itsnotmybizness

Is Kohl's Marking Up Prices Before It Puts Items On Sale?

2012-02-07T14:01:00.000-08:00

When you see a sale advertising "40% off" an item, what exactly does that mean? Is it 40% off the price it was selling for last week? 40% off the MSRP? There's a gray area in retail pricing that has some shoppers accusing Kohl's of inflating prices so that an "on sale" item looks to be a better deal than it actually is.

CBS Sacramento's Kurtis Ming -- one of the best named consumer reporters in the country -- looks at a few instances, including one where a Kohl's shopper thought she'd got a great deal when she bought a $210 sheet for for 50% off, only to later find a price tag showing the product had recently been selling for $170, and that the price had been marked up three times since until reaching $210.

"You always expect to see the price tag stuck on top of another one is the cheaper price," she says. "Actually, it was more expensive."

So CBS sent in hidden camera crews to several Kohl's outlets to see if this was standard operating procedure:

A CBS producer found clothes, luggage, kitchen, bath and bedding products -- 15 items in all -- marked up, some as much as $100, and price tags on top of price tags.

Other items have different price tags on different areas of the product.

One twin sheet set was listed at 50 percent off the original price of $89.99. But inside the plastic zipper, the earlier price tag shows $49.99, indicating the current sale is only $5 savings from the original tag.

A 10″ skillet was listed on sale for $34.99, with a regular price of $39.99, but underneath that sticker, the earlier price tag was marked $29.99 -- meaning Kohl's current price on sale is $5 more than the originally marked price.

One producer tried pointing out that a $150 sheet set marked at 30% off also had a price sticker showing a price of $90, about $15 less than what they would pay with the discount.

The producer asked the cashier if they could get 30% off the $90. A manager decided this was okay and told the undercover producer, "Sometimes when we do scratch-off coupons, we mark stuff up."

A consumer attorney tells CBS that Kohl's may be violating California state law if it is deliberately marking up prices just to make sales appear better than they should.

But Kohl's denies any such behavior, saying that prices of in-stock items went up because the cost of certain new inventory went up:

As is common in the retail industry, from time-to-time, product prices are increased due to production and raw material costs. When these types of price increases are implemented, our stores are instructed to re-ticket all items currently in our inventory to match the price tags for all in-coming merchandise...

Price increases at Kohl's are not common. However, the unprecedented increases in the cost of certain commodities such as cotton over the past 24 months have caused us to take these actions.

The retailer confirms that the price of the sheet set mentioned at the top of the story did indeed go up dramatically because they had to match the price Kohl's was going to charge for sheets made with cotton that was now costing everyone more money.

Using Buffett's Favorite Ratio To Analyze Apple And Its Industry

2012-01-09T09:53:00.000-08:00

Many years ago while reading the Berkshire Hathaway (BRK.A) 1986 Letter to Shareholders, I discovered Warren Buffett’s ratio, which he calls "Owner Earnings". And to my amazement, in a little footnote Mr. Buffett actually explains how to use it and basically states that it is one of the key ratios that he and Charlie Munger use in analyzing stocks.

Due to the popularity of my “Buffett’s Favorite Ratio” articles, I have gotten many emails asking me to analyze Apple in that context. The following is my analysis of Apple (AAPL) and its industry using Mr. Buffett's ratio. For those new to this type of analysis please look here.

I would like to start this analysis by first showing everyone how Apple has done from a historical owner earnings perspective, going back to 1995: (Click to enlarge)
As you can see from the data above, buying Apple when its price to owner earnings broke below 15 in 2009 would have been the best time to buy its stock. Buying a company's stock when it breaks below that specific number on a price to owner earnings basis is key in doing this type of analysis. I proved that point in my back test of the DJIA 30 Index for the 60 year period of 1950-2009.

From a CapFlow perspective, Apple has consistently stayed below 50% since 2004 and the chart below will show you what that has meant for the company’s stock price
CapFlow is a key indicator of how management is conducting its cost controls. Had you been using this system at the time, you would have seen Apple's CapFlow drop from 84.62% in 2003 to 40.74% in 2004. Management cut costs by 51.85% in that year and proceeded to drop CapFlow in 2005 to 18.02%. This miraculously amounted to another drop of 55.78%. Management was clearly in charge of their destiny at the time because in just two years they were able to drop Apple's CapFlow by some 78.07%. This was a key breaking point for the company and because management has continued to keep the company's CapFlow low, it has been able to generate some serious Owner Earnings growth rates.

Before continuing with our analysis of Apple let us first look at their competitors and see how they are doing from an owner earnings perspective. The following is a table of the major companies that are in Apple’s Industry
As you can see from the table above, with my system you can zero in (within minutes) and know exactly which companies are the super stocks and which ones are the dogs with fleas. Western Digital (WDC) and Brocade (BRCD) are definitely dogs with fleas, as Western Digital comes in with two negative results and has a CapFlow of 122.64%. So one could say “look out below!”

IBM (IBM) and Dell (DELL) are definitely super stocks as they are clearly putting up strong owner earnings numbers. Unlike Apple, Dell is concentrating on consumers who are looking for a low price point. In comparing the two, one finds that Dell's computers sell for about half of what Apple's do, but even so, Apple is winning in the owner earnings game because it gives its consumers "white glove" customer service and quality. In this world you get what you pay for.

IBM's long-time CEO recently retired and I am not sure how good its new CEO will be. So I will give her some time to show me what she can do before joining Mr. Buffett in buying it.

If you are looking for value plays, then Dell, Logitech (LOGI) and Seagate Technology (STX) have insanely low price to owner earning numbers. Had you done this analysis on Seagate back in September you would have had an amazing buying opportunity as the stock was only selling in the low teens. Here is a chart of Seagate that will clearly show you what can happen to you as an investor when you get the owner earnings numbers right
Finally one stock being pumped up by analysts is Hewlett Packard (HPQ) as Meg Whitman is now the CEO. But we need to give Meg some time to get things organized as the stock is still a value trap, in my opinion. I can say this because its FROIC is still too low for a tech stock and though its CapFlow is under 50%, it is not much below that. If Whitman can shed some assets that are underperforming and bring HP's FROIC up to 20%+, you may have a great turnaround story here.

Recently Apple's stock has been in a trading range even though its Owner Earnings numbers have been fantastic. I don't know if this is a result of its CEO Steve Jobs' passing, but I believe that I may have the answer as to why this may be happening. It can be attributed to the company having way too much cash on its balance sheet. This excess cash reduces the company's Main Street performance numbers because it effects its FROIC. Remember that FROIC measures owner earnings return on total capital. Total capital is basically long term debt + shareholder’s equity. Cash which returns 1% at best makes up the lion's share of Apple's total capital. In my opinion, Apple needs to either start making acquisitions of companies that have a FROIC of 20%+ or it needs to start paying a dividend. Until the company does that, I have decided to sit on the sidelines. As you can see, FROIC is actually expected to drop from 30.64% in 2011 to 27.96% for 2012, even though Apple's owner earnings are expected to grow at 27.02%.

You can’t really be expected to move much in the stock market if the return on half of your capital is growing rapidly and the other half is dead- growing at just 1%. It is an anchor on the stock, which can be remedied very quickly by paying a one-time $20 a share dividend to shareholders. Warren Buffett has this similar problem as Berkshire Hathaway (BRK.A) generates way too much cash. He solves this problem by being proactive about it and invests the cash in companies like IBM (IBM), Intel (INTC) or MasterCard (MA) which are all monster FROIC producers in their own right. If Apple's management decides not to pay out a dividend or buy out other companies, they should at least start buying stock in other companies which have tremendous FROIC. Until they do something about all that cash, the stock should remain in a trading range as much of its total capital is only earning 1% at best.

Moneyball: It's About Investing, Not Baseball

2011-09-23T15:03:00.001-07:00

Moneyball: It's About Investing, Not Baseball

By Joseph Hogue

The movie adaptation of Michael Lewis’ book, “Moneyball” comes out today to what will surely be big box office bucks (if advertising is any indication). The book is based on the front office career of Oakland A’s scout Billy Beane. Around 2002, Beane adopted Bill James’ Sabermetric approach to recruitment in order to help the team compete against teams with upwards of three times their salary power. Not able to recruit the big name athletes, the A’s had to find undervalued players. They did this by using statistical analysis of uncommon metrics, but ones with higher correlations to career success in athletes, than the more traditional metrics like stolen bases and RBIs.

The movie is sure to be a feel good romp about an underdog story and determination. What most will never know is that the book, “Moneyball: The Art of Winning an Unfair Game,” was written by one of the great financial journalists and has significant importance for investors. Those of us without the money power of institutional investors would do well to learn something from Mr. Beane and the Oakland A’s.

Metrics

Sabermetrics places emphasis on in-game statistics rather than the industry norm of career averages. Key metrics include: "late-inning pressure situations" (LIPS) and my favorite "narration, exposition, reflection, description" (NERD). What is important to investing is the idea that many measurements, i.e. price-to-earnings, debt-to-equity, and earnings per share are so popularized as to be commoditized and of relatively little value. To compete with the institutional players, investors must look deeper into stock metrics to find measures more highly correlated with success and less often used. To this end I will present two methods of measurement not universally used and with proven success.

The first method will be the Piotroski Score, named after the University of Chicago Professor, Joseph Piotroski. Piotroski argued that because value stocks are often distressed companies, investors should implement a way to distinguish between companies with good future potential and those more likely to be value traps. The scoring is built on a series of nine criteria for evaluating a firm’s financial strength. Over a 20-year test period, those stocks scoring highest also outperformed a portfolio of all value stocks by about 7.5%. Additionally, those stocks scoring lowest were up to five times more likely to file bankruptcy or de-list their shares. Piotroski immediately came to mind when I first saw the commercials for "Moneyball." Both the movie and the method involve finding undervalued picks with a good future. Both Sabermetrics and the Piotroski Score look at ‘in-game’ (financial statement) statistics instead of getting caught up in the more popular relative valuation methods.

The scoring is fairly simple and straightforward with one point given for each of the following criteria:

Positive prior year net income.
Positive prior year operating cash flow: This is a better gauge of income and less susceptible to management manipulation.
Current year return-on-assets is greater than prior year: A good measure of profitability.
Prior year operating cash flow exceeds net income: A warning sign of income statement manipulation by management is net income that significantly exceeds operating cash flow. Managers can manipulate accounts to show higher net income, but it is much harder to manipulate actual cash flows.
Ratio of long-term debt to assets is lower than prior year: Lower liabilities relative to assets is a sign of improving financial stability.
Increasing current ratio (current assets divided by current liabilities): This is a signal of improving access to working capital and solvency.
Number of shares outstanding is equal or lower than prior year: An increasing number of shares outstanding means that prior investments are being diluted.
Current year gross margin exceeds prior year: Margins measure the company’s competitive position.
Percentage increase in sales exceeds percentage increase in total assets: An improving asset turnover means the company is improving productivity.

DR Horton (DHI) and Dell Inc. (DELL) both did well in a Piotroski screen with top scores of nine. DR Horton is a $3.1 billion homebuilder operating in 26 states. Its stock price has been pressured along with the rest of the homebuilders, losing 11.4% over the last twelve months. Eighty-seven percent of the shares are held by institutions and 12.5% are held by insiders making the float relatively limited. Another 26 million shares are sold short, about 11.2% of float, meaning there could be some support as short-sellers return to buy back their positions.

Dell is the $27 billion computer-maker and retailer that was once the darling of wall street and the kind of stock that made you rich. In the ten years to 2000, the stock price increased by 846 times, but has not been able to catch a break since. The stock is up 14.7% over the past year but still off 15.1% from its July highs. The company’s CEO, Michael Dell, recently told Bloomberg that they would continue to look for 8-10 acquisitions per year of companies with proven technologies. The stock price is relatively cheap at only 8.0 times trailing earnings though return on assets is fairly low at only 7.5%.

Big Lots (BIG) and Eastman Kodak (EK) did not do as well on the screen with scores of 0 for Big Lots and 3 for Eastman Kodak. Big Lots operates a chain of cost-leader retail stores across the 48 contiguous states and 88 stores in Canada. Though the stock has been supported over the last few years as a low-cost retailer, lowered expectations on economic growth and a generally tired consumer are holding the company back. The stock, at $33.62, is up 1.4% over the year but well off its highs of $43.68 per share.

Eastman Kodak, that once great camera company is now only a $700 million shell of its former glory. The company operates in three segments: consumer digital imaging; graphic communications; and film, photofinishing, & entertainment. Looking over the financial statements is depressing with negative profit margins, return-on-assets, and cash flow. The stock is down 38.7% over the last year and has a negative book value when goodwill is backed out.

The Altman Z-Score is similar to the Piotroski Score in that it is a predictor of financial distress and used primarily in value investing. The method, published in 1968, was named after Professor Edward Altman of New York University. It uses five ratios, multiplied by a coefficient for weighting of importance, to predict the likelihood of bankruptcy within two years. The model was found to successfully predict 72% of corporate bankruptcies two years prior to filing chapter 7 and only falsely predicted bankruptcy in 6% of cases. Subsequent studies have found the method to accurately predict distress 80-90% of the time with 15-20% false predictions (pdf).

The five ratios and their coefficients are:

Working Capital/Total Assets (1.2): Measures liquidity of assets and the financial flexibility of the firm.
Retained Earnings/Total Assets (1.4): A measure of profitability relative to the company’s size.
Earnings Before Interest and Taxes/Total Assets (3.3): A measure of operating efficiency outside of tax and debt considerations.
Market Value of Equity/Book Value of Total Liabilities (.6): It is a possible warning signal when the market value of the firm is substantially below the book value.
Sales/Total Assets (1.0): A measure for total asset turnover and efficient use of firm assets.

The scores for each ratio are then summed and interpreted as follows:

Score>3.0 - The company is safe based on financial figures.
2.7><2.99 - The company is on alert and investors should be cautious.
1.8><2.7 - There is a good chance the company will file bankruptcy within two years.
Score<1.8 - The probability of the company filing for bankruptcy within two years is high.

One notable Altman Z laggard is media conglomerate Time Warner Inc. (TWX) with a score of negative .50 and a high probability of financial distress. The company trades for a persuasive price-to-earnings growth (PEG) ratio of just .78 and an even price-to-book value. The stock is only off 3.6% over the last year but has traded flat since 2002 and is off its 2007 highs by more than half. Media companies have had a tough go of it lately as more content goes to the internet and traditional media loses advertising revenues. Though the company’s margins and revenue growth are in-line with industry averages, a deeper look into the financial statements presents a possible unstable future.

There is some redundancy between the two measurements and not much research as to which is the better predictor. They are relatively easy to calculate and an Excel spreadsheet template makes the process even faster, so I use both for my value investments. Stocks scoring well on both metrics usually make the cut for value picks, while those scoring well in one but not the other would need further scrutiny. A note of caution, I’ve found several screens on the internet that give different scores for the same stock so you will want to take the time to dig into the financial statements and do the actual scoring yourself.

Adapt or Lose Money

Another key take-away from the book is the idea of adaptation to market efficiency. The success of the A’s Sabermetrics approach brought imitators and competitors in the field. Today, most big league teams have a staff of statisticians analyzing a slew of data. To continue their run, the A’s had to continuously search for neglected metrics that would correlate with success.

This is just as true in investing. The first guy to discover the January Effect probably made some good money. The millions of investors that have tried the approach since then haven’t fared as well. As soon as a metric or strategy is popularized, the market starts pricing for it and the easy money is gone. Investors must continuously adapt their strategy to stay one step ahead of the market.

Investing, like professional baseball, is an extremely competitive field. Those that do not spend the time to find novel and superior analytical tools will be fodder to the big dogs, i.e. the Detroit Tigers. Further, without an analytical staff to back our stock picks, regular investors like you and me need to analyze and adapt our strategies continuously to gain those coveted few percentage points above the index. The two measurement tools above will help to assess financial stability and solvency, but you’ll need a few other predictors to build out your toolbox.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Payout Ratio: Important Dividend Metric, Too Often Overlooked

2011-09-12T05:56:00.000-07:00

Payout Ratio: Important Dividend Metric, Too Often Overlooked
1 comment | September 12, 2011 | includes: DUK, ETE, FTR, MO, NOK, T, VGR

I was recently talking to one of my friends last week. He had about $600,000 invested in high yield stocks. These were companies paying well above what they were earning. I told him to be careful as these companies could cut their dividends in the future. This seems like a common problem for investors who overlook one simple metric, which is the payout ratio. The payout ratio is simply the percentage of earnings that are being paid out in dividends. Here are four companies that are actually paying out more than they take in.

Frontier Communications Corporation (FTR), a communications company, provides regulated and unregulated voice, data, and video services to residential, business, and wholesale customers in the United States. It offers local and long distance voice services, including basic telephone wireline services to residential and business customers.

Frontier pays nearly 11% in dividends. It sounds nice, except for the fact the payout ratio is around 450%. The company pays 75 cents a year and isn't even expected to earn half that next year. Another issue with Frontier is that it is in a dying area of business. It primarily deals with landlines. Landlines are quickly going away as people start switching to wireless telecom carriers.

Nokia Corporation (NOK) manufactures and sells mobile devices, and provides Internet and digital mapping and navigation services worldwide. Its devices & services segment develops and manages a portfolio of mobile devices, such as mobile phones, smartphones, and mobile computers; services; applications; and content.

Nokia pays a 7.6% dividend. The payout ratio is about 110%. This is set to increase as the company's earnings are set to decrease. Apple (AAPL) and Google (GOOG) have been taking a bite out of Nokia's market share. Nokia is already said to be stumbling as it tries to find new ways to innovate.

Energy Transfer Equity, L.P., (ETE) through its direct and indirect investments in the limited partner and general partner interests in Energy Transfer Partners, L.P., engages in midstream, intrastate, and interstate transportation of natural gas, as well as in storage of natural gas in the United States.

Energy Transfer Equity pays a 6.5%. The payout ratio is more than 200%. ETE has a good business model and I do like the MLP space, but the fact that it pays out so much is a huge red flag.

Vector Group Ltd., (VGR) through its subsidiaries, engages in the manufacture and sale of cigarettes in the United States.

The company pays an 8.5% dividend. The payout ratio is over 200%. Vector's brand of cigarettes have a very small market share. With the company paying out all its earnings and taking on debt, it is not putting any capital into potential growth opportunities.

The payout ratio can tell us what future distributions will look like. A few things to note is that you also need to look at future earnings growth. If a company cannot match distributions with earnings, it may be time to sell. Here are three companies that have a nice yield and low payout ratios.

AT&T Inc., (T) together with its subsidiaries, provides telecommunication services to consumers, businesses, and other service providers worldwide. Its Wireless segment offers wireless voice communication services, including local wireless communications service, long-distance service, and roaming services.

AT&T pays a 6.2% dividend. The payout ratio is 50%. The company has a strong base of customers. There is plenty of growth in the dividend as well. The company is a strong blue chip as well as being a Dow component. AT&T is a favorite amongst many dividend investors.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally.

Altria pays a 6.1% dividend. Its payout ratio is 93%. However, its earnings are suppose to increase substantially over the coming years, meaning the payout ratio will decrease. The company has some of the strongest brands around. Although, the dividend may not be as high as Vector's, the company is much safer.

Duke Energy Corporation (DUK) operates as an energy company in the Americas. It operates through three segments: U.S. franchised electric and gas, commercial power, and international energy.

Duke currently pays a 5.3% dividend. The payout ratio is 64%. Duke is one of the largest utility companies in the U.S. Americans will always need energy and consumption is set to increase. Duke is an extremely stable company and with its recent purchase of Progress Energy (PGN), the company is set to increase its earnings power.

These three companies are great example of strong dividend payers with a low payout ratio. Always be careful when investing. Sometimes companies have high yields for a reason simply because there exists more risk. The best advice I can give in this case is "Slow and steady wins the race."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Netflix's Market Opportunity Is A Lot Bigger Than You Think

2011-04-05T05:29:00.000-07:00

Our INTERVIEW OF THE WEEK this week is with one of the most successful Founder-CEOs in the history of the online industry: Reed Hastings of Netflix.

In the past decade, Reed has built Netflix from a little DVD-by-mail company into an international behemoth with a $12 billion market cap that is disrupting the traditional TV distribution business.

Along the way, Netflix's surging stock price has made fools (and paupers) of no end of skeptics.

What's next for Netflix? Will the skeptics finally be right? Or will the company's second decade be even more impressive than its first?

SAI's Dan Frommer and Henry Blodget spent a half-hour on the phone with Reed last week discussing the following topics...

* The size of Netflix's market opportunity (bigger than you think)
* "Personalized" Netflix accounts (one for every person in the family)
* The competition
* Why Netflix isn't offering pay-per-view
* Whether Netflix will offer "tiered" streaming prices
* Whether content companies will screw Netflix in the next round of negotiations
* Whether the cable cos will try to crush Netflix by enacting bandwidth caps
* The three key aspects of Netflix's culture that have helped it become such a success
* Whether Reed will be running Netflix for the next 10 years

And more...

Enjoy!

(And thanks to Business Insider's Ellis Hamburger for transcribing the call.)

Henry Blodget: Welcome, Reed! Thanks for doing this. Ten years ago, I remember when Netflix was originally thinking of going public, you were a tiny DVD-by-mail business, and everybody smart I talked to said there’s no chance in hell this thing ever works. Here we are ten years later, 20 million subscribers, two billion in revenue, 12 billion dollar market cap. Where do you think you’ll be ten years from now?

Reed Hastings: Well sticking with ten years ago, we couldn’t even get a meeting with you. (Laughs) Anyway, where are we in ten years? I don’t know, I couldn’t have predicted where we are from then.

BI: So it’s bigger than you thought it might’ve been?

RH: Oh, bigger and different. We were back in 2001. We were not yet profitable. We were growing on DVD and wondering how things will work. There are a lot of differences.

BI: Well, let's look forward 10 years. Do you think you’ll still be running the company?

RH: Ten years is always too long to make any useful prediction.

BI: But that’s your ambition? You’re not ready to hang up the skates?

RH: I can certainly say that I’m not thinking of retirement this year, but ten years for anyone, it can depend on so many things.

BI: Okay, let's talk about your market opportunity. You have 20 million subscribers now, approximately, in the United States, and there are something like 115 million households now. When you think about the total market opportunity domestically, what should people think is a reasonable number of subscribers that services like Netflix ultimately will have?

Netflix long term stock prices

NFLX stock price.

Image: Google Finance

RH: The way we look at it is on the upper bound, we do it by mobile phone subscriptions, the number of people in the United States that pay for a mobile phone. That cuts out very young kids, people with zero income, and that number is about 300 million.

BI: Our household only has one Netflix subscription. We currently pay you a lot more than eight dollars per month, but I don’t envision a scenario where my wife has one account and I have one account and each of my kids have an account, so you really think that that’s a reasonable way of looking at it?

RH: No, that's the upper bound. So the upper bound, if it was natural for each family member to have a separate subscription, like you each have a separate Facebook account, if it becomes so personalized video that you do want it individualized, than that would be the upper bound. Another way of looking at the market is the number of households that can subscribe to cable or satellite, and that number is about 100 million.

BI: Do you think that you ultimately will start offering personalized accounts? That’s an interesting idea that I hadn’t heard before.

RH: It’s quite personalized now, but not in a way that’s so compelling that you never want to say “I don’t want to use my kid’s account.” The question is, over time, can we make Netflix so personalized that as the kids get to be teenagers and they get their own Facebook account and their own mobile phone, that they also get their own Netflix account?

BI: Do you think that that’s likely?

RH: No, it’s a possibility. It’s an aspiration.

BI: So, as you think about it, do you think the 100 million number is the right market-opportunity number that people should think about, or should it be a 200-300 million type number?

RH: Well 100 million is another upper bound, and that assumes, in this case, that every single cable or satellite household subscribes to Netflix, so both of those are available market figures. As to how they get split between Netflix and its competitors, that’s really hard to tell. Somewhere north of 20 million, south of 300 million.

Netflix subscribers chart small

Image: Silicon Alley Insider

BI: What percentage of the 20 million now have cancelled cable or other TV?

RH: Everyone, essentially, on Netflix has a TV service and also 30% of them have HBO, which is the national average.

BI: So right now, it’s definitely not an either/or, in fact it’s just how many more services can you pile on top of your existing cable service?

RH: Yes, that’s right. We’re like one more cable network. We’ve grown from in the last three years, the number of streaming accounts in the US from zero to 20 million, and MVPD (multi-channel video programming distributor) is basically steady, so last year, total MVPD in the US went down slightly, or the first three quarters of the year, but that was largely due to the recession. And then in Q4, total MVPD households went back up. And if Netflix were a substitute, you would see MVPD going down like landlines have, or something like that, which you don’t see.

BI: We already talked about one possible way that you could get more money per household, which is personalized accounts. Do you think that with streaming, you will ultimately have tiers, the same way that you do with DVDs. Like I get a basic selection for $8, but if I pay $15 I get twice as much stuff, or I get cooler, different stuff. Or if I pay $50, I get everything?

RH: We don’t have any plans for that. We want to focus on a simple proposition: unlimited streaming for $7.99 per month. Our big focus is taking that simple proposition around the globe. We started with Canada seven months ago, we’ve been super successful there, we’re targeting to surpass 1 million subscribers this summer. Less than one year from launch in Canada. That’s been so successful that we’re now expanding to other countries.

BI: What other markets are attractive?

RH: All the markets where people have broadband and like TV.

BI: Must be a tiny opportunity.

RH: Exactly.

BI: Switching gears, let's talk about content deals going forward. I know Time Warner CEO Jeff Bewkes was quoted recently as saying something like “Look, back when Starz did their huge deal with Netflix, they were asleep at the switch, it was just a test, and suddenly, everyone has now woken up. There’s no way anyone would ever cut a deal like that again.” Do you think that’s true?

RH: When we did the Starz deal in 2008, we almost walked away from it because it was so much money for an activity that basically didn’t happen, i.e. streaming, at the time. Now, as we look at renewal coming up the middle of Q1 next year, we will clearly pay more. And there are more people streaming, so we can afford to pay more.

Reed hastings

Image: JD Lasica/Flickr
NFLX Apr 4 2011, 05:20 PM EDT
244.72 Change % Change
+2.63 +1.09%
BI: Do you think you’ll pay the same way? As I understand it, the last deal was basically a flat fee--will the next deal be a per-sub fee, or is it likely to be per-stream? How do you think the content deals of the future like that will be structured?

RH: I’m not really sure. We’re looking about how to acquire content. Traditionally or generally, most of our content, they want a guarantee, and a flat rate.

BI: They want that even with you going from however many single-digit million subscribers you had when you started the Starz deal to now, with 20 million subscribers, even going forward you think they’ll want that, or will they want an average fee per sub or per stream?

RH: Many of our deals are shorter term, 1-2 year deals, so it’s fixed in the short term, but fundamentally it’s variable in the long term.

BI: You’ve said you ultimately hope to be the biggest revenue source for a lot of the content providers. The objection that I hear raised to that very quickly is “Oh come on, look how much the cable companies pay, that’s why the bills are $160 per month, Netflix is $8, how could that possibly be?” What’s your reaction to that?

RH: For some content owners like Relativity Media, where we did an output deal with them, we’re already their biggest customer. So it depends on the content, in terms of the big bill that you referred to. There’s a huge amount of sports content, a majority of the value of MVPD. And then of course there’s news and reality and lots of other content types that we don’t focus on.

BI: Do you think you ever will offer news and reality and other types of content? I know I read a presentation a couple of years ago from you saying “No, we’ve picked our market, we’re going to focus on that market.” I know a lot of subscribers hope that you’ll go into sports and things like that. Is that possible?

RH: Now we’re very focused on TV shows and movies, and there’s an enormous opportunity. If you look at our selection, it’s really good. But it’s still a small part of the total universe of TV shows and movies. So both on the subscriber view and on the content view, we have tons of room to expand within TV shows and movies.

BI: On the selection issue, certainly with our family, what often happens is that we’ll start talking about watching a particular movie, everyone gets all excited, and the kids will say “Oh it’ll be on Netflix." Then they’ll go check and find out that it’s there via DVD, which is great, but suddenly it seems like Pony Express to wait for the DVD, and it’s often not there on streaming. How long will it take before most of the stuff that we’re all looking for is just going to be there, and it becomes relatively rare that you don’t have something available for streaming?

RH: Really, it is there today, from iTunes or Amazon, it’s just that you have to pay-per-view. So the newer stuff is first available in pay-per-view, and both of the services, iTunes and Amazon, are pretty comprehensive, but you’ve got to pay each time.

BI: Will you ever get into pay-per-view?

RH: Very, very unlikely. We’re focused on the subscription. Unlimited for a flat fee. That simple proposition. So the same answer I gave you about simple possibilities with tiering.

BI: Do you see Apple getting into a subscription thing at any point? There have been talks that they are, in theory, doing that, but we haven’t seen it yet.

RH: You’d have to ask them. Amazon is in subscription as you know with Prime, Hulu Plus is in subscription, and there may be others over time.

BI: But, really, why wouldn’t you offer pay-per-view? You now have this incredible catalog where you can find any movie and it’s either available by DVD or streaming--would it really muddy the waters that much to have a pay-per-view option?

RH: It’s a little like Business Insider doing sports news or something.

BI: We do have sports news!

RH: If you do sports news, you'd find that some of your readers really enjoy it, because you have a unique take on it, but that mostly it’s such a big competitive market that you really have to make your brand stand for something very specific. At least until you’re the size of the Wall Street Journal. And for us, it’s about brand clarity, and that we stand for $7.99 per month for unlimited streaming. That’s what we really want to focus on and we think that’s the optimal strategy. Rather than try to get into every possible thing that our subscribers also want, like should we sell DVDs? Should we offer various equipment? Etc etc.

reed hastings netflix

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BI: You guys are on a tremendous number of devices ranging from video game consoles to connected TVs and all that. Have you noticed anything unusual or interesting about the way people are consuming streaming content across any of these devices?

RH: It’s really quite broad. We get great traction on internet TVs, on Blu-ray players, on game consoles, iPads, Apple TV, iPhone. It’s amazing really how broad the viewing of our content is.

BI: Do you have any interest in the complementary social aspects that a lot of startups are focusing on? Getting people communicating on a second screen or even the first screen while they’re watching a show, or is Netflix kind of a private experience?

RH: We’re open to adapting our service as new enjoyment paradigms rise (such as multi-person viewing), so there’s social thing for finding content you want to watch, like these six other people you know just watched X, and then there’s social thing during the watching which is a little trickier with online because it’s asynchronous. Everyone watches at a different time. But, just as social transforms the internet generally, it will also transform the Netflix experience.

BI: So you just had to offer a higher compression streaming option in Canada because of bandwidth caps and overage charges, and I saw you talk quite a bit about this during the last earnings presentation. Do you think this is going to be a problem here in the states where we’re going to have to think about keeping an eye on the bandwidth meter, and do you foresee yourself having to adjust your service here to meet that?

RH: Well in ways we already have caps. If you look at most of the iPad mobile plans, they’re 2 GB, and then $10 per GB after that. AT&T just implemented an 150 GB cap on DSL, 250 GB on U-Verse fiber. So that’s clearly a move by some ISPs at least, and hopefully other ISPs will compete against them on the basis of being unlimited.

RH: With Google’s Kansas City move, hopefully that’s a sign of a long-term future trend that most of America gets Gigabit Ethernet, or Internet, and that these kind of skirmishes around 50 gigs, 100 gigs, 200 gigs are perceived to be like the 640K PC barrier 30 years ago.

BI: There seem to be people who think that MSOs [cable operators] and Telcos will try to stifle competition from people like you by imposing really small caps and high overage fees. Is that plausible or do you think that’s a worry that people shouldn’t have?

RH: No that’s plausible. In Canada, right after we announced that we were entering Canada, a few days after, Rogers lowered the caps on their most popular plans. So those kinds of things can definitely happen and then it’s an ongoing tension. We can do those high-density encodes like you referred to, and hopefully over time, broad, fast, inexpensive Internet becomes more and more a part of every person’s life, and that will open the possibility again over five or ten years for more online video.

BI: That's a good segue into competition. This market is just incredibly noisy and there’s so much competition, you’ve got TV everywhere and you’ve got pay-per-view stuff, you’ve got Amazon now linking streaming to Prime, you’ve got Facebook suddenly doing a deal with Warner, Google TV, so forth. Who scares you?

Streaming Netflix comparison chart

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RH: In the beginnings of a new market, it’s really hard to figure out who the long-term competition is, and what we tend to focus on is how to grow our business, and we’ll see what competition emerges. In general, the big incumbents, like the MVPDs, they may turn out to be the biggest competition with TV everywhere. But it depends on what their goals are and how they execute, and in particular, the more consumers see us as truly complementary, to MVPDs, then the less incentive they are to try to stop us or kill us.

BI: What percentage of the 100 million households that have cable and satellite do you think can actually afford a complementary service on top of the cable service?

RH: Your typical cable bill is, what, $70-$80? If you ask how many could afford $7.99, it’s probably pretty high, right?

BI: What do you think is the likely future of cable? A lot of people are saying “Look, there’s certainly a business for cable. Somebody’s got to be the actual hook-up to the Internet, but the idea that somebody else is going to have a box and control all the content is just ludicrous, and ultimately they [cable providers] will be reduced to being big fat pipes. Do you think that’s reasonable?

RH: No, that’s too pessimistic. They certainly will have a broadband business, which has very high profitability because it doesn’t have content costs. They’ll have a telephony business, and many, many more people get telephony from their cable company than they do from Vonage or Skype. Third, they’ll have a video business and they’ll offer unique content bundles, unique other things. I mean look at DirecTV—it’s growing substantially because it’s got incredible NFL content.

BI: On that subject--the sports question--are there folks who will do what Netflix has done in sports and become a very viable alternative option?

RH: Well there’s MLB TV which runs direct to consumer subscriptions today. So that would be a place to start, and then whether NFL and other leagues do the same I’m not sure. Certainly MLB is doing that to a degree today, and I think they try to keep it somewhat complementary. Out of season games, that kind of thing.

BI: Lastly, I have a couple questions about Netflix’s culture. I was fascinated by the presentation you did about that a couple of years ago. For example, the fact that you have no set vacation policy company-wide--that folks can take as much vacation as they want. When I broached that idea here asking if it was a good idea and if we should do that, people freaked out because they said “No, what’ll happen is everyone will work around the clock and I will feel like I can never take a vacation.” Why do you have the no vacation policy?

RH: I would say we don’t have a “no vacation” policy, that’s a little ambiguous. Instead, we have no policy on vacation. Perhaps because I take lots of great vacations it sets a good example. If you [Henry] were more visibly on vacation and then when you asked the question about it, everyone would probably relax. To the degree that you hardly ever are seen to take vacation, that might scare people.

BI: So it’s my fault?

RH: I think so.

BI: And the other thing you said that jumped out was “We’re not a family, we’re a professional sports team. Therefore, we’re going to try to have the best players at every position, and that means that folks who are B-players are going to be working elsewhere.” And when I raised that as a possibility here, people said “It’s ridiculous. There are lots of players who are B’s who want to be A’s. It’s just much too harsh.” What’s your reaction to that?

RH: You’re over-simplifying with A’s and B’s. There’s a lot of graduations in terms of how someone performs. We’ve often had someone who was performing OK at one job so we move them to another job and they do fantastic. So it’s not even that much a reflection on the person. But in general, a sports-oriented model is “If you want to win the championships, you have to have great players who can work together.” You need both of those, and so that’s what we focus on: getting great people who can work together.

BI: How do you convey to somebody that they’re just not quite great enough?

RH: An employee who doesn’t work out usually knows it and the parting is mutual. Most admit they thought it would be for them and ignored signs that it wouldn’t. For example, we hire a lot of seasoned people but we don’t have all the perks – cubes, not offices, very few assistants, small staffs, no traditional HR support (plan your own offsite!). Some find that refreshing, others learn quickly that they’re accustomed to all the trappings and aren’t comfortable without them. It’s an honest and candid environment, and as a result, most employees who don’t work out say thank you when they leave. And severances are generous.

BI: Is there anything else that you think is critical to Netflix’s culture that has helped you become such an incredibly successful company over the past ten years?

RH: It’s like the classic example: Which of the innovations for the DC-10 were most important? The retractable flaps and retractable wings, they all went together, and it’s pretty hard to put a finger on it. Some of the things are symbols -- the vacation policy symbolizes freedom and responsibility. But you couldn’t really do freedom and responsibility without high performance. And so those are intimately linked. And you couldn’t do freedom and responsibility without our kind of context management model.

BI: Which is what?

RH: In our culture deck, there’s a chapter on “context, not control,” which is using your role as manager and leader to educate people and what we’re trying to do and not guiding each specific action a person takes. When someone working for you does something that you think is a bad choice, instead of blaming them, it’s reflecting on yourself in terms of what context you failed to provide. Such as finding a talented person, who would come to the right decision. So it’s always reflecting back on the manager--what context did I fail to set?

BI: Are there other key aspects of it?

RH: The values are really key, that not only should one be clear about one’s values, but that there’s a collective intolerance to bad behavior.

BI: Anything else?

RH: No, I think those are the key elements.

tilson netflix

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BI: Last thing… you wrote an extraordinary public letter to Whitney Tilson, who had publicly shorted your stock. When CEOs do that it’s usually a huge red flag and everybody in the world says “The company is screwed--I can pile on now.” Obviously you phrased the letter in a way that wasn’t like that at all. You went point by point. Yet, in the middle of it, you say that there are some things that Whitney was right to be concerned about. So what else should people actually be worried about?

RH: I’d refer you to our January earnings letter where we said the two core questions are: “Given our approach, how big will we get in the domestic market?” and second, “How successful will we be internationally?” Those are the two core investor questions.

BI: You never did actually answer the first question we asked about how big you’ll get domestically. How big will you get domestically?

RH: That’s exactly why there are investors who debate that. It doesn’t really matter what I think. It matters what actually happens.

BI: I know it doesn’t matter, but I’m interested. How big do you think you’ll get?

RH: There’s no simple way to tell it. We’re growing very well right now, and we’re focused on making our service better and better. But other than those benchmarks that I gave you, and then the question is “Well, what’s the appropriate discount to apply to those?” That’s where the investor judgment comes in. And then once an investor answers those questions for themselves, then they can figure out if they want to be a buyer of our stock at the current price.

BI: And what about the international question? Are there unique challenges in many of the other attractive markets where there is broadband and people that want to watch TV that will prevent you from being successful?

RH: Yes--in certain markets, in China in particular, it looks very daunting for US companies to build a profitable business.

Now read the presentation on "Culture" that Reed refers to above >

http://www.businessinsider.com/netflix-management-presentation-2011#-1

The Profit Motive

2010-10-29T03:18:00.000-07:00

By Michael Totty

The Battelle Memorial Institute was founded in the 1920s to encourage "creative and research work and the making of discoveries and inventions." When it opened its doors on the eve of the Crash of 1929, it had fewer than 50 people, dedicated mainly to metallurgical research.

Today, the Columbus, Ohio-based nonprofit—whose motto is "the business of innovation"—employs 23,000, runs an in-house research-and-development lab and manages or co-manages eight national laboratories for the federal government. The institute also conducts contract research and development for companies, mainly small and midsize businesses that don't have their own R&D shops. And it does contract manufacturing—for instance, it makes parts of the cockpit display for the Army's Black Hawk helicopter—and maintains its own venture investment fund.

Its most famous product is the office copier. Chester Carlson, a New York lawyer, had invented a method to duplicate printed documents but lacked the backing to commercialize the technology. In the early 1940s he took it to Battelle, which developed Mr. Carlson's concept and later licensed the technology to the company that would become Xerox Corp. Battelle's lab also has turned out the technologies behind the compact disc, automobile cruise control and the bar code.

The Wall Street Journal's Michael Totty recently spoke with Jeffrey Wadsworth, who has been Battelle's chief executive since early 2009, about managing a large research-and-development organization, fostering an inventive culture and what we get wrong about innovation. Here are edited excerpts of that conversation.

MR. WADSWORTH: When Battelle scientists think they have an interesting idea, they have what is called an invention disclosure, where they write down what that idea is. Then a group of people evaluate which ones of those are worthy of investing the money needed to have a patent application.

WSJ: What are the criteria you use?

MR. WADSWORTH: One of them is: Can you conceive of this invention creating a product that is useful to society and makes money?

Another way of thinking about it, which is more defensive, is to say, "We've discovered something. Somebody else may discover it, and we don't want to have to pay them for that. Therefore we're going to patent it to protect ourselves."

Most of the things that we're working on are a race to be there first. Innovation's good, doing it fast is better and doing something with it is really the objective. When we look at what we want to patent, we have to think, are we going to make money out of it? It's not like we want to patent in order to have a publication.

WSJ: Battelle has been doing this for a long time. Do you have a secret sauce, and if so, what is it?

MR. WADSWORTH: We are a different kind of company. We have a lot of labs and look like a university at some level. But we try to operate more like a business.

WSJ: How does that combination of pure research and a business orientation help foster innovation?

MR. WADSWORTH: Some universities—certainly not all of them—will leave discovery on the floor, or it won't get developed, because often a company will not want to invest in something that's available to everyone because they won't then have an advantage.

Industry will often work with a university to use the resources of the university and hold the information proprietary. That often isn't something the university wants to do. They want to publish.

We're in a different business.

If a client comes to us and wants to have us solve a problem for them and wants that kept extremely confidential and private, we do that. We have that capacity. We also conduct work for the federal government that needs protecting. We'll do basic research, applied research, but we'll also hold the results very, very confidential. And that makes us different.
Current State of Innovation

WSJ: We've seen an incredible wave of innovation over the past 40 years. How would you describe the current state of innovation?

MR. WADSWORTH: There are more people being educated in more parts of the world. There's more cross-fertilization.

People from other countries come to the United States because 17 of the top 25 universities in the world are still in the United States. In the '70s they came and stayed. But nowadays, you can go back to your home country with education and insights and the network you've built in the United States, and you can live with your family and eat your home food.

We built a nanoscience center at Oak Ridge National Lab and one at Brookhaven. When I went to Beijing about three or four years ago, I went to Tsinghua University—it's their MIT. They had a brand new nanoscience facility there. The building was filled with Chinese nationals who had returned from somewhere else.

[The director] had a name for them: They're called hai gui—sea turtles. They had gone out, and they've come back.

The work they were doing was just as good as ours. The equipment they had was just as good as ours. The facility was just as good as ours. And the people were just as good. Technology evolution and development is far more global than it was.

Another thing that's happened is that the ownership of the entire lineage of discovery is no longer found in a company. I worked at Lockheed in the early '80s. Lockheed is very much like other big companies. They did not like to rely on other people for critical parts of their discovery chain.

It was almost seen as weakness if you had to go and get help from somewhere else. That not-invented-here syndrome has markedly moved to one we call "proudly found elsewhere."

That's a big shift.

WSJ: You're a big organization devoted to innovation. How do you avoid the problems of big organizations?

MR. WADSWORTH: If you'd talk to some of our people, they'd say we haven't. Because when you get to be very big, you end up putting a lot of processes in place to ensure that you're not violating the plethora of regulations, rules and expectations of big organizations. That can become stifling.

We all try to minimize it by being aware of it.

And at the same time, you can't expose the company to devastation by having a small group do something that's not being monitored and they get into trouble.

WSJ: How do you do this?

MR. WADSWORTH: It's impossible to know everything that's going on at an organization like ours. Often what you do is—we call it a deep dive. So that's one thing we do: Get data from the people who work for you.

Another way is to constantly benchmark.

I'm not a huge fan of benchmarking, because you're comparing yourself to the current, not the future. But if you find you have 10 times as many people in some support function as everyone else—first of all, you need to know that. Then you have to ask why. It could be a good answer, but it might not be.
Fostering Innovation

WSJ: What can you do to foster a culture of innovation?

MR. WADSWORTH: The tone at the top for what you want to see done is absolutely essential. If you tell a laboratory that you're only going to do basic research and that's all we're going to value, you won't get the same productivity commercially as you would if you say, I love basic research, but I also want to embrace the fact that we're here to put products out to the community, to the country, to help foster economic well-being for the United States.

You can encourage it in lots of ways financially. You can give rewards for things that you want to have done.

This is manifest throughout industry and universities. They'll have different ways of rewarding people for innovation. If you publish a patent, you get $1,000, or you get $1 in a frame. Or you get a piece of the action going forward. There are lots of ways that companies and institutions try to financially incentivize new thinking.

WSJ: What are some common misconceptions about innovation?

MR. WADSWORTH: The first one is the Edisonian thing. There is no Lone Ranger.

Most of the things that I've seen be successful have come from remarkably complex teams. If you want to have a successful enterprise, every job has got to be important. You can have the most innovative thing in the world, but if you've got terrible lawyers and terrible accountants and terrible people dealing with customers, it's not going to get out.

Another myth is that stuff happens fast. It doesn't. Xerox was in Chester Carlson's head for a decade before he came to us, and it took two decades to get it out.

The examples you hear about very, very fast return are iconic, but not typical. You'll hear about something being invented and three years later somebody's a billionaire, but I think under close inspection you'll find there's a lot—maybe decades—of work behind it.

Google Readies Its E-Book Plan, Bringing in a New Sales Approach

2010-05-19T08:27:00.000-07:00

By JESSICA E. VASCELLARO And JEFFREY A. TRACHTENBERG

Google Inc. plans to begin selling digital books in late June or July, a company official said Tuesday, throwing the search giant into a battle that already involves Amazon.com Inc., Apple Inc. and Barnes & Noble Inc.

Google has been discussing its vision for distributing books online for several years and for months has been evangelizing about its new service, called Google Editions. The company is hoping to distinguish Google Editions in the marketplace by allowing users to access books from a broad range of websites using an array of devices, unlike rivals that are focused on proprietary devices and software.

Chris Palma, Google's manager for strategic-partner development, announced the timetable for Google's plans on Tuesday at a publishing- industry panel in New York.

Jeff Trachtenberg discusses Google plan to start selling digital books this summer, setting the stage for a battle of the online behemoth booksellers. Plus, Apple attracts antitrust scrutiny from regulators and Congress drafts a web-ad privacy bill.

Google says users will be able to buy digital copies of books they discover through its book-search service. It will also allow book retailers—even independent shops—to sell Google Editions on their own sites, giving partners the bulk of the revenue.

The company would have copies on its servers for works it strikes agreements to sell. Google is still deciding whether it will follow the model where publishers set the retail price or whether Google sets the price.

While Mr. Palma didn't go into details, users of Google Editions would be able to read books from a web browser—meaning that the type of e-reader device wouldn't matter. The company also could build software to optimize reading on certain devices like an iPhone or iPad but hasn't announced any specific plans.

By contrast, Amazon's digital book business is largely focused on its Kindle e-reader and Kindle software that runs on some other hardware.

The project is Google's attempt to crack into the market of distributing current and backlist works.

Publishers have yet to publicly commit to participate in the service but Google isn't expected to run into much trouble getting them to join. Publishers tend to believe the more outlets to sell books the better. Even the smallest independent bookstore will have access to a sophisticated electronic-book sales service with a vast selection of titles.

"This levels the retail playing field," said Evan Schnittman, vice president of global business development for Oxford University Press. "And as a publisher, what I like is that I won't have to think about audiences based on devices. This is an electronic product that consumers can get anywhere as long as they have a Google account."

Google says users will be able to buy digital copies of books they discover through its book-search service.

He said Google Editions will also be critical because it represents "the ultimate test" of whether the ability to search, find and instantly buy content will generate significant gains in revenue. "This tears down barriers," he added.

Retail isn't Google's calling card, but the company has an online store for Android apps, sells software for businesses and it sells a phone.

Google may struggle to build awareness about the service. It is hoping users click to buy books through its Book Search product, which has a relatively small following compared to its overall search service. It is also betting on other book resellers to push and promote Google Editions themselves. Whether they do so will probably depend on how much revenue they are generating.

The online sales effort is separate from Google's fight to win rights to distribute millions of out-of-print books through its digital book settlement with authors and publishers. U.S. District Court Judge Denny Chin is expected to rule in that case soon.

Too Fat for Hooters?

2010-05-18T16:24:00.000-07:00

Employee says she was told to lose weight or lose her job

RadioShack

2010-05-11T06:00:00.000-07:00

The Lost Tribes of RadioShack: Tinkerers Search for New Spiritual Home

* By Jon Mooallem
Andy Cohen waves his arm at the electrical miscellany hanging around him, showing off his tubular lugs and a box labeled “81-piece terminal assortment”. Cohen is holding court at the back of the RadioShack store he owns in Sebastopol, California. To his left, a tattooed kid fishes through a metal chest of drawers labeled “fast-acting/slow-blow 3ag-type”. Another cabinet is labeled “capacitors: electrolytic, radial (pcb-mount) leads, axial (in-line) leads”. Behind him, a spinning rack is hung with baggies containing dozens of different brass and gold solderless connectors. They’re the little widgets you think of when you think of RadioShack — the sort of electronic parts the company once had a near monopoly on but that are increasingly hard to find there. Cohen gets much of his supply direct from China. “Where are you going to find all these different kinds of solder? A selection of five soldering irons? All these connectors?” Cohen says. “Other RadioShacks, they hide this stuff or don’t buy enough of it anymore. We go out of our way to show you these things.”

Cohen is 54, with a gruff voice and the intense, deep-set eyes of an older Joaquin Phoenix. As a kid, he built computers, yammered on ham radios, and took special trips to the electronics shops in Lower Manhattan with his dad. He also pored over the RadioShack catalog the day it arrived, studying up on what was then cutting-edge technology — reel-to-reel tape decks, fax machines — and the pages and pages of arcane electronic components.

Cohen bought this store in 2003 after 25 years as a project manager at companies like Hughes Aircraft and Hewlett-Packard. Housed in a strip mall between a pet supply shop and a dry cleaner, it is not among RadioShack’s 4,470 corporate-owned stores but one of about 1,400 franchised dealerships. In exchange for using the RadioShack name, Cohen is required to buy a certain amount of his inventory from the company. Otherwise, he has a lot of leeway. And he has used it to fashion his shop into something like the eccentric, mad-scientist RadioShacks he grew up with. But he knows that he’s largely on his own in this, fighting a battle for the soul of the company that’s pretty much been decided everywhere else.

Recently, RadioShack has been forcefully rebranding itself, trying to shed its image as a temple of transistors, parts, and cables. Polished executives have parachuted in from the boardrooms of Safeway, Kmart, and Coca-Cola to turn the iconic American retailer around after years of underperformance and uncertainty. (In 2007, The Onion summed up the brand’s decline with the satiric headline “Even CEO Can’t Figure Out How Radioshack Still in Business.”)

The plan? The new bosses want to turn RadioShack into a hipper, more mainstream place for “mobility” — which is what they insist on calling the cell phone market. (In an interview, RadioShack’s marketing chief used the word mobility an average of once every 105 seconds.) Selling phones is central to the new RadioShack. And so far, it seems to be working. Per-store sales are up, and corporate profits jumped 26 percent in the fourth quarter of 2009.

Wall Street seems to like the strategy. After Apple finally deigned to let the chain sell iPhones late last year, the same Morgan Stanley analyst who in 2008 had described RadioShack as “a decaying business model” lauded its “growing relevancy as a wireless destination.” And in early March, the company’s stock price was pumped up by unsubstantiated rumors that it might be taken over by an investment firm. If nothing else, the gossip could suggest that RadioShack has whipped itself back into respectable-enough shape to be a plausible investment target.

But a small subculture of RadioShack nostalgics, including many former employees, have watched all this unfold with sorrow — if not a feeling of betrayal, then at least loss. The last nails are being hammered into the coffin of the little electronics hobby shop they once loved. And the cell phone seems to be an apt symbol for the superficiality and ordinariness they feel are taking its place.

“You walk into a regular RadioShack and it’s become like a neurosis,” Cohen says. “‘Sir, can I sell you a cell phone today? How old is your cell phone? What about your family, do they have cell phones?’”

The story of RadioShack’s evolution over the past half century turns out to be the story of America’s changing relationship with technology. The RadioShacks of old catered to customers who could diagnose a busted TV on their basement workbench. They might be messing around with some project on a Saturday afternoon, find that they were missing a part, and hustle out to the nearest RadioShack for some of the very gear Cohen still stocks.

But his shop is a lone outpost; in a single generation, the American who built, repaired, and tinkered with technology has evolved into an entirely new species: the American who prefers to slip that technology out of his pocket and show off its killer apps. Once, we were makers. Now most of us are users.
“We are not looking for the guy who wants to spend his entire paycheck on a sound system,” RadioShack’s chair, Charles Tandy, bragged to analysts in the mid-1970s. “We are in the do-it-yourself business.”

Craftiness was in Tandy’s bloodline. He cut his teeth helming the family business, the Tandy Leather Company, which sold leather and leatherworking tools to veterans’ hospitals and Boy Scouts. The cigar-chomping Texan was the kind of eccentric, larger-than-life executive that any modern PR handler would keep tightly muzzled. He celebrated his 60th birthday by riding a rented elephant around the grounds of his mansion, and he kept a plastic breast on his desk that made a gong sound when he pressed the nipple. It was how he called for more coffee.

Tandy recognized that leatherworking was probably not a growth industry, and in 1963 he strong-armed his board of directors into buying and pouring money into RadioShack, then a 42-year-old company with nine stores. RadioShack quickly ballooned into a chain of more than 6,000 locations, becoming a kind of cluttered general store for the pioneers of the electronic age. That growth was spurred on in the mid-’70s, when the company smartly got in front of one particular technological fad: the CB radio craze. At the peak of the boom, RadioShack was opening three new stores a day. (”Americans sure like to jabber,” a befuddled executive told the press.)

This is not to say Charles Tandy himself was an early adopter or technogical visionary. According to the book Tandy’s Money Machine, by Irvin Farman, when a RadioShack vice president rushed down to Tandy’s departing Lincoln Continental to tell him they had created a promising prototype of a computer, Tandy shot back, “A computer? Who needs a computer?” Nevertheless, by 1977, the company was preparing to unveil the TRS-80, the world’s first mass-produced, fully assembled PC.

“I remember the TRS-80 very well,” says Forrest Mims. At the time, Mims had already begun his career writing how-to books like Getting Started in Electronics and Engineer’s Notebook, definitive editions in the world of hobby electronics that have sold more than 2 million copies. The books were written exclusively for RadioShack and were offered in stores for a few dollars each. They were essentially giveaways; the real money came from all the diodes, transistors, and tools that hobbyists needed to build the circuits he diagrammed. It was a shrewd tactic. Those little parts and pieces had huge markups — some as high as 500 percent — and RadioShack could fit lots of them in its relatively small stores.

Mims was invited to take a look at the TRS-80, before it went on sale, at a RadioShack R&D unit located in a warehouse in downtown Fort Worth. The two young engineers who had developed the machine led him around. “They escorted me into this room,” Mims recalls. “It was all hush-hush.” Inside, arrayed on long tables, were two dozen TRS-80s, with cassette decks for data storage and 12-inch RCA monitors. They were being tested, and each had an image on its screen of a waving American flag. “It was really a shock,” Mims says. He had never seen 24 computers in a room before; in those days, if you wanted a personal computer, you pretty much had to build it yourself.

One of the engineers invited Mims to sit down and try out the TRS-80 — just fool around on it a little. He declined. “I didn’t have a clue how to use the thing,” he says. Mims was an expert engineer, but he didn’t know anything about the machine’s programming language, Basic.

A new era was beginning. Computers, and all consumer electronic goods, were on their way to becoming what they are today: slick low-cost commodities heaped in the aisles of big-box stores. When they break, it’s cheaper to throw them out than open them up and repair them, and most can’t be sold for the kind of profit margins required by small stores like RadioShack. In retrospect, the launch of the TRS-80 was probably the most promising moment in RadioShack’s history — and the start of its decline.

“Let’s put it this way,” Mims says. “Hobby electronics peaked with the advent of the ready-made PC. There was no longer a need for anyone to build digital displays and TTL processors in their garage or spend time messing with circuitry. Now you could spend time at a keyboard, working on an actual computer.” It was a fulfillment of a dream. But it also served as a portent that the hands-on way of life RadioShack embodied would become irrelevant.

Mims couldn’t use the TRS-80 that day because he knew much more about how that piece of technology was wired on the inside than how to do anything with it. In other words, he was the exact opposite of today’s typical consumer. And that cultural shift is what RadioShack has been struggling with ever since.

The TRS-80 may have signaled the arrival of modern consumer electronics, but that revolution largely failed to transform RadioShack. The company, with its roots stuck deep in the DIY business, sold electronic products under the Tandy and Realistic brands, but they suffered in comparison with brands like Sony and Panasonic. Now the company is trying to engineer a dramatic change of course. Last August, it launched a $200 million “brand transformation” effort — not changing its name, exactly, but instead asking America to call it by a nickname: the Shack.

The company ran bizarre animated television spots. In one, a gaggle of Albert Einsteins scampered into a dump truck; in another, cell phones in Nordic attire sang in the native tongue of “Phonelandia.” (The message: “The Shack sells more phones than the population of Scandinavia.”) An outdoor party called the Summer Netogether was held simultaneously in San Francisco and New York City in front of two 17-foot laptop mock-ups and streamed live on the Web. But as the hours crawled on, the event started to feel like a painfully long red-carpet party with no main event to follow. At one point, there was a dance contest. One entrant whipped off his prosthetic leg and air-guitared with it.
Chief marketing officer ` says the aim has been to make RadioShack synonymous with mobile phones and “unwind decades of brand misconception.” The problem, in short, was that Americans didn’t think RadioShack was cool. To the extent that most people thought about RadioShack at all, it was as a convenient place to grab some printer ink or a hearing-aid battery.

Between 2004 and 2009, the company’s profits fell by 39 percent. It had gotten to the point where, early last year, executives were putting a little too much hope on the nationwide switch-over to digital TV, imagining that folks coming in to buy conversion boxes could be seduced into other, more expensive purchases, too. But the little old ladies with coupons for government-subsidized antennas were resistant to impulse buys.

Still, where giant specialty retailers like the Good Guys and Circuit City rode the electronics boom and bust right into bankruptcy, RadioShack has survived, although that survival was less a matter of salesmanship than cost-cutting. Around the time new CEO Julian Day took over in 2006, the company liquidated poorly selling inventory, closed 481 stores, and squeezed $100 million out of administrative expenses; even the houseplants in RadioShack stores were sold — to employees for $5 each — to save on the cost of watering them.

One of Day’s other priorities has been to meticulously homogenize RadioShack stores, á la McDonald’s and Starbucks. Whereas the company once gave store managers an astounding amount of autonomy, a recently distributed internal handbook provides precise instructions for everything from organizing merchandise on the show floor to which cleaning fluid they must use to shine their metallic lower shelves. (Armor All Original formula, if you’re wondering.) Another page presents, with a series of painstakingly annotated photographs, the head-to-toe elements of the only two acceptable styles of dress for salespeople: Traditional Business (tie, optional vest or blazer, light-colored shirt, dress shoes) and RadioShack Casual (black, white, or red shirt, no tie, dress loafers).

Day’s efforts have made the company look better on paper, but it was only when it began to sell itself as a place to comparison-shop for wireless phones and calling plans that RadioShack began to seem viable again.

It may seem strange that, finding themselves in a financial morass, executives decided their best option was to compete head-to-head with both the wireless carriers’ own stores and the cell phone departments of giants like Walmart and Best Buy. But they may have had little choice: The average RadioShack store is only 2,500 square feet and can’t possibly stock a competitive selection of large appliances like flatscreen TVs. (Managers have had to stash merchandise in the rafters or rent off-site storage units in the run-up to Christmas.) Cell phones, on the other hand, like the parts and pieces the company once thrived on, are small products with exceptionally high profit margins. There’s the handset and the accessories, but most important, there’s the commission that wireless carriers pay to cell phone retailers for every new contract on a phone. A phone is like a tiny slot machine that pays off month after month.

The logic is hard to resist, and in fact, RadioShack’s focus on wireless has been building gradually for at least the past decade — always at the direct expense of hobbyists, says Tim Oldham, a former corporate buyer at the company. “They intentionally decided to downsize the product offering for hobbyists, all the capacitors and resistors and connectors,” in order to cram in more phones, Oldham says. “It’s not coincidental. The money was just too big.”

Applbaum says he doesn’t want to “disenfranchise” hobbyists, but his job is to bust RadioShack out of that niche and reintroduce it to people as a competitive, mainstream retailer of consumer electronics. Especially mobility. Applbaum wants to send a message: “The RadioShack of yesterday … is not the RadioShack of today.”

Andy Cohen is not an unreasonable man. He’s willing to admit — begrudgingly — that he doesn’t totally disagree with what RadioShack is doing. “As a stockholder at a lot of other companies, I look at what Julian Day is doing and I think, actually, that looks like the right thing to do.” His shop is an anomaly, Cohen says — a product of its idiosyncratic community. He doesn’t pretend it’s some kind of concept store RadioShack ought to roll out nationwide.

Cohen takes pride in the fact that his store carries only a single model of cell phone: a bulbous white handset called the Jitterbug. It has no features to speak of — it’s basically the mom jeans of mobility.

Cohen and his store manager, Steven Muscarelli, have made the centerpiece of their shop something they call the Make Case. Make magazine, the quirky bible of the DIY community, happens to be headquartered down the street, and in a glass showcase right under the register, Cohen and Muscarelli have an exhibit of back issues, tools, printed circuit boards, kits, and a slew of components to screw around with: ultrasonic range finders, dual-axis accelerometers, microbots. (There are also a bunch of Star Wars action figures in the Make Case, just because.) Muscarelli says people will come in, pick up an issue of Make, buy all the stuff they’ll need to build a particular project or hack outlined in the magazine — like a TV-B-Gone or a USB device charger made from an Altoids box — then head off to their garages. “They come back in later and say, ‘Look what I made!’”

But elsewhere, it’s a grim time for old RadioShack diehards. Mike D’Alessio, a once-devoted customer in Illinois who grew up playing with crystal radios and electronics kits he bought at his local RadioShack, tells me, “We’re living in a disposable world. It’s just not worth it to repair things; it’s not worth it to build things from scratch. The magic of that seems to have passed.” For reasons he can’t fully articulate, D’Alessio felt moved to scan 67 years’ worth of old RadioShack catalogs, page by page, and post them online. He often gets grateful emails from wistful or disenfranchised former customers and employees.

“Some people say RadioShack is just a store,” D’Alessio says. “But to me it was an idea — a learning and resource center that really shaped people’s lives.” D’Alessio has started talking about the company in the past tense.

Unpaid Internships May Be Illegal

2010-04-06T14:22:00.000-07:00

New York Times: “With job openings scarce for young people, the number of unpaid internships has climbed in recent years, leading federal and state regulators to worry that more employers are illegally using such internships for free labor. Convinced that many unpaid internships violate minimum wage laws, officials in Oregon, California and other states have begun investigations and fined employers.” The U.S. Department of Labor issued “Training and Employment Guidance Letter 12-09” that explains when a person can be an unpaid trainee rather than an employee. The Guidance Letter states:

The U.S. Department of Labor’s Wage and Hour Division (WHD) has developed the six factors below to evaluate whether a worker is a trainee or an employee for purposes of the FLSA:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;
2. The training is for the benefit of the trainees;
3. The trainees do not displace regular employees, but work under their close observation;
4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;
5. The trainees are not necessarily entitled to a job at the conclusion of the training period; and
6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

If all of the factors listed above are met, then the worker is a “trainee”, an employment relationship does not exist under the FLSA, and the FLSA’s minimum wage and overtime provisions do not apply to the worker.

John G. McCoy, Innovator in Banking, Dies at 97

2010-04-06T10:22:00.000-07:00

By NATASHA SINGER

John G. McCoy, who transformed the smallest bank in Columbus, Ohio, into the national powerhouse Banc One, died Sunday at his home in New Albany, Ohio. He was 97.

His death was confirmed by his son, John B. McCoy.

Mr. McCoy was the bank’s chief executive from 1958 to 1983, during which the bank’s assets increased to $8 billion, from about $140 million.

Early on, Mr. McCoy identified growth opportunities for his bank in consumer-friendly customer service and in acquiring other banks.

“I had to sit down and figure out what kind of a bank I wanted to run,” Mr. McCoy told The New York Times in 1981. “Right away I realized that I wanted to run a Tiffany’s, not a Woolworth’s.”

In the 1950s, for example, when many people still received their salaries in cash and banks often had only one office, Mr. McCoy began building branches and had them open on weekends.

In the 1970s, because securities firms were not permitted to offer checking accounts to their money market mutual fund customers, Banc One signed an agreement with Merrill Lynch in which the bank offered checking accounts to 300,000 Merrill customers.

Banc One was also an early adopter of services like drive-through banking, A.T.M.’s, credit cards and debit cards.

But being an early adopter didn’t always pan out. Before the era of online banking, for example, Banc One tested in-home banking via set-top boxes connected to televisions. But customers weren’t ready for such technology.

Banc One also invested in information technology research, earning a reputation as a leader in data processing. By the 1980s, the bank was processing credit card transactions for dozens of other banks.

But Mr. McCoy had conservative lending policies, courting smaller companies instead of the country’s biggest corporations.

“He used to say ‘I’d rather make a thousand loans for $1,000 than one loan for $1 million,’ ” his son recalled, “because no matter how good you are, you are always going to have one loan go bad.”

In 1979, Banc One ranked first in profitability among the country’s 100 largest bank holding companies.

For Mr. McCoy, banking was also a family business.

He was the second of three McCoys to lead the bank, originally called the City National Bank and Trust. The third was his son, who took over in 1983, serving as its chief executive until 1999.

John G. McCoy was born in Marietta, Ohio, on Jan. 30, 1913, the oldest of five children of John H. and Florence McCoy.

His father was an oilman and banker who moved the family to Columbus in 1930s after the governor of Ohio asked him to supervise the closing of banks that had failed during the Depression. In 1933, his father became president of City National Bank and Trust.

John G. McCoy attended Marietta College in Ohio. He also graduated from the Stanford Graduate School of Business with a master’s degree in business administration.

Mr. McCoy joined City National in 1937. He married his wife, Jeanne Bonnet, in 1941. She died in 2006.

Besides his son, of Columbus, Mr. McCoy is survived by a daughter, Virginia McCoy of Kansas City, Mo.; three grandchildren; and seven great-grandchildren.

In 1958, after his father died, Mr. McCoy became president of City National Bank. He changed the name when he created a bank holding company that became known in 1979 as the Banc One Corporation. But the bank’s branches, like Bank One Columbus, used a “k” in the name.

A 1991 article in The New York Times described Banc One as the best-run bank among regional powerhouses and “perhaps the best bank in America.”

During Mr. McCoy’s son’s tenure, Banc One became one of the country’s largest banks, when it purchased First Chicago Bank for $21 billion. After the merger, the bank moved its headquarters to Chicago. John B. McCoy resigned in 1999 after the bank had earnings shortfalls. The board hired Jamie Dimon as chief executive in 2000.

JPMorgan Chase bought Banc One in 2004. Chase later changed the name of its two-million-square-foot corporate offices in Columbus to the McCoy Center.

Starbucks’ Midlife Crisis

2010-03-10T08:32:00.000-08:00

The coffee giant can’t quite accept its own customers’ tastes.

Greg Beato from the March 2010 issue

Last summer in Seattle, Starbucks opened 15th Avenue and Tea, an unbranded café featuring “small batch coffees sourced from individually owned farms” and a variety of fussy brewing methods designed to appeal to those connoisseurs who believe a cup of $4 coffee ought to be at least as complicated to make as a Big Mac. Live music is provided by a small-batch indie rock piano band sourced from a tiny town in Wisconsin. There’s an in-house “tea master,” and occasional outbreaks of poetry. Starbucks is 39 years old now, and like a lot of 39-year-olds, especially those who’ve experienced great success in their salad years but are beginning to wonder if they’ve lost their touch, it’s having a bit of an identity crisis.

In 2008, Starbucks closed 661 under-performing locations. In 2009 it shuttered an additional 300 stores and laid off 6,700 employees. In an attempt to position itself against newer, hipper rivals, the company started talking up its “heritage.” It resurrected a less polished version of its logo for use in certain branding situations. Presumably, its coffee is still brewed from coffee beans, but everything else in its new stores seems to have made a radical career switch. The bar at a London Starbucks is upholstered with scraps from an Italian shoe factory. The countertop at the Paris Starbucks is made out of recycled cell phones.

For all their ostensible authenticity, such adventures in interior design cannot match the truly radical act of installing espresso machines in bank lobbies. Like Seattle’s other great cultural export from the early 1990s, Nirvana, Starbucks has always been most vital, most interesting, most revolutionary when at its most commercial.

Granted, not everyone thinks of the chain as radical. Take Bryant Simon, a historian at Temple University. In his 2009 meditation on Starbucks, Everything But the Coffee, he offers the usual critiques of the company. It says it sells coffee, but it doesn’t. It says it’s a venue for conversation and civic discourse, but it isn’t. It sells overpriced coffee-like beverages and a safe, predictable, environment. It preys on needy, status-seeking consumers by offering them clean bathrooms, innovative products, and a soothing ambiance in myriad convenient locations. For Simon, Starbucks was designed to be an exclusive, elitist institution: When CEO Howard Schultz began adding locations in the late 1980s, he “made sure to put his stores in the direct path of lawyers and doctors, artists on trust funds and writers with day jobs as junk bond traders.”

If you’re thinking to yourself, damn, that’s totally unfair to writers with day jobs as unemployed writers, well, yes, that was Schultz’s evil scheme! He wanted to introduce fancy coffee to people who weren’t already drinking fancy coffee. So, Simon reports, “unlike an owner of one of the beat coffee shops in the 1950s, he didn’t set up in transitional neighborhoods or fringe places like, for instance, Chicago’s neobohemian Wicker Park.”

In the late 1980s, of course, there weren’t many cafés serving high-quality coffee anywhere. Coffee consumption per capita was at its lowest point since 1962, soft drinks had recently surpassed hot caffeine as the nation’s favorite beverage, and Coke was in the midst of a campaign advertising its utility as a breakfast drink. The few cafés that were selling espressos and capuccinos, however, were located precisely in places like Wicker Park.

In choosing to locate his outlets in busy downtown locations, Schultz was expanding the world of high-end coffee—diversifying it, in fact, by taking it beyond its insular, self-conscious subculture. The décor of his stores amplified this process. They had the clean and slick streamlining of a fast food restaurant but were more comfortably appointed. Instead of walls lined with old books, there were gleaming espresso machines for sale, packages of whole beans, ceramic cups. They felt a little like a Williams-Sonoma store crossed with an unusually tasteful airport lounge. They were cafés for people who would never set foot in a bohemian coffeehouse, people traditional coffeehouse entrepreneurs had completely ignored.

For less than the price of a Whopper, you could hang out in a sophisticated middlebrow lounge/office for hours on end. And they were popping up everywhere. Exclusive, elitist? Starbucks was exactly the opposite, introducing millions of people who didn’t know their arabica from their robusto to the pleasures of double espressos. Finally, good coffee had been liberated from the proprietary clutches of hipsters, campus intellectuals, and proto-foodies and shared with bank managers and real estate agents. In offices across America, it suddenly smelled like ’ffeine spirit.

For Schultz, this mainstream customer base was both a boon and a curse. In Pour Your Heart Into It, his 1997 account of Starbucks’ rise to global behemoth, he reveals a preoccupation with authenticity that echoed Kurt Cobain’s. In 1989, he initially balked at providing non-fat milk for customers—it wasn’t how the Italians did it. When word trickled up to him that rival stores in Santa Monica were doing big business in the summer months selling blended iced coffee drinks, he initially dismissed the idea as something that “sounded more like a fast-food shake than something a true coffee lover would enjoy.”

Eventually, Schultz relented. And really, what greater punk-rock middle finger is there to purist prescriptions about what constitutes a true coffee drink than a blended ice beverage flavored with Pumpkin Spice powder?

Simon recounts the birth of the Frappuccino in Everything But the Coffee too, but while he acknowledges the grassroots origins, he quickly positions it as an item the chain is “pushing” on “caffeine-dependent women and men.” In his estimation, the company’s “consumer persuaders” and “mythmakers” are the ones with real power. They’re constantly selling false promises, implanting “subliminal messages” in store décor, and otherwise manipulating hapless consumers.

In reality, the chain’s customers have played a substantial role in determining the Starbucks experience. They asked for non-fat milk, and they got it. They asked for Frappuccino, and they got it. What they haven’t been so interested in is Starbucks’ efforts to carry on the European coffeehouse tradition of creative interaction and spirited public discourse.

Over the years, Starbucks has tried various ways to foster an intellectual environment. In 1996 it tried selling a paper version of Slate and failed. In 1999 it introduced its own magazine, Joe. “Life is interesting. Discuss,” its tagline encouraged, but whatever discussions Joe prompted could sustain only three issues. In 2000 Starbucks opened Circadia, an upscale venue in San Francisco that Fortune described as an attempt to “resurrect the feel of the 1960s coffee shops of Greenwich Village.” The poetry readings didn’t work because customers weren’t sure if they were allowed to chat during the proceedings. The majority of Starbucks patrons, it seems, are happy to leave the European coffeehouse tradition to other retailers.

At 15th Avenue and Tea, the quest to cultivate highbrow customers continues. There’s a wall covered with excerpts from Plato’s dialogues. Blended drinks are banned from the premises, and you can safely assume that Bearista Bears, the highly sought-after plush toys that Starbucks has been selling since 1997, won’t ever appear here either.

But if Starbucks really hopes to re-establish its authority as an innovative, forward-thinking trailblazer, it should perhaps use its next experimental venue to honor its heritage as the first chain to take gourmet coffee culture beyond the narrow boundaries of traditional coffeehouse values and aesthetics. Imagine a place with matching chairs, clean tables, beverages that look like ice cream sundaes, Norah Jones on the sound system, and absolutely no horrid paintings from local artists decorating the walls. A place, that is, exactly like Starbucks!

Because despite its ubiquity, despite its advancing years, Starbucks is still the most radical thing to hit the coffeehouse universe in the last 50 years.

What Bankrupted Greece? It Was The Olympics!

2010-02-16T09:40:00.000-08:00

Here's an angle on the Greek financial crisis I hadn't considered: Victor Matheson, a member of the Sports Economist group blog, argues that one reason the Greeks wound up in such deep financial trouble is that they went deep in hock to pay for the Olympics:

Greece's federal government had historically been a profligate spender, but in order to join the euro currency zone, the government was forced to adopt austerity measures that reduced deficits from just over 9% of GDP in 1994 to just 3.1% of GDP in 1999, the year before Greece joined the euro.

But the Olympics broke the bank. Government deficits rose every year after 1999, peaking at 7.5% of GDP in 2004, the year of the Olympics, thanks in large part to the 9 billion euro price tag for the Games. For a relatively small country like Greece, the cost of hosting the Games equaled roughly 5% of the annual GDP of the country.

Of course, the Olympics didn't usher in an economic boom. Indeed, in 2005 Greece suffered an Olympic-sized hangover with GDP growth falling to its lowest level in a decade.

That would certainly follow the pattern of crazy civic development projects in which stadiums and museums are supposed to somehow substitute for everything that is missing in the local economy. But the governments in question don't usually end up in receivership.

Fun Olympic factoid of the day: the television news yesterday reported that the Whistler ski complex had essentially been developed in the hopes of the area someday scoring a winter Olympics. I have no idea if this is true, but it seems both plausible and deeply troubling.

Procter & Gamble to Test Online Store to Study Buying Habits

2010-01-17T05:54:00.000-08:00

By ANJALI CORDEIRO And ELLEN BYRON

Procter & Gamble Co. plans to launch an online store that will sell key brands, aiming to study consumer buying habits as it counters moves by traditional retailers, which have reduced the variety of brands they carry.

P&G spokeswoman Tressie Long said the company sees the new online store as more of a "learning lab," where it can study consumers' online buying habits, rather than as a direct source of sales growth. P&G, which already sells its products online through the Web sites of such retailers as Wal-Mart Stores Inc., says it will share what it learns with retailers that carry its brands.

P&G's new "eStore" will start as a pilot using 5,000 consumers in coming days. The site will carry only P&G products but will be owned and operated by PFSweb, an e-commerce service provider. Pricing on the site will be at the discretion of PFSweb, P&G says.

Not every P&G product will be available via the site initially, although big brands including Tide, Pampers and Olay will be sold there. The new Web site, at pgestore.com, is not yet publicly accessible but will be up for use beyond the pilot program in the spring. There will be a flat $5 shipping fee for all orders.

Procter & Gamble has increasingly been looking for new avenues of growth as consumers have cut back. In recent months the company has said it will push to sell more of its products online,

Despite P&G's push into the online medium, sales at traditional retailers will remain key to its business. P&G gets about half a billion dollars in online sales, a fraction of its roughly $79 billion in annual sales. Researcher Nielsen estimates online sales of consumer packaged goods including food, beverage, health and beauty aids and household cleaners increased 20% to 25% between 2004 and 2008, hitting roughly $10 billion in 2008.

In separate news, Procter & Gamble plans to end its fragrance licensing agreement with Valentino Fashion Group, according to a person familiar with the matter. Puig Beauty & Fashion Group SL, the Spanish fashion and fragrance company, is expected to take over the license from P&G in February 2011, this person said.

P&G produces a number of fragrances for Valentino, which is owned by U.K. based private-equity fund Permira. But sales never reached the heights of P&G's other fragrance licenses, including those with Gucci and Dolce & Gabbana, which last year launched a makeup line.

A spokeswoman from P&G declined to comment. A spokesman from Puig couldn't be immediately reached for comment.

P&G wants to weed out underperforming brands to focus on its more competitive products. The company has been moving into luxury beauty products, including the expansion of skin care line SK-II and its acquisition of high-end men's grooming lines like The Art of Shaving.

Banks vs. Credit Unions

2010-01-09T07:26:00.000-08:00

Would a credit union be a better alternative for you? The Early Show's financial contributor Vera Gibbons compares banks and credit unions.

Broadcast TV in 2010: Death or Rebirth?

2010-01-09T06:50:00.000-08:00

By Josef Adalian
Published: January 04, 2010
The nation's TV critics just spent the last two weeks raving about the small screen's creative triumphs over the past decade, with more than a few heralding a new golden age for the medium.

So why do the folks who run the industry -- particularly those who work at the big networks -- still feel so queasy heading into the '10s?

The short answer: While cable's renaissance means there are more networks with more "hit" shows than ever before, the windfall profits such success once guaranteed for the Big Four are harder than ever to reach.

The Age of Monster Hits like "Friends" and "Seinfeld" and "Law & Order" -- and the massive profits they once generated -- is over. Midrange success stories are the new 40 share. (See accompanying story about the movie industry: "Hollywood Cuts, Retools and Looks to the Future.")

No, network TV isn't on its deathbed, despite the rantings of some doomsayers. But the industry is still in for several more years of transition as executives look to radically remake the business model for broadcast TV.

Signs of change are everywhere:

-- News Corp.'s Chase Carey decision to go to the mat with Time Warner Cable over the New Year's holiday wasn't about pride. Networks like Fox simply can't thrive on advertising revenue alone anymore, particularly with some projections showing Madison Avenue will continue to cut back on network ad buys even as the overall economy improves.

-- Much of the pre-announcement hype over Apple's so-called "iSlate" has focused on its potential to bolster print. But the computer giant also has been talking to multiple networks about a monthly subscription service for TV shows. It's not hard to see TV programming being a big part of iSlate. Likewise, it's possible networks could use the internet to experiment with models where subscribers get first crack at big events -- anything to replace the dollars lost from shrinking syndication monies.

-- Despite the flak NBC has taken over its Jay Leno experiment, the Peacock may actually be the canary in the coal mine for broadcasters. The fact is, networks have no choice but to look for ways to reduce the number of hours they devote each week to high-cost scripted programming. Even reality TV -- once thought to be a panacea for the cost problems of networks -- has gotten more expensive and has ended up with the same rough success-to-failure ratio as comedy and drama. Don't be surprised to see more repeats in regular timeslots as networks finally concede that they can't afford 20 hours-plus of first-run fare every week.

-- Entire dayparts are disappearing or radically evolving. We've already seen the networks get out of the kids business. Daytime could be next, with two long-running soaps toast and more casualties highly likely soon.

-- The local-stations business, once a source of steady revenue for conglomerates such as NBC Universal and CBS, is now a drain on profits, thanks to a near-complete collapse of premium local advertising (there's a reason many stations now air informercials in the middle of the day, rather than just late at night).

There’s renewed talk the whole network-local affiliate relationship could be on the brink of crumbling as broadcasters seriously consider something they've mulled for years: transforming into cable networks.

And yet, while times are clearly still tough, they're also filled with opportunity. And as stomach-churning as 2010 promises to be for the TV business, indications are that broadcasters are -- ever so slowly -- starting to figure out how to adapt to the reshaped landscape of the business.

Consider: Lost in all the drama of "Will Fox pull the plug on Time Warner?" is the fact that nobody seemed to think News Corp. was crazy for demanding serious compensation for its signal.

At the start of the last decade, cable companies scoffed at the idea that they'd ever pay cash for free over-the-air TV. CBS broke ground with a few deals a while back, but they didn't produce serious money.

While Time Warner and Fox aren't yet revealing the terms of their pact, it's clear Fox got a record sum from a cable operator for its programming. Broadcasters' decades of dreaming about matching cable's dual revenue stream may soon be over -- and while it won't make up for dwindling syndication and ad revenues, it will help. A lot.

Likewise, major media companies' push to get paid for their content could yet result in another new revenue stream for broadcasters. The talks with Apple hint at this. Hulu's declaration that it may yet charge for some content is another sign of digital pennies slowly morphing into dimes, quarters and maybe even dollars.

The decline of the traditional 100-episodes-to-syndication-nirvana also may prove liberating to network programmers, and not so catastrophic for broadcast bean counters.

After all, freed from the burden of trying to produce as many episodes as quickly as possible in order to get to the back end ASAP, broadcasters could start to experiment more with the idea of limited-order series. Or shortened episode counts.

That could lead to even better shows. Maybe big talent that would never commit to the drudgery of virtual nonstop production for seven years -- the reality of a hit drama or comedy in the past -- might consider signing on for a three-year gig in which only 13 episodes are produced every 12 months.
It's a model that has allowed cable networks from FX to HBO to land major names who'd never do a network show.

Then there's the promise of technological revolution. Just as James Cameron's "Avatar" offers the hope of keeping moviegoing an in-theater experience, TV soon could get a 3D boost as well.

The big buzz at this week's Consumer Electronics Show is all about 3D TV, which is months -- not years -- away from becoming a reality. It won't be cheap, but there are thousands of hours of programming that could suddenly become a lot more valuable if converted to 3D. Bottom line: It's another source of potential profits to a business that needs as many as it can find.

As the Awful Aughts fade into memory, it would be nice to be able to predict smooth sailing ahead for broadcasters. It would also be naive.

But that doesn't mean there's not reason to hope that, like a TV icon from a simpler time, the networks might just make it after all.

H&R Block Beware!

2010-01-04T19:43:00.001-08:00

IRS to Boost Oversight of Paid Tax Preparers

By MARTIN VAUGHAN And MARY PILON

WASHINGTON—The Internal Revenue Service said it intends to regulate the legions of American tax-preparation companies, the first time the agency has sought to oversee these businesses. The move could affect how tax returns are prepared for tens of millions of people.

Under the new rules, employees of chain tax-preparation firms including H&R Block Inc. and Jackson Hewitt Tax Service Inc. will be required to pay a registration fee to the IRS, pass a "competency" exam and have 15 hours of education a year. Previously these employees weren't required to meet federal standards.

The requirements also will apply to hundreds of thousands of independent preparers and mom-and-pop storefronts that offer tax preparation as one of several services. About 60% of U.S. taxpayers use tax preparers, according to the IRS. That number includes certified public accountants, or CPAs, who are already subject to professional standards and aren't covered by the new rules.

The plan will take several years to implement and won't be in effect when taxpayers prepare their 2009 taxes for this April, the IRS said. But starting in 2011, all paid tax preparers will have to register with the IRS and include a unique identification number on any returns they prepare. Preparers will be given three years to pass a competency exam in either individual or small-business taxation.

"This is something that is long overdue," IRS Commissioner Doug Shulman said Monday. Until now, there have been "no national, professional standards for one of largest financial transactions individuals have each year," he said.

The IRS's move comes as Washington has looked to toughen regulatory oversight across the board, particularly in financial markets. Congress has toughened rules applying to credit-card firms. The White House is pushing an overhaul of financial regulation that would cover previously untouched or lightly regulated areas, like derivatives and hedge funds.

Some of the nation's largest tax preparers either welcomed or pushed for the new rules, seeing an advantage in regulations that could weed out some of their smallest competitors.

"We welcome the spotlight," said Kathryn Fulton, senior vice president for government relations at H&R Block, which said its business will be helped by forcing competitors to meet standards the firm already follows. "We think this should apply across the board," she said.

The testing and education requirements will apply to the preparer who actually signs the returns—a potential loophole that could allow chains such as H&R Block to avoid meeting requirements for preparers who work under a supervisor.

Intuit Inc., the maker of TurboTax, was among those lobbying for stricter oversight. Last year, 21 million tax returns were filed with the software, according to Julie Miller, an Intuit spokeswoman. Intuit staffs its hotlines primarily with CPAs and enrolled agents, workers who aren't accountants, but who are tested and certified by the IRS.
Journal Community

* discuss

“ This is a classic case of bandaging a scratch on the finger while allowing the severed artery to bleed. How about fixing the tax code so we don't need tax preparers? ”

—Nicholas Micskey

Tax-preparation software isn't covered by the plan unveiled by Monday, but the IRS could move to craft federal standards in this area. Mr. Shulman said the IRS will form a task force to examine the software industry's record on issues from accuracy to taxpayer-data security.

Like CPAs, volunteer tax preparers, such as those that help low-income taxpayers at free clinics, won't be subject to testing or education requirements.

For consumers, the new standards have the potential to raise tax-preparation fees, if tax preparers incur new costs to follow the regulations.

The regulations are primarily aimed at smaller firms, often branding themselves as generic "tax preparers" or "tax consultants." Government auditors, in undercover visits to firms, found high levels of inaccuracies and distortions on returns.

In 2006, the Better Business Bureau received 1,473 complaints against tax preparers, which ranked them 120 out of about 3,800 industry categories. In 2008, the number of tax-preparation complaints jumped to 2,276, ranking the industry 80th. Often, the complaints concerned errors that caused consumers to pay fees to resolve the problem.

"We want to make this into a profession, not just a part-time thing you set up on the kitchen table for six weeks during the tax season," said Frank Degen, an enrolled agent based in Setauket, N.Y. Enrolled agents have also been pushing for higher standards. "The good people have nothing to fear; it's the charlatans that hopefully will be rousted out."

Tom Ochsenschlager, a CPA and vice president at the American Institute of Certified Public Accountants, said the IRS has taken on a huge task in becoming "the consumer protection agency for tax preparers." He added: "Enforcing this is going to be a major undertaking."

Mr. Ochsenschlager worried the new regulations could confuse some consumers, because they aren't as tough as those required to become a CPA.

The IRS's Mr. Shulman said the agency will develop a public database through which consumers will be able to determine whether preparers have registered and passed the exam. The IRS said it also will explore whether to try to combat the growing use of refund-anticipation loans, in which firms offer upfront cash to customers expected to receive an IRS refund.

SK Telecom gets IBM cloud computing platform

2010-01-03T20:16:00.001-08:00

IBM has built South Korea's first cloud computing environment for SK Telecom. The cloud environment gives developers the software and hardware needed to develop applications that will allow SK Telecom to offer up to 20 new services to their customers by the end of 2009, such as sports news feeds and a photo service.

The IBM-built cloud environment will allow SK Telecom and its business partners to more quickly develop, test and publish new end-user services. The new cloud environment delivers the following business and technology benefits: all the servers, storage and middleware required for application development on a secure, stable environment; low up front costs and reduced investment risks of mobile content developers; and faster time to market and decreased barriers to entry of new services.

"Our efforts to develop services with IBM and other partners reflect the latest trends in Web 2.0, which will ultimately enhance our customers' experience," said Jong-tae Ihm, senior VP and head of SK Telecom's data network office. "Together with venture capital firms our aim is to create new business opportunities by rapidly commercializing the ideas of content developers, further advancing the development of the information and communication technology industry."

SK Telecom also operates an R&D test bed for developing and testing cloud computing technologies. By the end of 2009 the SK Telecom plans to accommodate more than 20 services for NATE, SK Telecom's WAP portal and in the coming years says it hopes to extend its entire IT infrastructure to the cloud model. This will in turn enhance the competitiveness of the cloud industry and foster business partnerships and cooperation.

"With this new environment SK Telecom will lead in innovation by offering IT infrastructure for software developers through a Platform-as-a-Service model," said Kang-yoon Lee, head of IBM's Cloud Computing Center in Korea. "We believe this project will be a model example in how enterprises in Korea and worldwide can leverage the cloud environment to support business requirements in continual change."

For this project IBM Korea worked jointly with SK Telecom to develop the entire cloud environment—from concept planning to hardware and software selection and implementation. The cloud includes 80 systems, comprised of both System x and blade servers, Xen virtualization technology and IBM middleware and service management technology. Service management is a key to any successful enterprise cloud computing project as it orchestrates hundreds—even thousands—of services in a workload-optimized fashion, maximizing efficiency of the overall system. SK Telecom is using IBM's Tivoli Service Automation Manager to enable software to be leased and installed seamlessly, and virtual machines provisioned accordingly. In planning the cloud architecture, SK Telecom also used implementation services and operation process consulting from IBM Global Technology Services through to implementation services and operation process consulting.

Toyota's Jim Lentz Predicts Peak Oil by 2020

2009-12-31T19:33:00.001-08:00

How Galleon's Boss Spun a Web of Contacts Into an Empire

2009-12-28T21:15:00.001-08:00

The Man Who Wired Silicon Valley
Fund Boss Built Empire on Charm, Smarts and Information

By ROBERT A. GUTH and JUSTIN SCHECK
[The case against fund king Raj Rajaratnam hinges on whether he knowingly traded on inside information.] Bloomberg News

The case against fund king Raj Rajaratnam hinges on whether he knowingly traded on inside information.

Raj Rajaratnam liked to tell people that his first name meant "king" in Hindi, and, coupled with his last name, that made him "king of kings."

He told the story with the broad, toothy smile that had ingratiated him to a generation of Silicon Valley executives. The grin softened the edge of a boss who'd call you an "idiot" or prod you into some humiliating stunt: Would you take $5,000 to be shocked with a stun gun?

In a mansion on a manmade island in Biscayne Bay in February 2007, Mr. Rajaratnam seemed determined to live up to his regal description of his name. It was Super Bowl weekend, and America's rich and powerful had descended on South Florida to watch the Indianapolis Colts play the Chicago Bears. Mostly they were there to do business. Mr. Rajaratnam's business was running a hedge fund, Galleon Group, that had made him a billionaire. And that business was based on contacts.
[The Rise of Raj]

Wealthy investors and executives swirled around the rented home -- $250,000 for the week -- on exclusive Star Island. Miami Beach twinkled in the darkness as they drank, smoked cigars and hobnobbed with beautiful women -- rent-a-dates, one Galleon employee called them -- around a swimming pool that seemed to disappear into the horizon.

But a fall was already brewing. Federal agents were circling Mr. Rajaratnam, starting to build the biggest insider-trading case in a generation. Prosecutors and securities regulators worked for the next 32 months before springing a sprawling indictment in October that charged Mr. Rajaratnam and 20 others with profiting off market-moving, inside information.

Mr. Rajaratnam has pleaded not guilty, and is free on bail.

"Throughout his career Mr. Rajaratnam has worked tirelessly as permitted by the securities laws to build a mosaic of public information about the companies he follows," his attorney, John Dowd, said. "His detailed, meticulous research into company fundamentals distinguished him as an exceptional analyst and portfolio manager. Mr. Rajaratnam is innocent of the charges against him and looks forward to his day in court when a jury of his fellow citizens will examine and evaluate all of the evidence."
Wednesday:

How federal prosecutors assembled the biggest insider-trading case in a generation.

A Wall Street Journal examination of Mr. Rajaratnam's career -- including interviews with more than 75 ex-business associates and a review of copies of Mr. Rajaratnam's own handwritten notes -- gives the clearest picture yet of how, for two decades, he persuaded executives at some of America's most prominent companies to risk their careers by passing corporate secrets.

The Galleon investigation has already touched McKinsey & Co., International Business Machines Corp., Intel Corp. and Advanced Micro Devices Inc. in connection with the leaking of confidential information that Mr. Rajaratnam allegedly traded on.

Mr. Rajaratnam got his start as an analyst just as the moribund semiconductor industry started to boom. Charming and puckish, he made contacts in Silicon Valley's Indian expatriate community, using them to meet other executives. By the early 1990s, tech industry executives and Mr. Rajaratnam's co-workers say he made himself the hub of dozens of sources funneling him supposedly confidential corporate information. In exchange, Mr. Rajaratnam would often pass them tips he'd heard.

The question of his guilt or innocence will turn on whether in this relentless cultivation of contacts, Mr. Rajaratnam grew rich by knowingly trading on inside information gleaned from the influential and savvy players who made up the network.
'One-Legged Men'

As a Needham & Co. staffer walked into the firm's reception area one day in 1985, a young man in a suit popped out of his seat, flashed a big smile and said he was there for a job interview. There was nothing to indicate that he'd one day be the impresario of a $7 billion hedge fund.

Raj Rajaratnam, who had been at Chase Manhattan Bank for two years after getting his M.B.A., was one of a stream of applicants hoping to catch on at the fledgling investment bank. The word was Needham would take a chance on the callow and the cast off, as long as they were willing to work grueling hours for low pay.

"I hire one-legged men, and I beat the crap out of them," the firm's founder, George Needham, was heard to say. He declined to comment through a spokesman for this article.

It was a time when corporate information flowed more freely than today. Until the late 1990s, executives tended to speak more openly with analysts, unfettered by tighter regulations put into place during the past decade. Mr. Needham, who hasn't been accused of any wrongdoing, expected his analysts to prospect for information on the industries they covered anywhere, any time: On a plane, quiz your seatmate; in a bar, chat up the drinker next to you.

He also expected them to be frugal. He checked expense reports himself, telling employees to take red-eye flights and chiding them when he found redeemable soda cans in the trash.

The digs at 400 Park Ave. matched the ethos: Mr. Needham furnished the place with second-hand furniture, such as a $100 credenza from the office of Ivan Boesky, the disgraced financier busted for insider trading.

Mr. Rajaratnam thrived in a job that could have been a dead end: analyzing the computer chip industry. Beset by a flood of Japanese chips, U.S. makers were on the ropes, many large investors had fled the sector, and few analysts covered it in depth.

View Full Image
Raj Rajaratnam appeared on top of theworld at a 2007 benefit in NewYork; with actress Blythe Danner, AIDS activist Brenda Freiberg and his wife, Asha.
Sipa Press

Raj Rajaratnam appeared on top of the world at a 2007 benefit in New York; with actress Blythe Danner, AIDS activist Brenda Freiberg and his wife, Asha.
Raj Rajaratnam appeared on top of theworld at a 2007 benefit in NewYork; with actress Blythe Danner, AIDS activist Brenda Freiberg and his wife, Asha.
Raj Rajaratnam appeared on top of theworld at a 2007 benefit in NewYork; with actress Blythe Danner, AIDS activist Brenda Freiberg and his wife, Asha.

Mr. Rajaratnam would fly overnight from New York to California, bunk at a Palo Alto motel that fit Needham's $90-a-night limit, and spend his days with chip executives.

Mr. Rajaratnam cut a more appealing figure than rival analysts. Gerald Taylor, a former finance chief at Applied Materials Inc., a manufacturer of chip-making machines, found most of them to be ill-informed "prima donnas, hot-shots." Mr. Rajaratnam, on the other hand, told stories of "a kind of Horatio Alger" upbringing in Sri Lanka. He told others of how, as Tamils in Sri Lanka, his family had to dodge bullets during the country's civil war.

The exotic tales sometimes glossed over the fact that Mr. Rajaratnam grew up in relative wealth. The son of a manager for sewing machine maker Singer Co., he attended college in England before going on to the University of Pennsylvania's prestigious Wharton School.
'Get the Number'

The stories added a dash of color to the sharp analysis and willingness to push hard that impressed chip executives.

When Applied Materials' Mr. Taylor was explaining a new technology called "chemical vapor deposition" in early 1987, one analyst at a big Wall Street bank fell asleep during his presentation. Mr. Rajaratnam, though, flew to Silicon Valley, met Mr. Taylor and company engineers, and touted the technology in reports to investors.

Mr. Rajaratnam also visited Applied's customers and myriad suppliers elsewhere, something few analysts did.

"He earned your respect because he did his homework," says Mr. Taylor, even though he only gave Mr. Rajaratnam the same information he offered to other analysts.

Sometimes, Mr. Rajaratnam's persistence raised alarms. "He was always trying to weasel more information out of you," says David Orgill, who was Applied's head of investor relations in the late 1980s and early 1990s.

All along, Mr. Rajaratnam worked to persuade executives at Applied and other companies to use Needham to help underwrite their stock offerings. Applied and chip makers including Atmel Corp., Oak Technology Inc. and Opti Inc. used Needham for that; so did Xilinx Corp., which picked Needham "because Raj promised to write extensive research reports," says the company's then-senior vice president of finance, Gordon Steel.

As Mr. Rajaratnam brought more business to the firm, he pushed for more power by touting job offers from bigger Wall Street banks. Mr. Needham made Mr. Rajaratnam the firm's director of research and then, in 1991, president.
[GeorgeNeedham, with wife, emphasized building contacts to Mr. Rajaratnam.] Patrick McMullan

George Needham, with wife, emphasized building contacts to Mr. Rajaratnam.

That year, an analyst named Gerald Fleming found out that while Mr. Rajaratnam had moved up the organizational chart, he was still plugged in. At a regular morning meeting with Mr. Rajaratnam and a roomful of colleagues on May 13, Mr. Fleming estimated Applied's earnings per share at 41 cents. A short time later, Mr. Rajaratnam told Mr. Fleming the projection was wrong. "A good source" told him the earnings would be 42 cents a share. When Applied announced its earnings later in the day, that was the number.

In the morning meeting the next day, Mr. Rajaratnam told Mr. Fleming, "I hired you to develop sources and get the number."

Mr. Rajaratnam's close ties to Applied led Mr. Needham to jokingly ask in meetings about what the "pillow talk" was telling him about the company's earnings, say three former Needham employees.

"Mr. Rajaratnam's interactions with representatives of Applied Materials were completely professional at all times, and any suggestion to the contrary is false," Mr. Dowd, his attorney, said.

Mr. Rajaratnam expanded his power at Needham by starting a hedge fund to invest in tech stocks in 1992, tapping many of his chip-industry contacts for investments. By the beginning of 1994, Mr. Rajaratnam owned 17% of the firm -- second only to Mr. Needham's 26% -- and was paid $1 million that year. He also made sure that new executives knew his stature at the firm: "I'm the boss here," he told one in his first week there. "George may be the guy who has his name on the door, but I'm the guy who makes things happen."
Taking Note

Mr. Rajaratnam became a charismatic leader, cementing a culture at the firm that was defined by testing personal limits.

After Mr. Rajaratnam boasted one day that there was no spicy sauce that he couldn't stomach, a colleague brought a bottle of habanero sauce called Armageddon to the trading desk. A crowd gathered to watch as Mr. Rajaratnam doused two chicken wings with it and chowed down. Within moments, Mr. Rajaratnam was crying and coughing uncontrollably. He ran to the bathroom and left work early. Mr. Rajaratnam laughed about it later.

By the early 1990s, Microsoft Corp.'s Windows software and fast, cheap microprocessors from Intel spawned a personal-computer boom that reinvigorated the chip industry that Mr. Rajaratnam had worked so assiduously to cultivate.

Intel in early 1994 was facing new threats from AMD over the brains used in PCs. AMD had just won a big court case against its larger rival, and investors were itching to find out whether AMD's 486 chips were eroding Intel's dominance.

View Full Image
Danielle Chiesi, a trader known for her tech-industry connections, surprised some Galleon employees by attending a party at Mr. Rajaratnam's house.
Getty Images

Danielle Chiesi, a trader known for her tech-industry connections, surprised some Galleon employees by attending a party at Mr. Rajaratnam's house.
Danielle Chiesi, a trader known for her tech-industry connections, surprised some Galleon employees by attending a party at Mr. Rajaratnam's house.
Danielle Chiesi, a trader known for her tech-industry connections, surprised some Galleon employees by attending a party at Mr. Rajaratnam's house.

On March 21 of that year, Mr. Rajaratnam was working the phones in his corner office overlooking Park Avenue and across a hallway from Needham's trading floor. It was two weeks before AMD would report earnings for its first fiscal quarter.

With a felt-tip pen, he wrote the date and two names in a spiral notebook. One was the first name of a manager at various tech companies in the 1990s, including AMD; the other was that of an engineer who worked at chip companies.

"Could do over $500 million," Mr. Rajaratnam noted farther down the first page. On an adjacent page, he wrote that the "goal," as of March 1, was "$484," then "New $515." Below that he wrote "486's" and "1 million units." In bold strokes across the two pages, he jotted other numbers, including prices for two versions of the 486 chip.

On April 4, AMD surprised Wall Street by announcing a record $513 million in revenue for its fiscal first quarter. The company said 486 chips sold more rapidly than expected early in the quarter, with sales surpassing 900,000 units.

A devoted note-taker, Mr. Rajaratnam kept a series of notebooks that recorded frequent conversations with people at tech companies, including Actel, Atmel and Alliance Semiconductor Inc. The pages were studded with the kind of information that analysts normally didn't get, the fruit of all those attentive visits to Silicon Valley.

It was the kind of work that enabled Mr. Rajaratnam to emerge from his office and be heard telling his top trader, Gary Rosenbach, that he had "the number" for earnings from Intel and AMD before they were announced.
Firms Try to Plug Leaks

Mr. Rajaratnam's aggressive tactics led several companies over the years to try to caulk leaks. Executives at chip makers Cirrus Logic and Silicon Valley Group, which both used Needham in stock offerings, grew frustrated with Mr. Rajaratnam badgering employees for tips.

In the mid-1990s, he offered to trade Cirrus executives proprietary information on other companies in exchange for Cirrus details. Similarly, Mr. Rajaratnam tried extracting information from Silicon Valley Group's then-chief executive, Papken Der Torossian, by saying he had information about orders from someone at an IBM plant in Vermont. Mr. Der Torossian says he turned him down.

Cirrus implemented a policy allowing just three top executives to talk with Mr. Rajaratnam and other analysts. Employment contracts were re-written to say that employees who violated that policy would be fired.
The Galleon Case

* Galleon Defendants Criticize Timing of Cases
* Rajaratnam, Chiesi Charged in Insider Case
* WSJ Topics: Raj Rajaratnam

At SVG, Mr. Der Torossian chastised employees for talking with Mr. Rajaratnam. Still, he says, while other analysts would "try to dig deep," Mr. Rajaratnam "was particularly clever, particularly good, and would get more information."

Around the same time, Intel held internal meetings to try to figure out how Mr. Rajaratnam's published reports were so uncannily accurate ahead of the company's earnings.

Concerns about Mr. Rajaratnam's activities helped cool Paine Webber's interest in buying Needham in 1995, according to a person with direct knowledge of negotiations. Soon, similar worries spurred complaints from some inside Needham.

Between 1993 and 1996, at least five Needham executives told Mr. Needham that they were worried about Mr. Rajaratnam's conduct, according to several people with knowledge of the situation. Needham brokerage clients complained to executives that Mr. Rajaratnam had potentially conflicting roles in the firm as president, fund manager, and sometime stock analyst. Normally, investment banks keep those areas separate to prevent clients' interests from clashing with the interests of bank-run funds.

Toward the end of 1996, the concerns fueled tensions between the executives and Mr. Rajaratnam. Meanwhile, Mr. Rajaratnam, who wanted to expand his hedge fund faster than Mr. Needham would allow, had been raising money for his own operation.

In November 1996, Mr. Needham told his employees that "I greatly regret to announce that Raj Rajaratnam, my friend and partner," would be leaving to form his own firm, ending a breakneck 11-year run at Needham.

Mr. Rajaratnam set up Galleon in a small office at Lexington Avenue and 57th Street, about a block from his old firm. He hired several former colleagues, including Mr. Rosenbach, the firm's head trader, and tapped Silicon Valley contacts for investment. Riding the wave of investors anxious to get in on the tech boom, Galleon was managing $800 million by the end of 1997, up from up from $250 million 12 months before.

Mr. Rajaratnam established a looser culture at his new firm. On Thursdays, employees could sign up to get massages at the office. Still, the game plan was the same as Needham: watch expenses closely and ferret out corporate information.

Not long after Galleon launched, Intel renewed its efforts to find out if someone at the company was leaking financial data to Mr. Rajaratnam. Intel installed cameras by a fax machine in its Santa Clara, Calif., headquarters. In March 1998, it recorded an employee named Roomy Khan sending handwritten notes and documents marked "Intel Confidential" to Mr. Rajaratnam.

Included were data on Intel chip orders from several dozen computer makers and selling prices of those chips. Combined, the information could be used to determine Intel's revenue for the quarter.

Ms. Khan left Intel soon after, and the company reported her to federal authorities. Soon, she had a new job. Mr. Rajaratnam hired her at Galleon.

She left Galleon after a year. In 2001, Ms. Khan agreed to plead guilty to wire-fraud charges -- and to cooperate in a probe of Mr. Rajaratnam. Ms. Khan served six months under house arrest, but prosecutors dropped the investigation, unable to prove that Mr. Rajaratnam traded on the information.
Galleon Sets Sail

Each day at Galleon started with a morning meeting. Traders and analysts streamed nearly all at once into a conference room trying to get there before start time -- 8:35 in recent years. A stickler for punctuality, Mr. Rajaratnam would sometimes fine latecomers $25.

Surrounded by his staff, Mr. Rajaratnam began the meeting by asking for an overview of the significant events of the day or week -- earnings announcements, a product launch, anything that might move stocks. Mr. Rajaratnam grilled them, sometimes sending analysts leafing through binders to find a figure, such as gross margins or the pricing of a product line.

He often got angry if an analyst couldn't confidently say whether a stock would go up or down. Mr. Rajaratnam always wanted "the variant view," his mantra for an opinion on a stock that was different from the rest of Wall Street. "If the market comes into your variant view, we make money," he would say.

At Galleon, Mr. Rajaratnam took his fondness for pranks and dares to a new level. When executives from stun-gun maker Taser International Inc. came to make an investment pitch around 2005, Mr. Rajaratnam offered $5,000 to anyone who'd agree to be shocked. Employees gathered around as two people propped up trader Keryn Limmer at the elbows and another person fired the weapon. Ms. Limmer's legs buckled beneath her from the shock. Ms. Limmer declined to comment.

That same year, employees arrived at Galleon's morning meeting to a surprise: In the conference room was a dwarf whom Mr. Rajaratnam introduced as an analyst hired to cover "small-cap" stocks. He was, in fact, an actor hired for an April Fool's Day gag.

By 2004, Mr. Rajaratnam was building a profile outside the hedge-fund world. He joined the board of the Harlem Children's Zone, an education nonprofit, and later raised about $7.5 million for victims of the South Asian tsunami. In January 2007, a list of celebrity donors honored Mr. Rajaratnam's philanthropy with a symphony performance at Lincoln Center.

By the time of the Super Bowl party a month later, Galleon and Mr. Rajaratnam appeared to be on top of the world. Approaching $7 billion under management, the firm moved into larger Manhattan offices at Madison Avenue and 57th Street, expanded into Asia and started a new fund based in California. Employees were convinced the firm would soon go public.

Yet all was not well. Mr. Rajaratnam was cooperating with a Securities and Exchange Commission investigation of his younger brother Rengan's now-defunct hedge fund, Sedna. No charges have been filed in that investigation, and Rengan Rajaratnam's lawyer declined to comment.

Raj Rajaratnam answered questions and provided reams of Sedna-related documents that raised investigators' suspicions about Galleon itself.

As the summer ended that year, the real shape of the threat was only beginning to emerge. On a hot September afternoon, Mr. Rajaratnam threw a party at his Greenwich, Conn., home for Galleon employees and their families -- a clambake with a cowboy theme, owing to the day's star attraction, country singer Kenny Rogers. Guests wore cowboy hats and sheriff's badges as they ate lobster while sitting on white folding chairs or red blankets with the Galleon logo.

Mr. Rajaratnam seemed relaxed, mingling with family and friends. One guest stuck out, a blonde woman in a black spaghetti-strap top, low-slung tangerine skirt and aviator sunglasses. A few guests knew her as Danielle Chiesi, a trader at a Bear Stearns hedge fund who had strong chip-industry connections. Some there wondered what Ms. Chiesi, accompanied by her mother, was doing at a Galleon party.

Mr. Rogers' hit song "The Gambler" was a favorite of Mr. Rajaratnam's: "You got to know when to hold 'em, know when to fold 'em, know when to walk away and know when to run...."

As Mr. Rogers sang, Ms. Chiesi sat in a folding chair; Mr. Rajaratnam stood a few paces behind.

Within a year federal agents would be recording their phone calls, pulling at loose threads in a web that had taken two decades to weave.

Avoid flying with American Airlines

2009-12-27T03:49:00.001-08:00

American Airlines Orange Juice Incident

NBC-Comcast: A TV Deal for the Post-TV Era

2009-12-05T09:37:00.000-08:00

Giant cable-TV provider Comcast has reached a deal with GE this morning to take over giant entertainment company NBC Universal. This means big changes ahead for 30 Rock's Jack Donaghy, who will have to adapt his core competencies from selling microwave ovens to pushing upgrades on DVR cable boxes. But what does it mean for you as a TV viewer?

In the short term, not much; probably not even that much in the medium term. (For starters, the deal faces an approval process which could take a year.) In the longer term, it says a few things about what the TV business is becoming, and what "TV" will mean in the future:

* For starters, it reminds us how small a part of the package what we recently knew as "TV"—free, over-the-air broadcast entertainment—now is. Comcast, a cable company whose interest is in finding new ways to sell viewers media, be it cable packages or movies on demand, is especially interested in NBCU's cable and theatrical properties. The Peacock, Jay Leno, The Office, et al., are more or less being thrown in the deal like complimentary floor mats in a new car. Keep in mind that one big reason GE bought NBC way back when was because broadcast TV was valued as a reliable cash cow. Not so much anymore.

* So what replaces "TV"? Well, more TV, but in different forms. The way mass entertainment worked for a long time was that there were genres that were defined by the machines and venues you used to experience them: a "movie" was what you saw on a big screen in a special building, "TV" was what you saw on a screen in your living room, "radio" came out of a box, etc. Now all the screens and means we have for distributing the same stuff render those distinctions increasingly moot. What Comcast and others envision is a world in which you buy the things you want to see and experience (TV shows, sporting events, movies), when you want to see them, on whichever device you prefer to use—and, of course, you pay and pay and pay for them.

* Speaking of pay and pay and pay: this deal is about online media, too, and the hope of getting you to pay for watching entertainment that way. Hulu is partly owned by NBC, and there's already been talk of making that a pay service.

* And the movies? This is more speculative, but there is increasing talk about monkeying with the "window"—that is, the amount of time you have to wait after a movie is in theaters before you can see it on demand, download it, rent it, buy it, etc. Take away the window, and the next Twilight movie becomes a high-profile Friday-night TV show. Now, there are plenty of people arguing for preserving the window, but it's already started to erode for some movies. And what studio might be especially aggressive about experimenting with it? Why, a troubled movie studio... like Universal.

* This is also speculative, but the NBC affiliates—already chafing at how they were thrown under the bus by the decision to give them a weaker news lead-in with Jay Leno—probably have even more reason to be nervous about their place, their importance and their leverage in the Comcast universe. Comcast is a cable company, and is probably not inclined to be too sentimental about the legacy or value of local TV stations.

* Jeff Zucker remains bulletproof. For now, anyway, Though the NBCU chief has been kicked around by TV critics and industry observers for the way he's run the flagship TV network into fourth place over the past decade, he'll stay in charge of the enterprise for the time being. And whatever you say about his programming acumen, the deal itself fits with his business vision, namely, that the TV business is now mainly the cable business.

Having said all this, is the merger a good deal? How the hell do I know? I work for Time Warner: you've seen how much we know about smart synergistic media mergers! Seriously, the thing I will say is that whether or not the Comcast deal specifically will be a success, it does at least grow out of the right sense of where entertainment media is heading. Of course, so, in a general sense, did the AOL and Time Warner merger, in that it recognized the importance of the Internet: the problem was deciding that AOL was the right company to take advantage of it, and grossly overvaluing AOL in the deal.

NBC and Comcast, in other words, probably have the right idea about where media is going. That doesn't mean this is the best means to get there. Now they'll just have to unravel the tangled cable of this deal, and see where it leads.

Toilet Paper History

2009-11-14T16:33:00.000-08:00

Linda Rodriguez
Toilet Paper History: How America Convinced the World to Wipe
by Linda Rodriguez

Since the dawn of time, people have found nifty ways to clean up after the bathroom act. The most common solution was simply to grab what was at hand: coconuts, shells, snow, moss, hay, leaves, grass, corncobs, sheep’s wool—and, later, thanks to the printing press—newspapers, magazines, and pages of books. The ancient Greeks used clay and stone. The Romans, sponges and salt water. But the idea of a commercial product designed solely to wipe one’s bum? That started about 150 years ago, right here in the U.S.A. In less than a century, Uncle Sam’s marketing genius turned something disposable into something indispensable.
How Toilet Paper Got on a Roll

toilet-paper-1The first products designed specifically to wipe one’s nethers were aloe-infused sheets of manila hemp dispensed from Kleenex-like boxes. They were invented in 1857 by a New York entrepreneur named Joseph Gayetty, who claimed his sheets prevented hemorrhoids. Gayetty was so proud of his therapeutic bathroom paper that he had his name printed on each sheet. But his success was limited. Americans soon grew accustomed to wiping with the Sears Roebuck catalog, and they saw no need to spend money on something that came in the mail for free.

Toilet paper took its next leap forward in 1890, when two brothers named Clarence and E. Irvin Scott popularized the concept of toilet paper on a roll. The Scotts’ brand became more successful than Gayetty’s medicated wipes, in part because they built a steady trade selling toilet paper to hotels and drugstores. But it was still an uphill battle to get the public to openly buy the product, largely because Americans remained embarrassed by bodily functions. In fact, the Scott brothers were so ashamed of the nature of their work that they didn’t take proper credit for their innovation until 1902.

“No one wanted to ask for it by name,” says Dave Praeger, author of Poop Culture: How America Is Shaped by Its Grossest National Product. “It was so taboo that you couldn’t even talk about the product.” By 1930, the German paper company Hakle began using the tag line, “Ask for a roll of Hakle and you won’t have to say toilet paper!”

As time passed, toilet tissues slowly became an American staple. But widespread acceptance of the product didn’t officially occur until a new technology demanded it. At the end of the 19th century, more and more homes were being built with sit-down flush toilets tied to indoor plumbing systems. And because people required a product that could be flushed away with minimal damage to the pipes, corncobs and moss no longer cut it. In no time, toilet paper ads boasted that the product was recommended by both doctors and plumbers.
The Strength of Going Soft

In the early 1900s, toilet paper was still being marketed as a medicinal item. But in 1928, the Hoberg Paper Company tried a different tack. On the advice of its ad men, the company introduced a brand called Charmin and fitted the product with a feminine logo that depicted a beautiful woman. The genius of the campaign was that by evincing softness and femininity, the company could avoid talking about toilet paper’s actual purpose. Charmin was enormously successful, and the tactic helped the brand survive the Great Depression. (It also helped that, in 1932, Charmin began marketing economy-size packs of four rolls.) Decades later, the dainty ladies were replaced with babies and bear cubs—advertising vehicles that still stock the aisles today.

By the 1970s, America could no longer conceive of life without toilet paper. Case in point: In December 1973, Tonight Show host Johnny Carson joked about a toilet paper shortage during his opening monologue. But America didn’t laugh. Instead, TV watchers across the country ran out to their local grocery stores and bought up as much of the stuff as they could. In 1978, a TV Guide poll named Mr. Whipple—the affable grocer who implored customers, “Please don’t squeeze the Charmin”—the third best-known man in America, behind former President Richard Nixon and the Rev. Billy Graham.
Currently, the United States spends more than $6 billion a year on toilet tissue—more than any other nation in the world. Americans, on average, use 57 squares a day and 50 lbs. a year.

Even still, the toilet paper market in the United States has largely plateaued. The real growth in the industry is happening in developing countries. There, it’s booming. Toilet paper revenues in Brazil alone have more than doubled since 2004. The radical upswing in sales is believed to be driven by a combination of changing demographics, social expectations, and disposable income.

“The spread of globalization can kind of be measured by the spread of Western bathroom practices,” says Praeger. When average citizens in a country start buying toilet paper, wealth and consumerism have arrived. It signifies that people not only have extra cash to spend, but they’ve also come under the influence of Western marketing.
America Without Toilet Paper

Even as the markets boom in developing nations, toilet paper manufacturers find themselves needing to charge more per roll to make a profit. That’s because production costs are rising. During the past few years, pulp has become more expensive, energy costs are rising, and even water is becoming scarce. Toilet paper companies may need to keep hiking up their prices. The question is, if toilet paper becomes a luxury item, can Americans live without it?

The truth is that we did live without it, for a very long time. And even now, a lot of people do. In Japan, the Washlet—a toilet that comes equipped with a bidet and an air-blower—is growing increasingly popular. And all over the world, water remains one of the most common methods of self-cleaning. Many places in India, the Middle East, and Asia, for instance, still depend on a bucket and a spigot. But as our economy continues to circle the drain, will Americans part with their beloved toilet paper in order to adopt more money-saving measures? Or will we keep flushing our cash away? Praeger, for one, believes a toilet-paper apocalypse is hardly likely. After all, the American marketing machine is a powerful thing.

Human face of Dirt Cheap moves on — as competitor

2009-11-02T06:05:00.000-08:00

By Phil O'Connor
ST. LOUIS POST-DISPATCH
Monday, Nov. 02 2009
His family's legacy in the St. Louis business community traces back to 1812,
when his great-great-grandfather founded a pretzel shop near what is now the
south leg of the Gateway Arch.

But it was his television appearances, often alongside an oversized furry
yellow chicken that chirped "Cheap, cheap, fun, fun," for which Fred Teutenberg
may be best known. Those corny TV spots, regularly laced with low-brow humor,
made Dirt Cheap discount liquor and cigarette stores a hit, both as a business
and as a recognizable brand across the metro area.

Now the man, who not long ago was reminding viewers that "the more she drinks,
the better you look," has moved on. After spending the last 16 years helping
establish Dirt Cheap and nurturing its growth to 14 stores, Teutenberg is
starting a new line of liquor stores under a new name.

While he's excited about his new venture, Teutenberg declined to discuss how he
feels about competing against the company he helped build. Nor does he care to
discuss his departure from Dirt Cheap, including reports that he was forced
out.

"No use going into the nitty-gritty, but we had a parting of the ways," said
Teutenberg, who was the company's president.

Dirt Cheap is controlled by members of the Paul Taylor family. Taylor founded
U-Gas, which operates 15 gas and convenience stores in the St. Louis area.
Through an attorney, company officials declined comment about Teutenberg and
his plans. In fact, both sides signed a legal agreement that prohibits them
from discussing the split.

Already, it's clear Teutenberg won't stray too far from the strategy that made
Dirt Cheap such a success. The name — Fred's Cheapo Depot — is the first
giveaway. The stores also will carry many of the same product lines as Dirt
Cheap.

But there will be some changes. The Cheapo Depot stores will have a retro
atmosphere that harken back to a time when, as Teutenberg describes it, "people
were more comfortable drinking and smoking in public and not so politically
correct."

Competitors, friends and family describe Teutenberg as a kind-hearted
workaholic with a passion for his customers. At 70 years old, he has no
intention of retiring.

Instead, he is busy working on two new stores he hopes to open by the end of
the year. One store will be in downtown St. Louis, the other in South County.

"It's starting from scratch," said Stacey Page, a former Dirt Cheap employee
who is vice president and chief financial officer of the new stores. "But
there's a lot of people who care about Fred and want him to be successful."

Teutenberg says he's ready for the challenge. And besides, it's not the first
time he has had to start over.

HARD KNOCKS

For five generations, the Teutenbergs operated several well-known bakeries and
restaurants in the area, making it at one time the oldest continually operating
business in the Midwest.

But with creditors closing in, it was Fred Teutenberg who made the decision to
close the last of the restaurants in 1991.

"It was no longer economically viable," he said. "We couldn't go on."

The family sold their home in Ladue and moved to a smaller house in Clayton.
"It's fair to say we struggled," he said.

Teutenberg's wife of 42 years recalled the months after the restaurants closed
as an introspective period for her husband. "It was time when he figured out he
wanted to go in a new direction," Janet Teutenberg said.

About that time, cigarette outlet shops were opening across the country that
took advantage of tax variances among neighboring jurisdictions to sell their
products at a lower price.

Teutenberg went into business with Taylor, a friend he had been classmates with
in high school and college. The first Dirt Cheap store opened in January 1993
in a strip shopping center that Taylor's mother owned at Highway 30 and Valley
Dell Drive in Fenton. They hoped Jefferson County's lower cigarette taxes would
lure customers from St. Louis County seeking cheaper alternatives.

The second and third stores opened later that year at Telegraph and Forder
roads, and at Dunn and Bellefontaine roads, locations aimed at drawing Illinois
buyers. Buying in bulk, selling at a discount and operating on thinner margins,
the business took off. Then came the television spots.

Teutenberg offered customers "the last refuge for the persecuted smoker." His
reminder to "be careful out there" became a staple. The chicken arrived when
the store needed a logo for its own line of beer.

"We struck some kind of chord," Teutenberg said.

Haim Mano, an associate professor of marketing at the University of
Missouri-St. Louis, said he often discusses the Dirt Cheap ads in classes.
Despite their low-value production, the ads effectively use humor to draw in
viewers and boost brand awareness.

"The fact that they've been going on for so many years, and we talk about them
and love to watch them even though we hate them, means they're doing something
right," Mano said.

A television commercial for Teutenberg's new stores — minus some of the
trademark lines of the previous ads but featuring a cartoon version of
Teutenberg — began running earlier this month. On the new store's website,
Teutenberg wrote, "We have ditched the pesky chicken and the big company
bureaucracy and left them behind."

FRUGALITY LEARNED

Friends and business associates say Teutenberg's common-man approach isn't just
a marketing ploy.

Teutenberg grew up in Webster Groves and attended public schools before
graduating from Washington University. Despite their success, his parents were
frugal, influenced by the Depression and World War II, a trait they passed on
to their son, according to his wife.

From his father, Teutenberg said he learned to work hard, not waste money, be
diligent and treat everyone fairly. But he said one lesson didn't stick.

"He always said, 'You have your business so you can live, you don't live so you
can have your business,'" Teutenberg said. "He might accuse me of living too
much for my business. But I think he would be proud of me."

Along the way, Teutenberg said he has learned that karma and luck have as much
to do with success as anything. "I know people in business who worked hard and
were successful and other people who worked just as hard and weren't. Working
hard, per se, doesn't guarantee it."

The couple, who have four grown children, now live in a modest-size brick house
with an American flag out front on a quiet street in Brentwood. Teutenberg
drives a 4-year-old Jeep Cherokee. He has no real hobbies, belongs to no
country clubs. He sleeps only a few hours a night, smokes a pack and half of
Kent Lights a day, and relaxes with Beefeaters gin and a good book.

He wears rumpled, off-the-rack suits and rarely dons a tie.

"It's who he is," said Jon Rand, president of Discount Smoke Shops. "Fred could
afford as nice a suit as anybody, but that's not his image. He'll wear a suit
every day, but it's a common man's suit, isn't it?"

REFLECTING ON LEGACY

If Teutenberg ever had any guilt about not passing the family restaurant
business on to his children, it has been alleviated.

Three years ago, his youngest daughter put the family name on a restaurant she
opened with the help of relatives at Seventh and Olive streets. Joanne
Teutenberg, 26, believes her father always had regrets about leaving the
restaurant business even though it opened up other opportunities for him.

"I think it was nice for him to be able to reconnect with that when we reopened
down here," she said.

Taking a break at a table in the restaurant's smoking section last week,
Teutenberg was asked to reflect on his family's legacy and his place in it. He
doesn't worry that he might one day be best remembered for his corny
commercials.

"I don't think about that kind of stuff at all," he said in his smoke-cured
voice. "That stuff's for presidents."

His competitor, Rand, suggested what he considered a most appropriate epitaph —
Fred Teutenberg: "He loved his customers."

Why Redbox Terrifies Hollywood

2009-10-27T11:05:00.000-07:00

Why Redbox Terrifies Hollywood
Dorothy Pomerantz, 10.26.09, 4:15 PM ET

LOS ANGELES -

It's rare that a new business comes along and freaks Hollywood out quite as much as Redbox has. The video kiosk was born out of McDonald's' new business development project, which launched such unsuccessful ventures as Ticktok Easy Shop, a convenience store in a vending machine.

But in 2004, Redbox took off. The kiosks are incredibly easy to use and movies cost just $1 per night, less than a rental at Blockbuster or a video on demand. Redbox is now owned by Washington-based Coinstar.

At first, Hollywood seemed happy to indulge the little start-up, but as Redbox has exploded (there are 21,000 kiosks at 7-11s and supermarkets across the country), studios have taken evasive actions. Universal, Fox and Warner Bros. now refuse to distribute DVDs to Redbox when they are first released. Redbox employees have been reduced to raiding local Target and Wal-Mart stores to stock kiosks. (See "Red Menace.")

President Mitch Lowe insists Redbox can keep buying at retail for as long as it takes the studios to understand that with DVD sales continuing to plummet (down 14% for the third quarter of 2009), Redbox might actually be able to help studios. Lowe sat down with Forbes to talk about Hollywood's fears, lawsuits and Redbox's plans for growth.

Forbes: What's your relationship with Hollywood like right now?

Lowe: It's misunderstood. Half of the studios love us and get the opportunity. We do a lot for our partner studios. We promote theatrical releases at no extra charge to the studios. There's a group who get that we're not cannibalistic. Our users are also film buyers. Studios that don't get it aren't basing their feelings on facts. We're trying to be patient. At some point they'll turn around.

But it's understandable that the studios would prefer someone buy a DVD rather than rent it for $1.

The studios say Redbox is hurting sales, but we're just a convenient scapegoat. People's shelves are full of movies. They're being more selective about what they're purchasing. And with our huge presence we can help promote films. For example: Management [staring Jennifer Aniston]. It didn't do well in theaters, but we promoted it heavily, and it made more in the first week in rental than it did during its entire theatrical run.

Do you offer the studios revenue sharing if they work with you?

Yes and copy depth, which means there is a minimum number of DVDs we will buy. Also, we only sell used copies of movies from studios that don't work with us. We destroy old copies from our partner studios.

And you're buying movies at retail from three studios right now?

We have a huge workforce out there acquiring product. We've perfected our methods with Universal titles so that by Friday we have machines that are fully stocked.

Isn't that kind of inefficient?

It is. We'd rather be paying the studios. We just want the same deal Blockbuster gets. We're prepared to continue doing this as long as it takes. We have the ability to open one kiosk per hour. The only way the studios can stop us is if they don't stock stores like Target and Wal-Mart.

Why not just charge a little more and give the studios more money per rental?

We pay the same money for the movies as Blockbuster--sometimes even more. So why shouldn't we charge less to rent? Maybe the question should be: Why doesn't Blockbuster charge less? The most amazing way to deliver movies to people is where they shop. We cut out real estate costs, and we've come up with a much more effective model.

So you think the studios are being emotional and irrational?

Historically, they have been. I dare them to show that we're cannibalizing their sales. Not one studio has gone public with any proof of that. They just assume that renting at a low cost hurts their sales.

What will you do when movie distribution moves to the Internet?

We survey our customers all the time to find out what they want. They're telling us they want more stuff like Blu-ray, catalog films and digital downloads. We are testing Blu-ray discs at different price points. In two markets we're testing games.

But isn't there a limit to how many discs a machine can hold? How much stuff can you add?

Each machine holds about 700 discs. We're trying to maximize space. In many locations we have two or three machines. It's a great way to improve service. One of the biggest challenges we have is lines. And when we have more machines, we can have more inventory. Initially we were thrilled to have lines, but now it's become something we have to figure out.

'Friends' of Facebook: Studio Marketers

2009-10-09T05:36:00.000-07:00

"Couples Retreat” doesn’t hit theaters until Friday, and it hasn’t had any festival exposure to speak of. But the Vince Vaughn comedy already has more than 13,000 “fans” on Facebook grabbing production stills and video clips provided by Universal.
Better still, it’s got the fans taking all that stuff back to their own pages to share with their friends.
With the youthful, moviegoing audience watching less TV than ever, studio marketers have begun to aggressively mine what has quickly become their preferred media platform – the web.
These days pretty much every major release now has promotional ties to Facebook, MySpace, Twitter or the other online watering holes where movie-watchers congregate. (The marketers' preferred social network? Find out here.)
“This is a huge part of our marketing now … creating an account and building a fan base -- and a lot of what we’re able to do is free,” said Nicole Butte, VP of new media for Focus Features, who recently oversaw a social networking campaign for the Tim Burton-produced animated film “9.”
Huge is right.
Paramount's "Transformers: Revenge of the Fallen" Facebook page has more than 1 million fans, who will receive notifications of the title's Oct. 20 DVD and Blu-ray release.
Last weekend's box-office champ, "Zombieland," has more than 250,000 fans -- 10,000 of which have signed up to play a Java-based game that lets them "kill zombies all over the Internet" with objects including banjos. As with most movie game apps, those who sign up to play not only agree to share profile data, they also post a promotion for the film on their own Facebook wall every time they visit a Sony-sponsored site that supports the online game.
Meanwhile, for its micro-budgeted horror film "Paranormal Activity," Paramount hired San Diego-based boutique marketing firm Eventful to, among other things, create a social media campaign built around driving users to the film's site so that they can "demand" that the movie open wide. As of Thursday, "Paranormal" was one of Twitter's top 10 "trending topics."
As for “9,” an aggressive Facebook campaign allowed the studio to frame the movie’s mysterious subject matter and characters for a core group of film enthusiasts. Even better, the smaller group virally disseminated the information they’d gathered to a broader audience – long before expensive TV ads began to run.
Indeed, the intersection between social media and the movie business became apparent this summer, when Universal’s “Bruno” got off to a hot Friday-night start. Unfortunately, that film also highlighted the downside of the new alliance when it cratered precipitously the following day and never recovered -- the victim of same unfavorable, real-time tweeting.
Studio marketers at the time gave birth to a new phrase, the “Twitter Effect,” to explain how dissatisfied moviegoers armed with smart phones and social networks were torpedoing films even before they left the theater.
According to information released last week by former New Line interactive marketing guru Gordon Paddison, who is now an industry consultant, 73 percent of 4,000 moviegoers in a recent study have established profiles on social media networks. The study was underwrittten Google, AOL, Microsoft, Fandango, Facebook, Yahoo and MovieTIckets.com.
“This is just where the audience is now,” said David Singh, executive VP of creative content for Disney of the use of social networks by studio marketers. “Something like 70-80 percent of frequent movie-goers under 25 visit Facebook eight or nine times a day.”
Singh said Disney started experimenting with MySpace for the launch of dance film “Step Up” back in the summer of 2006, a time when the News Corp.-owned property was still the dominant social media platform.
In the spring of 2008, he said the studio became enthralled with Facebook, which, despite the growth in popularity of Twitter, remains the social media network of choice for movie marketers, based mainly on its robust content-sharing features.
At that time, Disney bought out Facebook’s gift store and filled it with plush toys from the Pixar hit “Wall-E” -- only to watch the offering become so popular that the site crashed.
Today, pretty much every Disney release has a robust Facebook marketing component, with the studio’s interactive marketing team spending what Singh estimates to be about 40 percent of its time and resources on social media endeavors.
In June, for example, before romantic comedy “The Proposal” embarked on a theatrical release that would ultimately net $290.4 million worldwide and counting, Singh’s team posted a “how well do you know me” quiz on the Sandra Bullock film’s Facebook page.
The movie’s 4,000-plus “fans” soon dispersed the quiz all over the network. Ultimately, more than 400,000 took the quiz, clicking through and exposing themselves to all sorts of information about “The Proposal” in the process.
“That’s really the power of social media,” Singh said. “You can build on someone’s natural excitement for something and get them to evangelize on behalf of your film.”
Indeed, the number of fans who actually come to a Facebook page are “just the tip of the iceberg,” Focus marketing president David Brooks told TheWrap. “People share what they found with the world. It’s way more interactive than the usual movie fan page.”
Brooks wouldn’t reveal how much money Focus is spending on social media at this point. “It’s not a lot of money,” he said. “But it’s a significant part of our plan.”
Of course, there is a downside to this bargain marketing, as “Bruno” proved.
Much like the early days of harnessing nuclear power, studios admit that they’re still not always in control of the online forums they establish.
In fact, things can turn bad. Fast.
One studio marketing exec, who spoke to TheWrap on the day prior to a recent major release said he was “fantastically thrilled” with the results of the film’s MySpace and Facebook campaigns.
His viewpoint changed dramatically when the film’s September premiere tanked.
“We hyped the s--- out of it on MySpace and Facebook, and as soon as the movie was made available to the public, that turned on us,” he said. “We saw it happening hour by hour -- people were telling each other on our Facebook page how BAD they thought the movie was.’
“As soon as the product is available in the marketplace,” he said, “the same campaign that you created to let everyone talk about it can kill you.”
Disney’s Singh agreed. “Audiences on these social networks tend to be really savvy,” he said. “They don’t want to be marketed to in the traditional sense. As we’ve seen, positive feedback can spread like crazy, but so can negative feedback.”

How Self-Made Titans Launched Their Empires

2009-06-19T19:29:00.000-07:00

Scan the Forbes list of the world's wealthiest people and you'll find moguls from startlingly humble origins
Take John Paul DeJoria--owner of Paul Mitchell Systems, a hair products company, and Partron Spritis, a high-end tequila brand--who started out as a door-to-door salesman in Los Angeles at age 9. First he sold Christmas cards but soon moved to newspapers and other subscriptions. After a short stint in the navy, he returned to his salesman roots, selling encyclopedias.
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I haven't been recognized yet (but I'm hopeful). Rowling and Carnegie both came from near where my mother was born. Carnegie at least gave up a large amount of his wealth so others could benefit from....

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In 1980, with just $700 and an iron will, DeJoria and friend Paul Mitchell, a hairdresser, decided to launch a new line of shampoo and other hair care products, based on a new formula Mitchell had developed. In the early months, when he wasn't pounding on salon doors and told to bug off, DeJorira bought supplies on credit and lived in his car. "Having sold other products door-to-door, I understood that rejection was just part of the process," says DeJoria, 65.

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Without ever borrowing a dime, Paul Mitchell Systems became the largest salon-only hair care company in the U.S., with products in 10% of salons across the country. Then came his (and partner Martin Crowley's) agave assault with Patron. DeJoria currently owns a 51% stake in Paul Mitchell Systems and 70% of Patron. At last count, DeJoria's net worth was $2.5 billion.

Gift for gab helped Jeffrey Katzenberg, a high school-educated Manhattanite, climb to the top of the entertainment game. While he didn't launch a business on a shoestring, Katzenberg did spend decades building a network that would eventually help him launch one of the most storied movie studios of all time.

Katzenberg began honing his skills at age 15 as a volunteer in John Lindsay's campaign for mayor of New York in 1965; Lindsay won, and Katzenberg stayed on, foregoing college for the snap and crackle of politics. Through a connection at Lindsay' office, he later met Barry Diller, then president of Paramount, who invited him to Los Angeles to work as his assistant. "No one did more for my career than Barry," says Katzenberg, 58. "He taught me the entertainment business--not just the fun parts, but the not so fun parts that you need to learn in order to be successful."

During his 11 years at Paramount, Katzenberg also befriended Michael Eisner, then chief executive of the movie studio. When Eisner left Paramount for Disney ( DIS - news - people ) in 1984, he took Katzenberg with him, and there they pumped out hits like The Little Mermaid, Beauty and the Beast and Aladdin. After a falling out with Eisner in 1994, Katzenberg left to launch his own studio, DreamWorks SKG, with the likes of Steven Spielberg and David Geffen. With partners like that, little wonder this guy is worth $750 million.

Old-fashioned bartering helped put Kirk Kerkorian, farmer's son and future Wall Street titan, on the map. In the late 1930s, Kerkorian, who is 91, offered to look after famous female aviator Pancho Barnes' cattle in return for flying lessons. During World War II, he took a job with the Royal Air Force transporting planes from their Canadian factory to England for $1,000 per month--an especially treacherous journey, as the planes weren't designed to withstand the long trip or the harsh weather over the North Atlantic.

With savings from his wartime job, Kerkorian purchased Trans International Airlines for $60,000 in 1947. (It is unclear whether he needed additional financing.) He later sold it to Transamerica for $104 million in stock, used to fuel further investments. His private investment firm, Tracinda, now owns 39% of MGM Mirage ( MGM - news - people ), down from 53% in May.

Billionaire financier George Soros, 78, socked away a few pennies to jump-start his entrepreneurial career. Born in Hungary in 1930, Soros and his parents fled the Nazis and landed in England. After putting himself through the London School of Economics while working as a railway porter and waiter, Soros moved to the U.S. in 1956 and found work at several investment firms, including Arnhold and S. Bleichroeder, where he worked his way up to vice president. After running several offshore investment funds, he launched his own investment firm with colleague Jim Rogers. Their Soros Fund began with just $12 million under management (it's unclear how much of that was their own capital); it has since grown into the multibillion-dollar Quantum Fund. Soros' current net worth: about $11 billion

Sometimes sheer talent and persistence is enough. As a single mother on welfare in Scotland, J.K. Rowling, 43, began writing the first Harry Potter novel in Edinburgh cafés whenever she could get her infant daughter to sleep. After being rejected by 12 publishing houses, Bloomsbury, a small publisher in London, offered an advance of 1,500 pounds (about $2,400)--even while one its editors, Barry Cunningham, advised Rowling to get a day job.

Good thing she didn't listen: The following year, U.S. publishing rights to the first Potter book sold for $105,000. Rowling, who is now worth around $1 billion, has since moved nearly 400 million copies worldwide, and is the only author on our list.

Interview: Mark Cuban

2009-05-28T10:38:00.000-07:00

Published on May 27, 2009
by Peter Kafka

mark-cuban

Mark Cuban was lucky enough to make billions on Internet video during the Web 1.0 bubble and smart enough to cash out before it burst. He’s spent a bunch of that money on high-profile purchases like a basketball team and a Gulfstream. But much of his investment and energy since then has been directed… away from Web video and toward conventional video, in the form of movies and television.

Cuban’s portfolio companies make movies and television shows and distribute them to movie theaters and television sets. And he’s been loudly skeptical about the possibilities of Web video outlets like YouTube–around the time that Google plunked down $1.6 billion on the site, he declared that “only a moron” would want to invest in it. Time to see if he still feels the same way.

* Everyone says video on the Internet is great, but we spend 99 percent of our time watching TV, and that’s in large part because of HD TV.
* Walt: 99 percent?
* Mark: Well, I don’t know. But it’s a lot.
* Kara: Talk about Internet video. How do you look at it? Mark: It’s a real disappointment to see how far Internet video has come. We were working on hotspots, advertising standards, multicasting 10 years ago. Nothing happened. You can go on and on and on.
* Walt: Why is that? Mark: I have no idea. If you say one thing, it’s that when Google (GOOG) bought YouTube, they didn’t think about making money right away; the focus was on ubiquity, and because no one paid attention, that’s what happened. Now you can’t fight them; it’s like Microsoft (MSFT). You can’t do anything on video these days unless you work with YouTube.
* There are no hits on the Web. So the only way it works is if you can create a platform like YouTube. Hulu could do that, but they have big pockets to appease.
* Kara: No hits? Mark: There are hits. But they’re one-off hits. On TV, there’re hits, but they’re wrong 95 percent of the time, and there are 300-plus competitors. On the Internet, there are unlimited competitors, and YouTube subsidizes bandwidth. So the real cost is marketing. How do you stand out?

* Mark: Video for the Web has become a testing ground for mediums that actually have revenue.
* Kara: So what would the model have been had you bought YouTube? Mark: Like I said, I wouldn’t have bought it. They hid behind the DMCA, and they have huge copyright problems, and it’s a disaster waiting to happen. We still don’t know what’s going to happen with the Viacom (VIA) suit. And they’re paying for all that bandwidth.
* Mark: And by the way, if anything happens to Google, what happens to the whole video space? Everything gets flipped on its head. If you have to pay for it, maybe your kids stop posting videos of their bands.
* Discussion of bandwidth that I’m not catching entirely. But essentially, Mark is saying that the cable companies will have new bandwidth to play with, but they’re not going to necessarily hand it over to the Internet. So everyone in this room is trying to create all these apps and services to shove through one pipe, and the cable guys aren’t going to give them more room.
* Kara: Where do you see TV going? Mark: Television means different things now. Broadcast is one thing. Cable is another, and that’s healthy, because of that subscription business, and they’re never going to give up those subscription dollars for Internet nickels. We need to remember that the Internet is a staid platform. There has been very little innovation. It’s like the ’80s, when we were fighting between different word processing software. There’s only evolution, not revolution. But TV… you could have real innovation there.
* Kara: We’ve been hearing promises of innovation and interactivity for a long time. Mark: There’s been a problem with standards, and that needs to get fixed.
* Walt still wants to watch “Star Trek” on demand. When will that happen? Mark correctly points out that this is partly a programming issue, partly a technology issue. Tech is “easy.” Programming and windows are another story.
* Kara: OK. What do you think about the Internet? Yahoo?
* Mark: Yahoo (YHOO), Google, MySpace, Facebook, they’re all the same: “One hit and a lot of decent products that are second, third, fourth place, and living off the gravy train.” That’s been the tradition since Microsoft and Windows. They’re all the same.
* Kara: Twitter? Mark: The problem with them isn’t a business model. They have 10,000 ways to make money, and everyone in this room can come up with one. They’re just having fun and teasing you guys. I told Facebook, via Jim Breyer, that all those real names they provide via Facebook Connect and that they should charge for it. I think Twitter has similar possibilities.
* Walt points out that people do pay for some Web video, like baseball. Mark: Yup. I’m not saying you can’t have some number of Web users having a great experience. But there’s a limit to the number of people that can be there because there’s limited space, too congested. It’s like having a nice car on the 405. At a certain point it doesn’t matter how nice the car is, because there’s too much traffic. It’s like what Warren Buffet says: First come the innovators, then the imitators, then the idiots. Also: “There’s always going to be someone trying to rush the fat kid to the buffet.”
* Discussion of tiered pricing. Going to have it on mobile, and we should have the same thing on the Internet. What about content? Yes, we have that already.
* Kara and Walt: Tell us about your fight with the SEC? Mark: No. [Pause] “When someone in the government wants you, it’s not a good place to be. You don’t want to be someone’s skin on the wall.” Kara: “Do you know how it’s going to turn out”? Mark: “Yes.”
* Mark walks through how he inverts/breaks/changes traditional windows when it comes to movies, VOD, etc. Very interesting. Will have to come back to it, unfortunately.
* Walt: Does Internet help you run your basketball team? Mark: Yup: We watch video of prospects on YouTube. I follow free agent prospects on Twitter. I can accumulate information on searches, the real-time net is very helpful for the Mavericks. My Icerocket engine helps me track down info.
* Q&A: What do you think of 3-D? Mark: I think it has a great future. Cost is coming down, it’s a differentiated experience. We can put a huge digital screen in American Airlines Center and do 3-D with glasses. Screens are getting so big and prices are falling so quickly that people are changing the way they consume entertainment, and 3-D is a big part of that.
* Gary Shapiro from CEA has a confusing question. Ah. What should we do with the broadcast TV spectrum since 90 percent of people have cable? Mark: We should sell it.
* Kara wants investment tips. Mark talks about various start-ups he’s in, like some sort of mobile/SMS play. But I tell people who are in college today or 10 years from now that are going to look at the Internet and laugh. I think where it’s at is technology geared toward personal health. Walt: Are you investing? Mark: Looking. The problem is I don’t understand any of this stuff.

*
Mark Cuban is back at D7.Mark Cuban is back at D7.
*
Walt and Kara know that Mark Cuban is not a man of few words.Walt and Kara know that Mark Cuban is not a man of few words.

Malls: R.I.P.

2009-05-22T05:58:00.000-07:00

This same spasm in American society that's killing tract homes and reduced car consumption is hollowing out another infamous eyesore of the land: the shopping mall.

It has profound consequences both on a cultural level and an economic level

WSJ has the grim story:

On the low-income east side of Charlotte, N.C., the 1.1-million-square-foot Eastland Mall recently lost a slew of key tenants, including a Dillard's and, next month, a Sears. Sales per square foot at the venue fell to $210 in 2008 from $288 in 2001.

...

But the long recession is helping to empty out the promenades. Some analysts estimate that the number of so-called "dead malls" -- centers debilitated by anemic sales and high vacancy rates -- will swell to more than 100 by the end of this year.

In the 12 months ended March 31, U.S. malls collectively posted a 6.5% decline in tenants' same-store sales, according to Green Street Advisors Inc., a real-estate consulting firm. The recent slump was led by an average 7.3% sales drop at Simon Property Group Inc., the operator with the largest number of mall locations.

At the moment, most malls are healthy. As it says, only 100 malls are really considered to be dead (sales per square foot of $250 is the cutoff). But the trends are against malls, even if the economy stabilizes, due to the internet, higher gas prices, social networking (a substitute for the malls food court, which means goodbye mall movies), and the permanent reduction in household credit.

Authors@Google: Peter Schiff

2009-05-21T12:31:00.000-07:00

The Authors@Google program welcomed Peter Schiff to Google's NY office to discuss his book, "Crash Proof: How to Profit from the Coming Economic Collapse".

"Peter Schiff is an American economic commentator, author and licensed stock broker who currently serves as president of Euro Pacific Capital Inc., a fully accredited brokerage firm based in Darien, Connecticut."

This event took place on April 2, 2009.

Ray Anderson on the business logic of sustainability

2009-05-21T12:12:00.000-07:00

http://www.ted.com At his carpet company, Ray Anderson has increased sales and doubled profits while turning the traditional "take / make / waste" industrial system on its head. In a gentle, understated way, he shares a powerful vision for sustainable commerce.

Buffett Restructures Derivatives Bet To Take On More Risk

2009-05-18T13:24:00.000-07:00

By RICHARD WILNER

May 17, 2009

WHEN Berkshire Hathaway shareholders descended on Omaha earlier this month for their annual meeting -- the value investor's equivalent of a pilgrimage to Mecca -- one of the hottest topics of conversation was the $37.1 billion bet that the company had made on options tied to global stock prices two years ago.

Although Warren Buffett is famous for his portrayal of derivatives as "weapons of mass destruction," that didn't stop him from selling one type of derivative -- "put" options on the S&P 500 and other major indices -- an investment that is now heavily underwater after the dramatic downturn in the stock market since mid-2007.

During the conference, Berkshire executives let it be known that the firm had recently restructured its option positions, making new bets that would, in essence, pay off if stocks rebounded about 15 percent over the next decade -- instead of the original contracts, which would have required the S&P to climb over 70 percent in the next 18 years to break even.

In recent weeks the chatter along the derivatives "rat line" has been full of rumors about the new Berkshire trades. According to traders active in the options pit, when Berkshire sought to restructure its bets (essentially buying back the multi-decade options it was short and selling new, shorter-duration options that are closer to current stock price levels) it could do so only by paying a heavy cost, since the original positions were so deep in the red.

According to these sources, this restructuring was accomplished on a "dollar neutral" basis, meaning that Berkshire didn't have to pony up cash to do the trade.

Like a gambler doubling down on credit, Berkshire instead purportedly sold a significantly larger number of short-dated contracts than the original transaction -- meaning that the potential risk of loss to Buffet and his shareholders over the next 10 years has actually increased, but only if the markets were to decline from current levels and remain there.

Sources also say that Berkshire was squeezed more on the pricing this time around since the company's credit is not quite as pristine as it was two years ago.

Berkshire Hathaway didn't respond to two e-mails seeking comment.

If the rumors are true, the trades will be detailed in the company's next SEC filing -- but we will have to wait until 2020 to see if the bets pay off.

Beware of the fire drill!!

2009-04-29T10:49:00.000-07:00

A fire alarm rang at 4 PM in a large office campus when almost all employees were present ( approx 5,000 people ).
As per past fire-drill practices, the entire office was quickly evacuated within 3 minutes, and all employees gathered outside the complex in designated areas waiting for further announcement.
Before long, the fire drill officer in-charge made the following broadcast over their loud-speakers system :
" My dear colleagues : With sincere regret, I have been asked to announce that for many of you, this will be your last evacuation drill with us. Due to the on-going recession and bad business climate, the company is laying off almost 50% of its staff. So when this announcement finishes, I ask all of you to move back into the building. And if your swipe-card does not work, then it means that you have been laid off, in which case you will not be allowed inside, and all your personal belongings will be couriered to you by tomorrow.
The company is using this innovative, never-before approach as we do not want to choke our email system with lay-off notices and farewell messages going by the thousands, and we also wish to avoid any fighting inside the office and the consequent security issues for all staff.
We hope you have had a rewarding career with us. Now please move back in... and good luck ! "

Warren Buffett Still Unlikely To Lose Money On His Puts

2009-04-29T06:00:00.000-07:00

By Richard Teitelbaum
- Berkshire Hathaway Inc. shareholders have a chance this year to do something that’s rare among the Sage of Omaha’s followers: count their losses.

Despite Berkshire’s reputation as a bear market bulwark, its stock has been walloped. The Class A shares are down 31 percent since September, to $90,000 as of yesterday, exceeding the 26 percent drop in the Standard & Poor’s 500 Index.

One reason: Chief Executive Officer Warren Buffett’s increasing use of derivatives -- contracts whose value is based on the performance of stocks or bonds or the outcome of a specific event. That Buffett once called derivatives “time bombs” doesn’t calm investors.

Berkshire held contracts with a combined notional value of $67.3 billion at year-end. While this figure is used mostly for reporting purposes and isn’t indicative of potential losses, it dwarfs the company’s $25.5 billion in cash.

Buffett himself has warned of an increasing possibility he might have a loss from one type of contract on Berkshire’s books. Fitch Ratings and Moody’s Investors Service have lowered their credit ratings on Berkshire, partly because of the derivatives.

“People have become uncomfortable with financial investments that they don’t understand, especially anything related to derivatives,” says Charles Bobrinskoy, a manager at Ariel Investments LLC in Chicago.

Equity Index Puts

Berkshire’s derivatives fall into four categories. Because they carry the greatest notional value, at $37.1 billion, most attention is on put options that Buffett sold on stock indexes in the U.S., U.K., euro zone and Japan that expire from September 2019 to January 2028. Berkshire has to pay at expiration if any of the indexes are lower than they were when the puts were written.

While analysis of these bets shows big losses are unlikely, Buffett, 78, hasn’t provided sufficient information on the derivatives to keep some investors from hitting the sell button. Bobrinskoy says he hasn’t been scared away: Of the $250 million he co-manages at Ariel, 5.6 percent was invested in Berkshire as of March 31.

To lose the full $37.1 billion on the equity puts, the indexes would have to fall to zero -- an unlikely event. Berkshire received $4.9 billion in premiums, which together with what the company earns on it, may offset any eventual payments.

Market Scenarios

Citigroup Inc. analyst Joshua Shanker in a March 16 report examined several scenarios to gauge the likelihood of Buffett’s losing money on the puts. Using the S&P 500 as a proxy for all the indexes and assuming a 5 percent annualized return on the premium, the market would have to suffer a cumulative decline of at least 32 percent across the 15- to 20-year life of the contracts for the seller to lose money. In the U.S. market back to 1800, the only way to do that would be to start the bet just prior to the 1929 crash.

Some economists compare today with the Great Depression, and some of the puts may have been written near the U.S. market’s all-time high in late 2007, according to information Buffett has disclosed. The S&P 500 in March was down 57 percent from its peak.

With that in mind, Shanker looked at scenarios that begin with a 50 percent drop in the S&P 500. From that nadir, if the index rose 6 percent annualized over 14 years, Buffett still would not owe any money when the puts expire -- even without consideration of the $4.9 billion in premiums.

Potential Losses

Shanker also sketched out grimmer scenarios. Starting with the 50 percent decline, if the S&P 500 rises at the stock market’s post-1800 average annual rate of 2.8 percent, Berkshire could be out $5.4 billion at the end of the bet. That assumes an initial one-third loss on the premiums followed by 2.5 percent annualized returns.

David Winters says losses from these derivatives are unlikely. His Wintergreen Fund had 6.6 percent of its assets in Berkshire, as of year end. “We’re living in a world where there’s so much negativity, investors are extrapolating something that’s just remotely possible into something that’s probable,” he says.

Berkshire hasn’t disclosed sufficient information to fully analyze its other derivatives, Shanker says. One category is simply municipal bond insurance structured as derivatives; the risks here are similar to those for his municipal bond insurer. Another type consists of credit-default swaps through which Berkshire guarantees payment of individual corporate bonds. Those bets were relatively small, totaling $3.9 billion in notional value at the end of last year.

Worrisome Bets

The final category is the most worrisome, Shanker says. Berkshire has sold contracts that require it to pay when credit losses occur at companies that are included in certain unnamed high-yield-bond indexes. The notional value is $7.9 billion.

Berkshire took in $3.4 billion in premiums on these contracts and has paid losses of $542 million. The company has also recognized a noncash, $3 billion mark-to-market loss. With these contracts, payments are made when a credit event occurs. They expire from September of this year to December 2013.

Losses on these contracts are accelerating as bankruptcies grow, Buffett said in his shareholder letter in February. “Now with the recession deepening at a rapid rate, the possibility of an eventual loss has increased,” he wrote.

Buffett didn’t respond to an e-mailed request for comment. He is scheduled to address shareholders at Berkshire’s annual meeting on May 2, and quarterly results are expected from the company on May 1.

‘Handpicked’ Risks

Mark Curnin, co-founder of White River Capital LP, an investment partnership that specializes in financial stocks, says Buffett’s derivatives are simply smart ways to do what he’s always done: underwrite insurance and buy attractive securities.

“Buffett has handpicked a select group of risks that he understands and thinks are attractively priced,” he says.

The derivative risks are similar to the other hazards that might worry any investor in Berkshire. There are volatile profits from its insurance subsidiaries, for example, and units that depend on the housing industry, such as Acme Building Brands and Clayton Homes Inc. Then there’s Buffett’s portfolio of equity investments: While easy to understand, 7 of the 14 largest holdings listed at year-end were carried at a loss.

Notes From Buffett Meeting 2/6/2009

2009-04-27T14:38:00.000-07:00

Notes From Buffett Meeting 2/6/2009

By Dang Le

Note: Students from Emory and 5 other business schools were invited to come visit Mr. Buffett for a Q&A session. These notes were reproduced to the best of my ability as I heard and as I could recall them from a collection of mine and other students' notes. There is no guarantee that this was exactly what was said, but the intent was to preserve the spirit of the message. Enjoy.

Buffett:
Did you hear they called off the Wall Street Christmas Pageant this year? They had trouble finding three wise men…and a virgin. There are many opportunities right now. The markets are very inefficient at times, and this is one of those times.

Kansas:
Berkshire has invested in several insurance companies, would you go into the health insurance business?

Buffett:
No. Health insurance is so ingrained into national policy that it is a tough business. It’s pretty adversarial. I’m not really that excited about it from a business perspective. I don’t want to write policies with high loan loss ratios. That being said, I would buy the stock of an undervalued healthcare insurer.

Insurance is an interesting business. You know, we underwrote a two year life insurance policy on Mike Tyson. I wanted an exclusion against women shooting him, but they wouldn’t let me.

South Dakota:
You’ve recently invested in Goldman Sachs and GE. Is the financial sector a good buy right now?

Buffett:
No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.

Creighton:
How much and how does risk factor into your investment decisions? Would you invest in emerging markets?

Buffett:
In general, emerging markets are not great for me because I need to put a lot of money to work. Risk does not equal beta. Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. Mrs. B saved $500 over the course of 16 years to start and build Nebraska Furniture Mart. Tom Watson Sr of IBM said, “I’m smart in spots and I stay in those spots.” I just stay within my circle of confidence. When I bought Nebraska Furniture Mart in 1983, Mrs. B took cash and not Berkshire stock. Why? She didn’t understand the value of stock. She understood cash and that is what she took. I need only need to be right a few times and can let thousands of ideas go by.

Ted Williams, who wrote the “Science of Hitting,” broke the strike zone into 92 ball shaped sections. He knew, if hit in his sweet spot, he’d hit 430, a little further out, and he’d hit 350. You have to know your sweet spot. The beautiful thing about investing is that it’s a “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing.

When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven’t… exept for in the very beginning. I like to play from a position of strength. I always try to have the odds in my favor. When I go to Vegas, I don’t go around putting $5 dollars on the blackjack tables. If someone wants to come to my room and put $5 on my bed, well that’s fine. I like those odds better.

Emory:
How do you think about value?

Buffett:
The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don’t really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I don’t care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about if there’s price flexibility and whether the company can gain more market share. I care about people drinking more Coke.

I bought a farm from the FDIC 20 years ago for $600 per acre. Now I don’t know anything about farming but my son does. I asked him, how much it cost to buy corn, plow the field, harvest, how much an acre will yield, what price to expect. I haven’t gotten a quote on that farm in 20 years.

If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility. The stock market is funny. You have no compulsion to act and a bunch of silly people setting prices all the time, it is great odds. I want the market to be like a manic depressive drunk. Graham’s Ch. 8, in the book Intelligent Investor, on Mr. Market is the most important thing I have ever read. Now think about the NYSE. You have thousands of companies to choose from. For me, that universe has shrunk because I need to put large dollar amounts to work. Attitude is much more important than IQ. You can really get into trouble with a high IQ, i.e. Long-Term Capital. You need to have the right philosophical temperament.

Penn State:
Why did you invest in Harley-Davidson?

Buffett:
I like the 15%. I measured that 15% against other credits and it looked attractive on both a relative basis and an absolute basis. Also, we have to have a certain amount of the portfolio go to debt. Lately, the government has become the guarantor for some companies but not for others and the “haves” and “have-nots” determined by certainty of government assistance rather than the credit quality. These finance companies have a problem getting funded, not with their customers. Any company where you can get your customers to tattoo your name on their body has quite a strong brand. For this investment I had to think what is the probability that they will not pay me back and would I want to own the company if they did not, basically that the equity isn’t worth zero. Risk premiums in the corporate bond market went from real low to real high. Right now, they’re out of whack. The flip side is that governments are overpriced. We have a bubble in governments. T-bills actually had a negative interest rate. I never thought I’d see that. A mattress is a better investment than the US 10 Year. Buying corporates and shorting the 10-year is a great idea and smart guys went broke doing it because even if you’re right, you need to be able to play out your hand. I always think about what I would do if a nuclear bomb went off or if Bernanke ran off with Paris Hilton to South America.

Texas:
Do you feel that the might of America has changed?

Buffett:
You can bet against the dollar, but I would never bet against America. The system in the U.S. has allowed the country to unleash more for the world than any other country. Since 1776, the U.S. had a different system than the rest of the world and that system unleashed the human potential. We were not the smartest nor did we have the best resources. This is the same system we have in place today with people of similar intelligence. I have and would bet against the U.S. currency, stocks, etc. but the United States prevails over time. There are all kinds of rocky roads but we have rule of law, equality of opportunity, and a meritocracy. We have a market system and people apply energies and imagination to come up with things someone would want. Everyone in this room is working far below his/her potential.

Kansas:
We know that you are a big bridge player. Do you think that bridge correlates to investing? Are there any traits or characteristics that might carry over from one to the other?

Buffett:
Bridge is the best game there is. You’re drawing inferences from every bid and play of a card, and every card that is or isn’t played. It teaches you about partnership and other human skills. In bridge, you draw inferences from everything and that carries over well into investing. In bridge, similar to in life, you’ll never get the same hand twice but the past does have a meaning. The past does not make the future definitive but you can draw from those experiences. I think the partnership aspect of bridge is a great lesson for life. If I’m going into battle, I want to partner with the best. I was playing with a world champion and we were playing against my sister and her husband. We lost, so I took the scorepad and I ate it.

South Dakota:
What are your views on derivatives and how do you think they have affected the global market?

Buffett:
In my 2002 letter to shareholders I referred to them as “weapons of mass destruction.” Derivatives are really just a way to create a product with a very long fuse, for example, 100 years, as opposed to stocks which settle in 3 days. That kind of system allows claims to be built up. AIG called me in September and told me they were about to get downgraded which would have required higher posting requirements. Now this is an enterprise that has been built up over decades and was effectively destroyed in 48 hours by these products. With derivatives, you’re exposed to counterparties and thus reliant on others. These claims built up over time to the tune of billions of dollars and when one falls, the whole system falls. Derivatives are not evil by themselves but rather everyone needs to be able to handle them. System wide, they’re rat poison. Berkshire holds many derivatives but we always hold the money at Berkshire.

Creighton:
What do you think about the stimulus package? Would you rather see tax cuts or government spending?

Buffett:
We obviously have a problem, but we’ll come out of this just fine. The idea of a stimulus is to do things that will have an impact quickly and the current proposal won’t do that. When dealing with situations like this, you can’t do just one thing but always need to ask yourself what is the next question. We have utilized monetary policy and guaranteed everything in sight. It’s a standard Keynesian prescription. Tax cuts benefit people differently in the short term. We are basically saying, we’re not going to pay for what we’re doing in terms of government spending and that we’ll just mail you some money but it’s better than doing nothing. In the end, you should buy stock in a business that any idiot could run because someday, one will. You know, our country is similar.

Emory:
How do you think differently today than you did twenty years ago? Where do you expect to see the greatest differences in 2030?

Buffett:
The fundamental things about investing that I learned when I was younger haven’t changed. I am lucky to have picked up a book at 19, The Intelligent Investor, that gave structure to investing and investment decisions. Over time, I learned different ways to apply it. I have learned what it is outside my circle of confidence. I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988. Through experience, I have gotten smarter on predicting and evaluating human behavior. My wife put me together in terms of human behavior. I really enjoy doing what I do and I get to do what I want. I enjoy talking to groups like these. Irv and Ron Blumkin are some of my best friends and I continue to add friends by buying businesses. I don’t want a boat or 12 houses. I’m almost fully depreciated, down to my residual value. Age doesn’t affect my ability to my job though, as opposed to Arnold Palmer, he can’t play his game.

Penn State:
What advice would you give the average person in the U.S.?

Buffett:
It’s hard to give advice to someone who might lose their job. My Dad went to work on August 13, 1931 to find out the bank where he worked and held all our money had closed. He had no job and no money and two kids. You want to be as prepared as you can and you just don’t want to have debt. Medical problems cause a lot of the grief and lots of credit card debt. Credit cards are poison. If you make a dollar, only spend 95 cents, not $1.05. You should be ahead of the game all the time rather than behind as it is harder to work your way out of a hole. You want to play the game from strength, and you have to think ahead. People don’t always want to hear advice when things are going well. People risked everything they had and needed for something they didn’t have or need. Charlie once said, “The problem isn’t getting rich, it’s staying sane.

Texas:
What are the biggest challenges that this country faces?

Buffett:
The biggest problem is probably weapons of mass destruction. We have always had people who were ill-fitted to society and wished harm on others. In 1945 we unlocked the atom, and that changed everything. The human animal hasn’t changed, you still have the same percentage that are maladjusted. The problem is knowledge, materials, and deliverability. What you could do with the wrong kind of infectious disease is incredible. You can transmit things much faster today. Governments, individuals and organizations can’t control security. It’s what I would spend all of my money on if I could fix it. Everyone here in this room won what I call the ovarian lottery. You were born at the right time and we were all very, very lucky. We are in the luckiest 1% of humanity.

Kansas:
What are some of the mistakes that Secretary Paulson made during the sub-prime crisis?

Buffett:
Hank is a great guy and great friend. He’s extremely smart about markets but not so smart about politics. I sympathize with Hank. Hank Paulson was not the supreme commander. He had to work through at least 535 people with different incentives. The whole situation has developed faster and at an extreme pace, more than anyone thought. The first TARP program got voted down, which changed the dynamic. All variables affect other variables. Congress did not appreciate how severe the problem was. I call it an “Economic Pearl Harbor” in September. FDR essentially had a blank check and that what people think is important and believing it makes it so. He restored confidence in the banking system. Paulson’s job may have been almost impossible given the circumstances. He was used to operating in a sphere that did not require consensus (Goldman Sachs). People that take that on [public service jobs] are laying themselves open to be unfairly attacked, criticized and scrutinized. In hindsight, letting Lehman fail was probably not the right thing but it was difficult to tell at the time. It created trust problems as money market funds fell apart soon thereafter. When people start to worry about the money in money markets, it’s a problem. People want to be led at this point, but fall back into old habits very easily. When you think that Citi or Lehman is just a house of cards… I mean who would have even believed you. It’s like Noah before the flood, building his ark. Can you imagine the reaction he got?

South Dakota:
What do you think about the U.S. trade deficit?

Buffett:
I talked to Barack back in August, and said: “I have good news and bad news. The good news is that the economy will be terrible, so you’ll definitely get elected. The bad news is that the economy will be even worse at inauguration.” He asked, “Do you think it’s too late to throw the election?” The trade situation is there and it causes problem and could exacerbate the situation. However, all issues go on the back burner until we solve the big problem.

We create sovereign wealth funds, buying more goods and services than everyone else in the world. The decline in the oil price has helped the trade deficit but nothing will get better until everyone feels better. Every day, we buy $2 billion of goods and service more than we produce and export. We give the exporting nations USD. The trade deficit creates claims on the United States. Sometimes we’re a little hypocritical. For example, three years ago, the Chinese wanted to buy Unocal (a small oil company in California) and Congress wanted to condemn China for wanting to buy the oil company with the money we gave them (through U.S. imports). That’s a little disingenuous. The trade deficit creates a situation because we give people claim checks, then we get upset when they want to use them. The Japanese bought Rockefeller Center in the 80’s. Did we think they were going to move it? It’s not useful to fan those flames in a nuclear world, and that’s what’s wrong with “Buy America.” The trade deficit will come up big time when we get past the current problems.

Creighton:
Why do you live the way that you do?

Buffett:
Do you mean, why am I frugal? You can’t buy health and you can’t buy love. I’m a member of every golf club that I want to be a member of. I’m the highest handicap member of Augusta National. I’d rather play golf here with people I like than at the fanciest golf course in the world. I can do anything that I want, and I do. I buy everything I want to have. I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living. Bella Eidenberg was a Polish Jew who was at Auschwitz and some of her family didn’t make it. Twenty years ago she said she was slow to make friends, and that the real question in her mind was always, “Would they hide me?” If you have a lot of people that would hide you, you’ve had a very successful life. That can’t be bought. I know people that have billions of dollars and their children would say, “he’s in the attic.”

I estimate that I live on $100,000 per year, except for my plane which costs me about $1 to $1.5 million. I like the plane, it improves my life. My computer and my airplane changed my life in a big way and I’m not sure, if I had to choose, which one I’d give up. Anything beyond $50 Million doesn’t improve my life. If I took out $3 billion of Berkshire stock, I could have paid 30,000 people $100,000 per year to paint my portrait every day. I could have paid 50,000 people $60,000 per year to dress in loin cloths and haul rocks to create the Buffett tomb. That’s not me. I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.

Penn State:
What do you think of the good bank, bad bank idea?

Buffett:
It is tough to do but if it were done well, it could do a lot. Call the bad bank an “Aggregator Bank.” There is a lot to be said in cleaning out past problems. There are 7,000 banks in the U.S. with such varying degrees of conditions so it is tough to provide a sweeping overhaul. The biggest thing they’re wrestling with is pricing what goes into the aggregator bank. These are smart, well-intentioned people working enormously hard on this.

Emory:
You take great pride in keeping your schedule wide open. Do you believe that corporate America is overscheduled and overstretched?

Buffett:
[Showed his blank schedule book]. Bill Gates is overscheduled. I am extremely lucky and I can say no to anything because there isn’t an entity that can use economic pressure to make me do something. A lot of CEOs get into a lot of the rituals that are part of the job. I would rather deliver papers than be the CEO of GE. They have too much stuff to do that is a big pain. Don’t get me wrong, CEOs have it pretty good. I’d imagine that every CEO in the Fortune 500 would be willing to take the job for half of the money. The 76 or so CEOs that run companies at Berkshire don’t have to deal with bankers or lawyers. At Berkshire, we’ve never had a meeting for all of them anywhere. There are no presentations and no committees. They can be more productive, and it makes it attractive when they can do what they like to do best.

Kansas:
What are three traits of successful managers?

Buffett:
Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first two will kill you. All you have is a crook who works hard. If a person doesn’t have integrity, you want them dumb and lazy.

If you could put 10% of your future earnings on one of your classmates, you would pick the one that’s most effective at working with people. These are qualities that are elective. If you could pick one to sell short, it would be the person that no one wants to work with. You can elect to be the kind of person you want to be. Look at those qualities of the two people you’ve selected (one long and one short). They’re all qualities that you possess. It’s like marriage. If you want a marriage that’s going to last, look for someone with low expectations. Don’t keep score. Keeping score doesn’t build organizations, homes, etc. I have never had one fight with Charlie. When I took over Solomon I had to pick the best person to run it. I interviewed 12 people for 15 minutes each and I asked myself, “Who would I go into a foxhole with?” I never look at grades or where you went to school. When I picked Deryck Maughan, he never asked me about pay or options or indemnity. He went to work.

Chains of habit are too light to be felt until they’re too heavy to be broken. In terms of picking people how do you lead your life in a way that I’d pick you?

Frank Zappa - Wild Wild East

2009-04-24T16:38:00.000-07:00

Part 1

Part 2

Frank Zappa - FNN Focus Maccioni Interview

2009-04-24T16:34:00.000-07:00

Part 1

Part 2

Shai Agassi: A bold plan for mass adoption of electric cars

2009-04-14T12:43:00.000-07:00

Car Charging Company Coulomb Dreams of 2010 Profit

2009-04-13T17:30:00.000-07:00

Despite the fact that we're just seeing electric cars roll on the road, Richard Lowenthal, CEO of Coulomb Technologies tells us selling charging stations for electric cars will be a profitable business in a year and a half.

Coulomb sells charging stations for electric cars to businesses and cities. It makes its money selling charging stations for between $2,000 and $4,000. It then charges drivers around $720 annually to use the stations. Of that, Coulomb keeps $120 to cover its maintenance costs, and the city or business keeps the rest. This way a city pays off the cost of the station it bought, and usually profits, and Coulomb can pay for round the clock data centers that watch over the charging stations.

Coulomb raised $3.75 million in January from Estag Capital and Lowenthal says the company is looking to raise more. He anticipates $2 million in revenue for 2009, and profitability coming by 2010, when Coulomb should be selling 520 charging stations a month around the world. And that's before electric cars really start rolling around. When that happens, Lowenthal thinks the company is positioned to take advantage.

Why start a company for charging stations, when there aren't many electric cars out there?

We came into existence because every automaker is planning on a electric car. They're coming in the next 1-3 years, yet look at Chevy Volt, the prototypical electric. The idea is that you plug it in the garage at night. The first 40 miles is all electric, then the rest is gas. The average American goes 29 miles, so that's great as it gets us off fuels, but there's 247 million cars, but only 50 million garages. There was a plug in hybrid study at UC Davis, and it found people want to charge twice a day. When they're sleeping and when they're working.

We build charging stations for people that live in apartments and condos, also. In San Francisco, the primary model is replacement of a parking meter. You put in our product, so the people in San Francisco who park curbside have a place to charge their car. In San Jose, it's different, they asked us to develop product that mounts on light poles, and we have a few different locations for those.

Obama says we'll have 1 million electric cars by 2015, we think that's light, but you'll need at least 2 charging stations for every vehicle. So, if he's right then 2 million stations in the US alone.

How much does it cost to install?

It costs $3,000 for a station on average, it varies from $2,000 to $4,000. Somebody like San Jose or San Francisco or Cisco or Google will buy stations. We sell them for between $2,000 and $4,000, that's how we make our money. Then we have a subscription service to pay for charging minutes. Users go on our website, put in their credit card, we send them a key fop, which they use to activate the charging station to charge their car. We pick up money from driver, but we don't make any money from charging for the minutes, 80% of that money goes back to operators, like the cities who own the stations and the property. They usually profit from it.

So far we have 15 customers--cities, businesses. We installed our first network in December in San Jose. We have over a hundred drivers signed up. They use our system for free for 2009. It's a teaser year for people to charge their cars. We are learning a lot, figuring out how to charge people best. Our plan is to have people pay for $720 for the year to charge their cars. Of that we keep $120, and the rest goes to the operators.

What's the difference between your operation and Better Place, who also want to set up charging infrastructure?

Better Place owns the battery and has a custom car, and searches for clean energy to charge the whole thing. We just make best networked charging station. I have no interest in owning batteries, we are equipment provider. The other thing, we have the only networked station, so you can go onto a Google map and find every station and see what's free and what's broken, what's being used. Our operating center monitors the stations 24 hours a day. We have features that help people if they forget to plug the car in, we send alerts. All our stations are integrated with the smart grid.

Why aren't your stations near gas stations?

The cars that come out all take between 4 and 8 hours to charge. Since cars are parked 8 hours a day it shouldn't matter, the model is not go to station and charge up, when working, you want to be parked at a charging station. So a place like Google has charging stations for employees. So far there are no standards for quick charging, it's still experimental. But when it become standard, popular, we'll be ready. And we can sell our infrastructure to gas stations.

If I charge my car overnight, how do I know some prankster won't just yank the plug?

Well, there are two kinds of plugs. Standard for high powered where cable is permanatly attached, the cord comes with the car. When I pull up to the station, I plug in and it locks it so you can't get it out without the key fop. Still with the Prius, they can unplug from the bumper. Then we alert the driver and the operator of the station, that's something we can do because of networking.

So you have people constantly working?

We have a 24-7 data center, most of it is automated. If a non-subscriber still wants to get a charge thats when the data center gets called. We have 14 people in our head quarters, our sales force are all independent distrobutors, covering 46 states and we have installers in all those states. In the other 4 states cover with direct staff in valley, We have European distribution, the way we sell our product is dist.

We have distributors, but we don't pay them, they get paid on the margin. We sell them the stations at a slight discount, then they sell them to municipalities or businesses. They sell installation and maintenance, we probably have 100 people working for us but we only pay 14.

What does the low price of gas do to your business?

The motivation for buying electrics shifts. Two years ago it was avoiding carbon dioxide, last summer it was the high price of gas, and now because of Obama it's to avoid importation of oil. While the motivation has changed, remember it costs you 2 cents a mile on electric, versus 12-13 cents on gas, and we're less than half the price of gasoline. With us it's just about 5 cents a mile.

How does the recession hurt your business?

So far it's been 100% positive. There's a 50% tax credit for our electric charging stations, which puts our stations on a big sale. It made everyone hurry up to purchase them. There's also a big rebate on electric cars. The stimulus bill that was passed as a result of the recession gives funds to cities who can buy our stations at a discount. It's all been extremely positive for us, so we like the recession because its been a help. We don't like to say that, because the recession hurt so many people, but it's helped us.

How does the stimulus help you?

There's a tax credit for infrastructure, for buying charging stations. There's a 50% tax credit for municipalities purchasing electric car infrastructure.

When do you think you'll be profitable?

We are on target to be profitable in October of 2010. To do that, we need to sell 520 stations a month. We're on plan to do that, we made our first quarter plan. And that happens without any real cars out there. That just starts in the fourth quarter of 2010, that cars will be out there. We're going to do about 2 million in revenue this year, next year, I don't want to talk about, because we're out there raising money, but this year we're on track for $2 million in revenue. We make our money selling stations.

What happens if nobody uses the stations? How does that hurt your business?

It's an addressed concern. We don't like to get ahead of the electric cars, we don't want empty stations. We just had a significant announcement in Chicago, where we had a solar powered charging station installed for the municipality. Just one sends a signal that Chicago wants electric cars, it shows a model. It establishes a model for a few stations for the city. Obviously, we don't want empty stations. That will cause a backlash. But right now, they're policy statements by municipalities, that show a city is dedicated to electric cars.

Cramer: Stewart Interview Was "A Complete And Utter Ambush"!

2009-04-13T16:45:00.000-07:00

Cramer is not. He told told the Ohio State Lantern his interview on the Daily Show last month "was a complete and utter ambush" and that host Jon Stewart did not "comport himself as a gentleman."

Cramer's rant:

He told my staff that it was going to be fun, convivial, no clips, but [it] doesn't matter, he's a comedian, he can do whatever he wants.

Was it a fair fight? No, it wasn't even a fight. I came on with the idea of taking a high road approach and discussing the issues, obviously [Stewart] came on strictly to try to humiliate me. It was brutal.

Was he stand-up? Absolutely not.

Did he comport himself as a gentleman? Hardly. It was a deposition; he wants to be a prosecutor.

His goal was just to humiliate and destroy me and probably get me fired, and last I looked, I still have a show.

It was a 20 minute interview, he picked the worst eight minutes to make me look as horrible as possible. It's his show, he can do whatever he wants. If he comes on my show, it'll be a fair discussion, but he's not gonna come on my show, because he's all about his [ratings] numbers.

CompUSA Is Back, Taking Cues From Apple

2009-04-13T16:22:00.000-07:00

Welcome back, CompUSA!

The once-bankrupt electronics store is opening dozens of new stores (mostly in Florida), and operating with a new plan: Copy part of what made the Apple (AAPL) store successful.

Well, CompUSA isn't going with the Apple Store's stark minimalism, but they are making all of their floor demo computers available to the public, and connecting them to the Internet, Wired reports. That should encourage people to actually play with the products, start to lust after them, and loiter in the store. The ability to check Facebook on a demo Mac is part of what's made the Apple Store such a popular hangout -- all the while introducing people to Apple products.

We like the idea a lot, and a big part of our frustration with the old CompUSA (and big-box electronics stores in general) has always been that PC floor models tend to be turned on, but locked with a password-protected screen saver, preventing anyone from getting to know the computer.

And maybe the timing is right for a CompUSA comeback. One of CompUSA's biggest rivals, Circuit City, is now gone. At least some of the people who were buying things at Circuit City are now going to Best Buy (BBY) instead, but those customers can just as easily be CompUSA's.

NEWSPAPERS, HAIL AND FAREWELL

2009-03-17T20:32:00.000-07:00

NEWSPAPERS, HAIL AND FAREWELL by Michael S. Malone

Newspapers, ave atque vale.

But as we bid you good-bye, just remember: in the digital age the death of an industry usually plants the seeds of its resurrection.

The last two weeks saw what may prove to be the tipping point in the history of newspapers. The Rocky Mountain News became the first major U.S. newspaper to close in the face of declining circulation and revenues created by competition from the digital media. Close on its heels may be the equally venerable San Francisco Chronicle, which announced that it would soon be seeking a buyer . . .and failing that, may go out of business.

This bad news is just the latest in what has been a long, sad downward spiral by the newspaper industry through most of this decade. The newspaper industry gave up denying that anything was wrong about five years ago, abandoned the fantasy that this was a temporary setback two years ago, and now - like a terminal patient completing the Kubler-Ross cycle - has all-but resigned itself to imminent oblivion.

And, if things keep going the way they have, that’s a pretty accurate prognosis.

I was one of the very first people in the national media to predict the death of newspapers (though Time editor Daniel Okrent gave a prescient speech on “The Death of Print” in 2000) . I did so in this column in March, 2005. Here’s what I wrote:

“So, let’s finally come out and say it: Newspapers are dead. They will never come back. By the end of this decade, the newspaper industry will suffer the same death rate — 90-plus percent — that every other industry experiences when run over by a technology revolution.”

I was a little ambitious in that prediction, but not by much. There isn’t a single major newspaper in this country that isn’t in serious financial trouble. Even the industry’s annual convention was canceled this year. And waiting in the wings, not far behind the RMN and Chron, are at least another dozen papers on the brink - with the next to go likely the Seattle Post-Intelligencer. And you can now buy a share of New York Times stock for less than the price of its Sunday paper.

I also wrote this:

“Before it is all over, the number of “newspapers” left in America will probably be less than 10 — and they might not be individual papers but rather new entities created out of the current large chains.”

Frankly, these days that prediction - especially if we’re talking major metropolitan papers (small local papers are still doing pretty well) - almost seems too optimistic.

As they say about leading the pack, it’s always a good way to get shot in the back. And I took my fair share of arrows, many of them from veteran reporters who either dismissed my notions as absurd (‘People will always want to read the morning paper with their coffee’) or as calling down the Furies (‘Articles like this certainly don’t help matters’). I wonder how many of those commentators are still in the business today, and how many still believe those arguments.

The reason I was confident then in my predictions was not out any animus towards newspapers - on the contrary, as I’ve written here before, I’m a fourth generation newspaperman. I love newspapers. And some of the most satisfying moments in my career have been sitting in a café on a Sunday morning watching people around me reading something I’d written. No, what made me certain about this unfolding scenario were my experiences in the electronics industry. Over the years I’d seen one traditional industry after another, all of them seemingly permanent, be destroyed by the arrival of the digital revolution.

In almost every case - adding machines, arcade games, printing, letter writing, typing, LP records, clocks and watches, even older electronics businesses - these once-giant industries had been so annihilated that they were almost erased from our memories, supplanted by wholly new industries defined by microprocessors, mass customization and Moore’s Law. Once I saw Google News and first great blogs, it was obvious to me that this same destruction was about to happen to newspapers - and that the real challenge was to overcome sentiment and tradition and look this transformation straight in the eye and accept the full implications of what I saw. The death of newspapers seemed impossible, but so did the death of typewriters. You had to bet on technology, wherever it led.

And in newspapers, it has led us to where we are now. The ‘death of newspapers’ is now generally assumed; it has become the common view that soon there won’t be any major newspapers left in this country, with local papers soon to follow once Craigslist gets around to setting up shop in their backyards.

But that isn’t what technology is telling us. Once again the scenario presented by technology departs from the received view.

What the history of technology tells is that at some point the slaughter stops. What remains are a handful of survivors. Some, like the handful of companies that still make typewriters, will cater to a small surviving pool of traditional customers. These companies will never be as big as they once were, and eventually they will slowly fade away, but for a generation or two it will still be a very profitable existence being a big fish in small pond. In newspapers, USA Today seems to have the greatest chance of ending up here (while the New York Times, which wants this slot, will never make it).

The other survivors will be very different - indeed they will look almost nothing like their former selves. They may bear the names of once famous newspapers, but that will be the only resemblance. Technology revolutions are like black holes: what comes out looks nothing like what went in.

If they are smart, some of the newspapers that survivor that survive this Great Shakeout have a chance to come all of the way back and be major players in the next wave.

But to do so, they have to recognize that everything has now changed - and they have break from their past, recognize the utterly changed nature of the marketplace, and embark on a radically new strategy.

How? First of all: Don’t try to preserve what you were. It’s now too late. Look instead to what you must be in ten years, and get there in five. And for the next two years, do whatever it takes to survive.

What does that mean? Well, surprisingly it means: Forget computers. Newspapers have already lost that battle. Instead, move on - and target the next platform. My gut tells me that the future of news delivery is to e-Books, like Kindle, and even more, Smart Phones. So rebuild your paper for those platforms - automatic downloading of the daily news directly to e-books, and powerful new navigation and social networking (i.e., story reporting and sharing) tools for the phone.

It also means a new business model. The blogosphere has made one major mistake: it has yet to create a truly viable revenue model. And that represents a huge opportunity. Advertisers are still wary of the Web because they don’t see yet a vehicle that produces strong, verifiable results. That’s also the reason why (besides all of that capital equipment, like presses and buildings) that newspapers didn’t just migrate to the Web two years ago - it would have led to massive revenue losses. But newspapers have now taken those losses anyway, so accept the inevitable. A revenue model will emerge for the Web, so take your lumps now, shrink to 10 -20 percent of your original size, sell the buildings and presses, move exclusively to the Web, and get ready for the market to take off.

And, as long as you are thinking outside of the box, go all of the way. Why doesn’t a consortium of newspapers buy Craigslist, leave it intact, and divvy up the ads by region? Why not team up with the largest local TV station and become its integrated video-print website? Or better yet, buy one of those emerging Web aggregators - the Huffington Post, Pajamas Media, etc. - and embed yourselves within them. They’re going to be your future competitors anyway, so co-opt them now.

Finally, figure out a way to hang on to all of that reporting talent you have so indifferently tossed away. Turn them into contractors for a couple of stories per month, or put them on retainer. But don’t lose them - because five years from now there will be land rush on reporting talent to fill the new ‘newspapers’. So tie them up now.

In the end, it’s all about surviving short term, and starting over under the new rules long term. We will always need newspapers because we need news. But as to what form this transformed medium will take is as yet unknown. But we do have some ideas - and it is those ideas that America’s dying newspapers should now embrace, not wistful dreams of the past.

Buffett's Stock Picks Are Flat!

2009-03-03T05:36:00.000-08:00

No, we don't mean in the good way (who wouldn't kill for flat performance over the past year?). We mean in the round-trip way.

As in: All those stock gains Warren had amassed over the years, including the moonrocket WaPo and Coke stakes, have now disappeared.

At the end of 2007, says hedge fund manager Jeff Matthews, Warren had an embedded gain in Berkshire's stock portfolio of $35 billion. Now, he's flat.

From Jeff Matthews Is Not Making This Up:

Based on the year-end portfolio presented in the letter (and it has changed only modestly over time, but now excludes two stocks, Burlington Northern and Moody’s, in which Berkshire owns 20% and must report its holdings under the equity method,) Berkshire’s entire equity portfolio, which had a $37 billion cost basis and a $49 billion market value at year-end 2008, was, as of yesterday’s market close, worth only about $37 billion...

Now, the calculation itself is fairly straightforward. Since year-end Berkshire’s equity portfolio has suffered losses of close to $1 billion or more in American Express, Conoco-Phillips, P&G, and USB, if the computers here at NotMakingThisUp are correct.

And while some of those losses are certainly temporary, the hits to his financial holdings look more permanent—as does the whopping $5 billion decline in Berkshire's 7% stake in Wells Fargo thus far in 2009.

Virtually every other named holding in Berkshire’s portfolio—including Coke, Tesco, Swiss Re, and even poor old Washington Post—is also down year-to-date.

Consequently, if our math is correct, Berkshire’s equity portfolio stands at roughly $37 billion as of yesterday's market close, dead even with its $37.1 billion reported cost basis at year-end 2008.

And here's another bombshell:

Buffett also disclosed what might go down as the second most surprising disclosure in today’s letter: he had to sell some of Berkshire's stocks to make those headline-grabbing investments in GE, Goldman Sachs and Wrigley.

Berkshire Hathaway Reports Worst Year Ever

2009-02-28T06:35:00.000-08:00

In Letter to Shareholders, Buffett Calls Credit Markets 'Nonfunctional' but Strikes Upbeat Note for Long Term

By SCOTT PATTERSON

Warren Buffett's Berkshire Hathaway Inc. reported Saturday morning that 2008 was the legendary investor's worst year ever. It also reported a grim fourth quarter, though it eked out a slight gain. (Berkshire's annual letter to shareholders.)
[Berkshire Hathaway] Associated Press

A common metric Berkshire uses to track performance, book value per share, fell 9.6% in 2008, its biggest decline since Mr. Buffett took over the company in 1965.

It was only the second year in more than 40 years that Berkshire posted negative results. In 2001, Berkshire's book value per share fell 6.2%. The company's performance in 2008 still far outpaced the Standard & Poor's 500-stock index, which fell 37% last year, including dividends.

Berkshire's fourth-quarter net income was $117 million, a whopping 96% decline from last year's $2.9 billion fourth-quarter income. The results mark Berkshire's fifth year-over-year quarterly decline in a row.

Annual net income fell to $4.99 billion in 2008 from $13.21 billion the previous year amid poor results from the firm's insurance holdings and big declines in stock holdings such as Coca-Cola Co. and American Express Co. Berkshire also owns See's Candy, Fruit of the Loom and Benjamin Moore paint, but its insurance businesses generate the bulk of the parent company's results.
Annual Letter

* Berkshire's annual letter to shareholders

In his letter to shareholders, Mr. Buffett said that in the fourth quarter, a "series of life-threatening problems within many of the world's great financial institutions was unveiled." Credit markets turned "nonfunctional," Berkshire's chairman said.

Still, Mr. Buffett struck an upbeat note in his letter that detailed the current woes of the financial system. "[N]ever forget that our country has faced far worse travails in the past. … Without fail, however, we've overcome them."

Amid the turmoil of last year, Mr. Buffett did make some moves that could pay off in the long run. In late September, he agreed to buy $5 billion of perpetual preferred stock with a 10% yield from Goldman Sachs Group Inc., which was reeling after the collapse of Lehman Brothers Holdings Inc.

The deal, concocted in the heat of the moment during the September swoon, was agreed to in a matter of hours as Mr. Buffett swigged Cherry Coke and munched mixed nuts from his office in Omaha.

Berkshire also received warrants to purchase Goldman common stock at $115 a share. While the vote of confidence in Goldman by the savvy investor temporarily helped stabilize the bank's share price at around $120, since then Goldman's stock has wilted to well below $100.

In October, Mr. Buffett agreed to invest $3 billion, and potentially as much as $6 billion, in General Electric Co. preferred shares, which also sport a 10% yield. Friday, GE said it would slash its quarterly stock dividend by more than two-thirds to 10 cents a share, letting the company salt away about $9 billion a year. The move doesn't have an impact on Mr. Buffett's preferred holdings, however.

Berkshire recently has made other high-yielding investments in companies ranging from Swiss Reinsurance Co. to Harley-Davidson Inc.

The Lure of Sirius: Tax Losses

2009-02-22T06:56:00.000-08:00

By JESSE DRUCKER and MATTHEW KARNITSCHNIG

Some investors are baffled why media titans John Malone and Charles Ergen are competing to throw money at Sirius XM Radio Inc., the money-losing satellite-radio company that was perilously close to bankruptcy.

But in fact, the company's most valuable asset could be precisely all the money it has lost.

Sirius XM has at least $6 billion of tax losses, according to securities filings. That means that the losses it has accumulated over the years can be used as deductions to cut taxes on future profits. As long as those losses stay with Sirius, they have little value, securities filings show, because the company's future prospects for significant profits are still slim.

But in the eventual hands of another company, like Mr. Malone's Liberty Media Corp., those tax losses could become extremely valuable, helping to wipe more than $6 billion in taxable income off of its income tax returns -- thus some day cutting Liberty's corporate income-tax bill by more than $2 billion.

Tax concerns are often a big driver of corporate deal making, but few players maneuver through the tax code as thoroughly as Mr. Malone. In 2006, he acquired the Atlanta Braves in a way that enabled Liberty to effectively cash out its stake in Time Warner without incurring taxes.
Money for Nothing?

* Sirius XM's most valuable asset is the at least $6 billion it holds in "tax losses," which can be used to offset taxes on future profits.
* But those aren't worth much to Sirius, since its prospects for profits are slim.
* However, in the eventual hands of Liberty or EchoStar, they could cut those companies' taxes by more than $2 billion.

Similarly, Sirius's tax losses are considered a key part of the company's appeal to Liberty, according to people familiar with the matter. They were considered less significant to Mr. Ergen, who bought up Sirius debt in hopes of adding Sirius to his strategic arsenal of satellite assets. On Tuesday, Liberty announced it would rescue the company from a bankruptcy filing with a $530 million loan. Liberty will receive a 40% stake in Sirius.

Companies often have tax losses. But experts say it is unusual that they are potentially a firm's most valuable asset, as with Sirius. The only asset that is comparable is the company's collection of radio wave spectrum licenses granted by the Federal Communications Commission valued at $2 billion, according to a Sirius securities filing. "That's uncommon that the [tax loss] would be ... the most valuable asset," said Robert Willens, who runs a corporate tax advisory firm.

However, for Liberty to maximize the use of those tax losses, it must navigate Internal Revenue Service rules intended to prevent companies from acquiring others solely for their losses -- so-called "trafficking in losses."

Indeed, that issue is getting renewed attention: In late September, the Treasury Department lifted those tax-loss restrictions for some companies to encourage a spate of bank mergers. Congress effectively repealed Treasury's move for future bank deals as part of the recent stimulus package.

The IRS curbs already kicked in after the Sirius XM merger was closed in last July and limit how much of the losses can be used as tax deductions each year.

Based on those rules, Mr. Willens estimates that, for the first five years that the tax losses could be used, Sirius is limited to about $580 million a year in deductions stemming from the losses. After that, it drops even lower, to about $250 million a year for the next 15 years. Thus, all the losses would be used, but not immediately, which reduces their effective value. People familiar with the matter confirmed that those estimates are in the range of the company's working projections.

Another complication hangs over these tax losses. If ownership of the company changes again, the use of the tax losses would become even more limited, according to IRS rules. That is because the restrictions are calculated based in part on the market value of the company -- which is roughly 10% of what it was when the Sirius XM merger closed.

Under IRS rules, the restrictions on the use of the tax losses kick in if the company's major shareowners increase their ownership stakes by more than 50 percentage points. Liberty's current 40% investment is restricted to no more than 49.9% for the next three years, which prevents the Liberty deal from triggering another ownership change.

There is an additional wrinkle: If another investor purchased enough stock to give it a stake of 5% or more during the next three years, that could combine with Liberty's stake to trigger those restrictions anew. Sirius can implement trading restrictions to prevent that. At current values, a new restriction on the losses could cause Sirius to lose about 80% of its tax losses over the next 20 years, according to Mr. Willens.

Absent such changes, Liberty would then be free to acquire the rest of Sirius in three years and use all the losses to shelter taxable profits elsewhere.

Buffett & Berkshire Hathaway Disclose Holdings

2009-02-18T09:05:00.000-08:00

It’s that time again. Warren Buffett and Berkshire Hathaway, Inc. (NYSE: BRK-A) have filed with the SEC showing what the Oracle of Omaha owns in public stocks as of the quarter or as of December 31, 2008 in this case: These are broken out alphabetically by company, along with some color on each stock compared to prior report:

* American Express Co. (NYSE: AXP) over 151.6 million shares, looks same as before.
* Bank of America Corp. (NYSE: BAC) 5,000,000 shares; same as last quarter but lower than the 9.1 million shares reported in June.
* Burlington Northern Santa Fe (NYSE: BNI) 70.089 million shares, higher than the 63,785,418 shares reported previously but we already knew this one was higher from prior transactions.
* Carmax Inc. (NYSE: KMX) 17.63 million, down from 18.444 million last quarter.
* Coca Cola (NYSE: KO) right at 200,000,000 shares, same as before.
* Comcast (NASDAQ: CMCSA) 12 million shares, same as before.
* Comdisco Holdings (NASDAQ: CDCO) just over 1.5 million shares, same as before.
* ConocoPhillips (NYSE: COP) 79.896 million, above the 59.688 million in one unit, but was previously about 83.9 million total. Hard to know if this is a real change or just more reporting or more/less units….
* Constellation Energy Group (NYSE: CEG) 19.897 million shares, but this may have already ended after the last merger.
* Costco Wholesale (NASDAQ: COST) 5.254 million shares, same as before.
* Gannett Co. (NYSE: GCI) 3.447 million shares, same as before.
* General Electric Corp. (NYSE: GE) 7.777 million shares, same as before but that does not include the 10% interest bought last year.
* GlaxoSmithkline (NYSE: GSK) 1.51 million shares, same as before.
* Home Depot Inc. (NYSE: HD) 3.7 Million shares; same as before but down from June.
* Ingersoll-Rand (NYSE: IR) 7.78 million, above the 5.6366 million before.
* Iron Mountain (NYSE: IRM) 3.3722 million shares, same as last quarter.
* Johnson & Johnson (NYSE: JNJ) 28.6 million shares, down by more than half from about 62 million last quarter.
* Kraft Foods (NYSE: KFT) over 138 million. We had 148 million last time but that could have been a carrying difference we didn’t catch.
* Lowes Companies (NYSE: LOW) 6.5 million shares, same as last quarter.
* M&T Bank Corp. (NYSE: MTB) 6.71 million shares, same as last quarter.
* Moody’s (NYSE: MCO) about 48 million shares, same as before but may actually be larger since the 12/31 reporting.
* Nalco Holding (NYSE: NLC) 8.730 million shares; NEW HOLDING from last quarter.
* Nike Inc. (NYSE: NKE) 7.641 million shares, same as last quarter.
* Norfolk Southern (NYSE: NSC) 1.933 million shares, still same.
* NRG Energy (NYSE: NRG) 7.2 million, up from 5 million last quarter.
* Procter & Gamble (NYSE: PG) 96.3 million, down from more than 105.8 million last quarter. * Sanofi Aventis (NYSE: SNY) more than 3.9 million shares, same as before.
* Sun Trust Bank (NYSE: STI) more than 3.2 million shares, same as before.
* Torchmark Corp. (NYSE: TMK) looks roughly the same at 2.82 million.
* US Bancorp (NYSE: USB) about 67.6 million shares, down from over 72.9 million last quarter.
* USG Corp. (NYSE: USG) 17.072 million shares, looks same as last quarter.
* Union Pacific Corp. (NYSE: UNP) 8.9 million shares, same as before.
* United Parcel Service (NYSE: UPS) 1.429 million shares, same as before.
* WABCO Holdings (NYSE: WBC) 2.7 million shares, same as before.
* Wal-Mart Stores Inc. (NYSE: WMT) over 19.9 million shares, same as before.
* Washington Post (NYSE: WPO) over 1.72 million shares, same as before.
* Wells Fargo (NYSE: WFC) roughly 290.4 million shares, looks same as before.
* Wellpoint Inc. (NYSE: WLP) 4.7773 million shares, same as before.
* Wesco Financial Corp. (NYSE: WSC) 5.7 million shares, same as before.

WSJ NEWS ALERT: News Corp. Posts Loss on $8.4 Billion in Write-Downs

2009-02-05T14:51:00.000-08:00

By SHIRA OVIDE

News Corp. posted a $6.42 billion loss for its fiscal second quarter, as it took a stiff charge to write down the value of its assets and as deteriorating advertising spending crimped its broadcast television and newspaper businesses.

The New York media company, which owns The Wall Street Journal, was dragged down by an $8.44 billion impairment charge to reflect the declining value of its TV licenses, acquisitions and other assets. Other media companies, including Time Warner Inc. and CBS Corp., have taken similar charges.

The dour results Thursday – coming on the heels of rocky earnings reports from Walt Disney Co. and Time Warner – underscore the accelerating pace of the ad downturn, particularly for traditional media. News Corp., which relies on ad sales for roughly one-third of its profits, saw earnings decline in all its major divisions except its cable-television networks, which continue to be a bright spot.

"While we anticipated a weakening, the downturn is more severe and likely longer lasting than previously thought," News Corp. Chief Executive Rupert Murdoch said in a statement. Mr. Murdoch said the company was working to cut jobs and restrain costs to withstand the tough operating climate. Among the reductions, The Wall Street Journal said about two dozen newsroom jobs were cut through layoffs, buyouts and elimination of open positions

News Corp.'s loss, which amounted to $2.45 a share for the quarter ended Dec. 31, compared to earnings of 27 cents a share, or $832 million, in the same quarter a year earlier. Excluding the impairment charge, operating income declined 42% as revenue fell 8.4% to $7.87 billion.

The results were released after the market closed. In 4 p.m. Nasdaq trading, News Corp. Class A shares were ahead 5% at $6.94. News Corp.'s stock price has fallen by two-thirds in the last year. Among the major U.S. media conglomerates, only CBS has faded more over the same period.

The biggest deadweight on operating income was a 72% decline at News Corp.'s TV-and-film production division, which produces TV hits such as "24," and "The Unit," and recent movies including "Marley and Me." News Corp. said the decline largely reflects tough comparisons to a year ago, when the company had strong DVD sales of "The Simpsons Movie" and the latest in the "Die Hard" series.

The television division – which includes the Fox broadcast network and local TV stations – posted less than one-tenth of the operating income of a year ago. Local television market has been a particular worry, with spiraling declines in ad spending from auto makers and dealers, and News Corp. said local TV station ad marketing slumped 19% in its second quarter.

Cable networks were a spot of strength, as they were for Time Warner on Wednesday. Operating income rose 27%, helped by higher licensing fees for Fox News Channel and the first profitable quarter for News Corp.'s startup Big Ten sports channel.

Operating income declined 9% at the unit that includes News Corp.'s newspapers, as ad spending dropped 10% at the company's U.K. newspapers and 4% as its Australian titles. News Corp. papers include the Times and News of the World in the U.K., and the Herald Sun in Australia. The downturns more than offset lower depreciation expenses and the inclusion of results from Journal publisher Dow Jones & Co., which News Corp. acquired in December 2007.

Once-dark picture improves for TiVo

2009-02-03T10:03:00.000-08:00

Once-dark picture improves for TiVo
The pioneer of digital video recording bulked up its services and struck key partnerships. It's expected to have turned its first profit in the just-completed year.
By Alex Pham

February 2, 2009

On Oct. 9, a day the Dow dropped 679 points, TiVo Inc. deposited a check for $104.6 million. The company had just won a hard-fought battle against EchoStar Communications Inc., whose Dish Network digital video recorders were found by a federal jury to infringe TiVo's patents.

"I think we were the only company doing high-fives that day," recalled TiVo Chief Executive Tom Rogers.

TiVo, whose name has become synonymous with digital video recorders, is the comeback kid of technology.

Four years ago, the Alviso, Calif., company was on deathwatch, having lost a crucial partnership to provide recorders for DirecTV Group Inc.'s satellite TV customers. Sales of its TiVo boxes were slipping, and the company was fast running out of money.

Today, TiVo is debt-free, has $200 million in cash and is expected to post its first profitable fiscal year -- the one that ended Saturday.

TiVo's stock price, which dipped as low as $3.51 on Feb. 11, 2005, has rebounded to close at $7.19 on Friday. It hit a 52-week high of $9.43 in February last year.

"Financially, they're in great shape," said Alan S. Gould, senior media analyst at Natixis Bleichroeder Inc., an investment firm in New York. "They've done a good job of turning the company around."

Even though TiVo remains vulnerable because of its declining subscriber base, the company is no longer on the brink of collapse. If anything, the nimble outfit has managed to cheat obsolescence by continuing to innovate and adapt to changing viewing habits.

"TiVo has managed to keep itself in the game by focusing on where the consumer demand is," said James McQuivey, principal analyst at Forrester Research in Cambridge, Mass. "They started the trend a decade ago. Now they're working hard to stay on top of those trends."

During its darkest hours in 2005, the company picked a new chief executive, replacing co-founder Mike Ramsay with Rogers. Though a technology newbie, Rogers had extensive experience in the world of television, having founded financial news network CNBC while president of NBC Cable.

Together with TiVo vice presidents Naveen Chopra and Tara Maitra, Rogers lashed together deals to bolster the foundering company. His strategy was two-pronged: Land services to make the TiVo device more useful, and find cable partners to distribute the TiVo service -- which includes its programming guide, search interface and other well-regarded features -- to subscribers for a licensing fee.

He made headway on both fronts, adding RealNetworks Inc.'s Rhapsody music streaming service, Amazon.com Inc.'s Video on Demand service, Google Inc.'s YouTube videos, Viacom Inc.'s Nickelodeon TV shows and Netflix Inc.'s Instant Watch video streaming service. That meant people who bought the TiVo recorder could listen to music from Rhapsody's library of 6 million songs on their TVs, watch movies or shows on demand and sample videos from the Web.

"Most of what people are watching now is on the major networks and on the Internet," McQuivey said. "Between that and Netflix, people are getting much of what they need."

For now, though, cable and satellite are still king. TiVo struck deals with Comcast Corp. and Cox Communications Inc. to license the TiVo service on their set-top cable boxes.

And the relationship with DirecTV, which is now managed by cable mogul John Malone's Liberty Media Corp., is back on track. TiVo has a contract to provide DVRs for the satellite TV company's subscribers starting in the second half of this year.

Meanwhile, TiVo put its own finances in order, cutting back advertising and promotions. Last year, it laid off 38 people, about 7% of its workforce, to save $6.5 million in annual costs. The windfall from the EchoStar ruling is expected to help TiVo post its first-ever annual profit.

And its litigation against EchoStar could yield more cash. This month, a federal judge in Texas is set to hear TiVo's claim that EchoStar has continued to violate TiVo's patents since the September 2006 verdict that resulted in the $104.6-million award.

Yet TiVo isn't completely out of the woods.

Its subscribers continue to decline. About 3.5 million paid service fees as of Oct. 31, the end of its third quarter, down from 4.1 million a year earlier. Comcast and Cox have been slow to add subscribers for TiVo. And DirecTV won't begin to offer TiVo's device until later this year.

Meanwhile, TiVo is busy trying to convince consumers that its stand-alone device, priced between $150 and $600 (depending on storage capacity and features such as support for high-definition TV and surround-sound audio) with a monthly service fee of $12.95, can help bail them out of the economic doldrums by saving them "millions."

"By that, we mean millions of pieces of content that families can enjoy for free at home," Rogers said.

The irony of a company that's come back from the dead to turn a recession into a marketing opportunity isn't lost on the CEO.

"There were so many people who counted us out strategically and financially," he said. "We've gone from being a technology pioneer to a commodity and back to an innovator again."

Some Fear Google’s Power in Digital Books

2009-02-02T10:42:00.000-08:00

Some Fear Google’s Power in Digital Books
By NOAM COHEN

IN 2002, Google began to drink the milkshakes of the book world.

Back then, according to the company’s official history, it began a “secret ‘books’ project.” Today, that project is known as Google Book Search and, aided by a recent class-action settlement, it promises to transform the way information is collected: who controls the most books; who gets access to those books; how access will be sold and attained. There will be blood, in other words.

Like the oil barons in the late 19th century, Google is thirsty for a vital raw material — digital content. As Daniel J. Clancy, the engineering director for Google Book Search, put it, “our core business is about search and discovery, and search and discovery improves with more content.”

He can even sound like a prospector when he says Google began its effort to scan millions of books “because there is a ridiculous amount of information out there,” he said, later adding, “and we didn’t see anyone else doing it.”

But there is a crucial difference. Unlike Daniel Plainview, the antihero of “There Will Be Blood,” played by Daniel Day-Lewis, who cackles when describing how his rigs can suck the oil underneath other peoples’ property — drink their milkshakes, if you will — when Google copies a book the original remains.

Instead, the “property” being taken is represented by copyrights and other kinds of ownership. There will be lawsuits.

•

In the latest issue of The New York Review of Books, Robert Darnton, the head of the Harvard library system, writes about the Google class-action agreement with the passion of a Progressive Era muckraker.

“Google will enjoy what can only be called a monopoly — a monopoly of a new kind, not of railroads or steel but of access to information,” Mr. Darnton writes. “Google has no serious competitors.”

He adds, “Google alone has the wealth to digitize on a massive scale. And having settled with the authors and publishers, it can exploit its financial power from within a protective legal barrier; for the class action suit covers the entire class of authors and publishers.”

Google is certainly solidifying a dominant position in the world of books by digitizing the great collections of the world. It relies on a basic mathematical principle: no matter how many volumes Harvard or Oxford may have, each can’t have more than Oxford plus Harvard plus Michigan, and so on.

The class-action settlement (which a judge must still approve), Mr. Darnton writes, “will give Google control over the digitizing of virtually all books covered by copyright in the United States.”

As long as Google has a set of millions of books that it uniquely can offer to the public, he argues, it has a monopoly it can exploit. You want that 1953 treatise on German state planning? You’ll have to pay. Or, more seriously, your library wants unfettered access to these millions of books? You’ll have to subscribe.

While Harvard has allowed Google to digitize its public domain holdings, it has thus far not agreed to the settlement. “Contrary to many reports, Harvard has not rejected the settlement,” Mr. Darnton wrote in an e-mail message, in which he said his essay was “not meant as an attack on Google.” “It is studying the situation as the proposed accord makes its way through the court.”

To professors who track the fast-changing nature of content on the Internet, not to mention Google officials, the idea of Google as a robber baron is fanciful. Google has no interest in controlling content, Mr. Clancy said, and in the few cases where it does create its own content — maps or financial information, for instance — it tries to make it available free.

Eben Moglen, a law professor at Columbia and a free-culture advocate, puts it this way: if the fight over digitization of books is like horse-and-buggy makers against car manufacturers, Google wants to be the road.

To those who write about the significance of Google Book Search — and a bit of a cottage industry has formed online in a few months — it is not Google’s role as the owner of content that preoccupies them. Rather it is the digitization itself: the centralization — and homogenization — of information.

To Thomas Augst, an English professor at New York University who has studied the history of libraries, including those in the past that were run as businesses, what is significant is that the digitization of books is ending the distinction between circulating libraries, meant for public readers, and research libraries, meant for scholars. It’s not as if anyone from the public can walk into the Harvard library.

“A positive way to look at what Google is doing,” he said, “is that it is advancing the circulating of books and leveling these distinctions.”

•

In a final twist, however, the digital-rights class-action agreement has the potential to make physical libraries newly relevant. Each public library will have one computer with complete access to Google Book Search, a service that normally would come as part of a paid subscription.

One of Mr. Darnton’s concerns is that a single computer may not be enough to meet public demand. But Mr. Augst already can see a great benefit.

Google is “creating a new reason to go to public libraries, which I think is fantastic,” he said. “Public libraries have a communal function, a symbolic function that can only happen if people are there.”

How Netflix got started

2009-01-29T11:22:00.000-08:00

Netflix founder and CEO Reed Hastings tells Fortune how he got the idea for the DVD-by-mail service that now has more than eight million customers.

(Fortune Magazine) -- The genesis of Netflix came in 1997 when I got this late fee, about $40, for Apollo 13. I remember the fee because I was embarrassed about it. That was back in the VHS days, and it got me thinking that there's a big market out there.

So I started to investigate the idea of how to create a movie-rental business by mail. I didn't know about DVDs, and then a friend of mine told me they were coming. I ran out to Tower Records in Santa Cruz, Calif., and mailed CDs to myself, just a disc in an envelope. It was a long 24 hours until the mail arrived back at my house, and I ripped them open and they were all in great shape. That was the big excitement point.
Don't be afraid to change the model

Early on, the first concept we launched was rental by mail, but it wasn't subscription based, so it worked more like Blockbuster. Some people liked it, but it wasn't very popular. I remember thinking, God, this whole thing could go down, and we said, Let's try the more radical subscription idea. We knew it wouldn't be terrible, but we didn't know if it would be great. We launched the service on Sept. 23, 1999, and we could tell within a month that we had a renewal rate. It was a free trial, but only 20% didn't go from the free trial to the paid. We're up to 90% renewal now.
You know it's working when...

I was down in Arizona in 2003 visiting one of our distribution centers on the outskirts of Phoenix. It was raining, and my umbrella wasn't working, so I walked the half mile from the distribution center to the hotel. I got the message on my BlackBerry that we hit a million [subscribers] that day while I was walking in the rain. It was this beautiful moment where I was just so elated that we were going to make it, and that was also the first quarter that we turned profitable. It was a magic walk.
In my queue

I've seen well over 1,000 movies. The one I remember most was Sophie's Choice, because I was taking European history in college at the time, and I was totally bored with the topic. And then I saw the movie, and I started to care. It changed my perspective. I could relate to the trauma after seeing the movie in a way that I couldn't by studying it.
Secrets of my success

* Target a specific niche: When there's an ache, you want to be like aspirin, not vitamins. Aspirin solves a very particular problem someone has, whereas vitamins are a general "nice to have" market. [The Netflix idea] was certainly aspirin.
* Stay flexible: We named the company Netflix (NFLX), not DVDs by Mail because we knew that eventually we would deliver movies directly over the Internet. DVDs will be around a long time, but we're building for the day when they're not.
* Never underestimate the competition: We erroneously concluded that Blockbuster (BBI, Fortune 500) probably wasn't going to launch a competitive effort when they hadn't by 2003. Then, in 2004, they did. We thought, Well, they won't put much money behind it. Over the past four years they've invested more than $500 million against us.
* There are no shortcuts: Occasionally great wealth is created in a short amount of time, but it's through a lot of luck in those situations. You just have to think of building an organization as a lot of work. It may or may not turn into great wealth.

Charlie rose show An exclusive conversation with Warren Buffett

2008-10-05T17:24:00.000-07:00

Starbucks Sttock Tip

2008-08-25T04:49:00.000-07:00

Target Stock Tip

2008-08-25T04:43:00.000-07:00

Walmart Stock Tip

2008-08-25T04:28:00.001-07:00

Buffett's Berkshire Has Worst First Half Since 1990

2008-07-02T08:57:00.000-07:00

By Josh P. Hamilton

July 2 (Bloomberg) -- It must be a bear market because even billionaire Warren Buffett's Berkshire Hathaway Inc. has slumped almost 20 percent since December.

The decline exceeds the drop of the Standard & Poor's 500 Index and marks the worst first half for the Omaha, Nebraska- based investment and holding company since 1990. Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income.

Berkshire is ``close to getting more fairly priced,'' said Charles Hamilton, a Nashville, Tennessee-based analyst at FTN Midwest Securities Corp., who has a ``neutral'' rating on Berkshire. ``I wouldn't say it presents a buying opportunity right now.''

After reporting record 2007 earnings of $13.2 billion, the 77-year-old Buffett told shareholders in February that profit margins from insurance will drop.

``That party is over,'' Buffett wrote in his annual letter to shareholders in February. ``It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008.''

Berkshire also has been hurt by the declines of Wells Fargo & Co., American Express Co. and U.S. Bancorp, three of the company's 10 biggest equity holdings at the end of March. Wells Fargo, Berkshire's second-largest holding, dropped 18 percent in the second quarter, while American Express and U.S. Bancorp slipped 14 percent.

Buffett Bulls

Berkshire declined $250 to $119,850 at 9:58 a.m. in New York Stock Exchange composite trading, and is down more than 19 percent since its all-time closing high of $149,200 on Dec. 10. That exceeds the 15 percent slide of the S&P 500 in the same period. Berkshire spokeswoman Jackie Wilson didn't respond to a request for comment.

The slide hasn't deterred Buffett devotees, who think Berkshire's decline represents a buying opportunity.

``I'd put a new client in Berkshire right now,'' said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which oversees $800 million, including Berkshire shares. ``It's probably the highest-quality collection of individual companies that's ever been assembled. Long slides are not in the Berkshire Hathaway lexicon.''

Berkshire bulls are betting with history on their side: the shares advanced in 17 of the past 20 years. The last annual decline was 3.8 percent in 2002. The company had record earnings last year as Buffett booked a $3.5 billion profit on a $500 million investment in oil producer PetroChina Co., and insurance units made money selling coverage against storms that never came.

`Chaotic Markets'

The decline in financial shares may provide Buffett an opportunity to boost holdings, said Whitney Tilson, a principal at New York-based hedge fund T2 Partners, which counts Berkshire among its investments.

``Where Buffett makes his money is taking advantage of weak, chaotic markets,'' Tilson said. ``The odds that Buffett could do a large transformative deal have gone up substantially.''

Buffett built Berkshire over four decades from a failing maker of men's suit linings into a $185 billion company. He plows revenue into companies whose management he trusts and whose business models he deems superior. The billionaire's Berkshire stake makes him the world's richest person, according to Forbes magazine.

With Berkshire's $35 billion in cash, Buffett can scoop up bargains on beaten-down securities and make acquisitions while near-frozen credit markets curb purchases by leveraged buyout firms, Tilson said.

Bond Insurance

Buffett entered the bond insurance business in December as the largest companies in the industry, MBIA Inc. and Ambac Financial Group Inc., struggled to maintain their credit ratings. CIT Group Inc., the lender that lost 84 percent of its market value in 12 months, said yesterday that a Berkshire subsidiary agreed to pay $300 million for its portfolio of loans backing factory-built homes.

Tilson calculates the so-called intrinsic value of Berkshire's assets and operations at $157,000 a share. The stock reached intrinsic value in 11 of the past 12 years, Tilson said. The discount was about 24 percent at yesterday's close.

This year's gap emerged amid a drop in commercial property rates from their peaks after Hurricane Katrina in 2005. Property and casualty prices in the U.S. fell 14 percent in the first quarter from the same period a year earlier, according to a survey by the Council of Insurance Agents and Brokers.

Housing Slump

Berkshire, which owns National Indemnity, General Re Corp. and Geico Corp., saw first-quarter earnings from underwriting insurance policies fall 70 percent to $181 million. Pretax underwriting profit at Berkshire Hathaway Reinsurance Group, which sells catastrophe coverage, dropped 95 percent.

Also damaging to Berkshire's earnings is the biggest housing slump since the Great Depression, which slowed the company's building-related businesses, including Acme Brick, wallboard maker Johns Manville and Shaw Industries, the world's largest carpet manufacturer.

Buffett says the U.S. is mired in ``stagflation,'' a period of slowing economic growth and accelerating inflation.

``We're right in the middle of it,'' Buffett said in a June 25 interview. ``I think the `flation' part will heat up, and I think the `stag' part will get worse.''

An economic recovery isn't ``going to be tomorrow, it's not going to be next month, and may not even be next year,'' he said.

Tilson and Carret Zane's Betz say they'll wait. Berkshire gained 26-fold since 1988 in NYSE trading -- a return more than three times greater than the S&P 500.

``I sleep well,'' Tilson said. ``It's not going to double overnight, but we think it will in five years, which is a 15 percent compounded annual rate. It's the stock you want to own.''

New Starbucks Brew Attracts Customers, Flak

2008-06-30T21:46:00.000-07:00

Fans of Bold Coffee
Bemoan the Rise
Of Pike Place Roast
By JANET ADAMY

A backlash is brewing against Starbucks Corp. over its Pike Place Roast coffee, which has perked up the company's sales by attracting new business, but has alienated a small yet vocal group of longtime patrons.

In April, the Seattle-based chain made the new, milder brew the main drip coffee at its about 11,000 locations across the country. The idea was to offer a more approachable cup of java with a smoother finish.
[A Starbucks employee offers samples of Pike Place Roast at ceremonies in Seattle marking the coffee's launch. ]
UPI/Landov
A Starbucks employee offers samples of Pike Place Roast at ceremonies in Seattle marking the coffee's launch.

But the new strategy, which played down the company's more-established robust roasts, has touched off a debate about what customers think Starbucks should stand for: bold coffee for connoisseurs or a tamer brew for the masses?

Much of that debate is taking place on the company's customer-feedback Web site, which the chain launched in March. The site is littered with thumbs-down verdicts on the new roast. Some small competitors have posted messages there trying to woo away disenchanted Starbucks drinkers.

A customer with the handle Westend complained in a posting on the site that the flavor of Pike Place Roast is "weak, watery and no substitute for the bold." Another, ArtM, called the coffee "a fundamental, grievous error." Beccajav derided its finish as "reminiscent of a taste from the dentist's office."

But Starbucks executives say the chain's aggressive marketing of Pike Place Roast has been a success. Since its introduction, Starbucks' sales of drip coffee have risen by between 5% and 15%, depending on the part of the country, the company says.

"Our satisfaction metrics are up across the board," says Rob Grady, Starbucks' vice president, global beverage. Most of the sales increase in drip coffee has come from new customers "that historically might have not come into Starbucks," he adds.

Starbucks used to brew three types of coffee each day: one bold, one mild and one decaffeinated. The lineup changed weekly.

Now Starbucks outlets serve Pike Place Roast in regular and decaf versions every day. In the morning, stores also brew one of the chain's six bold flavors, like Gold Coast or Caffe Verona. But most Starbucks no longer brew a bold coffee after noon.

The new coffee has clearly struck a chord with some coffee drinkers. But other Starbucks patrons complain that it's gotten hard to buy the stronger-tasting blends on which Starbucks built its reputation. Two weeks ago, after getting thousands of pleas on its Web site, Starbucks again started brewing bold-flavored coffee in the afternoon at some of its locations.

Since New Coke flopped in the 1980s, food and beverage companies have been cautious about changing the taste or formula of their signature offerings. McDonald's Corp., for instance, has kept quiet about the changes in its cooking oil and Big Mac sauce in recent years, in part to minimize the potential for a backlash.

"The worst thing you can do is turn away your loyal customers," says Ron Paul, president of the food consulting firm Technomic Inc. "It's a very risky strategy."

For Starbucks, however, the controversy has succeeded in creating a buzz around the chain's brewed coffees after years in which it largely neglected them in favor of its fancier and pricier coffee-flavored drinks.

Starbucks' Mr. Grady adds that the chain's customers who want a stronger blend of coffee can always ask the barista behind the counter to brew them a cup specially. But some regulars say strong coffee shouldn't require a special order at a chain that popularized it. And some customers who say they have asked a barista to make them a cup of bold coffee say they have been refused.

Pike Place Roast, named for the first Starbucks, located in Seattle's Pike Place Market, has been widely interpreted as the company's attempt to address complaints that its coffee tastes bitter or burnt. But its executives say that wasn't their goal.

Customers were confused by the frequently changing blends available at the company's outlets and wanted something more consistent, says Anthony Carroll, Starbucks manager of green-coffee quality. Surveys of 1,500 consumers also showed they wanted coffee with a smoother finish, he says.

With Chief Executive Howard Schultz pushing for quick action to reverse the company's sliding same-store sales in the U.S., Starbucks developed Pike Place Roast and put it in the company's stores in six months. That's about a year less than it typically takes the chain to refine and implement major new ideas.

Last fall, Mr. Carroll and his colleagues "locked ourselves" in a tasting room at Starbucks headquarters and went through at least 50 coffee blends to settle on the new flavor, Mr. Carroll says. They adjusted the taste by changing variables like the temperature at which the beans were roasted.

"We know what the Starbucks profile is -- it's very near and dear to all of us -- and we weren't going to waver from that signature Starbucks flavor," Mr. Carroll says. He and his team narrowed the field to a group of blends that Mr. Schultz tasted to help make the final choice. Earlier this year, Starbucks tested the coffee with consumers, mostly in the Seattle area.

The new blend won Starbucks a more favorable review from Consumer Reports than the magazine's 2007 assessment, which declared Starbucks coffee "burnt and bitter."

"If you're a confirmed Starbucks drinker and like the taste you're familiar with, this may not be for you," the magazine wrote in a May posting on its Web site. "But if you're looking for coffee with a mild, medium-roasted flavor, Pike Place Roast might be the one to try."

Jolene Tapie of Rancho Cucamonga, Calif., decided the new coffee wasn't for her. "I just couldn't believe that Starbucks would even serve something that bland, tasteless, watery," she says. Ms. Tapie used to visit Starbucks at least three times a week on her way home from her job in a high-school records office. But when her nearby Starbucks replaced the bold blends she favored with Pike Place Roast in the afternoon, she started going to local coffee shops instead.

"I am shocked and disappointed that you have abandoned your original vision," a poster identified as WestPalm wrote on mystarbucksidea.com, the company's feedback site. "You need to wake up before it's too late." Thousands of votes of support for his stance and others like it helped persuade the company to restore a bold coffee variety to the afternoon lineup at about 900 of its locations.

Mr. Grady says Starbucks anticipated complaints. "Every time we change something ... there will be customers that liked it the way it was," he says.

Airlines hedge against soaring fuel costs

2008-06-30T21:16:00.000-07:00

Since 1999, the program has saved Southwest Airlines $3.5 billion
DALLAS - The computer screen on Scott Topping’s desk at Southwest Airlines flickered with row after row of dates and numbers, but they had nothing to do with arrivals and departures.

They tracked the price of oil futures for the next several months, and they told a grim tale: No letup in sight from record prices for jet fuel.

“We’re on a one-way street right now,” Topping said as he hunched over the screen, shaking his head.
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It’s Topping’s job to oversee Southwest’s battle to control surging fuel costs. It is the most successful program of its kind in the airline industry.

In the first quarter of this year, Southwest paid $1.98 per gallon for fuel. American Airlines paid $2.73, and United paid $2.83 per gallon in the same period.

Since 1999, hedging has saved Southwest $3.5 billion. It has sometimes meant the difference between profit and loss. In the first quarter, hedging gains of $291 million dwarfed Southwest’s $34 million profit.

What is hedging?
Hedging is a financial strategy that lets airlines or other investors protect themselves against rising prices for commodities such as oil by locking in a price for fuel. It has been described as everything from gambling to buying insurance.

Airlines can hedge in several ways, making financial transactions with banks, energy companies or other trading partners.

They can buy contracts for crude oil or unleaded gasoline, and reap a gain if prices rise, offsetting the higher cost of jet fuel.

They can buy a “call option” that gives them the right to buy fuel at a certain price.

They can also use collar hedges, a combination of rights to buy and sell at set prices (“call” and “put” options). Collars provide protection from a decline in prices but less upside if prices rise.

Airlines also use swaps, contracts that require them to buy oil or fuel on a certain date at a set price. These are risky — one party in a swap wins, the other loses.

A risky business
Most airlines use a combination of strategies to reduce risk.

The transactions carry a price tag. Southwest spent $52 million on hedging premiums last year and $14 million in the first three months of this year.

As a result mostly of trades made years ago, Southwest has hedged 70 percent of this year’s fuel needs at $51 per barrel instead of the current price of more than $140 per barrel.

But hedging premiums rise and fall with the price of the underlying commodity, making new trades very expensive. Southwest has not done much trading in the last several months.

Airline executives say hedging is not a bet on the direction of oil prices.

“We view our program as insurance,” said Paul Jacobson, the treasurer of Delta Air Lines Inc. “Our goal is to minimize the volatility of fuel expenses. To do that, you’ve got to be in the market actively without an opinion as to what energy prices will do.”

But hedging carries risks. Airlines can lose money if oil prices turn down and their options expire.

In 2006, Delta won approval from a bankruptcy court and creditors to get into hedging. But the airline got squeezed when oil prices dropped in midyear, and it reported a loss of $108 million from the trading.

Continental Airlines Inc. reported a loss of $18 million from hedging in the first quarter of 2007. But like Delta, Continental is still hedging.

Southwest's success
At one time in the 1990s, most major U.S. airlines hedged some of their fuel costs — even hiring experts from the oil industry to show them the ropes — said Peter Fusaro, chairman of Global Change Associates, an adviser to hedge funds.

That changed after the recession and terror attacks of 2001, which plunged airlines into huge losses. Banks and energy companies that make hedging trades with airlines grew nervous.

“The problem was that most carriers had terrible creditworthiness and couldn’t hedge,” Fusaro said. “Counter-parties feared the carriers would renege on their trades.”

Southwest was the only large U.S. carrier to remain profitable through the downturn. It benefited from higher labor productivity and lower ticket-sales costs. That, and a healthy balance sheet, allowed it to keep hedging when oil was a bargain, compared to today’s prices.

Now, Southwest is the only big carrier that has most of its fuel expenses hedged at below-market prices. And analysts say it will be the only one to earn a profit this year.

While other carriers plan to slash flights later this year — some contracting by more than 10 percent — Southwest expects to grow, although more slowly than it would like.

And Southwest has avoided the kind of fees that annoy passengers. It doesn’t charge for checking luggage or buying a ticket over the phone, doesn’t add a fuel surcharge to the fare, and still gives out free sodas and snacks.

Fuel crisis looming
But how long will the joy ride last?

The bulk of Southwest’s hedges expire gradually by 2012. Replacing them would be very expensive and risky. One plan under study is to go back to hedging only against catastrophically higher oil prices — say, $200 per barrel.

Unless oil prices stabilize or even decline, the airline could face a crisis covering higher fuel costs in just a few years.

“It’s starting to have an impact on their operating plan,” said Betsy Snyder, an analyst for the debt-rating service Standard & Poor’s. “They’re cutting back growth plans for the first time ever and exiting some unprofitable routes.”

Chairman and Chief Executive Gary Kelly said the fuel hedges have bought his airline time to adjust to higher energy costs. Now he wants to find $1.5 billion in new revenue to make up for shrinking fuel hedges.

Among possible sources of the money are higher fares, international service, in-flight entertainment for a charge, and selling hotel rooms on its Web site.

Snyder thinks Southwest can pull it off by following its current strategy of expansion in places like Denver, Philadelphia and Baltimore, where rivals are cutting flights.

“This is a company,” Snyder said, “that has always taken advantage of others’ misfortune.”

Bill Gates and Warren Buffett Discuss "Creative Capitalism"

2008-06-27T03:47:00.000-07:00

via Creative Capitalism by Conor Clake on 6/26/08

This is the transcript of a discussion between Bill Gates and Warren Buffett about Bill’s concept of “creative capitalism.” The discussion, over lunch at the Gates residence in Medina, Washington, took place on May 15, 2008. Also at the table were Melinda Gates, Josh Daniel of the Gates Foundation, and me. I started by asking Warren what he thought of the whole idea. As you can see, he didn’t fall for that one.

--Michael Kinsley
Warren Buffet: I would rather have Bill, if he will, give me the main points.

Bill Gates: Well it’s not completely well defined. It’s a phrase that I used in a speech at Harvard a year ago, because I totally believe in markets as such powerful forces for drawing out innovation and creating things that are sustainable. And yet, you do get trapped in this situation where the markets serve where the dollars are, so you don’t get markets meeting the needs of the poorest. And so how do you bootstrap or support the needs of the poorest so markets are reaching out to them. I mean, when I view the last hundred years as an experiment in how good markets are, the answer is very, very clear and very strong. It’s one of those things that’s so clear people won’t even discuss it with you anymore. Like in this [Edward] Teller biography: he says, Look, if he didn’t believe in innovation, he would have been a communist. If the economy is a zero-sum situation, then you ought to try some crazy sharing thing. It’s only the innovation and pie-growing activity that made Teller feel comfortable with the capitalistic approach. And I think that that’s been validated.

You often hear people saying that companies should do something besides profit maximization. And it’s amazing how strong a message is hidden in words like “diversity” or the broad term “corporate social responsibility.” Warren and I were just at the Microsoft CEO Summit for the last couple days and it was amazing how many of the talks were about how a company needs to have core values of who they are and what they do as the thing that makes the employees feel they have a purpose and guides their action. And how that needs to be really at the center, even more so than the short-term profit metrics. Jack Welch was very good on that and Lee Scott [CEO of Wal-Mart] was very good on that, I think in a very sincere way. I think it’s more true all the time.

Bill George [of Harvard Business School] ran the leadership panel, and he was saying how the younger generation really wants to go to work with people who have a purpose. So what I’m saying is when people write down that purpose, when they write down their values, that an element of that should be: what can we do based on our skill set, our innovators, whatever unique capacities we have as a company--what can we be doing for the poorest 2 billion? And that can either be taking more risk in terms of trying to develop markets there, which is C.K. Prahalad-type stuff, or just doing things like the Merck donation that are not profit seeking and yet not giving up huge percentage of profit.

So somebody can read the words “creative capitalism” and say, “Okay, Bill Gates said that you should serve the poorest 2 billion and ignore profit.” That is not what I intend to say at all, but then I am being a bit ambiguous about how far you go in being willing to give up something. Am I saying one percent? Two percent? Three percent? Nobody who sets these dual roles is very good about being clear. I mean, what do they say you’re supposed to give up for corporate social responsibility. Well, they’re not willing to be numeric because they feel like the two goals, profit and social responsibility, aren’t totally at odds over time—or diversity, or whatever the value is.

I understand it best in terms of the big companies of the world: pharma, banks, technology companies, food companies. Buying from the poor world, supplying to the poor world, having scientists and innovators who come together to think about the poor world. It’s best defined for me there, and then I think, “Okay, how concrete is this?” I go back to this thing of: Okay, if all companies did as well as the best do, then it would be pretty dramatic in terms of the rate of improvement for the poorest. And a year from now I’ll know a lot more about this, because in my new time back at the Foundation I’ll meet with heads of pharma, heads of food companies, heads of…I’ll meet a lot of these companies and try and get a sense of, do they agree that in their hiring it would help them, do they agree that in their reputation and maybe seeking long-term markets it would help them and see how concrete a response is possible.

Warren: But as Bill was talking, it just occurred to me that if you don’t trust the government to do a lot of things very well—and business will never trust them to do that; rich people will never trust them to do that—and if, on the other hand, the honor system doesn’t work particularly well in terms of how many people behave (and this idea just occurred to me ten seconds ago so it will take a lot of refining): what if you had three percent or something like that of the corporate income tax totally devoted to a fund that would be administered by some representatives of corporate America to be used in intelligent ways for the long-term benefit of society, This group—who think they can run things way better than government—could tackle education, health, etc. or other activities in which government has a large role. And it would have this forced funding of three percent of corporate profits or some sum like that. Ace Greenberg used to insist that all the managing directors of Bear Stearns give four percent to charity, and in December he went around and talked to everyone who hadn’t yet given his four percent. And he told all the Jews that they had to give any shortfall at year end to Catholic Charities, and he told the Catholics they had to give it to the United Jewish Appeal. Well this would be a variation on that. Take three percent—pick a figure—of corporate income. That would be, perhaps, $30 billion a year (you would exempt small companies). If there are things to be done in society that the market system doesn’t naturally lead to, something like this would be a supplement to the invisible hand. It would be a second hand that would come down for society—administered in a business-like manner—and it might be interesting to see what a system like that might produce.

Bill: You might want to say that companies could include the cost of putting their best innovators onto the problems, and say that if you don’t do that, then you have to pay it out in cash and it goes into a pool for the businesses that do have the innovators and might want to devote four percent or five percent. When we go to a drug company and say, “Work on a malaria vaccine,” it’s completely unreasonable to expect them to fund it themselves. And so you do get this weird thing--I don’t know how much I’ve said this in speeches; I think I’ve said it privately more--where it’s better for a large drug company to say, “We don’t work on the diseases for the poor. But if we did, we’d give it away. And then you have these other drug companies that do work on diseases for the poor that face the fact of saying, “No, we at least want to charge our marginal cost for this thing, and because we put our best people on it we want some credit for having done this,” but they actually get discredit because they’re charging their marginal cost, where the other guy could pontificate and say, “Yeah, we don’t happen to have any, but boy we wouldn’t be like those bastards and charge for the thing.” So you get sort of adverse selection. It’s a sticky wicket. As soon as you get in it’s like, Oh no, I’m expected to do more because I’m doing something.

Warren: The market system is always going to take care of the medical needs of the rich . . . if a rich guy wants to take out a young gal, you’re going to sell him Viagra and be able to make money doing so. Basically, the market system will make that research worthwhile. But it won’t make research worthwhile for some disease that is indigenous to the poorest parts of the world and not present elsewhere.

Mike: Two of the biggest categories of creative capitalism seem to be, first, one way or another, a corporation gives away money or money equivalents like the time of its best employees, and second, corporations seeking out profit-making opportunities in poorer countries that they otherwise might not. Let me ask you about the second one. It’s sort of like the famous joke about the economist who sees the ten-dollar bill on the ground and says it can’t be there, someone would have picked it up. Why does it require creative capitalism to…I mean, if there is great opportunity there, why aren’t people doing it already?

Warren: Market opportunities will be filled. I think the present system works pretty well in terms of real market opportunities. Now there are a lot of people who would like things to be market opportunities that aren’t market opportunities. But I don’t worry very much about real market opportunities not getting filled.

Bill: You definitely want to encourage people to go into countries where it would be normally riskier and they might not choose to go. A country like Vietnam is improving its situation without much help from creative capitalism. They’ve gotten governance basically right, the education thing is right, they’re getting population growth at a level where they can really feed and employ their people. It’s a spectacular thing. In an earlier question we talked about which are the most important elements. Government plus normal capitalism--really good government plus normal capitalism. If you can have that, God bless you, that is such a fantastic thing. It works very well.

But, when you get this problem of these diseases-- it’s almost too bad, this sounds like an awful thing to say--but there are diseases that are mostly in poor countries. When that’s not the case you have trickle down, which eventually will work for the poorest, because drugs usually have a high cost of development that gets recovered in the rich world and then as they go off patent they’re sold for marginal cost and everybody benefits. And so the fact that malaria was eliminated in the United States and so they don’t need a malaria vaccine, it’s a tiny bit of a tragedy, because you don’t have all of these brilliant minds just seeing that and acting on it and those economic dollars. So I do think we have some real traps where you need creative capitalism. Like getting micronutrients to the poor, getting these drug discovery things to get done. Trying to use the cell phone and network in a different way. The rich world can fall into a way of doing something that works for them that doesn’t work for the poor world and then they go off on very different paths. Ambani, the Reliance guy, [conor, find link pls]who’s very capitalistic, I mean he’s going to do some philanthropy, but he’s mostly in business. He’s chosen to go into the retail business in India. He’s in the energy business mostly. He split things up with his brother, but he kept the energy business. I said, “Why are you doing that?” Well, he’s kind of excited about it, but that would do a lot of social good. He was explaining how they use technology so that 50 million farmers who didn’t used to be able to sell their stuff would be able to sell their stuff. Anyway, so there are great things that capitalists are willing to take more risks in these countries and feel they get some reputational benefit for taking risks in these countries, or they think about long-term growth. So that boundary of how much are you pushing them beyond their normal comfort level to take a risk that will this help them to hire better employees, or will this eventually become economic? The creativity part is partly biasing them towards taking those big risks.

Warren: The market also gets distorted where you feel you’re going to get screwed after going in to a country. You’re going to set a higher threshold on expected returns, if you think there’s a fair chance they’re going to expropriate your assets. And, if there is no rule of law at all, you may skip the country regardless of possible returns.

Mike: But that’s rational.

Warren: Yeah, absolutely rational. Now the counterbalance of that is to have a federal Ex-Im bank or something like that that says if you go to, say, Indonesia and they take your assets away from you, well at least they guarantee you will get your cost back. But government has a role to play in that. Otherwise it is perfectly rational for me to say I’m not going to go back to Indonesia again because we got screwed. That will always be the case with some countries, although I think it’s way less of a deterrent now than it was 25 years ago. Nevertheless, expropriation risk—including confiscating taxes that might later be imposed—will still deter people bringing goods and services to people in some areas of the world.

Mike: When you talk about the comfort level, Bill, is that...can people or sometimes companies irrationally seek comfort and avoid risk? And if it’s not irrational, why should you force people to do it?

Bill: Well rationality only goes so far. If your young employees are saying to you, “Hey, should we be trying to develop the market in Africa?” Rationality might say to you, “Gosh, we don’t pay much attention to that, why bother?” There’s a lot of latitude in terms of what’s rational. If you feel like getting involved in that, if it has this positive benefit, then you’ll put more time into the specific strategy that is rational to going after that opportunity and maybe coming up with something that in the long term is very rational.

There are multiple rational paths that companies have to go down. If you said to a company, “Hey your diversity policy made you do irrational things versus what you would have done without a diversity policy,” they will say, “oh no, it just opened our eyes to better rationality.” And some of them will be telling the truth. I think a lot of them will be telling the truth. Some will just--of course they don’t really know. You don’t get to live path A and path B and then subtract and say, “Okay, the one that is bigger is the rational one and the other one is kind of the stupid one.” So it is a bit like diversity to say that, hey, if you’re a food company with geniuses about putting vitamins into foods that putting some portion of those people on to these needs of the poor people, you’re really being pressured to do that and find the smartest way with all your IQ experience to make that work for you and to the degree that it’s money losing, do it in a way that the visibility and reputational gain pays you back from the other customer base.

Warren: I would say that it may well be at Microsoft that it makes some difference in terms of whom they hire. But I think if you took Kraft versus Kellogg versus General Mills—and General Mills happens to be in Minneapolis where they have that five percent corporate donation program—I don’t think it has any real effect on the quality of who applies for jobs at the three companies. You take GEICO. If GEICO has a policy of being green, or whatever, when we are recruiting, I don’t think it makes much difference to prospective employees.

Mike: So let’s talk about situations where creative capitalism is frankly going to cost you something and it’s like you’re reducing the return to shareholders. And question one is why do corporate managers have the right to do that?

Warren: I don’t think they do. We (Berkshire Hathaway) had that shareholder designated contribution program for 25 years. Basically, I don’t feel I’ve got the right to give away shareholders’ money, though I feel our shareholders should have the right to designate their share of profits to their own charitable priorities. I mean I may believe in women’s reproductive rights or something like that and if I want to give all my personal money to that, that’s fine. But I don’t think other shareholders should have to support my preferences. However, I think it would be nice if we had a mechanism, like we once did, whereby the people who favored adoption would be able to devote their proportional share of Berkshire’s charitable funds to that purpose.

Mike: I thought you had a program like that.

Warren: We did for twenty or twenty-five years, but we had people who weren’t our employees, but who work with us, who were getting so much heat on them that they were losing their source of employment and earnings. I just wasn’t willing to fight them on that. When the government bureaucrats allocate the taxpayers’ money, all the rich guys get mad about it. But when the rich guys are allocating their shareholders’ money, they seem to think that God gave them that right.

Bill: Let me take a case that’s really clear-cut, which is the Microsoft case. We need to have great relationships with governments all over the world. And because we make a product whose marginal cost of production is very low--software--and because information empowerment is so directly what we’re about, it’s not a stretch in any way--the idea that we go into over 100 countries and do these things where we donate massive amounts of software and we even give cash gifts and we train teachers and we make sure we get visibility for that and we make sure when we hire employees they know about that. When we’re competing for government contracts we remind people we’re a good citizen in that country. I can’t do the math for you in some hyper-rational way. I suppose you could go overboard on it, but versus not doing that, Microsoft is absolutely way better off.

Now, the thing we’ve done that I don’t know if we’ll get credit for it--but I love it and I think we probably will--is we have the lab in India specialize on looking out for the poorest. And it was very interesting, because when they came in to present to me, they had a few slides up front that said…they call it bottom of the pyramid, bottom two billion. They had a few slides up front that said PCs are too expensive, electricity is too hard, we’re going to show you something here where Microsoft software actually plays a modest role. And it’s this thing where they use DVDs. It’s really cool. To help teachers and to help farmers. But literally it’s a TV set and a portable DVD player where the best practices, like American Idol, you get the local farmers together, they compete, they video the best one and they create a social event where they take that out and play that DVD. It didn’t use a lot of Microsoft software, but so what. It’s a very clever idea. They’re going to spin off, the people are so committed they’re going to go do this full time and The Foundation is looking at how we can support them as they plan to scale this thing up. So it’s a minor part. If you did the math, I think there were 30 people in the lab who were broadly working on this stuff in a 60,000-person company. Has that got some direct payoff? I bet it does, because there’s just so much leverage in something like that. So I think for the big companies that are in these world markets, there’s a lot.

Take the drug companies. The degree to which government policy affects how they charge for their product, it’s a lot like the Microsoft situation. They want to have good relationships with governments. They want governments to understand a little bit about the position that they’re in. Getting that hearing, they would be the first to say that on AIDS, they made a mistake. That drawing the line that, hey, you should always pay for drugs and not putting the footnote in about the AIDS emergency and how things were priced on that, that was just a mistake. The general principle okay, but they need the big footnote about tiered pricing, health emergencies. It’s a complicated footnote, but they blew it. And now they’re kind of making up for that, some better than others.

Warren: If I’m chairman of Exxon Mobil, though, and I think that Nigeria is a particularly attractive oil province to go to work in, do I give $10 million to the favorite charity of the president of Nigeria, or do I poll the lower class of Nigeria to see what they’d really like done for them and spend the $10 million there? I mean, if you’re really following market economics you do want people to think favorably of you, but different companies may want different people feeling favorably about them, and all this may have very little to do with what society would like if you had a social equation that you were weighing. On a strictly market test, it may be better to have a dictator or his wife think well of you than take an action that benefits his millions of subjects.

Mike: Isn’t there a sort of a catch-22 logic at work where you say that spending this money is justified for the shareholders because the good will pays off in various ways, helps you hire better people, gets you into Nigeria…

Warren: Or keeps you out of trouble.

Mike: Yes. But then if it really does pay off, why do you still have bragging rights? If what you’re buying is bragging rights that you do good, and those have value, therefore it’s justifying in terms of your imposition on the shareholders--well in that case you don’t deserve the bragging rights.

Bill: Yes you do, because you’ve pushed the world in the right direction. There is such a thing as a win/win in this world. If you figure out how to give good customer service, you are allowed to brag about how you have great customer service. If you figured out how to make governments love you by helping the poor people in that country, you get both the benefit of the government loving you and you get to say you helped the poor in that country.

Warren: As long as you don’t say what you’re doing is to get bragging rights?

Bill: No, no. Microsoft is very honest to saying that it’s not purely our doing . Partners and Learning, which is the school donation thing. That’s not purely… we don’t go to the world news and say, “Oh we’re just suffering so much this was so hard.” Ask Merck on the medicine donation thing, the Mectizan. Their employees are very enthusiastic about that. They give update videos from the employees when they get together and all that kind of thing.

The world is more like this. Kids do really want to associate themselves in their fulltime work activity with something beyond just how profitable the institution they’re involved in is. Now, maybe that’s a very elite statement, maybe that’s more an upper-tier, particular group of people, but if you take the big global companies, that’s the hiring pool that they care the most about. I hope I’m right about that, because that gives the win/win element to the part of this that the economics don’t ever develop from.

Warren: The people at Wal-Mart would rather work for an admired company than a company where they’re criticized every day. I don’t think they care that much about the specific policies that lead to the criticism or admiration, but there’s no question you feel better about going to work for a company that’s admired or your kids feel better because they hear different things at school. But at Wal-Mart I think most employees care about the policies that will directly affect them. I’m not sure how much they really care about the other issues, except to the extent they lead to this secondary aspect.

With our shareholder designation plan we had reverse publicity. In the end some people boycotted See’s Candy because of what our shareholders were giving to, even though other shareholders were giving to things they agreed with. They picked out the things they didn’t like rather than the things they did like in terms of our published activities.

Bill: They didn’t even give you the net benefit of the…

Warren: No. We regularly pointed out that it was totally the shareholders making the decision. We had lots of money going to Catholic schools and all that. One guy wrote me and said I don’t care if you give a billion dollars to pro-life organizations and a dollar to a pro-choice organization, he says I’m still boycotting you. People feel very strongly sometimes, often in inverse relationship to the logic of their argument.

Mike: One thing you’re proud of at the Gates Foundation is the way you focus and the way you make very rational, businesslike, and to the extent you can, testable decisions about where you devote your resources. What confidence do you have that this much more amorphous process you’re describing here where corporations want to have good relations with the government of Peru or want their employees in India to feel good and so on will have anything like that kind of discipline in where the resources go?

Bill: Well, discipline is always based on feedback systems, economic or otherwise, and so corporations are very, as Warren was saying, very influenced by reputational feedback. Almost slavishly so. I mean there are some things about how you do corporate structure that just gets done without even that much evaluation because somebody who does a point system on governance has chosen that to get these points we have to do such and such. And this thing would be most healthy if a body of expertise grew up that was probably industry specific that was looking say at the food companies, the drug companies, the banking companies and did on a say yearly basis an analysis of this is what this company did that is in this creative capitalism category and here’s the impact that we think that’s going to have. And that type of feedback system I think is a necessary element of keeping the score in some fair way and making sure that when these resources are used brilliantly, that the best practices are spread and when they’re not there isn’t too much credit. I’ll be the first to admit that it’s very easy because the normal person won’t be able to test the statement. It’s very easy to make statements about this that sound good and only by taking a lot of time to dig in to it do you find out that it had no impact at all, it wasn’t that much money, it was something that we were going to do anyway. Otherwise, there’s a lot of room for fluffery in this space and so you’ve got to bring in expertise and that will probably take a while to develop.

Mike: In Washington, I was always struck by the fact that there would be these lavish parties to celebrate, say, Exxon-Mobile’s contribution to Masterpiece Theater. And then you’d look it up and it turned out well they spent $3 bragging about how wonderful they were for every dollar they spent being wonderful.

Warren: I’ve been on the board of a number of places where I’ve watched the charitable dynamics. One was the Urban Institute. The truth is I could walk in to the CEO of any company and get $50,000 or $100,000 for the Urban Institute if Berkshire owned their stock or if I was on the board or Berkshire was a huge customer. The whole thing was based on figuring out who was connected to whom and one time I brought it up. . I said, “Do you ever list all the wonderful things the Urban Institute is doing and then ask the CEO for his own personal contribution?” They said, “Don’t do that! Just ask for the corporate money.” Having been on a lot of boards, a number of the boards even let the directors make certain charitable contributions and matching contributions all that sort of thing. I think Bill, however, could actually go to Pfizer or some other company and have some real impact. He’s personally contributing substantial sums, which is impressive, he’s calling personally, and he knows the subject. He could have some impact. Very few people can.

Bill: I do draw a distinction between the company drawing on its natural expertise like the drug company doing a drug or a Coke company with its distribution system or Nestle buying more food from poor farmers or helping put micronutrients in that don’t make the food taste bad. I draw a big distinction between that and writing a check. If ExxonMobil employees actually did the Masterpiece Theater thing or some brilliant thing about crude oil because that’s kind of a stretch, maybe they’re drawing on something unique there, but they’re more likely to help out in that they...and they do some of this. They have employee scenarios where there is very high disease and so in terms of trialing drugs they’re good. In terms of reporting oil revenue--anyway, I’m not really an expert on that, but they…

Warren: Well they went along with host countries. I mean it would be crazy if they didn’t. Getting along could mean doing some good things or paying off people or a whole lot of things. But they need to get along with the host country.

Bill: The Foreign Corrupt Practices Act and to the degree other rich countries have adopted that, that really has raised the level of honesty in business worldwide.

Warren: That is for sure.

Mike: There are people who will tell you it has destroyed the United States’ ability to compete.

Warren: Compete in certain areas. There’s no question about that.

Bill: I wonder what industries and how big that is? I know the worldwide benefit is pretty large, so the U.S. loss would have to be pretty big before I’d start to still think it was any type of mistake.

Mike: Well, suppose I was a shareholder of Microsoft or even suppose I wasn’t, but I came to you and said, “Bill, rather than trying to come up with all sorts of ways Microsoft can make the world a better place, some of which--maybe even most of which--aren’t going to help the bottom line, I would much rather you do everything you can do to make Microsoft profitable and then take the money that you made and spend it directly on what you have figured out to be the most efficient way to make the world a better place.”

Bill: I think that would be a mistake because what we get in countries around the world where our employees are volunteering to train teachers in these schools, where they are taking some of the time that we pay them for to train teachers in these schools, and where we’re making cash donations to training--the leverage we get by donating free software, and the leverage we get by having seen countries that do this well--and there are a lot of countries that are very open minded that say, “Hey, show us how to do this well.” And where we can have them go visit the other country and see it. They are really interested in what those pitfalls are going to be and, you know, the world’s not just about money. It’s about expertise. The developing world has a huge shortage of expertise and to that degree Microsoft, either from its rich world employees or spreading best practices from one developing country to the next, has a huge impact, though it’s hard to measure. The amount of money we…say we cancelled all this stuff, it wouldn’t be more than 2 to 3 percent of what we do. It might get about 3 percent because we put a lot of employees’ time into it. In some of the poorer countries it would be 20 percent of what Microsoft does, but not that high.

Mike: And you feel you’ve got a 20 percent payoff even there?

Bill: Well, in those countries it’s when we’re first establishing our business and our business is quite small, and the early relationship with the government is the main thing we’re doing when we go into a country that was so marginal. We weren’t in there before and now we’re in there. Take Indonesia where I just was…we’re down to where maybe 10 percent of what we do is not direct profit seeking but helping education, helping with community centers. It’s about 10 percent. And that’s not counting the value of the donated software. If you count the value of the donated software you can get some big number, but that’s a fanciful number in the sense that it’s not business forgone. There was not a path where those dollars came into our sales number.

Melinda Gates: I keep thinking about the refugee situation where you sent people in to catalogue the refugees. I mean that took expertise.

Bill: Right. This is the thing where when…if you get trained personnel who can go into refugee crises who own a laptop computer and who can just type in who they’re seeing and then the wireless network collects that from all the difference places and you have everybody who’s looking for somebody and everybody who has somebody and they actually print out these little cards that the person could carry around, but they had that database. That’s a very straightforward example: the expertise to get where there’s no real network, but the wireless thing works and then you can train the people on the software before the crisis happens. And everybody likes to give money when the crisis happens; if you give money before to buy the portable computer, set up the software, train the people then it’s more leveraged actually and that’s the kind of thing a company like Microsoft could do because it’s not a huge thing for us.

Our employees got very enthusiastic about it. We showed the video, people volunteered, got involved, even some people left and went and worked full time on that thing. So it’s not because software is magic and corporations have a lot of innovation power. If you don’t, you know, I have this strong belief that innovation is so key to improving the conditions in these poor countries. And they don’t--in terms of their universities, long-term research, people understanding the latest science and how that maps to the problems they have. Talk about a systemic underinvestment where the public good just doesn’t get created. It’s gigantic.

Warren: I think corporations, though, much like many foundations, will focus locally. That’s the natural tendency. If you take that Minneapolis group, you know, it started many decades ago and you really pledged, if you were a major corporation, that you were going to spend a significant portion of profits on philanthropy. Target is five percent, I think.

Bill: Five percent?

Warren: Yeah, five percent.

Bill: Five percent of their profits goes to…

Warren: Yeah.

Bill: That’s amazing.

Warren: They have General Mills, Pillsbury, Cargill, 3M . . . all of these guys . . . everybody did it. I mean you were an outcast if your business was in Minneapolis and you didn’t . . . but my guess is overwhelmingly most of the money went to Minneapolis or Minnesota related things. You weren’t expected to take a world view. Now Target has probably broadened it out as they have become national.

But the interesting thing about our shareholder contribution plan was that nobody was personally soliciting anybody for any cause. There wasn’t anybody putting pressure on, or personal solicitation. Churches were by far the biggest beneficiary of it and schools were second . . . and, of course, corporations normally never give to churches. We had hundreds and hundreds and hundreds of people designating churches.

Bill: To be fair at the operating level to the degree that there have been, you know, community charity type things that are appropriate for that business and are driven not by specific managerial interest but really by business interest, you allow the operating business to continue those things. So when you look at the overall Berkshire picture you really have to go down into those operating businesses.

Warren: We have companies for sure that give more than two percent and then we have others I never look at . . . I’ve never named a charity or said the amount subsidiaries should give. I just tell managers don’t do personal stuff with company money.

Bill: So take Iscar [an Israel-based metalworking company] that Warren just put $4 billion into. They have a policy, and I don’t know enough of the specifics. I’m excited to go see it, where they’re really big on putting their plants in tough places and employing the minorities, which are the Israeli Arabs, as much as they can.

Warren: 20 percent Arab.

Bill: And that is not purely driven by a bottom line thing. It’s a societal contribution, I believe, that they make by the way they do things.

Mike: There’s a third category of creative capitalism, which is like the Red Campaign. Basically, consumers will apparently pay a premium for a product if they know that part of it is going to go to charity. I would ask Warren: isn’t that a little irrational?

Warren: Yeah. I don’t think it works that well. I mean American Express didn’t want to follow through much on it, but I think if you have a specific cause for a short time . . . there’s a local tornado in Omaha or a tsunami far away—it’s both humane and politically correct to respond. I don’t think it’s something that sustains itself over time. There are a few people who will stay motivated on it. But I don’t think that if we announced at GEICO, you know, two percent of your premiums were going to help people around the world, only a few would want to pay an extra two percent. The rest would say reduce my premium and give it to me.

Bill: I agree with that in terms of car insurance. When people buy clothing, you know, my daughter’s not saying, you know, “Do these Juicy sweatpants wear out in N years and have a certain stiffness,” or things like that. She’s associating herself to the degree we fund her to do so with Juicy. And so the Red question, which I admit is out, but I think it’s a great experiment and I’m somewhat optimistic is can you create a brand association for consumers in the U.S. if there are some products like their credit card, their clothing, their cell phone? There are things and you have to be very creative in coming up with new things and keeping those fresh. Is there a brand association with red products that you feel proud that you’ve done that and it’s kind of a cool thing? There are kind of neat new products. Whether that’s just a short-term thing because it has worked short term or something that can really be sustained and get a broad group of products in. That’s where branding people are needed to help us achieve and I think and I hope the answer is yes. I’m not saying that all products in the economy should all go off and have some, you know, bleeding heart 2 percent payoff thing. I’m not saying that at all.

Even if it is grandly successful this will be a tiny part of the economy. These things do add up. You save lives now a days for $200 a year buying AIDS drugs and it’s a pretty powerful message. If we didn’t have Bono to help promote it, you know, we really wouldn’t have had the short-term phenomenon that we’ve had. You can talk to Gap or Hallmark about how they feel about their experience with it. So it’s not going to generate billions of dollars. I think whatever money it raises it also is a nice vehicle for us to raise awareness of these causes and ideally activate people to either volunteer or vote in a way that is beneficial to these causes as well.

Warren: There are 20 other variables, but Gap’s in-store sales are falling month-by-month. There are a lot of other variables. Believe me they were falling before, but it is . . . I think it’s tough to build a sustainable thing. I’m not saying it’s impossible, but I don’t yet see the evidence.

Mike: Is it ever going to work on you as a consumer?

Warren: Never has.

Bill: Well, Warren’s not much of a consumer.

Warren: In fact, I’m not much of a consumer at all.

Bill: Think about how you’re brand conscious in something you buy. When you buy golf balls what do you think? You buy brand.

Warren: You buy a brand. You’re buying what you hope is distance. You do.

Michael: So how much distance would you give up for part of the cost of your golf balls to go to AIDS?

Warren: The difference is a matter of a yard or two. I’m not giving up anything important.

Bill: If brands…brands are about an association and it’s not irrational that there could be a brand that was about being associated with helping with AIDS. It’s a new pioneering thing that…it’s done pretty well so far.

Mike: I just want to take another crack at something. Suppose you were running the world. Would there be a place for creative capitalism like this in it? Or would it be much more rational? Would you say, “Look, corporations should be efficient and produce products and then we should decide what we wish to achieve as a society and we all pay taxes and do it.”

Warren: I would have my own tax system, but the answer is I think I would go the second route.

Bill: I think there are going to be corporations where expertise builds up to solve problems that is not built up any other place. And your hypothetical is a little strange because what we’re faced with is a world with vast disparities in wealth that have to do with what country you’re born into and you wouldn’t have that if you had one person running the world and so, you know, the degree to which a little bit of innovation can make a huge, huge difference whether it’s an LED flashlight or something you can roll to move the water that you used to have to carry.

Some of these innovations--when you see them you say, “Oh, well, obviously that rationally should have happened,” but it only happened because somebody cared. Now you could say in the grand sweep of time capitalistic economics would have come up with that. Well, there’s a lot of suffering between now and eventually that this thing can deal with.

The brilliance in innovations inside universities--we haven’t talked about universities here because I haven’t thought about that as much, although even some of them are starting to get involved. Getting them to take their innovation power, thinking power, awareness raising power, into these things is another part thing that I think is important and I hit a tiny bit on that in the Harvard speech, but we have all this expertise. You need to apply it. Drugs are just such a clear, clear case. The government doesn’t know how to make drugs. They don’t know how to trial drugs. There’s no government in the world that’s in the business of doing that. So you’ve gotta send the signals…now I admit that you could do it if you had a single world government. You could do it just by giving money to the poor and then letting the market speak out. I think you could design a utopian system that would do it that way and then you wouldn’t have to rely on--you could have robots working at the company. Whereas here I’m actually explaining the fact you have people who care about humans working at the company.

Warren: But I think the most realistic model actually can be the Gates Foundation. If you’re really looking for ways to take huge amounts of resources over time, and they are going to be huge aggregations of resources, and you show the world that something is a better system than government and will work better and can attack things that government can’t and so on; and that will use resources efficiently. I think people will look for that--not 100 percent of the people, not maybe 50 percent of the people, but a lot of people will. But I think it could be a demonstration project like nothing else the world has ever seen.

Michael: The retiring CEO of the Gates Foundation--she’s very excited about the idea of a middle institution that’s not non-profit and it’s not for-profit. It’s a low-profit, and I think [Grameen Bank founder] Muhammad Yunus has suggested this and basically it runs like a corporation except all the money is put back in.

Bill: Well, there are such things, you know, there are mutual operations that are like that, you know, the recreational co-op, which is pretty sizeable now a days…What percentage of the hospitals in the U.S. are under that type of structure--50 percent, 60 percent?

Warren: If I owned 100 percent of Berkshire I could have set it up that way. But I think the model of intelligent, private philanthropy will look superior to governmental spending in many areas. I don’t think there will be a shortage of funds over time and I think there will be a lot of people who will make a lot of money who don’t now have the faintest damn idea about how to best funnel that money back to society, but will, nevertheless, feel like they want to funnel that money back to society. I think intelligent private philanthropy has a huge potential.

Bill: Yeah. I would say two things about that. One is there will be an effort with more to spread the word about how much fun it is to do philanthropy--either the way I’m doing it, where you get deeply involved, or the way Warren’s doing it, where you look and you pick somebody who you’re excited about their approach and you back them to go do it. So I’m going to meet some percentage of the very rich people in a quiet way and encourage them. It will be all their credit if they choose to do it, but I’ll say that (a) philanthropy is good, and (b) the hardest part of philanthropy, which is getting to poor countries because learning how to do that, knowing it’s effective, dealing with some of the challenges there, you know, showing them where that works and in a few cases maybe they will want to partner with us. I think upping that goes along with upping the corporate part, which is the creative capitalism, and goes along with upping the academic attention to the problems of the poorest.

Things like grand challenges are another kind of innovative thing here where we might dial a grand challenge in micronutrition and it might be some guy at Nestle in that food lab who sees that thing and says he can solve it and he needs a little bit of forbearance from his managers to take, you know, five or 10 people and write it up and come to us and say they’ll transfer that technology or something. It doesn’t take some big diversion of a profit.

Also, to the degree The Gates Foundation works, we are engaged in these things where companies like GlaxoSmithKline--even though we’re funding a lot of the work--they’re putting some of their top innovators on the malaria vaccine. You’ll never figure out the numbers, but there are some opportunity costs where those people could have worked on something else. Now if one or two of them were people who said they would have retired if they couldn’t work on this or figuring out how fungible that resource really would have been for them and what it would have done. It would be pretty hard to beat America on that, but they are really giving up opportunity costs to do these things. If we work it will be partly because people like GSK are going along with us or [India’s] ICICI Bank are going, or Nestle are going along. And that list, you know, a year from now will be a lot longer.

Warren: Over the years, by his letter, Bill will be talking to more rich philanthropists or potential philanthropists, you know, than anybody ever has in the world. I mean Carnegie is still talking 100 years later or whatever it may be since writing The Gospel of Wealth. Bill’s model can have a huge potential and it can have a huge potential with smart people who may think of variations on it. He’s in a unique position to talk to the world on it and the world wants to hear what he has to say. It’s a great opportunity.

Bill: Just to be clear what Warren’s referring to: I don’t know if you’ve heard, but I’m going to do something that in the world of philanthropy that is much like what Warren’s annual letter is in the world of business. And the target is that the first one of those will come out this January.

I do think talking with rich people globally, they will be interested. Not necessarily that they will do anything, but for me to say, “Oh, wow, this went well, this went poorly. Damn these governments who can’t do this and that.”

Mike: You get the letter if you could give away money and you don’t actually have to be giving it away yet?

Bill: The letter will be on the Internet. We’ll promote it as, “Hey, maybe you’d be interested in reading this thing.” And there will be a number of constituencies, but potential givers are a big part of it. Somebody who works at a UN agency I bet, you know, some of them will read it. Some people in poor world governments will read it. Some people in the drug industry, who knows.

Warren: They will all read it every time.

Bill: I’m going to get the jokes from Warren and so that is--

Melinda: The clean ones.

Bill: No Mae West.

Warren: It’s got huge potential, because you’re actually doing it. I mean it has so much more impact than some academic writing about it or something. Everything goes through your mind and they love it. They want to know that. They get a chance to sit down with Bill Gates and talk about philanthropy or listen about it anyway. They can see what you’ve done and they can say all kinds of things. Really, look at Carnegie’s thing. I mean it isn’t that amazing what he wrote or anything like that, but it influences people a century later. I mean this has got 100 times the potential.

Sharper Image Lives -- as a Brand

2008-06-26T06:20:00.000-07:00

By JEFFREY MCCRACKEN and PETER LATTMAN
Retailer Sharper Image was left for dead in February. Now, four months later, the bankrupt purveyor of air purifiers and nose-hair clippers is coming back to life.

This time, though, it won't have stores with $5,000 massage chairs where customers can relax. Instead, Sharper Image will live on as a virtual brand name, its moniker rented to other retailers that want to spruce up the appeal of a vacuum cleaner, pet robot or pair of sunglasses.

This Sharper Image retail store in International Plaza in Tampa, Fla., is one of the outlets left in the chain that is scheduled to be closed down.

Leading the revival are the country's two largest retail liquidators, Hilco Organization and Gordon Brothers Group LLC. Historically, these companies have served as a stockroom Grim Reaper, squeezing the last few dollars from a dying retailer's inventory.

But over the past 15 months, the two have moved aggressively into the brands themselves. So far, they have spent a combined $250 million on brand acquisitions, largely via bankruptcy-court auctions. Last fall they acquired furniture chain Bombay Co. In recent months, Hilco has purchased fashion brands Ellen Tracy and Halston.

In their largest acquisition to date, Hilco and Gordon Brothers had to beat back eight other bids for Sharper Image. They paid about $49 million, including roughly $33 million for the Sharper Image brand name. The companies partnered with brand-management firms Windsong Brands LLC and Bluestar Alliance on the deal.

The San Francisco-based retailer, which started in the late 1970s as a quirky catalog company that sold jogging watches, grew into a national chain, cornering the market on Ionic Breeze air purifiers and other high-tech gadgets. The store made it into the film "When Harry Met Sally..." when Meg Ryan and Billy Crystal tested a home karaoke machine. Sales tumbled in the last few years after a Consumer Reports article questioned the safety and effectiveness of the air purifiers.

"The store always generated a lot of foot traffic. But some brands are retailers, and some are better as wholesalers. Sharper Image is better as a wholesaler," says Hilco Consumer Capital Chief Executive James Salter. He adds that the brand will probably need a $5 million investment to analyze new products and market the name to product makers and other retailers who might use it.

Mr. Salter envisions Sharper Image products being sold around the world via infomercials, Web sites and catalogs. Or they could be set up in the aisles of a Target or Best Buy. One possibility: a Sharper Image treadmill with a computer and GPS system that would allow a user to race against others around the world in real time.

Mr. Salter says the high-tech name could generate annual retail sales of $1 billion. That would be a huge leap from its sales of $375 million in 2007 -- and from its sales in any recent years. A branding company typically earns 2% to 3% of a brand's revenue in royalties.

Hilco and Gordon Brothers are by no means the first to pursue a brand-licensing investment strategy. Publicly traded companies like Iconix Brand Group Inc. and Cherokee Inc. are leading players in an increasingly crowded field.

Sharper Image's new buyers take inspiration from such exhumed brands as Polaroid, which was bought out of bankruptcy in 2001 by a private-equity firm. Today, Wal-Mart Stores Inc. and Target Corp. do a brisk business selling an array of Polaroid products, including digital cameras and LCD television sets.

The strategy is not without risks. Nexcen Brands Inc., a publicly traded brand-management firm that owns fashion label Bill Blass and interior-design brand Waverly, recently told its shareholders that it faces a cash squeeze and is laying off workers and selling off assets to raise capital.

But dormant brands are more valuable than ever as mass-merchant retailers look for new ways to lure customers into their stores. Kohl's Corp. this month announced a licensing agreement to revive and sell the Hang Ten surfing brand in its stores. Earlier this year, Wal-Mart relaunched the Ocean Pacific apparel brand, which is owned by Iconix.

Mr. Salter says that earlier this year Hilco spent about $17 million for Ellen Tracy, a women's clothing line, and that it expects to double its return. One deal already in place is a five-year contract with G-III Apparel Group Ltd. to sell Ellen Tracy coats.

But before Sharper Image's new owners reinvent the brand, they're spending the summer winding down business at the remaining 80 stores of what was once a 180-store chain.

On a blisteringly hot day in Manhattan earlier this month, Gordon Brothers principals Bradley Snyder and Stephen Miller -- the duo that led the Sharper Image acquisition -- stopped in at the chain's flagship store on 57th Street. With the store's air conditioning broken, Mr. Snyder tried to cool off in front of a Vornado art-deco-style fan marked down from $130 to $100. He also explained the sensitivity of this particular closeout sale.

"No bright orange signs. You can't be too schlocky," said Mr. Snyder, standing underneath signs proclaiming "Nothing Held Back" and "Entire Store 20-40% Off." "You want to move the merchandise, but you can't impair the brand."

'Copy This! How I Turned Dyslexia, ADHD, and 100 Square Feet Into a Company Called Kinko's'

2008-06-18T08:34:00.000-07:00

By PAUL ORFALEA AS TOLD TO ANN MARSH

By 1983, we were doing about $70 million in sales a year with slightly more than 120 stores. We also had about 30 independent-minded partners running various corners of Kinko's. We were 30 partners—with an average age of about 28—motivated by our own value systems, ideals, and ambitions. With scant input from the head office, each person made his or her own decisions, whether they ran a single store or a string of them. The growth, even at that early point, was getting out of hand.

At the time, our head office was located on the second floor of the El Mercado shopping center in Santa Barbara. We were experiencing growing pains. The first half of the eighties was a time of furious growth and none of us had bothered to put certain fundamentals into place. I remember Dorothy Sandow, who used to do the books in our office, wondering out loud, "How will we stay the same as we grow?" Good question. I didn't have the answer. We'd grown so fast that we hadn't even bothered to secure trademark protections for ourselves nationwide. We hardly had any written agreements with anybody; most of our business was conducted on a handshake. Aside from our status as independent Subchapter S corporations, we lacked any structure to speak of.
[Journal_Report-Small_Business_BOOKS_Orfalea]
Workman Publishing Co.

To get some perspective on things, I enrolled in the Owner/President Management Program at Harvard Business School, which I attended three weeks a year for three years. While sitting through classes there (and never taking a note, though I did read my case studies), I realized we needed somebody—an outsider definitely and maybe an academic—to help us continue to grow while still retaining our unique culture and not killing each other in the process. My hunt lead me to John Davis, who got his doctorate at Harvard Business School and was an assistant professor at USC at the time. I called up John to ask him to meet and talk things over with me. John agreed to, even though at the end of our first conversation I abruptly hung up on him—"I gotta go," John remembers me saying, leaving him listening to a dead phone line. I guess he understood I was busy. Somehow, he was intrigued enough to follow through.
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Me, Me, Me
So many entrepreneurs are writing books about how they made it. Their books, though, aren't nearly as successful.

John's association with Kinko's would last for nearly two decades. He drove up to meet me and got a look at how our head office functioned. My partnership, Kinko's Graphics Corp., was still handling all the books for the partners for a low monthly fee. It wasn't the greatest structure. We were getting by, but we could do better. Later, John turned up at one of our partner meetings. He sat in the back, scribbling enigmatically into a small red notebook. Here's John:
[BOOKS_excerpt_Orfalea_headshot]
California Polytechnic State University, San Luis Obispo
Paul Orfalea

"In my field we learn about organic organizations, but I think it's fair to say that I'd never seen, at that point and subsequent to that time, an organization that was quite so organic. Things just happened as they needed to happen, or maybe a little later than they needed to happen, but they happened. There didn't seem to be a plan. There didn't seem to be a structure. There didn't seem to be much of anything, but a lot of things were getting done at the right time. It was fascinating to me. I felt like an anthropologist trekking through the jungle and kind of stumbling on this tribe that I had never seen an example of before. I had never seen organic Republicans. They were really interesting creatures. They were capitalist hippies, really. It was bordering on strange. You can only be so organic without defying the public health laws, right? The growth of this company and the growth of the people was clearly managing to outstrip any reasonable attempts to provide logical, sane infrastructure to the company. There were costs to it, but it was part of the magic of the company."
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At the end of that first partners meeting that he attended, everyone was curious to know who this scholar in our midst was, taking notes and saying nothing while the rest of us argued, pontificated, and generally exercised our democratic rights. Eventually, John took the microphone and shared some of his observations about what he saw in us and in Kinko's. He told us he saw us moving toward a more formal organization, but he saw us doing it in our own "organic" way. He made us laugh. We liked him. We liked what he had to say.

Over the years, he came to play a variety of roles at the company. He started as an outside consultant and eventually became a full board member, a position he held for ten years. He also served as, variously, educator-in-chief, peacemaker, resident shrink, and company philosopher. As my partner Tim remembers it, "We had to start growing up once John Davis became involved. He realized we were struggling with late adolescence. We didn't yet realize that commitment and hard work could go a long way. He had a fabulous influence on us." A lot of our partners were somewhat like me. We got things done, but we couldn't talk about what we were doing with the sort of context and eloquence that John brought to bear in any discussion. He became our spokesman. He helped us to communicate better with each other and with the outside world.

John noticed our tendency to philosophize right off the bat. "At that first partner meeting," John says, "they were all just sitting around talking about their business not just in financial terms and marketing terms, but in philosophical terms as well. It was like being on the set of The Big Chill. These people didn't go to college together, but it was almost like they did. And even though Paul played the role of paterfamilias he was basically just the big brother. He encouraged very collegial relationships, buddy relationships."

Two years later, in 1985, John decided he would put our proclivity for debate and discussion to work for us. He made a suggestion. John felt strongly that we needed to write down a set of guiding principles to unite our far-flung factions, giving us a flag to rally around. We took John up on it. We decided we would go ahead and try to put something on paper about who we were and who we wanted to be. John drew up the first draft and derived the content from what he'd observed in us for two years. The result came to be called the "Kinko's Philosophy." Like so many of our best ideas at Kinko's, this one originated not with me, but with someone from the outside who, by virtue of being undistracted by being in the business, was able to offer some valuable insight. We spent six months hashing out the Philosophy, and then continued to revise it over the years. The final version read as follows:

Kinko's Philosophy

Our primary objective is to take care of our customers. We are proud of our ability to serve him or her in a timely and helpful manner, and to provide high quality at a reasonable price. We develop long-term relationships that promote mutual growth and prosperity. We value creativity, productivity, and loyalty, and we encourage independent thinking and teamwork.

Our co-workers are the foundation of our success. We consider ourselves part of the Kinko's family. We trust and care for each other, and treat everyone with respect. We openly communicate our accomplishments and mistakes so we can learn from each other. We strive to live balanced lives in work, love, and play. We are confident of our future and point with pride to the way we run our business, and treat each other.

We plastered the Philosophy everywhere. We printed it up on small, laminated wallet-sized cards so that people could carry it around in their pockets. Some partners hung the Philosophy on the walls of their stores. Eventually, and even though it seemed hokey at first, we started reciting it at our partner meetings and picnics as if it were the Pledge of Allegiance. But we didn't view it as fixed in stone. The tenets of the Philosophy were inherently contradictory: even though we valued "independent thinking," we also encouraged "teamwork." The Philosophy became a tool for managing ambiguity, one of the most difficult challenges in any business. It provided a ready forum for discussions about how we would continue to grow and work together as individuals who were also members of a collective. As we changed, we constantly floated ideas for how to further hone, expand, or otherwise alter it. I was forever asking people, "Do you think we should change the Philosophy? How would you rewrite the Philosophy?" It became a mechanism by which everyone became invested in the direction of the company.

In the Judeo-Christian tradition, there are the Ten Commandments. We may not abide by all of them all of the time, but they are there to guide us. Every company should take the time to write a philosophy statement. One of my favorite companies, Johnson & Johnson (also one of my longtime favorite investments), has a great one. I bought the stock after I watched a 60 Minutes piece on the infamous crisis during which eight people died from poisoned Tylenol pills back in the eighties. J&J decided that any response it made to the crisis would be true to its credo, which has guided the company through the past 60 years. The first sentence of that credo reads, "We believe our first responsibility is to the doctors, nurses, patients, to mothers and fathers and all others who use our products and services." In other words, covering their own butts is explicitly not priority number one of J&J's leadership. The company leaned on its own stated belief system in a time of need. J&J responded to the crisis quickly, with compassion and, in the process, won new loyalty from its customers.

Having a high-minded vision that we all embraced for Kinko's was immeasurably helpful. At least we knew if we failed to meet its ideals, we could get back on track and point ourselves in the right direction. As John puts it, "The Philosophy was the expression of the ideal culture. But it was our goal. It was what we wanted." The only limit to your growth as a person or a company is your imagination. When you think about it, there are only two things in life: matter (cars, sidewalks, bodies, etc.) and ideas. These are the only two things on Earth. (In fact, scientists now believe that, at the subatomic level, there is really no significant difference between matter and thought; in other words, our thoughts truly create our reality. Isn't that cool?) The way I see it, you're only as good as your dreams. If all of us at Kinko's could imagine an ideal place where we could all work together, we had a shot at achieving it and much of the time we did.

Envision Your Vision

Having a vision is beneficial in the private, not just the corporate, realm. Early in my time at Kinko's, I took a class on goal setting at the University of Virginia, but goal setting has always been in my blood. Picturing myself owning my own business one day helped me to navigate through my difficulties in the second grade. Even as Sister Sheila paddled me, I told myself that someday I would own my own business and have secretaries who would read for me. By the time Kinko's was up and running, I made a habit of setting new goals every six weeks or so. Wherever I went when I was with Kinko's, I carried a four-subject notebook. I didn't write long letters or reports, of course, but I did make lists. The notebook was full of them. I was an inveterate list maker. I set personal goals. I set play goals (every January 1, I scheduled my blocks of vacation for the year). I set business goals. I set financial goals. I worked out the cash flow for Kinko's in one section of the notebook. I always say that if you don't know your business well enough to calculate your cash flow on the back of an envelope, you've got problems. My coworkers were constantly criticizing me for having too many top-priority items to attend to. It was tough for me to stay "on" my business while addressing so many priority issues. So I classed them as Big, and then Big-Big, and, finally, Big-Big-Big. It sounds corny, but it worked for me.

At the end of our family vacations, or any business trips, I became maniacal about getting my lists in order. Before I headed back to work, I got to work on these lists. Completing them could take me the better part of the day.

I quickly learned not to be too specific in putting my goals onto paper. I remember one time in 1975 I set an arbitrary goal for myself to open three new stores between September and December. In order to open store number three, I pushed too hard. The store, in Westchester, California, turned out to be one of our worst locations ever. We constantly clashed with the landlord at that site. Eventually, we closed it. I've since learned that goal setting should be more like an impressionistic painting. As opposed to "Open three new stores by the end of the year," my goal became simply "Expand the business." Keep your goals as anchors and then wander around among them, giving yourself plenty of room for error and experimentation. I used to sketch the following illustration for my partners back in my twenties. You start with some clear goals. Here they are represented by two straight lines:
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Then you allow for a little spontaneity. You wander around among them. Like this:
[dollarSign.gif]

Ta-da! See what you end up with? Know where you're going, but don't be too wedded to the result. My friend John Davis used to say, "The best part about goal setting is going through the process. First make your plan, and then throw it out!" Remember that line from the old musical South Pacific, "If you don't have a dream, how you gonna make a dream come true?" Good question. I love to sing that line to my partners from time to time. As far as I was concerned, the Philosophy was our strategic plan. It was the expression of our collective dreaming at Kinko's. We each need to do our individual dreaming as well.

Living It

The more we recited the Philosophy and embraced it as something real, the more it became, over time, something we held very close to our hearts. Some of our former coworkers have imported modified versions of it into the new companies they started after leaving Kinko's. I carry a copy of the Philosophy around with me on one of those laminated cards and still find myself having reason to pull it out and refer to it.

At every picnic and partner meeting, someone was chosen to go to the front of the room and recite the Philosophy at the microphone for the rest of us. It could be someone who had made a pioneering change or someone who had survived hardship. One year it was our partner in Chicago, Theresa Thompson, the first of us to take her stores to a 24-hour schedule, who led us at the mike. Other times, Karen chose a partner who had recently struggled through a trying time. My partner Todd Johnson was only 30 and had been working with us for eight years when his young wife died suddenly in 1984 from an aneurysm. She was 28 years old and pregnant with their fourth child. Doctors managed to save the infant but couldn't save her. She died a month before Natalie and I were married. I'd gotten to know Todd and his family well over the years so I flew out to them after it happened. He was planning on coming out to Santa Barbara from Utah for our wedding anyhow. I told him to bring his kids and stay at our place while Natalie and I went on our honeymoon. At a partners meeting about a year later, Todd read the Philosophy out loud to everybody. In the midst of all the general zaniness and uproar that accompanied most of our company meetings, moments like these were powerful.

Todd: "Reading the Philosophy made it more than a written philosophy. It became a living philosophy. I've never been great verbally, but the first time somebody laid out the Philosophy, I thought, 'That's exactly how I feel.' You heard it all the time. When Paul picks up on something, he's relentless. It became a way of life in the stores. At first, when we recited it, I kept thinking that I felt like I was working for Amway, but I knew that Paul believed in it. When someone practices a belief system in his life, you can see it. It was Paul's own philosophy and he promoted it to the point where it became everyone else's philosophy."

If you flipped over the small laminated card that was printed with the Philosophy on one side, you would find a list of guiding principles. These are the "Kinko's Commitments to Communication."

There were 14 points, with a final add-on at the end:

1. I will recognize your value to Kinko's.
2. I will share my goals with you, and together we will develop an action plan.
3. I will respect and utilize the chain of command to resolve problems.
4. I will solicit immediate feedback to assure we understand each other.
5. I will talk with you, not at you.
6. I will listen with an open mind.
7. I will try to see the situation from all points of view.
8. I will tell you when I don't know the answer, and together we will seek the answer.
9. I will give you honest and sincere feedback.
10. I will not usurp your authority.
11. I will not confront you when I am angry.
12. I will not gossip.
13. I will not publicly embarrass you.
14. I will admit when I am wrong.
. . . and in every case, I am worthy of the same from you.

I wish I could tell you I abided by each of these tenets all the time myself, but I'm a human being and we were a company of human beings. I always figured when we hired someone, we got the whole enchilada. That applied to all of us. I plead guilty to personally violating many of these tenets. But, just because I fell short myself from time to time doesn't mean I underestimate their importance. Our partner David Vogias, who owned and ran stores in Ohio, Pennsylvania, New Jersey, and New York, was the driving force behind the Commitments to Communication. Dave felt we needed the commitments to further define how the Philosophy should be implemented—to make sure it was being implemented. The truth is, Dave and I argued so much that he proposed the commitments as an effort to lay down the rules of engagement between him and me. The commitments weren't passed by all the partners. They were passed in a committee of which Dave was a member. As Dave remembers it, "I forced the Commitments to Communication."

Looking back I should have argued more to change some of these commitments. Number 12, for example: "I will not gossip." What does that mean, really? I never understood that one. How can we function as a community and a family if we don't talk about each other? Talking and learning about each other is one of the great pleasures in life. I think that commitment should have read, "I will not engage in malicious gossip." You can see how much debate these value statements can inspire. In retrospect, I would have also instituted a values statement covering all meetings. It would have stipulated that, when it comes to meetings, everyone in attendance would (a) arrive on time, (b) understand what the purpose of the meeting is, and (c) seek together to find a conclusion so that the meeting could end—and end quickly.

Nitpicking aside, the Commitments to Communication further refined some of the practical ways we sought to live by the Philosophy.

As we grew, we came to rely on the Philosophy in more concrete ways. By the late eighties, we began circulating anonymous coworker surveys to determine whether the Philosophy was being applied in all our stores. We used the Philosophy to devise a set of criteria that we used to evaluate coworkers. As we matured as a company, our president, Dan Frederickson, instituted a program of management effectiveness surveys and, later, 360-degree reviews wherein coworkers at the head office, Kinko's Service Corp., were evaluated by their colleagues, by the people who reported to them, and by those they reported to. From all directions, coworkers evaluated each other against the principles we'd voted on and laid out together in the Philosophy.

Before coming to Kinko's, our partner Gerry Alesia had worked at Ralph's Grocery Co., General Foods, Bally's, and Ramada and he hadn't come across anything like the Philosophy. "It was very unusual," Gerry says. "It took several meetings for us to write and there was a lot of fighting about the individual words. We pretty much lived and believed what the Philosophy said. We believed that the coworkers were the foundation of our success. It wasn't just lip service."

The fact that we shared a belief in a set of fundamental principles and tenets made it, paradoxically, easier for us to tolerate conflict. I've always loved controversy and debate. I believe it's necessary for a healthy company, indeed, every healthy relationship.

Here's my partner Mark Madden, "Paul and I once met with a real estate guy in Santa Barbara. He asked us what the perfect size was for a Kinko's store. Paul said about 8,000 to 10,000 square feet and I said about 4,000 square feet. Obviously, quite a difference. We debated with each other a few minutes and then looked up, a bit embarrassed that we couldn't even agree on the size of a store. The guy got a huge kick out of seeing us debate basic business principles. He was used to seeing a boss and a bunch of yes-men and -women who would never disagree with the leader. He loved that Paul was the one pushing for a bigger, longer-term opportunity, while I was the one pushing for moderation and improved short-term profitability."

We all did business differently. Take my partners David Vogias and Tim Stancliffe. Dave, who ended up with 50 stores, admired and sought to emulate big blue-chip companies like General Electric. He ran his company with many more levels of bureaucracy than I would have. And yet, the policy manual that his company wrote up for one of our core businesses, Professor Publishing, ended up being adopted by most of the other partners. I hate policy manuals myself. Obviously, I'm never going to spend free time reading them. But, if our other partners could make use of one, I'm glad Dave got it written. He loved concocting five-year strategic plans—an activity I find pointless and unbearable. In contrast, he thought my stores were loosely and poorly run. I repeatedly told him that he could have expanded his business ten times faster were he not so wrapped up in tending to all that bureaucratic mumbo jumbo. Then there was Tim, who owned stakes in about 170 stores in Colorado and surrounding states. Tim was so frugal with his money that, in my view, he never invested enough of his profits in testing new ideas. Tim didn't protest this view of his management strategy because he liked to put new products through a lot of testing and careful consideration before using them. Tim: "No-new-products-Tim was one of my nicknames. I reveled in that kind of attention." As a result, he was never on the cutting edge of adopting our newest innovations. This meant that all the Kinko's locations in one entire corner of the country lagged behind other regions. We constantly argued about our different views of the world and of business.

Simply put, we didn't treat each other with kid gloves. We knew we didn't have to. We could stand a little controversy and trust we'd emerge the better for it. Having a shared philosophy gave us resilience.

As John Davis observed, "The Philosophy became a fundamental aspect of the Kinko's religion. When somebody stood up and recited the Philosophy at the end of each meeting, it was like a recitation of the Nicene Creed [a doctrine of Christian faith adopted in a.d. 325]. It was 'This is who we are.' People really understood that the strength of the group came from the ability to speak openly about things and to challenge each other. It was a culture of being open and honest. You could go through really turbulent meetings where there was yelling and arguing and some harsh things said, and at the end of the meeting, we would recite the Philosophy together. And it was OK."

Excerpted from "Copy This! How I Turned Dyslexia, ADHD, and 100 Square Feet Into a Company Called Kinko's" by Paul Orfalea. Copyright © 2005, 2007. Used by permission of Workman Publishing Co. Inc. All Rights Reserved.

Shrinkage problems-monitoring employee theft

2008-06-18T08:23:00.000-07:00

For small businesses, preventing theft and fraud by employees can be an uphill struggle.

Unlike their big counterparts, small companies usually can't afford a large security staff or big-ticket monitoring technology to keep an eye on things. And they often don't generate enough sales volume to make up for the losses from pilfering.
WSJ's Raymund Flandez reports how grocery stores and retailers are waging a continuous battle against employee theft. He discusses "sweethearting," an unauthorized giving away of merchandise.

Now a new generation of security technology aims to give small businesses an inexpensive defense against unscrupulous employees. Some of these systems let business owners who are on the road check their security cameras over the Internet and get email alerts if something unusual happens, such as employees closing up shop early.

Restaurants, meanwhile, can use tableside credit-card readers to prevent cashiers from stealing customers' card numbers or inflating the tips written on bills. And grocery stores can use a combination of security cameras and software to automatically spot cashiers who try to slip free products to their friends and family.

These new products are arriving as stores face mounting losses from theft. According to the latest National Retail Security Survey, losses from "shrinkage" -- which includes theft, fraud and error -- reached a new high of about $40.5 billion in 2006. About half of that -- $19 billion -- came from employee theft. Shoplifting, in contrast, accounted for about a third. (The study, conducted by the University of Florida and the National Retail Federation, was funded in part by grants from makers of security systems.)

Here's a look at some of the most innovative new security systems out there.
TROUBLE IN STORE

• The Situation: Theft can mean disaster for a small business, wrecking its profit margins and hurting its reputation.
• The Trouble: Small businesses often can't afford the big-ticket security solutions big companies favor.
• The Way Out: A host of new technologies are filling the void, giving small operators a way to protect their businesses on the cheap.

WATCHING FROM AFAR

For a small-business owner worried about employee theft, leaving the shop in someone else's hands can be nerve-wracking. Now a host of security providers let bosses check in on things from the road.

For instance, Alarm.com Inc., of McLean, Va., sells a system that allows owners to travel to a Web portal and get remote feeds from security cameras, change entry codes and trigger sensors that monitor systems such as lighting and climate control. If a problem arises with those systems -- such as a power outage -- you can get an alert via a text message or email.

Recently, Kevin Donahue, owner of a Planet Beach Franchising Corp. location in McLean, was in Amsterdam on business when he received a text message from Alarm.com: The spa's alarm system had been armed at 3 p.m., before the usual closing time. He checked the security cameras online and saw the facility was dark.

So he called his manager and got the explanation: The spa had closed early because of a snowstorm.
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"The greatest thing is that it gives me the ability to travel and do the things that I do," says the 34-year-old Mr. Donahue, who's also a full-time salesperson for a tech company and often travels outside the country on sales trips. "It gives me the ability to manage my staff remotely. I can call and say, 'What's going on?' "

Mr. Donahue bought the system for under $100 and pays a monthly fee of $39. Alarm.com says the base price for the system is usually $500, with a monthly fee of $29 to $50, although those numbers can vary by reseller and area, as well as the features customers choose.

SAFEGUARDING CARDS

Another new technology helps small businesses -- particularly restaurants -- protect against "skimming." In this scam, cashiers steal customers' credit-card information for use in identity theft.

About 70% of credit-card-fraud cases involve skimming, according to Trustwave Holdings Inc., a data-security and compliance-management company based in Chicago. In many cases, business owners are ultimately held responsible for their cashiers' crimes -- costing them money and damaging their reputation.

For some businesses, the solution is to let customers become their own cashiers. At Southeast Grille House in Brewster, N.Y., servers bring a wireless gadget called On the Spot to their customers' tables. Patrons can swipe their credit cards on the device -- which is about the size of a brick -- punch in the tip amount and print out a receipt to sign, all from their seat.

Since the customer enters all the information, cashiers can't inflate the tip -- and the receipts don't contain much personal data that could be stolen and used for identity theft.

The device, from VeriFone Holdings Inc. of San Jose, Calif., runs about $1,000. Southeast Grille House owner Domenic Chiera says it was worth the investment. "It's fast, and the receipt has little information, so no names or numbers," says the 57-year-old restaurateur. "I like the system. It works well for us."

CHECKING OUT FRAUD

At grocery stores, thieving employees are almost as much of a problem as shoplifters. About 40% of grocery-store thefts were attributed to employees in 2006, according to the Food Marketing Institute's Supermarket Security and Loss Prevention 2007 report. One of the biggest problems is "sweethearting," in which cashiers give friends and family freebies by pretending to scan items at the register.

Many stores use closed-circuit television to watch checkout lines. But the stores often don't have the time or manpower to review the tapes, so the cameras aren't a strong deterrent. StopLift Inc. of Bedford, Mass., has devised a system that combines cameras with advanced software to spot sweethearting automatically. The technology can recognize when cashiers make unusual movements when handling items -- such as placing a hand over a bar code -- and determine whether the items were properly scanned.
[SECURITY_sweethearting]
Courtesy of the company
'Sweethearting' theft in progress as seen in a StopLift video

When the system identifies sweethearting, it places blinking squares over the video to show exactly where the theft occurred. Then it gathers the incriminating clips together for owners to review.

Stores "have the cameras but they don't have the manpower to watch it," says Malay Kundu, chief executive of StopLift. "What we've done is sort of automate that."

Three Big Y Foods Inc. stores in Massachusetts and Connecticut have been testing StopLift's Checkout Vision Systems for the past five weeks. Mark Gaudette, director of loss prevention at the Springfield, Mass., grocery-store chain, suspects that employee theft accounts for about 38% to 40% of its total losses.

"We've got pretty much a zero-tolerance policy for any folks that steal," Mr. Gaudette says. "What we're hoping is that all these technologies will help us in loss prevention and educate all of our staff."

The stores had already been using closed-circuit television and software that scrutinizes sales data for abnormal behavior or inconsistencies at the cash register, such as excessive voids or refunds. But those measures weren't enough to stem the losses.

StopLift's system works with those tools to ferret out sweethearting. For instance, if the sales-data software shows that somebody rang up too many coupons on one order, the StopLift system can analyze video from the exact moment this happened.
[losses from theft chart]

Big Y is still analyzing the results. So far, Mr. Gaudette says, he has spotted some sweethearting incidents, but he has seen far more cashier errors, such as giving up on hard-to-scan items instead of calling the manager for help.

Pricing for the technology is done on a case-by-case basis, says StopLift's Mr. Kundu. He says that for a typical medium-volume store, monthly subscriptions currently run about $2,000.

Of course, buying these systems isn't the only option available for small stores. Experts suggest that stores could hire fewer part-timers -- who have less attachment to the business and are more inclined to steal -- and conduct more-rigorous pre-employment screenings to weed out potential thieves.

Employers must also hammer home a code of conduct, experts advise. For instance, give new hires talks on integrity and loss prevention and offer anonymous hotlines where employees can notify managers about fellow workers who may be stealing.

The bottom line is that employees must recognize they have a part to play in stopping theft, says Joseph LaRocca, vice president of loss prevention for the National Retail Federation. "Loss prevention is really everybody's responsibility," he says.