. ❚❚ –By Richard S. Dunham

Corruption, politics, and America’s first big enviro battle

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IdeasViewpoint BY GLENN HUBBARD

Happy 70th, Social Security An acquaintance just turned 70 and bought an iPod. She has always loved music but finds she can indulge her passion of a lifetime in a new and more gratifying way. On Aug. 14, Social Security turns 70. As with my friend, this milestone birthday offers an opportunity for reflecting on how better to accomplish goals we hold dear. ¶ Social Security was originally proposed by Franklin D. Roosevelt as a way to ensure economic security—hardly surprising because substantial wealth was destroyed during the 1930s Great Depression, and many households lacked the means to finance old age. The law also authorized assistance to low-income individuals unable to work and set unemployment insurance standards. The 1935 Social Security agenda ushered in a new role for social insurance in the U.S. In 1965 this role was extended to health care for the elderly and low-income individuals with the introduction of Medicare and Medicaid. Rationales for government intervention included paternalism (many individuals wouldn’t save for their own retirement or health care) and market failure (private markets for old-age annuities or health insurance worked poorly).

around present realities. In our dynamic economy, that means greater individual control of savings for retirement, health insurance, and funds for training and income support. Government should focus its support on low-income workers in retirement, health care, and job training. Proponents of Social Security reform have embraced personal accounts owned by individual workers, stronger traditional benefits for low-income workers, and slower benefit growth for higherincome workers. This more progressive plan should also include reforms to beef up defined-benefit pensions and build private savings for all workers. Proposals that build on newly enacted Health Savings Accounts seek to enable individuals to save for medical expenses in retirement and to become more costconscious consumers of health care. President Bush’s proposal for Personal Reemployment Accounts would supplement traditional unemployment insurance with an individually controlled account to fund training or provide income when an individual changes jobs. These proposals embrace modern economic security. The celebration in recent years of the U.S. economy’s resilience must be accompanied by a rethinking of economic security to maintain growth. A growth consensus has been seriously challenged by an alternative view that the U.S. needs to maintain the status quo in economic security policy. This antiquated view embraces labor market and trade restrictions and higher taxes to finance current Social Security and health plans. But such economic limits and tax hikes would sap true economic security by reducing entrepreneurship, economic flexibility, and growth. After some initial grumbling, my friend enjoys the convenience of listening to music on her iPod. And U.S. economic security programs can adapt to today’s reality, too. Let’s keep economic security healthy for many happy returns. ❚❚

photograph by ethan hill

It’s a great program, but it must adapt to today’s economic realities

SOCIAL SECURITY REMAINS an important subject in 2005. But key aspects of the economic environment have changed radically since 1935 or even 1965. Longer life spans raise the need to think about governmental incentives for work in old age and to build substantial retirement savings. Absent reform, the financial integrity of traditional defined-benefit pension plans in the private sector and even Social Security are called into question. Unemployment insurance, designed to sustain spending in the face of temporary layoffs, offers only a partial solution in a world in which extensive retraining may be required for changes in jobs or careers. And growing costs of Medicare and Medicaid reflect in part a health-care market in which consumers lack incentives to minimize cost and maximize value. Also, financial innovation has made possible mechanisms for saving and risk sharing unheard of 70 years ago. The U.S. economy has been the world’s leading growth juggernaut over the past decade because of its flexibility to adapt to changes in technology, finance, and international trade. Success in the contemporary U.S. and global economies lies not in preserving the status quo but in seizing opportunity. Basing Social Security on a long-vanished economic environment is self-defeating. Public policy on economic security should be designed

Glenn Hubbard is dean of Columbia Business School. He chaired the Council of Economic Advisers from February, 2001, to March, 2003 ([email protected]). August 8, 2005 | BusinessWeek | 89

IdeasOutside Shot BY STEVEN RATTNER

The Rich Get (Much) Richer Hooray for The New York Times and The Wall Street Journal for returning the problems of class in America to the front page. Shame on the rest of us, passive witnesses to the emergence of a second Gilded Age, another Roaring Twenties, in which the fruits of economic success have gone not to the broad populace but to a slim sliver at the top. For this handful, life is a sweet mélange of megafortunes, grand houses, and massive yachts. Meanwhile, the bottom 80% endures economic stagnation, including real wages that haven’t risen in 14 months, according to the Bureau of Labor Statistics. Much of the recent commentary has focused on class mobility, the opportunity for individuals to move up the ladder. But trumpeting mobility as a reason for ignoring growing income inequality is a chimera. Even if mobility is high—a questionable assertion—it is hardly a consolation for those who remain at the bottom, gazing across a growing distance at the more successful. We can debate a lot of economic data but not income inequality. Every serious study shows that the U.S. income gap has become a chasm. Over the past 30 years, the share of income going to the highest-earning Americans has risen steadily to levels not seen since shortly before the Great Depression.

feel so vulnerable even as the overall economy continues to expand. Moods understandably darken when many have to take second jobs and go into debt to improve their living standards. These pressures are exacerbated by another evident trend: greater income insecurity, a result of the decreasing percentage of Americans who have certainty of pension and health-care benefits to cushion them against a loss of wages. The renewed attention to the glacial progress of all but a few has drawn fire from an eclectic mix of those who say it isn’t true, those who say it is true but it doesn’t matter, and those who say we don’t know enough to know whether it’s true, so let’s not worry about it. But a common thread among these naysayers is the fear that fretting about income disparities could lead to the redistributionist and suffocating slow-growth policies of Old Europe. We can follow their advice and do nothing and hope that America’s rising tide eventually will lift all boats proportionately—something that has not occurred in 30 years. Or we can believe in growth capitalism while also worrying that most Americans are being left behind. As Brad DeLong, an economist at University of California at Berkeley recently wrote, historical data suggest that growth and less income inequality are not mutually exclusive objectives. Sadly, there is no magic bullet. We need to provide more education and training to fix our problem of too many low-skilled workers. We don’t need to become tax-code Robin Hoods, but we can be vigilant about tax plans—like virtually all of President George W. Bush’s— that widen the gulf between haves and have-nots. Finally, we can provide more protection for those at risk, such as better wage insurance to cushion the effects of globalization. If we don’t pursue policies to fix inequality, social pressures may force unwise, even extremist moves, like protectionism. Income inequality is now wider in America than anywhere else in the industrialized world and on a par with that of a Third World country. Is this the American Dream? ❚❚

JUST HOW DRAMATIC A SHIFT over the past three decades? Economists Thomas Piketty and Emmanuel Saez calculated (using data from the Internal Revenue Service, hardly a hotbed of partisanship) that the share of income going to the top 1% of households nearly doubled, to 14.7% in 2002, up from a low of 7.7% in the early 1970s. By comparison, the income share for the top 1% peaked at 19.6% in 1928 before beginning its long slide. What is particularly alarming is that at every step up the ladder, the disparity has progressively widened. Over the past 30 years, the share of income garnered by the top 10% of Americans has grown by about a third; the share of the top 0.01%—the 13,000 or so households with an average income of $10.8 million in 2002—has multiplied nearly four times. What’s to blame for this sorry situation? Certainly globalization has taken its toll. Cheaper labor in emerging markets means relentless wage pressure on U.S. workers. Meanwhile, the fruits of American success in fast-growing services and technology remain available only to the slice of our workforce with the necessary skills. Other factors, such as an increasingly regressive tax code, have also played a role. Growing inequality helps explain why so many Americans 90 | BusinessWeek | August 8, 2005

Steven Rattner is managing principal of private investment firm Quadrangle Group and former deputy chairman of Lazard.

photograph by brad trent

The top 1% take a fatter slice now than at any time since the 1920s