Competitive Intelligence

RIM's BlackBerry Under Threat from Rivals & Other Risks

Despite RIM's September win in its long-running patent dispute with NTP, the company suffered a real setback last week when a judge refused to delay NTP's appeals court case:

The refusual to stay the case comes two months after a three-judge panel from the appeals court upheld most of the 2003 verdict, which has raised the seemingly remote possibility that RIM might be forced to stop selling BlackBerrys without a settlement.

But the August decision also identified certain errors during the trial, thereby reversing some of the infringement finding and asking the trial court to review whether those errors tainted the overall jury verdict.

NTP, based in Arlington, Va., has disputed the significance of that ruling as well as a series of recent "preliminary" rejections by the U.S. Patent and Trademark Office of the five patents RIM was found to have violated.

RIM has asserted that the patent office's actions hold enough weight to sway the court case, while NTP has dismissed them as a common formality in the agency's lengthy review process.

Settlement talks in the case broke down in June, several months after the companies appeared to reach an agreement that called for a $450 million payment to NTP.

RIM has indicated it will ask the trial court to enforce the settlement, while NTP has maintained that the companies failed to reach a definitive agreement over licensing terms for the patents in dispute.

"We're willing to settle the case, but not on terms that RIM is going to dictate," said Donald E. Stout, an attorney for NTP. "If the judge says `NTP you're right, there's no contract,' we will offer RIM a license with terms and conditions that we're willing to grant them a license under. And if they don't take that, we'll seek to enforce the injunction" fro RIM to stop selling BlackBerry mobile devices and service."

RIM, in a statement, said it "maintains that an injunction is inappropriate given the facts of the case and substantial doubts raised subsequent to trial as to the validity of the patents in question."

On the other hand, it would seem NTP's patents aren't that strong in the first place:

American Technology Research analyst Rob Sanderson said the latest ruling should not come as a surprise.

"What RIM was asking was to not move this case forward until the Supreme Court can decide. That request is almost never granted, so it's not unexpected," he said.

He said decisions for the lower court judge will include whether to reconfirm the injunction, whether to stay it pending review, and whether the earlier settlement was valid.

Sanderson said RIM may have helped its position by showing it was willing to settle, as courts prefer to see settlements in such cases.

He also noted that the U.S. Patent and Trademark Office recently finished reexamining eight NTP patents and issued initial rulings rejecting 100 percent of the claims.

Those rulings are not final and NTP has said it plans to see the full reexamination process through, which could take years. Some analysts have said that until that process is complete, the patents remain valid in the eyes of the court.

Still, the bigger they are the harder they fall and everybody wants to be king of the hill - with that, competitors were coming out of the woodwork with solutions at the recent CTIA wireless show:

Several mobile e-mail access companies this week will announce products and services designed to compete with Research In Motion Ltd.'s BlackBerry platform, but RIM continues to hold its own, with new carriers and device partnerships due by year's end.

At the CTIA Wireless IT & Entertainment show in San Francisco, Intellisync Corp. will introduce Intellisync Unified Messaging for Mobile Devices. "Intellisync has moved into the wireless enterprise space full force," said Bill Jones, a product manager at the San Jose, Calif., company. "This is really unified messaging."

A new version of the company's Intellisync Mobile Suite, the new platform makes e-mail, voice mail, text and instant messaging accessible on a single device screen. This includes the ability to view all the major IM networks, including AOL, Google, Jabber, ICQ, MSN Messenger and Yahoo IM, as well as corporate platforms such as Microsoft Live Communications and IBM Lotus Sametime.

The platform has new presence capabilities, officials said. An IM client allows others to see when a user is online, but Unified Messaging lets users specify how they would like to be contacted, setting their status to let colleagues know to use a text message rather than a voice call.

Unified Messaging also includes a data collection feature that lets a user see all the information relating to one contact—e-mail, voice mail and SMS (Short Message Service) messages—in a single view.

Supporting PalmSource Inc.'s Palm OS, Microsoft Corp.'s Windows Mobile and Symbian Ltd.'s Symbian OS, the Unified Messaging platform will be available in November, both as a private-label offering from carriers and directly from Intellisync's enterprise sales force, officials said.

Nokia's e-mail platform challenges Blackberry. Click here to read more.

Seven Networks Inc. will announce three new carrier partnerships in Europe and Asia, resulting in a total of 73 carriers offering the Redwood City, Calif., company's mobile e-mail platform.

Currently 140 carriers sell BlackBerry devices and services, and that number will soon exceed 200, said RIM officials in Waterloo, Ontario.

Visto Inc. at the show will announce support for 17 new devices on its Visto Mobile platform, meaning the platform supports 60 devices, said Visto officials in Redwood Shores, Calif.

But RIM has been slowly inching out of its BlackBerry device comfort zone via its BlackBerry Connect program, which enables non-RIM devices to work with the BlackBerry Enterprise Server. BlackBerry Connect has been slow to gain traction in the United States, but that seems to be changing.

By the end of the year, BlackBerry Connect support will be available in the United States on both the Nokia 9300 and on Palm Inc.'s Treo devices, according to industry sources. Cingular Wireless will be offering these BlackBerry-connected products, sources said. By November, T-Mobile USA Inc. and Verizon Wireless will be selling Windows Mobile devices that support BlackBerry Connect, sources said.

Competitors argue that BlackBerry Connect is not the same as building support for a device from the ground up. Still, it's not easy to pull customers away from the BlackBerry.

"It would take a lot for me to switch from RIM at this point," said Nicholas Gass, IT manager at Color Kinetics Inc., a digital lighting company in Boston. "Our infrastructure is established, both back and front end, and we've established a comfort level with all aspects of the BlackBerry product line."

All competitive comparisons aside, I have to say, it's hard not to admire RIM's founders for all the philathropic work they do which also serves a dual purpose role in original research to support economic development - and in so doing seem to be building Canada's future competitiveness in the process.

- Arik

Northwest Airlines: Mechanics Strike Will Negatively Impact Future of Organized Labor

Thanks to savvy planning ahead on the part of Northwest Airlines (thank goodness I'm not traveling much in August) it would appear the mechanics strike is, not only, having minimal impact on operations, but causing significant enough dissent in the ranks of Northwest's other unions (pilots, stewardess, etc.) that fears it could undermine the very character of organized labor - at least in the airline industry - do not go unfounded.

While the AMFA (Aircraft Mechanics Fraternal Organization) would have us avoid flying Northwest because of warnings planes are unsafe under "scab" oversight, the walkoff by 4,400 mechanics, cleaners and custodians appears to be having a somewhat counter-intuitive impact... teaching Northwest (and competing airlines) that it can indeed survive or even thrive without union labor.

No new talks are scheduled between Northwest and the union, which is refusing to take pay cuts and layoffs that would have reduced their ranks by nearly half. The mechanics averaged about $70,000 a year in pay, and cleaners and custodians made around $40,000. The company wants to cut their wages by about 25 percent. AMFA represents about 3,500 mechanics, about 790 cleaners and 75 custodians.

Northwest has said it needs $1.1 billion in labor savings but only pilots have agreed to reductions, accepting a 15 percent pay cut worth $300 million when combined with cuts for salaried employees. It is negotiating with ground workers and flight attendants, and it has said it can reopen talks with pilots once it gets concessions from the other groups.

Company executives credit their contingency plan that took 18 months to create and say the plan to use temporary workers in place of striking workers required extensive analysis, as well as the cooperation of other unions and the federal government - even consulting with White House.

With more than one labor expert observing Northwest's ability to switch to new work routines and keep operating, at last at outset of the labor action, sends an important signal to unions that strikes may have lost their power as tools to fight job losses and other cuts.

- Arik

General Motors Success in China Proves Company Can Compete After All (Free of Union Labor, At Least)

General Motors has apparently figured out how to build the right car for the right market - in this case, $5,000 minivans that get 43 miles to the gallon in city driving.

The minivans, which GM builds in a joint venture with a Chinese partner, have a quarter the horsepower of American minivans, weak acceleration and a top speed of 81 miles an hour - but they're selling like hotcakes. The New York Times reported that GM has sold more than 170,000 very small vehicles in China - enough to pass Volkswagen this year in sales in a market that VW has dominated for two decades, becoming, with its Chinese partner Wuling, the top automobile company in China.

The Wuling Sunshine minivan is a far cry from its bigger-is-better image of GM in United States, where it produces some of largest gas guzzlers on market, like Hummers. The minivan's development was led by Philip Murtaugh, the maverick executive who was able to create in China the kind of innovative environment that GM has struggled for decades to achieve in its American operations; but Murtaugh's success in China has led to his departure from company, in what may be telling sign of corporate culture at GM. A good summary comes from IHT:

The seats are only a third of the thickness of seats in Western models but look plush compared to similar Chinese cars.

Murtaugh's decision to invest in such practical vehicles went against the grain of a company known in the United States for producing some of the biggest gas-guzzlers on the market, like the Hummer. But in what may be a telling sign of the corporate culture at GM, his success in China led not to promotion, but to his departure from the company.

Meanwhile, the minivans have been a big hit in China, helping GM sell more than 170,000 compact vehicles and pass Volkswagen this year in sales in a market the German manufacturer has dominated for two decades.

They have also helped turn China into GM's biggest center of automotive profit - in contrast to losses in manufacturing operations in the United States - and its second-largest market in terms of the number of vehicles sold, after the United States.

Whether GM can duplicate elsewhere its success in China or even keep its pace here is unclear. But one thing is sure: Murtaugh was able to create a circle of innovation around the Wuling Sunshine minivan, the kind of environment GM has struggled for decades to foster in its American operations.

A genial, soft-spoken man in a company known for autocratic leaders, Murtaugh showed more talent in building a business than arguably any other GM executive of the past quarter century. From his base in Shanghai, he ran the company's China operations for more than nine years.

Yet he repeatedly made the best calls in the industry, only to find himself suddenly unemployed this spring and living in a small community in rural Kentucky.

Murtaugh resigned in March after the rising importance of China to GM prompted senior company executives in Detroit and Asia to intervene and take more direct control of the business. GM has firmly pegged its fortunes in the United States to sales of the biggest gas-guzzlers - the immense Hummers and Chevrolet Suburbans - even as oil prices soar past $60 a barrel and many Americans grow nervous about paying more than $50 for a tank of gas.

But here in China, GM was the only multinational automaker that spotted the potential back in the late 1990s for building lots of small, inexpensive, fuel-sipping cars, minivans and pickups.

"It is impressive, and it is strategically very smart," said Michael Dunne, the president of Automotive Resources Asia, a consulting firm based in Beijing and Bangkok.

GM's reward came in the first half of this year, when demand for utilitarian vehicles in China soared in response to steep gasoline prices and rising prosperity among the peasants and small business owners. GM's sales of spartan minivans and pickups and very small cars have climbed faster than its rivals, to 172,368 in the first half of this year, up 48.7 percent from a year earlier.

GM's Asian and Pacific division - just 5 percent of the company's worldwide sales - are increasingly dominated by the fortunes of its China business. The unit earned $176 million in the second quarter even as the company's overall automotive operations lost $948 million because of heavy losses in North America.

The factory here now runs day and night, six days a week. "When the employees stop for lunch, the maintenance people run in," said Yao Zuo Ping, the chief of manufacturing here.

Murtaugh played a central role in 1996 in setting up the company's main operation in China, a 50-50 joint venture with Shanghai Automotive Industry Corp., or SAIC. Instead of following the usual GM career track of bouncing through assignments around the world every two years, Murtaugh stayed on to run the operation for nearly a decade.

In the late 1990s, he noticed that millions of small business owners and affluent peasants were not prosperous enough to afford the latest Western models. But they were saving enough to acquire more spartan vehicles selling for less than $5,000.

"Essentially, it is his baby," said Stephen Small, the joint venture's GM-appointed chief financial officer.

Murtaugh never learned to speak Chinese, but he was instrumental in setting up the Liuzhou joint venture, which is 34 percent owned by GM and 50.1 percent by SAIC. The rest is held by the Liuzhou Wuling Automotive Co. His personal skills and ability to explain the latest ways to run a factory, often borrowed from Japanese carmakers, made a deep impression with executives here, as did his regular visits.

"Murtaugh himself was actually paying a lot of attention to our facility here," said Shen Yang, the president of the joint venture and a leading executive at the factory for more than a decade before GM invested here.

Murtaugh said by telephone from his home in Cadiz, Kentucky, that he made safety suggestions at the start of his very first visit to the factory in 1999. "We got about 20 paces inside the stamping plant and I said to Shen Yang, 'how many eye surgeries and finger amputations do you perform every year?"'

In early March, GM gave more power to executives in Detroit to oversee design, engineering and various manufacturing disciplines all over the world, including in China. The shift is supposed to allow greater coordination between the now-sprawling operations in China and the rest of GM's businesses.

In late March, Murtaugh resigned, at 49 years old. Murtaugh and the company said that the decision to leave GM was his, and that he was not fired.

But Shen, the president of the joint venture here, becomes visibly emotional at Murtaugh's surprise departure.

"I have a very good relationship with Murtaugh, he is my friend, and seeing him leave is very hard on me," Shen said, his voice catching slightly.

Regardless, it's forced VW to cut prices - according to Financial Times, Auto Asia, up to 14 percent just recently:

Responding to a loss of its previously commanding Chinese market share to GM’s Chinese joint venture, one of Volkswagen's two assembly joint ventures operations in China yesterday announced price cuts of up to 14% in its model range. Prices on 10 derivatives of four model families - Gol, Passat, Santana and Santana 3000 - were lowered by between six and 13.7 per cent on 8 August.

However, VW’s other Chinese joint venture, with First Auto Works (FAW), announced yesterday that it would not follow suit, but rather, hold current car prices. It is one of the first occasions since the beginning of China’s automotive market growth spurt that a domestic joint venture partner appears to have forced decisions that may not necessarily accord with the wishes of its Western partner.

VW’s partner in Shanghai VW is the state-controlled SAIC (Shanghai Automotive Industries Corp.), which independently spent £67m last year in acquiring intellectual property from MG Rover’s parent company, but failed last month to secure ownership of the British firm’s remaining assets. SAIC recently announced it will invest independently in a new plant which will make its own-badged cars derived from the Rover 25 and 75 model designs it acquired when considering a joint venture with MG Rover.

As a pioneer of inward investment, VW built up a large lead in the smaller, government fleet-dominated Chinese car market with the Santana, a derivative of the 1970s VW Passat, when cars remained unavailable to private Chinese consumers. Subsequently, the success of GM’s Wuling Sunshine small car, among others such as the Buick Sail, has helped GM overtake VW as China’s biggest-selling car brand, and the country recently became GM’s automotive operations’ largest profit centre.

A price ‘war’ in China could affect the majority of joint venture assembly and supplier firms which have invested heavily in China in recent years; a cooling of the Chinese consumer car market, together with raw materials cost increases, has already halved the Chinese automotive industry’s average profitability in the past half year, according to official sources.

China showed some recovery in demand for new cars in June and July after a pause in market growth; the China Association of Automobile Manufacturers (CAAM) cited stabilising car prices as an important factor in the regrowth of demand.

To build the cars in China, GM rebuilt a former tractor factory in ways that could become a model for automobile production in China for years to come. The assembly process has only one robot, for sealing windshields, relying mostly on workers earning $60 a month, above average for this region. That comes after GM's experience in Shanghai, where it installed four dozen robots for its first assembly line only to find them much costlier and less flexible than people; GM's second assembly line there was built with only four robots.

Still, while a $5,000 vehicle is probably not feasible here in the United States, Americans would no doubt be happy to pay two or three times that much for a vehicle getting that kind of mileage, hard seats and not.

- Arik

AMC + Loews = Consolidation Hitting the Slumping Theater Business

AMC Entertainment and Loews Cineplex Entertainment have decided to combine to see if maybe, together, they can beat the biggest moviegoing slump in 20 years. Not that movies, necessarily, are the problem or aren’t popular. It’s just that, the theater distribution channel is obsolete, undifferentiated and destined to become even more so, unless theater chains can create some integrated experience that would warrant fighting the crowds instead of cozying up at home with movies on demand or DVDs by mail, rented or bought outright.

The second and third (respectively) leading theater chains agreed to merge into a 5,900 screen movie-viewing goliath with operations throughout the the country and overseas. The deal is valued roughly at $4 billion and will put them second to Regal Entertainment group, the largest movie entity with 6273 screens in 558 theaters.

What's an even broader reason for the consolidation? Maybe Batman has a shot at saving Hollywood this summer... or maybe, Tom Cruise...?

For four months, Hollywood has been waiting for a movie to reverse its grim box-office slump. "Batman Begins" looked like the perfect candidate. A once-beloved franchise that hadn't been in theaters for eight years, the film had been re-imagined by the hip English director Christopher Nolan and was propelled by an ardent fan base, a huge marketing push and numerous rave reviews.

But like so many other recent releases, the tale of the Caped Crusader failed to save the day, further cementing 2005 as the year of the missing moviegoer.

In an era when a pair of movie tickets can cost more than a DVD, and in a season when the films seem like sorry retreads of years past, consumers are leaving one of America's great pastimes.

Compared with last year, box-office receipts have been down every weekend since late February; the last time comparable business was off for such a long span was in 1985.

This summer's movie season has been especially brutal. North American theater attendance from early May to June 19 was off nearly 11% from a year ago, tracking firm Exhibitor Relations Co. estimated Monday. If the year's overall weak admission trend holds, it will mark the lowest number of moviegoers since 1996 and the third consecutive year of decline, a skid that hasn't been seen since 1962.

Even with the price of a ticket exceeding $10 in some big cities, box-office receipts have fallen almost 7% from a year ago, according to Nielsen EDI, which tracks box-office performance.

Although the inescapable culprit may be second-rate storytelling, the weaker-than-expected opening of "Batman Begins" suggests that other factors are contributing to the decline. The expensive flops include pedigreed films such as "Cinderella Man" and "Kingdom of Heaven," as well as what should have been action blockbusters: "XXX: State of the Union" and "Elektra."

Some people attribute the nose dive to the growing popularity of DVDs, which now can come out mere weeks after movies arrive in theaters. More worrisome, executives say, is the industry's penchant for flooding the market on opening weekend, often putting a would-be blockbuster in more than 4,000 theaters. Beyond the added expense of those wide releases, the strategy leaves little time for curiosity to build for good movies and accelerates bad buzz, which can now be passed with viral speed on the Internet.

"Now at midnight on Friday evening, you're dead or alive," said Lucy Fisher, a producer of the upcoming "Bewitched" and a 30-year veteran of the industry. "However long it took to make the movie, by Friday night, except for Academy[-Award-type] movies, your fate gets cast."

Just as home entertainment systems — including plasma screens and surround sound — have become increasingly lavish, the overall moviegoing experience has become a shell of its former self. Even as theaters offer stadium seats and martinis, moviegoers are being bombarded with countless advertisements and coming attractions.

"Going to a movie theater used to be a unique way of seeing a movie and carried with it a romantic notion — it was a special forum you shared with a group of people," said Terry Press, the head of marketing for DreamWorks. Theater advertising is annoying and ruins the value of movie previews, which are a studio's most powerful marketing tool, Press said. "At least at my house I have the ability to fast-forward through the commercials," she said.

Said Richard Zanuck, a producer of the forthcoming "Charlie and the Chocolate Factory": "I don't like [commercials] at all. People come to see the movie. The movie experience is supposed to be that…. They've come to see the film and not to be sold something else."

In fact, 73% of adults prefer watching movies at home, according to an Associated Press-AOL poll released last week. A quarter of those polled said they had not been to a theater in the last year.

Despite bad news on the home front, the studios have seen some of their losses mitigated by international box-office receipts and exploding DVD sales, which have become increasingly important to the overall profit of a film.

But how well a film does in U.S. theaters typically sets the stage for its profitability. And its opening weekend grosses foreshadow its ultimate domestic take. In this equation, studio executives cynically say, quality has become increasingly irrelevant. Whether good or bad, a film can be expected to make three times its opening weekend grosses in the U.S.

If a movie doesn't do well in its first weekend, a studio will often pull the plug on its marketing resources, saving that money for its video release.

"There's not that much separation between the theatrical release and the video release. It suggests that the movie is becoming the trailer for the DVD," said Jeff Berg, chairman and chief executive of International Creative Management, a talent agency. "Because the studios are compressing the release window [between a movie's theatrical release and its DVD release], it's easier for the consumer to wait 12 to 13 weeks to get the DVD and own it."

Although the final accounting for 2005 releases cannot yet be determined, their domestic runs indicate the prospects are decidedly dim.

The $88-million "Cinderella Man" has grossed just $43.9 million in domestic theaters, and the $140-million "Kingdom of Heaven" has sold only $46.7 million worth of tickets domestically (although it has grossed more than $158 million overseas). "Batman Begins," which cost more than $150 million to make, grossed $72.9 million in its first five days of release. (Movie studios typically collect about half the box-office receipts, with the rest going to the theater owners.) The underachievers also include smaller films such as "The Honeymooners" and "Lords of Dogtown."

Many in the business are hoping this is just a temporary downturn. Some say comparisons with last year are unfair because 2004 included Mel Gibson's surprise hit "The Passion of the Christ," which grossed more than $370 million.

Dan Fellman, president of domestic distribution for Warner Bros., which made "Batman Begins," said the film's opening should not be considered weak. And he suggested that this year's slump wasn't a harbinger of more fundamental change in America's moviegoing habits.

"In any business, whether it's the stock market or whatever, you aren't going to have every year exceed the year prior," Fellman said. "Like any business that has a little bit of a downturn, you can't panic because of six months."

Now show business executives are waiting to see whether Steven Spielberg's "War of the Worlds" can save Hollywood when the Tom Cruise sci-fi thriller opens June 29. But it would need to be almost a "Titanic"-size hit to make up the lost ground.

Quite frankly, the only big-screen flick I’d planned to see this summer was “Revenge of the Sith”, which I think reflects a lot of people’s attitudes these days – if the entertainment experience would be diminished on a small screen then it’s probably worth paying fifteen or twenty bucks to go to a movie, spend a nice away from home and crowd into a theater with a bunch of snotty middle schoolers… if not, then hey! I’d rather watch at home.

- Arik

Gruner + Jahr Dump Inc. and Fast Company Magazines

Five years ago Gruner + Jahr paid a total of $571 million for two magazines - Fast Company and Inc. Yesterday they sold them for $35M. Fantastic ROI of -93%. Brilliant. Here's the rundown:

Gruner + Jahr, a division of the German media conglomerate Bertelsmann, has reached an agreement to sell its two American business magazines, Inc. and Fast Company, for about $35 million, a fraction of what it paid for the publications, according to a person with knowledge of the deal. The tentative agreement with Joseph Mansueto, founder of an investment research company, was expected to be announced Tuesday, the person said. Gruner + Jahr bought both magazines five years ago for $550 million - Inc. from Bernard Goldhirsch for $200 million and Fast Company from Mortimer Zuckerman for $350 million. Last month, Gruner + Jahr sold its women's magazines - Family Circle, Parents, Child and Fitness - to Meredith Corp. for $350 million. With the sales, the company, troubled by a two-year-old circulation scandal, has effectively shed its American magazines; it retains ownership of a magazine-printing company. As part of the deal last month, if Gruner + Jahr had not been able to sell Inc. and Fast Company by June 30, the two titles would have gone to Meredith. Initially, about 20 buyers expressed interest in Inc. and Fast Company. The list was eventually narrowed to six: Mansueto, founder of the investment research concern Morningstar; The Economist; Time Inc.; American City Business Journal, owned by the Newhouse family; Alta Communications, a venture capital firm in Boston; and Abry Partners, an equity firm also in Boston that represents managers from Gruner + Jahr. As of Monday night, only Mansueto and The Economist were still in the hunt. The final decision, the person close to the sale said, hinged on Mansueto's desire to keep the magazines afloat, saving about 100 jobs. "It was very, very tight," this person said. "There were a number of small things that added up, but Mansueto will continue to publish Fast Company, and The Economist didn't plan to do that." Mansueto is chairman and chief executive of Morningstar, based in Chicago, which provides a broad array of financial information to individuals and professional investors through newsletters and online services. It was Mansueto as an individual, not the company, that bid for the two titles. He is also a part owner of Time Out Chicago. Gruner + Jahr drew unwanted publicity in 2003 during a trial between the company and Rosie O'Donnell, a former talk show host, over a failed venture.

TheDeal.com reported yesterday that the Economist actually had the higher bid:

While Morningstar founder Joe Mansueto has the inside track in the auction for Inc. and Fast Company magazines, the Economist Group is closing fast, with a deal hinging on a few critical factors that could bring victory to either party, according to a source close to the process.

None of the issues to be resolved are contractual, said the source. Rather, they are deal-specific. For example, Inc. and Fast Company operated as a department within a division (Gruner+Jahr USA) within a corporation (Bertelsmann AG). As such, neither magazine has audited financial results. The question for Mansueto and the Economist Group is: How comfortable do you feel doing a deal without them?

According to the source, the Economist Group actually submitted a richer offer than Mansueto, though neither bid is believed to be much higher than $40 million. But given the strict June 30 deadline, Mansueto's flexibility — he can simply write a check without seeking board approval — gives him an edge.

Mansueto's plan to continue publishing Fast Company, which was widely expected to be shuttered with a change of control, also works in his favor. So, too, does his relationship with auction manager AdMedia Partners Inc., with whom Mansueto worked on taking a 40% stake in Time Out Chicago a few years ago.

But the Economist Group did submit a higher offer than Mansueto and, according to the source, "really, really wants" Inc. and Fast Company. And unlike Mansueto's investment in Time Out Chicago, which is a passive one, re-establishing Inc. and Fast Company as viable consumer magazines will be a massive undertaking that will fall squarely on Mansueto's shoulders.

Best of luck with that... sounds like he'll need it.

- Arik

Throwing in the Towel: Verizon "Wins" Qwest for MCI

Verizon will acquire MCI for $8.35 billion after Qwest capitulated, saying the bidding process was "permanently skewed" against it. Verizon won its costly, 11-week fight to acquire MCI on Monday after Qwest bitterly withdrew from the bidding war deciding the long-distance company "never intended to negotiate in good faith." The final blow came when MCI said some of its biggest customers just don’t want to do business with Qwest, so Qwest "qwit" a few hours later.

The best part of the deal for Qwest is, it cost its rival a billion dollars (almost) more than it'd originally intended, perhaps having the desired effect the company had been seeking all along. Here's a rundown of the bloodbath from the Washington Post:

Though marred by one of the largest accounting scandals in U.S. history and a shrinking business of providing long-distance service for consumers, MCI still sports a valuable stable of corporate and government customers that Verizon and the much smaller Qwest sought in order to compete in the new environment. MCI also operates an extensive chunk of Internet "backbone," the network that carries data traffic around the world.

For Washington area MCI employees, the buyout probably will bring more pain and uncertainty after several years of steady layoffs.

In February, when they first made plans to team up, Verizon and MCI said the acquisition would save about $1 billion a year and result in the loss of 7,000 jobs from a merged workforce of about 250,000. The firms have not said how many of those jobs might be in the region, where they employ roughly 3,500 people.

In choosing Verizon's sweetened bid over the weekend, MCI's board spurned for a third time higher offers from Qwest. Qwest lashed out at its takeover target upon hearing the news yesterday but said it would end its pursuit.

"It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest," the Denver-based phone company said in a news release.

"It is only fair to conclude that MCI is more interested in bending to Verizon's will than serving its shareholders."

If the AT&T and MCI takeovers are approved by the Federal Communications Commission and the Department of Justice, they will all but eliminate the independent long-distance business that flowered after regulators forced phone companies to share their lines.

Today, regional phone giants such as Verizon and SBC can offer long-distance service bundled at attractive prices with local service, while their wireless divisions offer free long-distance service.

Internet telephone service also is growing, with some plans including low-cost calls to Canada and parts of Europe.

Verizon's latest bid for MCI, totaling roughly $8.5 billion in cash and stock, is less than Qwest's latest offer of roughly $9.74 billion. But MCI's directors reasoned that the much larger Verizon is less burdened by debt, has an extensive wireless business and could take better advantage of MCI's assets than Qwest.

"From the standpoint of risk versus reward, Verizon's revised offer presents MCI with a stronger, superior choice," said MCI Chairman Nicholas deB. Katzenbach.

Under Verizon's latest offer, MCI shareholders would receive about $26 per share, $5.60 of which would be in cash and the rest in Verizon stock. The total price tag of the deal could rise depending on the price of Verizon stock.

Overall, Verizon's offer is about $900 million more than its previous bid.

Qwest's offer would have netted MCI shareholders about $30 a share, with about $16 in cash and $14 in stock.

MCI said in a news release that "a large number" of its business clients said they preferred an acquisition by Verizon and requested the right to terminate their contracts if Qwest were the buyer. MCI did not name the customers.

Some large MCI shareholders, who had helped keep the bidding war alive, continued to criticize the company's board for consistently embracing lower Verizon bids.

"No one jumped for joy" when Verizon revealed its latest offer, said David Ahl, an independent telecommunications consultant who is advising several of MCI's biggest shareholders. "No one said 'Oh, we're saved.' "

Ahl, who also personally owns stock in MCI and Qwest, said the new Verizon bid appeared designed primarily to bring other MCI shareholders up to par with Mexican financier Carlos Slim Helu, who had been the company's largest owner.

As the prospect of a proxy war for the company grew, Verizon secured a 13.4 percent stake in MCI by buying Helu's shares for $25.72 each, higher than its bid for the company at the time.

Ahl speculated that Qwest might still urge MCI shareholders to reject the Verizon deal.

But Steven M. Cohen, chief investment officer of Kellner Dileo Cohen & Co., a New York hedge fund that holds MCI stock, said it appears to him that Qwest is abandoning its pursuit.

"I'm disappointed in the MCI board," which "repeatedly has given its blessing to a lower-priced Verizon bid," Cohen said.

A Qwest spokeswoman declined to comment about the company's plans beyond its written statement. "The proposed industry mega-mergers will undoubtedly reduce consumer choice," the company said. "These issues will need to be addressed during the regulatory approval process for the Verizon/MCI and SBC/AT&T mergers."

Qwest already has told regulators it opposes the SBC-AT&T combination.

Of course, the fix was in a while back from the shareholder lobby. Three weeks ago, Mexican billionaire Carlos Slim Helu sold his shares of MCI to Verizon for more than $25.72 per share, which, with contingencies factored in, amounts to more than $27.00 per share. Since then, a number of MCI’s shareholders have been openly critical of MCI’s board, saying that it was creating two classes of shareholders by accepting any Verizon bid below what Slim was getting.

Still, Qwest stuck it to Verizon in the end - and the biggest winners in all of this are MCI's shareholders. Carlos Slim alone netted several hundred million dollars profit from those MCI bonds he bought on the cheap a few years back in the post-Worldcom fiasco. And that's real money.

- Arik

April Fools: Google Gulp Fakes-Out Investors with Diversification Strategy

Google put one over on users Friday, pitching a new product called Google Gulp on its home page, a new line of "smart drinks" designed to "maximize your surfing efficiency by making you more intelligent, and less thirsty," Google said.

Naturally, April Fools!

Well, it was original, anyway... and one mightn't doubt their aspirations for other lines of business, when they just can't shake the one-trick-pony label despite all the attempts at diversification.

- Arik

The New Sony PSP Handheld: a Clear Victory of Form Over Function

Sony's innovative new PSP (PlayStation Portable) gaming and media handheld - aka, "the iPod killer" - was introduced last Thursday, and then... today (Monday 28 March) it was ordered withdrawn.

Immersion Corp., a San Jose company who, in a 2002 lawsuit, accused Sony of patent infringement with the Dual Shock controller for the PlayStation and PlayStation2. Dual Shock technology makes the controller shake in rhythm with what's going on in the game. Sony denies that Dual Shock violates Immersion's patents and, while the district court decision included an order to suspend PlayStation sales, that order does not hold while an appeal is being heard so Sony will continue to sell its game machines in the United States.

But the bigger question may be, will anybody buy this thing? The PSP faces tough competition from the Nintendo DS as it sparks a battle for the $4.5 billion global handheld entertainment market, just at a time when Sony's in the midst of a pitched internal battle to get back on its feet after product successes fell short. Then, the PSP launches as more of a legacy product than anything - c'mon guys, the Memory Stick is a big failure and your failure to use non-proprietary technology standards will lead to the ultimate failure of the consumer electronics business in the long-run! I cannot believe you people can't see this!?! Simply stunning. Anyways, Red Herring broke it down for us on how the competitive battle lines are drawn:

The PSP’s unique features are console-quality graphics, a 24-title movie lineup, Wi-Fi capabilities, and the amalgamation of games, music, and movies in one gadget. Sony is expected to ship at least 3.7 million units to North America during 2005, according to research firm IDC.

Nintendo, so far, has been the leader in the portable gaming market with the GameBoy Advance and, more recently, the $150 Nintendo DS. The $250 PSP is the “first legitimate competitor to Nintendo’s dominance” in the handheld market, said IDC analyst Shelly Olhava. Other competitors in the market are Nokia’s Ngage portable and Gizmondo Europe’s portable.

David Cole, an analyst with DFC Intelligence, thinks that the PSP could become a long-term product and build a base for Sony for several years. “[Sony] is so strong in the game industry, it should do very well,” said Mr. Cole. “It really satisfies the need of the portable audience.”

The target audience for the PSP is adults between the ages of 18 to 34 rather than the younger audience gaming companies usually target. Nintendo, on the other hand, is more popular with the younger audience. “I think Sony decided that’s where they were really strong,” said Mr. Cole.

The PSP is a black gadget weighing just under 10 ounces with a 4.3-inch widescreen and high-resolution TFT display. It also has digital photo display and supports digital music playback in MP3 and ATRAC formats.

The processor is a high-capacity Universal Media Disk (UMD), which is an optical medium enabling feature films and high-quality games to be played on the portable. The 60-mm disk has a storage capability of 1.8 GB. This format will be utilized across the Sony family of products and is available for outside hardware makers and non-game entertainment content providers to use.

The portable gaming market worldwide was about $4.5 billion in 2004 and is expected to grow to $9 billion in 2009, according to DFC Intelligence. The PSP first launched in Japan on December 12 and has sold 1.18 million units there so far.

Mr. Cole expects the PSP to get a better reception in North America, where Sony plans to ship 1 million units for the launch. Company officials said that most U.S. stores are on their third and fourth waiting lists for the PSP. “The Japan market hasn’t been doing very well in general. Any product tends to do better [in the U.S.],” he said.

European launch uncertain

Analysts are expecting long lines outside stores on the night of the launch in North America. The demand for the PSP has reached such a peak that its European launch, which was scheduled for March 31, could take several more months.

Ms. Olhava said Sony hasn’t been able to handle shipments because of logistical problems. “I have heard that Sony has manufacturing issues,” she said. “It’s a brand-new product and it’s bound to have some hiccups along the way.

One problem could be the $250 price. “It’s an unproven price point and that will be a real challenge,” said Mr. Cole. Early adopters are price-insensitive, he said, but consumers will get tighter with their wallet after the first 1 million sales.

The Nintendo DS has already launched in the three major markets—North America, Europe, and Japan. The DS, which launched in North America on November 21, sold 1.5 million units by February. Company officials have said that Nintendo plans to ship 6 million DS units globally by the end of March.

Analysts feel the 2005 holiday season and the software availability will determine which portable product succeeds. “Both the DS and PSP are excellent portable systems,” said Mr. Cole. “You really will be able to get the analysis going into the holiday season.”

Meanwhile, every review I've read of the device itself leaves me wondering if it's worth the trouble. Jim Louderback has a few backhanded compliments in that regard, "it's going to redefine handheld gaming. But it's not going to be as popular or as successful as everyone claims. If Sony's expecting an iPod killer, this isn't it. Here's what I see as the good and the not-so-good in Sony's latest platform." More of his review is excerpted below:

Screen: A standout display, for sure. It's big, wide, and captivating. Colors are rich and detailed. Response rates seemed superb while I was playing Ridge Racer. But there's a downside to all those pulsating pixels, too. First, Sony opted for a very reflective coating. This makes the image look great, but also turns the screen into a mirror in bright light. Even in lower light, the reflections can become annoying in some situations. Don't plan on taking it hiking; this is not a player for the great outdoors.

Graphics: Far better than the competition's, the graphics engine made the smallish screen look much bigger. Although some of the early titles probably won't take advantage of all the power, Ridge Racer at least looked fantastic.

Sound: I have no complaints here. The audio quality was simply stunning on my tests, especially when paired with high-quality headphones. The built in speakers are weak and tinny, as you can imagine, but the top-notch audio—when combined with the zippy screen—creates a truly immersive gaming experience on the go.

Controls: The PSP includes the standard complement of PlayStation 2 controls—although it has only one joystick and one pair of shoulder buttons—and pads that are reasonably easy to use. It has no touch screen, unlike the Nintendo DS, but includes a real portable-gaming breakthrough: a tiny round nub that appears to be the twisted progeny of a joystick and the IBM TrackPoint mouse replacement. Instead of having to be yanked back and forth, this "pointing pad" glides almost effortlessly across a small part of the PSP's surface. It provided a perfect stand-in for a steering wheel in Ridge Racer, and it'll probably become the controller of choice for all but the most precise and demanding tasks.

Games: The PSP's launch library is good for a new platform, with about two dozen titles available now. Over time, expect to see PS2 retreads and brand extensions galore. But those titles will only reinforce one of the PSP's problems: It's a portable version of a home console, but nothing more. The Nintendo DS, with a touch screen, microphone, and unique dual-screen design, offers more potential for breakthrough styles of portable gaming that don't rely on the archetypes established by console games.

Just because you build it, however, doesn't mean they'll come. Even though the DS has been out for four months, only a paltry number of titles are available, and few take much advantage of the unique DS features. The DS has one ace card: It's compatible with the huge library of Game Boy Advance titles too, which makes it a better upgrade for existing Nintendo handheld customers.

Movies: The PSP has also been widely touted as a portable movie player. The device includes a new optical disc format, called UMD (for Universal Media Disc). Each disc is about twice the size of a quarter, and can hold an entire movie. In fact, the first million PSPs here in the U.S. will come bundled with Spider-Man 2 on UMD. Sony's penchant for launching unsuccessful proprietary media formats is legendary (witness Beta, Memory Stick, etc.), and I believe UMD as a broad media storage technology will fail here, too.

Why? First, because it's highly unlikely that many users will purchase movies in a format that works only on portable players—and no one will replace their home DVD player to go with UMDs. Movie availability is likely to be limited to Sony's back catalog and a smattering of other titles at first, so there won't be much to watch. What about rentals? The picture is murky there, too. Shernaz Daver, from Netflix, said that the company "will support any format as long as it becomes popular," but wasn't ready to commit at launch.

The big bugaboo here is that you can't make your own discs. And if Junior can't drop Letterman or the X Games onto a disc at night and watch it the next day, then the idea that any significant number of people are going to buy the PSP to watch videos is moot.

About five years ago, a company called Data Play released a nifty new quarter-sized optical media format. It was recordable, tiny and promised a revolution in media players. But before Data Play could get it to market, tiny hard-drive and flash-based players took off. Data Play sunk without a trace, and even though Sony has far bigger resources to bring to bear, UMD will too.

Oh, one other fundamental drawback for the PSP as a movie and video player: It lacks a kickstand or other way to keep it upright. Playing games is interactive; you want to hold the player while you frag. Watching video is passive and, based on my experience with first-generation portable video systems from Archos and Creative, if it doesn't stand on its own, it just isn't worth carrying.

Music: The PSP has the potential to be a great music player, but unfortunately it relies on a flash-based Memory Stick to store music. The system comes with a 32MB Memory Stick, enough for an hour or so of very compressed music—if you didn't have to share the Memory Stick with saved games. But even if you also picked up a 1GB Memory Stick—for an additional $130—you still wouldn't have enough space for music. I frequently hear iPod Mini users complain that even 4GB isn't enough for them. Sure, you can pick up a 4GB Memory Stick, if you've got a spare $500 lying around. I suggest a Creative Zen Xtra or Apple iPod instead.

In a pinch, the PSP can stand in as a music player. But until you can load 10GB or more onto the system—without spending as much on the memory card as you would on a brand new iPod—few people will use it as their primary music player. To support music and movies, Sony will have to add a mini-hard drive to the PSP, which will only make it heavier and more power-hungry.

Battery Life: Speaking of power, Sony claims you can get six hours of hard-core game play or movie playback on a single charge. If the PSP delivers on that promise, that's good. Based on my own experience with battery-powered devices, though, you're better off cutting that number in half. Even three hours of game play or movie watching is pretty good, except when your batteries cut out during a long flight or a boring class. Better pack a spare battery or two.

Price: $250 for a game-playing, movie-watching, music-playing device is pretty darn good, especially for one with a screen as beautiful as the PSP's. It must cost them more than that to make each one, which means they intend to profit on the games and the movies, instead.

To justify that price, though, the PSP will have to do more than just play games, as Nintendo's offerings cost half as much or less. Many hard-core gamers will certainly pony up, but the jury is out on whether enough casual gamers will adopt it to make it a success. My best guess is no.

Connectivity: Like the DS, the PSP will ship with built-in wireless networking. That's great for group gaming, but why is there no built-in Web browser or e-mail client? And no way to connect your PSP to your PC wirelessly to transfer music and movies to the Memory Stick? All the parts are there, but the whole is sadly lacking. I, for one, would love to see Skype for the PSP—that would have been a real breakthrough!

Reliability: This is the great unknown:. How well will the PSP hold up to months and years of heavy playing and portable jostling? I'm not particularly bullish, especially because that large screen is unprotected. Sure, the PSP comes with a slip-on foam case, but it's so nondescript that I almost lost it five times in one week. In just a few short months, a scratched screen will take much of the luster off of the PSP.

The Nintendo DS's clamshell design makes it much more likely to survive years on the road, especially in the backpacks of all those hyperactive kids and one clumsy journalist. I was almost scared to travel with the fragile-seeming PSP, particularly because we only had one in the entire company.

And how long will the battery last? Regular gamers will probably need a new one every year or so, which creates a tremendous after-market opportunity.

Finally, what about the internal software? Is it robust enough for all the banging—and hacking—that's bound to go on? Will it need regular flash updates? And how do you distribute a flash update to the PSP if you don't have a wireless network? Via UMD? Memory Stick? I don't know about you, but I certainly don't have a memory stick reader for my PC. Fortunately there's also a standard USB 2.0 port. Perhaps you'll download updates off the Web site and send them to the PSP via this port.

All in all, I think the PSP will be extremely popular among hard-core gamers, especially those who spend hours each week banging on their PS2s. I wouldn't buy it for kids, though, because it's too fragile. And I think the lack of robust media playback—non-writable UMD, paltry and expensive Memory Stick storage options—make it less than ideal for casual gamers.

In the end, the PSP excels at just one thing: portable gaming. Casual gamers who already own a satisfactory portable gaming platform, whether it's an old Game Boy Advance or even a game-playing cell phone, have little incentive to switch. And anyone looking for a portable media player that will unseat Apple's iPod needs to keep looking. Because when it comes to everything else, the PSP just doesn't cut it.

And, PC Magazine sums it up even more concisely, a victory of form over function:

Those in the target demographic have eagerly awaited its arrival. And even people other than 15- to- 25-year-old males may have more than a passing interest in one of the year's most anticipated pieces of gadgetry: the Sony PSP. Originally conceived as the PlayStation Portable (and now simply called the PSP), the slick, gorgeous device succeeds spectacularly as a portable gaming console. If you view its music- and video-playback capabilities as bonus features, you'll be thrilled; if you were hoping it would be best-in-class at all its endeavors, you'll be slightly disappointed.

Clearly breakthrough product innovation can make or break the company that gets it to market; but there must be a compelling customer value-proposition inherent in the product itself, differentiated in the way it is built/sold/positioned, or it must be disruptive to existing markets for there to be a hope for success. It sounds to me like the Sony PSP falls short on all three counts, despite all the hype and lawsuit PR.

- Arik

Dr. Dre's Protégé Formula: The Secret to Aftermath's Hip-Hop Success

Brendan Koerner broke it down for us in a fascinating analysis on Slate.com of the secret to the success Dr. Dre's formulated at Aftermath Entertainment in grooming protégés like Eminem and 50 Cent to supa-MC-dom... The Game appears to be next up.

Dre isn't just consistently good—he's good in a consistent way. No matter if the front man is 50 Cent, Eminem, The Game, or Dre himself, the man's sound is similar from album to album. Dre achieves this by working with up-and-coming talents rather than established MCs who might want too big a say in how the album turns out. Dre was attracted to The Game because of his gangster persona and laid-back vocal style, but a more important factor might have been the young rapper's willingness to subordinate his technique to the Dre formula—the beats come first, and the lyrics are dessert. Meanwhile, ego clashes recently scuppered planned collaborations between Dre and Rakim, and Dre and Ice Cube.

Dre also realizes that once he's created a star, he can no longer exert his preferred level of control. Which may be why he rewards his former protégés with labels of their own (Eminem has Shady Records, 50 Cent has G Unit). It gives them something to do, which frees him up to look for more pliable talent. The end result? A sound that's so consistent the industry's hype artists can bank on it. Magazines and clothing companies can be confident that the pre-release capital they spend plugging Dre's protégés is a safe bet—sort of like buying hip-hop's version of municipal bonds.

When it comes to winning this kind of free, pre-release exposure, Dre has one last trick up his sleeve: He keeps himself scarce. Contrast the Dre approach with that of more prolific beatsmiths. The Neptunes, for example, rent themselves out as hired guns so often that a new Neptunes-produced track is certainly no cause for an XXL cover story. Dre, on the other hand, rarely takes on freelance work for non-Aftermath artists, preferring to keep his creative focus on projects he controls completely. Since 1998, only five albums can truly be considered pure Dre projects—the first two releases from Eminem, the debuts of 50 Cent and The Game, and his own 2001. The scarcity of Dre's work ensures that each release is an event, one that garners lavish media and consumer attention. And as music snobs are forever complaining—and the inexplicable success of Ashlee Simpson's Autobiography proves—exposure is what really propels an album to No. 1.

Ah, yes... invoking the name of Ashlee "Appetite for Humiliation" Simpson in the same piece as Eminem and 50 Cent... what's the world coming to? Still, the lesson of "if you love it, let it go" in constructing a hip-hop dynastic family network serves as an interesting model for spinning off success in promising new acts.

One the rest of the business world might well learn from... step up to get your rep up.

Of course, that all assumes 50 Cent and the Game don't off one another ... or at least their entourages don't.

- Arik

Dan Rather Steps Down from CBS Evening News Presenting Opportunity for Media Innovation

Dan Rather's last night as anchor of the CBS Evening News, leaving 24 years to the day after taking over from predecessor (and only the second anchor in the history of the broadcast) Walter Cronkite, came and went with a touch of drama and sadness, despite the fact I've never considered him much of a "news man". Here's hoping, as he wished himself in an interview, that his best days are indeed ahead of him.

The larger question now is, wither the CBS Evening News? In an era when the whole genre is encountering shrinking viewership and increasing dependence on the wrong demographics, this presents some startlingly interesting opportunities for CBS to effect change - and, with it, competitive advantage - in revamping the medium for the modern era. Slate.com's media critic, Jack Shafer, offered up some cool ideas:

CBS should worry less about who anchors its evening news ship than what the ship looks like. Any of the current CBS doofuses will do as an anchor. It's not like Brian Williams and Peter Jennings light my charisma candle. CBS could steal a march on NBC and ABC and the cable networks by designing a program that reflects changing viewer habits. It needs to break the code of why viewers have turned off the news.

First, CBS should target serious news consumers, the sort of devotees who follow breaking news all day through news radio, cable, and the Web. Dedicate the program to breakingest of breaking news and ditch the news-you-can-use and heart-warming features unless they're stupendous. Produce a program that's worldly and doesn't waste time. The BBC World News, which airs on many PBS affiliates, is a good model, even if it is excessively chatty for my tastes.

Next, reduce the number of commercials. Right now, about eight of the 30 minutes of an evening news slot are ads, which makes the program too short and too frequently interrupted to be compelling. The Journalism.org study asserts that one reason the network's morning "news" programs have gained viewers steadily since 1998 is that viewers have realized that they often program big blocks—up to 20 minutes—free of commercial interruption. Advertise the CBS Evening News as the program that gives hardcore news consumers two minutes more news per half hour. Cutting ads will reduce revenue, of course, but it will build audience, which is the longterm problem the program faces.

Swing a deal with CNN to rebroadcast a refreshed version of the CBS Evening News in the 10 p.m. slot. One reason behind the evening news fade is that it's still scheduled for an era when moms stayed at home and cooked for dad, who didn't have a long commute. How many 30-year-olds do you know who would watch the evening news at 6:30 p.m. or 7 p.m. if you paid them? The network's morning shows have benefited by giving busy viewers a two-hour window through which to watch. Nobody expects them to watch the whole thing. A 10 p.m. cable slot for the CBS Evening News would similarly appeal to busy people. Sharing news resources with CNN, which has been on the table before, would be an excellent idea to add quality and scope to CBS's coverage.

Next, CBS News should partner with a premier daily newspaper—the New York Times, the Washington Post, the Los Angeles Times, or the Wall Street Journal—to give viewers a taste of tomorrow's news tonight. The networks already use the morning New York Times as a cheat sheet for the evening program. Why not use it as a preview of tomorrow's news? The New York Times already does a two-minute show based on this idea for the Discovery Times cable channel at 10 p.m., so W. 43rd Street might not be keen on partnering. What's in it for the newspaper to partner? The Web sites for both the Post and the Los Angeles Times already draw more readers nationally than they do locally. CBS News could steer additional eyes to those Web pages.

Next, hire a brainy and thoughtful commentator. Eric Severeid (good), Bill Moyers (bad), and Bill Bradley (uneven) once delivered interesting commentaries on CBS Evening News. In our increasingly opinionated world, CBS would seem futuristic by going retro and including a video columnist.

TiVo and other technologies have destroyed the concept of "appointment viewing." CBS should respond by putting the goddamn broadcast on the Web. Computers and television aren't converging—they've converged—and I want to watch the news 1) when I want to watch it and 2) on whatever monitor I'm looking at. CBS could start by streaming the program onto the Web at the same time it broadcasts the show. Then it should video-podcast it. Other time-shifting opportunities await. Monetize the evening program by putting it on the various cable video-on-demand services. Do the same with the CBS News archives. Wired Editor Chris Anderson's "long tail" thesis implies that there's money in all of those old documentaries, news magazines, and news casts. Thomas W. Hazlett of the Manhattan Institute urges CBS to allow viewers to personalize the Web version of the news and suggests that it be the first network to bring television news video to capable cell phones.

George Washington University professor of journalism Mark Feldstein thinks a network should abandon the traditional evening news time slot and program an hourlong news show starting at 8 p.m. Producing a money-making news program in prime time will become economically feasible if network entertainment ratings continue to decline. Ceding the 6:30 p.m. or 7 p.m. slot back to the affiliates would make them very happy (because it will make them money).

Arizona State University professor of journalism Craig Allen, author of News Is People: The Rise of Local TV News and the Fall of News From New York, suggests that one of the networks will eventually euthanize the program. Eliminating an early evening program from a network line-up was one of Rupert Murdoch's bright ideas when he started Fox. Instead of battling the other networks for profits in an overpopulated news slot, Murdoch programmed entertainment at the local level and put his energies into producing an hourlong local program at 10 p.m. for the various Fox affiliates that he owned.

The woolly mammoth was far too specialized—and too dumb—a beast to adapt to its changing environment. The producers at CBS News may be specialized, but they're not stupid. But if they continue to play by the current set of evening news rules, they're destined to to lose. Unless they want future news archaeologists to find them frozen alive in pack ice, they need to stop thinking about who is going to be their next anchor and start changing the news environment. Without subscribing to his news values, they need to ask themselves, What would Rupert Murdoch do?

Indeed! Murdoch might have objectionable politics for some, but he seems to know how to appeal to the marketplace with exactly what people want to watch. Taking a page from his competitive strategy seems like the best idea CBS has gotten in... oh, I dunno... about 24 years.

- Arik

Gates Gets His Groove On: Fulfilling Upgrade Value-Prop Strategy for Longhorn & Office in 2006

Fresh from his recent knighthood with the Queen, this morning's announcement that Microsoft would acquire Ray Ozzie's Groove Networks was viewed with broad optimism by most as the father of Lotus Notes, Microsoft Exchange's biggest competitor and, later on, an ultimate victim of Redmond's unrelenting competitive strategy, is set to become Chief Technology Officer at Microsoft in the process. Here's a good summary of what went down:

Terms of the deal weren't disclosed. Groove will continue to be run out of its Beverly, Mass., headquarters and will become part of Microsoft's Information Worker Business. Ozzie will report directly to Microsoft Chairman and Chief Software Architect Bill Gates.

Founded in 1997, Groove develops peer-to-peer software called Virtual Office that enables ad hoc workgroups to collaborate seamlessly in realtime.

Groove's software complements Microsoft's SharePoint Services and SharePoint Portal Server. Groove has worked closely with Microsoft on its collaboration technologies since its founding. In October, Microsoft invested $51 million in Groove, acquiring a 20 percent stake in the ISV. Redmond, Wash.-based Microsoft later was part of $38 million investment in Groove after the company had layoffs and a restructuring. Overall, Groove has received $155 million in financing since its founding.

Ozzie is best known for his creation of Lotus Notes. He left Lotus after the company was acquired by IBM and launched Groove as a dedicated Microsoft ISV. Lotus Notes competes directly with Microsoft Exchange. But in 1994, Microsoft named Ozzie a "Windows Pioneer," a rank given to only seven people, Microsoft said.

However, this wasn't all that surprising... Here's a summary of the technology and business implications:

Industry observers have long predicted that the two companies would combine forces because of Microsoft's substantial investment in Groove and the latter's innovative offline, peer-to-peer (P2P) and authentication capabilities, which enable ad hoc workgroups across firms to collaborate with outside partners, suppliers and customers.

Gates formally announced the agreement to acquire Groove on Thursday, saying that the Beverly, Mass.-based company's technology would be tightly integrated with Microsoft's next generation of Windows, code-named Longhorn, and Microsoft Office 12, including SharePoint. Other company executives said the "trifecta" of Office/SharePoint, Microsoft's Live Communications Server 2005 realtime platform and Groove's Virtual Office will extend Microsoft's lead in the collaboration space. They also hinted that Groove's technology would be integrated with Microsoft Business Solutions (MBS) offerings that support customer business processes.

"The way people work across locations and different organizations requires new technologies, and the Groove product has fantastic and unique features we want to fit into the Office system," Gates said in a conference call Thursday from Microsoft's Redmond, Wash., headquarters. "The P2P and authentication capabilities Groove built into their apps, we want to take the equivalent things we've been incubating at Microsoft and bring them in to strengthen the platform. One big thing about Longhorn will be its peer-to-peer capabilities."

Microsoft has long struggled with P2P technology and had invested in a Windows XP P2P development kit, but little became of that effort. Besides giving Microsoft's collaboration strategy a boost, Gates said the company's deal to buy Groove also fulfills a longtime dream of hiring Lotus Notes creator Ray Ozzie, the chairman, CEO and founder of Groove. Ozzie will serve as one of Microsoft's three CTOs, reporting directly Gates.

Ozzie's contributions as one of the early application developers on DOS and Windows and later on Lotus Notes and Groove's Virtual Office make him an ideal candidate for Microsoft's senior leadership team, according to Gates. "For me, I've thought about hiring Ray and his team for a long time. It's a big day for me that is finally taking place," he said.

The Groove acquisition will accelerate Microsoft's ambitions in the collaboration space, especially against rival IBM, said David Via, CEO of Wolcott Systems Group, a Fairlawn, Ohio-based solution provider. "It's a huge coup for Microsoft. Ray [Ozzie] is one of the most respected figures in the industry," Via said. "It could be to Groove what IBM's acquisition of Lotus was back in '95, a huge accelerator."

Other Microsoft partners also expressed enthusiasm, noting that Groove's software fills a big hole in Microsoft's collaboration lineup. The deal is plus for all partners in Microsoft's Information Worker division, noted Ted Dinsmore, president of Conchango, a New York-based solution provider.

"This fills in a hole in the office to back-office position for Microsoft. The offline feature is the hole, and Groove's peer-to-peer [software] allows better fits between Windows SharePoint Services and SharePoint Portal Server [SPS]," Dinsmore said. "With this acquisition, there are no competitors that have this depth, a full suite of collaborative [applications]. The question then becomes, what will IBM do now?"

Another Microsoft partner agreed. "We love it," said Ken Winell, managing executive at Vis.align, a West Chester, Pa.-based solution provider that recently acquired collaboration services provider Econium. "[The Groove deal] gives Microsoft the ability to tackle the offline and mobility piece of collaboration that has been missing in their stack. One of the key issues that enterprises encounter with SharePoint is the ability to move and work on documents while not connected. Users can check documents out; however, the extra steps required are not as intuitive as the Groove Mobility workspace for SPS. It allows me to select which documents and folders I want to bring with me, and then when I connect it seamlessly syncs."

Groove's technology also will integrate with and leverage Microsoft's instant-messaging and realtime communication platforms, Winell added.

Gates said the ability for Microsoft customers to immediately build on their current investment in SharePoint with Virtual Office--and enhance that later--made Groove a compelling buy for Microsoft. Groove's file-sharing technology, for example, lets users insert sharing, synchronization and conversation icons directly into Windows Explorer. That enables every Windows folder to have an attached Groove button that can turn the folder into a SharePoint workspace, allowing users to share the folder with people inside or outside the company and have chats and conversations within that folder. Groove's Virtual Office 3 upgrade, announced last summer, for the first time targeted the company's software at small and midsize businesses, extending the vendor's traditional base of enterprise and government customers.

Michael Cocanower, president of ITSynergy, a Phoenix-based SMB solution provider, said he currently doesn't deploy Groove software but held a seminar this week about SharePoint's value to lower-midmarket customers. The integration of Groove's technology and Microsoft's collaboration platform and SharePoint Workspaces can only be a good thing for the SMB space, he said.

"It seems to me that their product/feature set will ultimately become integrated in the SharePoint platform," Cocanower said. "This [acquisition] announcement seems to only enforce that making an investment in SharePoint is a good investment for the future."

Yet one Groove competitor in the SMB space disagreed. "By announcing its acquisition of Groove Networks, Microsoft has made a move but still finds itself with a complicated, peer-to-peer collaboration technology that does not address the massive SMB space," Rick Faulk, CEO of Intranets.com, said in a statement. "Unlike Groove's technology, we believe that professionally managed and hosted Web-based solutions--available from anywhere with an Internet connection--are the best way to serve this market.

Ozzie and Microsoft Information Worker Group Vice President Jeff Raikes also participated in the acquisition announcement from Groove's Beverly headquarters. "[Groove's software] will influence how collaborative technology can be broadly used across Microsoft applications and business proceses," Raikes said.

The integration of the two companies' platforms and peer-to-peer distributed capabilities will enable Microsoft to extend its lead in Office and SharePoint collaboration outside the firewall, Ozzie said. With the deal, Ozzie said he will "set up a life in Redmond" but also retain his home in the Boston area. "I'll be spending a lot of time on planes," he quipped. As a Microsoft CTO, Ozzie will serve alongside Craig Mundie, senior vice president and CTO of advanced strategies and policy, and David Vaskevitch, senior vice president and CTO of Microsoft's business platform.

After the announcement, Groove President and COO David Scult said there are no plans for any layoffs at Groove, which employs 200. He declined to comment on financial aspects of the deal, terms of which weren't disclosed. Microsoft already owns roughly 40 percent of privately held Groove in the wake of several investments since the collaboration software vendor's founding in 1997, including an initial $51 million funding in 2001.

The Groove operation will continue to be run out of Groove's Beverly headquarters, according to Microsoft. Though Ozzie will serve as a Microsoft CTO, he and Scult will continue to oversee the Groove operation, a Groove spokesman confirmed.

Groove runs a consulting services arm as a nonprofit support center for enterprise customers, and recently the company began developing a partner channel for the Virtual Office 3 upgrade, Scult said. The consulting unit serves as a "trusted adviser" to customers, Scult said. He declined to say if Groove's consultants will be folded into Microsoft Consulting Services or if Groove's handful of channel partners will be inducted into Microsoft's partner program.

News of the Groove acquisition comes on the heels of Microsoft's Convergence 2005 conference for the MBS division. At the event, Microsoft took the wraps off its next-gen, realtime collaboration suite, including the Office Communicator 2005 client--formerly code-named Istanbul--and Microsoft Office Live Communications Server 2005 Service Pack, as well as Microsoft Office Live Meeting 2005. Also this week, Groove announced the Virtual Office 3.1 update.

Of course, for a company who's biggest competitor seems lately to be itself, with its installed base of software users already on Office and Windows witnessing diminishing returns from the upgrade path coming up in 2006, the Groove acquisition provides a good reason to consider the upgrade, especially in the enterprise:

The deal poses some interesting questions for how both companies will weave in Groove's collaboration software with two critical releases expected from Microsoft in 2006, namely the long-awaited next version of Windows, code-named Longhorn, as well as the next version of Office designed to fully exploit Longhorn.

"Microsoft has two big releases coming next year in Longhorn and Office 12, which are radically different from their predecessors. They both have millions of lines of code, hundreds of developers, and programming teams well into their development phases. It is going to be hard to take a step back and stitch new technology and strategies into those products," said Nate Root, a vice president with Forrester Research, in Cambridge Mass.

Root and other analysts said they had been expecting the acquisition for some time, and generally think it makes strategic sense.

"Microsoft and Groove have been outstanding partners. Microsoft has been able to kick a lot of business Groove's way because Groove fills in a gap that Microsoft does not have any technology in, the off-line collaboration market. It is a smart move," Root said. "The one downside is, it might be a smart move that is happening a little later than what would have been ideal," he added.

The fact Microsoft is making Ozzie CTO is sending signals to some observers that the latter's role will be more than one of just shepherding the deal through to completion. Some believe Ozzie will play an integral role in shaping Microsoft's overall collaboration strategies with new products.

"It looks like they want Ray to be around for the long haul to make some other paradigm changing inventions like Notes and Groove. You can imagine some pretty far out conversation over a cup of coffee or a beet between those two," Root said.

In a prepared statement Microsoft group vice president in charge of the company's Information Worker Business unit, said the deal makes sense because the companies have a shared vision for collaboration. He said Groove complements Microsoft's collaboration products "by helping us better serve businesses with mobile workers and remote offices and will assist Microsoft in being able to offer both small and large companies more integrated collaboration software and services.

Currently Microsoft has Office SharePoint Portal Server and Windows SharePoint Services that allow IT shops to create and manage shared spaces for groups of information workers within an IT-based network. Just this past week the company introduced Office Live Communications Server and Microsoft Office Live Meeting that together reportedly offer a unified communications infrastructure for information workers.

One thing's for sure - whether you think Ozzie crossed over to the Dark Side or not, the powerful collaborative tools that can come out of the combination will help ensure Microsoft's continued dominance in the OS and Productivity sides of the software marketplace at least through the next release of Windows.

That's something everyone from Apple to the Linux community, and a good many other competing platform ISVs with stakes in either market, wish would've been a tad harder as Microsoft would've likely spent the rest of 2005 and 2006 convincing enterprise customers the upgrade was worth the time, expense and attention-span.

- Arik

Sony Shakeup: Sacking Idei, Appoints Welshman Successor

One of these things is not like the other...

The picture above presents a much happier collection of Sony execs as Idei (second from right) today gave way to a somewhat surprising Western successor in Sir Howard Stringer (guess who...) as the Japanese company's next Chairman and CEO.

In an emergency board meeting, Sony's current CEO, Nobuyuki Idei, stepped down a year earlier than his planned retirement (next year is Sony's 60th birthday) after a series of setbacks for the company and a general lagging performance in the consumer electronics business. The new CEO, Howard Stringer, who was once a producer at CBS News and is currently the head of Sony Corporation of America, is considered an unorthodox choice because he doesn't have an engineering background nor can he speak Japanese.

It seems Stringer's rise to the top and Sony's quest for reinvention have intersected at a point where the former television news journalist, who revived Sony's struggling music and movie businesses, takes the helm of a company badly in need of competitive differentiation as continued lost ground to stalwart rivals ranging from Chinese and South Korean electronics companies as well as rebounding American competitors like Apple damages Sony's long term ability to compete in an increasingly commoditized global consumer electronics market place.

NYTimes.com has a good summing-up:

It is also a recognition of the turnaround in Sony's entertainment businesses, which are among the most profitable parts of the company, riding blockbuster movies like "Spider-Man." And it underscores the changes that are sweeping Japan, once ascendant in the world economy, but suffering through a decade of little or no growth.

In a statement issued from Sony's Tokyo headquarters, Sir Howard hinted at future efforts to integrate the entertainment and electronics focuses of the company. "We look forward to joining our twin pillars of engineering and technology with our commanding presence in entertainment and content creation to deliver the most advanced devices and forms of entertainment to the consumer," Sir Howard said.

Sir Howard, a charismatic 63-year-old who does not speak Japanese, was born in Cardiff, Wales, and is an American citizen who splits his time between New York and his family's home in London. Before joining Sony in 1997, he worked for 30 years as a journalist, at CBS, at one point as a producer for Dan Rather at CBS, and ultimately went on to run that network.

Sir Howard was knighted by Queen Elizabeth in 1999 and has become known for being a likeable consensus builder, comfortable negotiating with both Hollywood divas as well as eccentric engineers and managers in Japan.

"Forgive the awful pun, but he has kind of oriented himself to his Japanese colleagues," said Peter G. Peterson, chairman and co-founder of The Blackstone Group and a former board member at Sony who helped recruit Sir Howard to the company. "It's a great achievement. They trust him. He's a harmonizer."

Mr. Idei, 67, was the first nonengineer to run Sony, and his departure will come two years into his three-year plan to overhaul the company. During his 10-year tenure, Mr. Idei used his background in marketing to reshape Sony into a more media-focused company.

Sir Howard, of course, is hardly an engineer himself. But in recent years he has taken an increasing interest in Sony's electronics business, particularly in areas that relate to music and movies. Sir Howard, who is also vice chairman of Sony's board, has tried to break through the bureaucratic logjams that have kept Sony - the company that invented the Walkman - from competing effectively against Apple's iPod, the dominant digital music player. And he has taken a key role in negotiating with other Hollywood studios to get support for the new Blu-Ray disk format, which Sony supports.

More recently, Sir Howard has been increasingly outspoken within Sony that the company has to break down its balkanized structure in order to move much more quickly in the marketplace. In a provocative speech to Sony managers in January he declared that "the business of Sony has become management not product design."

Sir Howard joins a small club of foreign executives who have taken the helm of major Japanese companies. This includes Carlos Ghosn of Nissan and Rolf Eckrodt, a German who led a failed effort to turn around Mitsubishi Motors.

Sir Howard does not keep a home in Tokyo, but he is expected to spend more time in Japan, a Sony executive said.

Still, he has shown that he can build bridges to all sides of that company.

"Howard is the ultimate diplomat," said Vic Pacor, the former head of Sony's television and home audio division in the United States. "He is even handed and will bring the kind of stability that the company needs," said Mr. Pacor, who is now president of D&M Holdings, a Japanese-American electronics company.

Allowing a foreigner to take over the reins of Sony would be one of the boldest moves a Japanese company could make. Most Japanese boards and executive ranks are filled with lifetime employees who win those spots more through their loyalty than through their creativity.

Yet in appointing a foreigner to its top spot, Sony's management appears to be completing a course originally set out in the 1950's by its co-founder, Akio Morita.

He recognized then that Sony had the potential to become a global powerhouse if it not only sold products overseas, but incorporated foreign thinking in its products, its brand and even its management.

We'll see whether Stringer can sharpen Sony's pencil enough to be competitive again - change can't hurt, after the Idei era, maneuvering a global powerhouse like Sony is no mean feat.

- Arik

ChoicePoint: the Problem with Selling Personal Information... it's a Massive Homeland Security Vulnerability

Nice going... ChoicePoint, the Georgia company that boasts it has the deepest database in the nation, said that it had alerted 35,000 Californians that they were vulnerable, as required by state law, but balked at notifying a far larger number of potential victims outside California... about 145,000 in all! Last fall, hackers apparently used stolen identities to create businesses that then opened some 50 ChoicePoint accounts and used their newly-minted access to the world's largest personal information stockpile to steal the identities of at least a few of the people involved.

Do you think maybe these guys have a little too much power here?

Daniel Engber had some advice in Slate.com for those who believe they've been among the unlucky profiles ripped off as a result of ChoicePoint's security lapse:

Once your personal information has been stolen, there's no good way to get it back. You just hope the thief will move on to easier targets who haven't done the same paperwork you have. Changing your Social Security number is possible, but very difficult and probably not too helpful. The Social Security Administration "cannot guarantee that a new number will solve your problem." Indeed, you might lose access to your own records, or run into problems for having no credit history at all.

But, the final question we have to ask ourselves - is all this transparency really worth it? Regardless, don't pay for another credit report again - get it free instead, and write your senators and representatives and ask for some regulation in this area. They'll need all the support they can get, when Derek Smith, ChoicePoint's chairman is so well-connected to the Bush administration... and benefited from new homeland security initiatives for doing background checks identifying suspected terrorism suspects.

The most ironic part of that whole situation is that, with all those stolen identities, if terrorists laid their hands on the data, they'd be able to create new IDs that are essentially indistinguishable from anything a real issuing agency might produce - because the phony IDs would contain real, authenticated identity data. In my view, this is a massive vulnerability to homeland security... why ID people at airports anymore, when the real IDs could be counterfeit, right?

For that reason alone, I would argue, ChoicePoint's very existence, and that of the other mega data-warehouses of personal information, is an unacceptable risk to national security and therefore should be heavily regulated from the viewpoint of the damage they could cause.

How ya' like them apples?

Regardless of the homeland security angle, an ounce of prevention might've prevented all the cure that'll be required to put a stop to the fastest-growing crime in the country, having victimized almost 10 million Americans last year alone.

- Arik

Verizon + MCI; Jilted Qwest Left at the Altar

MCI made the smart move by agreeing - or presuming it'll agree - to be bought by Verizon, leaving its last Baby Bell suitor, Qwest, standing at the altar of heartbreak. So far, the reaction has been mostly relief:

Verizon's purchase of MCI earlier this week will strengthen its business, provide access to lucrative business and government contracts, and, most importantly, prevent rivals from snapping up the Ashburn, Va. company.

In a coup likely to make rivals Qwest Communications International Ltd. and BellSouth Corp. sweat, Verizon Communications Inc. agreed to buy MCI Inc. for $6.7 billion in cash, stock and dividends. The merger follows two telecommunications mega-mergers last year: SBC Communications' acquisition of AT&T Corp. and Sprint Corp.'s purchase of Nextel Communications Inc.

Although MCI had its share of suitors—both Qwest and BellSouth were pursuing the company as well—company executives chose to sell the company to Verizon, despite the fact that Qwest offered a larger incentive package.

Verizon's financial stability as well as synergies in network infrastructure and customer base made the choice of Verizon a sound one, said Taher Bouzayen, vice president and long-distance sector analyst at Atlantic-ACM, a Boston-based research firm.

"Financially, although Verizon has some large debt, it has the financial strength to pay off that debt and a framework that's large enough to absorb a company like MCI, which came out of bankruptcy with very little debt," he said.

Verizon may have pushed so hard to buy MCI simply because others wanted it, noted Sean Hackett, senior analyst at Yankee Group of Boston, Mass. "It was a defensive move," he said. "It was about taking MCI out of play so somebody else couldn't buy it."

The move also allows Verizon to exploit its deep presence in the Northeast and strong branding by cross-selling many of MCI's services. "It helps to be able to take a brand that has been beaten up as much as MCI's has and leverage that brand equity," Hackett said.

But the reason Verizon was so intent on buying MCI may have been for its lucrative business and government contracts—an area where former RBOC Verizon simply didn't have much of a foothold.

Access to business contracts, in fact, also was one of the main reasons why SBC acquired AT&T, Bouzayen noted. "They are all hungry for business customers, because that's where most of the profit is. Those are the accounts where you build your margin."

Now that Verizon has a stronger foothold in the business arena, it would do well to exploit the combined technological strength of the two companies to provide better prices and service for its business customers, Bouzayen said.

"MCI's strength is on the long haul portion of the network, while Verizon has the last mile. Now they can offer end-to-end services at relatively good prices, once they work out some interoperability issues caused by merging two types of networks," he said. Bouzayen predicts that the integration will happen quickly.

In the end, it may be the business customers who really win. Not only will businesses experience less competition in the telecommunications marketplace, but they should expect to see price stabilization, Hackett predicted.

Although experts believe the move was a good one, the road may be less than smooth as consolidation gets underway. In addition to consolidating a host of business processes, Verizon will face the mammoth challenge of integrating MCI's confusing billing system with Verizon's more stable one.

MCI's billing system is a cobbled-together patchwork system that combines bits and pieces of the nearly 50 companies it has acquired over time. Four or five years after an acquisition, it's not unusual for a customer to receive multiple bills from companies owned by MCI instead of one integrated bill, Bouzayen noted.

"Verizon has a great billing platform that is extremely well managed, and if it succeeds in incorporating and integrating MCI's billing system into its platform, it will be a very successful company, but it will take some time," he said.

Despite challenges, analysts expect the combined company to succeed and prosper. Atlantic-ACM predicts that the combined company will generate $18.6 billion in 2005 for long-distance services alone, a number that will grow to $21.6 billion in 2009.

The unanswered question, of course, is what happens to erstwhile suitors Qwest and BellSouth, as well as to Sprint's wireline business.

"It really leaves them hanging. In those businesses that require scale to succeed, such as traditional voice/data-type transport businesses, BellSouth and Qwest will have to decide whether they want to compete," Hackett said.

Given enough time, the market may experience further consolidation, ending up with three or four mega-companies competing with each other, Bouzayen said.

"I could see the wireline business of Sprint combined with Qwest, or perhaps companies like Level 3 or Global Crossing could come into the mix in some fashion," he said. "Maybe we're really reversing the wheel and going back to a pre-1984 RBOC system. Only time will tell."

But watch out Verizon... MCI's a heartbreaker. Just ask Bernie Ebbers. And I still expect Qwest to sweeten their bid enough to either, get MCI and improve their balance sheet, or the worst case scenario is they force Verizon to pay more and take a hit competitively. In short, not a lot of risk in Notebaert moving forward with his offer.

Analysts found the whole deal a no-brainer for both MCI and Verizon and REALLY bad news for Qwest:

The deal to buy MCI at what amounts to $20.75 a share is a bargain for Verizon, but MCI accepted the terms because it sees Verizon as a stronger company than Qwest, said Jay Arnold, portfolio manager at Abacus Asset Management.

"I think [Verizon] stole the company," said Arnold of the MCI purchase. "It's a great deal for Verizon. The shareholders of MCI didn't get a great deal, but maybe the combined companies will be more powerful and the returns will offset that."

Arnold said that even though Qwest outbid Verizon by about a billion dollars, MCI made the right move. The reasoning behind MCI's decision is that Qwest carries considerable debt and is somewhat of "a junk-rated Baby Bell," said Arnold.

"MCI felt a Qwest deal would be largely a stock deal and if Qwest shareholders didn't like the deal, they would sell shares, weakening the overall value," he said.

Allan Tumolillo, COO of Probe Financial Associates, said a decision to sell to Qwest would have been a mistake.

"MCI merging with Qwest would have been the end of the whole thing," said Tumolillo. "[MCI President and CEO Michael] Capellas is a smart guy. He may not know telecom all that well, but you look at Qwest and its $17 billion in debt, and you see they are struggling. MCI doesn't need to go into a mess like that. The only purpose for MCI to talk to Qwest was to provoke Verizon and Bell South to take a look at them more seriously."

Without MCI, the future of Qwest is a major question mark, said Tumolillo. "I think Qwest is headed into oblivion," he said.

Fish or Cut Bait?

Although many believe Verizon would have preferred to wait before cutting a deal, or even offer a bid for Sprint instead, the company decided it needed to act once Qwest made its play for MCI. "This is the right deal at the right time," said Verizon Chairman and CEO Ivan Seidenberg. "It is a natural and logical extension of Verizon's strategy to transform our company to serve growth markets and offer broadband technologies."

Seidenberg said he and Capellas had been talking about a possible deal since late summer. He said the two companies match up well, and that he doesn't expect any other bidders. Maybe now that Carly's out at HP, Capellas thought he should strike while the iron was hot and force Verizon into making a move?

Whatever happens, if I were an MCI shareholder, I'd be trying to get that extra billion dollars somehow... can you say "class action lawsuit"?

- Arik

Sacked: Buck Stops at the Top as HP Dumps Carly Fiorina

Americans love nothing better than seeing corporate fat-cats get canned.

Today Hewlett-Packard decided it needed to outsource itself a new CEO, not one with a new strategy but one who could execute on it, after Carly Fiorina stepped down at the BoD's behest from the helm of the computer company she's spent the past six years transforming.

Sic Transit Fiorina

Perhaps Fiorina's worst sin was becoming the subject of charges by her lieutenants she'd become a bottleneck, and was interfering with the company’s ability to respond quickly to market changes. But, with a $21 million golden parachute, I wouldn't worry too much about where she'll land.

Surprising? No.

As architect of a controversial merger with Compaq that never produced the results she promised, HP turned in lousy financial results under one of the most powerful women in corporate America. HP was always something of an also-ran when it came to the way computers were bought and sold, but when the halcyon days of high margins departed with the go-go Dot-Com Bubble, so did the ability to get away with that sort of approach. As it stands today, HP trails Dell in PCs, EMC in storage and IBM in services... The only real winner in all of this has been Compaq, which would almost surely have been forced to sell off to Dell at a deep discount if HP hadn't swept in to save the day. The crown jewel of printing and imaging has lost a good deal of its luster as well, and the window of opportunity for a spin-off has narrowed substantially.

The REAL Reason She Got The Boot

Insiders say board dissatisfaction with Fiorina traces back to the November 2002 exit of former President Michael Capellas, who joined HP from Compaq and today heads MCI. Some board members wanted the position re-occupied. Recently, the board became convinced Fiorina would back down from her opposition and accept the appointment of a chief operating officer, given HP's spotty financial returns. "She was adamantly opposed to that," according to Rob Enderle, principal analyst at the Enderle Group. Fiorina's resistance brought the dispute to a crisis and sparked the decision to ask her to leave.

CFO Robert Wayman, who was named interim chief executive on Wednesday, said HP did not plan to reverse the Compaq deal but left the door open, saying the board would not be close-minded on strategy changes once it locates a new CEO. The board said its chief concern was to improve "execution" of strategy, although many on Wall Street hope HP will spin off its printing division, which delivers most of its profit, after Fiorina did the exact opposite by integrating it with the lagging PC division only two weeks ago.

HP shares, which have lost 63 percent of their value since Fiorina became CEO in July 1999, rose as much as 10 percent on Wednesday and closed up nearly 7 percent. Corporate recruiters saw Mike Zafirovski, Motorola's former chief operating officer, as a top contender to become CEO, while others pitched Michael Capellas, current CEO of communications company MCI and former Compaq chief, despite Capellas's link to the merger having been seen as a problem by some. Motorola's CEO, ex-Sun Microsystems exec Ed Zander, is considered another possible choice. Investors uniformly agree that, after dashing their hopes in three of the last nine quarters as it lost market share to Dell and IBM, anybody's got to be better than Carly.

Fiorina said in a statement, "While I regret the board and I have differences about how to execute HP's strategy, I respect their decision. HP is a great company and I wish all the people of HP much success in the future."

Truly, were it not for the ill-fated merger with Compaq, I frankly believe she could've become one of America's legendary corporate leaders - remembered as more Lou Gerstner than Bob Galvin. Maybe the ultimate lesson here is, in the era of mega-mergers, it's usually a bad idea to hang your career on successfully pulling it off.

David Katz, chief investment officer at Matrix Asset Advisors, one of the first HP investors to oppose the Compaq deal, said, "Today's announcement basically is a validation that Walter Hewlett was probably correct, that it was an ill-fated strategy," and added that a printer spinoff was still a possibility.

Meanwhile, Hewlett only said in a statement that he looked forward to HP fulfilling its promise. "HP has been a great company. It is facing a number of challenges." Despite Bear Stearns downgrading its rating on HP, saying Wednesday's gain reflected most of the possible upside from a potential break-up of the company, Wall Street generally liked the move.

Unquestionably, HP has lost its momentum since the Compaq merger, which we can see in hindsight offered hardly any value-add, while occupying huge management attention span in terms of distraction of time and resources. Over the past six years, HP has transitioned from a high-margin to a low-margin company.

Computers are commoditized and the Dell model of selling direct through a low-cost channel (the Web), getting and using the customers' money for a week without building inventory (not to mention paying vendors 45+ days terms) and then helping make experts out of their customers in the process by building a custom rig for everyone, is the only way to play and win the PC game any more.

From a technology standpoint, Itanium, through which HP partnered with Intel and did away with Compaq's older DEC Alpha chip, has been a disaster. It transferred its Precision Architecture to Intel as the basis for Itanium along with its silicon designers and shut down its chip foundries; and all of this was tied into an Itanium partnership that will return nothing to HP, and hardly more than that to Intel, while effectively closing down the chip-making line of business in the process. Sounds to me almost like Intel simply duped HP into putting itself out of business before it did. From that standpoint, the only winner in the 64-bit processor game has been AMD!

Finally, I have lots of friends in Silicon Valley who complain HP's corporate culture had been destroyed by cascading rounds of layoffs, after HP acquired Compaq having cut 16,800 jobs. What's needed to correct the cultural deterioration is an outsider who can come in and reinvigorate what has become a culture more akin to Larry Ellison's Oracle than Bill Gates' Microsoft.

If they don't end up with a value-extracting consolidator at the helm, that is. Stacey Quandt of the Robert Frances Group, said, "The door [is open] for the HP board to hire an executive to sell off pieces of the company, and the server and storage division would likely be on the top of the list. An asset-stripper CEO will most likely be Ms. Fiorina's replacement."

So, while competitors gaze on awaiting their chance to pounce, HP needs to get moving on fulfilling that promise Walter Hewlett is so in love with - the one it's touted to corporate IT customers for the past half-decade and more... As Eric Lundquist said at eWeek.com:

The biggest competitor HP now faces is time. Buoyed by a more optimistic economic outlook, corporations are once again spending money for technology purchases. HP's competitors have spent the last several years improving their product lines and service offerings. In the corporate world, technology decisions are now being made for 2005 and beyond, and HP needs to get on that short list of preferred vendors or risk being left behind.

- Arik

GSM/GPRS Treo 650 - Unlocked $599 or $699? Cingular Complains, Price Goes Up

Demand-based pricing takes another giant leap forward as the much coveted "unlocked" GSM version of the new Treo 650 smart-phone jumps $100 overnight, after Cingular apparently got ticked at the competition... not that there was any.

The price of the unlocked Treo 650 has increased by a $100, up to $699 from yesterday's price of $599.

According to palmOne Vice President Marlene Somsak, the $599 pricing was "a mistake. For those who got the earlier lower-priced GSM Treo 650's...lucky them!"

Maybe a mistake of anticipated demand?

The unlocked Treo 650 is attractive because it works with almost any GSM/GPRS network worldwide, so you can use it with your existing GSM/GPRS service plan. The unlocked phone also makes it easy to use local SIM cards when traveling internationally.

So, while I was willing to drop $599 on the unlocked version of the quad-band world-phone, $699 somehow seems a little steep. So, I've decided, I'm not going to buy any Treo at all... despite the fact I was going to put Cingular service on that handset anyhow.

So there.

- Arik

Ameriquest - Super Bowl Sponsor's Boiler Room Operation

Ameriquest Mortgage, Super Bowl Halftime Show sponsor, has been accused in a sweeping LA Times story of running a boiler-room operation and pressuring business associates into wrongdoing in pursuit of sales.

Appraisers in six states said in interviews that Ameriquest tried to hustle them into inflating home values and even lying about property defects. Now, my father-in-law is a property appraiser and I can tell you, he'd have filed a complaint over that sort of thing. He's cut ties with other lenders for a LOT less questionable ethics than that.

In the late 1990s, the company's sub-prime lending drew the attention of a national housing advocacy group, Assn. of Community Organizations for Reform Now, or ACORN. The group's president, Maude Hurd, denounced the company as a collection of "slimy mortgage predators." About the same time, the Federal Trade Commission began an investigation into its lending practices.

In July 2000 Ameriquest worked out a cease-fire with ACORN.

The deal included a commitment to make $360 million in low-interest, low-fee loans to customers in the largely minority neighborhoods where ACORN operates. (Ultimately, according to ACORN, Ameriquest made only a small fraction of those loans because the group found other firms offering better terms for community residents. Ameriquest says it continues to work with ACORN on the program.)

Soon after, the FTC called off its investigation. Fair lending advocates, including the National Community Reinvestment Coalition and the Leadership Conference on Civil Rights, hailed Ameriquest as a progressive force in the sub-prime market.

With its regulatory and image problems behind it, Ameriquest embarked on an all-out marketing offensive that now includes an Internet advertising blitz and two blimps that hover over major sporting events.

According to the ex-loan officers interviewed by The Times, however, the company's growth has been generated more by hard-sell tactics than by slick marketing. They described 10- and 12-hour days punctuated by "power hours" — nonstop cold-calling sessions to lists of prospects burdened with credit card bills; the goal was to persuade these people to roll their debts into new mortgages on their homes.

Employees who put up big numbers, they said, were rewarded with trips to Hawaii and the Super Bowl and, in some cases, with $100,000-plus salaries. No matter how many loans they peddled, however, the pressure rarely eased, ex-employees said.

"I don't think there's a day that went by that I wasn't told I was going to be fired," recalled Omar Ross, who said he was a top producer when he worked for Ameriquest in Grand Rapids in 2003 and 2004, quitting the company that year. "I was told I was going to be fired at least 200 times."

Supervisors didn't let up even when he was meeting his quota, Ross said. "They would tell everybody: 'Omar did 10. How come everybody else can't do 10?' Then in private they would turn around and say: 'Why can't you do more? You're slacking. You're capable of doing more.' "

In such a rabid atmosphere, several ex-employees said, abuses become inevitable.

"You close fast because the longer somebody has to sit and think about it, the longer they have to think about the numbers," said Dave Johnson, a former branch manager in suburban Detroit. "You don't want somebody to get buyer's remorse before they close."

Maybe it's no coincidence that former employees swear that, to fire up and energize them, watching the movie "Boiler Room" was part of their Ameriquest training...?

- Arik

MetLife Buys Travelers from CitiGroup

Reversing the strategic changes Sandy Weill undertook in the financial services consolidation of the 1990's, Citigroup dumped its Travelers life and annuity business to redeploy capital to in faster growing markets in Asia and Europe, as MetLife plopped down more than $11.5 billion to become the largest life insurance company in the business:

Citigroup, the largest financial institution in the United States, had retained Travelers Life & Annuity in 2002 when it spun off Travelers Property Casualty Corp. in a $5 billion initial public offering. Travelers Property merged with St. Paul Cos. Inc. in 2003 to create The St. Paul Travelers Cos., based in St. Paul, Minn.

The announcement Monday said that Citigroup and MetLife "have entered into 10-year agreements under which MetLife will greatly expand its distribution by making products available through certain Citigroup distribution channels," including Citi branches and its Smith Barney brokerage unit.

It said that Citigroup will receive $1 billion to $3 billion US in MetLife equity securities and the balance in cash, which will result in an after-tax gain of about $2 billion. It added that MetLife may finance the cash portion of the transaction through a combination of cash on hand, debt, mandatory convertible securities and selected asset sales.

In a phone call with analysts, MetLife's chief financial officer, William J. Wheeler, said that the asset sales could include divestiture of MetLife's reinsurance operations. Reinsurance is backup coverage purchased by insurance companies.

MetLife owns about 52 per cent of the Reinsurance Group of America.

Wheeler said asset sales could also include "equity real estate investments and potential other things."

C. Robert Henrikson, MetLife's president and chief operating officer, said the purchase would bring "even more balance" to MetLife's business mix.

MetLife currently earns about 46 per cent of its profits from institutional sales and 30 per cent from individual sales, he said. After the merger, profits from institutional sales should drop to about 43 per cent, while earnings from individual sales should rise to 36 per cent. Other categories are international, seven per cent; auto and home six per cent; and miscellaneous, eight per cent.

Citigroup said that the businesses being acquired by MetLife generated total revenues of $5.2 billion and profits of $901 million in 2004. The business had total assets of $96 billion at year's end, it said.

The transaction announced Monday doesn't directly involve operations in Canada, although the financial ratings of Citigroup's Primerica Life Insurance of Canada along with its parent Primerica were put under review Monday by A.M. Best Co.

A.M. Best also lowered ratings of Travelers Insurance Co and Travelers Life and Annuity, to A-plus superior from A-double-plus superior, reflecting their move out of the Citigroup group of companies.

Metropolitan Life sold the bulk of its Canadian operations in 1998.

The move was the latest by Citigroup to sell off noncore businesses.

Citigroup chief executive Charles Prince said that selling Travelers "sharpens our focus on Citigroup's long-term growth franchises." He did not say how Citigroup would use the proceeds from the sale.

In November, Citigroup sold a truck-leasing operation to General Electric Co. for $4.4 billion. It also sold its European vendor-finance leasing operation for CIT Group Inc.

Although no longer consider strategic, Travelers had played a big part in the creation of Citigroup.

Citigroup chairman Sanford I. Weill acquired the Travelers insurance group in 1993 and Travelers then acquired Shearson in 1993 and Salomon brokerage in 1997; it merged with Citicorp in 1998 to form Citigroup.

Of course, then there's American Express, that in an otherwise seemingly disconnected move, suddenly decided to spin off its personal finance unit, American Express Financial Advisors, to shareholders in the third quarter. Reportedly, the move is being planned so the Minneapolis unit, formerly called IDS back in the day, could "pursue new products, partnerships and expansion without having to compete with credit cards and other businesses for capital." I wonder if it doesn't have more to do with confirming theories about the disintegration of the "integrated financial services" strategy signified by the MetLife/CitiGroup deal...?

The financial advisory business provides financial planning and advice, asset management, insurance, annuities and related businesses through a network of more than 12,500 advisors. It generated revenues of about $7 billion and earned about $700 million in 2004.

"This spin-off will create two distinct businesses and allow them to capitalize on their respective growth opportunities," Kenneth I. Chenault, chairman and chief executive officer of American Express, said in a statement.

He said the new company would have greater latitude as an independent company to compete for capital or management resources, and react more quickly to business opportunities.

After the spin-off, American Express will consist of a charge and credit card business and a network that processes more than $400 billion in transactions from merchants throughout the world. It will also operate global travel and Travelers Cheque businesses and an international bank serving wealthy consumers and financial institutions.

Those businesses delivered approximately $22 billion of revenues and net income of $2.7 billion in 2004.

The two companies will be independent, have separate public ownership, boards of directors and management.

The spinoff business will continue to be led by James Cracchiolo as chairman and chief executive.

All this refocusing lends credence to thoughts that consolidation, at least in financial services, has been a failed strategy to create scale across multiple business units. Perhaps it's more a matter of getting the right people in charge - and MetLife looks to be the chief beneficiary of that change in approach.

- Arik

IBM Acquires Corio

IBM decided to place a bet on a money-losing ASP from days of old, acquiring Corio for $182 million:

At first glance, IBM's biggest challenge will be making Corio's operations profitable. In the first nine months of 2004, the company posted a net loss of $10.4 million. IBM, however, obviously sees potential in the business. Its per-share offer of $2.82 for each Corio share is a 38% premium over Monday's close of $2.05. In late-day trading, Corio shares were up more than 35% to $2.78.

Mike Riegel, director for On Demand Strategy at IBM, says the purchase price, in part, reflects the value of Corio's intellectual property. Specifically, Riegel says Corio's technology and methodologies for rapidly deploying enterprise applications in hosted environments will boost the appeal of IBM's hosting offerings. "Customers now want access to new applications in minutes or hours, not weeks or months, and Corio excels at that," Riegel says.

Meanwhile, at least one Corio competitor says the deal could help boost prices in the ASP market. "Some of the smaller players in the market pursued market share at unsustainable prices. We expect IBM will be a more disciplined competitor," says Andrew Stern, CEO of USinternetworking Inc., which is backed by Bain Capital. Stern says that USi could itself eventually seek a buyer, or issue public stock, but says no immediate plans are in the works.

We'll see if IBM can make a winner out of Corio yet.

- Arik

P&G + Gillette = One Winning Combination!

Procter and Gamble announced a humongous extension of its global household products empire with the acquisition of Gillette for about $57 billion in shares this week - the deal sets the combined firm up as, what Warren Buffett, Gillette's largest shareholder, calls "the greatest consumer products company in the world", consolidating supremacy in men's and women's FCMG together into a single firm.

Under the terms of the agreement, P and G will issue 0.975 shares of its common stock for each share of Gillette common stock, putting an 18-percent premium on Gillette shares since closing prices on Thursday - this is not an insignificant consequence, especially for investor Buffett as BusinessWeek explains:

Now, with his Jan. 28 backing of Procter & Gamble Co's (PG ) novel two-step, tax-free deal for Gillette Co. (G ), Buffett is again seizing an opportunity to exit a position without triggering a giant tax bill. Berkshire's gain on the 96 million Gillette shares it has held since 1989: $4.3 billion. Yet because it is plowing all of that gain into shares of the new company, Uncle Sam will have to wait for his piece of the profits.

Exactly who suggested the deal structure is not clear. Neither Buffett, Gillette's largest shareholder, nor the investment bankers involved would comment. Given Buffett's well-known aversion to taxes, though, bankers most likely devised the structure to satisfy him while also preventing an all-stock deal from drastically watering down P&G's earnings. Just as important, the ingenious structure could become a Wall Street model for future mergers and acquisitions. At the same time it comes with a lesson about what investors can and can't learn from watching Buffett.

Think of the deal as a two-step jig: The first movement makes Buffett happy, while the unusual second step pleases P&G. First, P&G will pay for Gillette with nothing but stock, issuing 0.975 shares of its common stock for each Gillette share. Gillette investors will owe no tax since they're exchanging one stock for another. If, instead, P&G had paid for Gillette with cash, Berkshire alone would have faced a whopping $1.5 billion tax bill thanks to the 35% corporate rate it pays.

Problem is, all that new stock will dilute the value of the shares P&G's current investors hold and slash its earnings per share. So as part of the deal P&G announced that it will spend $18 billion to $22 billion over the next 12 to 18 months buying back some of the stock it just issued for Gillette. The result, says P&G, is the same as if it had paid for Gillette with a package of 60% stock and 40% cash.

This isn't the first time P&G's gone after Gillette - just five years back, a failed run during a very different market climate taught both firms a lesson - now the first of five business lessons of branding, "Innovate, Innovate, Innovate":

Why would P&G tinker with Tide? Long the detergent leader, Tide would seem best left alone, a profitable annuity on years of mass-market flogging in the '60s, '70s, and '80s. But P&G has tinkered nonetheless, combining strong technology and consumer research to push sales up 2.6% over the last year in a category that is growing less than 1%. The secret: a widening family of detergents and cleaners that now includes everything from Tide Coldwater, for cold-water washing, to Tide Kick, a combination measuring cup and stain penetrator.

Innovation isn't always built from scratch. P&G is a master at transferring technologies from one brand to another. Tide StainBrush, a new electric brush for removing stains, uses the same basic mechanism as the Crest Spinbrush Pro toothbrush -- also a P&G brand. Gillette, too, is adept at cross-pollination. Its latest winner is the battery-operated M3Power, the result of a collaboration between the company's razor, Duracell battery, and Braun small-appliance units. Despite a 50% price premium over what Gillette charged for its previous top-of-the-line razor, the M3Power has captured a 35% share of the U.S. razor market in seven months.

Overall thought, the best impact analysis was at CMO Magazine on the P&G Gillette deal, with a critique that the deal is a strong one and could inject considerable growth by consolidating a women's brand with a men's brand holding great promise for generating new demand in consumer products companies, which could even prove beneficial for their competitors in the long run:

Consumers yearn for the peace of mind and the feeling of security that a favored brand can give. They enjoy the sense of self-definition that comes from choosing and using products that reflect their personalities, and they crave a feeling of connection to others. Consumers also have budgets, schedules, and the need to juggle both in an increasingly complicated world. So consumers, like businesses, want more streamlining and ease of use in the products and services they buy.

Our research has documented at least a dozen patterns of demand innovation in consumer markets. One of them is what we call the "from professional to do-it-yourself" pattern. The penchant to do it yourself has swept through a variety of consumer sectors. Internet- and software-based technologies make it relatively easy to turn complex procedures and knowledge into easily used tools; hence, the success of Turbotax by Intuit and Photoshop by Adobe, which have provided tremendous value for consumers.

In the packaged goods world, this pattern has been deployed masterfully by P&G with its Crest Whitestrips. Teeth whitening was the fastest growing dental procedure during the 1990s and now represents the most common elective procedure. P&G's big idea was to commercialize a drapeable strip that could adhere to teeth and to put a proven bleaching agent like peroxide directly in contact with teeth—essentially bringing home for consumers at a much lower price what was previously available only through the dentist. As a result, Whitestrips helped Crest to replace Colgate as the leading oral care brand in North America.

P&G's success with Whitestrips lies not just in an excellent product, but also in how the company identified and deployed various intangible assets. For example, P&G found superior film and bonding technology hidden within another part of the organization. It also tapped its existing network of 45,000 dentists, selling Whitestrips through dental offices before the nationwide launch.

Identifying and leveraging intangible assets to create other new streams of growth like Whitestrips is the central challenge for a merged P&G and Gillette. For example, the new company could pursue the "integrated solutions" pattern - combining an array of goods and services into a bundle that solves a customer's problem. Kraft, building on its acquisition of Oscar Meyer, has done this admirably with its Lunchables line of meal kits, which addresses a daily hassle for time-pressed working parents. Kids love the convenience and recreational aspect of the tray of snacks, and the Lunchables line gave Kraft a highly profitable new stream of revenues.

With Gillette's shaving products added to the P&G mix, one can envision an integrated travel kit containing makeup, skin lotion, shaving accessories, and other travel essentials. And acquiring Gillette's solid Braun brand, which includes small kitchen appliances, hair dryers, and electric shavers, could lead to opportunities to create a kitchen management system as well as an integrated hair salon offering that combines Pantene and Wella hair products with Braun grooming appliances. P&G might even consider opening a chain of Braun salons or consult to existing salons.

Interestingly, BusinessWeek covered the gadgetizing of P&G's product line a scant couple of days before the merger was announced, which I thought prescient. Plus, it sets the combined company up for true dominance in FCMG. An interview with P&G CEO Lafley himself breaks it down.

- Arik

Intel Reorgs Itself... Again!

Intel's reorganization follows a year-long trending away from processors and toward solutions and, on Monday, Intel announced that it was reorganizing the company into five business units that will target platforms rather than silicon. It was a move away from the traditional two business units it had been operating with - the Intel Architecture Group, which handled the bulk of the company's processors, including Pentiums and Xeons, and the Intel Communications Group.

The reorganization continues Intel's evolution beyond processors and chip speed. The company started moving away from chip frequency last year kicking off a new processor-naming scheme to de-emphasized gigahertz.

The new business units will include the Mobility Group, led by Sean Maloney and Dadi Perlmutter to focus on mobile devices, notebook computers cell phones and handhelds. In was in the area of mobile computing that Intel in 2003 made its first step toward becoming more platform-focused, with the launch of Centrino. The mobile platform not only offered a processor, but also a chip set and wireless access component designed to work best together.

Two other units include the Digital Enterprise Group, led by Pat Gelsinger and Abhi Talwalkar, and Digital Home Group, headed by Don MacDonald. Like the mobility unit, these groups will focus on creating complete computing and communication platforms for businesses and homes. The final two units are the Digital Health Group, led by Louis Burns, and the Channel Products Group, headed by Bill Siu.

eWeek's Dave Coursey was skeptical:

As many times as Intel has reorganized lately—four times since 1997 according to published accounts—I have to wonder whether it really matters how the company is structured. About the time the old order is out and the new order is in the new order becomes the old order and the process starts anew.

This year's model is an Intel based around market opportunities rather than technologies, which is about as clear an admission as you're going to get that we have plenty of technology running around but not enough interesting uses for it.

This reorganization is supposed to better connect Intel with the marketplace. The goal is finding new uses for as many MIPS as possible. The perfect innovation, from Intel's perspective, is something that causes customers to buy lots of new processors, either as upgrades or in completely new types of devices. But Intel is also extending its silicon offerings to include features not directly related to the CPU, such as wireless technology.

Touted as an example of Intel "done right" is the supposed "success" of the Centrino mobile processor set, a new version of which has just been introduced. I have not looked at the numbers, but it's hard for me to get excited over Centrino, best-known for forcing 802.11b wireless on customers just as 802.11g became affordable.

In my view, if Centrino really had been successful, customers would have dumped their old notebooks just to get a new Centrino-based machine. I haven't seen a lot of that happening.

If Centrino kept hardware OEM's buying Intel instead of AMD that alone would make it a success by some measures. But that doesn't fulfill the mission of convincing customers to buy new CPU's they wouldn't have bought anyway.

The reorg is a tacit admission that Intel is going to have to do more product R&D if chip demand is to increase. I am talking about real products, such as home entertainment or medical devices that could be built around specialized Intel chip sets. Already Intel has been shifting its focus away from the "speeds and feeds" of old toward feature sets enabled by additional Intel silicon.

The company has been doing this sort of work almost forever, but its latest output has been kind of depressing. Think Media Center PC's and iPod-ish video players as examples of Intel innovation. And Centrino, of course.

None have ignited a marketplace sensation. The next opportunity seems to be 64-bit processing, though it's barely on most customers' radar. The challenge of getting customers to shorten their PC and server replacement cycles has gone unmet.

This problem isn't Intel's alone. Microsoft, as I've commented before, faces the same issue: There's no shortage of better ways to do things, but getting from here to there presents a tremendous challenge. Especially while maintaining significant backward compatibility and reducing risk to acceptable levels.

But, only five months until Paul Otellini takes over as CEO for a retiring Craig Barrett, Intel still faces the same challenge as before - coordinating the work of different business units so that it can deliver products that work well. Organizing businesses with the end market in mind, as opposed to distribution along product lines, is a generally good idea of modern management... especially for huge companies. However, it will be a while before the company can start reaping any benefits in terms of sales, although the move should also make it easier to spin off maturing business units.

This is a prelude of things to come as the Otellini era of Intel's management takes over where Barrett, and Grove before him, left off.

- Arik

Apple's PC Strategy & Big Profits Underline Macworld, Dell Declares iPod a Fad, While Creative Says New Shuffle a Big Let Down

Apple's Macworld had some major, major news develop - enough to make this otherwise pretty PC-dedicated computer user consider switching to the Mac... although I was looking for an excuse. Behold, the iPod Shuffle, Mac Mini, Tiger OS and the iWork productivity suite that line up to challenge rivals across the technology landscape:

Apple CEO Steve Jobs is taking the concept of "mini" to the Mac computer and a flash-based iPod.

During his keynote Tuesday at the Macworld conference and expo here, Jobs introduced a Mac computer that almost fit into the palms of his hands and that is Apple Computer Inc.'s latest answer for Windows users wanting to switch platforms.

"People understood the iPod mini, and I think they'll understand the Mac mini as well," Jobs said, referring to the 4 GB iPod launched at last year's Macworld.

The Mac mini will be available Jan. 22 in two models that start at $499, Jobs said. It comes without a monitor, keyboard or mouse, instead connecting with a user's existing equipment.

"We supply the computer, and you supply the rest," Jobs said. "We want to price this Mac so that people thinking of switching will have no more excuses."

Apple also is making the iPod even smaller than the iPod mini. Jobs launched the iPod shuffle, Apple's entry into the flash player market that incorporates its song-shuffling technology.

The iPod shuffle began shipping from factories Tuesday. On one end, it includes a USB 2.0 connector that also can be fitted with a lanyard for wearing it around one's neck.

"It is smaller than most packs of gum, and it weighs about same as about four quarters, or under one ounce," Jobs said.

The iPod shuffle comes in a 512 MB and a 1 GB model, priced at $99 and $149, respectively. Along with digital music, it can double as a USB drive and lets users determine how much memory to devote to each function, Jobs said.

Not everything was about miniaturization during Jobs' keynote. He also introduced Apple's productivity suite replacement for AppleWorks in a move that could pit Apple more directly against Microsoft Corp.'s Office suite for the Mac.

The iWork suite builds atop Apple's existing Keynote software for creating presentations by also providing a word processor called Pages. AppleWorks had become outdated because it was developed before the move to Mac OS X and long before Apple's digital-media suite, called iLife, existed.

"We created [iWork] from the ground up to take full advantage of Mac OS X and iLife," Jobs said.

iWork is slated for release on Jan. 22, with pricing at $79. It will include Keynote 2, an update that adds 10 new design themes and expanded animation features.

As for Pages, Jobs called it "word processing with an incredible sense of style."

That's because it not only provides standard word-processing functions but also comes with 40 Apple-designed templates for creating everything from a form letter or brochure to a family newsletter or menu, Jobs said.

In a demonstration, Phil Schiller, Apple's vice president of worldwide product marketing, showed how the templates open with placeholder text, graphics and folders and let users grab photos from iPhoto to insert them into documents. The templates also automatically adjust when users add, move or resize elements.

While announcing few new features for the operating system, he recapped the major changes coming in Tiger, including the Spotlight search capability, Dashboard and an update to QuickTime 7 media player.

Jobs demonstrated some of the information "widgets" planned for Dashboard. Dashboard is a feature that lets user toggle to a display of a range of small applications that can display common information or perform quick tasks.

The widgets included a world clock, dictionary, thesaurus, calculator, measurement converter, and flight and stock trackers. Hundreds of third parties also are creating Dashboard widgets, such as an eBay Inc. auction tracker that Jobs displayed.

"This has evolved into something we think will be a big hit in Tiger," Jobs said of Dashboard.

Discussing Tiger's much-anticipated Spotlight search capabilities, Jobs downplayed the raft of other desktop-search tools hitting the market such as those from major search companies like Google Inc., Yahoo Inc. and Microsoft Corp.s' MSN unit.

Spotlight's key difference, Jobs said, is that it is integrated throughout the Mac OS and into applications such as Apple Mail.

"They're great, but they're nowhere near as great as Spotlight because when you build it into the core OS, you can do things you can't do with a tool sitting to the side," Jobs said.

Meanwhile, stores will open an hour early to support introduction of the new $499 Mac Mini this coming Saturday, when they're introduced, and this might just get PC users like me to make the final switch:

That's the hope of Apple whose approximately 100 retail stores are opening an hour early on Saturday as the highly touted and low-priced Mac mini computer and iPod Shuffle portable music player go on sale.

Analysts are betting Apple's mini might just tempt users of rival Microsoft Corp.'s Windows to switch operating systems and go with the Mac and its Mac OS X operating system.

That transition hasn't happened yet despite Apple's "Switch" advertising campaign and in spite of the success of the iPod portable digital music players. More than 10 million have been sold since their introduction more than three years ago. Apple's portion of the worldwide PC market was 2 percent in the fourth quarter, according to preliminary figures from market research firm IDC.

"I believe the Mac mini is actually going to have more of an impact on Apple's market share position than their digital music efforts have so far," said IDC analyst Roger Kay.

Echoing the sentiment, Needham & Co. analyst Charlie Wolf wrote to clients: "The iPod's only failure so far has been its inability to stimulate meaningful purchases of Macintoshes."

With the Mac mini, that could change, and Wolf now estimates that 11 percent of those who have iPods and PCs that use the Windows operating system may shell out the $499 for a Mac mini now that they're available. Before the mini, Wolf had predicted 4 percent could switch.

Apple is opening its stores at 9 a.m. local time on Saturday. Store personnel contacted by Reuters in California, Colorado, Florida and New Jersey said they had been receiving a slew of calls about the mini and the Shuffle.

The Shuffle is Apple's smaller, cheaper version of its market-leading iPod and holds either 120 or 240 songs, costing $99 and $149, respectively.

"Some of this is true demand, but I think some of it's orchestrated, too, by Apple," said Stephen Baker, an analyst at NPD Group.

Apple has long been criticized for pricing itself out of the mainstream with its sleek products, but, now, Apple is changing course.

"The Mac mini opens up lower price points for people who would like to try the Mac platform, and that's long been one of my chief complaints about Apple—the high price," IDC's Kay said.

Steve Jobs, co-founder and chief executive of Cupertino, California-based Apple, said last week, "People who are thinking of switching will have no excuse." Jobs introduced the mini, which comes without a display, keyboard or mouse, at the company's annual trade show on Jan. 11.

Starting at $499, the mini, which is 6.5 inches square and 2 inches tall, is Apple's cheapest computer ever.

Some analysts have said that Apple's blow-out fourth-quarter results offered clear proof of the "halo effect" of iPod sales boosting Mac sales. Kay said he was not so sure.

Apple's fourth-quarter share of the worldwide and U.S. PC markets rose by a mere 0.1 percentage point each, to 2.0 percent and 3.4 percent, respectively.

"That's not a whole lot of share gain, but will the Mac mini help them gain some more?" Kay asked. "I would certainly think so."

But will the new products really gain traction in the marketplace? eWeek's David Coursey thinks so:

Here's my immediate reaction:

Mac mini: A $499 Mac ought to be the ultimate "switcher" box. Not that most Windows users actually switch to Macintosh, but many have bought a Mac for use at home. Buy a KVM (keyboard/video/mouse) switch, and the Mac mini can share mouse, keyboard and screen with your PC. This gets users a Mac without a lot of work and for a minimal investment.

Having this machine in the Apple product line allows Mac fanatics to tell their Windows friends that instead of upgrading their Windows machine, they should add a Mac to their desktop or home—and save money in the process.

The downside of the Mac mini may be performance in the graphics-intensive applications toward which Mac users tend to gravitate. I want to see an independent, hands-on review before committing to a final score, but as a preliminary grade, I think an "A" is right on target. I'm about ready to pull out my credit card for this one.

iWork: So, this is the Microsoft Office competitor Apple was rumored to be releasing? Clearly, that's not what this is. But I am looking forward to using iWork nevertheless. First, Keynote is a very useful presentation package, and I've been looking forward to a new version.

Second, the Pages word processor is intended to be a tool that offers more layout options than a word processor without the complexity of desktop publishing. That's a need I often have. For $79, I'd be willing to take a chance on this one. Meanwhile, the Office competitor, if it exists, must wait for another day. A B+ seems appropriate.

iLife '05: Maybe there are features here that I really want and would be willing to pay for, but the Apple Web site isn't very convincing. This looks like Apple's bid to sell customers annual releases of popular software with only minor changes to functionality.

Nevertheless, keep the price low enough, $79 in this case, and some customers will buy. It's hard to upgrade applications whose main virtues are simplicity and a limited feature set, but Apple seems to manage. This one gets a C+, but might be hard-pressed to do better.

iPod shuffle: When I bought my first iPod, it was because the MP3 players available at the time were low-capacity and took a long time to fill with music, thanks to a low connection speed to the desktop.

The iPod Shuffle is low capacity, compared with a "real" iPod, but fortunately it connects at swift USB 2.0 speeds, as well as at the much slower USB 1.1 rate used by the first MP3 players.

Apple is trying to make a virtue out of the fact that the device lacks a screen by making it sound like random playback is an advantage. I don't think so. But I am sure they will sell a zillion of these—just not to me. I give it a C-.

I am sure those still washed in the glow of Steve's keynote will rate all of these products, and especially the iPod shuffle, a full letter grade or higher than I have. But I've been following Apple long enough (and have become cynical enough) that I think I've called these about right.

And now, I am off to order my new Mac mini. Yes, sometimes even I succumb—and at a distance, too.

As for the ongoing controversy over the Think Secret fan site being sued by Think Different, Jim Nash from InformationWeek summed it up nicely in its daily newsletter today:

There are missteps that we all make because we don't see something coming, and there are missteps that some of us make because we don't see the big picture. Apple Computer appears to be making the latter in suing a 19-year-old Internet entrepreneur who has the audacity to be a successful journalist.

Harvard undergrad Nicholas M. Ciarelli has for six years operated the Think Secret site, at which he posts product information before Apple wants it released. This is a game that business journalists play with vendors, and more publicity-savvy execs know how to play it well: They do everything in their considerable power to keep secrets secure. When reporters still get the goods, the smarter execs shrug it off and move on.

When Apple subsidizes Macs for schools, it's buying loyalty and, it hopes, market share. But suing a member of that target customer base for being a (perhaps overzealous) Mac enthusiast may send the wrong message to the people Apple wants as customers.

Let's hope that doesn't get in the way of success for an innovative product line. The ThinkSecret.com lawsuit, however, continues to percolate, as 19-year-old Nick Ciarelli seeks out help for his legal defense, including saying, "is that so wrong" to leak previews of tech products, like the rest of the press does with great regularity:

Is the technology press abandoning one of its wounded on the battlefield? Where is the righteous indignation on behalf of Nicholas Ciarelli aka Nick dePlume? Mr. Ciarelli is the 19-year old publisher of ThinkSecret.com, a Web site that Apple is suing over an article about a once top-secret $499 Mac. Mr. Ciarelli, a Harvard University student of Cazenovia, N.Y., is now looking for free legal help. He is seeking protection under the First Amendment, although he is not named as a defendant. Going after a member of the press could become a public relations problem for Apple. Technology companies are no strangers to this kind of mildly aggressive journalistic scrutiny.

The technology press has made its bones on breaking stories about not-yet-released products. To a large extent, that's the definition of a breaking story in the tech press. According to Apple, the company is protecting its right to "innovate and surprise and delight people with great products," so they reserve their right to secrecy. But there is also such a thing as freedom of the press. And in the tech world, the two have coexisted fairly well until now. All of the dailies ran the bare bones, just-the-facts wire story of the lawsuit—no editorial comment, no in-house story. Maybe the technology press just needed a moment to catch its breath after having to cover two very exhilarating trade shows back to back.

Meanwhile, Apple's MP3 player rivals were dissing the champ of the category after the screenless Shuffle was announced:

The chief executive officer of Creative, the maker of one of the leading contenders to the iPod's crown, has called the iPod shuffle "a big let down", accusing Apple of rehashing "a four year old product… worse than the cheapest Chinese player."

In an interview with Channel NewsAsia, Creative CEO Sim Wong Hoo, claimed the company was not worried about the potential threat posed by Apple's entry into the flash music player market. He called the iPod shuffle "[like] our first generation MuVo One product, without display, just have a shuffle feature."

And, Sim claimed, the product was not likely to impress other competitors. "I think the whole industry will just laugh at it, because the flash people -- it's worse than the cheapest Chinese player. Even the cheap, cheap Chinese brand today has display and has FM. They don't have this kind of thing, and they expect to come out with a fight; I think it's a non-starter to begin with."

According to Apple, the company sold over 4.5 million iPods over the quarter leading up to Christmas, double that of Creative's Zen player – the iPod's nearest competitor. Sim claimed the company was prepared to spend up to $100 million in marketing funds in order to catch up with the iPod.

Plus, there's no love lost between Apple and Dell, as Dell CEO Kevin Rollins called the iPod nothing more than a fad:

The chief executive officer of Dell has claimed that the success of the iPod amounts to "a fad", adding that Apple "isn't in the same league" as his own company.

In an interview with Silicon.com, Kevin Rollins claimed the product faced an uphill struggle to capitalize on the success of the iPod and sustain it into the future, drawing parallels with Sony's Walkman. "It's interesting the iPod has been out for three years and it's only this past year it's become a raging success. Well those things that become fads rage and then they drop off. When I was growing up there was a product made by Sony called the Sony Walkman – a rage, everyone had to have one. Well you don't hear about the Walkman anymore. I believe that one product wonders come and go. You have to have sustainable business models, sustainable strategy."

Rollins also claimed that Apple had "done a nice job" with the iPod, but was less impressed with the Mac mini. "It might take some [sales] here and there, but Apple's market share in the global computer business has really shrunk pretty far," he claimed. Despite the number of headlines grabbed by the product, Rollins added, Apple remains a niche player and "isn't in the same league" as Dell.

But all this pales in the glare of Apple's stellar financial results - my brother Derek curses the day I told him to buy AAPL - languishing around 20 a year ago it's in the low 70's today:

As the Mac faithful continue to pack the ongoing Macworld Expo in San Francisco, Apple Computer Inc. on Wednesday offered the public some further good news about the company's progress. Boosted by the success of the iPod, the company reported its highest-ever quarterly revenue and net income in its first fiscal quarter.

For the quarter, ended Dec. 25, Apple reported total revenue of $3.49 billion, up from $2.01 billion in the year-ago quarter, a leap of 74 percent. Analysts had forecast revenue of a bit over $3 billion. Apple's net profit grew even more: $295 million, compared with $63 million for the year-ago quarter.

The success of the consumer music player was the difference. Announced by CEO Steve Jobs in his Tuesday keynote address at Macworld, Apple sold about 4.6 million iPods during the quarter, a more than 500 percent rise over the same period last year.

Still, in a conference call with financial analysts Wednesday afternoon, Apple chief financial officer Peter Oppenheimer stressed the positive growth in computer sales.

He said the company shipped 1,046,000 Macintosh units, a 26 percent increase over the year-ago quarter.

The leaders in the CPU field were the iMac and iBook series aimed at consumers and education, up 101 percent and 35 percent compared with the year-ago quarter. Sales of the Power Macintosh G5 rose 7 percent over the previous quarter, while PowerBook G4 sales dropped 29 percent, despite a speed bump in the fall.

The executive said sales to the education market grew 11 percent, bringing its highest quarterly total for that market in seven years.

Questions regarding the success of a "halo," or multiplier effect for CPU sales from its success with the audio player, were posed by analysts. Apple has targeted these "switchers" from the Windows platform in the past several years.

While avoiding a direct answer on the subject, Oppenheimer pointed to the increasing number of such customers in Apple stores. In the quarter, more than 40 percent of Mac buyers in the stores were "new to the Mac," he said.

Best of luck to the Mac-faithful - competition, as we know, is good for innovation, so keep up the good work!

- Arik

BenQ's Treo Killer

One big product announcement from the Consumer Electronics Show was from BenQ, in the form of its GSM Pocket PC P50, which CNet thinks could just be enough to make otherwise erstwhile Treo 650 buyers reconsider their purchase, because of the integrated Wi-Fi and bigger memory:

The product: BenQ may not be well known for its cell phones or its smart phones, but we're betting that that's about to change with the introduction of its P50 series. This Windows Pocket PC smart phone features an integrated keyboard, a 2.8-inch vibrant color screen (262,000 hues), and a 1.3-megapixel camera in a compact, candy bar style. But wait, there's more: It has 64MB of memory, integrated Bluetooth and Wi-Fi, and audio playback (WAV, MP3, WMA, and more). Other goodies include:

- Quad-band GSM 850/900/1800/1900; GPRS; world phone
- SDIO/MMC expansion slot
- Video recording (MPEG-4, WMV, .3GP)
- E-mail, text, and multimedia messaging
- Speakerphone and conference calling
- 64-chord polyphonic ring tones
- Rated talk time of 3 to 5 hours and standby time of 120 hours

The prospects: Can we say Treo killer? Yes, it's been noted before, but we think the BenQ P50 series has what it takes to battle the current smart phone king. The memory and Wi-Fi alone give this puppy an edge over the Treo 650, but we'll have to wait and see how this mobile actually performs in our tests. The P50 series will be available in late Q2 2005, but pricing and carrier have not yet been determined.

I'm still holding out to see how Cingular executes on the Treo 650 - if they fumble the adaptation to the GSM network, it could be enough to make me change my purchase plans.

- Arik

Wither The New York Times?: Life in the Era of News as Product or Credibility as Service

In the wake of the Jayson Blair scandal and the firing of Howell Raines, BusinessWeek took a look at the Suzberger family’s guidance of The New York Times through its latest series of challenges:

Since 1896, four generations of the Ochs-Sulzberger family have guided The New York Times through wars, recessions, strikes, and innumerable family crises. In 2003, though, Arthur Ochs Sulzberger Jr., the current proprietor, faced what seemed to be a publisher's ultimate test after a loosely supervised young reporter named Jayson Blair was found to have fabricated dozens of stories. The revelations sparked a newsroom rebellion that humiliated Sulzberger into firing Executive Editor Howell Raines. "My heart is breaking," Sulzberger admitted to his staff on the day he showed Raines the door.

It turns out, though, that fate was not finished with Arthur Sulzberger, who also is chairman of the newspaper's corporate parent, New York Times Co. The strife that convulsed The New York Times's newsroom under the tyrannical Raines has faded under the measured leadership of his successor, Bill Keller, but now its financial performance is lagging. NYT Co.'s stock is trading at about 40, down 25% from its high of 53.80 in mid-2002 and has trailed the shares of many other newspaper companies for a good year and a half. "Their numbers in this recovery are bordering on the abysmal," says Douglas Arthur, Morgan Stanley's (MWD.) senior publishing analyst.

Meanwhile, the once-Olympian authority of the Times is being eroded not only by its own journalistic screw-ups -- from the Blair scandal to erroneous reports of weapons of mass destruction in Iraq -- but also by profound changes in communications technology and in the U.S. political climate. There are those who contend that the paper has been permanently diminished, along with the rest of what now is dismissively known in some circles as "MSM," mainstream media. "The Roman Empire that was mass media is breaking up, and we are entering an almost-feudal period where there will be many more centers of power and influence," says Orville Schell, dean of the University of California at Berkeley's journalism school. "It's a kind of disaggregation of the molecular structure of the media."

Can the Times adapt? It appears to be working on doing just that:

New York Times Digital (which includes Boston.com as well as NYTimes.com) netted an enviable $17.3 million on revenues of $53.1 million during the first half of 2004, the last period for which its financials have been disclosed. All indications are that the digital unit is continuing to grow at 30% to 40% a year, making it NYT Co.'s fastest-revving growth engine.

Advertising accounts for almost all of the digital operation's revenues, but disagreement rages within the company over whether NYTimes.com should emulate The Wall Street Journal and begin charging a subscription fee. Undoubtedly, many of the site's 18 million unique monthly visitors would flee if hit with a $39.95 or even a $9.95 monthly charge. One camp within the NYT Co. argues that such a massive loss of Web traffic would cost the Times dearly in the long run, both by shrinking the audience for its journalism and by depriving it of untold millions in ad revenue. The counterargument is that the Times would more than make up for lost ad dollars by boosting circulation revenue -- both from online fees and new print subscriptions paid for by people who now read for free on the Web.

Sulzberger declines to take a side in this debate, but sounds as if he is leaning toward a pay site. "It gets to the issue of how comfortable are we training a generation of readers to get quality information for free," he says. "That is troubling."

What's a platform agnostic to do? The New York Times, like all print publications, faces a quandary. A majority of the paper's readership now views the paper online, but the company still derives 90% of its revenues from newspapering. "The business model that seems to justify the expense of producing quality journalism is the one that isn't growing, and the one that is growing -- the Internet -- isn't producing enough revenue to produce journalism of the same quality," says John Battelle, a co-founder of Wired and other magazines and Web sites.

Today, Sulzberger faces an even bigger challenge than when he took charge of the Times in the mid-1990s. Can he find a way to rekindle growth while preserving the primacy of the Times's journalism? The answer will go a long way toward determining not only the fate of America's most important newspaper but also whether traditional, reporting-intensive journalism has a central place in the Digital Age.

So, we’ll see if the Gray Lady can bring the ship about and adapt. After all, NYT isn’t really selling the news – its real product is credibility.

- Arik

Apple vs. Think Secret: Trade Secret Disclosure Steals Macworld Thunder

Apple decided it’s had enough of fan sites blowing the cover on its product development initiatives and decided to sue one of them to get them to stop disclosing trade secrets:

Apple Computer Inc. filed another lawsuit in the Superior Court of Santa Clara County on Tuesday against a Web site alleged to have posted proprietary information or trade secrets.

This follows a filing in December by Apple, of Cupertino, Calif., which asked the court to subpoena sites in order to reveal the identities of individuals who allegedly placed such information on message boards related to similar sites.

This later suit differs from the December one in that it is not seeking to reveal the identity of anonymous or pseudonymous posters, but rather is claiming damages from articles filed and published by the owners of the site ThinkSecret.com.

In Apple's claim, it says recent Think Secret articles contained trade secrets.

In the past week, Think Secret has published articles claiming to reveal an upcoming Apple productivity suite, named iWork, as well as a sub-$500 Macintosh desktop computer.

Apple's action was based on the Uniform Trade Secrets Act as defined in California Civil Code 3426.1. This states that if a company takes reasonable measures to protect its information and the information derives value from being kept secret, California courts should rule that such information, even if it is commonplace, should be afforded protection as a trade secret. Common examples of such data are corporate minutes and customer lists.

Under this statute, misappropriation, which is defined as the acquisition of information via improper means or the use or disclosure of trade secrets, is prosecutable.

"Trade secret cases are fairly common," said Kurt Opsahl, a staff attorney for the Electronic Frontier Foundation, a nonprofit group interested in protecting digital rights.

Opsahl noted that there might be a jurisdictional issue in the case as Apple filed under the California Uniform Trade Secrets Act (most states have their own version of the statute), while the company that owns the ThinkSecret Web site is based in New York. However, Opsahl said, this is a minor issue and one Apple says is moot.

He said he thought Apple's suit was ill-advised since it is essential that a news organization be able to maintain confidentiality of sources.

"[ThinkSecret] may not have the same physical characteristics as a newspaper, but there is no way to make a strong distinction between these and online sites," Opsahl said. "To deny a site like that the status of a news operation is inappropriate."

In the December suit, Apple asked for subpoenas against Think Secret in order to discover the true identity of a poster on the AppleNova message boards.

However, despite a link to the latter on the former's front page, there is no business or editorial connection between the two.

In past years, Apple has sent cease-and-desist letters to many Web sites that have purported to have inside information on upcoming Apple products.

Such rumors have traditionally ramped up as the company's annual trade show Macworld approached. Many Mac watchers have noted that such furor, even when fueled by threatened legal actions by Apple, has only served to increase the marketing buzz around the company and its products.

The next such conference is scheduled to begin Jan. 10 in San Francisco. Parts of the city have already been covered with posters for the company's popular iPod MP3 player.

Whether Apple can stop the rumor-mongering or not, the disadvantage of having rabid fans as customers means they're so starved for news, it creates demand for the sort of secret-swapping Think Secret is all about.

- Arik

Gartner Buys META: Consolidating Analysts Search for Security

Gartner bought-out META Group at the end of the year and, having failed to blog it right away, just couldn't let it go past withough a few thoughts. The primary implications, in my view, boil down to significantly less choice for IT leaders looking for analytical research and consulting. The $162 million cash acquisition leaves just two big research firms in Gartner and Forrester, with IDC as a lagging third choice, but the real story is that, the squeeze on IT budgets over the past several years, along with the growth of the Internet as an information resource, has led to decreasing revenue for information service companies across the board.

This is primarily an opportunity for Gartner to buy into faster growth, cut operations and admin costs to increase profitability, having reported $638 million in revenue through the first nine months of 2004, up 4% from 2003, but with net income declining 30% to a measily $12 million. But, since IT managers often come to rely on the particular analysts covering a technology sector or business issue important to them, the combined firms' clients will be most concerned about what happens to that person after the acquisition. An exodus of those analysts could scuttle the point of buy-out, if cultures don't mesh, but Gartner says the addition of META's sales team will enhance Gartner's ability to increase revenue in coming years, while also driving operational efficiency given the complementary nature of the two companies. Gartner CEO Gene Hall weighed in with his own (brief) opinion of the deal:

I am delighted to share with you the news that Gartner, Inc. has reached an agreement to acquire META Group. Upon completion of the transaction, the combined company's professional staff of research analysts and consultants will be able to provide an even greater scope of independent, objective counsel to help senior IT and business executives leverage information technology to meet their strategic objectives.

META Group represents an outstanding strategic fit with Gartner. The acquisition of META Group allows us to expand our ability to deliver the broadest, deepest, most timely advice and consulting on information technology.

We expect the transaction, which is subject to customary closing conditions, including regulatory approvals, and approval by META Group's stockholders, to close in the second quarter 2005. We will keep you informed of developments as they occur. As Gartner moves forward, I want to thank you for allowing us to be your partner. We look forward to continuing and growing our relationship with you in the future.

Since both firms are based in Stamford Connecticut, at least there won't be many office changes, but a continued the lack of differentiation - plus the relatively low $162 million selling price (in my opinion) reflects that lack of value many IT constituents find in the advice of such firms, in an age when strategic advice is rather easier to come by.

The Red Herring commented that, $162 million would have gone a lot farther invested in a place like India, shipping those high-priced analyst jobs off-shore, rather than consolidating with a competitor at home. One thing's for sure - if differentiation remains this hard to establish, Indian competitors will continue their march on North American shores, and already rapid price commoditization will certainly accelerate.

Is there any upside? At least the two analyst teams might be able to sync up on growth forecasts - I always found it puzzling the 5-year CAGR on any given component or technology could easily be off by 100 percent, making the reliability with which a client entrusted the analysts to predict the future a bit less certain than they'd hoped.

- Arik

Symantec-Veritas Merger – Major Shift in Strategy a Smart Move for Both Companies

With the purchase of Veritas by Symantec announced this week, Merger Madness charges toward Christmas encouraging us all to compare the relative fortunes and merit of each. So, in what in my view is the most strategic of the deals so far, the $13.5 billion transaction creating the world's fourth-largest software vendor behind Microsoft, SAP and Oracle. Lack of a common technology platform for data management and integration means the merger of technology assets will take a lot longer than the financial ones, but operating synergy can probably be squeezed from its sales channel in the meantime, despite "information integrity" being so far off in the future. Symantec's 30-plus percent growth rate makes this look like a more strategic, offensive move, but with Microsoft likely to bundle antivirus on its desktop in the first half of 2005, Symantec could lose as much as 50 percent of its revenue stream, making the more modest 17% growth of Veritas less of a drag to take on.

But this deal was far from unpredictable - Symantec has long tried to begin applying security principles to storage, first by attempting to buy VMware (eventually bought by EMC) and then following through with the purchase of PowerQuest. And, Symantec has been shoring up its security-software portfolio since the summer of 2002 when the company started a shopping spree that continues here today, acquiring managed-security services provider Riptech for $145 million, intrusion-detection software maker Recourse Technologies for $135 million, and threat-management and security-intelligence provider SecurityFocus for $75 million. The company also acquired security-management software maker Mountain Wave for $20 million in cash that year. Just last week Symantec acquired Platform Logic to strengthen it's weak spot in host-based intrusion prevention and also recently acquired application security consulting firm @stake, as well as anti-spam vendors TurnTide and Brightmail.

Plus, with Microsoft's most serious tactical threat to its platform dominance arising from security questions, getting into the antivirus market would seriously impact Symantec's consumer-driven revenue base. It's been happening already - the Windows XP operating system equipped with Service Pack 2 provides more security features, including a pretty good firewall, than any of Microsoft's other operating systems. Then Thursday, Microsoft acquired anti-spyware company Giant Company Software for an undisclosed sum to build anti-spyware capabilities into its Windows operating system.

From the Press Release:

The leader in storage software and the leader in security software will provide enterprise customers with a more effective way to secure and manage their most valuable asset, their information. The combined company will be uniquely positioned to deliver information security and availability solutions across all platforms, from the desktop to the data center, from consumers and small businesses to large organizations and service providers.

The combined company will operate under the Symantec name. John W. Thompson, Chairman and Chief Executive Officer of Symantec, will continue as Chairman and CEO of the combined company. Gary L. Bloom, Chairman, President and Chief Executive Officer of VERITAS, will be Vice-Chairman and President of the combined company. The board directors of the combined company will include 6 members of Symantec's current board and 4 from VERITAS' current board for a total of 10 members.

"Customers are looking to reduce the complexity and cost of managing their IT infrastructure and drive efficiency with fewer suppliers," said John W. Thompson, Chairman and CEO, Symantec. "The new Symantec will help customers balance the need to both secure their information and make it available, thus ensuring its integrity. We believe that information integrity provides the most cost-effective, responsive way to keep businesses up, running and growing in the face of system failures, Internet threats or natural disasters."

"Our customers have told us that one of their most critical needs is to enable 24x7 access to information. At the same time, they must maintain tight security, comply with all regulatory requirements and operate within their existing budget constraints," said Gary L. Bloom, Chairman, President and CEO of VERITAS Software. "Through our unique portfolio of solutions, Symantec and VERITAS are best positioned to address the ever-growing needs of our customers. Based on IDC data, the total market opportunity for the combined company today is approximately $35 billion and is expected to grow to $56 billion by 2007."

By merging with VERITAS, Symantec will expand its combined revenue base and create an entity with significantly greater financial scale and resources. The aggregate revenue of the combined company is expected to be approximately $5 billion for fiscal year 2006, which begins in April 2005 and ends in March 2006. Approximately 75 percent of the revenue of the combined company is expected to come from the enterprise business and 25 percent from the consumer business. In addition, the combined company will have approximately $5 billion in cash.

The deal will integrate Symantec’s expertise in security, including virus protection, firewall software, and intrusion prevention, with Veritas’ expertise backing up corporate data. In an interview before the Symantec-Veritas deal was announced, Vincent Weafer, Symantec’s senior director of development for the security response division, said the company has been working with partners for some time to develop a unified response to digital threats. “If we saw cyber activity increase, we could dynamically increase the frequency of backups,” said Mr. Weafer.

For Veritas, the deal represents an opportunity to escape a difficult financial history. In 2002, the company restated its revenues and earnings after an internal audit showed its CFO had lied about when expenses occurred and when sales representatives were compensated. The restatement kept Veritas from filing its annual report on time and its stock took a hit.

Although Veritas’ recent earnings have been solid at $470 million on almost $2 billion in annual revenues, analysts worry the company may face increasing market pressure and have trouble growing. In January, Veritas bought Ejasent, a file-management company, for $59 million. In July, it acquired IT automation company Invio for $35 million, and in September, Veritas purchased email archiving company KVault Software for $225 million. Last year the company shelled out $537 million for Precise Software Solutions to augment its data collection capabilities. “It’s probably good technology, but it doesn’t generate a lot of revenue yet,” Dan Cummins, an analyst at UBS Cummins, said of the Precise acquisition.

Problems integrating new technology, along with price competition from EMC, gave Veritas good reason to flirt with potential acquirers. “If you want to get into the storage software business, you either buy Veritas or you’re out,” said Nitsan Hargil, an analyst at Friedman, Billings, Ramsey, & Co. “There’s no halfway to play this.”

ComputerWire had another perspective from an interview with a Symantec exec:

In an interview with ComputerWire, Symantec senior vice president for global technology and corporate development, Ajei Gopal, said that, "Veritas is a trusted brand in the enterprise, and so is Symantec. Exactly how we brand [the acquired Veritas products] going forward has not been worked out. What I can say is that we will aim to build on the brand value. If you look historically, for example when we acquired BrightMail we called it Symantec BrightMail and we still do."

Asked whether there is likely to be a significant headcount reduction when the deal closes - likely to be in the second quarter of 2005 - Gopal would say only that, "Both companies are of approximately the same size and scale. We expect to take advantage of the skills of both companies, and in fact we would expect to be able to continue to grow the company. This is not a merger based on the goal of the elimination of cost. It is a deal done for strategic reasons."

One possible conclusion to be drawn from the move is that Symantec is aiming to become more of an infrastructure management company, managing not only security and storage but systems too. It already has some capability in this area thanks to its acquisition of On Technology Corp in October 2003, and it will soon also be able to draw on the provisioning and applications management technology that Veritas acquired by buying Jareva Technologies and Precise Software.

Moving in this direction of course leads it into a head to head battle with the systems management vendors such as IBM-Tivoli, HP, Computer Associates, NetIQ and Evidian. Of these, Computer Associates has the broadest portfolio so far, thanks to its eTrust security management; BrightStor storage; Unicenter enterprise management; CleverPath portal and business Intelligence; AllFusion life cycle management and Advantage data management and application development product lines.

So is Symantec on the road to building out its capability in all of these areas, and in particular building upon its On Technology acquisition in the systems management space? "I think the way to think of this is as an evolution," said Gopal. "We needed to take the company from security into availability, in effect to start to do data integrity. That action is not complete. It is far from complete. But our immediate goal is to absolutely deliver on the promise, and that means our immediate focus is on integration [of Veritas, once the deal closes]. When it all passes compliance and so on we think it will close in April '05. There is a lot of work to be done [on integration]. We need to make sure that we deliver the deal to the marketplace. That means integration."

This deal is a capstone of sorts to Symantec's positioning of itself as a consolidator in the security industry more broadly. Its antivirus software has been a consumer staple, but Thompson has sought to make the company a provider of a broad range of security technologies to corporations, largely through acquisitions. This purchase significantly diversifies the company and helps position Symantec for an emerging competition with a host of technology giants that have been showing increasing interest in the high-growth computer security market, from Microsoft to IBM to Cisco. Their interest reflects their customers' need for tighter defenses amid a rise in attacks and government regulations requiring data security.

Veritas would bring data management pieces that would help Symantec make a case that it can provide companies with a broad set of the security technologies they need today. "It really helps them redefine what the company does and what enterprise security is all about," said Richard Parower, co-manager of the Seligman Global Technology Fund, which owns shares in both Symantec and Veritas. "Stopping attacks is important, but what it comes down to is you want your data to be secure and available all the time."

This new drive for enterprise security has created the IT "assurance" market, where software companies provide products and services that assure availability in a hostile business environment. This concept also could take Symantec to terrain such as data encryption and identity management, or even physical security systems. One other company is pursuing a similar strategy, but from the opposite direction. Computer Associates International has been bulking up its security offerings lately, having last month completed its acquisition of Netegrity, an identity and access management software maker.

The buyout is also attractive to Veritas, as the company is facing tough competition from larger rivals CA and EMC and looking increasingly lonely as the enterprise software industry consolidates. They couldn't continue to be as dependent on the backup business and really needed to grow beyond it; $13.5 billion is apparently the right price to give up going it alone.

Long-range, by putting together the system-management pieces that Symantec and Veritas have acquired recently, together the companies hope to create a dominant presence in the market that would allow them to compete effectively with the likes of IBM, HP, EMC and CA. But, as in all such mega-deals, it comes down to execution - and Symantec is only about average in its track record of successful integrations - back in 2000, when the company acquired firewall, VPN, and intrusion-detection vendor Axent Technologies for $975 million, most of those products just disappeared.

Of course, the stakes are a lot higher for all involved here - and if they can make it succeed, they may just have transformed the security and storage market forever. It essentially proves what users have been saying for quite some time - that traditional perimeter-based security leaves the crown jewels of the corporation vulnerable to compromise when they're inside the firewall spinning around on disk drives. Once completed, this merger may be the proof the industry needs that storage and information security themselves are merging.

- Arik

Sprint-Nextel: Tech Challenges Ahead - But CDMA & Qualcomm are the Biggest Winners

Merger Madness continues this week, following the IBM/Lenovo deal, then Oracle/PeopleSoft, with Sprint and Nextel agreeing to a merger-of-equals that reinforces the third largest mobile telecom provider in the U.S., with a combined 39 million customers - well behind Cingular's 47 million, but within striking distance of Verizon's 42 million - setting the stage for a battle for growth that could pit smaller operators like GSM-based T-Mobile against other CDMA companies such as AllTel in continued consolidation.

Two months after Cingular Wireless announced it would buy AT&T Wireless, Sprint makes a bid for Nextel in a stock and cash deal valued at $35 billion. Sprint CEO Gary Forsee will become CEO of the new company, Nextel CEO Tim Donahue will become chairman, and the company will set up headquarters in Sprint’s Kansas offices. "There is a market that we compete in today that has two very significant, larger players. As we looked at requirements to compete, we liked our prospects by ourselves but thought our prospects together would allow us an even playing field into the future," Forsee told the news conference in New York. Nextel has greater monthly revenue per customer and a lower subscriber cancellation rate than Sprint, but Sprint is ahead of Nextel in developing advanced services and has greater spectrum capacity to support growth.

But, the challenges in this deal come down to the divergent technologies - Nextel's proprietary (and Motorola-dependent) iDEN network is incompatible with Sprint's nationwide CDMA network, so that'll cost billions to upgrade. But it'll help Sprint shed its wireline business and refocus itself on a wireless and business services strategy that appears to be the wisest niche move going forward.

Why'd they do it? Because wireless companies will be partnering with everyone in 2005 — wireline, content, hardware and software companies — and the best opportunities and technologies will go to the ones with the largest market share. So, there's a lot of consolidation potential in the industry due to the huge gravitational pull of Cingular and Verizon.

But alongside the tech challenges, can Sprint-Nextel integrate two different cultures (the product of various consolidations in the past) to compete with Verizon and Cingular? A bigger question exists on whether size really matters anymore? To Sprint, size will matter a lot since it can extract efficiency from consolidation. To Nextel, with an evolving technology gap in radio spectrum, this would accelerate its already successful consumer programs of cell phone as walkie-talkie and an appeal to the youth market. So the synergies are there, but the cultural issues should not be underestimated - 80 percent of M&A deal-failure is due to cultural incompatibliites.

Still, Slate.com's Daniel Gross views this, like the other few big M&A deals announced this week, as mostly defensive:

Sprint and Nextel are responding to the telecom industry's troubles. Even after the bankruptcies of WorldCom and Global Crossing, and the consolidation of AT&T Wireless and Cingular, there are still too many companies fighting over the same customers. The fixed-line business is profitable but wasting. Cell phone companies bent on growth must engage in fierce promotional cost-cutting or spend billions to convince people they need phones that can take photos and play music. Sprint and Nextel are hoping to find an easier path to greater profits: cost-cutting. In their merger announcement, Sprint and Nextel said that by doing everything from using fewer cell sites to slashing jobs, they could save more than $12 billion.

The Red Herring, on the other hand, found it a big win-win for both companies... but an even bigger headache for competitor Verizon:

It came as no surprise, then, that Verizon was alarmed. Yesterday, a day before Sprint and Nextel announced the creation of “America’s premier communications company,” the Street was buzzing with rumors that UK’s Vodafone, which owns 45 percent of Verizon, had given the go-ahead for a takeover of Sprint, speculation that was later denied by the companies. But analysts believe that Verizon is worried. “I think Verizon finds itself like the ham in a ham sandwich,” said Lisa Pierce of Forrester Research. “The new company could close the gap really quickly.”

Sprint Nextel has all the makings of an enterprise wireless powerhouse. Nextel provides the business clout: 80 percent of its subscribers are from the enterprise sector. Albert Lin, an analyst at American Technology Research, said that with more businesses opting for bundled wireless and wireline services, the Sprint-Nextel merger would be a significant force as Sprint offers fixed-line and wireless services as part of the same package.

Plus, Sprint gains a focused, vertical sales force that Nextel has arranged along industry lines. In addition to knowing the Nextel offerings, sales team members also understand the issues facing specific vertical markets, the tools they currently use and their data needs and has produced the industry's highest penetration of both, data and enterprise users. But Nextel's superb customer service is something altogether different from Sprint's rep, where a 40-minute wait to talk to a human is not uncommon. But the hidden gem in this deal is, Nextel avoids having to upgrade its network to new bandwidth standards for data services - a use of capital that can now be better used to consolidate the networks to CDMA.

Still, every one of Nextel's handsets will have to be replaced - but that's something the company would have to do anyway in upgrading its network to higher data rates. The biggest challenge in the upgrade will be to preserve the popular Direct Connect push-to-talk feature, a very sticky differentiator for Nextel. It's a feature people don't want to give up and must continue to be supported through the transition if the combination is to be successful.

And don't think Motorola is about to let its biggest customer off the hook that easily. A new PTT technology, called Next Generation Dispatch, is interoperable with CDMA networks, including CDMA 1xRTT and EV-DO data networks, Motorola said. "The Next Generation Dispatch solution will enhance Nextel's high quality PTT services by driving greater network efficiencies and product flexibility," Nextel CTO Barry West said in a statement. "It will also provide the added benefit of more easily bridging multiple radio access technologies such as CDMA or OFDM." So, maybe that MOT sell-off on this news was a little premature after all.

So, with all this consolidation continuing - T-Mobile might be next, despite the weak dollar making Deutsche Telekom's Euros a lot stronger as acquisition capital - what's to halt the inevitable march toward a new wireless version of Ma Bell?

Regulators, that's who.

The FCC continues to examine proposals to break the companies into pieces to promote competition. Under the mandate of the Telecommunications Act of 1996, the agency is required to develop a plan to have major carriers unbundle elements of their networks to be leased to competitors. The FCC put together three plans, all of which have been whacked by the courts, but coinciding with the Sprint-Nextel merger, the issue was back on the agency's agenda at its meeting Wednesday.

Curiouser and curiouser...

Let's hope regulation can save competition for the rest of us - it'd be even nicer to imagine a single network technology for wireless to ride on - GSM being my preference because of its global ubiquity, especially among the fastest-growing markets worldwide... but that's not a likely proposition with the momentum behind CDMA in the U.S. today.

And, if this merger goes through in the second half of 2005 as intended, CDMA has essentially just won the battle for U.S. wireless networks. With our government's affinity toward Qualcomm (guess what flavor network Iraq is building), versus "Old Europe", means GSM, despite powering most of the world's wireless new networks, isn't likely to dominate anytime in the foreseeable future here in the States.

So, maybe the biggest winner in all of this, is Qualcomm?

- Arik

Oracle-PeopleSoft: Ellison Prevails

As I'd earlier opined would happen, Larry Ellison and Oracle prevailed, at long last, over PeopleSoft in their pursuit to acquire this most reluctant of prey.

Still, planning is the easy part - execution is where success or failure will be judged. Often criticized for weak integration, Oracle needs to pull demonstrate an executable roadmap that will show skeptical customers, pro and con, exactly what, when and how it will integrate the company and its products to reassure the primary asset being acquired - PeopleSoft's customers - that they're safe staying put. Despite the cultural challenges ahead, at least Wall Street remains optimistic:

"PeopleSoft as a standalone entity was probably not worth $20 per share," said John DiFucci, a managing director at Bear, Stearns & Co. Inc. in New York. The pumped-up price reflects Wall Street's faith in Oracle's ability to turn the merged outfit into a lean software machine that will operate with fewer costs and will drive home more revenue, he said.

"I think it's good for Oracle, and it's good for the industry," DiFucci said, because Oracle CEO Larry Ellison has been right all along in saying that the industry has been in need of consolidation.

"Frankly, I don't think we'll see a return to double-digit growth, at least not on a long-term basis, this year or next year," he said. "Assuming all that, and assuming a lot of software companies came about or proliferated during the [dot-com] bubble, you come to the conclusion that we have too many out there, and there has to be a rationalization of the industry."

The deal also sent Oracle stock up almost 10 percent, largely due to the market's love for certainty, according to Tom Burnett, president of New York-based Merger Insight, an affiliate of Wall Street Access. "The market loves getting rid of the uncertainty," he said. "It's a very good move for Oracle. The board distraction was beginning to take a big toll."

Oracle executives have forecast the deal as promising to be 8 cents accretive by next year—in other words, the merger will add 8 cents per share to the bottom line.

The raw translation of that promise means that many PeopleSoft employees will lose their jobs, as Oracle squeezes redundancies out of the merged companies. Donovan Gow, an analyst for American Technology Research, in Greenwich, Conn., predicted that more than a few thousand employees will be considered redundant, and that the bulk of the victims will come from PeopleSoft's ranks.

"There will be massive head-count reduction across the combined firms," he said. "I would presume the bulk will come from the PeopleSoft side."

Of course, many PeopleSoft personnel may jump ship rather than work for the company they have long regarded as a bitter enemy. "Oracle is considered a more aggressive, hard-hitting, less friendly type of corporate culture," Gow said.

"PeopleSoft has been viewed as a nicer place to work: more enjoyable, more camaraderie, more laid-back, less hard-hitting. That's why they brought over [former PeopleSoft CEO] Craig Conway from Oracle: to instill a little more competitiveness to PeopleSoft's environment."

Regardless of Conway's tenure, PeopleSoft still has a different culture that will entail a tough adjustment for of its employees, many of whom will likely leave.

But from a financial perspective, that will work in Oracle's favor, according to DiFucci. "The PeopleSoft culture will be destroyed here," he said. "The Oracle culture will dominate. … That kind of integration, [which is just about rationalizing the industry], is not as risky as a lot of acquisitions.

"You're just buying a customer base, which is reflected by the maintenance stream. … When you're integrating people, that's where the risk comes in: with integrating the culture."

The question of customer retention is the big risk in all this, but Ellison has an exceedingly good poker face:

Ellison's strategy envisions virtually all of PeopleSoft's customers remaining on board after the acquisition, giving Oracle the opportunity to sell them a variety of other software products while it collects a steady flow of revenue for maintaining and upgrading existing products. Oracle is so confident its strategy will pan out that it has already assured investors the PeopleSoft will boost the company's profit by about $400 million during the fiscal year ending in May 2006.

Yet some surprises seem inevitable. Because of the hostilities underlying the deal, Oracle did not get an insider's view of PeopleSoft until this past weekend when the takeover target finally opened its books for the first time.

"Oracle is coming in with an unusual amount of ignorance about something that just cost them $10.3 billion," said Joshua Greenbaum, a business software consultant who has followed Oracle and PeopleSoft for years.

University of Southern California corporate law professor Ehud Kamar agreed, describing the Oracle takeover as "a deal that looks particularly susceptible to integration difficulties."

To ease the transition, Oracle hopes to retain the brightest engineers among PeopleSoft's 11,500 employees. At the same time, though, Oracle plans to fire thousands of other workers to cut expenses -- a process that threatens to open even more emotional wounds among PeopleSoft workers who skewered Ellison and his lieutenants during the takeover saga.

Ellison already is trying to patch things up. After Oracle announced the deal had been cinched, Ellison sent an e-mail to PeopleSoft's employees to reassure them that they will be treated fairly under his reign.

"One of the biggest risks for Oracle is whether it will be able to retain enough of the right people," said Meta Group analyst David Yockelson.

Silicon Valley's soft labor market should help Oracle by giving alienated PeopleSoft engineers less incentive to leave. PeopleSoft's October firing of its former CEO Craig Conway -- a vitriolic critic of Oracle -- also might have helped cool the tensions during the past two months, Kamar said.

Still, keeping PeopleSoft customers happy might prove even more difficult for Oracle.

PeopleSoft's customers have a huge stake in how the deal progresses because they already have sunk millions of dollars into sophisticated software applications that run everything from their accounting to personnel departments.

"You are talking about big, complex software that's difficult to implement potentially becoming even bigger and more complex," said Michael Lodato, executive vice president for QAD Inc., a smaller software maker in Santa Barbara. "I don't think you will see any of the customers jump ship in the short term, but two or three years down the road they may start spending their money on something else."

Ellison seems to welcome the skepticism about a merger that many analysts predicted would never be consummated. "The conventional wisdom has been wrong consistently in analyzing this deal."

At least PeopleSoft's board managed to get a slightly sweeter deal; but it remains to be seen whether customer retention will make it all worthwhile:

The PeopleSoft takeover saga became a foregone conclusion over the weekend, when the prey finally caved. After all, PeopleSoft's arguments—antitrust regulators won't approve it, the price tag wasn't high enough, and we just don't like Oracle—fell away gradually. Especially when you raised the bid to $26.50 a share, from $24.

Now Oracle gets what it really wanted—PeopleSoft's 12,500 customers and the support and maintenance revenue they represent. But the fun is really just beginning. PeopleSoft customers are a wary bunch, and many are making alternative plans just to be safe. Among the customers you will need to win over:

- David Smith, chief executive officer of PSS World Medical, who installed J.D. Edwards enterprise planning software four years ago at the Jacksonville-based medical products distributor. Since PeopleSoft bought J.D. Edwards, service has improved, according to Smith; PeopleSoft was just more responsive. Now that Oracle has PeopleSoft in the loop, however, he doesn't want the software his company depends on to become an afterthought. "I'm afraid," Smith says.

Why the worry? Maybe it was the June 2003 press release from Oracle blasting PeopleSoft's J.D. Edwards acquisition as a tactic just to fend off Ellison & Co.

- Arnold Testa, chief information officer of the Electric Power Research Institute, a nonprofit center for public-interest energy and environmental research. His firm has standardized on PeopleSoft software, and Testa says an Oracle takeover could be a disaster. Why? He doesn't want another implementation to suck up time and costs, and he has IBM as his database provider. No matter how Testa slices the deal, it's likely to be more work for him.

- John Moon, chief information officer at pharmaceutical company Baxter International, whose company is both a PeopleSoft and J.D. Edwards customer. When asked about a potential Oracle takeover at SIMposium Chicago in September, Moon said he was formulating undisclosed plans to deal with the event.

- John Webster, PeopleSoft programs director at Dakota State University in Madison, S.D. "Had Larry Ellison made a different case, it might be different. But his first approach to [PeopleSoft] obviously scared me. And first impressions are what counts," Webster said at PeopleSoft Connect in September.

Oracle will have to win that foursome over, and thousands of other technology executives (read: Oracle customers-to-be) with the same concerns.

Rest assured, these executives are plotting their next move, pondering switches to rivals such as SAP and anxiously awaiting phone calls from their Oracle and PeopleSoft contacts. Maybe you can keep them happy initially, but you'll have to work hard to migrate them to Oracle applications and upgrade accordingly. Their technology road maps will be amended starting today to include escape hatches and possible jumps to other suppliers. Your job: Keep them happy or they'll leave.

You wouldn't want to waste $10.3 billion.

Predictably, SAP wasted no time in weighing in on the mediocre nature of competition in a post-PeopleSoft market:

"The era of uncertainty is far from over," said Bill Wohl, SAP's vice president for product marketing, in a telephone interview. He said plenty of questions still remain around how former JD Edwards customers will be supported, how the integration of the two companies will proceed and what the long-term plan will be. "All of those questions and uncertainties bode well for SAP, which looks increasingly like a safe harbor in a stormy sea. ... We're dealing with customer requirements, while the others are focusing on legal battles and now mergers and acquisitions."

SAP, based in Walldorf, Germany, is the biggest business applications player, accounting for 39 percent of the market, compared with 25 percent for PeopleSoft and Oracle together. During the 18 months since Oracle launched its PeopleSoft takeover bid, SAP's market share increased in all its key markets around the world, Wohl said—an increase analysts attribute to the Oracle-PeopleSoft turmoil. In a research note earlier this year Gartner warned that enterprises in the midst of implementing packaged applications face additional risks when their vendors are acquired.

The turmoil will continue for at least another 12 to 18 months while the two companies complete the merger process, Wohl predicted. "You can't minimize the amount of work here to bring the two together. We believe this is a market opportunity for us—it's been that way all along, and it continues today," he said.

He said that even once they complete their integration, Oracle and PeopleSoft will only be "a modest competitor."

According to its president, Oracle has a clear idea of how it's going to slice up PeopleSoft to retain the choicest assets and send the rest to the corporate rendering yard. Click here to read more.

Ex-PeopleSoft CEO Craig Conway once likened the process of adopting SAP software to "pouring concrete," but sales increases are the best answer to such criticisms, Wohl said. "At the small and midsized business level, where flexibility and openness are most required, as well as at the enterprise level, SAP has solutions that are meeting those requirements," he said. "Customers are speaking with their wallets."

Philip Carnelley, research director with U.K. analyst firm Ovum Ltd., agreed that it will be some time before the merger results in a serious competitor to SAP, but he said the combined company should ultimately increase competition. "A stronger, equivalent competitor to SAP... will also be good for the industry and future buyers. SAP really was having things all its own way," Carnelley wrote in a research note.

He said the deal should mean some certainty for PeopleSoft customers. "At least now they'll get some certainty, even if they don't like the outcome, which now seems rather better than they feared," he wrote. IBM, one of PeopleSoft's closest partners and the customer for its largest-ever installation, will be one of the biggest losers from the deal, Carnelley wrote.

Microsoft Corp., which once considered acquiring SAP, said it "remained neutral" toward Oracle-PeopleSoft as it has done throughout the process. The software giant said it remains focused on its existing business applications strategy for small and midsize businesses. "Microsoft has no position concerning today's Oracle announcement," the company said in a statement.

Meanwhile, Microsoft has begun its onslaught to try and capitalize on all that FUD:

Just two days after Oracle signed an agreement to buy PeopleSoft Inc., Microsoft issued its first formal overture to PeopleSoft's customers.

Microsoft corporate VP Bill Veghte on Wednesday sent a letter to PeopleSoft users urging them to migrate their Unix-, AS/400-, and mainframe-based PeopleSoft applications to Windows servers. For companies already running PeopleSoft applications on Windows, Veghte pitched increased investment in a broader range of Microsoft technologies, including its .Net Web services, portal software, and analytics tools.

"Extending your current PeopleSoft investment positions you for the future on the Microsoft platform," he wrote.

Microsoft also is encouraging PeopleSoft customers to consider shifting to the enterprise-resource-planning applications sold by its own Microsoft Business Solutions division or those of a partner.

"Migration to another ERP solution, including Microsoft Business Solutions, SAP and other partner ERP solutions on the Microsoft platform are additional options to PeopleSoft customers seeking greater clarity around technology direction and platform choice," Veghte wrote.

That last pitch is a shot across the bow of Oracle, which is spending $10.3 billion to acquire PeopleSoft largely to gain its customer base. Microsoft officials have repeatedly said they don't intend to compete at the high end of the ERP market, but there are many small and midsize accounts where Microsoft Business Solutions could bid against a combined Oracle-PeopleSoft. Microsoft Business Solutions sells four ERP suites, acquired for more than $2 billion over the past three years.

And, it's managed to push middleware vendors into a tighter spot - perhaps sowing the seeds of a broad alliance between the two other giants of the business - IBM and SAP:

Oracle's successful bid for PeopleSoft is going to change the face of the enterprise-applications market. It will blur the edges between middleware offerings and applications and force middleware vendors to compete or get pushed into a corner, says Yankee Group analyst Michael Dominy. Middleware suppliers such as BEA Systems, Tibco Software, and webMethods, as well as younger companies such as Blue Titan Software and Sonic Software, "are in danger of being left behind" by the combined impact that an applications and database vendor can have on the middleware space, he says.

One of the middleware's primary roles is to connect applications to database resources. Oracle is about to convert its ability to manage that connection seamlessly into a competitive advantage. And it will be developing that capability for an applications customer base second only to SAP itself.

One possible outcome will be greater cooperation between IBM and SAP, Dominy says. The two companies are longstanding partners on several fronts, and SAP has made its pioneering NetWeaver middleware and application-integration tools interoperable with IBM's WebSphere middleware.

IBM for several years has competed with Oracle by telling third-party application vendors that it won't compete with them on the applications front the way Oracle is willing to. IBM is unlikely at this late date to make a foray into the applications market because that would require it to either buy or build its own product set, observers note.

"IBM has done an amazing job of building professional services," says Niel Robertson, CTO of Newmerix Corp., a supplier of management software for PeopleSoft applications. Part of its IBM Global Services expertise is in moving enterprises onto ERP systems. Now it will lose part of that business as PeopleSoft, with whom IBM was a partner, disappears inside the Oracle fold, Robertson says. Nevertheless, IBM, more than Oracle, "has become master of the middleware infrastructure" with WebSphere, its Tivoli management system, and Rational Software development tools.

PeopleSoft will add to Oracle's strengths in certain areas. It has development, marketing, and sales expertise in human-resource, customer-relationship-management, and supplier management applications--the core of its applications business. It's also adept at selling to state governments, an area where Oracle has sometimes shown a tendency to stumble. For example, Oracle got into a brouhaha with California in 2002 when state officials charged Oracle with over-selling the expected benefits of a $95 million software contract with the state government. That contract was canceled.

"Oracle needs to be sure and retain the people with expertise in those markets," Dominy says. But he added that it's not yet clear that it will know how to do so. Efforts to retain PeopleSoft employees and the company's customer base may have been hurt by Oracle executives' comments about its plans for PeopleSoft in the early days of the takeover attempt, Dominy notes. Now a lot of key personnel inside PeopleSoft may or may not know what the future holds for them. Given that Oracle's efforts to buy out PeopleSoft took 18 months, Dominy says, "you would think Oracle would be ready to flesh out more details of the takeover at this point."

One this is for sure - if Oracle can execute as well as they plan (overlooking SAP's broader opinion that this was a dumb idea from the start) to stem what could be a tidal wave of customers from running to the waiting arms of the competition, the economies of scale the deal provides Oracle are impressive.

In the words of Ellison himself: "This merger gives Oracle even more scale and momentum [in its applications business]... This merger is going to make that applications business bigger and stronger... This merger works because we will have more customers, which increases our ability to invest more in applications development and support."

- Arik

IBM’s PC Sale to Lenovo Long Overdue & a Great Entry Point to the China Market

IBM hit the headlines revealing that it is to sell its personal computing division to China's Lenovo Group for $1.75 billion. IBM will take an 18.9% stake in Beijing-based Lenovo under the terms of the agreement, which also sees Lenovo become the preferred supplier of PCs to IBM, and IBM becoming the preferred services and customer-financing provider to Lenovo, with headquarters of the combined company moving to New York.

The Chinese company, which has aspired to enter international markets for years, will be able to use IBM's strength in branding, technologies, sales networks, and financing worldwide to achieve its dream, while IBM spins off what has become an increasingly non-core business and builds a closer partnership with a company from China. It is believed to be a perfect match by IBM China Chairman and CEO Henry Chow because of international influences and China's manufacturing strength.

For many, this has seen the end of an era with the IBM news but the decision should not come as too much of a surprise to anyone. In keeping with the company's recent strategy of getting out of less profitable businesses and focusing on higher margin services and software-led operations, the move also creates a powerful capitalization strategy for market-entry into the fast-growth China market for services and software that are sure to accompany PC sales.

IBM's recent acquisitions have focused on software and services markets, including its $3.5 billion acquisition of PricewaterhouseCoopers and $2.1 billion to acquire Rational, both in 2002. Despite good growth from its PC business in recent months, its share of the market is small, compared to bigger rivals such as Dell and Hewlett-Packard and is also not a big income generator for the company.

We'll see how these two powerhouses of the PC market will do competing in ever-lower margins with a branded seller from China:

Combined, IBM and Lenovo will stand at third place among PC makers with a projected 7.7 percent of the market and combined sales of $12 billion last year, behind Dell Inc. and Hewlett-Packard Co., which respectively command 16.7 percent and 15 percent of the market.

Even for the industry leaders, though, the business remains one of low margins and low return on investment. In IBM's case, the first nine months of 2004 saw a profit of less than $100 million measured against $9.4 billion in revenue.

Similarly, HP's Personal Systems Group, which represents the company's total sales of laptops, desktops, personal workstations and handhelds, saw a $210 million profit on $24 billion of revenue.

Despite the low ROI, which was seen as a factor in IBM's decision, HP remains committed to the PC market, said Deb Nelson, the company's vice president of marketing worldwide for the Personal Systems Group.

"It's a two-horse race" between HP and Dell, Nelson said. The IBM/Lenovo deal "is a change but not a significant one on the overall market," she added.

"We're not surprised by this move," Nelson said. She agreed that the PC business is one in which low profits are the norm, but she stressed that in HP's case, the PC is just the entry for sales of HP products.

Although HP is also a competitor in the server and support market, as IBM is, Nelson said that fielding PCs "brings a lot of other benefits" aside from unit desktop or laptop sales.

Nelson pointed to a "portfolio" of other items HP markets, such as printers, cameras, MP3 players and servers. These, she said, have higher margins but are sold using HP's PC line as an anchor. In fact, Nelson said, digital entertainment was the focus of the company's August product launches as well as its print and advertising campaigns.

Whether IBM's deal with Lenovo will affect HP's market share in the United States (Lenovo has a long lead over the field of computer manufacturers in China, so much so that Dell decided to abandon the PC field there earlier this year), Nelson said it could induce "some uncertainty in IBM customers," which would be an "opportunity" for HP.

Lionel Menchaca, a spokesperson for Dell, declined to comment directly on the IBM/Lenovo deal. He noted that Dell does not break out profit numbers for desktop and laptop sales, but did note that they were both "profitable." He added that 50 percent of the company's $47 billion of revenue for the past four quarters was due to desktops and 29 percent was attributed to laptops, with the remaining 21 percent coming from servers and storage. Dell has historically been able to retain larger profit margins on its products due in part to its direct-sales model over the Internet.

Menchaca added that Dell is not focused on acquisitions, preferring instead to grow the company "organically." However, Dell has been no stranger to purchasing companies to get a foothold in a market. In 1999, the company made its first acquisition, of storage vendor ConvergeNet, for $340 million. And in 2002, Dell bought services company Plural Inc.

eWEEK's Jim Louderback had another take on the strategy:

IBM spent the last few years commoditizing everything below middleware, including the OS and the PC. That explains the fascination with Linux. A commoditized and free OS not only makes Microsoft's key market position obsolete, it also makes the PC itself simply an off-the-shelf component. The consultants at the core of IBM have been recommending non-IBM hardware for years...

In fact, IBM should have gotten out of the PC industry a long time ago. It's been years since the company made memory, hard drives and Token Ring cards—why did they stick it out with PCs? According to ex-CEO Lou Gerstner, it's been "painful and costly for IBM." But he truly believes that the company could have competed. As he said in his 2002 memoirs, "If we had focused on the marketplace and done our homework, there's no reason the IBM PC business today would be looking up the leaderboard at Dell."

Well that time has passed. The corporate desktop looks a lot like a terminal, circa 1985. Interchangeable parts are defined more by what they connect to rather than what's inside. In other words, it's the services they run that are far more important—and they'll run just as well on a Dell.

Most of the PC excitement is happening at home, where Dell, Gateway, HP and others are jockeying for a piece of the media server market. From where I sit, those legacy PC vendors have already lost. Those devices will look a lot more like TiVo or iPod than your standard PC. But IBM hasn't been credible at home since its failed PC JR, so that's no great loss.

My final verdict - an excellent move by IBM, with manifold benefits and little obvious downside.

- Arik

P&G’s Intrinsa: Cautious FDA Says No Approval for Female Testosterone Patch

P&G’s new Intrinsa testosterone patch for women with low sexual desire just didn’t make the cut in the approvals process recently, leaving millions of under-sexed husbands, which one could suspect as the primary target market for the therapy, wondering when their monastic lives will ever end:

A more cautious Food and Drug Administration dealt Procter & Gamble a setback in its bid to be first to market a drug to improve women's sex drive.

An advisory committee of the FDA on Thursday recommended that P&G's female sex-drive drug Intrinsa needs more study before it's approved for U.S. consumers.

Studies indicate that women who take the drug, which is meant to restore sexual desire in women who have undergone hysterectomies during menopause, could face an increased risk of heart attack and stroke.

"It is not an acceptable tradeoff and we cannot allow this to move forward until we have more data," said Dr. Steven Nissen, a cardiologist at the Cleveland Clinic Foundation and a member of the panel.

Several members of the advisory committee said they were not satisfied with the number of women studied so far, the length of the studies and the modest benefits of the drug. The FDA usually follows the recommendations of its advisors.

Eyeing potential blockbuster sales, Cincinnati-based P&G had hoped to get the drug to U.S. women by next year. Company officials said after the panel's unanimous vote they would work with the FDA to determine what additional information was needed. They declined to say how long Intrinsa's launch could be delayed.

"That's purely speculative at this point," said spokesman Tom Millikin. He also declined to comment on whether P&G was concerned about losing its head start to any rival.

FDA appears to be more cautious about new drug approvals since the Vioxx debacle, where the popular pain medication stayed on the market despite evidence of possible lethal side effects.

"We're clearly in a different regulatory environment in light of recent events including the Vioxx withdrawal," Millikin said.

Sena Lund, an analyst with Cathay Financial in New York, said any changes to the approval process will impact all drug companies looking to launch new products.

"The FDA is under pressure right now internally and from the government," he said. "It's going to affect companies with drugs in the pipeline."

Still, he added pharmaceutical companies are accustomed to investing millions of dollars and several years to bring a drug to market, which is part of the reason why new medicines have such high profit margins.

Larry Hess, an analyst with Moody's Investors Service in New York, said P&G wouldn't want to risk its reputation by putting a drug on the market before it's ready but said the panel's decision must be discouraging. Since Intrinsa would have been the first female sex-drive drug on the market, it could have locked up a commanding share.

Pfizer was first to market with a drug addressing men's sexual impotence -- Viagra, now worth more than $1 billion in sales a year -- in the late 1990s. Industry experts have estimated that any drug for female sexual dysfunction could rack up similar sales.

"P&G views medical as a faster growing and more profitable area for the company," Hess said. "The returns are higher and the capital investment isn't as heavy."

Focus on Intrinsa comes as P&G's drug business has helped power its growth in recent years through its osteoporosis drug Actonel and non-prescription heartburn drug Prilosec OTC.

P&G sought to market the testosterone patch Intrinsa to women who lost their libido after their ovaries were removed.

Clinical trials showed that women using Intrinsa had modest sex- life improvements. Women who applied the patch to their abdomen twice weekly had one more "satisfying sexual event" per four weeks, according to the data presented to the panel.

Agency officials noted a lack of controlled safety data for women who had used Intrinsa longer than six months.

About 3 million women whose ovaries were removed would have been eligible to use the Intrinsa patch, according to the company. However, it was widely expected it would have been used off-label by women who wanted to increase their sex drive.

Critics said they were worried months or years of testosterone therapy may be dangerous. The hormones estrogen and progestin were prescribed to women for years following menopause before risks of heart disease and breast cancer came to light. P&G said its research showed Intrinsa, placed on the abdomen and changed twice a week, helped women who were distressed by a lack of sexual desire and produced no serious side effects during 24-week trials. The company has proposed studying Intrinsa's safety for five years after approval. That's an almost laughable approach strategy in the post-Vioxx pharma regulation environment.

P&G studied about 1,000 women who said they were bothered by low sex drive and, on average, reported three satisfying sexual experiences per month. The number increased to five for women who were treated with Intrinsa, but also rose to four for women given a dummy patch. "I don't want to expose several million American women to the risk of a heart attack or a stroke ... in order to have one more sexual experience per month. It is not an acceptable trade-off," said panel member Dr. Steven Nissen, a cardiologist from the Cleveland Clinic. P&G is aiming at a narrow group of about 2 million women who have undergone removal of their ovaries, the source of half the body's testosterone, are taking estrogen and are bothered by a lack of sexual desire. But several panel members were worried the patch would be used much more widely.

So really, what’d they expect after the Vioxx debacle and all the testimony from Dr. Graham about the FDA’s lax approach to drug approvals? Signs of things to come, me thinks… in a world of drug regulation that has been irrevocably altered.

- Arik

20 Years After Bhopal: The Yes Men Pull Off Dow Chemical Hoax on the BBC

On the leadup to the 20th anniversary of the Union Carbide accident in Bhopal India, the BBC broadcast an interview with a purported representative of the Dow Chemical company early in the morning. During the interview, a "representative of Dow" (in reality, Andy Bichlbaum, activist from the "Yes Men" group), accepted responsibility on behalf of Dow for the disastrous gas leak that killed thousands of people and injured thousands more. Dow Chemical bought out Union Carbide in 2001 and the company had denied responsibility for the tragedy, but nonetheless paid the Indian government $470 million in 1989 to settle the claims against it.

As for the BBC story, the news agency was apparently contacted by a "Mr. Finisterra," who claimed to speak for Dow Chemical and backed up his claim by referring the BBC to a fake website for Dow that "confirmed" his identity. He requested an interview on the anniversary of the Bhopal disaster (which occurred on December 3, 1984), promising to make a "significant announcement" on the show.

The announcement was that, Dow Chemical had decided to take full responsibility for Union Carbide's disaster and pay the families of the victims and the survivors of the tragedy $12 billion (about 25% of Dow's current market cap) in compensation for their losses. Here’s the Yes Men’s statement of what went on and how they pulled it off:

On November 29, an email comes in to DowEthics.com: BBC World Television wants a Dow representative to discuss the company's position on the 1984 Bhopal tragedy on this, its 20th anniversary.

Knowing Dow's history of gross negligence on this matter, we think it unlikely they will send a representative themselves—and if they do, he or she will likely only reiterate the old nonsense yet again, which will be depressing for all concerned. Yes, we'd better just do their PR for them.

Since we can't possibly afford to go to London with our pathetic American dollars, we ask to be booked in a studio in Paris, where Andy is living. No problem. Mr. Jude (patron saint of the impossible) Finisterra (earth's end) becomes Dow's official spokesperson.

What to do with the five or so minutes he'll be allotted? We briefly consider embodying the psychopathic monster that is Dow by explaining in frank terms how they (a) don't give a rat's ass about the people of Bhopal and (b) wouldn't do anything to help them even if they did. Which they don't. This would be familiar territory for Andy: he did something similar representing the WTO on CNBC's Marketwrap.

Instead we settle on having the impossible Jude announce a radical new direction for the company, one in which Dow takes full responsibility for the disaster. We will lay out a straightforward ethical path for Dow to follow to compensate the victims, clean up the plant site, and otherwise help make amends for the worst industrial disaster in history.

There are some risks to this approach. It could offer false hope to people who have suffered 20 years because of Dow and Union Carbide. But all hopes are false until they're realized, and what's an hour of false hope to 20 years of unrealized ones? If it works, this could focus a great deal of media attention on the issue, especially in the US, where the Bhopal anniversary has often gone completely unnoticed. Who knows—it could even somehow force Dow's hand.

After all, the real hoax here is Dow's claim that they can't do anything to help. They have conned the world into thinking they can't end the crisis, when in fact it would be quite simple. What would it cost to clean up the Bhopal plant site, which continues to poison the water people drink, causing an estimated one death per day?

We decide to show how another world is possible, and to direct any questions about false hopes for justice in Bhopal directly to Dow.

Another problem we anticipate is that this could result in some backlash for the BBC. This is bothersome, because they have covered Bhopal very well, infinitely better than what we're used to in the US. We would much rather hoax CBS, ABC, NBC, or Fox, but none of those could give that rat's ass about Bhopal, and so none of those has approached us.

In any case, it didn't seem to hurt CNBC when "Granwyth Hulatberi" appeared as WTO spokesperson. It was a simple mistake, and one that anyone could make. Intelligent people will not question the excellence of BBC's overall coverage because of an unavoidable error, especially if it is caught quickly and provides for some interesting discussion that wouldn't have happened otherwise.

Frankly, I think it’s a funny way to get Dow Chemical moving on the matter of Bhopal, but if it works, it’s certainly an interesting and gutsy tactic. We’ll see if the guy is prosecuted for stock manipulation though, as it caused quite a day of volatility and uproar with investors, as one might imagine.

- Arik

Target vs. the Salvation Army: Consumer Backlash Coming?

The Salvation Army, those humble bell-ringers of the holiday season, are no longer welcome outside Target stores this year. So, it would seem a consumer backlash is the least they might expect:

A backlash could be brewing against Target Corp. after it decided to ban Salvation Army bell-ringers and their red kettles from its store entrances this holiday season.

The company announced the decision months ago, but the criticism didn't start to mount until Salvation Army officials recently noted the problems it could cause to their fund raising plans, and shoppers noticed the bell ringers' absence.

The latest reaction has come from several national Christian groups, who are denouncing Target's decision.

"For Target to say that the Salvation Army is no longer welcome at the inn should send a message to Christians that perhaps they'd like to do their shopping elsewhere," said Robert Knight, a spokesman for Concerned Women of America, a Christian activist group that claims more than 500,000 members.

The issue dates to last January, when Minneapolis-based Target told the Salvation Army that it would no longer allow its kettles and bell-ringers outside Target's nearly 1,200 U.S. stores.

The Salvation Army has said it raised about $9 million last year from Target shoppers nationwide. But Target felt it no longer could make the Salvation Army the sole exception to a rule banning solicitation at its stores, spokeswoman Carolyn Brookter said.

"It's unfortunate that this is being looked at as something against the Salvation Army," she said. "That's not the way we intended it to be. It's really about us trying to make our policy consistent. We have always respected the Salvation Army's mission and their goals."

Also figuring in the decision, she said, was Target's desire to protect its customers from the potential discomfort of being asked for donations.

"Part of what we offer as a brand experience is a distraction-free shopping experience, and I think that's one reason people like to come here," Brookter said.

What Target is striving to avoid is the "gauntlet effect," said James Tenser, a retail consultant and author in Tucson, Ariz.

"Do you make some customers more comfortable by taking away this gauntlet effect?" Tenser said. "Or do you offend others by taking away from the Salvation Army's goals? They're in a tough spot."

The American Family Association, a Christian activist group based in Tupelo, Miss., this week sent an "action alert" to more than 2.2 million people on its mailing list, alerting them to Target's decision.

While not calling for a boycott of Target, the association asked its members to consider shopping at retailers that support the Salvation Army - such as Target's chief rival, Wal-Mart Stores Inc., which allows bell-ringers at its stores as an exception to its own no-solicitation policy.

"It's very discouraging when a multibillion-dollar organization with millions and millions of dollars of profit to be made won't give one month of their storefront to the Salvation Army," AFA spokesman Randy Sharp said.

Brookter said Target donates more than $100 million a year to charity and already contributes to the Salvation Army through the United Way.

In addition, Target is a member of the Salvation Army's Web shopping site, http: www.kettleshop.org, which generates donations to the Salvation Army based on purchases from participating retailers.

"In the end, we would still like to find a way where we can partner together, but it will have to be in a different manner," Brookter said. "We do that with other nonprofit organizations."

Brian LeVoir of Minneapolis is volunteering as a bell-ringer this year for the first time. A single parent of four boys, he said his sons all took part in recreation programs sponsored by the Salvation Army, and he wanted to give something back.

"The donations have been good," LeVoir said, ringing his bell outside a Cub Foods grocery store. "But I'm hearing a lot of hardhearted comments about Target."

It would seem Target just wants to be Scrooge this Christmas – maybe our humble bell-ringers will fare better over at Wal-Mart?

- Arik

Kryptonite: Tough World, Tough Luck - Company Drawn Asunder by Bic Ballpoint Pen

On September 12, 2004, a forum poster at bikeforums.net noted that he could open his Kryptonite lock with a Bic pen. One day later, one of his fellow bikeforums.net forum members posts video of the lock being picked, verifying the claim. Just a few days after the initial forum post, the story leapt into the mainstream media with on September 23 in The New York Times, “The Pen is Mightier Than the Lock,” and only afterwards did the company finally post a statement on their Web site. By then, of course, it was too late - AP and dozens of other media outlets had picked up the scent and the product was ostensibly finished.

The bike-lock maker heard about the problem through an e-mail to its customer service department, but didn't issue a formal statement about the vulnerability until days later. By then, angry and confused customers were flooding the company with questions about their locks. "That was probably the most astounding thing - to see how rapidly this whole thing developed and moved around the world at an amazing speed," says Karen Rizzo, director of marketing at Kryptonite, a division of Ingersoll-Rand.

I learned of the situation myself just a few days ago from an interview with the technique's popularizer, Benjamin Running, in CSO Magazine online:

The first time Benjamin Running picked his $90 Kryptonite bike lock with a 10 cent ballpoint pen, it took a few minutes. But after 10 tries, he says, “I had it down to five seconds.” Running, a Brooklyn-based graphic designer, reported this astonishing discovery on his blog, Thirdrate.com. “Bike owners beware, that same bright yellow lock that once said, Don’t screw with me! now screams, Steal me!” Running wrote. He also linked to a video demonstrating how he penned his own lock. It was this video that turned Running into an internationally sought after “hacker.”

Could Kryptonite have avoided the situation? Unlikely – it’s a fundamental design flaw with unforeseen consequences of an innovative and curious guy trying something new. But, they certainly could've reacted more quickly, had they been monitoring the online discussion space. One thing's for sure: pride goes before the fall... nobody had the foresight to think of what might happen if their product is suddenly made useless. As the old CI saying goes, it's rarely direct competitors that jump up and put you out of business - it's usually a threat you'd never heard of.

- Arik

Sears & Kmart: Can Two Wrongs Make a Right?

The guys in the picture from Sears and Kmart look decidedly less than enthused about the merger announced while I was in India last week. Why shouldn’t they? They’re still dwarfed by leader Wal-Mart and running third behind Target. The question is, can they get their house in order after a Christmas shopping season that many are predicting will be pretty weak? Here’s the story from Reuters:

Kmart Holding Corp., the discount chain pulled from bankruptcy by hedge fund operator Edward Lampert, will buy Sears, Roebuck & Co. for $10.85 billion in a bold play to revive two of America's best-known, but long-struggling, retail brands.

The deal, the fourth-biggest retail merger ever, will form the third-largest U.S. retailer by sales. Known as Sears Holdings, it will have $55 billion in annual revenue, nearly 3,500 retail stores and 394,000 employees. Both company names will be used on stores, but some Kmart stores will convert to the venerable Sears nameplate.

Shares of the two companies, both former No. 1's in the U.S. retail industry, surged as they outlined plans to stem sliding sales and battle rivals like Wal-Mart Stores Inc., now the world's biggest retailer.

Some analysts said the deal could set off a wave of consolidation in the retail sector, where smaller players are struggling to survive against the industry leaders.

"This will trigger a lot of activity in the retail sector, with toys and possibly home furnishing companies coming together to become stronger," said Gary Ruffing, head of retail services at management consulting group BBK Ltd.

Others were skeptical that two flagging retail giants, which appear long past their prime, could join forces and challenge such a dominant competitor as Wal-Mart.

"The problem is they are missing a key ingredient -- sales growth," Darrell Rigby, head of the retail practice at consulting firm Bain & Co. "They haven't been able to solve their sales problems separately. Can they solve them jointly?"

The merger was the work of Kmart's billionaire chairman, Edward Lampert, whose ESL Investments Inc. hedge fund is the largest shareholder in both Kmart and Sears. Lampert told an investors' meeting that Sears was as good a company as its rivals but needed to be moved out of malls and into free-standing stores.

"Sears in a Kmart box...ought to do very, very well," said Lampert, who will be chairman of Sears Holdings.

He sees Sears, with its 1,971 stores and annual revenue of $41 billion, as the stronger of the two brands, with Kmart struggling to differentiate its 1,504 stores from other discounters but boasting a cash-rich, debt-free business.

Sears Chief Executive Alan Lacy said several hundred Kmart stores could be converted into off-the-mall Sears Grand stores, accelerating a new one-stop-shopping concept where Sears offers foods as well as apparel and home appliances.

The merger, which should be completed by next March if shareholders approve, is expected to lead to annual savings of $500 million within three years and maybe some real estate sales, the companies said. No details were given on job cuts. Sears employs 250,000 people and Kmart about 144,000.

Under terms of the deal, Kmart shareholders will receive one share of Sears Holdings stock for each Kmart share. Sears shareholders will have the right to choose either $50 in cash or 0.5 share of Sears Holdings for each of their shares.

Lampert has built up a huge cash pile by selling off some Kmart real estate since taking the company out of bankruptcy in May 2003, even selling about 50 stores to Sears as it tried to move away from malls where it has 870 of its stores.

Even so, analysts were divided over the motive for the merger and questioned the merit of combining two ailing companies.

"This entire deal is designed to pile up cash, and Lampert will then liquidate his position or buy something else and do the same thing all over," said Erik Gordon, a marketing professor at Johns Hopkins University, expressing skepticism over the future of Sears Holdings.

"Whether putting together two struggling retailers will create enough value and synergies to make a good retailer is a major question," UBS analyst Gary Balter wrote in a note to clients.

Sales at Kmart fell 14 percent in its fiscal third quarter, the company said on Wednesday. Sales at stores open at least a year -- a key gauge of retail strength known as same-store sales -- rose 1.9 percent in October after six straight months of declines. Sears is battling to keep its No. 1 slot in appliance sales against Home Depot and Lowe's Co.

Kmart, which sells brands like Martha Stewart Everyday and Jaclyn Smith and has annual revenue of about $19 billion, on Wednesday posted a 12.8 percent drop in third-quarter sales.

But investors welcomed the deal. Sears shares rose 17.2 percent to $52.99 on the New York Stock Exchange on Wednesday, while Kmart gained 7.7 percent to $109 on the Nasdaq. Wal-Mart shares slipped 1.1 percent to $56.24.

Shares of Martha Stewart Living Omnimedia Inc. rose 6.3 percent to $18.49. Cross-merchandising between Kmart and Sears will boost the number of outlets selling Martha Stewart goods.

Standard & Poor's said it will likely cut its ratings on Sears debt to "junk" after the deal, down from "BBB," the second-lowest investment-grade rating, at present. S&P said both Sears and Kmart "lag their peers in terms of store productivity and profitability."

Sears shares have rocketed in the past two weeks following news that real estate investment trust Vornado Realty Trust Inc. had acquired a 4.3 percent stake in the company, which highlighted the value of Sears' vast property holdings.

Lampert said Vornado had not been involved in the deal.

Lacy will be chief executive of Sears Holdings, while Kmart Chief Executive Aylwin Lewis will become CEO of Sears Retail.

So, unless some sales growth gets underway, whether Lampert can put “Sears in a Kmart box” and do well, is up for grabs.

- Arik

Vioxx: Even Worse than We Thought

It's even worse than we thought - Merck shareholders take it on the chin again - here's USA Today's rundown:

Shares of Merck plunged more than 7% Monday after a report said the pharmaceutical giant apparently hid or denied evidence for years that its blockbuster arthritis drug Vioxx causes heart problems.

Merck, one of the world's top five drug makers, pulled the arthritis and acute pain drug from the market worldwide Sept. 30, saying it was acting in patients' best interest. Vioxx has been taken by about 20 million Americans and accounted for 11% of Merck's total revenue.

On Monday, Merck shares were down 7% after The Wall Street Journal reported that internal e-mails and marketing materials show the company knew as far back as 2000 that Vioxx was linked to an increased risk of heart attack but tried to discredit such evidence.

The newspaper says that a March 9, 2000 e-mail from Merck research director Edward Scolnick to colleagues conceded an elevated risk of heart attack and stroke was "clearly there." Nevertheless, the newspaper says, Merck continued to try to discredit academic researchers critical of the drug.

The Journal reported that one training document from Merck listed potentially difficult questions about the drug and stated in capital letters, "DODGE!"

Ted Mayer, a lawyer representing Merck, told the Journal that the e-mails and marketing materials were "taken out of context" and "do not accurately represent the conduct of Merck and its employees."

Merck shares had been trading in the $45 range until the drug was taken off the market. The stock plunged to the mid $30s that day.

But the BBC mentioned the real evidenciary consequences for Merck in potential class action lawsuits:

Merck already faces patient lawsuits, filed after its decision to recall the drug in September. Investors now fear that the picture could be grimmer and the potential costs higher.

The Wall Street Journal quoted internal company e-mails, including one from Merck's head of research Edward Scolnick in March 2000 to colleagues saying that cardiovascular problems with Vioxx "are clearly there".

"If the e-mails actually exist and say what they are purported to say, they appear at least superficially to be a smoking gun that lawyers could pull up as evidence against Merck," said drug industry analyst Trevor Polischuk of Orbimed Advisors.

The result is likely to be more litigation, though he believes it may be difficult for Vioxx users to prove the drug harmed them given that many will have had pre-existing heart problems.

Credit rating agency Standard and Poor's said it may downgrade Merck's credit rating and is seeking a meeting with the firm's management to discuss Merck's "long-term ability to retain its credit strength".

The agency said its actions "reflect Standard and Poor's increasing concern about the magnitude of possible litigation" over Vioxx.

Datamonitor had a great analysis of the situation that looked at competitive implications:

With the higher potency, and lower gastrointestinal side effect profile of Vioxx compared to Celebrex (celecoxib) being speculatively linked to its poor cardiovascular side effect profile, physicians may now be reluctant to prescribe the second generation products.

While a significant proportion of existing Vioxx users are expected to switch to another COX-2 product, particularly those that had been prescribed Vioxx as second line therapy after having failed on traditional NSAID therapy, Celebrex is expected to be the key beneficiary of this, and not the newer drugs.

Pfizer itself has reinforced this view, by immediately responding to Merck's announcement by turning the spotlight on Celebrex, re-affirming the drug's safety profile and guaranteeing its availability for current Vioxx users, while making little mention of Bextra. This action is particularly intriguing considering Pfizer's previous strategy had been to position Bextra, not Celebrex, against Vioxx. Perhaps the company feels that in the current environment of heightened safety fears, Celebrex's key marketing message of long-term experience and safety is more appropriate than Bextra's "powerful medicine" tag.

A key uncertainty that remains is to what extent this event will drive physicians to reconsider their use of COX-2 products, which have come under fire recently as many healthcare payors, such as insurance companies in the US and NICE in the UK, have questioned whether their high cost, compared with traditional NSAIDs, is justified. The key defense of leading players Merck & Co and Pfizer has been that the lower incidence of gastrointestinal complications associated with COX-2 products actually increased the cost effectiveness of these medications. With suggestions that Celebrex is inferior to Vioxx in this respect, the removal of Vioxx from the market may see physicians question this defense, and increasingly opt for traditional NSAIDs plus a proton pump inhibitor (PPI) for patients at risk of gastrointestinal side effects.

The views of key opinion leaders have differed widely in this respect, with industry opinion leaders seemingly holding diverse views on the precise impact of Vioxx's withdrawal. This uncertainty is unlikely to be resolved until prescribing data becomes available. Datamonitor expects Celebrex to pick up a significant share of existing Vioxx patients, but anticipates the COX-2 market as a whole to decline, as fewer new patients are prescribed COX-2 products.

Prior to the withdrawal of Vioxx, Datamonitor forecast the COX-2 market (defined as Bextra, Celebrex, Vioxx, Dynastat, Arcoxia, Prexige and Mobic), to grow at a CAGR of 2.8% between 2004 and 2010, reaching sales of $9,099 million. This forecast has now been reduced to $7,056 million in 2010, representing an average annual decline of 0.4% between 2004 and 2010, as a proportion of Vioxx patients leave the COX-2 market, and with lower uptake of premium priced products Bextra and the pipeline COX-2s among new patients now anticipated.

Despite expecting the COX-2 market to remain static, two key COX-2 products are expected to directly benefit from withdrawal of Vioxx. Forecasts of both Pfizer's Celebrex and Abbott/ Boehringer Ingelheim's Mobic (meloxicam) have been increased following this event.

The key factor driving Mobic's success lies in its differentiation from the remainder of the COX-2 market. While the drug has some selectivity for cyclo-oxygenase II, and therefore may be associated with a lower rate of gastrointestinal adverse events than other NSAIDs, it is not a specific COX-2 inhibitor. Abbott and BI may therefore be able to distance the drug from association with cardiovascular side effects in a way that some of the true COX-2s may struggle to. Although this product is expected to suffer from generic competition in 2005, until that time, sales are expected to be boosted by patient switching from Vioxx. Forecasts for 2005 sales for this product are $996 million, compared to the previously forecast $442 million.

In the case of Celebrex, Pfizer's marketing strength will ensure this product is a key beneficiary among those patients currently taking Vioxx that will be switched to another COX-2. The 2005 forecast for this drug has raised from $2,472 million to $3,677 million, as it benefits not only from direct patient switching from Vioxx, but also from reduced competition from Bextra and other new COX-2s.

Initial data, according to a report in the Wall Street Journal, suggests that of the 2.4% of Vioxx users that switched drugs within 24 hours of the announcement, 58% received either Celebrex or Bextra.

Merck & Co.'s ethical revenues amounted to $22,485 million in 2003, and were forecast to decrease at an average annual rate of 0.4% between 2003 and 2010, due to the loss of patent protection of three of its five blockbuster drugs, Zocor (simvastatin), Fosamax (alendronate) and Cozaar (losartan).

With Vioxx off the market, Merck will lose one of its only two blockbuster drugs not to face patent expiry in the short to medium term, with Singulair (montelukast) being the other. Without Vioxx, and with Arcoxia's prospects being significantly reduced, Merck's ethical sales are forecast to fall at a faster CAGR of 1.7% to 2010, recording sales of $20,502 million in 2004, $22,139 million in 2007 and down to $19,969 million in 2010.

Meanwhile, Pfizer's ethical sales forecast has received a boost from this event, and is now forecast a CAGR of 2.7% between 2003 and 2010, taking ethical sales to $47,649 million, up slightly from the previous forecast of 2.6% taking sales to $47,569 million. Pfizer is also expected to suffer from generic competition to several of its major brands over the forecast period, with all of its nine blockbuster products in 2003 facing patent expiry, except for Viagra (sildenafil) and Celebrex. Pfizer will therefore be watching development of the COX-2 market keenly following this event, and will do all it can to protect revenues in its COX-2 franchise.

The competitive positioning of Pfizer and Merck & Co. has diverged over the past few years and the loss of Vioxx will accelerate this process. From being the number one pharmaceutical company in terms of ethical sales in 1999, by 2002, Merck had dropped to third place, $7.9 billion behind GSK and $6.8 billion behind Pfizer. Then, in 2003, a $17 billion gap opened up between Merck and previous nearest rival Pfizer, following the latter's acquisition of Pharmacia. By 2010, Merck was forecast to fall to 7th position, but following the withdrawal of Vioxx, The company is now forecast to drop to 9th position, as a combination of loss of Vioxx and generic competition to its other leading brands takes its toll.

Merck & Co. has historically been resistant to a merger, and as recently as November 2003, it was busy denying rumors that it was to acquire partner Schering-Plough. However, M&A may now be the only way for Merck to achieve growth in the increasingly competitive pharmaceutical market. Schering-Plough, with its ethical sales forecast to grow at a CAGR of 5% between 2003 and 2010 (well above the average of 2.9% for the top 10 pharmaceutical companies), would indeed boost Merck's growth prospects. Whether Merck will be in a position to make any major acquisitions in the light of Vioxx's withdrawal and the likely litigation costs associated with this is another matter.

But I think the whole market is essentially a trainwreck... watch Celebrex and Bextra - there're rumblings about the FDA needing to yank more drugs off the market and that'll have big consequences for everyone in this business. I just wrote an article for SCIP's Competitive Intelligence Magazine about the implications of the Vioxx situation, alongside the Oracle/PeopleSoft consequences, and Section 409 of Sarbanes-Oxley. As always, I'd be interested in any feedback. I'm doing a presentation in a couple of weeks at CBI's Philadelphia "Pharmaceutical Decision Support" Conference on corporate governance, so Merck and SarbOx are very timely topics.

- Arik

PalmOne Finally Gets It Right: The New Treo 650

After spending most of October OTR (on the road) – feeling guilty for not having updated my Weblog much over the past few weeks, despite having been given ample opportunity to do so during flyover, I thought I'd at least make mention of some of the more significant October events in business and competition – here's my top 12 list:

1. Merck's Vioxx Withdrawal
   
2. Orbitz Acquisition by Cendant
   
3. Virgin Galactic & The X-Prize
   
4. Chiron's Flu Vaccine Debacle
   
5. Fannie Mae's Financial Shenanigans
   
6. Sun Almost Losing Java to Kodak
   
7. Howard Stern Casting Lot with Sirius
   
8. Britney Spears Becoming Britney Federline
   
9. Marsh & McLennan versus Eliot Spitzer
   
10. Sinclair Broadcasting's Cave to Investor Pressure
    
11. Wisconsin's Unreal Football Win Over Purdue
    
12. Boston Red Sox Finally Winning the World Series

Alongside this, I thought I’d leave October behind by blogging the most personally stand-out and interesting event of the month for me – palmOne’s launch of the Treo 650 last week in San Francisco... FINALLY!

After arriving for my second trip to the West Coast this month (Palm Springs last week for Frost & Sullivan) on Sunday 24 October, I checked in at the KMWorld 2004 conference in Santa Clara, gave my pre-conference half-day workshop on CI software applications and connected with friends Steve Barth and Madan Rao to journey in my spaciously appointed Dodge Magnum rental up to the Hilton in San Francisco where Steve slipped us into the press event before the week’s Moscone-HQ’d CTIA Wireless exhibition. (While the Magnum rode nicely, I can’t recommend it for the tight switchbacks and bottoming-out hills and valleys of downtown SF, plus the turning radius is awful… but I digress…)

We got checked into CTIA’s Oktoberfest-themed event – replete with free beer and cheese and sausages – and proceeded to gorge ourselves on equal helpings of German-inspired stand-up cuisine alongside all the wireless hi-tech – software, services, hardware offered up by the titans of the industry across at least 25 demo booths. Besides all the cool GPS and Bluetooth apps, without a doubt the show-stealer was the Treo 650 – available on the Sprint network in November and elsewhere presumably later on.

I have to say that, after my pan of the Treo 600 almost a year ago, the 650 fixes virtually all of the most important shortcomings the 600 suffered from – most notably, the replaceable battery problem, which was explained to me as stemming in the earlier model from the lack of uninterruptible, nonvolatile memory… i.e., if the battery was swapped, the handset would lose all of its data and configs and reset back to factory default… which, in hindsight, makes sense. Plus, they added Bluetooth and a mega-pixel digital camera with video capture that, side-by-side with the 600, is vastly superior and with image quality high enough that the average snapshot-taker could discard a separate camera entirely depending only on this. While I’ve heard the biggest problem with the 600 had been the clarity and reception quality of the phone’s voice-calling itself, and I haven’t had the opportunity to try that out in the 650, but if they’ve pulled off the functional part of the equation, then I’ll be looking forward to getting one myself, although I might wait for AT&T Wireless to be somewhat better digested by Cingular before placing my network bets. Here’s a longer and better review from PC Magazine:

Because the 600 was such a hit, palmOne has been understandably conservative with the new Treo. Although the Treo 650 looks the same, feels pretty much the same, and runs the same programs as the 600, we think it's a worthy upgrade.

Most notably, palmOne has boosted the Treo's screen resolution from 160 by 160 to 320 by 320. The company also added quad-band support and EDGE high-speed data capability to the GSM version, bumped processor speed up to 312 MHz, incorporated Bluetooth for wireless headsets and HotSyncing, slightly enlarged the keyboard and backlit it, and made the rechargeable battery removable.

EDGE support—which doubles the data speed of the previous GPRS version—and the high-res screen will make this model an even more compelling e-mail and Web browsing device. The Treo 650 will come with Exchange ActiveSync to hook up to Exchange 2003 servers and DataViz Documents To Go 7, an application for reading Microsoft Office documents—and the best document reader for any handheld.

There's no WiFi—this isn't the HP iPAQ h6315, the networking jack-of-all-trades handheld. But if you get a version that runs on AT&T's EDGE network, you may not miss WiFi on such a small device. The Treo 650 runs Palm OS 5.4, not the upcoming Cobalt OS. We're not expecting to see any Cobalt devices until 2005.
We got to play around with a unit a few weeks back and loved what we saw. We can't wait to get a Treo 650 into PC Labs to test. Until then, we'll give a cautious thumbs-up to this definite step forward for Palm smart phones.

While I can’t turn back the clock on October (cue vague daylight savings time reference), here’s hoping November proves an altogether more consistently bloggable month... at least for me. The Treo’s back on everybody’s wish list; only this time, deservedly so.

- Arik

JPMorgan Chase & IBM’s $5 Billion Shrug: Palmisano’s Strategic Collapse or Really No Big Deal?

J.P. Morgan Chase & Co. is scrapping a $5 billion outsourcing deal with IBM as the company plans to manage more of its own technology services. "The recent merger between JPMorgan Chase and Bank One created a new firm with significantly greater capacity to manage its own technology and infrastructure. After a rigorous review, the merged firm concluded it now has the significant scale, enhanced capabilities, tools and processes to build its own global infrastructure services organization."

Back in December 2002, when the financial services company announced the seven-year, $5 billion deal to outsource much of its data processing to the world's largest computer company both companies bragged that the contract - the largest of its kind for IBM - would reduce costs, create value and propel innovation at J.P. Morgan. Today, both companies are downplaying the termination.

IBM put a positive spin on the cancellation, stating that it would actually help its 2005 earnings. JPMorgan Chase likewise said the cancellation would have no material impact on its business. The bank noted that IBM remains a key technology partner and provides IT services and products to a number of its businesses. The functions to be reintegrated back into the bank cited by the two are "the previously outsourced portions of its technology infrastructure, including data centers, help desks, distributed computing, data networks and voice networks." IBM said the cancellation could improve earnings because it was still in the early stages of deployment on the contract. It also said its backlog of services will be revised when it announces its third-quarter earnings. IBM estimated a $118 billion services backlog at the end of the second quarter.

Fewer all-encompassing technology services deals are expected in coming years as competition pushes down the size of these agreements, and customers consider doing more themselves. In turn, services providers like IBM are looking to sign more pacts for individual projects like software or data.

Bank One decided to bring its information technology in-house several years ago and has spent over $1 billion to upgrade its entire technology suite, including building data centers. This philosophy has now taken hold at J.P. Morgan.

Plus, this week JPMorgan's president and chief operating officer, Jamie Dimon, announced the opening of two new data centers in Delaware. The $300 million investment will add 100 jobs and support the bank's national network.

Here's an excerpt with some further detail:

Executives at IBM Global Services must have cringed earlier this year upon hearing that J.P. Morgan Chase had tapped Jamie Dimon as its president and chief operating officer. As CEO of Bank One Corp., Dimon scrapped a $2 billion IT outsourcing contract the bank had inked with IBM and AT&T in 1998 under a much-ballyhooed "Technology One" alliance.

Dimon canceled that deal in 2002. Now, he appears to have done it to IBM again.

Industry watchers see Dimon's fingerprints on Chase's decision, announced Wednesday, to cancel the company's $5 billion, 10-year "business-transformation-outsourcing" contract it signed with IBM in late 2002. "After the Bank One experience, he's become a big believer in doing things in-house," an analyst says.

Indeed, Dimon publicly said in 2002 that Bank One's outsourcing experience "hadn't worked out" and that henceforth it needed to "control its own destiny." Dimon joined Chase as a result of its merger with Bank One, which was completed in July.

In a Chase press release issued Wednesday, a statement attributed to CIO Austin Adams uses language similar to Dimon's to explain why Chase nixed its outsourcing contract. "We believe that managing our own technology is best for the long-term growth and success of our company," Adams said in the statement.

Chase says it plans to reel in the 4,000 IT workers it dispatched to IBM under the defunct deal and take back a number of ongoing IT projects.

For its part, IBM is looking to put a positive spin on the news, noting that the contract required substantial up-front investments that would have placed a slight drag on its earnings this year. However, $5 billion in revenue isn't easy to make up. One Wall Street watcher says the loss of the contract should cost IBM about 2 cents per share in annual earnings over what would have been its remaining years. The analyst notes that IBM will enjoy some fees that Chase will be obliged to pay as a result of its decision to cancel the deal.

JPMorgan Chase wanted to get the most out of its newly acquired Bank One assets as well:

Spokesmen say the move actually was based on a desire to make full use of IT assets and processes the company acquired through its July merger with Bank One, which "really changed the equation" in terms of effective IT use, says executive VP Charles Costa.

The financial-services company will have access to a state-of-the-art data center that Bank One opened in Wilmington, Delaware, last week at a cost of $150 million, says Costa, J.P. Morgan Chase's executive VP for global technology infrastructure. Among other things, the building features dedicated fiber-optic lines and new server and storage systems. "This didn't exist for us" when J.P. Morgan Chase struck its outsourcing deal with IBM in 2002, Costa says, adding that the company is better served assimilating Bank One's advanced IT assets than turning them over to IBM to manage.

Bank One's IT capabilities also will help J.P. Morgan Chase meet tech-driven business requirements, such as the Check 21 initiative that lets banks process checks using graphic images instead of paper. "That's a big priority that we need to be well positioned for," Costa says. Last year, Bank One rolled out a system that converts consumer checks into electronic debits for next-day settlements using high-speed imaging.

Bank One recently completed a $500 million initiative to standardize and centralize its IT systems, an effort that's expected to shave $200 million from its annual operating costs by, among other things, eliminating 600 software applications and reducing 11 loan systems to six. "The merger really changed the equation, and Bank One's technology infrastructure is a key part of that," Costa says.

In my opinion the deal's falling apart is really a philosophical shift more than anything and this is somewhat of a blow to IBM's grand corporate strategy of providing technology services to companies large and small around the globe. The 2002 contract was the centerpiece of IBM's transformation from a technology manufacturer to a technology manager, a strategy devised and overseen by the chief executive, Sam Palmisano. The contract with JPMorgan was among the largest such outsourcing contracts ever signed; only a $6.9 billion deal won by Electronic Data Systems to manage information technology for the U.S. Navy was larger. Trying to put the contract loss in the best possible light for IBM is still tough. "The combined firm found itself with an abundance of IT assets," an IBM spokesman, James Sciales, said. "This decision was like other business decisions related to the merger."

The announcement makes me (and much more influential analysts) wonder whether IBM's technology outsourcing strategy - its response to what it calls the on-demand era - is as promising or as profitable as the company has led investors to believe.

"This was Palmisano's grand vision, and this was the reference account," said Fred Hickey, editor of The High-Tech Strategist, an investment newsletter in Nashua, New Hampshire. "This whole on-demand strategy kicked off just a couple of years ago was predicated on these kinds of large accounts they were going to win. Now, not very long after starting it, they're pulling it back. You have to question whether this strategy is going to be successful or if services will be, as Sun's Scott McNealy says, the graveyard for old tech companies that can't compete."

There is no denying that IBM's future is heavily reliant on success in Global Services. Revenue from that unit now accounts for half of IBM's sales, which totaled $89 billion in 2003. Hardware revenue was roughly a third of the company's total sales in the first half of 2004, reflecting IBM's recent exit from the disk drive, consumer PC, semiconductor and chip-packaging businesses and software sales accounted for just 15 percent of revenue.

However, after IBM's decade-long push into services, revenue growth in the unit is slowing and services revenue rose only 2 percent in the second quarter of 2004, compared with the prior year's revenue growth of 9.3 percent.

Indeed, throughout 2003, Global Services provided the only bright spot for IBM in revenue growth, after software sales rose only 1.9 percent last year and hardware, financing and enterprise investments all declined. While services dominate IBM's revenue, gross profit margins in the business - at 25 percent in the second quarter - are the lowest at the company.

Sciales said that the cancellation of the deal has not caused great concern at the company over its on-demand strategy, but IBM is not the only company that has encountered problems with long-term contracts. EDS, its chief rival in this business, has struggled with some of its largest contracts and Cap Gemini, a competitor in Europe, has also had some big problems.

Long-term contracts like these are almost impossible for investors to assess for profitability because, under accounting rules, the companies devising the contracts have wide license in the expenses they can assign to the business during a given period. If expenses are underestimated, the contracts look a lot more profitable than they really are.

The final contradiction cannot be avoided… to paraphrase one analyst, IBM has been touting its on-demand strategy and how great their backlog is as a result, but if losing this contract is a good thing, how can getting more of these contracts also be a good thing?

- Arik

Oprah & Pontiac: Over the Top Product Placement and a 276-Car Giveaway

Pontiac wanted to draw attention to its brand-new sport sedan, and Oprah Winfrey wanted to celebrate the start of her 19th season. The result was Pontiac G6s for 276 surprised audience members on "The Oprah Winfrey Show" and an event that marketing executives say could set a new bar for product placement. As advertisers struggle with viewers either tuning out or fast-forwarding through traditional commercials, product placement has been on the rise.

Winfrey spent about half of the show on the Pontiacs - including a taped visit to the factory where they were made - and the giveaway was featured all over the media. Mary Kubitskey, Pontiac's advertising manager, said the company was looking to reach women, who are Winfrey's primary audience.

The company approached Winfrey about doing a giveaway, but the event grew in scope - and Pontiac decided to gamble by spending a chunk of what would have been used on traditional advertising, Kubitskey said. "Quite frankly, we have a car no one has ever heard of. We knew we had to go really big, and she was the holy grail for us," Kubitskey said.

Winfrey's influence with consumers is well documented. When she launched a book club, its selections were virtually guaranteed a spot on bestseller lists. Her personal trainer, Bob Greene, has his own endorsement deals, and her protege, Dr. Phil McGraw, launched his own successful talk show. Winfrey's annual "My Favorite Things" episode - when she distributes bags of goodies to her audience - inspires such hysteria in the crowd that it spawned a spoof on "Saturday Night Live."

"We're calling this our wildest dream season, because this year on the Oprah show, no dream is too wild, no surprise too impossible to pull off," Winfrey said. Making sure the audience was kept in suspense, Winfrey opened the show by calling 11 audience members onto the stage. She gave each of them a car - a Pontiac G6. She then had gift boxes distributed to the rest of the audience and said one of the boxes contained keys to a twelfth car. But when the audience members opened the boxes, each had a set of keys.

"Everybody gets a car! Everybody gets a car! Everybody gets a car!" Winfrey yelled as she jumped up and down on the stage. The audience members screamed, cried and hugged each other - then followed Winfrey out to the parking lot of her Harpo Studios to see their Pontiacs, all decorated with giant red bows.

One woman stepped up onto the frame of a driver's side door, put her head on the roof and hugged the vehicle. Winfrey said the audience members were chosen because their friends or family had written to the show about their need for a new car. One woman's young son said she drove a car that "looks like she got into a gunfight"; another couple had almost 400,000 miles on their two vehicles.

The real question is, did it work?

Web sites operated by Pontiac and Oprah have reaped the benefits of the giveaway with a "massive" increase in website traffic. Web searches for "Oprah" and/or "Pontiac" increased 1000%. Visits to both websites peaked on Tuesday, with the Oprah website seeing an increase of 864% (over 600,000 visitors) and the Pontiac website seeing an increase of 636% (over 140,000 visitors). Visits from the workplace jumped for both sites, with Oprah's site seeing 60% of its visits from people at work (it usually gets 50%) and Pontiac getting 70% (up from 50%).

According to comScore Networks, visits to Pontiac.com increased by 322 percent over the average of the previous four days with about 85,000 logging on to the site that day. Tuesday was even better when around 141,000 visitors browsed Pontiac.com that day, an increase of 636 percent. Visitors dropped in the following days but were still well above pre-stunt averages, at 76,000 on Wednesday, 74,000 on Thursday and 69,000 on Friday. The previous Friday, the site had drawn 33,000 visitors.

The Pontiac stunt illustrates the lengths innovative marketers will go to in order to break through the ad clutter, and nowhere is the competition to do more intense than among domestic automakers.

The estimated value of the 276 new Pontiac G6s given away on Monday’s "Oprah" is $7.7 million. GM retails the cars for $28,000 each and says the expense of the donation was the equivalent of 50 ads on primetime television. A 30-second ad on Oprah typically costs about $75,000.

The promotion was also the best free publicity "Oprah" could ask for, icing on the cake after posting the highest rating for a season premiere since 1996. The episode earned a 10.1 national rating and also helped boost traffic to Oprah.com as well. That Monday, Oprah.com attracted 346,000 visitors, 551 percent higher than the average of the previous four corresponding days. Tuesday was even better for the site, with 634,000 visitors logging on. Traffic then eased but remained well above pre-giveaway levels, dropping to 290,000 on Wednesday, 244,000 on Thursday and 201,000 on Friday. That was still 259 percent higher than the day before the Pontiac giveaway, when the site attracted 56,000 visitors.

- Arik

Dark Skies: US Airways Skips Pension Payment as Escape Looks Less Likely

US Airways Group told a bankruptcy court on Monday it would skip a $110 million pension payment due Wednesday as it looks to slash costs and avoid liquidation after filing for protection from its creditors over the weekend. I frankly don't think the odds are very good US Airways will ever emerge from Chapter 11 and neither do most observers. Their operating costs are just too high to compete with low cost carriers that don't have such pension funds to support… and the airlines themselves have managed to so commoditize their business that competitive differentiation is hard to come by.

The decision to miss the payment to pension plans covering mechanics and flight attendants gives the airline financial breathing room but the judge presiding over the case said he would hold a hearing on the matter Oct. 7.

The No. 7 U.S. airline, which filed for its second bankruptcy in as many years on Sunday, did get permission on Monday to continue operating using a loan it secured last year with the help of a guarantee from the federal Air Transportation Stabilization Board.

The company, which negotiated new relief from the loan board, still owes more than $700 million to the government.

US Airways aims to cut costs in a bid to become more like the discount airlines that threaten its survival, but analysts said the job would be difficult without additional financing.

"With no (debtor-in-possession financing) and with no serious prospect for an equity investor injecting cash into the carrier, you'll need to see a radically different cost structure in place by 2005," said William Warlick, senior credit analyst for Fitch Ratings.

When a company goes bankrupt, its debt ratings shift to default and its stock usually sinks as investors expect shares to be worthless by the end of the bankruptcy process.

US Airways said current management had no plans to liquidate the carrier. "This management team isn't here to preside over a liquidation," US Airways chief bankruptcy lawyer Brian Leitch told the court.

"There is no reason in the world that the plan cannot be successful. We won't ask for unrealistically low costs," Leitch added.

US Airways has said it must cut costs by $1.5 billion -- $800 million of which it hopes to get from labor unions that yielded nearly $2 billion to help the company out of its first bankruptcy.

"We're still talking, we talk every day, we're still working very hard," Chief Executive Bruce Lakefield told reporters outside court about thus-far-unsuccessful efforts to win givebacks from the airline's unions.

US Airways did not rule out the possibility that labor contracts and pension agreements could be rescinded if the talks fail, but the court would have to agree.

US Airways is arguing its case before the same judge, Stephen Mitchell, who approved its initial restructuring in March 2003.

The company told Mitchell it also cannot pay $19 million it owes to its pilots' retirement plan. The previous plan for pilots was terminated during the company's first bankruptcy and replaced with a cheaper plan.

Soaring fuel costs, $300 million higher than expected at US Airways -- and weak sales amid competition from low-cost rivals like Southwest Airlines are at the root of US Airways' problems.

US Airways was the first big U.S. carrier to enter bankruptcy during the industry's worst downturn, accelerated by the Sept. 11, 2001, hijack attacks. It filed its first bankruptcy in August 2002, followed months later by No. 2 United Airlines, which is still in Chapter 11.

Delta Air Lines, the No. 3 U.S. carrier, is fighting to avert a filing.

While Lakefield said discussions with the unions on possible concessions continue, labor groups said the company's plan to skip pension payments could complicate negotiations on concessions.

"US Airways management has thus far demonstrated an overwhelming inability to look beyond labor costs for any means to replenish falling revenues," said Randy Canale, president of the US Airways unit of the International Association of Machinists.

However, the company's financial problems are so daunting that industry experts agree with the company that labor must concede givebacks.

"These workers have chosen not to (take paycuts) voluntarily, so it will be imposed upon them," said Gary Hindes, managing director at Deltec Asset Management where he runs a distressed securities fund. "US Air probably is a goner."

The company listed assets of about $8.8 billion and liabilities of $8.7 billion. It has about $1.45 billion in cash.

Pension fund Retirement Systems of Alabama, which invested $240 million during the last bankruptcy, owns 36 percent of US Airways. The pilots' union, the Air Line Pilots Association, holds a 19 percent stake.

The U.S. government, through its loan guarantee, holds 10 percent. General Electric Co., a supplier of regional jet financing, owns 5 percent.

Despite the dark clouds hanging over the airline, we have to ask ourselves if there’s any way to save the other five of the six majors? To do that, we have to ask why so many airlines are struggling right now. I found a great article on NYTimes.com about it:

High fuel prices and the post-9/11 slump have taken a toll, to be sure. But many in the industry - including some of the major-airline executives themselves - say the traditional airlines are finally being brought low by a more fundamental problem of their own creation, one that has been building up for years.

Simply put, they have taught their customers to resent them, and to resist paying the fares they need to make a profit.

"People's expectations for airline service are pretty low," said Peter Cappelli, professor of management at the Wharton School of Business. The situation is so dismal that "things could deteriorate another 20 percent and I'm not sure you could calibrate the difference," he said.

Year after year, under chronic financial pressure, the traditional airlines have made flying less comfortable and less convenient for most passengers. In addition to the cramped seats on crowded planes, with cutbacks or extra charges on nearly ever facet of service from the food to baggage allowances, travelers navigate complicated fare systems that still exact sky-high "full" prices from some passengers while dangling ever-changing discounts before others. These systems, intended to reap as much revenue as possible while still filling the plane, have left consumers feeling that there is no such thing as a fair price for air travel and have encouraged them to game the system.

On top of that, the airlines have added one restriction after another to their tickets in recent years, making it expensive or impossible for passengers to change their travel plans after booking. The chief consolation offered for all these irritations - frequent-flier miles - have been drained of value as the airlines make redemption harder by limiting the available dates and seats.

And in recent months, several of the major airlines have begun charging a $5 fee to buy tickets over the phone and $10 to buy them at an airport counter, where "How can I help you?" used to be free.

Even the airlines' "hub and spoke" route systems became a nuisance for many passengers. Though they brought new air service to many smaller cities, they forced harried throngs of passengers to make connections in crowded hub airports to get where they wanted to go, rather than be able to fly nonstop. Meanwhile, the major airlines set a trap for themselves in the 1990's, when the long economic boom produced some fat years that many executives thought would go on indefinitely.

In an industry already famed for high pay and lavish benefits, companies locked in high, hard-to-cut costs with union contracts that were the envy of the labor movement. The airlines could afford those costs only as long as the public was willing to pay high fares for their reputation and service.

The rapid growth of discount airlines like Southwest and JetBlue, with their bare-bones service and lack of pretensions, shows what many passengers think of that proposition now.

These airlines, which have never held themselves out as anything more than a way to get from here to there, can charge much less than the old majors and still make money because they have avoided the big airlines' big mistakes.

The low-fare airlines' operations are simpler and leaner; their labor costs are much lower; they do not have the financial burden of pension obligations to thousands of retired workers, a major expense for the older carriers; and crucially, they have not annoyed their customers nearly as much.

On the low-fare carriers, passengers are not pampered, but they do not expect to be. People who might be disappointed with the quality of a United meal - or resent being forced to pay extra for one on a Ted flight - do not seem to mind when Southwest gives them just a drink and a bag of peanuts, because that is all Southwest has ever promised them.

While a segment of the market is still willing to pay premium prices for a substantially higher standard of service, it exists now mostly on long-haul and international routes. Flights of just a few hours have become a commodity bought strictly on price, and the market won't bear the fares that the big airlines need to cover their costs. So, in their current form, these companies are not viable any more. The question for the traditional carriers now is whether they can transform themselves into something like the low-fare carriers, or find niches where they can still thrive.

US Airways and Delta have each said in recent weeks that they would drop hubs and eliminate thousands of jobs in an effort to rein in costs. Each hopes to make its operations more like their low-fare rivals. But those hopes depend on the willingness of their workers to accept new cuts in pay and benefits, and investors to pump in more money.

Once the public would have had an emotional investment in the fates of storied names like Delta and United: witness the anguished reaction to Pan Am's closure in 1991. But not now.

There was some sympathy for the airlines in the dark days after Sept. 11, but despite the bailout that Congress approved after the attacks, the industry is still in turmoil, and the continuing drumbeat of bad news has had a numbing effect on customers.

- Arik

Home Depot Opens World’s Largest Home Improvement Store in Manhattan

The Home Depot had a "board-cutting" ceremony last Friday morning at the new Manhattan location marking the opening of the world's largest home improvement store boasting 105,000 square feet of sales space and merchandise. The multi-level store employs 300 associates, including a full-time concierge and is located at 23rd Street between Fifth and Sixth Avenues. The Home Depot's chairman, president and CEO, Bob Nardelli, said, "Our new Manhattan location is a retail marvel and proof positive that The Home Depot continues to break the mold in how we approach new formats, new markets and new customers."

The company will be playing to a more urban crowd at the 105,000-square foot space in Chelsea, an area that already boasts mega-stores like Staples, Best Buy and Bed Bath & Beyond.

Home Depot's first Manhattan store, which opens to the public on Friday, will have a doorman for help in hailing cabs and a concierge to offer information and schedule appointments with designers. It promises same-day delivery of most merchandise, a boon for public transportation-bound urbanites.

"Manhattan is unique, and it has a tremendous customer base opportunity," Robert Nardelli, the company's chairman, chief executive and president said at the store's grand opening on Thursday. "We're confident that with success here, it will give us the opportunity to continue to expand our business."

The store, located on 23rd Street between Fifth and Sixth Avenues in Manhattan, announces itself with orange banners on its facade and features a more classic, homey interior, with white columns and an atrium.

The company says that it has transformed the store for the urban audience through months of working with focus groups and doing customer research.

The store will focus on the upscale, fashionable home items and decor that city dwellers demand, the company said.

"We've got nails. We've got electrical sockets. But we've also got $7,000 rugs," said Tom Taylor, the company's Eastern Division president.

While customers can still buy themselves a miter saw or a cordless drill, those who, for example, don't have room to store large power tools in their studio apartment, can rent tools, which the store will deliver and pick up.

The store will also offer urban-oriented home improvement clinics with names like "Make 500 sq. ft. feel like 5,000 sq. ft." and "How to Create a Garden on a Fire Escape."

Instead of displays of lawn mowers or lumber or sheetrock (which are still available by special order), the Manhattan store has expanded showcases of light fixtures, cabinet hardware and small appliances.

With space at a premium in many Manhattan homes, the new store has focused on storage solutions, offering the help of special closet designers.

There are also down-sized stoves, stackable washer-dryer sets and mini refrigerators, as well as a $2,299 "Gym-In-A-Box" with a treadmill, weightbench and dumbbells that all fold neatly into an armoire. New York-only items include electric fireplaces and 40 one-of-a-kind area rugs.

Home Depot has poured $14 billion into new store construction, store remodeling and technology upgrades over the past four years, Nardelli said.

If they can make it there, maybe they really can make it anywhere…

- Arik

Muzak: Elevator Music No More

Once "Elevator Music," now "Audio Architecture," Muzak creates experiences with music. When General Squier patented the transmission of background music in the 1920s, that is music from phonograph records delivered over electrical lines, he soon found out that it not only soothed the minds of his workers, it enhanced their production. What the general never knew is what his idea would become with 3,000 employees, more than 250,000 subscribers and all 80 million plus listeners worth. Today with offices across the nation and around the world more people listen to Muzak than any music provider in the world and Muzak has become a hip new branding tool for corporate clients eager to keep eyeballs in stores as long as possible. I found an article at USAToday about how Muzak has reinvented itself, over and over, throughout the years:

Every day, Muzak is heard by 100 million people, the equivalent of more than a third of the U.S. population.

But if you're straining to remember the last time you heard sleep-inducing orchestrations of the Beatles played in an elevator or grocery-store frozen-food aisle, you have it all wrong. That was the old Muzak.

Today's Muzak is played in the Gap, McDonald's and Barnes & Noble and in homes via the Dish Network, to name a few. It sounds completely different, featuring combinations of upbeat, toe-tapping songs.

And there are words, real words sung by the artists themselves. Muzak has been doing that for decades. If it's a Beatles song, you'll actually hear Ringo, Paul, George and John. Unless, of course, it's a rendition sung by Tori Amos, Aerosmith or Nirvana.

It's, dare we say, hip?

"It's been one heck of a ride," says Alvin Collis, who is head of strategy and branding and joined Muzak 19 years ago. Collis, a thin 52-year-old wearing a dark T-shirt, pants and high-top sneakers, once played in a punk-rock band and admits to being fired as a child by his violin teacher. Not exactly how most people picture the typical Muzak employee.

Yet Collis is one of the people who has orchestrated Muzak's transformation into a much more modern company, an effort that officially began in 1997.

But Muzak's mission is still the same: provide music for offices, restaurants, retailers and other businesses to help maximize productivity, morale and sales. While the company has been successful in its 69 years — more than half of companies that play music play Muzak — it's still fighting the "elevator music" stigma. And Muzak officials have their sights set on the numerous businesses sitting in silence.

"If we have a problem, it's that we haven't told the story loud enough and clear enough," Collis says.

Muzak was founded by Gen. Owen Squier, who during the Great Depression patented the transmission of music over electricity lines. The name Muzak combines the word "music" with "Kodak," Squier's favorite company.

Squier introduced music into typing pools to help boost productivity. In the 1930s, as buildings grew taller and elevators became more prominent, Muzak was piped in to soothe the nerves of riders leery of the new contraptions. Thus, elevator music was born.

In the subsequent decades, Muzak spread into retailers, restaurants and other businesses countrywide. During Eisenhower's administration, Muzak was played in the White House. Astronauts even listened to Muzak in the Apollo lunar spacecraft.

Today, Muzak is a privately held company. The principal owner is ABRY Partners, a Boston-based media investment firm.

Muzak estimates it is heard in about 60% of the U.S. businesses that subscribe to music programming.

Many companies seek Muzak to customize their music, creating a personal soundtrack that can be heard only in their stores.

Moe's Southwest Grill is one of those firms. Not only does the Atlanta-based company want a soundtrack for its 133 casual restaurants to reflect its fun, upbeat style, it has another special request for Muzak: All of the artists must be dead.

"Our music is a tribute to the heroes of the days gone by, the legends who will never be able to enjoy Moe's food," says Carl Griffenkranz, head of marketing at Moe's. The music "creates an energy in our restaurant that we feel makes us successful."

On a recent visit to a Moe's in Charlotte, artists as diverse as Roy Orbison, Johnny Cash, Jimi Hendrix, Frank Sinatra and Marvin Gaye were heard. Griffenkranz says Ray Charles, who died in June, will be added soon.

Even though Muzak had evolved into a modern company, officials realized in the mid-1990s that to most people, Muzak was still, well, Muzak. And the company wasn't helping to change that image. Promotional materials were drab. There was no brand uniformity, be it the business cards or the 1,000 vans driven by technicians across the USA.

It became evident that a radical effort to better promote the brand was needed. Collis says it was a "necessity" from a personal level.

"People would ask, 'Where do you work?' and I wouldn't want to tell them," he says.

Collis, along with Kenny Kahn, head of products and marketing, went on a crusade, hiring a design firm to overhaul the Muzak brand.

A modern, simple logo — an encircled, rounded "M" — emerged, gracing updated business cards and vans. Edgy, oversize brochures were developed, featuring large lettering and examples of well-known, modern clients, with the words, "What does your business sound like?"

The company took its efforts to become modern to a new level at its headquarters, a futuristic-style building located just south of North Carolina's border near Charlotte. It built the 120,000-square-foot building four years ago, when the firm moved from Seattle, in part to take advantage of the South's lower operating costs.

"Once you decide to become a modern brand, you have to live that way," says Kahn, 42, a down-to-earth man who has been with the company seven years.

From the parking lot, visitors can immediately hear music. On a recent day, songs from the "New Grooves" program were being played, a combination of upbeat, jazzy music with a touch of Caribbean flair. It's hard not to bob your head a bit to the beat on your way to the door.

Kahn explains that the building was designed with an Italian city in mind. Near the entrance is the "city center," where employees hold spur-of-the-moment meetings and meet clients. Sometimes the entire staff greets potential clients. When the folks from Red Lobster restaurant came, staff members all wore Red Lobster bibs. Bowling lanes were set up for AMF Bowling Worldwide's visit.

Exposed wires snake across high ceilings, and the floor is solid concrete. There are no offices. Even the CEO doesn't have a door to close. Twenty-five conference rooms are sprinkled about, made of varying materials, including bamboo and plastic. Mailroom workers deliver packages riding an orange bicycle.

And although there is an elevator in the building, it does not have a speaker.

Everyone is dressed casually. On a recent hot day, employees were wearing shorts, jeans, T-shirts and flip-flops. There's not a tie in sight. Collis says employees often bring their families from out of town to see their workspace; he considers that a good sign.

As expected, music can be heard throughout the building. It's played fairly loudly — loudly enough that a visitor is always somewhat aware of what's playing, but somehow remains undistracted. It's a soundtrack to what seems like a fun place to work.

"There's a feeling here that doesn't exist in a lot of places. I see it. I feel it," says Lon Otremba, Muzak CEO for nine months now. He notes that when Muzak recently held a Saturday job fair to fill about 115 spots, 3,000 people showed up. Employees conducted interviews from 8 a.m. until past 10 p.m.

Otremba, 47, is quick to point out that the company is blessed with a long legacy. In its 69 years, Muzak has established itself in the business world. That's where being a household word pays off.

"We have a legacy on which to build; we don't have to create it," Otremba says. "The intention here is not to put a keg of dynamite under it and blow it up.

Yet Otremba knows firsthand there is a Muzak stigma. Last year, when he was wooed from America Online, where he was the executive vice president of the Interactive Marketing Group, the recruiter initially told him everything about the company except for one minor point: the name. She wanted him to listen without any prejudices about Muzak. It wasn't until he had all the information that she finally told him what the company was.

Otremba laughs at the story now, saying he would have considered the job anyway.

Going forward, Muzak will continue to work to fight the elevator-music label, Otremba says. It's taken years to get this far, he says, and it will take many more years to get where they want.

As part of that effort, last month the company unveiled a new Web site design at www.muzak.com, incorporating music, quickly moving pictures and lots of company information, including its seven-decade history.

Company leaders are setting their sights on expansion both in the USA and abroad, where they have 13 offices in places such as Japan, Canada, Mexico and the Netherlands. While they note that Muzak is by far the leader in its industry, many companies still do not subscribe to any music providers. Muzak doesn't plan to enter the consumer market to compete with firms such as XM Satellite Radio, instead choosing to focus on commercial clients.

The challenge is to convince companies that do not play music that life would be better with Muzak, a challenge Otremba says the company is finally ready to tackle.

"I believe we will rewrite the rules again," Otremba says.

- Arik

Novell Reorganizes – Linux & Identity Markets Compact for Two Hybrid Divisions

Novell has finally decided Nterprise just doesn’t warrant its own division anymore, since the purchase of SuSE Linux a few months back, and alongside identity management, constitutes the future of the company. If reviewers assessments are accurate, indeed, it would appear a reinvigorated Novell is getting back in the game after languishing through the Internet era of network operating systems.

Novell vice chairman Chris Stone on Monday sent staff members an e-mail informing them of the organizational changes. Stone said Novell's future success will be based on two key initiatives: the now-familiar Linux and open-source platforms and related services, and a series of strategic customer solutions based on identity management.

"These are both significant growth opportunities and markets where Novell already has substantial expertise and presence," Stone said in the memo. "In combination, these represent the core strategy of the company.

"In order to align Novell's product development efforts with our corporate strategy and go-to-market model, I am announcing some organizational changes, effective immediately."

Bruce Lowry, Novell's San Francisco-based director of public relations, on Monday confirmed the authenticity of the e-mail, telling eWEEK that Novell "is strategically aligned behind platforms and identity-driven solutions."

"These moves were designed to align product development behind these two major strategic goals," Lowry said.

There are currently four product business units at Waltham, Mass.-based Novell: Nterprise, Secure iServices, Resource Management and SuSE. These four are being morphed into "two major units focused on our two core strategies," Stone said, adding that Identity Services would combine the existing Resource Management and Secure iServices teams, while the Platform and Application Services would now be a combination of the existing Nterprise and SuSE units.

David Patrick will become general manager of the new product business unit for Linux, Open-Source Platforms and Services. Reporting to him will be Markus Rex, vice president for SuSE; Nat Friedman, vice president for the desktop; Angie Anderson, vice president of applications and services; Ed Anderson, vice president of product marketing; and Rob Kain, director of product management.

David Litwack will become general manager of the Identity-Based Solutions business unit, with the following people now reporting to him: Kent Erickson, vice president of identity-based solutions; Frank Auger, vice president of product management and marketing of identity-based solutions; Carlos Montero-Luque, vice president of resource management development; and Alan Murray, director of product management and marketing, resource management.

Stone ended his e-mail by telling Novell employees, "With everyone's help, this new alignment will help drive Novell toward its key strategic goals and future success."

With the formal reorg around the renewed Linux focus, the old saying appears to ring true: When you can’t beat ‘em, join ‘em.

- Arik

InBev: Belgium's Interbrew Acquisition of Brazil’s AmBev Surpasses Anheuser-Busch to Become World’s Largest Beer Maker

With number one or two positions in 20 key global markets and 13 percent of the world’s beer brewing volume, Interbrew’s purchase of AmBev has created the new powerhouse worldwide beer competitor: InBev.

Shareholders voted in favor of the deal at an extraordinary meeting in Brussels, bringing Interbrew one step closer to creating a global behemoth with brands such as Stella Artois, Bass, Beck's, Brahma, Rolling Rock and Skol.

Interbrew shareholders approved the first in a series of resolutions enabling the deal, allowing Interbrew to give AmBev's controlling shareholders 141.7 million shares in the new company in return for their stake in the Brazilian brewer.

The deal, valued at about 8 billion euros ($9.66 billion), will close once AmBev shareholders give it their blessing at a meeting in Sao Paulo.

"The transaction creates a global platform for the combined group to develop its three global flagship brands, Brahma, a top-ten brand worldwide, and what we believe are the two fastest growing international brands, Stella Artois and Beck's,'' Interbrew said in a statement.

The deal allows Interbrew access to Latin America, where it had scant presence in the past. AmBev gains the opportunity to expand outside of the Americas.
European regulators have already approved the deal.

Although Brazil's main Cade anti-trust watchdog has yet to rule on it, its head has said it appeared to pose no competitive threat to rivals.

The approval was expected given that the controlling shareholders of Interbrew and AmBev created with the deal.

They will remain firmly in control of the new company and have equal representation on its 14-member board.

The free float, however, will fall to 26.2 percent from Interbrew's 35 percent and 23 percent at AmBev, also known as Companhia de Bebidas das Americas.

Interbrew Chief Executive John Brock will take on the same job at the new company, to be based in Leuven, Belgium, Interbrew's current headquarters.

Interbrew expects 280 million euros of annual cost savings.

Despite initial skepticism, investors have warmed to the deal, pushing Interbrew shares nearly 10 percent higher since the deal was first announced in March.

AmBev's preferred shares have slumped about 18 percent since early March but its common, or voting stock, has gained some 66 percent over the period.

Interbrew has said it would consider listing the new company on New York Stock Exchange in the next two years.

With the next six months, Interbrew will make a tender offer for AmBev's remaining voting shares at a cost of up to 1.4 billion euros.

Brazilian regulators recently rejected a request by the country's largest pension fund to determine whether the deal would hurt minority shareholders.

- Arik

Conrad Black & the Hollinger Kleptocracy

In the wake of the sale of London’s Daily Telegraph, I noticed this Washington Post piece on the ‘kleptocracy’ that was Hollinger International. Not to Mr. Black: comparisons to Dennis Kozlowski should not be considered complimentary...

Press tycoon Conrad M. Black and other top Hollinger International Inc. officials pocketed more than $400 million in company money over seven years and Black's handpicked board of directors passively approved many of the transactions, a company investigation concluded.

A report by a special board committee singled out director Richard N. Perle, a former Defense Department official, who received $5.4 million in bonuses and compensation. The report said Perle should return the money to the Chicago company.

The report also criticized the board's audit committee, which includes former Illinois governor James R. Thompson and former ambassador Richard R. Burt, for failing to question Black's large management fees. It said it was reasonable for former secretary of state Henry Kissinger, another independent director, to rely on the audit committee.

Black's holding company said the report was filled with "outright lies."
Black resigned in November after an internal investigation showed that he and associates, mainly chief operating officer F. David Radler, received money that the company should have kept. Hollinger International is suing Black -- a native of Canada who is now a British citizen -- and others for $1.25 billion in damages for their alleged pillaging of the company, which owns the Chicago Sun-Times, the Jerusalem Post and other newspapers. It recently sold London's Daily Telegraph.

The new report, filed with the Securities and Exchange Commission late Monday, added details of what it called the "corporate kleptocracy" Black and Radler created at Hollinger. It said they treated the company as a "piggybank" and fashion accessory, with Black using the prestige of the newspapers to gain access to the wealthy, powerful and royal.

For example, the report said Black and his wife, Barbara Amiel Black, treated the Hollinger corporate jet as a private shuttle between cities such as Chicago and Toronto and vacation spots. They took frequent trips to Palm Springs and one 33-hour round trip to Bora Bora, which cost the company $530,000, the report said. It also said Black charged the company $90,000 to refurbish a Rolls-Royce and used $8 million in company money to buy memorabilia of President Franklin D. Roosevelt, about whom Black wrote a book.

From 1997 to 2003, the report said, Black, Radler and other controlling shareholders steered 95.2 percent of Hollinger's adjusted net income into their personal accounts. Black's Hollinger Inc. has 68 percent voting control of Hollinger International and 18.2 percent equity interest.

"Behind a constant stream of bombast regarding their accomplishments as self-described 'proprietors,' Black and Radler made it their business to line their pockets at the expense of Hollinger almost every day, in almost every way they could devise," said the report, prepared by Richard C. Breeden, a former SEC chairman. "At Hollinger, Black as both [chief executive] and controlling shareholder, together with his associates, created an entity in which ethical corruption was a defining characteristic of the leadership team."

Ravelston Corp. Ltd., Black's holding company, disputed the findings. "The special committee's report is recycling the same exaggerated claims laced with outright lies that have been peddled in leaks to the media and over-reaching lawsuits since Richard Breeden first began his campaign against the founders of Hollinger International," Ravelston said in a written statement. Black filed a defamation suit against Breeden in February. "The report is full of so many factual and tainting misrepresentations and inaccuracies that it is not practical to address them in their entirety here."

The report said Perle "breached his fiduciary duties" as a member of the board's executive committee, signing documents without evaluating or, sometimes, reading them, including those that allowed Black and Radler to evade audit committee scrutiny. Perle received more than $3 million in bonuses and hundreds of thousands of dollars more in compensation from a Hollinger subsidiary that invested in new media companies during the dot-com boom. The report said Hollinger International put $63.6 million into 11 companies Perle recommended and lost nearly $50 million. "Perle was a faithless fiduciary . . . and . . . should not be allowed to retain any of his Hollinger compensation," the report said.

Perle did not return a call to his office and e-mails asking for comment yesterday. He said in an interview in May that any suggestion "that actions or decisions taken by me involved a quid pro quo for compensation I received . . . is absolutely false."

The report said Black and others diverted Hollinger money through Ravelston, which charged management fees when Hollinger sold properties. The audit committee, for example, approved $52 million for Ravelston when Hollinger completed its sale of Canada's National Post newspaper to CanWest Global Communications Corp. in 2001.

Members of the company's audit committee either didn't know or didn't care what Black and Radler were doing, probably because they were too close to Black, the report said. "Black named every member of the board, and the board's membership was largely composed of individuals with whom Black had longstanding social, business or political ties," the report said. "The board Black selected functioned more like a social club or public policy association than as the board of a major corporation, enjoying extremely short meetings followed by a good lunch and discussion of world affairs."

Black said the board's audit committee signed off on his decisions. The report said the audit committee should have pushed Black and Radler for more information.

Laura Jereski, an analyst with minority shareholder Tweedy, Browne Co., which spurred the creation of the special committee, said yesterday's report is "a step in the right direction."

The report is inconclusive about the directors, she said, as it withholds its opinion on how much blame they should receive for the actions of Black and others. "So much money left this company," she said. "The special committee is fully empowered to seek all remedies. We just want our money back."

The report contains e-mails from Black to other company officials about Perle, whom Black called a "trimmer and a sharper" who was profiting from Hollinger's name in establishing his own venture fund.

"I have been exposed to Richard's full repertoire of histrionics, cajolery, and utilization of fine print," Black wrote. "He hasn't been disingenuous exactly, but I understand how he finessed the Russians out of deployed missiles in exchange for non-eventual-deployment of half the number of missiles of unproven design." Perle was an assistant secretary of defense in the Reagan administration.

The report also contains some unexpected humor. When detailing the "Happy Birthday, Barbara" dinner party that Black threw for his wife at New York's La Grenouille restaurant ($42,870), the authors noted: "At least Black's choice of venue for his wife's birthday was less expensive than Dennis Kozlowski's party for his wife on Sardinia that was charged in part to Tyco."

- Arik

Foster’s Staggering over U.S. Wine Business

Since I’ve just gotten back from Australia and one of the feedback items on my evals was to have more Aussie examples to share of competitive strategy, I thought it’d be fun to take a look at Foster’s Group (“Australian for Beer”, according to the American ad campaign, although I never did find the lager on tap ANYWHERE in Sydney… I had mostly Tooheys New and VB). It seems Foster’s has hit a rough patch as a result of disappointing results from its former "growth engine" in Beringer wine business.

Foster's Group's drifting share price yesterday had its biggest one-day fall in 10 months after the global drinks company told investors to wait until 2006 before its struggling US wine business fully recovered and to expect only moderate earnings growth next year.

The group disappointed investors by announcing a net profit, before significant items, of $469.4 million - down more than 17 per cent on the previous year's $568.1 million. This was below market forecasts of between $479 million and $515 million.

Foster's share price shed 10 ¢ yesterday to close at $4.57, down more than 2 per cent. The weaker profit was propped up by the $329.9 million net gain from the spin-off of its pub assets, Australian Leisure & Hospitality.

Most of the damage was done by the group's Beringer Blass Wine Estates (BBWE) business which cost Foster's $1.5 billion four years ago when it was acquired as the growth engine for what was once a pure brewing company.

BBWE's earnings before interest tax and amortisation and significant items (EBITAS) crashed 32 per cent, falling from $428.8 million in 2003 to $291.7 million.

Like its competitors, BBWE has been forced to sacrifice some of its profit margins in the face of the California grape and wine glut, price wars and US consumers quaffing cheaper wines.

Announcing his first full-year profit result since taking the helm in April, Foster's chief executive Trevor O'Hoy said Beringer's figures were "unacceptable".

Some of the pain was set to continue in the first half of this new financial year, but a significant turnaround in the second six months was expected.
Foster's is counting on radical surgery, unveiled by Mr O'Hoy in June, to overhaul the ailing wine unit. This includes write-downs, reduced inventory levels, increased marketing spending and installing a team of new managers.

Mr O'Hoy said there would be no wine acquisitions for 12 to 18 months, and not before BBWE was fixed. "Clearly we've got to run the businesses we've got well and get towards the optimum performance before we even consider m&a (mergers and acquisitions)," Mr O'Hoy said.

The group's second problem-child, wine clubs and services, is also being overhauled and Mr O'Hoy signalled yesterday that Foster's might jettison the business if it wasn't fixed.

EBITAS for services fell 49.4 per cent to $17.8 million and clubs' EBITAS fell 10 per cent to 44.3 million.

Mr O'Hoy said the aim was to keep these as part of the group, partly because it also provided good competitive intelligence about the market, but the businesses needed to be integrated into the group's operations over the next two years and start generating returns of at least 15 per cent.

"If you can't see a 15 per cent return at the end of that period, it's not a business you would want to hang on to," he said.

The group has forecast single-digit earnings per share growth of between 5 per cent and 9 per cent per cent in 2005 - about half coming from share buybacks - with growth reverting back to 10 per cent-plus levels in 2006.

Australian for beer, indeed; but apparently, not American for wine.

- Arik

Dairy Queen’s "MooLatte" Product Moniker Controversy

Over the past few weeks, Dairy Queen’s been running into a few rough spots with its new MooLatte coffee/ice-cream treat. The commercial to launch the drink was bashed by most marketing savvy ad critics; but, the more potent criticism has been the stunning resemblance between the words "MooLatte" and "mulatto":

The Houston Press, an alternative weekly in the New Times chain, agrees that the name of Dairy Queen's new frozen drink, the MooLatte, sounds so much like "mulatto" as to call into question the mental competence of Dairy Queen's corporate leadership. That the Minneapolis-based company would deliberately allude to the hoary stock character of the "tragic mulatto" in naming a drink of light brown hue is too ghastly a possibility to consider. But could DQ really be so dim as not to notice the similarities between "MooLatte" and "mulatto"? Houston Press staff writers Richard Connelly and Craig Malisow have laid out compelling evidence that it is.

Malisow, working under Connelly's close direction, placed a call to Dairy Queen spokesman Chad Durasa, whose name appeared on an Aug. 3 press release inviting residents of the Lone Star State to "bring your favorite cow" to Dairy Queen on Aug. 24 to receive a free MooLatte. Malisow's ensuing Ali G-style interview, as related in the Aug. 12 Houston Press, was so extraordinary that I felt compelled to ask both Connelly and Malisow whether any of it was made up. They assured me it was genuine. Here it is...

But, you'll have to visit Slate.com for the full interview - it's pretty good stuff... In searching around the DQ site this week, the MooLatte product line appears to have pretty much disappeared from view, as the company tries to figure out how to handle this, I’d reckon.

For me, having tried the Mocha MooLatte (more than once), I thought it rivaled the Starbucks Mocha Frap (Venti only for me, thanks)… but it wasn't until later that, I learned both drinks have somewhere around 700 calories, and all of ‘em of the bad-for-you variety. It seems DQ's otherwise deft move to expand the customer base by adding caffeinated beverages to the product mix may ultimately fail to impact the Starbucks horde to defect to the Brazier.

- Arik

Heads Roll at HP as Fiorina Pink Slips Three Top Execs from Enterprise Server & Storage Business

Reinforcing perceptions of a weaker-than-expected tech-spending rebound, Hewlett-Packard has given top enterprise server and storage executives, Peter Blackmore, Jim Milton and Kasper Rorsted, their walking papers in the wake of a $208 million third-quarter operating loss for the division; meanwhile Dell racked up quarterly net profits rising 29 percent compared with a year ago to $799 million on stronger server sales. Earnings per share struck a record 31 cents, up from 24 cents a year ago.

Dell's server sales were the real boost, after introducing a new, eighth-generation of PowerEdge servers, which features stronger processors and enhanced systems-management software. Sales gained across the Americas, Europe, the Middle East and Africa and in Asia-Pacific and Japan. "Global product shipments increased 19 percent, sharply faster than for the rest of the industry," Dell said. Profitable growth in China during the period included a 41-percent jump in server shipments. Across the Americas, Dell's sales grew 16 percent and it added nearly two points to its leading United States market share, with shipments increasing at more than twice the average of other companies.

On the other side of the tracks, heads were rolling, as execution in such a high-margin business is also the key entry point for up-selling and cross-selling all manner of sundry and kindred products and services to the same customers:

Chairman and CEO Carly Fiorina said Mike Winkler will replace Peter Blackmore as executive VP of the Customer Solutions Group; Jack Novia will replace Jim Milton as the group's senior VP and managing director for the Americas region; and Bernard Meric will replace Kasper Rorsted as the group's senior VP and managing director of Europe.

Winkler has served as chief marketing officer and will retain that role. Novia was senior VP and general manager of the HP Technology Solutions Group. Meric was senior VP of the Imaging and Printing Group for the Europe, Middle East, and Africa region. An HP spokesman said he wasn't aware of any other planned changes.

"It's pretty clear that heads will roll," says Jonathon Eunice, an analyst with Illuminata. "If you're a customer with certain personal relationships with some of the people inside that organization, you'd better brace for change. Anyone with responsibility within that organization is at risk."

Executives on the hot seat could include Ann Livermore, an executive VP who earlier this year was placed in charge of the Technology Solutions Group, which includes Enterprise Servers and Storage, and Bob Shultz, senior VP and general manager of the Network Storage Solutions business unit, Eunice says.

"Execution issues cost us, and we are therefore making immediate management changes," Fiorina said in the statement.

Solid results by the company overall "were overshadowed" by the Enterprise Servers and Storage Group's performance, where revenue was down 5% year to year and down about 15% compared with the second quarter, she said. The segment suffered an operating loss of $208 million, after revenue declines of 8% year over year in its Business Critical Server business and 15% in its storage business.

Fiorina pointed to three issues that led to problems, resulting in shortfalls in revenue of about $400 million and operating profit of about $270 million. The company "executed poorly" on the migration to a new order-processing and supply-chain system, which led to missing some sales opportunities. The problems also required the company to take special measures to ensure deliveries, including fulfilling some direct orders by its channel partners and expediting orders with air shipment, which led to erosion of gross margins.

Second, there were channel-management issues in Europe, including overly aggressive discounting and a transition to centralized claims process. The channel claims process has been resolved, Fiorina said.

The company also experienced declines in average selling prices in its storage business.

New introductions within HP's storage business in May, as well as those planned for September, are expected to strengthen the company's position in that business, Fiorina said.

Overall, the Enterprise Servers and Storage unit should return to profitability in the fourth quarter, she said.

The company reported earnings of $586 million, or 19 cents per share, on revenue of $18.9 billion in the quarter ended July 31. That compares with earnings of $884 million, or 29 cents per share, on revenue of $20.1 billion in the previous quarter, and earnings of $297 million, or 10 cents per share, on revenue of $17.3 billion in same quarter a year ago.

The company said revenue in personal systems grew 19 percent year-over-year, and sales in imaging and printing rose 8 percent. The company's enterprise servers and storage posted a 5 percent revenue decline, but sales in HP services and software grew 12 percent and 17 percent, respectively.

"Although we are satisfied with our performance in Personal Systems, Imaging and Printing, Software and Services, these solid results were overshadowed by unacceptable execution in Enterprise Servers and Storage. We therefore are making immediate management changes. We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter," said Fiorina.

So, where's the problem - can we blame it on logistics (e.g., the SAP implementation)? Or culture...?

Chuck Kokoska, president of The Computer Specialists (TCS), a Whitesboro, New York-based HP Gold partner, said he has seen a number of problems with shipping delays for a wide range of products, including servers and storage. "I don't know if this will solve the problem," Kokoska said. "There seems to be a major gap between the direction from upper management and the implementation at middle management. The problem pervades the entire organization. There has to be a fundamental change to move back toward the Compaq spirit of 'can-do' vs. the HP spirit of 'we'll think about it.' "

The irony of HP's computer woes was not lost on analysts. HP prides itself on its consulting services division, which helps businesses deploy technology and had third-quarter sales of $3.5 billion, a 12 percent increase over last year.

"HP likes to promote its own internal IT environment and execution as an example of what's possible with customers using their own technology," said Frank Gillett, a Forrester Research analyst. "The bottom line is, yes, it is embarrassing."

HP faces competitive pressure at both the high and low ends of its lines of business. In PCs and inexpensive servers, it competes against Dell and its efficient manufacturing and direct distribution. In larger systems, it competes against IBM's full line of products and its massive consulting business. And top storage competitor EMC saw its earnings rise 33 percent in its most recent quarter. "The industry rap about HP is that they're stuck in a difficult spot," Gillett said. And, in a slow growth market with so many different wars to fight, companies like Dell will continue to take share away from companies like HP.

Hopefully everyone's philosophical about it. I found this presentation of Blackmore's from a year ago introducing the "Darwin" reference architecture, alongside the company's new "Demand More Accountability" ad campaign featuring the Charles Darwin quote below:

It is not the strongest of the species that survive nor the most intelligent, but the one most responsive to change.

- Arik

Tale of Two Cars: Once-High-Flying Saturn & Mitsubishi See Red in Struggle for Traction

Two of my least favorite car companies have fallen on some hard times of late, but perhaps its just karmic justice? I own a Mitsubishi – a ‘97 Galant LS, inherited from a software company I used to own – and, despite its 189,000-odd miles, it’s on its third transmission and has never really been a great car for the 20-something-thousand bucks it cost… I’ve put at least another $10 grand into that car and I only keep it around as a spare, these days.

Then, there’s Saturn, a personal beef for me that goes back more than a dozen years when, fairly fresh out of college, I was sold on Saturn as a company, a product and a philosophy. I eagerly awaited the day I would strut into the showroom and buy a brand new Saturn (whatever-it-was) and join the club! Except, when I walked in to test-drive one of the new models (at Saturn of Eau Claire Wisconsin, so we’re clear…), I got treated like gum on the bottom of the salesman’s shoe, who apparently didn’t take me for a serious buyer and essentially told me to buzz off. Since that day, I’ve sworn I’d NEVER buy a Saturn, if they were the last car company on Earth!

So, it is not without some schadenfreude that I read a pair of New York Times articles last week detailing both companies’ recent troubles in sustaining themselves in business.

For Saturn, it was the recall of some 246,233 (pretty much all) Vue sport utility vehicles when it was discovered in June that, in two rollover tests, the National Highway Traffic Safety Administration was unable to provide a rollover rating because the vehicle's rear suspension system collapsed.

That’s a “different kinda car” alright! Not once, twice:

General Motors, the world's largest automaker, took steps on Thursday to mitigate problems both under the hood and in its financial reports.

John M. Devine, G.M.'s chief financial officer, said at an industry management conference here that the company would recall all the Saturn Vue sport utility vehicles it has made since their introduction in 2001. The announcement came a week after regulators said the vehicle's suspension had broken during new federal rollover tests.

"When we see something, we fix it - we jump on it right away," Mr. Devine said. "If you look at our quality record, we're not pleased with this and we're working very hard to make sure it doesn't happen again."

Adding to this costly recall news, GM (alongside Ford and Chrysler) has spent a ton of money elsewhere this year trying to cover healthcare costs, a huge disadvantage to competitiveness, all while Toyota seems to be the real engine of growth in the American auto industry:

G.M. had more recalls in the first four months of the year than in all 2003. In a securities filing, it said Thursday that it had spent $400 million more than expected in the first half of the year to cover the cost of recalls.

The Vue was developed before a new government rollover test. Regulators have begun tests on new cars and trucks in an effort to reduce rollover-related fatalities, which now stand at more than 10,000 a year. They tested two versions of the Vue and the suspensions broke on both vehicles, halting the tests.

"It's a very aggressive test that went beyond, frankly, what we had tested," Mr. Devine said, adding, "The fix is to beef up the suspension system, and we're doing just that."

Consumer advocates had called for G.M. to initiate a recall.

"I think General Motors made the right decision," said Joan Claybrook, the president of Public Citizen. "It was the only decision."

Mr. Devine also reiterated how tough financial conditions were for domestic manufacturers, particularly because of high health care costs. Total costs for the Big Three automakers - G.M., the Ford Motor Company and the Chrysler division of DaimlerChrysler - reached $8.5 billion last year. G.M., the company with the most retirees, accounted for more than half of that.

"We in the U.S. have a serious competitive disadvantage that we have to deal with," Mr. Devine said.

High health care costs have limited the Big Three in slowing the advance of foreign competitors chipping away at market share. The president of Toyota, Fujio Cho, said on Wednesday that his company had been expanding so rapidly that its North American managers, especially those with training in its quality processes, were stretched thin, leading Toyota to make its regions more self-reliant on their own quality experts.

"Instead of having ample time to work with a small American management team, we are now rushing to add managers to handle new plants in Texas, Tennessee and Mexico," Mr. Cho said in a speech.

The Vue had been one of the bright spots in GM’s product portfolio, but these latest tests by NHTSA might sideline that success:

Rollovers have been an area of increasing scrutiny because of surging sales of S.U.V.'s and pickup trucks, which are more prone to roll over than passenger cars because of their higher ground clearance.

This year, the traffic safety agency has been conducting its first rollover tests on a track. Previously, the agency used a mathematical formula, factoring in a vehicle's specifications, to predict rollover risk. Congress ordered the agency to devise a track test after nearly 300 people died in rollovers of Explorers equipped with Firestone tires in the late 1990's.

In the new tests, conducted at speeds of 35 to 50 miles an hour, vehicles are driven through as many as 10 maneuvers known as fishhooks. The maneuver simulates the kind of jarring swerve that might happen when vehicles drift off the road and then the drivers overcompensate while trying to recover.

The suspension of the four-wheel-drive Vue failed at 45 m.p.h., according to the agency's summary; the summary said the two-wheel-drive Vue had "a similar rear suspension failure" but did not say at what speed.

Several S.U.V.'s and pickup trucks have tipped up on two wheels during the new tests, indicating an imminent rollover risk. Vehicles do not actually roll over on the test track because they are equipped with metal wings, known as outriggers, to protect the test drivers.

Sales of the Vue were up nearly 17 percent in the first half of the year, according to the Autodata Corporation, as consumers appeared to consider smaller, more fuel-efficient S.U.V.'s in light of higher gas prices.

For G.M., the world's largest automaker, the Vue test results are the latest problem in what has been a difficult year for recall-related issues. The company recalled more vehicles in the first four months of this year than it did in all of 2003, costing it $200 million more than it expected in the first quarter.

Meanwhile, in Mitsu territory, the "turnaround" continues:

With American sales of Mitsubishi, once one of the hottest car brands, in a free fall, the company's executives are trying to engineer a turnaround.

It could not come too soon for dealers and employees. "June was a terrible month. I sold 10 cars," said Maria Prendergast-Lunn, general manager of Auddie Brown Mitsubishi in Florence, S.C., 80 miles from the major metropolitan center of Columbia. A year ago the dealership sold 75 Mitsubishis a month.

Sales started picking up this month, but even so Ms. Prendergast-Lunn expects the dealership to sell only half the number of vehicles it did a year earlier. "I'm hoping to end July with 35 or 40 sales," she said.

Other dealers are struggling as well. The market share of Mitsubishi Motors North America, the United States unit of the Japanese automaker, has been halved in just a year, to 0.8 percent last month from 1.5 percent in June 2003, according to the Autodata Corporation. In June, the company's sales dropped 45.7 percent, to 12,301.

Mitsubishi announced last week that it would lay off 1,200 employees, or about a third of its work force in Normal, Ill., site of its American plant, where it produces the Galant sedan, the Eclipse sporty coupe car and the Endeavor sport utility vehicle.

Mitsubishi has also decreased its advertising. For years it pitched the brand to young consumers with cheap financing and emotional eye-catching ads set to the music of Average White Band, Iggy Pop and Republica. That strategy created some of its trouble because it suffered a high default rate on the loans. Analysts say that Mitsubishi needs to write off about $1 billion in bad loans.

"We were a brand on sale," said Finbarr J. O'Neill, the American company's chief executive, in a telephone interview. Mr. O'Neill, the former chief executive of Hyundai Motor America, was hired last September to succeed Pierre Gagnon who was blamed for the aggressive financing.

"Now we need to establish natural demand for the products," Mr. O'Neill said.

The American sales slump has been a big factor in the struggles of the Japanese parent company, but not the only factor. Mitsubishi has also suffered from a cover-up of defects in its cars and trucks for decades.

In April, Mitsubishi's minority owner, DaimlerChrysler, decided not to invest any more money in the troubled carmaker, and Mitsubishi had to scramble for money to cover its debts. The Phoenix Capital Company, a Tokyo-based investment firm, bought a third of the company, replacing DaimlerChrysler as the controlling partner.

The parent company's financial and quality problems make Mr. O'Neill's battle to reverse the fortunes of Mitsubishi tougher. The American unit has only two new models coming in the next several months, a redesigned Eclipse sport coupe and a small truck built by Chrysler.

"It takes time to get all of this done," Mr. O'Neill said, "and we also are under financial pressures."

He added: "We are doing what we need to do. I just wish I could speed up time."

Mr. O'Neill is familiar with time-consuming turnarounds. When he took over as chief executive at Hyundai in 1998, the brand was on the skids. It was selling fewer than 100,000 units a year, and dealers were disgruntled. Over the next six years, Mr. O'Neill pushed hard to solve the company's quality problems, offering one of the industry's longest and most extensive warranties. This year, Hyundai's sales have had double-digit increases, and the brand has snagged top spots on quality surveys.

At Mitsubishi, Mr. O'Neill is using some of the same strategies. Earlier this year, he introduced a 100,000-mile warranty on vehicles, and he is promoting it this summer.

"I want to get rid of any objections that people may have had with our cars," Mr. O'Neill said.

He said the company also had to focus on "what is Mitsubishi's reason for existence?" His answer is to cast Mitsubishi's vehicles as performance-driven alternatives to some of the country's most respected brands.

"I like to think there's a little bit of Evo in all of our cars," Mr. O'Neill said, referring to the Lancer Evolution, a small but powerful car that has won at the World Rally Championships and is a favorite among young adults who "tune" their car's engine for higher horsepower and performance.

Advertising for the redesigned 2004 Galant midsize sedan introduced earlier this year, pits the car against the Toyota Camry in a high-speed crash avoidance test. The cars follow two semi-trucks from which two men are throwing everything from bowling balls to barbecue grills in front of the two fast-moving cars. Each car swerves to miss the obstacles. Finally, two old cars fall out of the back of the semis and the Galant and the Camry swerve to miss them. The Galant deftly maneuvers around them while the Camry is left in the dust.

On the company's Web site, Mitsubishi also claims that the Galant brakes faster from 70 miles an hour to zero than Camry and Accord and accelerates faster from zero to 60 miles an hour. Automotive Marketing Consultants Inc., which conducts tests to support advertising claims, said its tests had verified Mitsubishi's claims.

This summer, seeking to get people behind the wheel of its vehicles, Mitsubishi is inviting thousands of consumers to re-enact the tests at special "ride-and-drive" events in 10 cities.

The hands-on tactic has become increasingly popular with automakers. General Motors and Audi have offered 24-hour test-drives.

Ms. Prendergast-Lunn credits the new advertising and the new warranty for drawing more buyers in July. "I feel that this campaign is the best that we've ever done," she said. "We've put out the best warranty, and if that doesn't bring people in, I don't know what will."

But branding experts and other dealers say that the warranty and the side-by-side comparisons are going to be a hard sale against well-established brands.

"It's tough to win by contrasting your features against the competition when you are trying to reinvent a brand," said Erich Joachimsthaler, chief executive of Vivaldi Partners, a brand-consulting firm in New York.

"Consumers already have made up their minds," he said, "and it's tough for consumers to 'unlearn' what they think about a brand."

Some dealers also doubt that the comparison strategy will set Mitsubishi apart.

"You just can't go head-to-head with Toyota or Honda," said Ernie Boch Jr., owner of Boch Mitsubishi in Norwood, Mass., who is set to open a $5 million showroom in the coming months.

"Mitsubishi has to understand that it's a niche brand. They have to brand the car. They have to do something better than anybody else."

Whether Galant is better than Camry and Accord, I can’t say – but I can say, despite the Camry recall recently, they can’t be that much worse if, like me, you buy cars planning to drive ‘til the wheels fall off.

- Arik

Toys-R-Us... or R They?

Whether, as John Eyler, chairman and chief executive officer of Toys R Us, said that, the global toy and Babies "R" Us businesses are at "fundamentally different phases in their growth cycle," and that this separation would give the baby business more opportunity to continue its healthy growth, it's still a factor of Wal-Mart's dominance in retail strategy that it could force what was once the preeminent toy retailer of all time to essentially go out of business.

Toys "R" Us Inc., battered by price wars from discounters, particularly Wal-Mart, is considering getting out of the toy business.

The nation's second-largest toy retailer behind Wal-Mart Stores Inc. announced plans Wednesday to restructure its toy business, but said it is considering selling the business outright as part of an effort to dramatically reduce operating and capital expenses.

The $11.6 billion company is also pursuing a possible spinoff of its fast-growing Babies "R" Us, whose 200 stores sell furniture, including cribs and bedding, as well as accessories. The company will begin operating the toy and baby business as separate entities in the meantime.

The Babies "R" Us division has been the company's growth vehicle, and has not been as vulnerable to discounters, Standard & Poor's credit analyst Diane Shand said in an S&P statement affirming its ratings on Toys "R" Us remained on CreditWatch with negative implications.

The company's U.S. toy division, however, has been inconsistent since the mid-1990s, when Wal-Mart ramped up its toy department as it also dramatically expanded the number of stores.

"Traditional toys have decreased in importance, as children are turning to video games, computer software, sporting goods, and music for entertainment at younger ages," Shand said.

Babies "R" Us, which represents 15 percent of the company's total revenues, posted sales of $1.76 billion, up nearly 11 percent, for the year ended Jan. 31. Meanwhile, the Toys "R" Us' U.S. revenues fell 4 percent to $6.48 billion. Toys "R" Us has 683 toy stores in the United States and 579 international toy stores. It also sells through its Internet sites.

The announcement "is extremely positive for investors, as one of the critical pieces to unlocking shareholder value in (Toys "R" Us) is separating its crown jewel, Babies "R" Us," said Mark Rowen, an analyst at Prudential Equity Group Inc.

It is anticipated that today's announcement comes preceeding some very, very weak results:

Toys "R" Us said Wednesday it would delay releasing its second quarter 2004 earnings until Aug. 23. The figures were to be released Monday. In the first quarter, the company's profit declined 48 percent in its fourth fiscal quarter, which ended Jan. 31 and covered a disappointing holiday sales season. Disappointing results continued into the first quarter, with the retailer posting a wider-than-expected loss and lower sales.

Poor holiday 2003 results helped lead to the bankruptcies of FAO Schwarz and K-B Toys.

Toys "R" Us has been retrenching for much of the last year to improve its bottom line. In November, it said it would close 146 freestanding Kids "R" Us clothing chain and 36 Imaginarium specialty toy stores, which sold educational toys, cutting up to 3,800 U.S. jobs.

So, maybe toys "R" not us? After the earnings release in a few days we'll see... but it'll be the coming holiday season, when we'll truly get to find out.

- Arik

DuPont Teflon: Does One of the Most Successful Products of All Time Make People Sick?

The New York Times article on DuPont and its potentially humongous liabilities from recent adverse health claims surrounding what has arguably been one of the most successful products in history - Teflon:

Teflon has been hugely successful for DuPont, which over the last half-century has made the material almost ubiquitous, putting it not just on frying pans but also on carpets, fast-food packaging, clothing, eyeglasses and electrical wires - even the fabric roofs covering football stadiums.

Now DuPont has to worry that Teflon and the materials used to make it have perhaps become a bit too ubiquitous. Teflon constituents have found their way into rivers, soil, wild animals and humans, the company, government environmental officials and others say. Evidence suggests that some of the materials, known to cause cancer and other problems in animals, may be making people sick.

While it remains one of DuPont's most valuable assets, Teflon has also become a potentially huge liability. The Environmental Protection Agency filed a complaint last month charging the company with withholding evidence of its own health and environmental concerns about an important chemical used to manufacture Teflon. That would be a violation of federal environmental law, compounded by the possibility that DuPont covered up the evidence for two decades.

DuPont contends that it met its legal reporting obligations, and said that it plans to file a formal response this week.

If an E.P.A. administrative judge does not agree, the agency could fine the company up to $25,000 a day from the time DuPont learned of potential problems with the chemical two decades ago until Jan. 30, 1997, when the agency's fines were raised, and $27,500 a day since then. The total penalty could reach $300 million. The agency is also investigating whether the suspect chemical, a detergentlike substance called perfluorooctanoic acid, is harmful to human health, and how it has become so pervasive in the environment. The chemical - which is more commonly known as PFOA or C-8, for the number of carbon atoms in its molecular structure - has turned up in the blood of more than 90 percent of Americans, according to samples taken from blood banks by the 3M Company beginning in the mid-90's. Until it got out of the business in 2000, 3M was the biggest supplier of PFOA. DuPont promptly announced it would begin making the substance itself.

What's more important than the immediate financial impact is the longer-term consequences to DuPont's image:

At the very least, the Teflon flap could damage DuPont's well-polished image. The 200-year-old company, based in Wilmington, Del., prides itself on its corporate values, and Mr. Holliday is a high-profile advocate of socially responsible business. "In the chemical industry, the critical thing is not only investor perception, but consumer trust," Mr. Pisasale said. "That can be very hard to build back."

In a preliminary risk assessment report released last spring, the E.P.A. said PFOA was a possible carcinogen, but did not advise that consumers stop using Teflon products. PFOA is used as a processing aid in making many Teflon products and and is not present in end products, such as cookware. But some researchers assert that some Teflon products can release PFC's, including PFOA, in the environment and in the human body. They contend that this could account for its wide presence in the environment and in the population.

A spokesman for W. L. Gore & Associates, which makes Gore-Tex, said the material it gets from DuPont does not break down into PFOA, but he conceded that the material could contain trace amounts and that there was still an open question about safety. "Are the downstream folks involved? Sure. We all want to find the sources and pathways here," the spokesman, Ed Schneider, said.

Most disturbing of all are the recently unsealed memoranda of DuPont's legal staff:

The class-action lawsuit, filed in Wood County, W.Va., the home of the Washington Works plant where DuPont has made Teflon for decades, has turned up a series of documents that DuPont had sought to shield as proprietary information. The latest came to light in May, when the West Virginia Supreme Court voted unanimously to unseal several DuPont memorandums from 2000 in which John R. Bowman, a company lawyer, warned two of his superiors - Thomas L. Sager, a vice president and assistant general counsel, and Martha L. Rees, an associate general counsel - that the company would "spend millions to defend these lawsuits and have the additional threat of punitive damages hanging over our head."

He added that other companies that had polluted drinking water supplies near their factories had warned him that it was cheaper and easier to replace those supplies and settle claims than to try to fight them in court. And those companies, he noted, had spilled chemicals that did not persist in the environment the way that PFOA does. "Our story is not a good one," he wrote in one memorandum. "We continued to increase our emissions into the river in spite of internal commitments to reduce or eliminate the release of this chemical into the community and environment because of our concern about the biopersistence of this chemical."

Another document summarizes the company's strategy for deflecting the PFOA issue and litigation. It offers various suggestions for improving credibility with employees, the community and regulators, such as "keep issue out of press as much as possible" and "do not create impression that DuPont did harm to the environment."

- Arik

Google's IPO: Trouble Ahead?

Not only did Google illegally sell shares...

Google Inc. may have illegally issued more than 23 million shares of its stock to hundreds of employees and consultants, injecting an unexpected legal risk into the online search engine leader's highly anticipated IPO.

The Mountain View-based company disclosed the possible violations Wednesday in a prospectus offering to buy back the affected shares and outstanding stock options for a total of $25.9 million, including interest payments.

... and more than one curmudgeon thinks we should just boycott it altogether, as it's likely to wreck a perfectly good company:

The lead Googlians say they're doing the IPO so investors can cash out, but as soon as that happens they will run the company without regard to the quarterly numbers that made Wall Street's heart go pitter-patter.

So Google will be just like a private company that isn't. And the people who buy the 9 percent of Google that's hitting the public market will be treated like … well, it could be like they don't own anything! That should make for really fun annual meetings.

For more than $100 a share, I say we should let Google keep its overpriced stock. Mark my words: Google is the Netscape of the new millennium. Well, the fall won't be so dramatic—Microsoft only sort of wants Google's head on a stick—but the selling shareholders are getting out while the getting's good. It's possible all the "odd" aspects of the stock offering are just PR stunts intended to more efficiently part fools from their money.

Something else I've noticed is the closer we get to the Google IPO the less useful Google has become. The bad guys have clearly learned to spoof the search engine, so much so that sometimes the first page or two of results are liberally salted with pages from other search engines claiming to be search results. It's also not as easy to find what I want on Google. I can't say why, but I am starting to look at using multiple search engines again. Maybe you really can't decide the relevance of a particular page based on how many other pages are linked to it.

Even the previously useful Google advertising of old now seems, likely as not, to be fill-in-the-customers'-search-term-here ads from eBay and other vendors who really don't have much to offer me.

Unless Google can do something quick to dramatically improve the quality of the results it presents, the search engine is in real trouble. But not to worry—most people won't pay attention during the IPO hype-storm, and no one will understand the real mess Google seems to be in until after a cool $3 billion has left investors' pockets.

Nice work if you can get it. And speaking of work, for the past few years the best and the brightest haven't been going to Microsoft or to other startups (what other startups?) but to Google, where the promise of riches awaited. After the IPO, Google will become a company of haves—new houses, new cars, early retirements—and have-nots—everyone else and most future hires.

That sort of environment is not particularly conducive to cooperation and harmony. I believe it was Apple where at one point the old-timers took to wearing buttons reading "FUIFV," as in "f-you-I'm-fully-vested." I am not sure how Google dealt with this in advance, but many IPOs have littered companies with perpetual underlings suddenly worth much more than their more recently hired bosses. Like I said, a post-IPO company can be a really interesting place to work.

Here's how I see the future: Google's star may continue to rise a bit, but then reality and the reality of being No. 1 and being everyone's target will hit home. Google will start to sink a bit—perhaps a big bit—just as Microsoft's new offering appears on the search scene. By that time, other search engines may have solved their problems, and customers will have noticed that Google isn't nearly as wonderful as it used to be. It's also possible that some third party will out-Google Google and come up with a better search engine, just as Google bested AltaVista (remember them?).

This could mean Google will be a short-lived phenomenon, at least as the Holy Grail of searching that it clearly used to be. Every day I use Google—and I do use it every day—it seems to be less useful to me than the day before.

At least it's doing good things for Silicon Valley...

Unlike Netscape, which went public to almost as much fanfare and celebration nine years ago, Google isn't being brought to a stock market unfamiliar with the Internet or the valley's technological wizardry. Silicon Valley has a history with investors, now. And for all the good—in terms of innovation and jobs—that has been created in the valley, there's some bad feeling, too.

That bad feeling—the slight aftertaste of being taken for a ride—is one reason politicians lump the valley with Enron when it comes to stock options. And it's worth remembering that sentiment when it comes time to consider Google's sale. Google has. The revised filing the company made with the Securities and Exchange Commission includes a section decrying the need to treat option grants as expenses.

So what's the most unusual thing about the Google offering? Unlike traditional stock offerings, Google's early shareholders—its backers, executives and other friends of the firm—can and are selling a great deal of stock. All told, those insiders are offering almost 10.5 million share of stock for sale at between $108 and $135 a share.

The company is selling a bit more, just about 14 million shares. A lot of rich people who acquired their stock at pennies per share are going to be even wealthier. And they are getting that way in a process that's being wildly (and correctly) described as being more open—and therefore more honest—than what's gone on before.

That's important. Because offerings like Google's have a way of starting trends. That could mean more "dutch auctions"—where the final price is set by the bidders—as tech companies try to follow in Google's shoes and do an end-run around the banking establishment and show shareholders the wonders of a disintermediated stock market. Clearly that's what Google founders Larry Page and Sergey Brin say as much in their "owners' manual" to shareholders.

And it might even change the way IPOs are done from here on out - which is good news for investors, but really bad news for underwriters and most other Wall Street fat cats:

In the dot-com era, IPOs were run as much for the benefit of the Wall Street underwriters as for the companies. Wall Street firms would set a price at which a company would sell shares to the broad investing public and distribute the shares. In practice, underwriters would dole out many shares to favored executives at client companies, or to hedge funds and mutual funds that threw a lot of trading business to the underwriters. By setting the price for dot-com stocks artificially low and by deciding who could get in on the IPO at the artificially low price, underwriters had a license to make their friends and clients rich in a matter of minutes, when frantic individual investors bid up the shares. (Before Eliot Spitzer came along, these conflicts of interest were known in Manhattan as "synergies.") In exchange for suppressing the offering price and thus depriving their client of needed capital, underwriters in most dot-com IPOs typically helped themselves to a fee totaling 7 percent of the offering.

But Google has largely cut out the underwriters. Its IPO is being structured as a Dutch auction. Any investor can submit a bid for as few as five shares. The underwriters will tally all the bids. They'll start at the top—$150, $200, whatever—and work their way down until all the shares are spoken for. That price then becomes the clearing price, which Google intends to use as the IPO price. There's no penalty for bidding high—if the clearing price is $140 and you bid $200 you'll pay $140. Those who bid under the clearing price get nothing.

Google's IPO price will thus be set naturally by all interested market participants, not artificially by underwriters. Google—and not well-connected investors—will receive the full benefit of investors' enthusiasm for the stock. To add insult to the injury of the chastened investment bankers, Google has decreed that it'll only pay a 3 percent underwriting fee.

In other words, Google has inverted the process. Almost by definition, the buying enthusiasm will peak before the stock starts trading. And today, you and I have the same chance as Warren Buffett, or Ford CEO William Ford, or a hedge fund manager, of getting in on Google's IPO. For precisely that reason Warren Buffett and Bill Ford and hedge fund managers probably won't be bidding. They have no angle, no leg up on the rest of us chumps.

And so most professional investors will likely boycott the offering. This is one of the reasons that TheStreet.com's James Cramer, a brilliant commentator and trader (but not one given to irony), has already dubbed the Google deal a fiasco. As Cramer implies, giving the stiff-arm to the professional investors who comprise a significant majority of the market, and who constantly have money to put to work, isn't an intelligent long-term investor-relations strategy. Professional investors in effect become salesmen for a company's stock. Selling stock without them is almost like Coca-Cola deciding to eschew the wholesale market (McDonald's, Marriott, college dormitories) and focus exclusively on selling six-packs to individual customers.

Google's IPO ensures that individual investors are treated fairly, as was frequently not the case in the 1990s. But it won't ensure that they'll make money. In fact, Google explicitly warns those seeking a quick buck not to bother: "We caution you not to submit a bid in the auction process for our offering unless you are willing to take the risk that our stock price could decline significantly." In fact, because of the auction process, the individual investors who absolutely positively must have this stock on the day of its offering may very well be buying at the top. At least some things never change.

- Arik

Doom 3: Can Carmack's "id" Reinvent Computer Games (as it did with the original, Doom)?

id Software released the much-anticipated "Doom 3" first-person-shooter on the world this week, to largely rave reviews:

“Doom 3,” the newest entry in game developer id Software’s horror hall of fame, is a departure of sorts. You still have hordes of demons after you. And that familiar click-click of the reloading shotgun remains. But over time, things have changed.

With previous id games, from 1993’s original “Doom” through 1994’s “Doom II” and 1996’s “Quake,” you were rewarded for shooting first and worrying about the consequences later. Now -- though you again play a Marine on Mars, facing a horde of demons unleashed from hell by scientific experiments -- you have to be careful not to eradicate a character who might hold a valuable clue to the secret to preventing a demonic assault on Earth.

“The first game didn’t have much depth,” says technical director John Carmack, who co-founded id in 1991 and was made wealthy by “Doom.” “Early on, we were just excited to get the basics, to get people scared or shocked at all.”

The original was groundbreaking. It established the success of the software marketing system known as shareware: The game was available free to download, swap and try, and customers paid to unlock higher levels. Some 20 million wound up playing the game. Subsequent id software games such as “Doom II,” “Quake” and “Return to Castle Wolfenstein” have sold a collective 15 million.

“Every game they have produced has set the standard for that time,” says fan Matthew Wood, 20, of Merritt Island, Fla. Since id announced last month that “Doom 3” -- after several long delays -- was finished and getting ready to ship, “time slowed down for many of us,” Wood says. “I pre-ordered the next day. ... ’Doom 3’ looks scary as hell. I cannot wait.”

“Doom” also popularized the “first-person shooter” concept: Players view the 3-D world through the eyes of the character on screen, wielding weaponry as if it were in their own hands.

Anti-violence activists decry the genre. “Desensitization is the classic problem that comes from these games’ point of view,” says Roy Fox, chairman of the department of learning, teaching and curriculum at the University of Missouri. He worries that children and teens will get access to the game, which is rated M for mature players, ages 17 and older. “It breeds the acceptance of violence.”

The action in “Doom 3” promises to be more intense than its predecessors, with effects and environments reminiscent of such movies as “Alien,” thanks to Carmack’s breakthrough method of realistically tying lighting and textures of objects to the player’s movements. “On a cinematic level, there’s depth and story,” says Carmack, who has already begun work on the next id game, an original title. “I’m extremely excited at how it turned out.”

One of the most anticipated games in years, “Doom 3” will have to battle for Game of the Year honors with “Half-Life 2,” a sequel to Valve Software’s 1998 top game. “It’s kind of a parlor game to discuss which is the most anticipated of the two,” says Dan Morris, editor of PC Gamer.

Together, the games could amount to a renaissance for a PC industry desperate to reclaim some of the glamour from console video games, which have been responsible for the bulk of the $10 billion video-game market. “This is going to swing the pendulum back our way,” Morris says.

In the September issue, Morris gives “Doom 3” the magazine’s highest rating in recent times (94 percent). “Its biggest breakthrough, after the technological side, is that it’s a compelling story,” he says. “The main purpose is not to shock you out of your seat but to draw you into a world and into a drama.”

“Doom 3” not only looks like a scary movie, it was developed like one. For this game, id Software recruited Matt Costello, who penned the stories for classic plot-driven games “The Seventh Guest” and “The Eleventh Hour,” to flesh out a script from which artists created storyboards, just as filmmakers do. “It allowed us to put all the action into the context of the story,” says id CEO Todd Hollenshead. “The players, when they play through the game, they will know where they are, they will understand the environment and will have a sense of purpose. We felt that was important.”

More fun though was Slate.com's piece on the designers behind the games, in this case, profiling John Carmack - dean of FPS genre game design.

- Arik

EDS Pays $135 Million to Buy Its Way Out of a Bad Deal

"EDS remains a tale of two cities," CEO Mike Jordan said in a press release. "Our ongoing business is now fully competitive, with increasing sales momentum reflected in our results as we lay the groundwork for further gains in 2005.

"At the same time, we continue to be burdened by the cleanup of past problem contracts, as exhibited by our lower cash flow guidance on Navy and the charge this quarter to terminate the company's 'other commercial contract.'"

So, just who is this 'other commercial contract' firm getting the $135 big ones? Well, nobody really knows for sure... but there is one top suspect:

EDS has paid $135m to pull out of a loss-making IT outsourcing contract, believed to be with US firm Dow Chemical.

The termination, effective from 1 August, was revealed in EDS's results for the quarter ended 30 June.

The Texas-based outsourcer recorded a 3.5 per cent rise in revenues to $5.24bn and an operating loss of $84m, compared with last year's $184m profit. However, the sale of the UGS PLM unit led to an overall post-tax profit of $270m, compared to $88m for the same quarter last year.

Buried in the earnings report was a one-line announcement that EDS has reached an "amicable agreement" to terminate a "commercial contract".

EDS is keeping tight-lipped on which company the loss-making contract was with but industry sources have named Dow Chemical as the number one suspect.

One source told silicon.com that the reason the name is being kept secret is that as a result of settling amicably EDS will get a shot at some BPO work from the firm in the next three to six months.

Dow Chemical, however, is also keeping tight-lipped and a spokeswoman would neither confirm nor deny it is the company in question. All she would say to silicon.com is that Dow has been in active conversation with EDS and is happy with progress.

Robert Morgan, business development director at outsourcing consultancy Morgan Chambers, said that whichever deal it is, it is likely to be part of a "hit list" of troublesome contracts drawn up by EDS CEO Michael Jordan back in February.

"Jordan ordered a review of accounts and those not performing had to produce a report. He has met with most of the CEOs of those companies to see if it is possible to retrieve the situation or not. Jordan is taking a very personal interest and this hit list has more than a dozen companies on it. This is the only one so far that has been settled like this," he said.

Anthony Miller, analyst at Ovum Holway, said in a statement that the results are a "tale of two halves" with duff contracts pulling down the bits of EDS's business that are improving.

"There's still a huge job ahead, not made easier by EDS first having to explain its credit rating downgrade to all of its major clients and prospects -- not the best way to have to start a sales call," said Miller. "Embattled, certainly, but beaten? Not by a long way."

- Arik

DaimlerChrysler's Youth Brand: Competing with Toyota's Scion Growth Strategy

The line would be a spin-off of either Chrysler's Dodge or Jeep brands tailored for Generation Y consumers - the 65 million Americans born between 1977 and 1994, Chrysler Group chief executive Dieter Zetsche told the Detroit News Monday.

The automaker has been considering the idea for a year and has developed three concept vehicles for the marque, according to a company source who said Chrysler expects to make a decision by the end of the year.

Gen Y consumers are expected to purchase 1 in 5 vehicles in the United States by 2010, according to J.D. Power and Associates.

Marketing experts say the impact of Generation Y could rival or even exceed that of baby boomers. “This is a trend Chrysler cannot ignore,” said Michael Robinet, an automotive analyst with CSM Worldwide in Farmington Hills.

A youth-oriented brand could introduce Chrysler to buyers who might otherwise ignore the smallest of Detroit’s automakers. The average Dodge customer is 44 years old, while Jeep buyers average 43 and Chrysler brand buyers average 50, according to J.D. Power and Associates’ Power Information Network, which studies dealer sales data. The average age of buyers of all vehicle brands is 46.

“Some people feel you need to have a $12,000 car, either built domestically or imported from somewhere else,” said George Murphy, Chrysler’s senior vice president for global brand marketing. “Some people believe you’re basically served with used cars, which is 75 percent of what people under 25 buy.

“I haven’t seen much to tell me that our current brands can’t reach younger target audiences with the right products.”

Any new brand will not be affiliated with the Chrysler brand, which Chrysler is trying to move upscale with premium vehicles such as the new 300 sedan. It would be more likely a spinoff of Jeep or Dodge, which have younger average buyers.

Chrysler is likely to seek out a joint venture partner, perhaps in a low-cost country such as China or South Korea, to share engineering and parts for the new brand. Because of high labor costs, it’s often impossible to make a profit on small, low-price vehicles produced in the United States.

“You should look for some cooperation for execution of this idea,” Zetsche said, but that does not necessarily mean Japan’s Mitsubishi Motors Corp. and Hyundai Motor Co. in South Korea. Both companies are partially owned by DaimlerChrysler and linked with the automaker on several existing vehicle projects.

Toyota rolled out its youth-oriented Scion brand last year. The compact and uniquely-designed cars start at around $16,000 and are meant to be a test case for Toyota as it tries to discern the preferences of up-and-coming buyers. Toyota hopes to sell 100,000 Scion vehicles in the United States in 2005 after a staggered roll out this year.

“Toyota is breaking new ground that is likely causing most other mainstream manufacturers to take a look at their youth strategies,” Robinet said.

While Ford Motor Co. has won over young buyers with its Focus sedans and hatchbacks and General Motors Corp. has reached Gen X and Y customers with its Saturn brand, neither has launched a nameplate aimed squarely at those groups. Honda has also found room for the youth-targeted Element SUV within its lineup without creating a whole new brand.

But there are no guarantees that youth-driven brands or designs will ultimately attract youthful drivers. Scion draws more Gen Y buyers than any other marque — 19.1 percent of sales are to consumers 25 and under — but the average age of Scion buyers is still 40, according to J.D. Power and Associates. And Honda’s Element has an average buyer age of 43.

In the end, Chrysler may decide that adding another brand is too costly and too risky, given the already crowded landscape of vehicle nameplates in the United States.

But if Chrysler rolls out new, low-cost cars, Dan Frost believes he can sell them. “We don’t offer (young buyers) a car at all,” said Frost, president of Southfield Chrysler Jeep. “The closest we come is a Dodge Neon.”

- Arik

Interbrand’s "Best Global Brands 2004"

Interbrand released its 2004 ranking of the Best Global Brands by Value for the next issue of BusinessWeek:

Based on its high brand loyalty and strong sales of the iPod, Apple (No. 43) is the biggest mover with a 24% gain in brand value. Other big gainers include Yahoo!, No. 61 (up 17%); Amazon, No. 66 (up 22%); Samsung, No. 21 (up 16%); and HSBC, No. 33 (up 15%). Online auctioneer eBay debuts on the list this year at No. 60. As BusinessWeek notes, even established brands such as Coca Cola (No. 1) and Microsoft (No. 2) “have started to recognize the need to nurture stronger ties with consumers.” Microsoft has started mini-trade shows in airport lounges and Coca Cola has opened hip "Coke Red Lounges" for teenagers in suburban malls.

Meanwhile, BusinessWeek tried to crack the code on "cult brands" such as Apple and Starbucks and why the online world and mass customization have empowered consumer choice more than ever before:

A customer spurned, the logic goes, is a customer lost. But these days the relationship between brands and their customers has become much more complex. For one thing, consumers simply know more than they used to. The Internet opens up a wealth of information, allowing for instant price and quality comparisons. But consumers demand more from the brands they love than simple reliability; passionate consumers want their brands to become a form of self-expression. Increasingly, consumers are customizing products and services to achieve that -- whether it's tailoring colors on a pair of sneakers from Nike Inc. or adding items to their personal to-watch list on eBay. Instead of arms-length customers, they're beginning to act like and feel like owners or members of a community. They no longer passively consume. Through the Internet, they can talk back and talk to one another. They can ignite a groundswell of positive buzz or spawn a revolt. As Peter Weedfald, senior vice-president for strategic marketing and new media at Samsung Electronics North America, puts it: "Consumers are empowered in a way that's almost frightening."

This seismic shift in clout from companies to their customers is creating opportunities, especially for younger brands that grew up with the Internet and have become adept at building user communities. Meanwhile, some traditional brands, such as Coca-Cola and Microsoft, are struggling to retain their mammoth leads in a market where consumers increasingly resist what they see as bland ubiquity and a surfeit of power.

Looks like even the biggest of companies, no matter how strong their relative global power of brand, need to keep working to stay on top. I did find it interesting that, of the top 10, eight were U.S. companies, and overall, of the top 100, 58 were U.S. firms.

- Arik

Mylan Labs Acquires King Pharmaceuticals for $4 Billion = $3.3 Million Per Salesperson

Necessity always the mother of invention, Mylan continues to try and smooth out its business cycle by further expanding its portfolio of branded drugs with its $4 billion stock swap acquisition of King Pharmaceuticals, makers of the successfully marketed hypertension drug, Altace. The key asset here is the salesforce itself, except that, at $3.3 million per salesperson, that’s a steep premium if it’s all they were after.

King's flagship product is Altace, which is used for hypertension and cardiovascular protection. Altace had sales of about $446 million for the 12 months ended March 31.

Generic drug companies such as Mylan, Teva Pharmaceuticals, Forest Laboratories and others have seen their sales surge as employers try to cut soaring health care costs. Yet many of those sales were driven by the expiration of patents on high-margin branded pharmaceuticals, which will slow considerably in the coming years as fewer patents expire.

Mylan and other generic companies are trying to smooth out that boom-bust cycle by filling their portfolios with branded drugs.

King Pharmaceuticals has pushed aggressively into the branded market and has a division devoted to the acquisition of name brands and companies. Perhaps most important to Mylan, however, is access to King's 1,200-person sales force, which successfully marketed Altace.

Whether the King portfolio successfully fends off other generic competitors or even is able to pass SEC muster following a Medicaid pricing scandal, Mylan just upped the ante in its bet to take branded products to market more quickly with a stronger salesforce by bringing a downtrodden acquisition target back to life.

- Arik

Stiff Competition in Beer Market Leads Molson & Coors Merger to Create World’s Fifth Largest Brewer

In the face of consolidation and strong marketshare gains by competitors like Anheuser-Busch, SABMiller and Interbrew, both Coors and Molson had been struggling to compete.

Canada's Molson and US-based Coors announced plans for a "merger of equals" of the two family-controlled brewers creating the world's fifth largest beermaker by volume.

The deal "will create a new company with the operating scale and balance sheet strength to take a leading role in the consolidating global brewing industry," the companies said in a joint statement.

With combined beer production of 60 million hectoliters (51 million US barrels), the company to be named Molson Coors Brewing Company will be the world's fifth largest brewing company by volume, the statement said.

"This transaction allows us to create a stronger company in a consolidating global industry while preserving Molson's rich heritage as North America's oldest beer company and Canada's leading brewer," said Eric Molson, chairman of the Canadian firm.

What's the upside for shareholders? None really, since they're already effectively a combined entity with two joint ventures, one in Canada and one in the U.S.; however, long-term value could be created if the potential combination of Coors and Molson attracts a larger suitor, like Heineken or SABMiller, since as the number five global brewer the company would derive most of its earnings from businesses with a number two market position.

- Arik

SCO Loses DaimlerChrysler Lawsuit

SCO’s first major legal challenge was lost today, when a Michigan court dismissed all but one charge against DaimlerChrysler as SCO tried to enforce its UNIX copyrights.

SCO suffered its first major defeat Wednesday in its legal wars against Linux-using companies, when DaimlerChrysler was granted all of the important points in its motion to dismiss SCO's case.

Judge Rae Lee Chabot of Oakland County Circuit Court in Michigan all but dismissed The SCO Group Inc.'s case after a hearing, which, according to at least one eyewitness, took only about 20 minutes.

This latest ruling is likely to discourage SCO from suing other Unix licensees that failed to certify their use of the operating system. The DaimlerChrysler suit addressed different issues than those in lawsuits SCO has filed against IBM, Novell, and Linux customer AutoZone, but the impact on these other cases is still up for grabs. Regardless, there was joy in Linux-land, at least for the moment.

- Arik

EU Clears the Way for Merger of Sony Music & Bertelsmann

The consolidation will not be televised. But, it might be listened to, if U.S. regulators follow the EU's lead and approve the Sony-Bertelsmann merger.

European Commission regulators have cleared a merger between the music businesses of Japanese electronics group Sony and German media company Bertelsmann.

EU regulators opened an inquiry into the deal between Sony's music arm and Bertelsmann's music business BMG in February on concerns that a combined group would dominate the market.

If the merger goes ahead, the market will be carved up between four instead of five majors: Vivendi's Universal, the newly-created SonyBMG, Warner and EMI. Together they would share around 80 percent of European recorded music sales.

The European and US competition authorities have run parallel investigations into the merger, which will create the world's largest music company by market share according to 2003 figures.

The merger will bring together Sony stars such as Barbara Streisand and Beyonce and BMG stars, including Elvis Presley and Christina Aguilera.

The Japanese and German parent groups argue that their businesses need to join forces to tackle the crisis in the global music industry faced with both pirate CDs and an explosion of illegal music downloading.

At least Sony got its new music service and MP3 player to market a few weeks ago, or its biggest competitor would be the iPod/iTunes platform. Wait a second... it already is!

- Arik

L'Oréal & Armani vs. Louis Vuitton Moët Hennessy & PinaultPrintempsRedoute

It would appear "cosmetics giant L'Oréal and Dubai property developer Emaar have emerged as prime potential partners for Milan luxury group Giorgio Armani as the 69-year-old founder arranges his succession."

The excerpt continues as follows:

A deal could crystallise the company's value at about e4bn (£2.7bn) and give Armani's favoured partner an entry into the luxury-goods business.

Billionaire Armani, who built his empire on the clothes he designed for Richard Gere in the 1980 movie American Gigolo, says he is looking at ways of preserving the group's independence. One possibility is the sale of a minority stake to an outside investor or to a 'perfume multinational', he was reported as saying.

Communications chief Isabelle Harvie-Watt said Armani was weighing several options but no decision had been taken. 'He is working on creating a strong management team to ensure the business continues to grow,' she added.

Armani's Milan-based fashion empire had sales of e1.3bn last year. While rivals have rushed to float or to be taken over by multinational groups, Armani still owns his business outright and appears determined that it will not fall into the hands of French luxury-goods groups Louis Vuitton Moët Hennessy or PinaultPrintempsRedoute.

L'Oréal, capitalised at e42.7bn, already makes perfumes sold under the Armani brand, is virtually debt-free and needs to find new external growth opportunities. A spokesman declined to comment.

Emaar Properties, the Dubai-based developer with which Armani agreed a massive hotel deal in February and which is building the world's tallest tower in Dubai, has massive financial firepower and a close relationship with Gucci.

It is developing 10 hotels and four holiday resorts in partnership with Armani, which will design the interiors and have a management role.

Armani told an Italian newspaper: 'In three years' time, everything should be in place.'

A one-time medical student and department-store window-dresser, Armani joined Nina Cerruti as a designer in 1961 and launched his own business in 1970. He has made a relaxed easy-to-wear look his trademark while at the same time maintaining meticulous tailoring and manufacturing standards.

It's high time things started getting interesting in luxury, fashion and parfume markets!

- Arik

Gator Remakes Itself as Claria: Can a Fresh Coat of Lipstick Make a Spyware IPO Succeed?

Not many people remember Claria by its original - and far more controversial - moniker of Gator... all except the bunch of companies still suing their pants off for unfair competition, unfair trade and violation of trademark and copyright. Essentially, Gator's business had been to redirect traffic from the site a Web surfer intends to visit to that of a competitor (and Gator client).

But Gator had an image problem. They were considered underhanded - the name Gator and the logo that went with it certainly gave an impression they were proud of that rep.

But, Gator's re-christening as Claria is made complete by the IPO filing - here's an excerpt from the ClickZ network:

Controversial ad-supported software player Claria, formerly known as Gator, filed for an initial public offering with the Securities and Exchange Commission (SEC) this week. The company is hoping to raise $150 million.

Claria had net income of about $35 million on revenue of $90 million in 2003, according to documents filed with the SEC. Despite the controversy, the company's filings also reveal it has won over well-known brands and well-respected names in the Internet advertising industry.

In 2002, Avenue A accounted for 21 percent of the company's revenue. In 2003, Yahoo!'s Overture Services helped Claria bring in 31 percent of its revenue, through a deal to syndicate Overture listings through Claria's SearchScout software.

But Claria noted that new state laws, proposed federal legislation and lawsuits against it may hamper its future.

The company's business model involves distributing its advertising software by bundling it with other applications -- both its own and third-party software. (It gets a significant amount of distribution through bundling with Sharman Networks' Kazaa.)

Once the "adware" is installed, Claria is able to observe users' surfing behavior. It uses that behavioral information to target ads, which pop up while users are surfing Web sites. That tracking of surfing behavior, and Claria's past questionable distribution practices -- which it insists it has since given up -- have given the company a bad reputation with some privacy advocates and some consumers.

Still, some believe the disclosure requirements that come with being a public company will help legitimize the "adware" sector as a whole.

"Claria going public will pull away the veil of secrecy and mystery that surrounds the whole [adware] industry," said Gary Stein, analyst for Jupiter Research, owned by the parent of this publication. "Mainstream advertisers have long wanted to do behavioral advertising, but hesitated because they weren't sure how to do it. As these companies shed their negative images, behavioral advertising will come into its own."

Stein admitted the company faces some challenges, however.

Most notably, Claria faces legal problems. The company has been involved in a great deal of litigation. In fact, the company's list of pending civil suits includes cases involving the Hertz Corporation, L.L. Bean, Six Continent Hotels Inc. and Inter-Continental Hotels Corporation, TigerDirect, True Communication, Wells Fargo & Company, WFC Holdings Corporation and Quicken Loans. The primary allegations against Claria are that it violates trademarks and copyrights, and engages is unfair competition and unfair trade practices.

"There are risk factors, just as there are with any company. It is significant that Claria is involved in lawsuits that threaten the very nature of their business," Stein said. "But they have a good solid legal department and are trying to change opinions about their company."

New state legislation and pending federal legislation also pose risks, the company noted in its filing. Last month, U.S. Sens. Conrad Burns and Barbara Boxer introduced legislation to prohibit spyware, adware and other intrusive software. The proposed act, known as Spyblock, would make it illegal to install software on a user's computer without notice and consent. Also, Utah recently passed an anti-spyware law that will prohibit the company from operating in that state.

Claria has worked to clean up its image. Among other things, the company changed its name from Gator to Claria in late 2003. It's been successful in attracting big name advertisers to its GAIN Network.

According to the company, its direct and indirect customers in 2003 include about 425 advertisers. Cendant Corp., FTD.com, Netflix and Orbitz are among them.

"When you talk to media buying companies, they love Claria. They're happy to use them because they get great results," Stein said. "Only 10 percent of ad agencies are using behavioral advertising, but 50 percent are optimistic about using it in 2004."

Whether Hertz or Wells Fargo will succeed in their legal actions is somewhat less important than what law comes out at the state and federal levels. If their business model is made illegal, it's a rotten investment by any estimation.

- Arik

Wal-Mart’s Supercenter Defeat in Inglewood: Can the Company be Stopped by Union-Backing California Shoppers?

Wal-Mart's recent defeat in a referendum to build a new Supercenter in Inglewood, California hasn't deterred the company from expanding its business in California and putting more pressure on grocers, despite pressure from union-supported opposition groups and even local politicians. Here's an excerpt from April 7th article in the North County Times:

The world's largest retailer spent more than $1 million to try to sway residents in the Los Angeles suburb of Inglewood to approve its ballot initiative clearing the way for a new store, but it lost the vote.

Tuesday's defeat represents at least the second time a majority of voters in a California community has blocked Wal-Mart's efforts. Last month, residents in San Marcos forced a referendum on a City Council decision to approve a new Wal-Mart store, and ultimately overturned it.

On Wednesday, the company downplayed the outcome of the Inglewood vote, saying it would not affect its strategy to open 40 of its hybrid grocery store and Wal-Mart Supercenter stores in California during the next four to six years.

"We've got a lot of things going on in the state. Inglewood was not our only interest," said Bob McAdam, Wal-Mart's vice president of corporate affairs. "That program continues moving forward. ... I don't see this deterring us from reaching our goal."

Critics of Bentonville, Ark.-based Wal-Mart Stores Inc. say the company's stores, particularly its roughly 200,000-square-foot Supercenters, lead to jammed roads and worsen suburban sprawl. Others, specifically labor unions, say Wal-Mart stores only create low-benefit, low-wage jobs and its low prices drive smaller competitors out of business.

The company rejects those criticisms, saying its stores help drive competition to the benefit of consumers and help attract other businesses, which leads to more jobs.

Wal-Mart has faced steady opposition throughout the United States, and California has been no exception, particularly since the company announced in 2002 its intention to expand its Supercenters here.

"We have challenges across the country, but I would say that it's perhaps more pronounced here in California," McAdam said.

The 4 1/2-month-long labor dispute by Southern California grocery workers focused unabashed public criticism by the workers' union and the supermarkets against Wal-Mart.

That sentiment lingers in union-strong areas of the state and remains an influential issue with many elected officials. In Los Angeles and other municipalities, city officials are considering or have passed ordinances to block the warehouse-sized stores.

"There is something brewing here, which is about holding Wal-Mart accountable," said Madeline Janis-Aparicio, executive director of the Los Angeles Alliance for a New Economy, which helped lobby residents of Inglewood to reject the Wal-Mart ballot initiative.

"The effort to stop them cold has not been successful. The effort to hold them accountable is gathering steam," Janis-Aparicio said. "They're in California, but they're not in firmly with both feet."

This could impact Wal-Mart more negatively than one might think, if the win bolsters opposition groups elsewhere and might even cause Wal-Mart to miss five-year goal of building another 40 Supercenters in the state. Apparently, when the grassroots go against you, "always low-prices" can't always ensure victory.

- Arik

Gateway Closes Retail Operations, Reflecting Influence of Acquired eMachine’s Management

By the end of April, Gateway will close down its 188 retail stores and lay off 2,500 employees as the shakeout of the acquisition of eMachines continues, even while the company hopes to expand its retail distribution options both in the United States and around the world as their own stores are shuttered.

I expected such a move to occur sooner than later, as the $290 million merger was consummated by last week's executive reshuffle that saw most of the management team taken over by former eMachines staff. Here's an excerpt from eWEEK.com:

As part of the acquisition, Gateway founder and CEO Ted Waitt stepped aside and let eMachines CEO Wayne Inouye assume the post. Waitt will remain as chairman.

Last week, Gateway announced a new management team populated primarily by eMachines executives. At the same time, the company announced that several of the executives brought in by Waitt over the past year would leave Gateway.

Earlier this week, the company announced it was moving its headquarters from Poway, in suburban San Diego, to Orange Country, near eMachines' former Irvine, Calif., base.

Industry observers had said even before the acquisition that Gateway's stores were a double-edged sword for the company. While they offered a place for Gateway to demonstrate its wares, they also represented an expense that many competitors, such as Dell Inc. didn't have to carry.

Gateway had closed about 90 stores over the past couple of years as it struggled to return to profitability, but last fall it unveiled the first of its refurbished stores.

Gateway executives at the time said the stores played a critical role in the company's push to move beyond its PC making routes and into the role of a systems integrator, offering a wide array of consumer electronics, from digital cameras and personal digital assistants to plasma TVs. The stores also represented a way of displaying its growing list of enterprise products, such as servers and storage devices.

In December 2002, Gateway started a program in which the combined computing resources of the thousands of PCs displayed in the stores—most of which sat on shelves unused—were pooled together to create a grid. Customers could access the compute power to run data-intensive applications.

At the time of Gateway's purchase of eMachines, both Waitt and Inouye touted the synergies that would be realized by combining Gateway's direct sales model with the indirect model of eMachines, which sells its products though such retail outlets as Best Buy and Circuit City. Following the announcement, many retailers that sold eMachines products reacted negatively, complaining that they would have to compete against the Gateway stores.

However, at the January briefing with reporters and analysts on the deal, Waitt was questioned repeatedly on that indirect model's impact on Gateway's own retail stores. There were no plans to start selling eMachines products in Gateway's stores, he said. "We're going to try to minimize any conflict between those two" sales channels, Waitt said at the time.

In the words of analyst Rob Enderle: "This remains a textbook approach to a leadership problem; bring in a new team, intact, so that they can hit the ground running. The announcement of the closure, the layoffs, and the executive office move is consistent with a team that doesn’t need to figure out the landscape before making critical decisions." In that respect, Gateway is set now to pull away from its troubled recent past. Hard decisions are made all the more important when the management team has the intestinal fortitude to acknowledge past problems and fix them. Ted Waitt couldn't do that; let's hope Wayne Inouye can.

- Arik

DeBeers Diamond Monopoly Poised to Re-Enter U.S. Market, Faces New Scrutiny in Europe

De Beers signaled last year it might agree to plead guilty and pay a fine to settle allegations that date back to shortly after World War II when the Justice Department alleged that it fixed the price of industrial diamonds, which was followed with another suit in 1994.

"We have outstanding legal issues with the Department of Justice and the European Union, and we're working to resolve them," said Lynette Hori, the spokeswoman for DeBeers's diamond trading company. "The U.S. is the biggest market for diamond jewelry - accounting for 50 percent of global retail jewelry sales - and we would really, really like to resolve these issues," she said.

I'll bet.

After 10 years of inactivity in the case, the court in January scheduled an arraignment and plea hearing for March 11th. DeBeers and General Electric were indicted in 1994, accused of fixing prices in the $500 million industrial diamond market. Federal officials alleged that GE and DeBeers, which at the time controlled about 80 percent of the market, told each other about price increases in advance.

A federal judge dismissed charges against General Electric in December 1994, saying the government had failed to prove its case. The suits were filed in Columbus because GE's industrial diamond business was headquartered in the Columbus suburb of Worthington. Industrial diamond is sold to diamond tool manufacturers, who use it to make cutting and polishing tools used in a variety of manufacturing and construction applications.

But, prosecution of DeBeers has proven difficult for the past decade because U.S. officials have no jurisdiction over the company, which is based in South Africa.

That hasn't stopped DeBeers from becoming one of the world's best-known brands and one of the biggest advertisers in the U.S., relentlessly linking diamonds to engagements, weddings and anniversaries with its "A Diamond is Forever" campaign. But DeBeers hasn't had a retail presence in America and its executives are subject to detention if they enter the country. DeBeers only has its own retail stores in London and Tokyo.

DeBeers's 1994 charge is still pending in U.S. District Court in Columbus, Ohio, where the Justice Department is looking for a guilty plea, which might be forthcoming, that a unit of DeBeers was part of the global price-fixing conspiracy with GE. Prosecutors said that they hadn't been given access to needed evidence overseas.

DeBeers's efforts to get the charge dropped were rebuffed by the Clinton administration and, initially, by the current Bush administration. But late last year, the company signaled that it might agree to plead guilty and pay a fine to end the suit, and those discussions are now at an advanced stage, according to people close to the talks.

U.S. officials over the years haven't been eager to help DeBeers because of its history of harsh labor conditions and support for South Africa's apartheid regime. But Justice Department officials apparently have concluded that - having lost their case against DeBeers's co-defendant GE in 1994 - they have little leverage to continue to exclude the company from the U.S. if it is willing to plead guilty, unconditionally, to the 10-year-old charge.

Meanwhile, the European Union is investigating sales tactics of the world's largest diamond dealer, even as its relations with U.S. regulators may be improving. Prompted by complaints of retail jewelers, the EU is probing DeBeers, which controls two-thirds of the world's rough diamond market.

The complaints arose after De Beers moved into the retail end of the diamond business. With emerging competition in the wholesale diamond business from companies like BHP Billiton and Rio Tino, which produce diamonds in Canada, De Beers has tried to become an upmarket jewelry brand through a retail joint venture with French luxury goods company LVMH. EU investigators are studying DeBeers's "supplier of choice" system, in which gems are sold only to a select few.

- Arik

Disney & Comcast: House of Mouse Under Siege in Cable Bid to Reshape Media Landscape

The Walt Disney Company kicked off a two-day analyst meeting yesterday at Disney World, just minutes before an impeccably-timed Comcast Corporation rolled out an unsolicited $54.1 billion takeover offer, sending Disney's stock up almost 15 percent by day's end, a level sure to continue for the foreseeable future.

Comcast took everybody by surprise - not least of which Disney itself, which never saw itself nearly as vulnerable as its amorous suitor seems to find it. We'll see what happens when Disney's board travels to Comcast's headquarters town of Philadelphia in March for its board meeting.



In the meantime, as Disney responded to the Comcast offer by politely patting them on the head and saying their board would consider the proposal, behind the curtains Disney was scrambling to plot a defensive strategy, get investment bankers hired and try to fend off what is likely to become a hostile suitor. Tactically, the quarterly earnings announcement, demonstrating much improved results, was moved up to try and blunt the impact of Comcast's own news conference.

It was an audacious move by Comcast in attempt to create what would become the world's largest media and entertainment company, leapfrogging more sizeable competitors Time Warner and Rupert Murdoch's News Corporation, both of whom have said they're not interested in competing (so far) with Comcast for Disney... However, I think it's safe to assume other suitors would emerge to either block the combination of Comcast's distribution channel with more than 21 million cable subscribers and Disney's TV and film franchises, including the ABC television network, ESPN and other cable networks, the Disney and Miramax movie studios, and Disney theme parks around the world. (That’s why Bill Gates appears in both photos above.)

But Comcast's bid won't come easily, if embattled CEO Michael Eisner has anything to say about it - and the likelihood of a takeover battle is largely responsible for Disney's stock move yesterday. Comcast is two-thirds Disney's revenue and owns or controls entertainment properties of its own, with cable channels such as E!, the Golf Channel and Outdoor Life Network, as well as its cable systems, and such a bid by the company for Disney really shouldn't have been such a big surprise. CEO Brian Roberts, son of the company's founder (both pictured with Gates above), nearly went after Vivendi Universal's TV and motion picture assets before they were sold to General Electric to be merged with NBC.

Its peers in the industry seem to approve. Viacom Chairman Sumner Redstone said the combination "would be a transforming event for Comcast, which would elevate it from a cable company to a media giant, and Brian is undoubtedly on the right track." He added, "But, for Disney, Eisner might justifiably take the position that the company is doing better, the earnings and stock are rising and that he does not need a merger partner."

But the key to understanding the deal is to first realize the new environment and competitive dynamics first established by Rupert Murdoch and News Corp.

In the future, media and communications will be dominated by hybrids such as News Corp., which recently acquired satellite-TV operator DirecTV, and Comcast has embraced this future as one where Disney and other programmers no longer hold the balance of power in distribution deals. The cable-TV business isn't just a collection of small family companies running regional outfits anymore and it has to compete with satellite-distribution companies (like DirecTV) that are also national in scope and with DirecTV under Murdoch's control, Disney simply can no longer compete without a distribution partner of comparable stature - a partner like Comcast.

Comcast's studio acquisition is designed to counter the competitive threat posed by News Corp., which controls both satellite television services around the world, 20th Century Fox Studio and the Fox News and Sports networks. Cable companies worry that Murdoch will develop exclusive Fox entertainment and sports content for its satellite operations, putting local cable services at a major disadvantage. But buying Disney gives Comcast a nice hedge against Murdoch, while positioning Comcast to offer advanced products, such as improved on-demand movie service to exclusive shows in the new high-definition television format.

Indeed, buying Disney would give Comcast a rich source of programming for video on demand and establish Comcast as the premiere company in the rapidly converging markets for delivering broadband Internet and video entertainment to households. That will help it fend off competition from other telecommunications and satellite companies that are vying for the same consumers.

Industry insiders commented that Time Warner was scheduled to hold a conference call with investment bankers yesterday afternoon to discuss the possibility of making a run at Disney, while Pixar Animation Studios' Steve Jobs was thought to be in active discussions with a range of parties, including cable operators and others, about putting together an alliance to grab Disney.

A Disney-Comcast combination touches virtually every aspect of a rapidly converging media and Internet landscape, from range and control of programming to cable-television rates to online services to concerns about indecent content. By acquiring Disney's ABC network, Comcast, with 22 million television subscribers, would in several U.S. cities operate the only cable system while also owning one or more of the local broadcast stations. The FCC used to bar firms from operating cable and broadcast facilities in the same market, but those rules were thrown out by a federal court in 2002 and the FCC decided not to rewrite them.

The possibility of a recapitalization could preserve Disney's independence by recruiting a partner like Microsoft or John Malone's Liberty Media to inject some cash into the company, but however remote a recapitalization seems, the perception of one is likely to be good enough to achieve the desired effect - that is to get Comcast to increase its bid.

Indeed, Comcast both expects and welcomes an auction process: "We encourage them to run an open process," said Dennis Hersch, Comcast's attorney at Davis Polk & Wardwell. "We feel pretty confident and think this is a great, logical combination." Comcast's confidence comes from a reputation for being a disciplined buyer unafraid to walk away from unreasonable expectations or too-rich prices, regardless of how logical or great the combination may be, having done so with both MediaOne and VUE.

At Comcast's crowded New York news conference yesterday announcing the offer, CEO Roberts said he'd approached Disney's Eisner on Monday about a merger of the companies, but that Mr. Eisner, without consulting Disney's board, had told him, "It was not of immediate interest to put this together." Roberts wrote to Disney's board yesterday that, "Given this, the only way for us to proceed is to make a public proposal directly to you and your board."

But, Comcast's initial bid will not be enough to draw Disney in to negotiate, as the all-stock offer values Disney's shares at $26.47 apiece, just a 10 percent premium over Disney's closing price of $24.08 on Tuesday. Disney's stock leapt up 14.6 percent yesterday, to $27.60, already putting it out of reach of Comcast's opening offer. Disney reported first-quarter earnings of 33 cents a share, which beat analyst mean expectations of 23 cents, as revenues rose 19% to $8.5 billion from $7.2 billion with parks and resorts, studio entertainment and media networks all making contributions. Indeed, I'd put fair value for Disney way above $30 a share, maybe as high as $35 - if Comcast closes this deal for anything less, it's getting a bargain.

Clearly, one of the biggest challenges to completing this deal will be public outcry against media consolidation. Here's an excerpt from the Washington Post that describes how the deal would likely be received by regulators and consumer groups:

Like other mega-mergers of media companies, the Comcast-Disney deal "may well pose a risk to competition in the marketplace of ideas and the diversity of news, information and entertainment available to the American public," Sens. Mike DeWine (R-Ohio) and Herb Kohl (D-Wis.) said in a joint statement. The two men head the Senate Judiciary subcommittee on antitrust.

Consumer advocates and many in Congress fear that such continuing consolidation will result in four or five companies gaining the ability to keep out competition and diversity while stifling localism.

Mark Cooper, research director of the Consumer Federation of America, said it is inevitable that media companies will race to get as big as possible as they are freed from ownership limits and rules that force them to share their networks. "This is the merger that the industrial policy of the [Bush] administration wanted," he said. "You get outrageous sameness" of programming.

Cooper and others say that cable rates have risen as much as 50 percent in the past 10 years and that Comcast's market power would only increase.

Regulators did attach several conditions to the DirecTV acquisition, including requiring News Corp. to provide local channels in DirecTV's top 210 markets by 2008. News Corp. also would have to submit to arbitration in disputes over how much it can charge rival networks for its Fox programming.

To some, the more ominous consequence of the Comcast deal would be in controlling Internet service. Comcast is the country's largest provider of high-speed Internet service via cable, with 5.3 million subscribers.

Increasingly, consumer groups and many technology heavyweights, such as Microsoft Corp., Apple Computer Inc. and Amazon.com Inc., have urged the FCC to ensure that the few major Internet service providers not be able to keep certain Internet content off their systems.

Suppose, for example, that Time Warner's cable Internet service decided to make it hard to get non-Time Warner movies online. Or Verizon's DSL Internet service decided it was not in its interest to let non-Verizon Internet telephone traffic over its network.

"As a content company, it [Disney] was a powerful force in favor of keeping the net neutral - so it could compete equally with other content companies to sell its content," said Stanford University law professor Lawrence Lessig. "But why compete when you've got control over the pipes?"

Internet service companies have repeatedly said they have no interest in content discrimination, saying it would only drive customers to seek alternatives.

And FCC Chairman Powell, who has championed deregulating the media and Internet industries, has resisted seeking network-neutrality rules. But in a speech last weekend, he for the first time sent a message to industry that "net freedom" is an important principle and that the FCC will be watching for violations. "As we continue to promote competition among high-speed platforms, we must preserve the freedom of use broadband consumers have come to expect," Powell said.

However unlikely between companies don't directly compete, regulators might scuttle it before it gets off the ground if it looks as though the deal might have a negative impact on consumer prices. "I don't know if Comcast will get Disney or not, it's a hostile bid," Michael K. Powell, FCC chairman told John McCain during Senate Commerce Committee testimony yesterday. "A merger of that magnitude will undoubtedly go through the finest filter at the commission as is possible, I assure you."

Further, Roberts managerial skill in the more turbulent world content programming is still relatively untested, reminiscent of the disastrous mega-media-mergers of the past – AOL with Time Warner and Vivendi with Seagram - a pair of deals that collectively squandered nearly a quarter of a trillion dollars of shareholder value.

After the blows Disney's suffered in the past year, from the board turmoil to the Pixar alliance crumbling, Eisner will not survive this challenge, and Comcast may prevail in the end - it became market leader among cable operators after a similarly hostile $50 billion transaction to acquire AT&T's cable operations, after a similar reaction by AT&T as Disney's, under interestingly similar circumstances among boards.

But Comcast has weaknesses of its own - Roberts family members have special shares that give them a 33 percent voting stake with financial ownership of only 2 percent, which could make an excellent excuse for Disney to reject the offer.

Comcast president Stephen Burke is a key player in pulling off this deal, having been a Disney executive for 12 years before joining Comcast in 1988 and was one of many once thought a possible successor to Eisner. Burke's father was a top exec at Capital Cities, which bought the ABC television network before it merged with Disney. Yesterday, Burke criticized the performance of several Disney divisions and predicted that Comcast would be able to increase the company's cash flow by between $800 million and $1.3 billion within three years.

The most interesting part of the developing story is whether a white knight will join the fray to compete and cobble together a deal with Disney. A renegade like Barry Diller has always wanted to own a network, but it's uncertain whether he's got the wherewithal to compete in a bidding war. And, Viacom, who owns CBS and Paramount, and GE, who is currently occupied integrating NBC with Vivendi’s Universal media empire, would both face regulatory scrutiny that would almost certainly kill any of their attempts. Likewise, cable competitors Cox and EchoStar don't have the resources to make a run and neither does Time Warner really. Murdoch's News Corporation has said he's not interested... which isn’t very surprising at the moment, but might change if he smells fear on either side.

Microsoft is perhaps the most intriguing possibility (thus the pics of Bill) - a combination that would make things interesting to say the least, but which would be fairly out of character for Microsoft, which prefers arms-length cooperation with content creators and distributors, despite relatively small investments in vehicles like MSNBC and Slate.com - plus, they've never done an acquisition of more than a couple of billion dollars. But, following last week's joint collaboration announcement between Disney and Microsoft on protecting digital content assets for distribution over the Internet, and the ample resources Microsoft has at hand ($53 billion in cash), the combination would be a powerful one.

Whatever happens, because Microsoft already owns 7.4 percent of Comcast, it would control some 4 percent of a combined Disney-Comcast. And, that could give Microsoft leverage over the course of the deal and afterward as it looks to push its software beyond the maturing market for personal computers and into the developing boom in digital entertainment. With the next version of Microsoft's market-dominant Windows OS not expected for another two years or more, digital audio and video will need to keep PC sales humming. Even a minority ownership in the combination would be enough to strengthen links between Microsoft's software, Comcast's distribution and Disney's entertainment assets.

"At one time Microsoft seemed very intent on expanding its media role, particularly when looking at the perceived threat of then AOL and Time Warner," said Joe Wilcox, analyst at Jupiter Media, "But right now, the company is now focusing on getting back to basics." Microsoft also proved to be a key player when Comcast acquired AT&T's cable business, exercising its influence both through its stake in Comcast and a $5 billion investment it made in AT&T.

In the end, timing is everything, and it will prove once again the quality and importance of good timing if Roberts can lure the board to the negotiating table, given the current perception of Disney weaknesses at the moment, not least of which has them lacking a poison pill to help block such an attempt. Whether we think this deal makes as much sense as the AT&T deal did in 2002 - after all, what does Comcast know about running theme parks, sports teams (hockey's Flyers and basketball's 76ers, notwithstanding) and merchandising to children - Comcast still buys content from companies like Disney and if they can pull it off, it will represent a change in perspective for everyone in the media sector, as scale and scope becomes paramount to compete with Murdoch and Comcast-Disney.

My final verdict: on balance, I think far from a done deal, but if Disney's stock price takes any hits and Comcast can boost its own - or Microsoft gets involved, it's over for Eisner. Can Disney compete without Comcast? Probably, but only if it can make an acquisition of its own - Cox is looking awfully attractive lately.

- Arik

Pixar vs. Disney: Clash of CEOs and the New Competitive Challenges Both Will Face

Late last week, 10-month-old talks to renew the pact between Disney and Pixar that produced $2.5 billion in box office over the past few years, broke down as the companies failed to arrive at an agreement to move forward together - instead, they'll move forward as competitors.

Pixar's chief executive, Steve Jobs, who also runs Apple Computer, abruptly ended negotiations with Disney after no progress was made in what Disney and its financial analysts believed was just asking too much, including sole ownership of the films the two had made together under the existing agreement - including hits like "Finding Nemo", "Toy Story" and "Monsters Inc."

"What Pixar has that we don't have is John Lasseter," Eisner said during an investment conference last year. "It's like Walt in a way. He has that quirky sense of humor and understanding. John is unique." This gives Disney two years to nurture or hire its own version of Lasseter - himself a former Disney animator - to compete against future Pixar films.

Eisner faced criticism for having mismanaged one of the most profitable tie-ups in the history of Hollywood and letting Pixar go its own way. "He made them feel like second-class citizens when they were producing the best product in the country," said Stanley Gold, a former board member allied with ex-director Roy Disney who is campaigning for Eisner's ouster. "It was no way to manage talent," added Gold, who is campaigning for shareholders to vote against Eisner and three other board members up for reelection at the March 3rd shareholder meeting in a symbolic protest.

But short-term, analysts said, Disney would benefit, since it was not going to give away any of its profit from the two films left in the current Pixar deal, which had been part of the renegotiation. "Eisner had no other choice in my opinion," said Schwab SoundView analyst Jordan Rohan who estimates Disney would have forgone up to $1 billion in pretax profit over four years. "If my financial projections are correct... then Eisner will be vindicated, the company will be back and Roy Disney will find it hard to effect any change," he said.

Then, yesterday, in an conference call announcing a quadrupling of earnings on the strength of "Finding Nemo" DVD sales, Jobs ended any hope that the companies might continue their partnership by blasting Disney's own animation efforts and blaming the company for refusing to reach a compromise. Jobs said Pixar is now the "most powerful and trusted brand in animation" and is free to work with new partners.

"The truth is that there has been little creative collaboration with Disney for years," Jobs said. "You can compare the creative quality of Pixar's last three films, for example, with the creative quality of Disney's last three animated films and gauge each company's creative abilities for yourself."

"We will truly miss working with Dick Cook and his terrific distribution and marketing teams," Jobs said, referring to the chairman of Walt Disney Studios. "And you would be hard pressed to find anyone who loves the original spirit of Disney more than John Lasseter, Ed Catmull or myself. But after almost a year, it's time to move on." Lasseter, a former Disney animator, is the chief creative force at Pixar. Catmull is Pixar's president.

"Not even Disney's marketing and brand could turn Disney's last two animated films, ‘Treasure Planet’ and ‘Brother Bear’ into successes. Both bombed at the box office," Jobs said. "No amount of marketing will turn a dud into a hit," Jobs said. While Disney must now face Pixar as a competitor, it retains the rights to make video and theatrical sequels and TV shows to the movies covered by the current deal. However, despite retaining the right to make sequels to Pixar films, Disney does not own the underlying technology and must recreate the millions of lines of computer code for each character. "We feel sick about Disney doing sequels because if you look at the quality of their sequels, like ‘The Lion King 1-1/2,’ ‘Peter Pan’ sequels and stuff, it is pretty embarrassing," Jobs added.

Pixar still has two movies to deliver under its current deal, including "The Incredibles," due in theaters in November, and "Cars," which will be released next year.

Disney's studio division contributed 19 percent of the company's overall operating income in 2003 and during the past five years, Pixar contributed more than 50 percent of Disney's studio profits, but if Disney had agreed to Pixar's terms, it would have forfeited hundreds of millions of dollars in profits it is entitled to under the current deal.

One factor in Disney's favor may be that Disney's studio division has found increasing success with live-action films, such as "Pirates of the Caribbean: The Curse of the Black Pearl." Strong box office returns in that area could reduce the company's reliance on Pixar profits and Disney's theme parks, which contribute the bulk of the company's revenues, also have been recovering from several years of lower attendance.

Disney has said it will release its first-ever computer-animated film, "Chicken Little," in 2005 and has several other computer and hand-drawn animated films in the works. But the big challenge for Disney will be to fill the creative vacuum left by the loss of Pixar writers and animators such as Lasseter, Andrew Stanton, the director of "Finding Nemo," and Lee Unkrich, co-director of "Monsters Inc." and several other Pixar films.

Disney has cut back its own feature animation department having earlier this month announced it would close its Orlando animation studio and shed more than 250 jobs. Computer-generated characters will largely replace hand-drawn ones in Disney's restructured animation department.

In a recent interview with The Associated Press, Disney studio chairman Dick Cook said attracting and nurturing creative animation talent is a priority. "There is a group of kids graduating today from CalArts or from UCLA or USC that are bigger, better, faster, smarter than the current group," Cook said. "They have the ability to know what the masters have done before them, and they're better than they are. Attracting that kind of talent, for us, is one of the great priorities."

"Finding Nemo," Pixar's latest film, has earned more than $800 million at the international box office to date, surpassing the record previously held by Disney's 1994 film, "The Lion King." Jobs said every major studio has expressed interest in working with Pixar and negotiations with at least four of them will begin in March and Pixar hopes to have a new deal in place by the fall.

In an e-mail, David Stainton, picked by Eisner last year as Disney's new chief of animation, tried making lemonade: "Given Pixar's demands, this is good news for the company. It is also a great vote of confidence for feature animation - confidence in our talent, our slate, and our future. You all are awesome and ready for your close-up!"

Barron's said Pixar has probably capped its earnings power for the next three years because its next two movies, "The Incredibles" and "Cars," will be released under the existing deal, which effectively gives Disney more than 60 percent of any profits, and the same report cited a Morgan Stanley analyst who said the possibility of negotiating more favorable terms on those two movies is now off the table. And, as Pixar faces Disney as a rival in the increasingly competitive animated film business, Pixar's new partner is unlikely to be as strong as Disney in family entertainment. In the future, starting with its as-yet unnamed 2006 movie, Pixar will probably bear all the production and marketing costs, Barron's said.

So, can Eisner carry on? His instincts appear to be failing him… Several months before last summer's release of "Finding Nemo," Eisner, told his board not to expect a blockbuster and suggested that such a fate might not be all that bad. Eisner said that although Pixar was excited about its film, he was not impressed by early cuts he'd seen, according to people familiar with the matter. Should the movie falter, Eisner said, Disney could gain negotiating leverage in contentious talks to extend its partnership with the highflying animation company. Pixar, Eisner concluded, may be headed for "a reality check." The computer-animated film would, in fact, prove to be a reality check for Eisner, as the critically acclaimed "Finding Nemo" would soon make more money than any animated film in history. Advantage: Pixar.

I think in the end, the real source of competition was probably in the inflated egos of the two firms' CEOs, Eisner and Jobs, both famously strong-willed and who let their personal differences cloud their objectivity in a partnership in which the spoils were evenly split. Jobs felt so slighted that he put an offer on the table designed to make Eisner so angry talks would break down and each company could go their separate ways. Here’s a great backgrounder excerpt from the LA Times, comparing the two leaders:

Eisner has been at the helm of Disney for 20 years. He has weathered a number of storms, including poor performance of its stock, deteriorating ratings of its ABC television network, weak sales at its retail stores, and the defection of high-level executives who have found success elsewhere. The Disney chairman is widely known as someone who will not give an inch in his business dealings, whether it's litigating over merchandising royalties for Winnie the Pooh or forcing cable operators to pay escalating fees to air Disney's ESPN network.

The equally tough-minded Jobs has survived his own share of setbacks. In 1985, the legendary Silicon Valley entrepreneur left Apple Computer, the company he co-founded in his father's garage, amid a power struggle over its direction. Like Eisner, he is guarded and intensely protective of his company's brand name. Jobs recently demonstrated his maverick vision and shrewd negotiating skills in persuading executives at Universal Music Group and other labels to sell songs online with few restrictions through Apple's iTunes Music Store. Associates say he wins some battles sheerly on the force of personality. "He is the best salesman in the technology industry, bar none," one Silicon Valley analyst said of Jobs.

The pairing of two men with such combustible personalities may have been destined for a blowup.

The companies first joined in 1991. Back then, Pixar was not an equal partner. The upstart animation company was paid a fee to create digitally animated movies that Disney would market and release.

But after the surprise success of "Toy Story" in 1995, Jobs insisted on changing the financial balance of the relationship. He demanded that Pixar be paid half the profits on the films it wholly created for Disney. When Eisner balked, Jobs nearly walked.

Still, according to sources who know both men, Eisner continued to treat Jobs - known to have a disdain for authority - in a paternalistic fashion. "Steve viewed it as a partnership and he thought Eisner treated him like a hired hand," one source said.

Many say the turning point in the unraveling of their relationship came when Jobs and Eisner collided over the fate of "Toy Story 3" and how sequels figured into their new five-picture deal.

Under the terms of the agreement, sequels would not be counted as part of the five. At the time, Disney was trying to save money and time by making direct-to-video animated sequels. That's how "Toy Story 2" was initially envisioned. But as production proceeded, Jobs could see the financial and creative potential of turning it into a major movie that would be released in theaters.

Although Eisner resisted, Jobs would not give up, according to sources familiar with the dispute. In the end, Jobs' persistence paid off for Pixar and Disney. "Toy Story 2" made more money than the original, raking in a stunning $245 million domestically in 1999.

But because the movie was a sequel, it was not counted under the multipicture deal — a fact that Jobs accepted without making a ruckus. He was not so amenable when it came to plans to make "Toy Story 3."

This time, Jobs was adamant that the sequel be counted as one of the films Pixar owed under the Disney contract. Jobs' view was that "Toy Story 2" was a giant "freebie" for Disney and that Pixar should not be forced to provide another one.

Despite a collaboration that unexpectedly enriched Disney, Eisner insisted on sticking to the letter of the contract. He refused to compromise and publicly bragged about the leverage he had over Pixar.

Jobs was livid, according to a source close to the executive.

Even Walt's nephew Roy Disney couldn't mend the rift after Jobs sought his counsel, following Eisner's 2002 congressional testimony that directly mocking Apple's "Rip. Mix. Burn." slogan exemplifying digital piracy of entertainment content. But Eisner strictly forbid Disney from visiting Pixar to screen his pet short film project "Destino" saying Disney personnel would not mingle with Pixar's during tough contract re-negotiations.

Still, those analysts who'd speculated last week's announcement by Jobs was just a negotiating ploy are left to remember words from last November, while discussing Pixar's third-quarter earnings with analysts: "If we cannot strike a deal with Disney, then we can talk with the rest of these companies and they will know that we're not just talking to them to get a better deal with Disney, because we'll be finished with Disney."

The competitive dynamics get pretty interesting to think about for other players in Hollywood, namely DreamWorks with its upcoming "Shrek II" sequel, following up on the success of "Shrek" – the first film to win Best Animated Feature at the Academy Awards. Other studios will be vying to build out an animation franchise as well, as they spot a weakened competitor in Disney – possibly with Pixar – although they’d need to tolerate the relationship.

In the end, I think Disney thought DreamWorks took the right road by building their own animation machine and this represents largely a revision of history to redeem what was originally an unexpectedly entangling decision to buy rather than build. That said, "Toy Story", the film that started it all, might not have happened without both Disney and Pixar behind the wheel.

- Arik

Trouble in LEGO-Land: Playing Well, but Not Putting It Together

The name LEGO comes from the Danish words "Leg Godt", which means "Play well". In Latin it means "I put together" or "I assemble". The Danish toy maker, founded in 1932 and whose colored plastic building blocks have been favorite children's toys for decades (including my own), said last week it was expecting a $240 million pretax loss, the worst in the privately held company's 72-year history.

The company fired EVP and COO Poul Plougmann over failed marketing strategies and also dismissed Francesco Ciccolella, who was responsible for product development. The company said it might also lay off some of its 8,000 workers worldwide.

Kjeld Kirk Kristiansen, chief executive and grandson of the company's founder, said Lego's push to develop new products did not generate the results it wanted. Last year was "very, very bad," he said.

Since it reported its first loss of $47.8 million in 1998, Lego has been hit hard by increasing competition from the makers of electronic toys. Under Plougmann, the company reacted by expanding its electronic offerings, including making high-profile deals to use characters from Disney, the Star Wars films and Harry Potter books in its toys. It also developed popular CD-ROM games and its cool Mindstorms series of high-tech robots made of building blocks but programmed with a PC, in effect turning children in programmers plugging in reusable OOP code to control robot activity.

As a result, sales rose but profits stagnated because of the higher cost of producing the new products. The company now plans to stop making the electronics and movie tie-in products and return to its core mission of producing plastic building blocks primarily for pre-school children. "We would rather be in control of our own products, the things that we can decide," Kristiansen said. "We want to go back to our core products, and that is a key part of our future strategy."

Figures for 2003 were not released, but in 2002, Lego posted a 7% increase in sales, to $1.9 billion and a 1% gain in its net profit to $72.5 million. Until 1997, Lego did not release its financial results. The global toy market came to a near standstill in 2003 and caused a deleterious 25 percent sales drop for the company.

It's a real question whether a company like Lego can compete in the high-tech game world kids have become accustomed to. An excerpt from one story explains Lego’s dilemma:

[Kristiansen] said the company would now go back to its roots, focusing on building blocks and abandoning its forays into multimedia and film products. "We are returning to Lego's former concept. We're going to focus on building bricks as our main product, concentrating on little kids' eagerness to assemble," he said. "That's why we're pursuing much more aggressive marketing for building bricks, leaving products linked to films such as Star Wars on the back burner," he said.

One key factor for the weak result this year was the poor sales of games based on the Star Wars and Harry Potter films in 2002. Kristiansen acknowledged that Lego's recent attempts to diversify had been a catastrophe. "We tried to follow trends, to have toys that were in fashion, that are 'in' one year and 'out' the next. But it didn't work," he said. "In our efforts to follow the trend, we forgot about our traditional, basic products - the plastic building bricks - and we spent all our efforts on new toys that we launched together with films like Star Wars and Harry Potter".

Other forays included Lego theme parks in England, the United States and Germany, collaboration with the Formula 1 Williams car racing team to get children interested in the sport, and a clothing line bearing the Lego brand.

Facing tough competition from electronic games, Lego also jumped into the fray and began producing in 2002 videos and animated films based on its hugely successful Bionicle series, signing contracts with U.S. companies Creative Capers Entertainment and Miramax Films. Its film "Bionicle Mask and Light", produced in DVD and VHS formats, got off to a strong start when it was launched in the United States and Canada on September 16. Lego is still hoping for similar success in Europe and in the rest of the world.

Children's toy researcher Joern Martin Steenhold said there were several reasons for Lego's poor health. "Lego was not able to follow up on the success it had on its new products. There was a void after the Bionicle, Harry Potter and Star War series," he said. "In addition, Lego was not skillful enough to exploit its 'smart building brick' with an electronic chip, a super product with enormous potential," he added.

Making matters worse, Lego has been hit hard by the weak U.S. dollar. Some 40 percent of its sales are in the United States.

Danish PR guru Martin Lindstroem agreed with Lego chief Kristiansen, saying he believed the company's future lay not in multimedia products, but in the bricks. But he stressed that it "still has a lot of potential, it has one of the best brandnames, recognized in 90 percent of the western world."

Toy researcher Steenhold also said Lego was making the right move by targetting pre-school children. "All research, including my own, shows that computer games and other electronic games take up only 20 to 30 percent of children's play time. Boys play with traditional toys up until the age of eight or 10, and it is in the zero to seven age range that Lego has its niche," he said.

Personally, I think it takes a lot of guts for a company to take risks on product innovations as Lego has, fail miserably, then be able to admit it, dust itself off and take steps to move forward. One bright spot is its new $90 Mars "Spirit" rover 858-piece play set of building blocks – thanks to the successful touchdown of the NASA exploratory space mission, another risky proposition if the mission had failed. "It's on the high end of challenging to put together," said Jeff James, of Lego's community development office in Connecticut.

- Arik

Merger of JP Morgan Chase & Bank One Puts New Pressure on Competitors Large & Small

The wave of consolidation in the U.S. financial services industry has given birth to another mega-bank - and the new team of J.P. Morgan Chase & Co. and Bank One Corp. already is talking about getting bigger.

The nation's third- and sixth-largest banks announced plans for a merger after markets closed Wednesday, a deal that leapfrogs last fall's Bank of America-FleetBoston hook-up to become number two behind Citigroup, assuming both transactions are approved.

For $58 billion, J.P. Morgan Chase acquires Bank One's Midwest banking strength, $290 billion in assets and 1,800 branches in 14 states while keeping its name and New York headquarters status intact. It also gets a successor to 60-year-old chief executive William B. Harrison Jr., who agreed to give up that post in 2006 to Jamie Dimon, a Wall Street darling since before his four-year stint as Bank One's CEO, Dimon kept his Manhattan apartment before taking to the CEO’s office in Chicago. Dimon will be president and chief operating officer in the interim.

The banking acquisitions may not stop there, as Harrison and Dimon acknowledged they will have an eye on possible future deals once this one is completed, which they expect by mid-2004. "We're well-positioned if the right opportunity is there," Harrison said in a Wednesday evening conference call with reporters. "If the right situation comes along, we'll look at it."

This merger would create a company with assets of $1.1 trillion — a powerhouse in corporate and retail banking with 2,300 branches that trails only Citigroup's $1.19 trillion. It's the third largest U.S. banking deal ever, with the two bigger combinations the Travelers Group-Citicorp merger in 1998 that created Citigroup and the NationsBank-BankAmerica combo the same year that created the Bank of America.

In a Thursday morning meeting with Wall Street analysts, Harrison emphasized that integration of Bank One's retail operations with J.P. Morgan's commercial and investment banking prowess would create "a balanced model" that should lead to less-volatile earnings and a higher market valuation. Harrison also disclosed that he and Dimon "had talked over the years about strategic options" but that negotiations toward a merger became serious last November. The New York bank at that point had completed the integration of the J.P. Morgan investment house and Chase Manhattan bank that had begun in 2000. "And then the financials began to come around," Harrison said, referring to writedowns of troubled commercial loans and settlements on Enron regulatory issues.

Dimon called the J.P. Morgan-Bank One combination "the perfect fit" and added: "The reason to do this is because it's great for shareholders ... and right for the company."

J.P. Morgan gets diversification out of capital markets into retail banking, and Dimon gets to run the combined company with the brokerage capability he was coveting. But, the deal will come at a steep price for the as many as 10,000 employees who will lose their jobs when the companies' operations are integrated. Harrison, who will retain the chairman's title after he gives way to Dimon, said the companies were still identifying overlapping jobs to be cut. That number of job cuts would amount to 7 percent of the combined work force of 145,000, but the agreement was unanimously approved by the boards of directors of both companies.

"This landmark transaction will create one of the world's great financial services companies - a powerful enterprise well-positioned to generate significant value for our shareholders, customers and communities," Harrison said.

Dimon said the merger "makes tremendous sense strategically, operationally and financially." Asked about the possibility of future retail bank acquisitions, Harrison said they would be considered but, as a strong force in wholesale and retail banking, "we don't have to do another merger to be successful.

Bank One shareholders would receive 1.32 J.P. Morgan shares for each share they own. Based on J.P. Morgan's closing price of $39.22 on Wednesday, the transaction would have a value of about $51.77 for each of the 1.12 billion outstanding shares of Bank One stock - a total of $58 billion - and create an enterprise with a combined market capitalization of about $130 billion. The premium paid for Bank One amounts to about 14 percent based on closing market prices.

The retail financial services business will be based in Chicago, as will its middle market business, which includes the consumer banking, small business banking and consumer lending activities except for the credit-card business.

Losing a Fortune 100 company to New York is a blow to Chicago, which has lost the top billing for numbers of large corporations through mergers or closure in recent years, although it did add Boeing in 2001. It also takes away the company that was its sole candidate to be a national bank. Bank One had been based in Columbus, Ohio, before moving its headquarters to Chicago in 1998. Dimon said the merged bank is making a "major commitment" to Chicago by keeping much of its business there. He also said that contrary to widespread industry talk, he hadn't been "dying to get back to New York" and may even commute from his Chicago home if his family wants to stay here.

Analyst Reilly Tierney praised the deal for not being overly expensive and because "it gives Jamie Dimon a platform to build a serious global investment bank" and also answers the succession issues at J.P. Morgan. He said the combination will be especially potent in auto finance and credit cards. "They're going to be as big as Citi in the United States," he said.

In terms of the effects on competitors, Wachovia said the merger wouldn’t force their hand, but looking at the relative scale of competitors in this market following the consolidation in these past few years – the top three are all within about 20 percent of one another’s size, but number four is less than half the size of number three – we can expect to see even fewer banks out there than we have today.

There was a nice competitive and market effects overview at The Deal that puts it all in perspective:

It's the second 11-figure bank deal in the U.S. in three months. And whereas Bank of America Corp.'s $47 billion purchase of FleetBoston Financial Corp. in October precipitated a wave of small bank deals (and may have helped push the J.P. Morgan deal), the acquisition of Bank One is seen as heralding a wave of big deals — really big deals.

Statistics from SNL Financial show that once the J.P. Morgan, Bank One and BofA-Fleet deals close, there will be three massive American banks: New York-based Citigroup Inc., with $1.2 trillion in assets; J.P. Morgan, with $1.08 trillion; and Charlotte, N.C.-based Bank of America with $933 billion.

But the No. 4 bank, Wells Fargo & Co. of San Francisco, is less than half the size of Bank of America with $394 billion in assets. Analysts and bankers believe that 2004 will be highlighted by the race to make up ground between the big three and the rest of the pack.

The banks analysts say are now in the spotlight are: Wells Fargo; No. 5 Wachovia Corp. of Charlotte; No. 6 U.S. Bancorp of Minneapolis; No. 8 Sun Trust Banks Inc. of Atlanta; and No. 20 Comerica Inc. of Detroit.

"We believe the end game is now being played, and that the pressure for banks to pick their partners will only intensify as the number of both large potential suitors and truly difference-making targets shrinks," said Michael A. Plodwick and Richard Erin Caddell of Blaylock & Partners in a note to clients on Thursday, which predicted consolidation among the top 10 banks. "Also, that BAC [BofA] has recovered nearly all of the value it lost following the Fleet announcement should provide further incentive for potential buyers and sellers."

One banker said Wachovia in particular is worth watching because chairman and chief executive Ken Thompson will feel pressure in his core East Coast retail network now that the three mega-banks are concentrated in this market.

Overlapping the basic need to bulk up will be the need to find partners that are complementary to each bank's existing business. A West Coast bank like Wells Fargo will probably want an eastern partner like Bank of New York or Wachovia. A corporate bank like U.S. Bancorp will probably want to increase its retail business, so a partner like Winston-Salem, N.C.-based BB&T Corp. may be suitable.

Meanwhile, the middle market will feel the effects of the J.P. Morgan-Bank One deal, especially in the Midwest. After BofA announced the FleetBoston deal, banks in the Northeast scrambled to merge so they would have a larger network with which to poach disgruntled customers of the enlarged bank. And bankers foresee a similar pattern occurring now in the Midwest.

"The movement at the top of the industry only encourages that hope among the smaller players," said Ted Peters, president and chief executive of Bryn Mawr Trust Co. of Philadelphia. "We're sure to see more action among the local banks in 2004."

SNL said there were 68 U.S. bank deals in the fourth quarter with a total value of $57.3 billion. That means that excluding the Bank of America deal, the average value of the other 67 deals was a mere $163 million, showing the prevalence of small deals in the quarter.

Three foreign banks may also be drawn into the consolidation if it rapidly gains pace. ABN Amro Holdings NV of the Netherlands has the seventh-largest banking presence in the U.S. and could expand its Chicago-based network further. London-based HSBC Holdings plc has a New York franchise and is still integrating its Household International acquisition of last year, but certainly has the capital to expand further. And Royal Bank of Scotland plc has built its Citizens Financial unit into the 17th-largest U.S. bank mainly through small purchases, and may now be ready for a bigger acquisition, possibly Sovereign Bancorp. Inc. of Pennsylvania.

Yet the recent spate of mergers has also driven up the cost of U.S. banks, and another banker said that could prove a barrier to foreign banks that have been talking about entering the U.S. market, such as Barclays plc and Lloyds TSB Group plc of Britain.

Indeed, this puts new pressure on Citibank to expand its domestic retail footprint, and they have another capital markets competitor with an even larger low-cost deposit base to leverage. The chess board has shifted and banks with strong, but not dominant, deposit franchises will be rethinking their strategy.

But, I don't think consolidation will necessarily be a bad thing for consumers.

Now that U.S. banks are feeling a bit more confident about their borrower's health and some optimism has been reflected in equity markets, M&A activity will heat up after a couple of years' off and this should strengthen the U.S. banking market globally, which has historically been a fragmented one compared to other markets around the world. It's unusual that we don't have a bank that has more then 10 percent of market share of deposits in the U.S. Thanks to consolidation we're finally beginning to get banks with a nationwide franchise, so common elsewhere in the world.

- Arik

Two-Buck Chuck: Charles Shaw vs. Napa Valley

Friday night’s 20/20 TV newsmagazine on ABC featured a great piece on the effect Charles Shaw – aka, "Two-Buck Chuck" – is having on the wine marketplace… especially Napa Valley vintners. So much so, they’re suing to get the winery barred from using the very word "Napa" on its label.

Still, the company took advantage of a micro-economic climate – that is, an oversupply glut of cheap grapes – in California’s wine country to change the rules and fans are buying the stuff by the case.

There are a couple of articles on the ABCNEWS.com Web site that recap the 20/20 feature and it’s worth a read:

To wine traditionalists, California's Napa Valley is hallowed ground, and a $2-per-bottle upstart wine commonly known as "Two Buck Chuck" is stomping all over it. Though the label of the $2 wine reads "Charles Shaw," it was not the brainchild of anyone named Charles. The wine, which sells exclusively at Trader Joe's stores, was created by Fred Franzia, who prefers to call his product a "super value wine," rather than a "cheap" one.

But Napa winemakers claim it's not the price of the wine that has them teed off. Rather, for one ex-winery owner, it's the name "Charles Shaw." For others, it's the claim "Two Buck Chuck" makes to a Napa Valley origin.

"I like the guy; I just despise his business practices," said Tom Shelton, the CEO of a Napa Valley-based premium label, Joseph Phelps, and part of a group of Napa winemakers suing Franzia to protect the "Napa Valley" name.

"I don't have a real argument with … the existence of Two Buck Chuck," Shelton said. "My argument really is when producers like two buck chuck try to pass themselves off as Napa Valley wines."

The label reads "cellared and bottled in Napa" which is true, but Shelton says Franzia doesn't make Two Buck Chuck with Napa-grown grapes, and that's misleading to consumers.

Shelton says Franzia doesn't make Two Buck Chuck or any of his 32 wines with Napa-grown grapes. His labels read "cellared and bottled" in Napa, which is true. But, even so, Shelton says, it's misleading to consumers.

"This really represents consumer fraud. It would be as if I were trying to pass off a Volkswagen as a Porsche." Franzia says it's all just sour grapes and snobbery, and he's won so far in court. "We'll take them on," Franzia said. "And I'm sure we will prevail legally on this topic."

Maybe so, but Franzia does have a reputation for pushing the legal envelope to the limit. He admits he was convicted of a felony a decade ago, but told ABCNEWS it was "history, about some grapes that got mislabeled," and involved "a small percentage of wine."

But the percentage was not small enough to escape a fine of $3 million and a felony conviction.

A couple years later, in 1995, Franzia bounced back to buy the Charles Shaw label for about $18,000. He has made millions with the label, which racked up $150 million in sales last year.

Still, according to Franzia, "The name is just another name."

However, it's not just another name to one former winery owner — Charles F. Shaw.

"I just want my vintner friends in Napa Valley to know I didn't sell this name to these folks," Shaw said.

The real Charles Shaw lost his vineyard and the Charles Shaw label to his wife in a painful divorce. When she went bankrupt, Franzia snapped it up. Now, Shaw loathes having his name on a $2 bottle of wine that, he says, has forced his friends in the industry to suffer losses and layoffs, even closures.

"I'm very uncomfortable about it, and I'm upset about it, and I think it's wrong," Shaw said. What does Franzia have to say to Shaw?

"I don't have to say anything to it," Franzia told ABCNEWS. "I own it."

And, it tastes good too - the graphic below shows how Shaw rates versus its pricier competitors. Excerpted from the part of the story on quality for the price:

Five years ago, Franzia's nose for business told him California was growing more wine grapes than people could drink. And he was right. When the grape glut came, Franzia bought up tons of cheap grapes all over California to create his rock-bottom priced wine.

Now, "super value wine" is a whole new industry category, with about a dozen labels selling for $3 or less.

"There are a lot wines that are coming down in price," said the economist Robert Smiley, a professor at the University of California at Davis and a leading consultant to the wine industry. "This is a great time to be a wine drinker."

"Everybody in the industry is talking about Two Buck Chuck," Smiley said. "There are few wineries in the very high end who think they're immune and they probably are if they're selling in three digits, over a hundred dollars a bottle. But virtually everybody else is affected one way or another."

And what has winemakers running scared is that Trader Joe's, which has exclusive rights to carry the label Charles Shaw, can't keep it on the shelf.

"You've got the people who buy one or two bottles," says Trader Joe's wine captain Alan McTaggart. "Then, you get the people who buy a case. Then you get the four or five cases."

When stacked up against the competition — red or white — "Two Buck Chuck" held its own, even inching ahead of the $50 Chardonnay.

"These wines don't taste bad," admitted Jess Jackson, the founder of the wine label Kendall Jackson, whose wine was part of the ABCNEWS taste test. "They're thinner. They have less character, less focus … and less heart in the bottle."

Ann Noble, a professor at the University of California at Davis, the country's top school for winemaking, said it's all about expectations, and that knowing the price can influence your taste buds.

"It's cheaper wine, that's the expectation for the Charles Shaw," Noble said. "You have an expectation the cheaper wine isn't going to be as good. I tell you it's a cheaper wine, what do you do? You look for flaws. I tell you this is a good wine, you don't look for flaws, you look for good things."

- Arik

Wheels & Gadgets: 2004 Consumer Electronics Show Hits Las Vegas & 2004 North American Auto Show Wraps in Detroit

Another week of gadget porn is underway as the 2004 Consumer Electronics Show in Las Vegas gets going, even as the 2004 North American Auto Show in Detroit rolls on. Both exhibitions highlight the renewal of hypercompetitive strategy reminiscent of the pre-bubble 90’s, where product design is once again the key differentiator among a crowded field of competitors.

While the coolest of technologies bubble over in Vegas, it seems the cutthroat market for television sets has been renewed, fueled by the hottest Christmas season in recent memory squarely focused on a new class of thin, low-cost plasma and LCD TVs from fresh competitors like Gateway, HP, Dell and other computer firms. Even chip giants like Texas Instruments and Intel are pushing DLP and LCOS technologies as next-generation solutions for the converged and connected home.

Bill Gates’ opening keynote, punctuated by his first pairing with surprise guest Jay Leno since the Windows 95 launch "back in the day", introduced the first new breed of SPOT watches in what one observer commented:

Watches say something about us. Rolex says power, Hamilton says suave, Seiko says thrifty. SPOT says stupid.

Panasonic launched a new line of plasma TVs with HDTV included (finally), while Sharp announced plans to add Wi-Fi to its line of LCD TVs and Thomson rolled out an amazingly cool looking 70" DLP that's less than 7" thin.

Toshiba introduced the world’s smallest hard drive, delivering multi-gigabyte capacities for mobile devices. Acer America sped past the competition with its stunning Ferrari 3000 Notebook entry. Netscape launched a new low-cost Internet service and Canon introduced everything from new multifunction printers to camcorders.

WHEW! For more, read these recaps from PC Magazine or from USAToday.com

Meanwhile, in Detroit, competition is heating up over an ever-more-demanding car market that needs to keep growing even as the taste for used cars is the worst in recent memory. Low-interest financing keeps driving ever-bigger SUVs alongside cutting-edge hybrid gas-electric vehicles from Honda and Toyota to hit a more mature North American market.

The model year 2005 promises to be the year of the muscle car, with horsepower taking over the spotlight at 2004’s NAIAS. Ford appears to be back with a vengeance with new cars from Aston Martin, Volvo, Jaguar and Land Rover as well as the new "Project Daisy" initiative to create a new high-performance sports coupe to rival the Mustang – there’s a good video on all of the details. And, the Ford F-150 took top honors as 2004’s North American Truck of the Year. Meanwhile, Infiniti added to its All-Wheel Drive lineup with a new Full-Size QX56 Luxury SUV and G35 Sedan AWD, and Toyota launched a hybrid SUV.

Here are a few more links I found interesting:

• General Motors: Driving Away the Competition
• New York Times Auto Show Coverage
• Automakers Go All Out in Search for New Look
• Hyundai Targeting U.S. Growth
• Hip-Hop Style Mixes with Hot-Rod Culture
• Nissan: U.S. Crucial to Future Success

I really wish I had business in the Motor City this month (instead I'm visiting lovely Philly, the week after the Eagles beat my beloved Packers).

CES in Vegas is always too short in my opinion and NAIAS can seem too long, but it was definitely a treat a couple of years ago when I was in Detroit for a conference and got to see both production and concept models adorning the exhibitions – truly, a beautiful thing.

- Arik

Fortune 100 Best Companies to Work For

Happy New Year!

As we kick off another new year, I call today on Fortune to give us their annual list of the "100 Best Companies to Work for" – and topping the list is J.M. Smucker:

Jam and jelly maker J.M. Smucker & Co. made the top spot in Fortune magazine's 2004 ranking of "Best Companies to Work For," an annual list released Monday. It's the first time a manufacturer has made No. 1 on the top 100 list. Last year, Smucker ranked No. 8.

Run by two brothers, the Orrville, Ohio-based company is a "throwback to a simpler time," according to Fortune. Employees said the company treats them like family, with a corporate culture based on objectives including: "Listen with your full attention, look for the good in others, have a sense of humor, and say thank you for a job well done."

Legal services firm Alston & Bird took the second spot, inching up from No. 3 last year. Among the benefits its employees said they appreciated were maternity leave of up to three months at full salary for mothers - and fathers if they're primary caregivers. Alston & Bird also provides an on-site child-care center that costs an average of $500 a month.

Rounding out the top 5 "Best Compaies" were, in order, home decor retailer Container Store, financial services firm Edward Jones, and commercial bank Republic Bancorp.

Republic managed to climb to No. 5 from last year's No. 17 spot, after awarding 300 employees trips to Aruba, Cancun, or the Dominican Republic last year. Edward Jones, falling to No. 4 from last year's top spot, added 1,500 employees in the past year and hasn't had a single layoff in 34 years, according to the report.

To arrive at its list of best companies to work for, Fortune randomly selected 46,526 employees from 304 candidate companies to fill out a survey created by the Great Place to Work Institute. Each candidate company also filled out a questionnaire detailing its people policies, practices, and philosophies. The employee portion accounted for two-thirds of the total score, according to Fortune's report.

Software maker Adobe, engineering and construction company TDIndustries, software maker SAS Institute, family-owned supermarket Wegmans Food Markets, and chipmaker Xilinx made the bottom half of the top 10 companies, in that order.

Check out the full list at Fortune.com, then go get a job at one.

- Arik

Forbes 400 Best Managed Big Companies 2004

Since it’s New Year’s Eve and all, I decided to mooch off Forbes and supply the supreme list of companies to be admired – Best Buy tops the list this year and duly-so. Check ‘em all out for yourself.

Here’s hoping everyone had as blessed a 2003 as I did and I wish you a very Happy and Prosperous New Year in 2004.

- Arik

Chinese Firms Buying Up Trademark Brands to Compete for Premium Prices

The move by Chinese firms to "go premium" and capture prestige brands and the awareness and loyalty they convey has long been a goal of a country most commonly thought of as the low-cost-producer, but recent moves by some firms to buy up everything from Dirt Devil to Revlon remind us of their rather more upscale aspirations. Here’s a few choice excerpts from the San Francisco Chronicle:

In 1905, in a backyard factory in Cleveland, workers began making vacuum cleaners for a company that became known as Royal Appliance Manufacturing Co. Almost a century later, Royal, which established the popular Dirt Devil brand, stopped making almost all of its vacuums in Cleveland because it realized it was cheaper to pay a Chinese company to do it.

Dirt Devil's departure would have been a relatively minor chapter in the grand exodus of American manufacturing to China. But this year the Chinese company that got the contract to make Royal's vacuums acquired something potentially even more valuable: It bought Royal and the Dirt Devil brand name, too.

Other Chinese manufacturing companies are also starting to buy the brand names of products that they formerly only produced. In some cases, they acquire the company, as with Nakamichi stereo gear, in others they get an exclusive licensing deal, as with Benetton eyeglass frames.

Hong Kong-based Techtronic Industries Co., the company that bought Royal and Dirt Devil, also grabbed the Ryobi tool brand from the parent company, Ryobi Ltd., in every market but Japan. As with Royal, Techtronic had been making Ryobi products for years. The Hong Kong company also bought two brands with products similar to ones Techtronic already made: the Homelite outdoor-products brand from Deere & Co. of Moline, Ill.; and the VAX brand of floor-care products, formerly owned by England's VAX International Ltd.

The purchase by Chinese manufacturing companies of Western and other foreign brands signals an important shift in the supply chain forged during the past three decades between the West and Asia. While such deals so far aren't numerous, conditions are ripe for many more, pointing to what may well be the next major phase in China's industrial evolution. Instead of constantly trying to lower their production costs to increase margins, Chinese companies are now trying to capture brand value - the ability to sell their products at a higher price directly to consumers who are willing to pay for a recognized label. If this trend continues, it means more dollars paid for brand-name products will wind up in China.

Several factors are responsible for the increasing Chinese purchases of American brands. Many U.S. companies - particularly those that own midsize brands such as Dirt Devil - have been under pressure as Asia's cheaper, no-brand goods flooded into the U.S. and competed directly with American brands. Major U.S. retail chains have played these weaker brands against each other, demanding bigger discounts, faster delivery and lower inventories.

In addition, Chinese factories themselves are feeling the trickle-down effect of this pressure. The country's rapid development has produced an oversupply of factories, forcing Chinese manufacturers to vie with one another to produce the same goods for the American and European markets. The intense competition has driven down prices and made their margins razor thin.

"We looked at our product lineup and we saw this trend of shrinking margins, greater competition," says Christopher Ho, chairman of Grande Holdings Ltd., a Hong Kong-listed consumer-electronics manufacturer, which supplied Sony, Pioneer, JVC and others.

Grande snapped up three Japanese electronics brands in bankruptcy proceedings. Its margins on those lines are between 8 percent and 10 percent, compared with 3 percent to 4 percent on the products it makes for others.

Similarly, Hong Kong firm Moulin International Holdings Ltd. in 2001 bought the licenses to a portfolio of brands including Benetton, Revlon and Sisley, from three European companies that were struggling.

In general, the Chinese companies acquiring foreign brands have been focused on making products, not marketing them. And managing brands sometimes puts them in unfamiliar territory, as they must respond to the changing tastes of consumers half a world away.

In the course of its brand-buying spree, Techtronic has increasingly moved away from its roots as a no-name, low-cost Chinese manufacturer and toward an integrated marketing and sales company. It deals every day with major U.S. retailers such as Home Depot Inc. and Wal-Mart Stores Inc. as well as European retailers. Since its first acquisition in 1999, Techtronic's revenue has risen more than threefold to $1.2 billion last year; profit has almost tripled in the same period, to $53 million.

At this stage, Techtronic maintains the same close relations with its Royal unit that it developed as a supplier. The U.S. subsidiary, based in Glenwillow, Ohio, still handles much of the marketing for the Dirt Devil brand, although Techtronic has begun working in that area, too. Hong Kong staffers are more involved with retailers and have taken a bigger role in dealing with product design and presentation.

There a fascinating history of Techtronic also included in the article, so I’d encourage you read the whole thing. And, keep watching Asia for brand migration. Odds are, we’ll see more U.S. dollars flowing that direction in the future, especially if Beijing successfully resists Washington’s pressure to let their currency float, even as the U.S. continues to devalue the greenback in hopes of making America more competitive abroad.

- Arik

Christmas Toy Wars

As Christmas Eve dawns, we see the end of the Toy Wars that have eroded a lot of the profit out of being in the toy business. Wal-Mart's price war has impacted toy-specific retailers the most - KB and Toys-R-Us - but KMart, Target and others are also feeling the heat.

Here's an excerpt from the San Diego Daily Transcript, that I think offers a good summary macro-view of take-aways similar to many local toy markets across the country:

FAO Schwarz's Zany Brainy children's toy stores are liquidating in what could be the beginning of meltdown in the toy industry. Zany Brainy, scheduled to have closed all its stores by the end of January, has numerous locations in San Diego, including a store in Fashion Valley, on Westview Parkway in Mira Mesa, and on Grossmont Center Drive.

FAO Schwarz, a toy retailer in danger of going out of existence, also once had a store in Horton Plaza. FAO Inc., the toy retailer's parent, filed for Chapter 11 bankruptcy for the second time in a year earlier this month.

On Nov. 17, as noted by Bloomberg News, New Jersey-based Toys "R" Us Inc., the second-largest U.S. toy retailer behind Wal-Mart, announced it would close 182 Kids "R" Us and Imaginarium stores.

Toys "R" Us closed its Imaginarium store in Horton Plaza after an unsuccessful run some years ago. A Kids "R" Us store that exists in La Mesa will be closed. While there are only a couple of Toys "R" Us-related stores that have or are scheduled to close in San Diego County, a look at the company's bottom line suggests that more closures could be on the way.

Toys "R" Us store locations in San Diego County include stores at 8181 Mira Mesa Blvd. in Mira Mesa; 1240 Morena Blvd. in Linda Vista; 1100 East 30th St. in National City; 1240 Auto Parkway South in Escondido; 2425 Vista Way in Oceanside; and 1008 A Industrial Blvd. in Chula Vista.

Toys "R" Us reported a net loss of $38 million, or 18 cents a share, in the quarter ended Nov. 1 compared to a net loss of $28 million, or 13 cents, for the like quarter a year earlier.

The Wayne, N.J.-based company had announced late last year it would be slashing 1,900 jobs and closing 64 stores as it continues a restructuring effort to focus on its core toy business, but the company hasn't been able to stop the bleeding. Pretax costs for the store closings are estimated to be about $280 million.

Toys "R" Us, like FAO Schwarz, is trying to keep Wal-Mart at bay. As noted by Bloomberg News, sales at Kids "R" Us stores opened at least a year dropped 11 percent, for the fifth straight decline.

A check of online prices at both Wal-Mart and Toy "R" Us revealed that the Swan Lake Beauty Castle that cost $109.99 at Toys "R" Us, cost just $98.97 at Wal-Mart.

Toys "R" Us is offering as much as 40 percent off merchandise such as Hot Wheels cars, but analysts wonder whether it will be enough.

"I can't really get comfortable about (Toys "R" Us) long-term competitive position," said Abhay Deshpande, a retail analyst at First Eagle Funds, whose $11 billion in assets don't include Toys "R" Us shares. Deshpande, who had personally owned the retailer's shares, dumped the Toys "R" Us portfolio in 2001.

While conceding it may not be able to compete with Wal-Mart on price, Toys "R" Us is hoping that specialized customer services, such as providing play areas with everything from play pens to jungle gyms, will help it regain its market share. "We have done a complete overhaul of all of our stores," said Toys "R" Us spokeswoman Susan McLaughlin. "They are brighter, cleaner and a lot more fun."

Karen Burk, a Wal-Mart spokeswoman, said the most popular items this year are the Barbie Swan Lake, Teenage Mutant Ninja Turtles and Leap Pad books.

Sometimes, the toys are a result of a partnership with another retailer. In a joint venture with Home Depot, Toys "R" Us is offering a toy animal collection known as "Barnyard in a Bag." Then there is "Go-Go, the Walking Puppy," a robotic dog for $35, that normally retails for $49.99.

Stores such as Toys "R" Us and KB Toy & Hobby of Massachusetts may have a difficult time competing head to head with Wal-Mart, because they carry many of the same items. There are four Geppetto stores in Fashion Valley, La Jolla, Bazaar del Mundo and at the Hotel del Coronado, and owner Brian Miller said the stores are doing fine.

"We're actually running a double digit increase, though I know that it's definitely not the trend," Miller said. Miller said there was what he referred to as "a bit of a shakeup in the toy industry," he responded with a blitz of newspaper and television advertising. The ads have paid off. "And we weren't afraid to buy inventory, so we're well stocked," Miller said. While admitting there are items that are sold in both stores, Miller said that Wal-Mart doesn't have the hand made items, nor the customer service.

Jules Martin, owner of Hobby Central, whose business is in the same shopping center as a Wal-Mart in Poway, said while there are a few things such as rocket motors that people might be able to get cheaper at Wal-Mart, they are not likely to find a person to give them chapter and verse about model rocketry.

There were a few other trend-pieces that I thought would make for good reading this holiday season:

• KB Toys Delays Payment to Some Suppliers
• Toy Giant FAO May Have Buyer in the Wings
• Fashion Dolls Fight It Out Between Wholesome and Trashy
• Knock-offs for the Toy Box?

Have a blessed holiday,

- Arik

Abercrombie & Fitch: Accusations of Racism in Sales Staff Hiring

CBS News’ program "60 Minutes" did a piece recently by Morley Safer on Abercrombie & Fitch and accusations of racism in their hiring practices for in-store sales associates – essentially that, the company excludes people of color from jobs, hoping to sell clothes to a particular (racial) demographic… e.g., white. The excerpt below is from the conclusion of the piece, but you can read it all for yourself online. In light of their recent pulling of the controversial catalog in the past few days, this other bit of bad press is probably not what they were hoping for as a Christmas present.

After bankruptcy and buyouts a few years ago, Abercrombie decided on a major face and body lift. Out went the camping gear - and off came the clothes.

Abercrombie’s image is now party-loving jocks and bare-naked ladies living fantasy lives. Nubile young store "greeters" stripped down during the holidays to boost up sales. Flipping through their catalogs, you now might wonder what Abercrombie is selling. Could it be clothes?

"Sex sells with any age group, and that’s what they’re trying to do," says Elizabeth Nill, a sophomore at Northwestern University. Elizabeth and her friends feel that Abercrombie & Fitch has a certain something.

"I would describe it as the all-American look. I know it's very cliché," says Elizabeth. "But I don't think there's really any other way to describe it."

In fact, she enjoyed shopping there so much that she is often asked if she wants a job. She says it’s happened to her about five times, in three different stores.

And it’s not by accident. Abercrombie & Fitch wants a sales force that reflects what’s up on its walls - cool yet seductive.

"The skirts are getting shorter. The tops are getting smaller," says Elizabeth. "That seems to be the trend and Abercrombie is going with that."

But Abercrombie & Fitch, the reputation that it once had was a very classical, classy look. That’s long gone. Now, the provocative strategy aimed at teens and twenties has done wonders for Abercrombie’s bottom line. And of course, the more parents are outraged, the bigger the sales. And now with more than 600 stores and annual revenues well over $1 billion, Abercrombie & Fitch has become just about the largest teen retailer on the block - and a mainstay of "Generation Y" couture, and even its music.

But all that fair hair and skin has made them a juicy target. They’re being taken to court, accused of racial discrimination in their hiring. Does Abercrombie’s all-American look exclude some Americans?

"All-American doesn't mean all-white," says Jennifer Lu, a student at University of California, Irvine and a former salesperson at a Costa Mesa store. Lu and several other young people say they couldn’t get a job or were fired because their "look" was not consistent with the Abercrombie "look."

"It’s dominated by Caucasian, football looking, blond hair, blue eyed males. Skinny, tall," says Lu. "You don't see any African American, Asian Americans And that's the image that they're portraying and that they're looking for."

Lu says she was fired after corporate officials visited the store, and according to her, didn’t like what they saw: "A corporate official had pointed to an Abercrombie poster and told our management at our store, ‘You need to have more staff that looks like this.’ And it was a white Caucasian male on that poster."

She says shortly thereafter that several Asian-American salespeople were fired and replaced with white males.

Anthony Ocampo says blacks, Asians and Latinos were sometimes hired by Abercrombie, but he says "the greeters and the people that worked in the in-season clothing, most of them were white, if not all of them were white. The people that worked in the stockroom, where nobody sees them, were mostly Asian American, Filipino, Mexican, Latino."

Ocampo worked four years ago as a sales rep at an Abercrombie store during his Christmas break from Stanford University. He says he assumed his job would still be available when he returned home that summer, but when he turned up for work he found out he lost his job.

"’We're sorry. We can't rehire you because we already have too many Filipinos working at this store,’" recalls Ocampo. "Too many Filipinos. That was her exact words … I was speechless. I didn't really know what to say. I've never seen racism that explicit prior to that."

The closing quote from the piece: "... their all-American image does not mean all white. That's not right. That's not legal," says Lu. "That's what we grew up learning all-American to be. All-American, a melting pot. Not all white."

- Arik

For FAO Schwarz, Christmas Looks Like A Humbug

Venerable retailer FAO appears poised for liquidation, even as the toy-shopping season approaches for Fifth Avenue's FAO Schwarz.

Zany Brainy is already being liquidated and FAO Schwarz and The Right Start are right-around-the-corner, if a buy-out can't be arranged before December 15th. Here's an excerpt:

...hefty competition, especially from discounters willing to slash prices, was too much for FAO. The company said in November it had instructed a banker to find a buyer for the business.

One likely suitor is Saks Inc., which invested $5 million in FAO and operates boutiques under the FAO name in some of its department stores, a person familiar with the situation said.

Another possible bidder could be Target, which has made a reputation of acquiring well-known brands like Isaac Mizrahi, this person said.

Julia Bentley, a Saks spokeswoman, didn't return a phone call seeking comment. A Target spokesman couldn't be reached.

FAO is racing the clock, given that the value of its inventory quickly loses value after the Christmas season.

As a result, the company said if a deal is not completed by Dec. 15 it could be forced to quickly sell the remaining assets of FAO Schwarz and The Right Start, including inventory, trademarks and leases.

That scenario would open the door to a wider range of buyers, including private equity firms and toy manufacturers interested in licensing the FAO Schwarz name, but not in running retail stores, analysts said.

The main assets for the 15-store FAO Schwarz chain include rights to the name, controlled by the FAO Schwarz Family Foundation, with an estimated value of $10 million to $12 million; the lease to the flagship Fifth Avenue store ($10 million to $12 million); and the inventory ($20 million). All told, the company could be worth $45 million to $55 million, analysts said.

- Arik

Handspring's Treo 600: A Hot Product with a Big Flaw

Pretty, aren't they?

With Christmas coming up, I thought I'd highlight one of the gadgets that's sure to be on a bunch of wish-lists this season: Handspring-ne-PalmOne's Treo 600. Sporting a VGA digital camera, quad-band GSM or CDMA models, QWERTY thumb-board, SDIO expansion and a Palm 5 OS, this is the coolest entry in the smart-phone category.

Unfortunately, it'll sell like hotcakes - despite what I believe is perhaps the silliest product oversight in mobile communications. This thing has no removeable battery! Not only do cell-phones run out of charge, PDA's make power demands even more robust, and now I can't even carry a spare around to bail me out in a jam.

Furthermore, batteries eventually wear out and won't take a charge any longer. If I'm gonna shell out $600 bucks for a Treo 600 (that must be how they price 'em, eh?) at least let me amortize that investment over a few years of product life. I don't think PDA-makers can afford (yet) to build in planned obsolecence like that.

Although I know I'm not the only one who feels this way, it's a shame this product will sell so well - it's falsely reinforcing to the manufacturer that the issue doesn't matter. This had been my must-have gadget of the season, but until it comes with a replaceable battery, it's off my list for good.

- Arik

BAE Systems: Sex, Cars, Gambling, Saudis & the UK's Largest Business Deal Ever

There was an article I noticed in CorpWatch today, about how BAE Systems - the former British Aerospace - allegedly secured sales of some $33.4 billion in jet aircraft and other weapons systems to the Saudi government, in return for a providing the buyers with a "slush fund to finance prostitutes, gambling trips, yachts, sports cars, and more for its most important clients the Saudi royal family and their intermediaries, greasing the wheels of the largest business deal in UK history".

Really fascinating reading!

- Arik

Is Sony Broken…? 20,000 Jobs Lost is One Indicator

Browsing around this morning, I noticed on the BBC Web site from a couple of days ago an article describing how Sony is being forced to partner with Plasma/LCD-TV competitor Samsung in order to try and recover in an important (and eminently profitable) market that Sony has found itself losing ground in. Likewise, DVD Recorder shipments have suffered at the hands of Matsushita’s Panasonic, who boosted profits 73% in the same quarter Sony’s profits dropped 25%. As a result, some 13% of Sony’s worldwide workforce will be cut over the next three years to try and restructure the company for a future less certain in its reliance on the quintessential consumer electronics brand.

Chief Executive Nobuyuki Idei said last month that Sony was "lacking a sense of urgency". Sony has perhaps gotten too comfortable and complacent – an all-too-familiar story seen countless times with once-high-flying market leaders – trying to sell more of what Sony innovates, rather than what their customers really want to buy. Certainly, Sony’s key challenger these days – Samsung – has such an urgency at work in its enterprise, impacting the marketplace to Sony’s detriment time and time again in multiple sectors – from cell phones to televisions. Other rivals have presented themselves – such as LG – that have overcome Sony’s previous brand image in so many markets – that is, when you choose Sony, you get the best-quality product money can buy. Lower cost competitors have risen to meet that quality bar and in the minds of Sony’s customers, their pricing power (and profitability) has been eroding ever since.

- Arik

AMD Gets 64-Bit Competitive Leverage from Opteron & Athlon64 in Battle with Intel

Shares of Advanced Micro Devices shot up, after an influential tech stock strategist said AMD’s new Opteron and Athlon64 microprocessors pose the “biggest-ever threat” to the dominance of industry hegemon Intel Corporation. Has Intel allowed AMD a point of competitive leverage in their ongoing battle by being slow to market with its own 64-bit microprocessor?

Investment newsletter publisher Fred Hickey told Reuters that, “an endorsement by IBM of AMD's Opteron chip has given the Sunnyvale, California-based chip maker momentum to break into the business of selling chips for use in data-serving computers used by businesses. ‘They're threatening Intel like they never had,’ Hickey said in an interview following comments he made earlier to the financial weekly Barron's. Intel is ‘facing their biggest threat in history,’ he said.”

In another quote from the same Reuters piece, “Hickey said the likelihood of widespread acceptance of AMD's chips has never been greater. He said he expects Sun Microsystems Inc. to use Opteron chips in some of its business computers. Hickey also said he expects major PC manufacturers to adopt AMD's new Athlon64 line of chips for home computers. Intel has downplayed the need for 64-bit computers in the home, and has not announced any plans to sell 64-bit chips designed for home users. Apple Computer …

- Arik

A.F.L.-C.I.O. Dials Up Competitive Threat in Verizon Union Fight

The New York Times reported that Verizon's union is willing to fight dirty to strengthen their negotiating position:

"The A.F.L.-C.I.O. plans to start by urging roughly 3.5 million people — those from families with union members in five Eastern states where Verizon is the dominant phone company — to log their names, addresses and phone numbers on a Web site, where they could be easily compiled for submission to AT&T."

That's more than 10 percent of Verizon's customer base in the states affected, something AT&T has said they'd both welcome and be able to handle. Since union-sponsored boycotts in the telecom market are tough for unions to promote or enforce, wholesale switching of service providers appears to be the hardball alternative... except for the paradox that, the very act of reducing a customer base to the advantage of a top competitor means fewer union jobs will be needed in the end.

- Arik