January 25, 2010 I

JANUARY 25, 2010 I BUSINESSWEEK.
COM
KRAFT’S CHOCOHOLIC CEO THE HUNT FOR AN AUTISM DRUG
APPLE VS. GOOGLE
WHY THEY CAN’T

BE FRIENDS
Plus:
Google’s
China
Problem
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CONTENTS JANUARY 25, 2010
O
In Depth
(COVER) ILLUSTRATION BY JOSIE JAMMET, BASED ON PHOTOGRAPHS BY PAUL SAKUMA/AP PHOTO (STEVE JOBS),
ANDREW HARRER/BLOOMBERG (ERIC SCHMIDT); (THIS PAGE) JEFF KOWALSKY/BLOOMBERG
Volkswagen unveils its New Concept Coupe at the Detroit auto show
28 Google
| Apple Vs.
From smartphones
36 Sugar Rush
| Kraft’s
Kraft CEO Irene

40 Autism?
| Pills for
Armed with fresh

44 To Watch
| The Car Giant
Volkswagen’s aim to
to computing to Rosenfeld’s determina- medical insights, become the world’s
advertising, Silicon tion to acquire Cadbury, drug companies are biggest carmaker would
Valley’s former allies the British candymaker, redoubling their efforts have seemed far-
are increasingly at frayed her relationship to tackle the complex fetched not long ago.
war. Why the future of with shareholder causes of the condition. Now, with Toyota in a
technology rides on the Warren Buffett and will With a growing popula- funk and VW on a roll,
outcome of their many define her career, no tion of autistic adults in it’s time to take that
clashes to come matter how it all need of care, the stakes possibility seriously
shakes out are high
JAN UARY 25, 2010 I BLOOMBERG BUSINESSWEEK I 5

CONTENTS JANUARY 25, 2010
O
The Global Report

20 | Empty Clawbacks? This
The Week in Business year many executives will have
08 | Executive Summary Conan conditions tied to their bonuses
says “No!” to NBC; Heineken goes 21 | Intel Under Assault Qualcomm
to Mexico; China’s export surge chips edge closer in the gadget war
14 | Business Outlook The global 22 | Tablet Time They’re hyped, and
post-stimulus debt hangover have been before. Are consumers
15 | Numbers Where the bears are finally ready for tablet PCs?
placing their bets
23 | Easing Pain in Ukraine An
16 | At the Table Charlie Rose talks election offers hope for growth
to Mideast envoy George Mitchell
24 | Crying for Argentina A divisive
battle over government debt
New Business 25 | Chávez Logic Why Venezuela’s
18 | The Missing Witness Who the devaluation makes some sense
Financial Crisis Inquiry Commis- 26 | Default in Dubai Its first housing
sion really needs to hear from foreclosure, with more to follow
JPMorgan Chase CEO Dimon in D.C.
What’s Next 57 | EPA Crackdown The U.S.

agency isn’t waiting for new laws
50 | Healthy Pepsi The snack and to go after corporate polluters
soda company’s earnest push to 59 | Unforgiven Hedge Funds
make its offerings more nutritious Investors take their revenge
(TOP TO BOTTOM) JAY MALLIN/BLOOMBERG; DAVID JOHNSON/CORBIS; OLIVIER ROLLER/FEDEPHOTO/PIXPALACE

52 | Amgen’s Hope Its osteoporosis
drug, awaiting approval, may also
be an anti-cancer blockbuster Personal Business
53 | IBM’s Patents By volume, it’s 61 | Money Report Upbeat forecasts
the patent king. So why is its port- for the Aussie and Canuck bucks;
folio worth a third of Microsoft’s? an earnings pop; a platinum ETF
54 | The Quiznos Comeback 62 | How To Play It Are Apple and
Beaten down by Subway, the chain Google still smart bets?
has discovered the power of value 63 | Investing Getting over your
55 | Acquisitive Yahoo! CEO Bartz jaundiced view of bank stocks
has a shopping spree planned 64 | Investing Why you should look
56 | Indebted Europe The Conti- for a fund manager with skin in
nent’s problem gets worse the game
Pepsi CEO Nooyi’s good-for-you agenda
69 | Feedback Permanent temps

Business Views 72 | Outside Shot Innovation’s
66 | Books Stiglitz: Freefall accidental enemies: CEOs
68 | Tech & You Rich Jaroslovsky
says the Nexus One is a good
69 | Corrections & Clarifications
smartphone, but no game-changer 70 | Company Index
Nobel winner Stiglitz on Obama
6 I BLOOMBERG BUSINESSWEEK I JAN UARY 25, 2010
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Edited by
Harry Maurer and
Cristina Lindblad THE WEEK IN BUSINESS
Jan. 11 purchase of Mexico’s
second-largest beer producer.
The Dutch brewer will pay
$5.2 billion, all in stock—and ab-
sorb $2.1 billion in debt—for the
beer unit of Femsa. That gives
Heineken valuable brands (Dos
Equis, Tecate, Sol) and a strong
foothold in developing Latin
American countries where beer
consumption is growing faster
than in Heineken’s traditional
European market. Next likely
deal : Grupo Modelo, Mexico’s
biggest brewer, may get swal-
lowed up by Anheuser-Busch
InBev, which already owns just
over 50% of the maker of No. 1
brand Corona.
ECONOMICS & POLICY

DISASTER IN HAITI
The worst earthquake to hit the
Leno’s Zucker had O’Brien Caribbean region in 200 years
show didn’t an easy fix: refused to
work at 10 Move Leno go along
struck Haiti on Jan. 12. Prime
Minister Jean-Max Bellerive
said “well over” 100,000 people
STRATEGY NBC violated contract terms. may have died, though his es-
The network has countered, timate was just that. The quake
CONAN THE CONTRARIAN insiders say, that changing the destroyed much of the capital,
It was a great plan while it lasted. show’s time slot doesn’t violate Port-au-Prince, inflicting even
NBC’s attempt to save face after the agreement. Meanwhile, NBC greater economic pain on the
JUSTIN STEELE/THE NEW YORK TIMES/REDUX; KEVIN WINTER/GETTY IMAGES

affiliates rejected five nights of is scrambling to fill the 10 p.m. hemisphere’s poorest nation.
The Jay Leno Show at 10p.m., hour with dramas, Dateline, and The magnitude 7.0 temblor rated
was upended when Tonight other shows, while Fox has said 9 on a 1-to-10 scale that mea-
Show host Conan O’Brien
refused to move his show to 12:05
that if Conan is a free agent, it
would like to talk with him. Vari- -4.8% sures the shaking of the ground.
That contributed to extensive
to make room for Leno at 11:35. ous media outlets, citing Leno damage to Haiti’s many make-
(L-R) JUSTIN LUBIN/NBCU PHOTO BANK/AP PHOTO;
Saying he “honestly believes” camp insiders, reported that he 2009 con- shift dwellings, though larger
the move would be the show’s might bolt NBC as well. traction in buildings, including the presi-
“destruction,” Conan at press ‡ “Mr. Zucker, Comcast on Line British dential palace, also collapsed.
GDP, the
time was locked in talks with Three”
biggest
NBC, headed by Jeff Zucker, to businessweek.com/magazine
one-year
THE CHINESE DYNAMO
extricate himself from his three- decline China passed two milestones
year contract. O’Brien hired HEINEKEN SCORES IN MEXICO since 1921 this week, offering more
heavyweight Hollywood litigator The beer business just keeps Data: National evidence of how handily it has
Patricia Glaser to win what getting more global, as brewers Institute of weathered the financial crisis—
Economic and
his side contends is as much as ignore borders to quaff rivals. Social Research and causing more irritation
$50 million owed him because The latest deal: Heineken’s among its trading partners.

EXECUTIVE SUMMARY
Exports in December jumped

17.7% from November, their first
increase in 14 months. For the
year, China exported $1.2 tril-
lion worth of goods, surpassing
Germany, with an estimated
$1.17 trillion, as the world’s top
exporter. That seemed certain
to intensify pressure on Beijing
to let the yuan rise rather than
keeping it pegged to the sinking
dollar. China also announced,
on Jan. 11, that it has become the
largest auto market in the world,
as sales climbed 46% in 2009,
to 13.6 million (including heavy
commercial vehicles.) That far
exceeded the traditional leader,
the U.S., with 10.9 million sales.
China is expected to remain atop Containers at the tax on banks’ liabilities, will Street bosses on the hot seat:
the market for 2010. port of Shanghai: probably stay in effect for some Lloyd Blankfein of Gold-
China is now
the world’s No. 1
years, but Obama is expected to man Sachs, Jamie Dimon of
OBAMA TAPS THE BANKS exporter include revenue from the fees JPMorgan Chase, John Mack
The Obama Administration has in his proposed budget for 2011. of Morgan Stanley, and Brian
stepped up its effort to recoup as Banks responded with outrage Moynihan of Bank of America.
much as possible of the $700 bil- and claimed they would harm Each conceded that financial
lion in TARP money used to the economy. “To impose yet service firms took excessive
bail out financial institutions another burden on the industry risks, but implied that all the
and auto companies. President would obviously decrease [its] really horrific stuff happened
Obama was scheduled to an- ability to lend,” warned Edward in some other guy’s shop. “Too
nounce on Jan. 14 a new fee on Yingling, president of the many financial institutions and
the biggest banks that would American Bankers Assn. investors simply outsourced
KEVIN LEE/BLOOMBERG
make the government whole their risk management,” said

on its losses, which could run HEARINGS ON THE CRISIS Blankfein in his opening state-
as high as $120 billion. The fee, On Jan. 13 the Financial Crisis ment. Chaired by Phil An-
which The Wall Street Journal Inquiry Commission held its gelides, a former state treasurer
reported would consist of a first hearing, with four Wall of California, the commission is
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THE WEEK IN BUSINESS
EXECUTIVE SUMMARY
down, Google may well pull the

Florida’s farmers plug on its Chinese operations.
watered orange
trees through the
That might offer a graceful way
night to protect out of a troubled business: The
them from cold overwhelming search favorite
in the U.S. has never dominated
in China, running second with
about 36% of the market to
Baidu’s 58%.
~ PAGE 35 “Google and China:
A Win for Liberty—and Strategy
LEADERSHIP
MICKEY D’S NEW CHEF
Since taking over McDonald’s
in 2004, Chief Executive James
Skinner has hired—and lost—
two chief operating officers and
heirs apparent. On Jan. 11 the
65-year-old Skinner named his
slated to conduct a months-long ing fruit trees all night to help third, elevating another veteran
investigation into the meltdown them avoid the worst effects of a of the world’s top restaurant
and make proposals for reform sharp frost. But “there’s only so McDonald’s chain to president and COO.
in a report due in December. much you can do when Mother has a new heir Don Thompson, 46, succeeds
But whatever light Angelides Nature unfurls her fury,” says apparent, Ralph Alvarez, who resigned in
Don Thompson
manages to throw on the mat- Terence McElroy, a spokes- December, citing health reasons.
ter probably won’t bring major man for the Florida Agriculture Thompson joined the Golden
change, because investment Dept. McElroy predicts the Arches in 1990 as an electrical
bankers have already fended off damage could run as high as engineer and has run McDon-
legislative proposals for aggres- hundreds of millions of dollars. ald’s USA—the company’s
sive regulatory reform. biggest division—since 2006.
~ PAGE 18 “The Crisis Commis- TECHNOLOGY He beat out two other insiders:
sion’s Missing Witness” Denis Hennequin, who runs
GOOGLE DECLARES WAR McDonald’s in Europe, and
FLORIDA’S FREEZE The search king is losing pa-
It’s not yet clear how hard Flori- tience with Beijing’s Internet
THE OPTIMISM METER
da farmers were hit by the worst policy. On Jan. 12, Google said it 100
cold snap in 21 years, but losses will stop censoring search results DISCOURAGING SIGNALS
will be serious, local growers on its Chinese site, Google.cn, The Meter clocked in at 49 on
and state officials say. Florida in response to what the company Jan. 12, down from 52 a week earlier,
oranges, grapefruit, strawber- called a “highly sophisticated” as attitudes became decidedly less
ries, sugar cane, and other hacking of its Web site from Chi- cheery. The share of individuals who
crops harvested over the winter
months make up a $20 billion
na and the infiltration of Gmail
accounts of human-rights
49 50
think that equity markets and home
prices will rise in 2010 dropped over
the past week, and more believe
slice of the state’s $128 billion activists in China and elsewhere. that the unemployed will continue to
agricultural output. Dan Kot- “Over the next few weeks we will struggle to find new jobs. Developed
tlowski, a senior meteorologist be discussing with the Chinese by Bloomberg BusinessWeek
(TOP) SCOTT AUDETTE/POLARIS
at AccuWeather.com, says his government the basis on which using data from pollster YouGov,
firm estimates that 5% of the or- we could operate an unfiltered the Meter is a proprietary measure
0
ange crop suffered some impact. search engine within the law, of sentiment and expectations,
economic statistics, and market
A frost warning was issued well if at all,” wrote Google’s chief
forecasts.
ahead of time, and farmers took legal officer, David Drummond,
0=lowest and 100=highest
precautions ranging from pick- on the company’s official blog.
ing strawberries early to water- Since Beijing is unlikely to back

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I couldn’t believe
I was having a heart attack.”
~Dean K.
Airmont, NY
Heart attack: 12/19/2005
“I should’ve done more to take care of myself.

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●
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cholesterol) as well. LIPITOR can lower the risk for heart
If you take LIPITOR, tell your doctor if you feel any attack, stroke, certain types of heart surgery, and chest pain
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© 2009 Pfizer Inc. All rights reserved. LPU01267IA

IMPORTANT FACTS (LIP-ih-tore)
LOWERING YOUR HIGH CHOLESTEROL POSSIBLE SIDE EFFECTS OF LIPITOR

High cholesterol is more than just a number, it’s a risk factor Serious side effects in a small number of people:
that should not be ignored. If your doctor said you have high • Muscle problems that can lead to kidney problems, including
cholesterol, you may be at an increased risk for heart attack kidney failure. Your chance for muscle problems is higher if
and stroke. But the good news is, you can take steps to lower you take certain other medicines with LIPITOR.
your cholesterol. • Liver problems. Your doctor may do blood tests to check
With the help of your doctor and a cholesterol-lowering your liver before you start LIPITOR and while you are
medicine like LIPITOR, along with diet and exercise, you could taking it.
be on your way to lowering your cholesterol. Call your doctor right away if you have:
• Unexplained muscle weakness or pain, especially if you have
Ready to start eating right and exercising more? Talk to your a fever or feel very tired
doctor and visit the American Heart Association at • Allergic reactions including swelling of the face, lips, tongue,
www.americanheart.org. and/or throat that may cause difficulty in breathing or
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WHO IS LIPITOR FOR? • Brown or dark-colored urine
Who can take LIPITOR: • Feeling more tired than usual
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and exercise • Allergic skin reactions
• Adults and children over 10 Common side effects of LIPITOR are:
Who should NOT take LIPITOR: • Diarrhea • Muscle and joint pain
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ABOUT LIPITOR
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of heart surgery, and chest pain in patients who have heart • Go to www.lipitor.com or call 1-888-LIPITOR.
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history of early heart disease
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Manufactured by Pfizer Ireland Pharmaceuticals, Dublin, Ireland Distributed by Parke-Davis, Division of Pfizer Inc. Rx only
© 2009 Pfizer Ireland Pharmaceuticals All rights reserved. New York, NY 10017 USA
Printed in the USA. June 2009

EXECUTIVE SUMMARY
Timothy Fenton, the company’s Pandit, who won a mostly

Asia-Pacific head. positive review, stays in his post.
Dial was the highest-ranking
MORE CHANGES AT CITI woman at Citi and was one of
Last year, when Washington the first people Pandit hired
became the largest shareholder when he took over in late 2007.
in Citigroup, regulators ordered
the bank to get a management FINANCE
appraisal from an outside
consultant. That report has DO-GOODERS AT GOLDMAN?
now sparked yet another shuffle Preparing for the negative
of top executives. On Jan. 11, publicity that’s certain to fall on
Citi said that Manuel Medina- Wall Street when the first 2009
Mora, who oversees units in bonus checks are cut, Goldman hundreds of millions of dollars Buffett will help
Mexico and South America, Sachs is pondering the expan- would flow into philanthropic oversee a
$500 million
will take over the North sion of a program requiring top causes. Goldman already has Goldman fund for
American consumer business staff to donate a percentage of a program under which its small businesses
from Terri Dial, who got poor their earnings to charity. The 400-plus partners must donate
marks in the report. Responsi- New York Times reported on an undisclosed amount to
bilities also may change for Jan. 11 that the firm may adopt a charity. It also set up, in Oc-
other panned executives, scheme like one at failed invest- tober, a $500 million fund for
including Vice-Chairman ment bank Bear Stearns, which loans to small business, to be
Lewis Kaden and Chief compelled more than 1,000 partly overseen by one of its
Administrative Officer Don employees to donate 4% of their biggest shareholders, Warren
Callahan, a person briefed on pay each year. Were Goldman Buffett.
the matter said. CEO Vikram to impose something similar, ~ PAGE 20 “Empty Clawbacks?”
IDEAS ALL WORKED UP OVER PRIVACY ON THE WEB

Is privacy dead in the age of the Internet? Facebook nothing of posting compromising pictures on their
founder Mark Zuckerberg, speaking at an awards cer- Facebook page, Zuckerberg should not assume the rest
emony in San Francisco this month, said as much, when of the site’s 350 million will readily give up the right
he commented that privacy is “no longer a social norm.” to control who can view such material. (Facebook last
His words kicked off a lively debate in the blogosphere. year rejiggered its privacy settings, making “public” the
Marshall Kirkpatrick, on the technology industry default setting for text, photo, and video updates.)
blog ReadWriteWeb, grants that, because of sites like On his blog Net.Effect, Evgeny Morozov notes
Facebook, the notion of privacy can no that, Zuckerberg’s pronouncements
longer be equated with absolute secrecy. aside, some governments are moving
A contemporary understanding of privacy toward reinforcing privacy protec-
centers on context, writes Kirkpatrick: tions. In France, for instance, a bill
“We expect our communication to go on under debate would give Internet users
in an appropriate context (no drinking in the option of having old online data
church or praying in the bar) and we expect about themselves deleted—though the
(FROM TOP) ANDREW HARRER/BLOOMBERG;
to understand how our communication technology to make this possible is not

will be distributed.” So if a college pal yet available.
snapped photos of you carousing at a bar ‡ “Why Facebook Is Wrong: Privacy Is
MATTHEW STAVER/BLOOMBERG
and showed them to people at church, you Still Important”

might feel your privacy has been violated— Zuckerberg ReadWriteWeb, Jan. 11
said that
even though the bar is a public privacy is
“France Wants to Forget;
place. Kirkpatrick goes on to argue “no longer a Facebook Doesn’t”
that just because some people think social norm” Net Effect, Jan. 10
BLOOMBERG BUSINESSWEEK I 13
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BUSINESS OUTLOOK WILLIAM PESEK
AFTER THE STIMULUS BINGE, A DEBT HANGOVER

Trillions of dollars have been spent keeping the global economy afloat. But now fears about
the Great Recession are giving way to worries about something else: The Great Reckoning.
Government policymakers from Washington to Tokyo are tallying the bill for last globe and hurting stock prices.
year’s stimulus binge, and the results won’t be pretty for investors or elected of- The unwinding process will keep
ficials. Since the collapse of Lehman Brothers in September 2008, the Group of 20 central bankers like Federal Reserve
largest industrialized economies have spent more than $2.2 trillion—much of it Chairman Ben Bernanke busy as well.
borrowed—trying to restore growth. The Bank of Japan and the Fed are
This unprecedented public debt glut will complicate the holding interest rates near zero, while
global recovery. That’s because the government debt entering the Bank of England and European
the bond markets will make it harder for private companies to
issue debt of their own, either to expand or simply ride out the
lingering effects of the credit crisis.
118% Central Bank aren’t far behind. All that
liquidity is finding its way into stock
and real estate markets from Mumbai
This so-called crowding-out dynamic, together with ris- The level to Shanghai to São Paulo, creating
ing borrowing costs, will depress job growth. The more that public debt, fresh bubbles and increasing the risk of
small- and medium-sized businesses are starved for credit, for as a percent inflation.
example, the fewer new employees they will add. The crowding of GDP, will But the debt burden makes it harder
also could lift interest rates for consumers. reach in ad- to move rates back to more normal
vanced G-20
That’s the downside of a stimulus binge: It pumps up growth levels, since boosting borrowing costs
economies
initially, but the hangover can be painful across an economy for by 2014 will increase that even more.
years to come. Data: International
Other nations will be set back
Even assuming some budget trimming, the International Monetary Fund in underappreciated ways. What
Monetary Fund expects government debt in advanced G-20 economies like India, Indonesia and
economies to reach 118% of their combined gross domestic the Philippines have in common
product by 2014, up from 78.2% in 2007, just before the economic crisis took are young populations. Unless you
hold. Getting to a more sustainable 60% level will involve raising taxes and cut- create opportunities and well-paid
ting services. jobs for them, these societies risk
President Barack Obama’s dilemma is not unique: Raising taxes to reduce becoming breeding grounds for
debt may delay a solid recovery, while trimming spending too much could erode greater poverty and violence, the
the social safety net and damage competitiveness in the long run. Either way, most unwelcome part of the Great
he and other heads of state struggling with mounting debt burdens are likely to Reckoning. ^
find economic growth over the next trialized nations, with public debt ap-
decade slower than in the last. proaching 200% of GDP, slow-growth
GOVERNMENT DEBT IN RICH
Japan is a poster child for the Great Japan risks seeing a downgrade of its
NATIONS IS SOARING
Reckoning. Asia’s biggest economy Aa2 credit rating this year. “Japan is 120
PERCENT
has little to show for the 30 trillion the mega-risk problem. It’s the next PUBLIC DEBT AS A
PERCENTAGE OF GDP
yen ($329 billion) that the govern- big thing that will hit credit markets,’’ 100
ment has pumped into it since late says Carl Weinberg, chief economist at
80
2008. Unemployment, already at a High Frequency Economics.
near-record 5.2%, is edging higher. Expect both credit-rating agencies 60
ADVANCED G-20 ECONOMIES
EMERGING G-20 ECONOMIES
Meanwhile, deflation is intensify- and investors in 2010 to be sniff-
ing, wages are stagnant, and worried ing around for other potential debt 40
households are saving more and troubles, be they in China, Greece,

20
spending less. Worse, Japan’s popula- Mexico, Vietnam, or even the U.S.
PROJECTION
tion is aging rapidly, reducing the tax Any move to downgrade credit rat- 0
'00 '02 '04 '06 '08 '10 '12 '14
base and raising social costs. ings could shake global markets,
Data: International Monetary Fund
The most indebted among indus- boosting mortgage rates around the
14 I BLOOMBERG BUSINESSWEEK I JANUARY 25, 2010

NUMBERS
WHERE THE BEARS
1.3
Number of S&P 500 short
contracts bought on the
Chicago Mercantile Ex-
ARE PLACING THEIR BETS change last month for each
long contract, the highest
ratio since at least 1993
By Tara Kalwarski/Charts by David Foster Data: Bloomberg, Commitments of Traders Report
The U.S. stock market’s short-interest ratio—a measure
of how many investors are betting on a fall—has in- Shorted Sectors: Industrial companies have
creased by almost 50% since March. The ratio is calcu- drawn the most attention from short-sellers.
lated by taking the number of shares borrowed and sold SHORT-INTEREST RATIO BY S&P 500 SECTOR*
short and dividing it by the average daily trading volume. INDUSTRIALS
CONSUMER DISCRETIONARY
Low Expectations: These companies are among the FINANCIALS
most heavily shorted in the S&P 500.

OVERALL S&P 500
MOST SHORTED S&P 500 SHORT-INTEREST RATIOS*

COMPANIES DEC. '08 2009 CHANGE IN STOCK PRICE DEC. '09 HEALTH CARE
McCORMICK & CO. 3.0 13% 19.3

UTILITIES
WASTE MANAGEMENT 7.2 2% 18.1
CONSUMER STAPLES
FASTENAL 7.5 19% 16.8
M&T BANK 8.6 17% 15.7 MATERIALS
VULCAN MATERIALS 9.0 –24% 15.6 INFORMATION TECHNOLOGY DEC. '09

MYLAN MAR. '09
10.4 86% 14.9
TELECOMMUNICATIONS
TOTAL SYSTEM SERVICES 2.3 23% 11.7
ENERGY
NEWELL RUBBERMAID 1.3 53% 11.6
FEDERATED INVESTORS 1.4 62% 11.6 0 1 2 3 4 5
IRON MOUNTAIN 10.5 –8% 11.3 * Number of shares borrowed and sold short,
divided by average daily trading volume
Data: Bloomberg *As of Dec. 31 Data: Bloomberg
THE SHORT AND THE LONG OF IT

The S&P 500’s short-interest ratio was at a low just as the market started to turn in March 2009.
1,200
STANDARD & POOR'S 500-STOCK INDEX

1,000
800
600
SHORT-INTEREST RATIOS*
3.12 3.42 3.39 3.38 3.31 3.18 3.42

2.88 2.64 2.95 2.55
2.36
JAN. '09 FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
Data: Bloomberg *Figures are mid-month
JANUARY 25, 2010 I BLOOMBERG BUSINESSWEEK I 15

AT THE TABLE CHARLIE ROSE
CHARLIE ROSE
GEORGE MITCHELL
(FROM TOP) PHOTOGRAPHS BY BRAD TRENT; SAUL LOEB/AFP/GETTY IMAGES
Do you have a hard time with the
perception that the U.S. is not an in-
His Dogged Drive for Mideast Peace nocent broker in the Mideast?
GEORGE MITCHELL
George Mitchell, the former Senate abuse by Major League Baseball play- Oh, I hear it a lot here, in Europe, and
Majority Leader who is now President ers. He also served for several years as in the Middle East, but I don’t believe
Barack Obama’s Special Envoy to the chairman of Walt Disney. it. That assertion is based on the as-
Middle East, has a record of bringing Mitchell has spent the past year sumption that the U.S. cannot at the
intractable opponents together, deal- trying to get Israelis and Palestinians same time be totally committed to
ing with delicate issues, and broker- back to the negotiating table after a Israel’s security, which we are, and be
ing sustainable agreements. Most stalemate that critics attribute to the totally committed to the creation of the
famously, he chaired the peace talks in Obama Administration’s early focus Palestinian state, which we are. To the
Northern Ireland that led to the his- on freezing new Israeli settlements. contrary, I believe they are mutually
toric Good Friday agreement of 1998. Mitchell was a guest on The Charlie reinforcing. It will help Israel get se-
And in 2006 he headed a commission Rose Show on Jan. 6. This is an edited curity for its people if the Palestinians
that examined allegations of steroid version of those conversations. have a state.

What’s the mood over there about the 13 of them before we began substantive What is different from the efforts of
possibilities in a new year? discussions with the Israelis—said that previous Administrations?
I think there’s more optimism there there would be no progress without Because in at least the last two Ad-
than here, but you have to temper a freeze. Secondly, you’ve been in a ministrations, efforts began late in the
it with reality —the complexity and lot of negotiations. If you want to get term. This President appointed me
length of the conflict. [One focus will 60%, do you begin by asking for 60%? two days after he was sworn in, and
be on] economic growth, helping the So what we got was a moratorium—10 you know what he said to me? “I want
Palestinians you to go over there tonight.” I said:
improve their “Mr. President, I’ve got a wife and
economy and
encouraging the
“DESPITE THE HORRIFIC EVENTS OF THE kids. I don’t have any clothes with me.
I have to go home and tell them I’m
current Prime PAST HALF CENTURY,” A MAJORITY ON going to leave.”
Minister—an im-
pressive person, BOTH SIDES STILL BELIEVES IN PEACE You have been Senate Majority
Salaam Fayyad— Leader, a district court judge, and it is
who is trying to said Bill Clinton was prepared to put
build from the ground up the institu- months, far less than what was re- you on the Supreme Court.
tions that can govern effectively on quested but more significant than any He offered the position to me.
Day One of the Palestinian state. action taken by any previous govern-
ment of Israel for the 40 years that the And yet is this the most challenging,
There is this impression, reflected settlement [movement] has existed. the most exciting thing that you have
in a New York Times editorial, that done in your professional life?
the past year has not been successful Why is a peace agreement possible? You left out steroids and Major League
because the Administration stressed Because it’s in the best interest of the Baseball. Actually, this is very difficult.
a settlement freeze. people on both sides. Let me tell you, it takes a lot of courage
A little over a year ago—before I knew for these political leaders to operate in
President Obama and had any idea It’s been in their best interest for a these circumstances. There are direct
I would be asked to take this job—I long time. threats against them and their families.
was in Israel, and I gave a speech at a Despite the horrific events of the past
university. And I was asked a question half century—all the death, destruc- O.K., you have lots of carrots. Do you
about Northern Ireland. In my answer, tion, mistrust, and hatred—a substan- have any sticks—other than say-
I pointed out that the peace agreement tial majority on both sides still believes ing: “Goodbye, take care of yourself,
in Northern Ireland came 800 years we’re out of here”?
after the British domination began. Yes, of course, but
After the speech, an elderly gentleman, you have to be very
hard of hearing, came up to me. He careful about how
said in a loud voice: “Senator Mitchell, and when you use
did you say 800 years?” I said: “Yes, them.
800 years.” He said: “No wonder you
settled, it’s such a recent argument.” To So you say to Israel,
think that an issue that’s gone on longer look, if you don’t do
than 800 years is going to be resolved in this … what?
a few months if we only take this step or Under American law,
that is really, I think, misperceiving the the U.S. can with-
complexity and difficulty. hold support on loan
guarantees to Israel.
But the point was that by focusing on President George W.
a settlement freeze—which Israelis Bush did so on one
were unlikely to agree to—you creat- occasion. But we
ed disappointment from the begin- Right-wing Jewish that’s the way to think the way to approach this is to try
ning because it was unachievable. settlers earlier resolve the problem. to persuade the parties what is in their
DAVID SILVERMAN/GETTY IMAGES
All you have to do is go back and read this month protest self-interest.
the freeze on
the papers over the past five or six settlements
Do you have a time
years to see that it was not the Obama frame? Two years? Why is President Obama’s popularity
Administration or the Secretary of We think that the negotiation should so low in Israel? It’s 4%.
State or me who suggested a settle- last no more than two years. Person- I’ve heard the figure, but it’s simply
ment freeze. Every Arab country, in- ally, I think it can be done in a shorter not true. A plurality supports him in
cluding the Palestinians—and I visited period of time. Israel. ^
& www.fantamag.com
20 Empty clawbacks?
21 Intel vs. Qualcomm
22 It’s tablet time
23 Easing Ukraine’s pain
24 Bond brawl in Argentina
25 Chavez, inflation fighter
26 Foreclosure in Dubai NEW BUSINESS
COMMENTARY
The Crisis Commission’s

Missing Witness
To really get to the roots of the financial debacle, call
Alan Greenspan and give him the third degree
By Paul M. Barrett devises a catchier name soon) holds Do not expect the bipartisan FCIC,
The public debut of the Financial hearings in coming months. chaired by Phil Angelides, a former
Crisis Inquiry Commission on Jan. 13 The Pecora Commission also laid California state treasurer, to rival the
featured Wall Street bosses striking the groundwork for legislation es- impact of Pecora. We will not see the
alternately defensive and humble poses tablishing the Securities & Exchange likes of the Securities Act of 1933, the
while pundits recalled the glory days Commission and insulating the staid Glass-Steagall Act of 1933, and the
of New Deal investigator Ferdinand depository and lending functions of Securities Exchange Act of 1934. This
Pecora. The contrition seemed mostly commercial banking from the riskier time around, Wall Street lobbyists got
shallow, especially compared with trade in securities. That framework the jump on the legislative process.
the bankers’ obvious impatience over kept commercial banking relatively The major battles on Capitol Hill have
the occasional sharp question. More safe, if dull, for a half-century. Its bi- already been fought, with only the
important, it seems likely that the partisan demolition, beginning in the details left to resolve.
hopeful historical references to Pecora 1980s, together with the purposeful After all of President Barack Obama’s
will ultimately prove disappointing. demoralization of institutions such as fulminating over the largely symbolic
One way the commission could sal- the SEC, helped recreate a free-for-all, issue of investment banker bonuses,
vage something meaningful from the 1920s-style environment in the 2000s. Wall Street is writing checks with just
hearing room theater would be to bear You know what happened next. as many zeroes, and Congress isn’t
down on a former Washington player going to do anything about it. Obama
so far not on the witness list. That and lawmakers bought the financial
would be Alan Greenspan. wizards’ insistence that substantial
In the run-up to the commission’s curbs on derivatives speculation would
opening act, many commentators somehow threaten the Republic. What
invoked Pecora, the peppery chief we’ll probably get instead is greater
counsel who 77 years ago galvanized a transparency for some, but not all,
Senate investigation of the 1929 crash. derivatives trading. This half-measure
The Pecora Commission, as it came to will allow new petri dishes of systemic
be called, revealed abuses that showed risk to fester in darkness as Wall Street
Depression-era Americans just how returns to the “financial innovation”
BETTMANN/CORBIS
January 1933:
much Wall Street was a semi-rigged Banker Donald laboratory. Congress is expected to
casino. We will likely get some of the Durant is sworn make it easier for the government to
in before a
same as the Financial Crisis Inquiry step in once a financial conglomerate
Senate panel
Commission (and let’s hope someone starts to fail. But the idea of revisiting

January 2010:
Blankfein,
Dimon, Mack,
and Moynihan
take the oath
Glass-Steagall’s separation of com- Waxman (D-Calif.) publicly sautéed enforced a hands-off orthodoxy based
mercial banking from securities specu- their CEOs in 1994. A lot of lawsuits on the idea that government officials
lation never got past the daydreams of followed. But tobacco remains a very can’t distinguish between markets
Paul Volcker, Obama’s marginalized lucrative, very deadly business. overheating dangerously and prices
emissary from a distant and more com- The best way for the commission to rising because of economic funda-
monsensical era of regulatory caution. make a name for itself is not to focus mentals. Rather than prick bubbles
The big three credit-rating agencies solely on banker avarice and mortgage too early, the Fed should do damage
will continue to enjoy a government- fraud—much of which has already control after a crash, he told the Sen-
blessed oligopoly while collecting come to light in the past year—but to ate Banking Committee in July 1999:
fees from the very institutions whose conduct a symposium on the funda- “Mitigate the fallout when it occurs,
securities they evaluate. mental causes of our financial troubles. and, hopefully, ease the transition to
That’s not to say that the commis- The two major ones: 1) the persistently the next expansion.”
sion will fail to examine some episodes low interest rates in the early 2000s Following this strategy, Green-
of fraud, greed, and hubris. “We may that inflated the bubbles in housing span did little to address the Internet
well find criminal activity as well as and credit and 2) the notion that finan- craze of the 1990s, which ended in a
egregious practices that were not only cial markets police themselves. stock bust and recession. He and his
permitted but exalted,” Angelides As the Fed’s domineering chief colleagues mitigated the fallout by
said on Jan. 13. The Wall Street CEOs from 1987 to 2006, Alan Greenspan hacking interest rates and flooding
conceded that things got out of hand, the economy with cheap money. That
implying that all the really horrific stuff seemed smart at the time; the reces-
happened in some other guy’s shop. DON’T EXPECT 1930s- sion of 2001 was relatively brief. But by
“Too many financial institutions and keeping rates artificially low for several
investors simply outsourced their risk
STYLE REFORM. THIS TIME, years, the Fed replaced the Internet
KEVIN LAMARQUE/REUTERS
management,” Lloyd C. Blankfein,

chairman and CEO of Goldman Sachs,
WALL STREET LOBBYISTS stock bubble with a real estate bubble,
as John Cassidy, economics corre-
said in his opening statement. GOT THE JUMP ON THE spondent for The New Yorker, observes
Hearing room talk is one thing; real in his instructive book How Markets
change, another. Ask the cigarette LEGISLATIVE PROCESS Fail (2009). Faced with the ensuing
manufacturers. Representative Henry consumer borrowing binge and soaring

home prices, Greenspan and his col-
leagues did nothing.
They also blithely ignored the manic
leveraged gambling on Wall Street
predicated on a fantasy of ever-rising
EMPTY CLAWBACKS?
real estate values. Investment banks The tool for recouping bonuses remains untested
could be trusted to keep one another
honest, Greenspan said. By Alexis Leondis and Margaret Collins backs haven’t used them much. That’s
That turned out to be incorrect. Many executives will find something because the process can be long and
Greenspan’s legacy is having combined extra in their 2009 bonuses: conditions costly, particularly when an employee
reckless easy money policies with even on whether they can keep the money. has spent the money or quit. Employers
more reckless antiregulatory zeal, Of the 100 largest U.S. companies usually have to go to court or arbitration
Richard A. Posner, the economist and by revenue, 70 say they have so-called to enforce the rules. More companies,
federal judge argues in his forthcoming clawback provisions that allow them though, may be taking action. Last year
volume, The Crisis of Capitalist De- to recoup pay. That’s up from 16 in there was a 57% jump in breach-of-
mocracy. Posner adds: “The regulators 2006, according to Equilar, a compen- contract arbitration cases, which some-
of money and banking—of monetary sation research firm. “The concept of times involve clawbacks, according to
policy and financial intermediation— a clawback is gaining credibility and the self-governing Financial Industry
were asleep at the switch.” frequency,” says Kenneth Feinberg, Regulatory Authority.
So I suggest that the crisis hearings the Treasury Dept.’s special master on Recently regulators have been going
quickly move to giving Greenspan the executive compensation. “Whether it after bonuses more aggressively. In
third degree. In his characteristically will be effective in promoting stability July the Securities & Exchange Com-
convoluted way, the ex-Fed chair- and growth remains to be seen.” mission sued Maynard Jenkins, former
man already conceded to Congress, in Companies were under pressure CEO of car parts retailer CSK Auto,
October 2008, that he had been naive to do some- demanding that he
about self-regulation. Let’s get him to thing given the forfeit $4.1 million
say it in plain English—and more than public outcry over he received from
once. Hearing a discredited Greenspan supersized pay, 2003 to 2005
concede grave error could possibly free especially at big when company
Washington of his lingering influence; banks. Some 75% employees al-
maybe it would even embolden a few of 1,000 Ameri- legedly inflated
more lawmakers to show some resolve cans surveyed earnings. (Under
in the face of Wall Street’s formidable by Bloomberg in the Sarbanes-
lobbying machine. December said Oxley Act, the
The commission could sit Green- bailout recipients agency can seize
span’s successor, Ben Bernanke, next to shouldn’t give payments to top
him at the witness table. Bernanke, who out bonuses. The executives of
has agreed to testify, acknowledged in Federal Deposit companies that
early January that regulatory failings Insurance Corp. is have inflated earn-
contributed to the crisis. But since looking at claw- ings or engaged in
he was at Greenspan’s right hand as a backs, and Senate lawmakers want to U.S. pay czar other misconduct.)
member of the Fed board for most of make them mandatory at companies Feinberg doesn’t It’s the first time
know if clawbacks
the crucial 2002-06 period, Bernanke’s that issue inaccurate financial reports. the SEC has gone
will deter risky
passive-voice implication that it was Rather than waiting for legisla- behavior after an executive
someone else’s regulatory screw-ups tion, Goldman Sachs, Morgan Stanley, who it hasn’t ac-
that led to woe seems, well, inadequate. Motorola, Pfizer, Safeway, and others are cused of wrongdoing.
Even more disturbing, Bernanke con- putting clawback clauses into employ- Jenkins asked a court to dismiss
tinues to insist implausibly that low ment contracts. Some companies can the case. His attorney, John Spiegel
interest rates didn’t feed the bubblefest. rescind bonuses for excessive risk- of Munger, Tolles & Olson, said in a
A reincarnated Ferdinand Pecora taking. Others can recoup pay for statement this summer that the SEC
would want to skewer a few dishon- unethical behavior. Executives may is “overreaching.” Said Rosalind Tyson,
RICHARD CLEMENT/NEWSCOM
est mortgage peddlers and unmask have to forfeit cash or stock up to four director of the SEC’s Los Angeles of-
reckless credit-default-swap jockeys. years after the payout. “There’s no such fice, in a July statement: “Jenkins was
Some of that wouldn’t hurt. But if the thing as free money,” said Liam O’Brien, captain of the ship and profited during
Financial Crisis Inquiry Commission managing partner at New York law firm the time that CSK was misleading
wants to make its own name, the panel McCormick & O’Brien. investors. The law requires Jenkins to
needs to expand its witness list by at Companies that have had claw- return those proceeds.”
least one. ^

NEW BUSINESS
Make That the performance gap with some Intel

processors. Analysts think that Apple,
which now uses Samsung chips in its
‘Qualcomm Inside’ iPhone, may also begin using Qual-

comm chips in some devices. “The
last smartphone holdout, Apple, will
embrace [Qualcomm] this year,” wrote
Suddenly the cellphone chipmaker is everywhere, Brian Modoff of Deutsche Bank in a
challenging mighty Intel on its own turf Jan. 7 report.
Bolstering Qualcomm’s assault on
the chip market is the
By Olga Kharif and Ian King growing acceptance of
Behind the hoopla over the debut of the ARM technology in
Google’s Nexus One is a quiet triumph many of its chips. Cre-
for Qualcomm. That the San Diego ated by ARM Holdings in
company’s chips are powering the Britain, the technology
smartphone is a sign of its continuing is used in chips primar-
success in the mobile phone market. ily powering cell phones
It’s also a sign that Intel should watch and, more recently,
its back. smartbooks, which are
Qualcomm is already the world’s a bit smaller than net-
largest maker of cell-phone chips. books. The number of
But it’s upping its dominance of that smartbooks powered by
market just as Intel is making a foray ARM chips is expected
into mobile phones. Later this year, to exceed the number
Intel plans to release a smartphone of netbooks using chips
processor called Moorestown, part of from Intel and Advanced
its Atom line of chips. Micro Devices by 2013,
Even as Intel tries to catch up in according to IDC. Mar-
the mobile phone market, Qual- vell Technology, Nvidia,
comm is attacking on other fronts. Freescale Semiconduc-
While Intel has been busy serving ery major [equipment maker],” he says. tor, and Texas Instruments also use
traditional PC markets, Qualcomm Qualcomm’s big bet is on Snap- chip technology developed by ARM.
has begun targeting the many new dragon, the chip in the Nexus One. Intel says it’s confident that
smaller computers now tempting The company predicts that the chip demand for its chips will remain
consumers, including smartbooks eventually will be used in more than buoyant. “We’ve heard a lot about
and netbooks. Qualcomm’s chips 40 devices made by 17 manufac- ARM-based netbooks for more than
are under the hood of new machines turers. “Over the last two or three a year. But today it’s very limited in
from Hewlett-Packard and Lenovo. years, the partners that we deal with what you can buy in the market,” says
“Intel and Qualcomm are on a colli- are new,” says Steve Mollenkopf, a Calder.
sion course,” says Flint Pulskamp, an Qualcomm executive vice-president. Intel, of course, has tremendous
analyst at research firm IDC. “It used to be the phone guys. Now resources, including boatloads of
Both companies are looking to regain it’s consumer electronics and phone cash that it has used in the past to
momentum after revenue declines guys.” leave rivals like AMD behind. On
during the recession. Qualcomm’s In the first half of the year, Qual- Jan. 4, the company unveiled its
revenues dropped 7% for the fiscal year comm plans to introduce faster ver- next-generation Atom processor
ending in September, to $10.4 billion, sions of Snapdragon, almost closing and said it will be used in notebook
while Intel’s revenues are expected designs from companies including
to slide 8% for 2009, to $34.7 billion, Asus, Acer, and Dell. Intel has high
according to consensus estimates from “INTEL AND QUALCOMM hopes for cell-phone chips, too.
Bloomberg. It is collaborating on mobile de-
Intel spokesman Bill Calder says the
ARE ON A COLLISION vices with Nokia, the world’s largest
company sees robust demand for its
Atom chips, which are designed for use
COURSE” IN EVERYTHING maker of cell phones, and in early
January showcased Moorestown
FROM CELL PHONES TO
THOMAS FUCHS
in scaled-down computers and mobile chips in a phone by South Korea’s LG.

devices. “We’ve shipped well in excess “Intel has deep pockets,” Pulskamp
of 40 million Atom chips in netbooks SMARTBOOKS says. “You never underestimate
and have over 80 design wins from ev- Intel.” ^

The Next Big Thing, Widely served, however, is a certainty.
In 2009, about 15 PC makers released
tablets. This year, that number could
20 Years Later top 30. Despite the wave of products,

most analysts believe the success of
the entire category hinges on Apple.
Sanford Bernstein analyst Toni Sac-
The tech industry thinks the time is right for tablets, conaghi estimates the Apple model
thanks to lower prices and friendlier features alone could sell 3 million units in its
first year—triple the total tablet sales
worldwide in 2009.
By Spencer Ante popular form of PC sold in the U.S. That’s because of Apple’s knack for
If there was a land of misfit gadgets, within five years; in 2009, they made up packaging elegant hardware with soft-
the tablet computer would be one of less than 1% of the market, according to ware and applications: iTunes drove
its oldest residents. The tech industry, estimates from research firm IDC. sales of the iPod, while the App Store
though, refuses to give up on these The first generation was doomed is fueling those of the iPhone. Now
slate-like portable PCs. Tablets from by a combination of big price tags, Apple is trying to convince studios and
Hewlett-Packard, Dell, and others short battery life, and clunky inter- publishers to format movies, books,
were some of the st≠≠ars at this month’s faces. Tablets’ capabilities have since and magazines for its latest device.
Consumer Electronics Show in Las evolved, as have the tastes of con- Getting phone companies to offer
Veg≠as, while the buzz around Apple’s sumers. Portability is paramount, new and affordable Internet service
long-awaited entry into the market, and the latest crop are lighter, boast plans to support a data-guzzling tablet
due out this spring, is already deafen- longer battery life, and better screen could prove even more challenging.
ing. “The industry understands better technology. Software is more sophis- Currently, Wi-Fi service is too spotty
how people can use tablets,” says Roger ticated, too, and Web connections outside the home to make a tablet
Kay, president of Endpoint Technolo- have improved. “The timing is right experience rich, and many consumers
gies Associates. for this,” says Philip McKinney, vice- are leery of spending $60 a month for
Yet PC makers have been trying to sell president and chief technology officer a mobile broadband plan. “Connectiv-
consumers on the utility of tablets for of HP’s Personal Systems Group. “We ity remains a big problem,” says IDC
decades—with little success. In 2001, wouldn’t go into a market that we felt analyst David Daoud. “Apple has done
Microsoft Chairman Bill Gates pre- wasn’t going to be widely adopted.” pretty fantastic things and maybe they
dicted that tablets would be the most Widely adopted remains to be seen. can figure it out.” ^
THE ORIGIN OF SPECIES: HOW TABLET PCs HAVE EVOLVED

GRIDPAD APPLE MESSAGEPAD
Introduced: 1990 Introduced: 1993
DANIELE MELGIOVANNI/SSPL/GETTY IMAGES; COURTESY HP; RON WURZER/GETTY IMAGES

Price: $2,500 Price: $700
This early ancestor featured a Although it was dubbed a per-
stylus for on-screen writing and sonal digital assistant, Apple’s
(CLOCKWISE FROM TOP LEFT) COURTESY THE COMPUTER HISTORY MUSEUM;

sold 10,000 units before a lack MessagePad was a tablet precur-
of software applications and sor. The device, better known as
a high price doomed it to the Newton (after its operating
extinction. system), suffered from poor
handwriting recognition.
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the steep price, scant battery and a swiveling keyboard
life (4 hours), and heat buildup for those who don’t like the
scared away prospective buyers. touchscreen technology.

NEW BUSINESS
Ahead in the ity needed to win

polls, Yanukovych outright. That means
seeks better ties
with both Moscow
Yanukovych and
and Europe Timoshenko will
likely face each other
in a runoff on Feb. 7. Whoever emerges
triumphant already knows how bad
the path forward is. Ukraine’s gross
domestic product shrank an estimated
14% in 2009. The country’s currency,
the hryvnia, was the world’s worst per-
forming vs. the U.S. dollar in the year
ended in September. And Ukraine is
the world’s second-least creditworthy
economy behind Argentina (page 24),
as measured by the cost of credit-de-
fault swaps that protect bondholders.
Can Ukraine Say Nyet

High on the agenda for the new
president will be unfreezing IMF
money. Ukraine secured the loan in
late 2008 after the global credit crisis
To Political Squabbles? crippled its exports and financial

sector. But the IMF delayed a $3.4
billion installment in November after
lawmakers failed to pass a 2010 budget
If presidential elections usher in stability in Kiev, the while raising social spending. “The
economy stands a chance of returning to growth political infighting that has paralyzed
the country has to stop,” says Jorge
Zukoski, president of the American
Chamber of Commerce in Ukraine.
By James M. Gomez the European Union, predicts Sacha If Ukraine stabilizes its politics
and Daryna Krasnolutska Tessier-Stall, head of foreign policy at after the election, the country stands
It’s not even February yet, and 2010 is Kiev’s International Centre for Policy a chance of returning to growth.
shaping up to be a bad year for Viktor Studies. “No matter who wins, there That could give foreign investment a
Yushchenko, who survived a poisoning will be an improvement,” he says. boost. Since Yushchenko took over the
(TOP TO BOTTOM) PHOTOGRAPHS BY YURIY DYACHYSHYN/AFP/GETTY IMAGES; VIRGINIA MAYO/AP PHOTO
attempt by political opponents in 2004 The election may also improve Eu- presidency in early 2005, Ukraine has
and went on to be elected president of rope’s energy security. The EU relies attracted some $36 billion in foreign
Ukraine. Voters are tired of Yushchen- on Russia for a quarter of its direct investment from
ko and seem far fonder of two other natural gas, and 80% of that companies such as Lux-
candidates vying to succeed him this passes through Ukraine, a embourg’s Arcelor-Mittal,
week: opposition leader Viktor Yanu- country of 46 million that’s Italy’s UniCredit Group,
kovych and populist Prime Minister about as big as France. Dis- and French retailer Groupe
Yulia Timoshenko. putes over prices led Russia Auchan. Between 1999 and
Yushchenko, 55, feuded with Rus- to turn off the gas to Ukraine 2004, the country pulled in
sia and cozied up to the U.S. and the in January 2006 and January just $5.7 billion in foreign
European Union, so should West- 2009, which in turn caused direct investment.
ern policymakers and investors be fuel shortages in the EU. Timoshenko Under Yushchenko, the
hammered out
worried about a Ukraine tilted more In November, Timoshenko country won membership in
a gas deal with
toward Moscow? Probably not. Both and Russian Prime Minister Russia, easing the World Trade Organization
Yanukovych, 59, who is ahead in the Vladimir Putin renegoti- fears of shortages and the EU declared Ukraine
opinion polls, and Timoshenko, 49, ated the two countries’ gas a market economy. Now, both
say they want better ties with both contract for 2010, easing concerns Yanukovych and Timoshenko support
Moscow and Europe. Political stability about a shutoff. “The risk to Europe signing an association agreement with
under a new president could unfreeze has decreased,” says Gergely Varkonyi, the EU, which includes a free-trade
a $16.4 billion bailout loan from the an energy analyst at Deutsche Bank in pact. Says Ivan Tchakarov, an emerging
International Monetary Fund, ease Budapest. markets analyst at Nomura Holdings
conflicts with Russia, and improve the With 18 candidates competing, no in London: “Ukraine can be a positive
prospects for a free-trade accord with one is likely to gain the 50% major- surprise this year.” ^

Reasons to Cry at the same steep
discount offered in
2005. The goal is to
restore her govern-
Eyes left:
Expenditures
have jumped
30% annually on
For Argentina
Kirchner’s watch
ment’s access to
financing and tap into global demand
for debt that pays higher yields than
An attempt to pay off creditors sparks a feud with U.S. and European treasury bonds.
But in her attempts to mollify inves-
the central bank—and now a constitutional crisis tors, la presidenta is facing criticism
at home and abroad. The central bank
chief refused to hand over the $6.6 bil-
By Geri Smith at the Banco Central de la República lion in reserves Kirchner had requested
For the better part of a decade, over- Argentina to guarantee future foreign for the fund, and Congress accused the
seas investors have viewed Argentina debt payments. She’s also preparing to president of raiding the bank so she can
as a pariah: After a currency collapse offer the thousands of remaining hold- continue to pump up spending. “Right
in 2001, the country suspended pay- ers of the older bonds—investors such when Argentina should be showing
ments on some $95 billion in foreign as the Kansas Cattlemen’s Assn., the investors how capable and solid its
debt—the largest sovereign default in Nebraska Association of Retired School strategy is, the different branches of
history. Then in 2005, the government Personnel, and vulture funds that government are fighting,” says Esteban
offered creditors, ranging from Italian bought in after the default—another Fernández Medrano, an economist with
pensioners and American teachers’ chance to swap them for new notes consultancy Global Source Partners.
unions to Wall Street hedge funds, just On Jan. 12, creditors holding out for
30¢ on the dollar if they agreed to swap better compensation on the defaulted
their old bonds for new notes. About “WHAT WE REALLY HAVE IS bonds persuaded a U.S. judge to freeze
PRAKASH SINGH/AFP/GETTY IMAGES
three-quarters of the debt holders Argentine government funds on de-

grudgingly accepted the deal.
A POLITICALLY WEAKENED posit with the U.S. Federal Reserve.
So it should be good news that Ar-
gentine President Cristina Fernández
GOVERNMENT DESPERATE Kirchner’s move has sparked a
constitutional crisis. On Jan. 7 she
de Kirchner is trying to return to the TO GET FUNDS TO KEEP fired Martin Redrado, the Harvard-
good graces of the global investment educated head of the central bank, and
community. In December she said she SPENDING” tried to replace him with a deputy more
would set up a fund backed by reserves amenable to her plan. The next day

NEW BUSINESS
a judge ordered Redrado reinstated,

arguing that only Congress can remove
him. Congress, in recess until March GUESS WHO LIKES THE DOLLAR
for the Southern Hemisphere summer
holidays, is considering an emergency With inflation soaring, Chávez finally devalues the bolívar
session to resolve the dispute.
Kirchner has lavished billions of
dollars on subsidies for food, fuel, and By Peter Coy for essential imported goods, such as
electricity, sending state expenditures Hugo Chávez regularly gets ripped food and health-care items, but a 50%
up by some 30% annually since she by international economists for his devaluation, to 4.6 bolívars to the dollar,
took office two years ago. The problem interventionist and abrupt economic for nonessential items. Anticipating
is, tax revenues have been rising just policies. Yet the Venezuela president’s price increases, consumers in major
12% annually, so a comfortable fiscal latest move to devalue the national cur- cities such as Caracas rushed to buy
surplus has become a deficit equiva- rency has a certain logic. It might help electronic goods and appliances. The
lent to 2.5% of gross domestic product stabilize the nation’s finances and boost hope, however, is that exchange rate ad-
over the past two years. To make up the domestic producers, which have been justments will cause a one-time reset of
shortfall, Kirchner tried in 2008 to raise hit by competition from imported goods consumer prices rather than exacerbate
export taxes sharply on soybeans and subsidized by an artificially pumped-up long-term inflation. Once import prices
other grains. That led to a four-month currency. rise to reflect the new exchange rates,
standoff with farmers before she backed A devaluation was long overdue, their contribution to inflation will end.
off. Later that year she nationalized even though Chávez had repeatedly None of this means Chávez has sud-
some $30 billion in private pension denied one was in the works. Years of denly embraced free-market capital-
funds, adding the resources to the Trea- 20% inflation rates caused by govern- ism. He sent inspectors, accompanied
sury and forcing millions of Argentines ment overspending has
to join the government’s pay-as-you- eroded the value of the
go social security system. bolivar in international
currency markets. The
SHORT MEMORIES current black market
Such moves contributed to the defeat exchange rate is more
of Kirchner’s Peronist party in last than 6 bolívars for
year’s mid-term elections. With a pres- 1 U.S. dollar. Officially,
idential vote looming in 2011, Kirchner though, the exchange
is eager to shore up support. “What we rate has been stuck at
really have here is a politically weak- 2.15 bolívars to the dol-
ened government that’s desperate to lar since 2005.
get funds to keep spending,” says Daniel As a result, anyone
Kerner, an analyst with political risk who could buy dollars at
consultancy Eurasia Group. the official rate was able
Even if she manages to win her to import, say, Japanese
battle with the central bank, some wide-screen TVs rela- Behind schedule? by soldiers, to shut down stores
bondholders may shun the swap— tively cheaply and resell Chávez’s failure that raised prices, even though
to devalue sooner
and present more legal challenges them at a tidy profit. helped create a
price increases on imported
to Argentina’s efforts to raise funds The artificially low price dollar shortage products are probably needed.
internationally. But others will be for dollars also created “The bourgeois are already talk-
eager to collect some interest on their a shortage of them inside Venezuela, ing about how all prices are going to
long-defaulted bonds. If Kirchner crimping domestic manufacturers that double,” he said on state television dur-
manages to persuade the bulk of the need dollars to buy critical components. ing his weekly Aló Presidente program.
holdouts to go along with the debt By bringing the bolívar closer in line “People, don’t let them rob you.”
swap, plenty of international investors with its market value, “the government More worrisome was an announce-
in search of high returns are likely to is reducing a distortion,” says Alejandro ment by Chávez that Venezuela’s
THOMAS COEX/AFP/GETTY IMAGES
find their way back to Buenos Aires. Grisanti, a Venezuelan economist at central bank will transfer a higher-than-
“One lesson in emerging markets is Barclays Capital in New York. expected $7.8 billion of international re-
that memories are short,” says Ignacio Devaluations are never popular, serves to cover the government deficit.
Sosa, a portfolio manager for Vorás because no one likes to lose purchas- Such transfers will enable more deficit
Capital Management. “If the yield is ing power. So Chávez made some spending, causing higher inflation—and
attractive enough, people will invest distinctions. He announced a 21% inevitably, more devaluations to come.
in Argentina again.” ^ devaluation, to 2.6 bolívars to the dollar, –With Daniel Cancel in Caracas
–With Drew Benson in Buenos Aires

NEW BUSINESS
Dubai: The First property values down 52% over

the past year, says Deutsche Bank.
High-rises stand empty. Some foreign
Foreclosure residents who can’t pay their mort-

gage bills have simply abandoned their
homes and fled the country, ditching
their cars at the airport parking lot.
Barclays’ landmark case paves the way for other That’s because borrowers are required
lenders to go after homeowners in default to write postdated checks when they
take out a home loan—and people until
recently could be jailed for bounc-
ing a check in Dubai. Some 12% of the
27,000 residential mortgages in the
sheikdom could go into default within
12 to 18 months, according to Septem-
ber estimates by Moody’s.
Not long ago there was no formal
system for dealing with defaults.
Lenders avoided the courts, discour-
aged by the ambiguity of the legal
process and a culture that frowns on
forcing people from their homes. To
help buyers, lenders usually try to
work out troubled loans, extending
payment terms or allowing borrow-
ers to return some of their investment
properties. Even so, many loans have
been left in limbo.
The 2008 law should impose some
structure on the process. It requires
lenders to give homeowners 30 days’
Projects started notice of their intent to pursue
before the bust
could add 30,000
foreclosure. If the court finds in favor
homes to Dubai’s of the lender, Dubai’s Land Dept.
troubled market auctions off the property, with the
proceeds going to pay off the loan.
By Zainab Fattah emirate was one of the world’s hot- Lenders may be selective in using the
With plunging values, missed mort- test property markets. Residential new law. Britain’s Standard Char-
gage payments, and abandoned real estate prices quadrupled from tered Bank, a big mortgage lender in
homes, Dubai’s housing market is a lot 2002—the year Dubai first allowed Dubai, says foreclosure is “a legitimate
like others around the world. Except foreign residents to own property—to course of action” but not its “preferred
for one thing: There have been no mid-2008. The boom was fueled by approach.” As in the U.S., banks are
foreclosures in the emirate. Until now. a growing expatriate workforce and reluctant to dump foreclosed proper-
Barclays recently won the sheik- speculation. Prospective ties on the market for
dom’s first foreclosure case in a local buyers routinely stood in fear of driving down
court. The decision, based on a 2008 long lines to snag homes prices, says Saud Masud,
law, paves the way for others to pursue in new developments,
claims. Lenders hold $16 billion of res- even before construc-
idential mortgages. Tamweel P.J.S.C., tion began. Investors 12% a Dubai-based real estate
analyst at UBS. New
projects, started before
CHARLES CROWELL/BLOOMBERG NEWS
Dubai’s biggest mortgage bank, has frequently flipped the bust, will add up to
several foreclosure cases pending. apartments, using profits The share of 30,000 housing units
“Banks will be more aggressive,” to buy more proper- Dubai’s 27,000 resi- to the market in 2010,
dential mortgages
says Antoine Yacoub, a Dubai-based ties. Some apartments according to Deutsche
that could go into
banking analyst at Moody’s Investors changed hands two default within 12 to
Bank. “Mass auctions
Service. “Once they see a precedent or three times before 18 months may reprice the property
has been set, they will be encouraged ground was broken. Data: Moody’s Investors
market in a meaningful
to push more cases through.” The global financial Service way,” Masud says. “It’s a
For much of the past decade the crisis has sent Dubai slippery slope.” ^

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V

S
How the battle
between Silicon
Valley’s superstars
will shape the
future of mobile
computing
By Peter Burrows
Photo-Illustration by
David Rudes/BW

On Jan. 5, Google did a very Apple-like thing. In a presentation at 2006, Jobs tapped Schmidt. “Eric is obvi-
the Googleplex in Mountain View, Calif., the 11-year-old search ously doing a terrific job as CEO of Google,”
Jobs said at the time. Schmidt, meanwhile,
behemoth unveiled Nexus One, a stylish touchscreen smart- called Apple “one of the companies in the
phone that runs on the company’s Android operating system, is world that I most admire.”
Tensions in Silicon Valley’s special re-
sold through a Google-operated retail Web site, and greets the
lationship began to emerge in late 2007,
market with an advertising tagline (“Web meets phone”) as sim- when Google announced plans to develop
ple and optimistic as the one Apple used in 2007 to introduce its Android for mobile phones. Apple had un-
veiled its iPhone in January of that year, and
iPhone (“The Internet in your pocket”). it was clear that the two companies would
On the same day, Apple did a very spar in the smartphone business. Still, both
Google-like thing. Steve Jobs, the were niche players, with more formidable
rivals in companies like Nokia, Samsung,
king of splashy product launches and Research In Motion. Only after soft-
and in-house development, an- ware developers began creating thousands
nounced a strategic acquisition. of mobile apps, and it became clear that
phones would become the computers of
For $275 million, Apple purchased the future, did the conflicts begin to grow
Quattro Wireless, an upstart ad- serious. Last summer, Apple refused to
(THIS PAGE) PHOTOGRAPH BY KEVIN LORENZI/BLOOMBERG; ICONS BY MARK NERYS

approve two Google apps for sale to iPhone
vertising company that excels at
(PREVIOUS PAGE) NEXUS ONE PHOTOGRAPH BY TOM SCHIERLITZ/GOOGLE/MCT;

users, raising questions about how much
targeting ads to mobile-phone of a Google presence Apple would allow on
users based on their behavior. its devices. In August, Schmidt gave up his
board seat. “Unfortunately, as Google en-
When companies start to imitate one an- ters more of Apple’s core businesses,” Jobs
other, it’s usually either an extreme case of said at the time, “Eric’s effectiveness as an
flattery—or war. In the case of Google and Apple board member will be significantly
Apple, it’s both. Separated by a mere 10 diminished, since he will have to recuse
miles in Silicon Valley, the two have been on himself from even larger portions of our
famously good terms for almost a decade. meetings.”
Jobs and Google CEO Eric Schmidt, both Now the companies have entered a
54, spent years in separate battles against new, more adversarial phase. With Nexus
Microsoft while Schmidt was at Sun Micro- One, Google, which had been content
systems and Novell. Over to power multiple phonemakers’ de-
time, they went from Schmidt gave vices with Android, enters the hardware
up his Apple
spiritual allies to strate- board seat due game, becoming a direct threat to the
gic ones. When Apple had to increasing iPhone. With its Quattro purchase, Apple
an opening on its board in conflicts aims to create completely new kinds of
COLLISION COURSE Apple and Google, once close allies, are battling on a growing number of fronts
SMARTPHONES MOBILE SOFTWARE ADVERTISING

Apple has ridden The 125,000 apps Google’s core busi-
the iPhone to 14% iPhone users can ness is advertising,
of the smartphone download bolster with virtually all of
market in three the popularity of its revenue com-
years. Google’s Apple devices and ing from the text
original plan to let give it influence ads that pop up
hardware partners over how people alongside search
make phones use their phones. results. Apple aims
running its Android Rather than use to break into the
software has garnered only a sliver of Google’s search, iPhone users can fire up mobile advertising business Google has
the market. So Google, risking the ire of the New York Times app for news or Yelp been eyeing by creating new ways to adver-
Android phonemakers, is launching its own for local restaurants. Google is well behind tise within apps on the iPhone and other
Nexus One phone. with 18,000 Android apps. Apple devices.

IN DEPTH
mobile ads, say three sources familiar with Apple’s thinking. an analyst with Piper Jaffray. “It’s about winning the battle
The goal isn’t so much to compete with Google in search as to today rather than getting into the fight tomorrow.” Billions
make search on mobile phones obsolete. “Apple and Google of dollars are up for grabs in selling phones, software, and
both want more,” says Chris Cunningham, founder of the services.
New York mobile advertising firm Appssavvy. “They’re gear- The money in mobile advertising is small—about $2 billion
ing up for the ultimate fight.” last year, according to researcher Gartner, compared with
Apple spokeswoman Katie Cotton declined to comment $60 billion for the overall Web. But figuring out how to make
on the company’s advertising plans or its relationship with mobile advertising more profitable is a lot more important
Google. Google spokeswoman Katie Watson said the compa- than merely getting in as the hockey-stick curve begins to
ny would not make executives available for this story. She did move upward. A company that can nail mobile ads and share
provide a statement, attributed to Vic Gundotra, the wealth with the growing legion of app
Google’s vice-president of engineering: “Apple developers—freelance software writers who
is a valued partner of ours and we continue to create all those sometimes-useful (Busi-
work closely with them to help move the entire ness Card Reader), sometimes time-killing
mobile ecosystem forward.” (Flick Fishing) mobile programs—could
pull in the best of the lot. Create the stron-
THE MOVE TO MOBILE gest ecosystem of apps and devices, and,
The tech industry has had its share of legend- the thinking goes, you leave rivals gasping
ary rivalries: IBM vs. Digital Equipment Corp., to keep up. “The mobile platform that cre-
Microsoft vs. Netscape, America Online vs. ates the most ways to make money wins,”
Yahoo! Apple vs. Google could dwarf them all. says David Hyman, chief executive of MOG,
Both companies are revered by consumers with an Internet music service that’s developing
a passion usually reserved for movie stars and mobile apps.
pro athletes. They have multibillion-dollar war Apple has a substantial lead in establish-
chests, visionary founders, and ambitions for ing this ecosystem. Developers have created
smartphones, Web browsers, music, and tablet more than 125,000 mobile applications for
computers that set them on a collision course. Apple devices—seven times as many as
The key battleground in the near term is exist on Android—and the endless diversity
mobile computing. Analysts who once tingled of apps has helped the iPhone quickly pick
when talking about the Internet are getting up 14% of smartphone share, compared
that same old feeling over mobile’s potential. with 3.5% for all the Android-powered de-
Morgan Stanley’s Mary Meeker predicts that vices put together, according to estimates
within five years more users will tap into the by the market research firm IDC. But in the
TONY AVELAR/BLOOMBERG
Internet via mobile devices than desktop PCs. past few months, an increasing number of
Desktop Internet use led to the app developers have complained that they
rise of Google, eBay, and Yahoo, Jobs believes app couldn’t make money on their work. Free
development is
but the mobile winners are still crucial to keeping apps have become the norm, and very few
emerging. “Now is the time to iPhone sales sell for more than 99¢. Some developers
get going,” says Doug Clinton, brisk have profited by embedding ads in their
PERSONAL COMPUTERS ENTERTAINMENT ACQUISITIONS

Apple still gets While Apple has Apple and Google,
almost 40% of its become the world’s with $23 billion and
revenue from Mac largest music $22 billion in cash
computers running retailer, Google and short-term
its operating sys- just began using securities, respec-
tem. Now Google is its search engine tively, are compet-
developing Android to direct people to ing increasingly for
to run competing Apple rivals to play the same startups.
machines and has and buy songs. Google won out
designed a separate operating system, Google owns YouTube, and Apple is adding in bidding for the ad service AdMob, then
Chrome OS, for simpler computer Web more video to iTunes, reportedly including Apple outbid Google for the music site LaLa
surfing. Both companies will soon back a push to offer cable-like subscriptions to Media last year. Apple is adding people and
tablets, too. shows from CBS, ABC, and others. processes to better compete for deals.

apps, but the payments tend to be insignificant since the ads Nov. 8 that it would pay a staggering $750 million for the
are usually smaller, less effective versions of their Web ban- company.
ner forms. According to a source familiar with his thinking, Outbid on its first choice, Apple quickly turned to Waltham
Jobs has recognized that “mobile ads suck” and that improv- (Mass.)-based Quattro Wireless, AdMob’s closest rival. Tell-
ing that situation will make Apple even harder to beat. ingly, when Apple announced the deal, Jobs gave Quattro CEO
Not one to shy away from a challenge, particularly when Andrew Miller the title of vice-president of mobile advertis-
it offends his aesthetic sensibilities, Jobs and his
lieutenants have discussed ways to overhaul mobile
advertising in the same way they had revolutionized APPLE HAS VALUABLE MARKET DATA
music players and phones, say two sources close to
the company. The sources did not reveal specific
THAT WILL ENABLE IT TO BLEND
plans at Apple but say there are several possible ad
approaches. Apple could employ its user data and
ADVERTISING AND E-COMMERCE
geo-location technology to make ads more relevant,
so that a user cruising the mobile Web at lunchtime could re- ing. Vice-president is a rare title at Apple, and Miller is the
ceive an ad for specials at a nearby restaurant. It could also use first one ever assigned to online advertising. Apple has also
the iPhone’s capabilities in creative ways—say, having some- hired an M&A specialist to better compete for deals (box).
one shake the device to win a rebate the same way they do to For almost any company, taking on Google in search ad-
roll dice in games. vertising would be folly. Google dominates traditional search
To pull any of this off, Apple realized that it needed a net- with more than 65% of the market, and its share of search on
work of advertisers and the technology to target ads to cus- mobile phones is even more imposing. More than a million
tomer behavior. In fall 2009, Apple entered the bidding for businesses bid on keywords to show up alongside search re-
AdMob, the leader in the nascent mobile advertising indus- sults, and most experts have assumed a migration to mobile
try. It was a target that made perfect sense; more than half of devices as more people use them for computing tasks.
the AdMob ads served up on smartphones ended up on the Yet mobile search hasn’t taken off. Gartner estimates that
iPhone or iPod Touch (which also run Apple’s apps). But before $924 million was spent on mobile search ads worldwide last
Apple could close the deal, Google intervened, announcing on year, less than 2% of overall Internet advertising. The problem
IS APPLE READY TO GO SHOPPING?

The company has hired a Goldman banker and become a bit more acquisitive
By Peter Burrows less, the largest buy since Jobs’ return. if they thought there was a beneficial one
Historically, Steve Jobs has not been “Given Apple’s strong stock price, it is to be made. After getting Jobs’ O.K., the
the acquisitive type. Since he returned in a position to be generous [in do- champion of the idea would pull together
to Apple as chief executive in 1997, ing deals],” says Michael Kwatinetz, a a team to make an overture, negotiate
the company has bought only 11 small general partner with venture capitalists terms, and work through the administra-
companies, far fewer than Silicon Valley Azure Capital Partners in the Valley. tive details. “It was super ad hoc,” says
counterparts such as Cisco Systems or Apple spokeswoman Katie Cotton one of the former executives.
Hewlett-Packard. Google has bought 11 declined to comment on the company’s But Apple lost out on a deal last year,
companies in just the past 18 months. acquisition strategy or whether it has had in part because of its improvisational ap-
Last year, Apple quietly hired a Gold- deal specialists on staff in the past. proach. As the company was negotiating
man Sachs investment banker, Adrian Jobs has long preferred for his com- with the mobile advertising firm AdMob
Perica, to help the company cut deals. pany to develop technology in-house and last fall, Google swooped in and quickly
Multiple sources close to Apple say they avoid the risks that come with integrating bought the company for $750 million.
believe Perica is the first dedicated M&A other companies into Apple’s unique, Perica helped make sure Apple didn’t
specialist on staff. The company has finely tuned culture. In the past, there make the same mistake with its next
also stepped up its pace of acquisitions: was no organized M&A effort, say three deal, say four sources familiar with the
Three of Jobs’ 11 deals have come former executives at the company. In- situation. Late last year, Apple entered
in the past five months, including the stead, business chiefs were supposed to the bidding for the online music site
$275 million purchase of Quattro Wire- keep an eye out for deals and go to Jobs Lala.com, after Google and several

IN DEPTH
is that user behavior isn’t consistent between desktops and with Google,” says Kevin Lee, chief executive of search mar-
mobile devices. Many people shy away from calling up mi- keting firm Didit. The technology could also be used on the
nuscule search bars on their phones and pecking out queries tablet computer that Apple is expected to introduce later this
using cramped keyboards. Search ads tend to be less effective, month.
too, since people are reluctant to give over the one browser
screen they have on a phone to an ad. In many cases, apps are SAFETY IN NUMBERS
far more effective; it takes fewer steps to find the best local When Google introduced Android in 2007, the company said
sushi joint using apps from Urbanspoon or Yelp than to type it would concentrate on developing the operating system
out “best local sushi” into a search bar and navigate the re- software and let traditional phone manufacturers, such as
sults. “Eric Schmidt has said that the search problem is 99% Motorola and HTC, make the devices. The strategy was simi-
solved, but, boy, is that self-serving,” says Jonathan Yarmis, lar to Microsoft’s in personal computers, aimed at working
research fellow with the consulting firm Ovum. “The fact that with dozens of partners to attack every product area, geog-
I have to go to a search bar at all is a sign of failure.” raphy, and demographic. “One or two devices don’t matter,”
Apple has a vault of valuable data that can help drive an ad said Andy Rubin, head of Google’s Android business, after
business. It knows precisely which apps, podcasts, videos, the Nexus One event. “Twenty or thirty or a hundred devices,
and songs people download from iTunes; in many cases it has all running the same software—that’s what matters.”
detailed customer information such as credit-card numbers Yet the arrival of Nexus One suggests that Google is con-
and home addresses. That gives Apple a chance to blend ad- cerned Android isn’t gaining market share fast enough. “The
vertising and e-commerce in new ways, particularly after volume, quality, and variety of Android phones in the market
the acquisition of Quattro. The startup already works with today has exceeded our most optimistic expectations,” said
advertisers, including Ford, Netflix, and Procter & Gamble, Google Product Management Vice-President Mario Queiroz
to help them figure out when and where to place ads on the at the January announcement. “But we want to do more.” The
sites of publishers, such as Sports Illustrated and CBS News. mobile market is so important that Google can’t afford to de-
By tying Quattro’s ad-serving technology into its own, Apple pend on other companies for access; the Nexus One offensive,
MARK NERYS
would be able to tell advertisers how often and under what Google hopes, will establish a foothold in smartphones so the
circumstances a person clicked on particular ads. “Apple company can control its own fate.
is one of the few brands that could actually go head to head Nexus One isn’t without risk. Android hardware makers
Point and was a can help them with the new terrain.
U.S. Army officer In Apple’s case, it has a war chest of
before joining $23 billion in cash and short-term
Goldman. While securities to pursue acquisitions. “Their
he doesn’t report [business] model is evolving, and you can
directly to Jobs expect them to broaden their horizons,”
and is not part says Bill Whyman, an analyst with Inter-
of Apple’s most national Strategy & Investment.
senior team, “he Many experts believe Apple still won’t
brings a DNA be making any huge deals—the multibil-
that’s not native to lion-dollar, headline-grabbing transactions
other potential acquirers had gotten Apple,” says an investment banker who other companies specialize in. Whyman
involved. The company moved unusually has worked with the company. says Apple has been an “organic grower”
quickly, closing the deal in a few weeks, There are obvious strategic reasons and will likely keep its acquisitions small.
rather than the more typical two to three Apple might want to become more ac- Rich Geruson, a former Nokia executive
months. It was clear that Apple didn’t quisitive. The company is moving beyond who sits on the boards of seven startups,
want to lose out again, and especially not its traditional base in personal comput- says big companies like Google often
to Google. “They’ve always gone slow ers and charging into smartphones and wait to acquire a startup in an emerging
on M&A, but that’s changing,” says one mobile computing. As mobile computing field until they see which one is the most
Silicon Valley banker. takes shape, Apple, Google, Nokia, and dominant. But that’s not Apple. “The pat-
Perica has a reputation for being direct other traditional tech titans have become tern I’ve seen with Apple is that they buy
and likable. He graduated from West more active in searching for startups that very, very small companies,” he says.

may balk at having to com- make Bing Apple’s engine
pete with their supposed
partner. “If the Nexus One
THE SAME, BUT DIFFERENT of choice, or even launch its
own search engine, Yarmis
is any good, why would you says. “I fully expect [Apple]
buy anything else?” says GOOGLE APPLE to do something in search,”
Edward J. Zander, Motor- Date Founded 1998 1976 he adds. “If there’s all these
ola’s former CEO, who is advertising dollars to be
surprised Google would go CEOs Eric Schmidt Steve Jobs won, why would it want
so far as to enter the hard- Google on its iPhones?”
CEO salary $1 a year $1 a year
ware fray. “At least Micro- Whatever happens, it’s
soft never built PCs.” Headquarters The Googleplex, Infinite Loop clear that Apple and Google
Meanwhile, Google is Mountain View campus, Cupertino are headed for more con-
aware of its vulnerabil- flict. Android is a threat to
ity in mobile advertising Market cap $186 billion $190 billion an iPhone business that has
and is pushing to make Revenue* $22.6 billion $36.5 billion quickly come to represent
improvements. Schmidt more than 30% of Apple’s
believes mobile ads will Motto Don’t be evil Think different sales. Meanwhile, nearly all
one day be more impor- the growth in search is ex-
Key to success Algorithms Elegance
tant than PC advertising, pected to come from mobile
largely because of person- Work ethic 20% of 120% of devices, which Piper Jaf-
alization and localization. employees’ time for employees’ time for fray predicts will account
Although Google declined pet projects Steve’s projects for 23.5% of all searches in
to discuss its plans for this 2016, up from less than 5%
The employees Engineers Designers
story, Schmidt has floated who matter today. That sets the stage
the idea that eventually for a new main event in the
some mobile phones could How decisions Data, data, data Because Steve tech sector. “This rivalry is
be free for consumers, with get made says so going to accelerate innova-
advertising paying the bills. Founders’ aircraft Boeing 767 Gulfstream V
tion,” says Andreas Bech-
“If Google could do that, tolsheim, a co-founder of
they’d be untouchable,” Sun Microsystems and an
says tech consultant John Car of choice Toyota Prius Mercedes SL55 early investor in Google.
Metcalfe, who has worked “Apple goes pretty fast, but
Big challenge Can they make Does anyone but
with Google on mobile money on anything Jobs have a vision? having someone chasing
projects. “Apple wouldn’t but search? you always makes you go
be able to come up with an faster. This is going to be
Data: Bloomberg as of Jan. 13 *for the 12 months ending Sept. 30
answer for that.” good for consumers.”
Of course, Apple and Still, in a battle over the
Google could both end up thriving as computing goes mobile. future of computing, friendship will almost surely be a ca-
But there will be losers. Microsoft is fading fast in smart- sualty of progress. “You can just feel the tension rising,” says
phones as device makers shift attention away from Windows Piper Jaffray analyst Gene Munster. “Until the Nexus One, the
Mobile, which doesn’t have nearly as many apps or develop- competition was at arm’s length. But the iPhone is Apple’s
ers as Android and Apple. Nokia, the world’s largest mobile- darling. Now it’s personal.” ^
phone maker, is struggling too; its Ovi online store toils in
near-anonymity compared with Apple’s iTunes store. Even
Samsung and LG Electronics, Korean phonemakers long
hailed for their advanced technology, are losing ground. “The Business Exchange
older cell-phone makers never had to deal with software or Read, save, and add content on BW’s Web 2.0 topic network
software developers,” says Shaw Wu, an analyst with Kauf-
man Bros. “It’s just not in their DNA. [But] the world is mov- Did Google Do the Right Thing in China?
ing that way.” Google’s decision to stop censoring search results in China
sparked strong reactions. The Web site ChinaSmack, which
translates Chinese Internet postings, collected many from
BING IN THE WINGS? the country’s native speakers. “I applaud Google for …
Some analysts believe the Apple-Google battle is likely to get taking a stand on some very important issues,” wrote one
much rougher in the months ahead. Ovum’s Yarmis thinks person. “This isn’t Google making a moral stand,” wrote
Apple may soon decide to dump Google as the default search another. “Google isn’t making any money in China.”
engine on its devices, primarily to cut Google off from mobile To find all the reactions, go to bx.businessweek.com/
data that could be used to improve its advertising and Android google/reference
technology. Jobs might cut a deal with—gasp!—Microsoft to

IN DEPTH
GOOGLE AND CHINA: A WIN FOR LIBERTY—AND STRATEGY

“Don’t be evil” is a good motto. But then again, China business. Lee quit in September.
so is “don’t stay with a loser” Google says financial considerations
have nothing to do with its challenge to
the Beijing censors. Outsiders disagree.
By Bruce Einhorn Analysys International. No wonder, “Google is in a really tough spot,” says
Isaac Mao saw this coming. In early says David Wolf, CEO of Beijing-based Bill Bishop, a Beijing-based angel
2007, a year after Google launched advisory firm Wolf Group Asia, “Google investor in Chinese startups. “There
a China-based version of its search appears to be more interested in winning is no long-term potential.” By citing
engine that adhered to Beijing’s strict hearts and minds than in sustaining its the hacking and censorship issues as
censorship rules, the prominent Chinese business in China.” reasons for leaving, Google can end
blogger posted an open letter to found- China, which has more than 330 mil- its agony and “get this incredible lift
ers Larry Page and Sergey Brin. Mao lion Web users,
described the frustration he and other has not been kind
Chinese Google fans felt as a company to American Web
with the informal motto “Don’t be evil” giants. Instead of
obeyed policies forbidding access to replicating their
sites deemed taboo by China’s govern- U.S. success, eBay,
ment. Google’s self-censorship “hurts Yahoo!, and Micro-
those loyal users a lot,” wrote Mao, who soft portal MSN
said it was “high time to change [Google found they couldn’t
policy] back to the right track.” go it alone against
Now the 37-year-old Mao seems such domestic
to be getting his wish. After Google’s rivals as Baidu,
Jan. 12 announcement that it would stop e-commerce
censoring search results on Google.cn— leader Alibaba’s
in response to what the company called Taobao, and instant
“highly sophisticated” hacking from messaging power
China of its computer systems and the Tencent. Even
infiltration of Gmail accounts of human- after U.S. players
rights activists—Internet users in China teamed up with
had new hope they might gain access local partners, they
to information on the 1989 Tiananmen still trailed.
Square crackdown, the Dalai Lama, Google
and other banned topics. The company struggled from the
says it will quit China if it can’t run a get-go. Despite its
permanently unfiltered search engine. submission to censorship, its YouTube Google’s Beijing in brand equity,” he
headquarters
It’s hard, though, to imagine the Chinese business was regularly blocked, and cen- says. Google won’t
after it announced
giving Google, or anyone else, that kind sors still occasionally restricted access it may leave lose much financially:
of autonomy. to the entire search engine, not just re- China Its Chinese business
An exit from the mainland would sults to offending queries. After Google was on target for
uphold the right of free expression announced that it would alert Chinese 2010 sales of $600 million, according
and acquit Google in the eyes of those users every time it provided them with a to JPMorgan Chase. That’s a fraction
who protested its initial complicity with censored result, the government-run me- of Google’s estimated overall sales this
Chinese restrictions. “It’s a smart move,” dia attacked the company for allegedly year of $26 billion.
says Mao. But before heaping too much operating without a license. Chinese Net The irony is that the main Google site,
praise on Page and Brin, it’s worth noting users even mocked Google’s Chinese Google.com, is popular with China’s Eng-
that a pullout would also end a bruising name, a transliteration of the word lish-speaking elite, who find local search
VINCENT THIAN/AP PHOTO
commercial battle. In the U.S. Google has Google that was rendered inelegantly engines insufficiently global. Sounds like
over 60% of the search market. In China as “Valley Song.” Google also had to the makings of a good business. Such
its share of search profits is 35.6%, a wage a bitter court battle in 2005 before logic doesn’t always work in China.
distant No. 2 to local champion Baidu’s winning permission to hire a brilliant Mi- —With Tom Giles in San Francisco and
58.4%, according to China data tracker crosoft executive, Kai-Fu Lee, to head its Douglas MacMillan in New York

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IN DEPTH
Irene Rosenfeld hasn’t been around Kraft Foods’ more stock or increase her price, even if other bidders emerge.
It was an unusually public smackdown for an investor used
suburban Chicago headquarters much lately. The to operating behind closed doors. Rosenfeld and Buffett de-
door to her wood-paneled office is kept closed. clined to comment.
Her desk is bare. Rosenfeld has grabbed her leather Now, to save the deal, Rosenfeld is traveling the world to
placate two groups of shareholders: Kraft’s, who are increas-
folders of meticulously compiled research and is ingly worried that she’ll pay too much, and Cadbury’s, who
traveling to London and around the U.S. in Kraft’s are being told she’s offering too little. She has until Jan. 19 to
Gulfstream jet. These trips weren’t supposed to make her final offer, and until Feb. 2 to persuade them all. Win
or lose, says former Kraft CEO Robert S. Morrison, the Cad-
be urgent or secretive, but they’ve become both as bury affair “will be defining for her career.”
Rosenfeld scrambles to reassure shareholders that Kraft is the world’s No. 2 food company after Nestlé, sell-
ing $42 billion worth of Kraft Macaroni & Cheese, Oreos,
her surprising $17 billion hostile bid to buy British
Oscar Mayer cold cuts, and hundreds of other brands each
candymaker Cadbury will be good for them. year. It is the product of two decades of dealmaking. Philip
Rosenfeld, 56, has led Kraft Morris International, seeking to
since 2006 and has worked broaden its reach beyond ciga-
KRAFT’S
there for almost her entire pro- rettes, bought General Foods
fessional life. She can be pretty (which had among its brands
persuasive. Early on she told Jell-O, Minute Rice, and Kool-
her bosses that commercials for Aid) in 1985, succeeded in a hos-
Kool-Aid should be aimed at kids tile takeover of Kraft in 1988,
SUGAR
(not mothers), and that Jell-O merged the two companies by
could be made modern with new 1995, and five years later bought
flavors. In the late 1990s, she Nabisco.
turned around Kraft’s business
in Canada; troubled as it was MIDNIGHT BRAINSTORMING
RUSH
when she arrived, the first thing During the 1980s, General Foods,
she had to do was show skepti- which was based in Westchester
cal colleagues that an American County, N.Y., had a reputation
could understand Canadian con- as an intellectually challeng-
sumers. As chief executive, she ing workplace where debate was
has won most employees’ co- encouraged. It was here, in 1981,
operation for a wrenching reor- that Rosenfeld got her start in
ganization. “When she is trying market research. She had spent
to persuade you of something, CEO Irene Rosenfeld’s most of the previous decade at
she will be relentless in com- Cornell University complet-
ing back with facts and showing pursuit of Cadbury is testing ing an undergraduate degree in
you she has the support of other psychology, an MBA, and a PhD
people,” says John Bowlin, who
her considerable powers of in marketing and statistics. Her
ran Kraft North America in the persuasion—and could thesis adviser, Vithala R. Rao,
mid-1990s. “She will be totally recalls that even though she was
emotionally and intellectually define her career working and pregnant she was
committed to her idea.” determined to finish her disser-
Now Rosenfeld must summon By Susan Berfield and Michael Arndt tation on how consumers make
all of her powers as she takes on Illustration by Anita Kunz decisions about purchases. “She
her biggest marketing challenge knew a PhD would give her an
yet: selling the Cadbury deal to shareholders. Her task is edge in the business world,” says Rao. “And her husband was
all the more difficult because she has alienated her biggest getting one. They were a little competitive.”
shareholder and one of the world’s most influential inves- When Rosenfeld presented her bosses at General Foods with
tors, Warren Buffett. research showing that Kool-Aid should be marketed directly
So confident was Rosenfeld of the deal’s potential to trans- to kids, the pitch won her a job working on the brand full-time.
form Kraft into a global juggernaut that she told investors on It was an unexpected turn for a researcher. After a presentation
Dec. 18 she planned to issue new stock to help pay for the pur- at one of her first meetings with Grey Advertising, Rosenfeld
chase. The subtext: She might be willing to raise her original was so excited that she applauded. Back then, junior employ-
$17 billion bid, which Cadbury management had complained ees were expected to stay silent. “We were all so shocked and
was too low. But Buffett didn’t like the idea of paying more. On amused by her reaction,” says Carol Herman, who worked at
Jan. 5 he issued a press release warning Rosenfeld not to sell Grey and remains a close friend of Rosenfeld’s.

As Rosenfeld came up through the ranks at General Foods Rosenfeld wasn’t alone in wanting change—ac-
and Kraft—eventually overseeing the Nabisco integration and tivist investor Nelson Peltz was demanding it. She
serving as president of Kraft North America—she developed a learned that engagement and conciliation were the
reputation as a tough and insistent boss. She would call people best ways to handle powerful dissenters. When
with ideas, however big or small, late into the night. Conversa- Peltz pushed her to sell some brands, she did, un-
tions about kids turned into discussions about Kraft products. loading Veryfine fruit juice and Post cereals. And
“I can’t tell you how many midnight talks we had about Min- when she asked him not to purchase more than
ute Rice and Stove Top stuffing,” says Herman, who worked on 10% of the company, he agreed.
various accounts for Kraft through the 1990s. Says James M. Peltz was also a big investor in Cadbury
Kilts, a former Kraft president who later ran Gillette: “Irene Schweppes, and he persuaded the British food giant
didn’t need a lot of advice. That’s why I liked her. She was giv- to sell its soft drink division in 2008 and become
ing me the right answers.” Yet her intensity and self-confidence purely a candy company. That would set the stage
didn’t always endear her to colleagues. One former executive for Rosenfeld’s eventual hostile takeover bid and
recalls a time when Rosenfeld provided helpful insight into a provide Cadbury its philosophical defense: It didn’t
business she had once managed. When the executive offered want to lose focus on its core business by becoming
to return the favor, Rosenfeld took a pass. part of a conglomerate.
In 2001, Rosenfeld suffered her first big professional set- As the Great Recession took hold, Kraft should
back when a contemporary, Betsy D. Holden, was appointed have thrived. But even though consumers ate at
co-chief executive alongside Roger Deromedi. Rosenfeld home more often and ingredient prices fell, the
stayed on almost two more years, then left to join Frito-Lay, a company was forced to cut prices to compete with
Kraft rival more global in its outlook and more local in its de- private label products. For 2009, Rosenfeld’s goal
cision-making. “Irene thought about the marketing agenda was sales growth of 4% and profit growth of at least
and innovation much more aggressively” than the company 7%. Instead, revenue fell 6% through the first three
was used to, says Indra Nooyi, the CEO of PepsiCo (page 50), quarters of 2009, with net income down 14.6% over the same
which owns Frito-Lay. “She was fearless in what she did.” period. Kraft stock, which went public at $31 a share in 2001,
fell as low as $21 last March. (It has been hovering at about $29
“REWIRE FOR GROWTH” this year.) The company introduced items such as Bagel-fuls,
Rosenfeld gave every impression that she was committed to bagels stuffed with Philadelphia cream cheese. The products
Frito-Lay for the long term. But when Kraft asked her to re- did well, but not well enough to have a major impact. Rosen-
turn as CEO in June 2006, she jumped. The dual leader ex- feld also devoted considerable resources to creating premium
periment had failed; Kraft was faltering amid high commodity toppings for Kraft’s DiGiorno frozen pizza, and frequently
prices, increasing competition from private labels, and a mis- pointed to the brand’s success.
placed focus on cost-cutting. She told Kraft’s nearly 100,000 With the recession abating, Rosenfeld started thinking
(TOP) TODD ROSENBERG; (CANDY) DAVID RUDES/BW

employees that the company had lost its heart and soul and of ways to transform the company. “She wanted to capture
needed to “rewire for growth.” In a speech at Cornell in 2007, the imagination of the world about what Kraft could be,”
Rosenfeld described her return to Kraft. “The staff was tired, says Shelly Lazarus, chairman of ad agency Ogilvy & Mather
raw, disillusioned,” she told the audience. “My slogan was, Worldwide, which works with Kraft. Rosenfeld began study-
‘let’s get growing.’ It’s not a warm and fuzzy strategy.” She ing the possibility of buying Cadbury, which sells Trident gum
replaced half of her executive team and half of those in the and chocolate in 60 countries and has sales of about $8 billion.
next two levels down. She reorganized the structure of the It’s a fast-growing global business with high profit margins.
company, changed how people receive their bonuses, and told Eventually she fixed on a price, and in early August decided
everyone “to stop apologizing for our categories and make to approach Cadbury Chairman Roger Carr with an offer.
them more relevant.” She concluded her talk: “Sometimes I On Aug. 28 she met with Carr in London to lay out her plan.
lie awake thinking, ‘Should we?’ And then I think, ‘How can “She was brisk, efficient, delivered her proposal and left quite
we not?’ ” quickly,” says Carr. The two haven’t spoken since, he says.
THE
CHOCOLATE
WARS Mars Nestlé Kraft Ferrero
GLOBAL MARKET SHARE 14.6% 12.6% 8.3% 7.3%
BEST-SELLING CANDIES M&Ms, Snickers, Milky Way Nestlé Crunch, Butterfinger Milka Ferrero Rocher
ETC. Snickers was named after Just bought Kraft’s frozen Milka’s mascot since 1901 The Italian company is
the Mars family’s favorite pizza business and said it has been a purple cow known for its chocolate-
horse in 1930 wouldn’t bid for Cadbury hazelnut spread Nutella
Data: Euromonitor 2008; companies

IN DEPTH
side of North America, and within

the company it was an isolated
brand. Next she had to persuade
the board. “It was a difficult de-
cision. But once we got our heads
around the strategic and finan-
cial rationale for the deal, it be-
came clear,” says Perry Yeatman,
a Kraft spokeswoman. Closing
the sale proved difficult; it wasn’t
until Jan. 5 that Kraft announced
it would sell the pizza business to
Nestlé for $3.7 billion. Some inves-
tors thought the price was too low.
But the deal would give Rosenfeld
the cash she’d need to pursue Cad-
bury. And there was another ben-
efit: Nestlé, Kraft’s main rival for
Cadbury, said it wouldn’t bid.
Whatever sense of relief Rosen-
feld might have felt didn’t last
long. On the same day, Buffett
went public with his concerns,
They have, however, exchanged a few letters. In the first, Rosenfeld (left) calling Rosenfeld’s proposal to issue more
meets a parenting
which Carr sent to Rosenfeld the next week, he called the shares a “blank check.” He noted that while
blogger at the
offer “derisory.” Then on Labor Day, Rosenfeld announced Kraft Kitchens in the company had bought back shares at a
Kraft’s bid in a news release on the corporate Web site, hop- Illinois price of $33 a piece in 2007, it would be sell-
ing to win over shareholders directly. She spoke to several ing the new shares for the Cadbury trans-
British newspapers about her admiration for Cadbury and action for far less. He did say, though, that he would support
the great promise of a merger. In a video interview posted on an offer that “does not destroy value for Kraft shareholders.”
the Kraft site, she expressed her enthusiasm for Cadbury’s Other investors share Buffett’s skepticism. “What is she wast-
products in a way only a marketer could appreciate: “I am a ing our money for?” asks John Kornitzer, founder of Kornitzer
heavy, heavy user of Trident gum and, on a seasonal basis, I Capital Management in Shawnee Mission, Kan. “To chase
love those Cadbury eggs.” But after receiving no encourage- after these guys is ridiculous.” Alice Schroeder, a former Wall
ment from the candymaker, Rosenfeld launched a hostile bid Street analyst and author of a biography of Buffett who also
on Nov. 9. “We believe that our proposal offers the best im- writes a column for Bloomberg News, says even if Rosenfeld
mediate and long-term value for Cadbury’s shareholders and had consulted with Buffett it might serve his purposes to take
for the company itself compared with any other option cur- a public stand. He can take credit for reining her in and de-
rently available, including Cadbury remaining independent,” fending shareholders. “No matter how this turns out, Warren
she wrote in the formal offer. looks great,” she says.
Meanwhile, Rosenfeld was juggling another deal that would Rosenfeld, however, is under attack from all sides. On Jan.
determine how much Kraft could spend for Cadbury. In early 12, Carr released a stinging “defense document” on Cadbury’s
2009, Nestlé made a surprise offer to buy DiGiorno and the Web site, saying “the bid is even more unattractive today than
rest of Kraft’s pizza business. Rosenfeld concluded that sell- it was when Kraft made its formal offer.” Kraft called the argu-
ing the unit made sense: Frozen pizza wouldn’t do well out- ment “underwhelming.” Carr responds: “I think the clarity
with which we reviewed Kraft’s own record must have been
disturbing for them and illuminating for our shareholders.”
Kraft shareholders will vote on whether to issue more stock
on Feb. 1; the next day Cadbury stockholders will vote on the
offer. Rosenfeld spent Jan. 12 with Cadbury investors in the U.S.
Cadbury Hershey before jetting to London to talk with Cadbury shareholders
6.9% 6.7% there. Some refused her visit, says Carr. While Rosenfeld re-
mains determined to make Kraft bigger and more global, finding
Cadbury Creme Egg Hershey’s, Hershey’s Kisses
a price for Cadbury that works for everyone might be impos-
Cadbury became solely a con- America’s milk chocolate sible. “Rosenfeld has made it clear that she’s disciplined, that
fectioner after spinning off its pioneer has been considering she won’t overpay,” says Donald Yacktman, president of Yackt-
beverage business in 2008 making an offer for Cadbury man Asset Management, a longtime investor. “I guess we’ll
find out how much she really means what she says.” ^

IN DEPTH
THE HUNT
FOR AN
AUTISM DRUG
By Ellen Gibson
Photograph by Jeff Hutchens
Armed with fresh medical insights,

drug companies are redoubling their
efforts to address the disease’s
complex causes
The Weakley family lives in Dover, Pa., about

30 miles south of Harrisburg. Their two-story
house sits on a mostly treeless tract of land, across
the road from a big white barn. Seated at the din-
ing table, Beverly Morgart-Weakley is describing
the recent changes she’s seen in her 21-year-old
daughter Jennifer. Once unable to form words,
“she keeps saying ‘mama’, and she’s starting to say
the beginnings of other words. You’ll hear some-
thing that almost sounds like a sentence and you
can figure out what she’s trying to tell you.”
Every parent looks forward to these develop-
mental milestones, but Beverly has been waiting
two decades. In the early 1990s, Jennifer was di-
agnosed with autism, and her early childhood was
dominated by doctor’s visits. Things got worse in
her teens. The girl would sometimes bite her own
arms in paroxysms of frustration. Many times she
grabbed her mother or her younger sister by the
neck and squeezed hard. Even the family’s collie
REPORTAGE BY GETTY IMAGES
was bitten.
Beverly was skeptical of medications, but
she needed a way to quell
her daughter’s increasingly Beverly Morgart-
Weakley’s
violent outbursts. Doctors daughter Jennifer
tried the antipsychotic drug has improved on
Risperdal, but Jennifer gained the drug Namenda

IN DEPTH

weight and grew sluggish. Then they turned to Zyprexa, a pediatric disorders, only
schizophrenia medication, but the symptoms persisted. diabetes, AIDS, and asthma
Over the past year the family has had a modest breakthrough draw more research funding
with Namenda, an Alzheimer’s drug from Forest Laborato- from the National Institutes
ries. Jen’s aggression has subsided and her communication of Health. Last year, Presi-
skills have improved. “She is still far from normal,” says Bev- dent Barack Obama allocat-
erly, looking on as her daughter repeatedly opens and closes ed $60 million of stimulus
the refrigerator, then settles on the floor in the den and me- funds to the autism research
thodically removes every item from a filing cabinet. “But she’s pool and earmarked $1 bil-
made progress, and that in itself is a miracle.” lion for studies extending
through 2018. While many
EVOLVING SCIENCE medical authorities play
Encouraged by even partial success stories like the Weakleys’, down the idea of an autism
the drug industry is gearing up for an assault on autism. The epidemic, noting that better
timing makes good sense for both scientific and economic detection and changes in di-
reasons. Powerful genetic tools and brain-imaging tech- agnostic criteria account for
niques have given researchers fresh insights about the disor- part of the rise, most experts
der, often described as a “spectrum” because symptoms vary believe cases are increasing.
greatly in nature and severity. In the past year scientists at Researchers often express
several small biotech companies have voiced excitement over awe at autism’s complexity.
new drugs in early-stage clinical trials. Last year, industry “Early on we felt that if we
giant Pfizer formed a 14-person autism research group at its could collect large enough
Groton (Conn.) laboratories. “The science has evolved to the samples of families with multiple affected individuals, we
point where we can now start investing in potential pathways would find the autism gene,” says Dr. Eric Hollander, a psychia-
and targets,” says Anabella Villalobos, Pfizer’s vice-president trist and former director of the Seaver Autism Center for Re-
for neuroscience chemistry. search & Treatment in New York. “As the sample size got bigger,
From a drug-industry standpoint, the demographics of the there were more genes popping up that had minor effects.”
disease are also compelling. Diagnoses among children jumped Many autism experts are now looking to epigenetics for
57% from 2002 to 2006, according to the Centers for Disease a possible explanation. This is the branch of genetics that
Control & Prevention in Atlanta. Roughly 1 in 110 8-year-olds looks at how the environment influences gene expression.
in the U.S. is on the autism spectrum. Just as interesting to Last year, researchers at the University of California Davis’s
drugmakers is the fast-growing population of adult autistics MIND Institute concluded that the state’s sevenfold increase
who can’t be helped by the kind of intensive behavioral therapy in autism cases since 1990 is most likely linked to environ-
that sometimes works on children, because their brains lack the mental exposure—to pesticides, viruses, chemicals in house-
same plasticity. One decade from now there will be seven times hold products, or some other agent. One reason they think so:
as many autistics entering the adult-services sector as there there are cases in which one identical twin is autistic and the
are today. The disorder already costs the U.S. about $35 billion other is not; the two have identical genes, so environmental
per year for special education, medical care, and assisted living. factors must contribute.
If the drug industry can devise better treatments, families and Considering how little is known about the underlying biol-
society will find a way to pay. ogy, it’s not surprising the Food & Drug Administration has
At the federal level, autism is already a priority. Among yet to approve a single medication to treat the core conditions
of the disorder. Yet drugmakers are
racking up nearly $3.5 billion in annual
PHOTOGRAPH BY JEFF HUTCHENS/REPORTAGE BY GETTY IMAGES;
COMING OF AGE sales for treatments aimed at manag-
ing secondary symptoms—everything
A new calculation, starting in 2010, shows the rapid, cumulative increase in
the population of autistic adults in the U.S. and the climbing cost of care from antidepressants for anxiety to
anticonvulsants for seizures.
THOUSANDS BILLIONS OF DOLLARS
400 30 As autistic people grow up, their
AUTISTIC ADULTS WHO ARE DIRECT COST OF CARE doctors often add to the drug regimen,
320 NO LONGER COVERED BY 24
meaning an autistic adult may be on
CHART BY LAUREL DAUNIS-ALLEN/BW
THE PEDIATRIC SAFETY NET*

240 18 three or four different drugs at once,
with no solid data on their effective-
160 12
ness or how they may interact. A 2007
80 6 study found that 70% of autistics
PROJECTED PROJECTED
0 0
ages 8 and up received a psychoactive
'10 '12 '14 '16 '18 '20 '22 '23 '10 '12 '14 '16 '18 '20 '22 '23 medication in a given year. “The word
*Doesn’t include high-functioning adults on autism spectrum
Data: SAGE Crossing Foundation ‘experimentation’ sounds scary,” says
Bryan H. King, director of psychiatry

IN DEPTH
Weakley hopes peutics in Cambridge, Mass., is going after

for a drug that a specific target. The company has zeroed
will “unlock”
her daughter’s
in on a rare brain disorder called Fragile X,
potential caused by a mutation on the X chromo-
some and known to cause a hereditary
form of autism. Founded in 2005 by former Massachusetts
Institute of Technology neuroscientist Mark F. Bear, Seaside
has two drug candidates in clinical trials. Like Jennifer Weak-
ley’s drug, Namenda, these compounds zero in on the brain’s
glutamate system, involved in learning and memory.
“What you need is a company to be successful—to show that
the FDA will approve you, and that you can make money—and
everybody will jump in,” says Seaside CEO Dr. Randy Carpen-
ter. “If [a drug] shows a benefit, we can charge a premium.”
Some experimental treatments focus on the social-bonding
aspects of the disorder. Oxytocin, which is given to pregnant
women to induce labor under the brand name Pitocin, has
earned the nickname the “love chemical,” because studies in
healthy adults have shown that sniffing it results in the forma-
tion of strong bonds of trust. Studying the effects of the drug
on patients with Asperger’s, a syndrome marked by social awk-
wardness that is on the less severe end of the autism spectrum,
at the Seattle Children’s Hospital. “People aren’t randomly psychiatrist Hollander found a reduction in repetitive behav-
picking drugs off the shelf and saying, ‘Let’s try this.’ But it iors and an improved ability to recognize the emotional tone
starts to look like that when you take two steps back.” of sentences. Other drugs target the brain’s interaction with
As a research target, autism has suffered from companies’ organs that aren’t usually associated with autism, including
reluctance to run large placebo-controlled trials. When such those of the gastrointestinal tract and the immune system.
studies were done, the results were mostly disappointing. In One of the most promising treatments in this category is a
June, for example, a large trial of Forest Labs’ depression drug drug called CM-AT made by a startup called Curemark. Dr.
Celexa showed no benefit over a placebo. Up to that point, Cel- Joan Fallon, the company’s founder and CEO, observed that
exa had been a go-to drug. But greater efforts by large drug- many autistics show a strong preference for foods high in car-
makers change the picture: “Companies are finally starting to bohydrates and low in protein. A diagnostic test revealed that
take an interest in autism, which is great to see,” says King. some autistic children lack enzymes that digest protein. As
MISWIRED BRAINS?
While blockbusters may still be far off, research- IF JUST ONE DRUG CAN GET APPROVED BY
ers are laying foundations for discovery. The new
research team at Pfizer, for example, is focusing
THE FDA AND MAKE MONEY, “EVERYBODY WILL
on genes that may affect synapses in the brain.
These are the spaces where two nerve endings
JUMP IN,” SAYS ONE BIOTECH EXECUTIVE
meet—a tiny gap neurochemicals must cross
in order to transmit information. Many researchers are now a result, these children produce fewer of the essential amino
framing autism in terms of information processing, says Larry acids that are the building blocks for brain development and
Fitzgerald, a scientist who helped found Pfizer’s autism team neuroreception. Fallon believes this deficiency is linked to the
before departing the company in September. Brain-scan data, most severe symptoms of autism, and she says an early ob-
for example, suggest autistics may process spoken language servational study of CM-AT, an orally ingested powder that
more slowly than “neuro-typicals,” meaning non-autistics. delivers protein-digesting protease, showed “significant im-
One theory holds that the brains of autistics are miswired, with provements.” Curemark is enrolling patients in phase III clini-
too many local neural connections and too little long-distance cal trials at 10 to 12 sites—the largest autism trial to date.
connectivity. The latter might make it difficult to integrate new Beverly Weakley is counting on Namenda—or some yet-to-
information, causing characteristic social impairment, posits be-formulated treatment—to “unlock” Jennifer’s potential.
Clarence Schutt, a Princeton University chemistry professor She describes how one day, many years ago, she heard Jennifer
who co-founded the National Alliance for Autism Research. call out from another room “Mommy, I need you.” It was as
On the other hand, enhanced local networks could explain why though a window to her daughter had opened up. She raced
some autistics are exquisitely tuned to sensory input, and may to her daughter’s side, but by the time she got there, Jen was
explain the “savant” capabilities—musical or mathematical ge- “gone.” Since then, the long silence has been almost unbear-
nius, for instance—that about 10% of autistic people display. able, but Beverly has learned not to dwell on setbacks. She
While Pfizer plumbs the basic biology, tiny Seaside Thera- keeps hoping, she says, that the window will reopen. ^

THE TRANSFORMER:
WHY VW
IS THE
CAR GIANT
TO WATCH
By David Welch
Illustration by Eddie Guy
Volkswagen is
bent on displacing
When Volkswagen CEO Martin
Toyota as the
Winterkorn said two years ago that world’s biggest car
he was determined to zoom past
Toyota to become the world’s big- company—and it
gest automaker, the notion seemed just may succeed
laughable. At the time, the German
automaker sold 3 million fewer ve-
hicles than Toyota, was losing ground in the U.S., and had a repu-
tation for iffy quality. Toyota, then set to pass General Motors as
the best-selling carmaker on the planet, seemed unassailable.
Today Toyota is vulnerable, and Winterkorn’s ambitions seem a
lot less outlandish. In November, for the first time, VW built more
cars than its Japanese rival. Toyota still sells more each year, but
VW has closed the gap to less than 1.5 million cars. Quality contin-
ues to be an issue for VW in the U.S., but Toyota is the one suffering
negative headlines after a series of embarrassing recalls. Toyota’s
CEO—in an act of extreme self-flagellation—has even said his
company’s best days may be behind it.
Winterkorn sees an historic opportunity. And with the back-
ing of his formidable boss and mentor, VW Chairman Ferdi-
nand Piëch, he’s seizing it. By 2018, Winterkorn vows, VW will
pass Toyota. “VW saw a chink in Toyota’s armor and realized
they could act on their ambitions,” says Stephen Pope, who
follows the industry for Cantor Fitzgerald in London. “They

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went for it straightaway.” CEO Winterkorn
All over the globe, Winterkorn, greets the press
at VW’s Wolfsburg
62, is punching the accelerator. headquarters
VW has agreed to buy a 20% stake last year
in Suzuki Motors to gear up for an
assault on the rapidly growing markets of Southeast
Asia and India. Winterkorn is going after BMW and
Mercedes, committing $11 billion over the next three
years to Audi, VW’s luxury brand. Peter Schwarzen-
bauer, a board member who oversees Audi’s sales and
marketing, says the brand plans 10 new models, includ-
ing the A1, the world’s first “premium subcompact.”
AIMING DOWNMARKET
Winterkorn’s most ambitious plans are in the U.S.,
where he aims to double sales by 2012. It was only five
years ago that VW tried and failed to move upmarket
in the U.S. Remember the Phaeton, the VW with a
sticker price of $85,000? Now Winterkorn is revers-
ing course. He’s betting that Volkswagen can steal
customers from Toyota, Honda, Ford, and others by
selling Americans on German engineering and style
at affordable prices. This year, VW will introduce a
compact priced to compete with cars like the $16,000
Toyota Corolla. “We have to bring the masses to VW,”
says Mark Barnes, VW’s U.S. chief operating officer.
Beating Toyota won’t be easy. For starters, VW sells
fewer vehicles in the U.S. than Subaru or Kia and still
has a reputation for making unreliable, overpriced
cars. In Southeast Asia—a Toyota stronghold—the
VW brand is practically unknown. Ditto for India.
Winterkorn’s plan to double Audi’s sales in the U.S. by 2018, By the end of 2006 it was clear that VW’s move upmarket
meanwhile, isn’t exactly scaring BMW. “They have been say- wasn’t working, and in January 2007 Piëch installed Winter-
ing that for years,” says Jim O’Donnell, president of BMW of korn as CEO. Before his elevation, Winterkorn ran Audi, where
North America. he boosted quality and supercharged growth with new models
Still, VW is a formidable competitor; it earned $975 million that rivaled BMW’s cars. Winterkorn rewarded employees for
in the first three quarters of 2009, despite the global collapse speaking their minds and bringing ideas to his attention.
of car sales, and it has $33.3 billion in cash. “We want to make In the summer of 2007, Winterkorn and the board met to
[VW] the economic, ecological, and technological leader by brainstorm ways to become the world’s biggest automaker,
2018,” Winterkorn wrote in an e-mail. “Our goal is not just says VW’s U.S. chief, Stefan Jacoby. High on the agenda was
fixing VW’s America problem. That year,
VW expected to sell 200,000 cars in the
‘VW SAW A CHINK IN TOYOTA’S ARMOR AND U.S., a 40% drop from 2000 and a third of
what VW sold in 1970 when the Bug and Bus
REALIZED THEY COULD ACT ON THEIR AMBITIONS. were Hippie icons. Jacoby says executives at
the meeting saw three choices: They could
THEY WENT FOR IT STRAIGHTAWAY’ continue to lose buckets of money selling
cars that were too small and too expensive;
they could wave the white flag; or they could
about size—we are aiming for quality-driven growth.” go on the offensive. They chose Door No. 3.
(TOP) JOERN POLLEX/GETTY IMAGES
Piëch has long wanted to move beyond VW’s bases in Europe, Jacoby says he persuaded the board to build VW’s first U.S
China, and Brazil. In the 1990s, as Audi chairman and later VW plant. He recalls arguing that doing so would help VW over-
CEO, Piëch acquired lower-end brands, including Spain’s SEAT come resistance in the American heartland to imported vehi-
and the Czech Republic’s Skoda. Later he added ritzy names cles. If VW built the plant, Jacoby recalls saying, he would sell
like Bentley, Lamborghini, and Bugatti. “He used to privately 150,000 cars from that factory alone each year. The board ap-
talk about selling a car for every purse and purpose like Alfred proved the plan and allocated $1 billion for the facility, which
Sloan did at GM,” says Garel Rhys, president of the Center for is scheduled to open next year in Chattanooga, Tenn. VW’s
Auto Industry Studies at Cardiff University in Wales. decision to build cars in the U.S. has not gone unnoticed by its

IN DEPTH
ing affordable European cars. BMW and Mercedes sell German

engineering, but their cheapest models start at $30,000.
According to a source briefed on VW’s plans for the U.S.,
the company plans to expand its lineup from 10 cars today to
14 in five years. VW will have new compact and mid-sized se-
dans priced for the American market, plus a small SUV. VW
also may introduce its Polo compact—now available in Eu-
rope, China, and other markets—to the U.S.
VW will have to convince Americans its cars are worth buy-
ing. In J.D. Power & Associates’ Initial Quality Study, which
ranks cars in the first three months of ownership, VW came in
15th out of 37 last year. The company’s ranking improved from
24th in 2008. But VW still trails Toyota, Honda, and Nissan,
as well as the Chevrolet and Ford brands. What’s more, though
Jacoby, VW’s U.S.

chief, says he
persuaded the
board to build a
U.S. factory
main rival. “The fact that they are producing in the U.S. gives 78% of Americans know the VW brand, only 2% buy the cars.
them a leg up,” says Donald V. Esmond, senior vice-president Most Americans recognize the Beetle and Jetta, says Ellis, but
for automotive operations at Toyota Motor Sales USA. “But draw a blank on VW’s other six U.S. models. “Volkswagen has a
we’ll just keep focusing on our customers.” bigger brand than it deserves,” he says. “But we have a low sense
Jacoby’s most pressing challenge is devising a roomy fam- of awareness for our products.”
ily sedan at a price Americans will pay. Today’s Passat, despite Turning around those perceptions will take a sustained
being smaller than most mid-size sedans, sells for $28,000, marketing push. VW’s new American commercials will debut
or $7,000 more than a Toyota Camry. That’s largely why VW during the Super Bowl on Feb. 7 in a campaign called “Punch
sold only 11,000 Passats in the U.S. last year, compared with Dub,” (as in Vee Dub). It’s a reference to a game kids used to
some 350,000 Camrys. VW plans to stretch the Passat’s suc- play back in the original Beetle’s heyday: The first kid to see
cessor four inches, add three inches of legroom, and sell it for a Beetle would yell, “punch Bug,” and slug their friend. In the
a starting price of $20,000. Timothy Ellis, VW’s U.S. market- ads, people will say, “punch Dub,” when a Jetta, Passat, or any
ing chief, says he expects to move more than 135,000 mid-size other Volkswagen model drives by. The idea: Show millions of
(RIGHT) STEPHEN VOSS; (BOTTOM) REBECCA COOK/REUTERS
sedans a year starting in 2011. James N. Hall, principal of the Americans that VW sells something besides the Beetle.
auto consulting firm 2953 Analytics, is skeptical. Typically, If VW is playing catch-up in the U.S., it is many laps be-
Hall says, it takes two hind its rivals in India
generations for a new VW recently and Southeast Asia.
mid-size sedan to get unveiled its New Indians now buy about
Concept Coupe
traction in the U.S. “The 2 million cars a year;
first-generation car is So u t h ea s t A s i a n s
going to have to hit it out about 1 million. VW
of the park,” he says. is lucky to sell 20,000
Industry analysts say cars a year in each re-
Winterkorn’s mass mar- gion. It will have to
ket approach could work steal customers from
in the U.S. VW will be Honda and Toyota,
the only company offer- which have dominated

Southeast Asia for many years. That’s where Suzuki comes
ONE MAN,
in. By buying a stake in the Japanese company, VW gets ac-
cess to Suzuki’s small-car technology. Suzuki’s Indian joint CONTENDER
venture already does well with its Alto and Swift subcom-
pacts. “India has a massive road-building program,” says
Cantor Fitzgerald’s Pope. “With Suzuki, VW will be able to
ONE CAR,
put out very efficient vehicles.”
VW has tapped Wei Ming Soh to oversee its Asia push. A
U.S.-educated Singaporean, Soh most recently helped orches-
ONE WORLD
trate a turnaround of VW’s operations in China. Soh says VW Why the Focus is so crucial
Group, which includes VW, Audi, and Skoda, will add or fresh- to Ford—and Mulally
en 20 models in China by late 2011. His goal is to double VW’s
Chinese retail network to 1,600 dealers in five years and sell By David Welch
2 million cars. As part of his Southeast Asia strategy, Soh plans When Alan Mulally left Boeing
beachheads in Hong Kong and Singapore. Those markets are for Ford Motor three years ago,
tiny, selling 30,000 and 100,000 cars a year, respectively. But industry watchers wondered: Does
Soh says Singapore sets trends for Southeast Asia, and Hong this guy know anything about cars?
Kong is influential in southern China. “My aim is to make these The question returned on Jan. 11
two markets VW states,” Soh says. as Ford unveiled the 2012 Focus
Winterkorn and Piëch have put in place the pieces of their at the Detroit auto show. The com-
global strategy. Now that VW’s two main rivals, Toyota and pact is the first model with Mulally’s
GM, are retrenching, they’re speeding up their plans. The big mitts all over it.
question is whether size for size’s sake generates real benefits Mulally has won much applause
for a car company. Automakers like to get big so they can spread for shunning a government bailout
the huge costs of developing new models over mass volumes. Of and putting his company on a sus-
course, car companies have a tendency to get so big that they tainable road to profitability. Now
become unmanageable. That’s what happened to GM. Bolting he needs to prove that his product
together various acquisitions also can be problematic. Exhibit strategy will work. FROM BOSTON
A: the unhappy Daimler-Chrysler marriage. Winterkorn and At the heart of it is a concept TO BARCELONA
his executives argue that they can retain management control Mulally calls One Ford. The idea is Designing a car that will ap-
of their sprawling enterprise because VW is more decentral- peal to everyone inevitably
to design one model for multiple requires compromises. With
ized than many automakers. “The critical factor is that each markets, rather than having teams the Focus, Ford had to ap-
brand has its independence, a clear positioning, and au- of engineers in different regions peal to drivers who expect
tonomous management,” Winterkorn wrote in his e-mail to creating the same basic car. The lots of legroom (Americans)
Bloomberg BusinessWeek. and drivers who demand
appeal is obvious: It’s a lot cheaper
world-class fuel efficiency
Eric Noble, president of auto consultant The CarLab, says to build one model than several. (Europeans and Asians).
that Winterkorn’s tactical moves make sense. But, he adds, The most successful so-called
“VW had best be making these acquisitions for reasons other world cars are Toyota’s Corolla and
than size alone.” Looming over the debate is Toyota. A few Honda’s Civic and Fit. They have
years ago, its management decided Toyota needed to be big- the same guts from Boston to WINNER
ger than GM. Look what happened. ^ Beijing to Bogota, but often have
different styling and features for
local tastes. The new four-door
or hatchback Focus, by contrast,
Business Exchange will be almost exactly the same
Read, save, and add content on everywhere.
BW’s Web 2.0 topic network Ford and its U.S. rivals have
tried to sell world cars before—and
Evolution of an Emblem mostly failed, because the vehicles
A photo- and illustration-packed post on the blog weren’t tailored for individual mar-
Neatorama traces the evolution of the VW logo from its kets. Mulally needs the Focus to
inception in 1939, when it resembled an iron cross (once
work because the carmaker is plan-
the symbol of the German armed forces), to today’s more
pared-down look. The logos of Audi, Porsche, and a host of ning to release several more mod-
other carmakers get similar treatment. els under the One Ford strategy. If
HONDA CIVIC
Honda sells 900,000 Civics
he succeeds, he will have proved worldwide using different
To view the post, go to http://bx.businessweek.com/ that a plane guy can teach Detroit a
volkswagen/reference/ engines and body styles in
thing or two about cars. ^

IN DEPTH
THIS IS NO HOW MUCH MORE THAN THE WHO LOVES MINI ENVY
HONDA CIVIC DID YOU SAY? SUM OF ITS PARTS A HATCHBACK? IS CATCHING
While Honda tailors Europeans hap- Ford made sure that The Focus was So far no compact
the styling of the Civic pily pay big bucks for it can use parts from developed in Europe has matched the
to the idiosyncrasies souped-up compacts. the Focus in other (Koln, Germany) price commanded
of different markets, The question is models such as the where hatchbacks are by BMW’s Mini. Ford
Ford has no such whether Americans C-Max people mover. beloved. Americans hopes to do so with
luxury with the Focus. and buyers in emerg- The automaker also generally don’t like the Euro stylings of
It will look the same ing markets will pay can use Focus as- them, but Ford will sell the Focus Titanium
everywhere, which more than $23,000 for sembly lines to build a hatchback version in Edition, which will sell
could hurt its chances. a fully loaded Focus. sister vehicles. the U.S. anyway. for about $26,000.
LOSER
FORD CONTOUR
different regions. Along with the Toyota In the 1990s, Ford spent billions develop- balked at paying nearly $16,000 for the Con-
Corolla, it’s one of the most successful ing the Contour, which was sold in Europe tour, which was $3,000 more than the Ford
world cars on the planet. as the nearly identical Mondeo. Americans Tempo it replaced. The Contour flopped.

52 Amgen’s cancer hope
53 IBM, patent king?
54 Quiznos: Back on track
55 Yahoo’s spending spree
56 Europe’s debt dilemma
57 Greenhouse gas regs
59 Revenge of the hedge
fund investors WHAT’S NEXT
STRATEGY & COMPETITION Kahn, Pepsi’s first- Mehmood Kahn
ever chief scientific was hired by
CEO Indra Nooyi
officer, is to create
Pepsi Brings in
to develop more
healthy options nutritious foods
while making the
bad stuff less bad. “It’s O.K. to have a
slice of birthday cake on your birth-
The Health Police

day,” says Kahn, formerly a practicing
physician specializing in nutrition who
did a stint at the Mayo Clinic. “Would
you eat it every day of the week? That’s
a different question.” At Pepsi, he and
the other scientists “can say we can
actually make an impact on what is
The snack food behemoth has hired a team of available for consumers.”
idealistic scientists to find alternatives to Doritos
FLIGHT FROM JUNK FOOD
Khan hunts for benign ingredients
that can go into multiple products.
By Nanette Byrnes who in times past might have seen Last year, technological improvements
In February 2007, when Derek Yach, a Pepsi as the enemy—come up with to an all-natural zero-calorie sweet-
former executive director of the World an apple treat that tastes as good as a ener derived from a plant called stevia
Health Organization and an expert on deep-fried Lay’s potato chip? allowed Pepsi to devise several fast-
nutrition, took a new job with PepsiCo, Over the past two years, Pepsi has growing brands, including Trop50, a
his mother worried that he’d lost his hired a dozen physicians and PhDs, variation on its Tropicana orange juice
mind. “You are aware they sell soda many of whom built their reputations that has half the calories of the break-
and chips, and these things cause you at the Mayo Clinic, WHO, and like- fast standby. Introduced in March,
to get unhealthy and fat?” she asked minded institutions. Some researched Trop50 has become a $100 million
him. Yach’s former colleagues in diabetes and heart disease, the sort of brand. Two Trop50 line extensions
public health circles murmured similar ailments that can result in part from are hitting the shelves: Pomegranate
concerns. eating too much of what Pepsi sells. Blueberry and Pineapple Mango.
Yes, he said, he knew what Pepsi Yach and his comrades aren’t Chief Executive Nooyi says she has
made. But he wanted to help guide the subversives. The goal, says Mehmood no choice but to move in healthier
$43 billion snack directions. For more
food multinational In the lab: than 15 years, consumers
toward a more Seeking healthy have gradually defected
ideas to benefit
balanced prod- multiple brands
from the carbonated soft
uct menu. The drinks that once com-
company describes prised 90% of Pepsi’s
its current portfolio of “healthy” fare beverage business. Many
as a $10 billion business—a figure CEO switched to bottled
Indra Nooyi says she wants to see jump water. Meanwhile,
PHOTOGRAPHS BY DAVID YELLEN
to $30 billion over the next decade. the cloud of criticism

The question is, will Yach, now shadowing Pepsi’s larg-
senior vice-president for global health est business, oil- and
policy, really have the influence his salt-laden Frito Lay
boss has promised? If he does, will snacks, grew steadily.
Pepsi’s strategy prove profitable? Can The company acquired
its growing team of health advocates— Quaker Oats and other

for an apple or carrot stick,” says Bill
Pecoriello, CEO of Consumer Edge Re-
search, an independent stock-research
firm in Stamford, Conn.
Pepsi built its empire on the manu-
facture and distribution of instantly
recognizable products. It could get a
bag of Lay’s or a can of Mountain Dew
to customers practically anywhere in
the world. So far, healthier options have
produced only modest hits, including
TrueNorth nut snacks and SoBe Life-
water. “We’re not building Pepsi again,”
Nooyi says. She aims to sell a wider
variety of products to meet all kinds of
consumer demands.
Pepsi’s health push includes a con-
troversial plan to sell new products to
undernourished people in India and
other developing countries. This isn’t
charity, notes Nooyi, herself a native
of India. The goal is to make money. As
one of its exploratory ventures, Pepsi
is supporting a nonprofit operation
in Nigeria that distributes a protein-
rich peanut-based paste. Khan says
that once the company has figured out
what’s needed most, Pepsi will shift to
for-profit production of nutritionally
beneficial processed foods.
One potential hazard of marketing
in the developing world is that Pepsi
“SOCIETY, PEOPLE,
AND LIFESTYLES HAVE
CHANGED. THE R&D NEEDS
FOR THIS NEW WORLD ARE
ALSO DIFFERENT”
wholesome brands but until recently Coming off a tough 2009, during could be accused of trading on misfor-
didn’t emphasize research. Nooyi, who which once high-flying brands such as tune and not serving the overall dietary
took over in 2006, is changing that. Gatorade slipped, Pepsi hasn’t con- needs of the poor—a criticism that
She has increased the R&D budget vinced Wall Street that Nooyi’s plans has haunted sellers of infant formula.
38% over three years, to $388 million will pay off. The company trades at a Kelly D. Brownell, director of the Yale
in 2008. significant discount to its rival, Coca- University Rudd Center for Food Policy
“Society, people, and lifestyles have Cola. While securities analysts say that & Obesity, says Pepsi’s developing-
changed,” Nooyi says. “The R&D needs healthier foods look like a good long- nations initiative deserves scrutiny.
for this new world are also differ- term market, for now, the slowdown But Brownell, an industry critic,
ent.” Her goal of expanding healthy in the company’s far larger traditional praises Pepsi for improvements in its
products to $30 billion in sales would snack-and-soda portfolio cannot be mainstream products, such as remov-
require annual growth in those lines of ignored. “The consumer can move to ing bad fats from its chips. “They’re
more than 10%, twice the company’s baked chips, or pretzels, or Sun Chips, the most progressive player in the
overall historical average. but they’re not yet giving up their chips industry,” he says.^

annually by 2014. If it also proves ef-
fective against bone metastasis, sales
could soar to $6 billion, nearly twice as
much as the drugmaker’s current top
seller, he says.
Amgen investors are paying close
attention partly because the Thousand
Oaks (Calif.)-based
Fortifying company has taken
weakened
bones may
a beating in recent
bring myriad months. Its stock fell
benefits 2% in 2009 while the
Nasdaq Biotech Index
STRATEGY & COMPETITION rose 16%. That drop came after sales of
Amgen’s anemia drugs, accounting for
34% of revenue, fell 16% in two years
Strengthening Bones, through 2008 because of safety issues.

Studies supporting denosumab’s can-
cer benefit could boost Amgen’s shares
about 20% this year, analysts say.
Weakening Cancer ANTITUMOR EFFECT?

Even if the FDA approves denosumab
for osteoporosis, however, no one
can predict how well it will perform
Regulators may soon approve an Amgen drug for against bone metastases. The first in-
osteoporosis, but the payoff could be in oncology dication will come sometime this year
when Amgen releases initial results of
a trial involving 1,400 prostate cancer
patients. Dr. Matthew R. Smith, the
By Rob Waters ing swelling and fractures can cause research chief who heads the study
When Amgen put its new treatment for excruciating pain and may require ra- at Massachusetts General Hospital
the bone-thinning disease osteoporo- diation, chemotherapy, or amputation. in Boston, says the drug has a good
sis up for review by the Food & Drug To ease the agony and strengthen the chance of succeeding. “The bone
Administration last year, it got an bones, doctors prescribed $1.4 billion microenvironment is very rich soil for
unwelcome rebuke. On Oct. 19 the worth of a bone-boosting drug called cancer to grow,” he says. “Denosumab
agency came back with a request for Zometa, from Novartis, in 2008. Deno- changes that microenvironment by
more information on how the company sumab could be bigger, some analysts inhibiting bone turnover. It may also
plans to manage infection risks associ- say—in part because patients receive have a direct antitumor effect.”
ated with the medicine. it in simple injections while Zometa Once approved, how will denosumab
Amgen CEO Kevin Sharer recently requires lengthy infusions. fare against Zometa and other bone-
told investors the company will submit Denosumab is a synthetic antibody strengthening drugs on the market?
the required information “very soon.” that inhibits a protein the body uses Early signs look good. At the recent San
In the meantime, Amgen is pushing the to break down old bone. Antonio Breast Cancer
drug, called denosumab, toward a very The protein is part of Symposium, a study of
$6 billion
different goal—keeping cancer from a natural replenishing denosumab’s impact on
PROFESSOR PIETRO M. MOTTA/PHOTO RESEARCHERS
metastasizing into bones in patients process, but too much bone strength showed it
with breast and prostate cancer. If it of it can lead to osteo- cut the rate of fractures
works, analysts say the payoff could porosis. Cancer also and other bone com-
help revive the company’s fortunes. has an insidious way of plications in patients
Potential annual sales
“The real money is in cancer,” says stimulating production in 2014 of Amgen’s with breast cancer
Craig Gordon, an analyst with Cowen of the protein to facilitate experimental bone- better than Zometa and
& Co. in New York. its attack. boosting drug if it had fewer side effects.
Nobody doubts there is immense If denosumab is approves effective Amgen says it expects
demand for drugs like this one. Some proved, Cowen’s Gordon against metastatic to release data from a
65% to 75% of advanced breast and estimates that its use cancer similar study on build-
prostate cancer patients eventually for osteoporosis might Data: Cowen & Co. ing bone strength by the
suffer bone metastases. The result- bring in $1.4 billion end of March. ^

WHAT’S NEXT
STRATEGY & COMPETITION The race for patents is not just a

matter of bragging rights. Pfizer relies
IBM Piles Up Patents,

on a single set of patents for choles-
terol drug Lipitor for a fourth of total
sales, or an estimated $11 billion last
year. Qualcomm collects almost all its
But Quantity Isn’t King revenue—$10.4 billion in 2009—from

licenses for and chips containing its
patented 3G mobile-phone technology
known as CDMA.
Although Big Blue regularly rakes in more patents GAUGING INNOVATION

IBM may be shortchanging itself, ac-
than its peers, Microsoft’s are more valuable cording to the Ocean Tomo study. To
determine the firepower of companies’
patent portfolios, the consulting firm
By Steve LeVine 2009, spent $5.8 billion on research analyzed five years of patents awarded
No one beats IBM on patents. For and development last year, or 6% of to the world’s 1,000-largest public
17 years running, Big Blue has been total revenue. Aside from protecting its companies by revenue. Among the
granted more U.S. patents than products and services from imitators, dozens of measuring sticks Ocean
any other applicant, raking in an IBM’s patents produce considerable Tomo used to judge the significance of
unprecedented 4,914 in 2009. That income—fees from licensing and cus- a company’s breakthroughs were the
tally is more than the number of prior patents
number of patents grant- cited, patent renewal pay-
ed last year to Microsoft, ments, and litigation.
Hewlett-Packard, Oracle, In all, Microsoft’s port-
Apple, Accenture, and folio was assessed at 3.3
Google combined. IBM’s times that of IBM’s. “This
worldwide portfolio now is something that IBM
covers more than 40,000 people won’t accept, but
inventions for everything it’s accurate nonetheless,”
from microprocessors says Steve Lee, president
for video games to the of Ocean Tomo’s patent
erasable read-write CD. rating division. He says
Quantity, however, is IBM’s portfolio includes a
not the same as quality. large number of service-
“The arms race approach related patents, which do
doesn’t pay off,” says not command as high a
Mark Chandler, general price as the video-game
counsel of Cisco Systems. and software patents
“It doesn’t do you a lot that heavily weigh in
of good just to have a Microsoft’s portfolio.
lot of patents.” A study “The ultimate value is not
conducted for Bloomberg some rating,” says Manny
BusinessWeek by Ocean Schecter, IBM’s chief
Tomo, a Chicago intel- patent counsel. “It’s the
lectual property consult- leverage we are able to get
ing firm, concludes that from the patent [licens-
IBM’s collection of U.S. ing] negotiations.
patents over the past five years ranks tom-developing intellectual property At Microsoft, Horacio Gutiérrez, the
only eighth in value. No. 1 is Microsoft, for other companies through Sept. 30 company’s chief intellectual property
which had 2,906 patents last year and were on track to top $1.1 billion in officer, says patents are treated not as
ranked third in number. 2009. “Their patent department is a profit center but “as a currency that
ACME ILLUSTRATORS
IBM is hardly a creative has-been. a profit center,” says Bruce Lehman, you use to trade to another company”
The company maintains one of the last former head of the U.S. Patent & for its patents. Volume is an important
university-like laboratories in Ameri- Trademark Office and now chairman of gauge of a company’s innovation, he
can business and, based on outlays the International Intellectual Property adds, but “only if they are high-quali-
through the first three quarters of Institute, a Washington think tank. ty patents.” ^

CEO Schaden
won’t keep
trying to match
Subway’s low
prices
STRATEGY & COMPETITION large part by a yesteryear approach to

market research.
Quiznos reconnected with the
Damn! Torpedoes Get frugal-who-lunch last March, by of-

fering the $4 Toasty Torpedo, a 13-in.
sandwich on a thin loaf of ciabatta
bread. It did it again in July with an
Quiznos Back on Track 8-in. version, the $3 Toasty Bullet. And

in October the company expanded its
bargain options with a Bullet plus soup
or salad combo for $5. Since the Torpe-
do’s launch, Chief Executive Richard E.
The sandwich chain swears by rapid-fire taste tests
PHOTO-ILLUSTRATION BY JAMIE KRIPKE
Schaden says, sales have been flat, even

that help it give customers what they want as industrywide revenue has declined
and stalwarts such as McDonald’s have
reported drops in U.S. traffic. “Flat is
the new up,” says Darren Tristano, ex-
By Michael Arndt accordingly. These days, however, ecutive vice-president of food-service
Quiznos has always positioned itself value is what sells. After a two-year consultancy Technomic.
as a cut above Subway in the fast-food slide, Quiznos is proving it can be as Quiznos seems to have put internal
market—and priced its sandwiches deft as the submarine king, helped in turmoil behind it, too. The privately
& www.fantamag.com
WHAT’S NEXT
MANAGEMENT & LEADERSHIP

held company has had three CEOs in
three years, including Gregory Bren-
Yahoo Opens
neman, who took over in 2007 after
three years as Burger King chief. Bren-
neman is now executive chairman,
while Schaden, who founded the chain
in 1991, reclaimed the CEO spot last
February. Quiznos also just settled four
class actions by franchisees, agreeing
to pay $114 million in compensation for
Its Checkbook
disputed food and marketing fees. Over
the three-year legal fight, the number CEO Bartz steps up acquisitions and stresses local
of franchised restaurants slipped 10%
in the U.S., to 4,100 today.
content to stay relevant in the Age of Twitter
“A LITTLE DATED”
Management was thrown for another By Brian Womack as upstarts Twitter and Facebook
loop when Subway slashed prices on Less than three minutes into an in- reshape how people communicate,
foot-long subs to $5 in spring 2008. terview at Yahoo!’s Sunnyvale (Calif.) and rival Google increases its lead in
Denver-based Quiznos responded by headquarters, Chief Executive Carol search-related ads. “It’s really im-
lowering its prices too. But the dis- Bartz is eager to tell reporters how she portant, especially as the economy
counting ate into margins and didn’t lift would grade her first-year perfor- starts coming back,” that Yahoo step
sales. Quiznos also cut back on product mance: She gives herself a B-. Deal- up dealmaking, says Gartner analyst
development. In late 2008, though, as making may help her work up to an A. Andrew Frank. Bartz, previously CEO
rising joblessness and Subway’s cheap “You’re going to see more acquisi- of Autodesk, says she’s interested in
prices took more lunchtime customers tions this year,” says Bartz, 61, who in ways to bolster Yahoo’s local content.
away, Schaden decided to reconvene test January 2009 replaced Jerry Yang as “Local is extemely important,” she
groups to find new sandwiches. CEO of Yahoo, the says in response to a question about
While restaurant operators regularly Bartz is looking Web portal that orga- whether Yahoo might try to buy Yelp,
for global
enlist consumers for feedback, many purchases that
nizes online informa- which lets users post reviews of nearby
have turned away from focus groups. will bring Yahoo tion, provides e-mail, businesses. “People do some outra-
Panera Bread, for instance, asks custom- more users and sells Internet geous percentage of their commercial
ers to try new products individually in spending five miles from
restaurants, to avoid the peril of group their home.” Google recently
think. Andrew Stefanovich, a senior halted talks to buy Yelp, says
partner at Prophet, a marketing consul- a person familiar with the
tancy in San Francisco, says a shortcom- negotiations.
ing of focus groups is that consumers can Bartz is interested in
only react to what they’re fed, and not purchases that bring Yahoo
propose something new. “Frankly, it’s a more users, “whether it’s
little dated,” he adds. a place like Mexico, a place
Quiznos executives nonetheless like Brazil,” she says. In
swear by their speed-dining approach, 2009 Yahoo bought Arabic
empaneling as many as 25 groups in Web site Maktoob.com and,
back-to-back, 90-minute tastings. with a partner, Australian
By reworking recipes based on snap travel site totaltravel.com.
reviews, Quiznos can get products from Yahoo is also preparing
test kitchen to the market in six months. advertising. Potential targets include to collaborate with Microsoft in Web
Panera requires at least a year. Quiz- overseas companies and data analyt- search and advertising. The deal, which
nos also can find the right ingredients, ics businesses that help companies is awaiting regulatory approval, would
portion sizes, and pricing that ensure assess their advertising results, she let Yahoo cut capital spending by a pro-
healthy profits before moving ahead. says. “Last year people talked about, jected $200 million. Gene Munster, an
DANIEL ACKER/BLOOMBERG
Now Quiznos is gunning for upmar- ‘Oh, Yahoo is trying to get smaller,’ ” analyst at Piper Jaffray in Minneapolis,
ket consumers, too, with two new subs Bartz says. “We were never trying to says Bartz may be able to lift annual
priced at up to $7.49. That may seem get smaller. We were just trying to get sales growth to 10%. “We believe in
foolhardy, with unemployment at 10%. more focused.” Carol Bartz and believe that she is going
But Schaden is confident. After all, fo- Yahoo’s priority is stemming a year- to get the revenue growth to a point
cus groups ate them up in October. ^ long sales slump and staying relevant that’s acceptable,” he says. ^

WHAT’S NEXT
ECONOMICS & POLICY

relatively weak recovery and rising debt
levels,” says Sebastian Barnes, senior
Europe’s Delicate
economist at the Organization for Eco-
nomic Cooperation & Development in
Paris. “Some countries find themselves
in extremely difficult positions.”
Dilemma
Which EU countries are having the biggest
That’s particularly true for the so-
called PIIGS: Portugal, Italy, Ireland,
Greece, and Spain. Fears of default
have spurred international ratings
agencies to downgrade their sovereign
financial problems? Hint: Oink, oink debt, making it costlier for them to
raise money. “Uncertainty is poison
for market confidence,” says Alistair
Milne, a finance professor at the Cass
Business School in London.
By Mark Scott The ratio of overall debt to gross
LONDON domestic product in the Euro- VOTER ANGER
When a patient is on life support, it’s pean Union—a key indicator of fiscal Ireland, where the credit-fueled hous-
not typically advisable to squeeze the health—will jump to almost 80% this ing market shrank by a fifth last year
oxygen hose. But that’s just what Euro- year, according to the European Com- and the economy contracted 7.5%,
pean policymakers may be forced to do. mission. While that’s shy of the 89% slashed $5.8 billion from its 2010
The region’s economy contracted by level in the spendthrift U.S., it’s up budget of $87 billion. That includes
4.1% last year and is expected to show from 60% in 2007. For this year, the lower unemployment benefits, reduced
growth of just 0.7% in 2010 as stimulus combined deficits of European govern- subsidies to parents of young children,
and pay cuts of 5% to 15% for govern-
ment workers. Greece plans to free up
THE PROBLEM CHILDREN $6.5 billion by freezing civil servants’
Debt loads are dangerously high in pay, raising taxes on high-end property,
many European countries NETHERLANDS
and increasing levies on cigarettes and
66% liquor by 20%. France aims to raise
BELGIUM
DEBT/GDP RATIO
2010 PROJECTIONS 101% GERMANY $4.4 billion annually by charging $25 per
77% metric ton of carbon dioxide emitted
IRELAND by cars, home furnaces, and factories.
83% Britain will probably increase its retire-
BRITAIN AUSTRIA
ment age and cut welfare programs,
80% 74% though nothing is likely to happen
before a national election this spring.
FRANCE
Mounting voter anger could temper
83% politicians’ plans. Strikes are planned
SPAIN HUNGARY in Greece, laborers in Spain have balked
66% 80% at lower jobless benefits, and Irish
PORTUGAL workers have taken to the streets to
85% protest the cutbacks. “Short of selling
ITALY GREECE our kidneys, we don’t know how we’re
Data: European Commission
117% 125% going to [pay our bills],” says Brian
Condra, 38, a hospital orderly and
father of three from the Irish coastal
spending takes effect. With governments will hit 6.7% of GDP, more than town of Drogheda. He expects his fam-
ment debt growing and Greece and double the 3% mandated under EU law. ily’s take-home pay to drop by some
Ireland flirting with default, though, In Greece, Britain, Latvia, and Spain, $360 monthly, and that’s on top of
leaders across Europe may have to cut the 2010 shortfall is in double digits. $500 a month in new taxes introduced
some of that oxygen—risking a tumble Taxes must be raised, big infrastruc- last year. “I went around for the last
MAP BY DAVID FOSTER
back into recession. “If cuts come too ture projects scaled back, and bureau- four months needing new shoes,” adds
quickly, they could stifle the recovery,” crats’ pay cut if debt is to be reduced. Condra, who clearly has a gift for pun-
says Jamie Dannhauser, an econo- But many experts fret that govern- gent language. Now “I will have to be
mist at consultancy Lombard Street ments may be moving too fast. “A walking around in my bare feet.”^
Research. balance needs to be struck between a –With Louisa Fahy

WHAT’S NEXT
ECONOMICS & POLICY haust. Eight years Joubert: Capturing

carbon emissions
of legal wrangling
is “possible and
later, the Supreme
Greenhouse Gas Cuts,

economically
Court sternly viable”
admonished the
agency. Yes, the justices said, CO2 is
a pollutant, and you’d better regulate
One Way or Another auto emissions or explain why not.

The Bush White House stalled, but
the Obama Administration swiftly
worked out a deal with the auto com-
panies to boost fuel economy and cut
The EPA will soon crack down on emissions— emissions. On Dec. 7 the EPA provided
pressuring Congress to pass a climate bill of its own the formal justification, ruling that
greenhouse gases are a threat to health
and welfare. It plans to finalize the tail-
pipe rules by the end of March.
By John Carey penhagen. Yet such assurances aren’t What does this have to do with
The Copenhagen summit aimed at stopping opponents such as Senator power plants? “Under the Clean Air
limiting greenhouse gases ended with Lisa Murkowski (R-Alaska), Gover- Act, there is a domino effect,” explains
a whimper. Climate legislation in nor Bobby Jindal (R-La.), and the U.S. Kyle W. Danish, a climate law expert
Congress is stumbling. But curbs on Chamber of Commerce from ques- at Van Ness Feldman, a Washington
U.S. emissions from power plants and tioning the agency’s authority. Many (D.C.) law firm. Once a pollutant is
factories are coming anyway. environmentalists think there’s a better regulated, “it triggers a whole bunch of
The Environmental Protection approach than rigid bureaucratic rules requirements.” Any new or significant-
Agency is poised to take an historic requiring states to act. David Book- ly upgraded source of emissions must
step at the end of March, issuing the binder, chief climate counsel at the Si- get a “prevention of significant dete-
first-ever national rules to fight cli- erra Club, sees regulation as “truly the rioration” (PSD) permit saying that the
mate change. That puts companies on second-best option to legislation” and “best available control technology”
edge. “With the economy still limping, hopes the threat will make companies has been used to limit pollution.
it’s not the right time for this massive urge Congress to pass a climate bill. The approach isn’t ideal. “The Clean
increase in the cost of everything we Air Act is a blunt instrument,” says
do,” says Michael G. Morris, CEO of LEGAL WRANGLING former Energy Dept. official Joseph J.
American Electric Power (AEP). Here’s how the regulations came Romm. For one thing, the law requires a
SAUL LOEB/AFP PHOTO
EPA officials insist that fears about about—and what they’ll do. In 1999 PSD permit for new or revamped facili-
the new rules are overblown. “The EPA environmentalists and renewable ties that emit more than 250 tons of a
will act decisively and with common energy advocates petitioned the EPA pollutant per year. This threshold may
sense,” Gina McCarthy, head of air under the Clean Air Act to limit the be practical for trace pollutants such as
regulation, said at an event in Co- carbon dioxide coming from car ex- sulfur dioxide, but not for CO2, which

is spewed in large amounts by power
plants, factories—even the local bakery.
Hundreds of thousands of businesses
exceed the limit; the rule would snare
an estimated 41,000 new or improved
facilities each year. “It would be an
economic wrecking ball aimed straight
at small business,” says Marlo Lewis Jr.,
senior fellow at the conservative Com-
petitive Enterprise Institute. Even the
EPA agrees the law would have absurd
results. It plans to change the threshold
to 25,000 or even 50,000 tons annu-
ally, at which point fewer than 400 PSD
permits would be needed per year.
20 - 24 Jan 2010 THREADING THE NEEDLE

The second big issue involves defin-
ing “best available control technol-
ogy.” One idea, capturing carbon from
smokestacks, is “possible and econom-
Fashion, stars and style: ically viable,” says Philippe Joubert,
Berlin looks forward to an exciting fashion week president of France’s Alstom Power,
including Mercedes-Benz Fashion Week Berlin, which makes such equipment. But the
Jam Berlin, Premium, countless fashion shows, Clean Air Act requires control technol-
trade shows and awards. ogy to be commercially available; gear
such as Alstom’s is still being tested. So
the EPA’s coming guidance will start
out specifying energy efficiency mea-
sures. Later it could steer companies to
switch from coal power to natural gas.
U.S. companies worry, however, that
the legal tools available to the EPA are
too crude to put them on the best green
path. “They are trying to thread this
needle between being too onerous and
too ineffective,” says Steven B. Corneli,
senior vice-president for market and
climate policy at the utility NRG En-
ergy. “I’m afraid it’s likely to be both.”
Environmentalists counter that the
EPA’s action, while not optimal, is
still progress. “The good news is that
a lot can be done with regulation,”
says Bookbinder—including, eventu-
ally, cracking down on existing power
plants. Even the utilities see positive
potential outcomes. “There are ways
the EPA could go about it that are ratio-
nal and could work,” says AEP’s Morris.
But the politics are also crucial. If the
rules survive legal challenges and kick
in by summer, as the EPA expects, the
first big impact may be to urge lawmak-
ers to devise a more comprehensive ap-
proach. Says Corneli: “We respect what
the EPA is doing, but it makes it more
urgent that Congress act.” ^
58 I BLOOMBERG BUSINESSWEEK I

WHAT’S NEXT
FINANCE
Revenge of the
Hedge Investor
Big returns aren’t enough
to keep angry clients
from pulling out of funds
that blocked withdrawals
By Saijel Kishan and Katherine Burton

Since their record losses in 2008,
hedge funds have staged a comeback,
posting a 20% gain last year. So why
are many investors still wary?
Partly it’s because they could have
made more in the S&P 500-stock
index, which returned almost 27%
in 2009, and avoided those pesky,
high fees. Some simply aren’t happy have done terrible long-term damage Jones’ BVI Global Fund, Brook-
with the way they were treated when to their businesses,” says Simon Atiyah, side Capital Partners, an affiliate of
hedge funds barred redemptions dur- an attorney at London-based law firm Boston-based Bain Capital, and the
ing the market’s darkest days. Pen- Lovells, which represents hedge funds. $21.3 billion Brevan Howard Master
sion funds, foundations, and wealthy Citadel declined to comment. Fund—are limiting new cash because
individuals yanked $118 billion from Amit Shabi, a Paris-based partner at their assets have ballooned. It’s a step
hedge funds in the first 11 months of Bernheim Dreyfus, a money man- managers take when they feel their
2009, and many continue to hoard ager, says his firm won’t invest in any funds have gotten too big to run effec-
cash. “Before, managers could rely hedge fund that imposed restrictions tively. The firms declined to comment.
on their returns to sell on withdrawals. “Many These portfolios have attracted cash
themselves,” says Andrea managers acted like with a combination of consistent,
$118
Gentilini, head of strate- traitors,” he says. Drake long-term gains and investor-friendly
gic consulting at Barclays Management, the New behavior. Jones, the 55-year-old
Capital’s Prime Ser- York firm founded by for- former commodities trader whose
vices unit in New York. mer BlackRock managers, BVI Global has returned an average
“Now investors want
more transparency and
communication.”
billion had to shelve plans for a
new fund late last year
after it couldn’t drum up
of 22% a year since it was started in
1986, briefly suspended withdrawals
from the fund in November 2008. The
The amount
Citadel Investment enough cash. The firm firm then quickly placated clients by
investors pulled
Group, the $13 billion Chi- from hedge shut its flagship vehicle returning some of their money. It paid
cago money management funds in the first in 2008 and suspended off: Between March and July, inves-
firm run by Ken Griffin, 11 months of 2009. redemptions. Investors tors put $1.3 billion into BVI Global.
lost 55% in 2008 and Data: EurekaHedge are still waiting to get Says Debra Pipines, founder of New
suspended withdrawals their money back. Drake York-based Asperion Group, which
for much of 2009. Despite declined to comment. raises money for hedge funds: “Man-
returns that soared Meanwhile hedge fund firms that agers that honored their agreements
TOMASZ WALENTA
62% last year, clients nonetheless allowed withdrawals during the and treated their investors as partners
pulled $500 million from the firm. downturn have become so popular during the last 18 months of economic
“Some managers that prevented inves- that they’re turning money away. At difficulties are being rewarded with
tors from getting their money back least six funds—including Paul Tudor additional money.” ^

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62 How to Play It: Apple vs.
Google
PERSONAL BUSINESS
63 Investing: Bank stocks
64 Investing: Fund managers
MONEY REPORT FUNDS
GRIEF FOR
NOT-SO-
HEAVY METAL
Following 2009’s
launch of gold and
GREENBACKS
silver exchange-trad-
ed funds backed by
the physical metals,
London-based ETF
Securities launched
similar products for
platinum and
The Australian and Canadian dollars will keep gaining on palladium (used in
catalytic converters,
the U.S. dollar in 2010, appreciating at least 3% and 7.5%, among other things).
according to Bloomberg’s top forecasters for each cur- The ETFS Platinum
Trust and ETFS
rency. U.S. growth will spur demand for Canadian oil and natural gas, and China Palladium Trust track
should boost purchases of Australian iron ore and coal, which will push the cur- daily prices of the
metals, which rose
rencies higher, says Sacha Tihanyi, a foreign exchange strategist at Bank of Nova 57% and 118%,
Scotia. ¶ In the two years following the 2001 recession, the currencies traders dub respectively, in 2009.
the Aussie and loonie rose 48% and 23%, respectively. Since last year’s lows, the
Aussie is up 49% and the loonie 27%. On Jan. 11, $1 U.S. bought 1.08 Australian
and 1.03 Canadian. John Kyriakopoulos, head of currency strategy at National
Australia Bank, thinks the Aussie will reach parity with the U.S. dollar and that
by March it may take more than $1 U.S. to buy $1 Canadian. He sees 11% gains for
118%
2009 gain in the
price of palladium
each by Sept. 30. ¶ For pure plays, CurrencyShares has the Canadian Dollar Trust Data: Bloomberg
and Australian Dollar Trust. –Oliver Biggadike and Candice Zachariahs
ETFS product
development head
(FROM TOP) JACK ATLEY/BLOOMBERG NEWS; SEAN GALLUP/GETTY IMAGES
Fred Jheon says

STOCKS tionary, materials, and telecom are forecast to
speculation by
post solid year-over-year gains. Industrial and
Q4 EARNINGS: CHEERS! energy companies are expected to have lower
investors who take
profits when metal
Time to take the champagne out of the fridge. earnings, with losses forecast at international prices rise won’t affect
Alcoa reported net income of $0.01 a share on freight company CSX (-16%) and energy giant the new ETFs’ returns.
Jan. 11—the first major earnings announcement ConocoPhillips (-5%). –Tara Kalwarski Rather than track a
this season and a big change from the $0.28 basket of futures
loss reported one year earlier. John Butters, Rolling: contracts like some
director of U.S. earnings at Thomson Reuters, An Alcoa commodity ETFs, each
aluminum share of these ETFs is
predicts the Standard & Poor’s 500-stock index
factory in always worth the
will report “unusually high” growth of 184% in Hungary equivalent of 0.1
fourth quarter 2009. On Jan. 1, 2009, analysts ounce of the corre-
had estimated that figure at 30%. sponding metal. The
Financials are expected to see the biggest expense ratios on
bounce, with $2.4 billion in net income vs. each of the new ETFs
2008’s $81 billion Q4 loss. Consumer discre- are 0.60%. -T.K.
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PERSONAL BUSINESS
HOW TO PLAY IT APPLE VS. GOOGLE
slash their budgets. “It’s going to be tougher for

Google to put up the type of revenue they have
had in the past few years,” says Shinnick. The av-
erage analyst prediction for Google’s sales growth
is 16%, according to data compiled by Bloomberg,
and 23% for Apple.
ECONOMIC WILD CARD

(FROM PAGE 28) Apple has shown a bit more resistance to the
By Ben Steverman slowdown, and some analysts predict a bump
from strong holiday results when it reports
earnings on Jan. 25. Its advantage has been a
steady rollout of new products that customers
The heated rivalry between Google and Apple extends love. “I cannot point to another tech titan that
to the stock market, where their shares jostle for pride has been able to innovate outside their primary
of place in many technology investors’ portfolios. With product area,” says Michael Pytosh, a tech-
nology analyst for the ING Growth & Income
Bloomberg data showing the price-to-earnings ratios of Fund. (His fund holds Apple but not Google.)
both stocks higher than 85% of the companies in the Stan- Apple investor Ankur Crawford, vice-president
and analyst at Fred Alger Management in New
dard &Poor’s 500-stock index, they may struggle to meet
York, notes that despite the popularity of Macs
investor expectations.
Investors flocked to Google and Apple in
early ’09 as it became clear that even a se- PRICEY TECH PLAYS
vere recession wouldn’t stall them. Last year, 150
Google’s share price doubled; Apple’s shot up CUMULATIVE PERCENTAGE CHANGE IN STOCK PRICE
120
147%. Apple may be more likely to support its APPLE
GOOGLE
premium valuation. A long record of success- 90
fully jumping into new products leads many 60

tech experts to see it as a pricey, but less risky,
30
play. Google, 22 years younger, is still trying to
expand beyond its core expertise in Net search. 0
Alan Lancz, of wealth manager Alan B. Lancz –30

JAN. '09 MAR. MAY JULY SEPT. NOV.
& Associates in Toledo, Ohio, started buying Data: Bloomberg
JAN. 11, '10
Google and Apple shares in December, 2008.

He stopped buying when Google, now at 600,
passed the limit of 365 he had set for the stock and iPhones, Apple still has a tiny share of the
last April. Apple, now at 210, passed his limit of market in personal computers and handsets.
130 last May. Lancz raised his six-month price “[Apple] can essentially double their share in
estimates in November, to a range of 620 to 680 PCs and handsets,” she says.
for Google and 215 to 235 for Apple. “We like As dominant players in fast-growing mar-
the companies but definitely wouldn’t be buy- kets, both Apple and Google have advantages
ing them now,” he says. that justify paying more for their stocks than
Google may prove more vulnerable to a weaker- for those of rivals. In mobile phones, for ex-
than-expected recovery. In 2009, it maintained ample, competition could benefit both com-
earnings growth by cutting costs, but sales panies as they win market share from more
growth over the past 12 months has slowed to established players. Still, serious challenges
8.4%, from 31.4% a year ago. (Apple’s sales rose remain, and the markets they’re in are chang-
at a 12.5% rate over the past year, about half the ing rapidly. Tech consultant John Metcalfe
growth rate of a year ago.) “So much of Google’s frames the ongoing drama this way: “Google
business model is based on advertising,” says Mi- doesn’t know what it’s going to be yet. It’s like
chael Shinnick, a portfolio manager at Wasatch [a batch] of corporate stem cells–genes trying
Advisors in South Bend, Ind. Web competition to arrange themselves. Apple on the other
is pushing ad rates lower at the same time that hand, knows exactly what its game is. That’s
the economic downturn has forced advertisers to what makes this so fascinating.” ^

PERSONAL BUSINESS
INVESTING
FINANCIAL STOCKS better economic data and government rescues

of companies from Citigroup to American
DO YOU DARE
International Group.
Investors in financial shares will get a lot
of information to mull over in the next few
weeks. Goldman Sachs, American Express,
and 26 other S&P 500 financial companies are
BUY BANKS?
By Lynn Thomasson
scheduled to release earnings by Jan. 22. Bank
of America is forecast to post the largest gain
among the biggest U.S. banks. Profit may climb
to 95¢ a share in 2010 from a 19¢ loss last year,
analysts estimate. “What we’re looking at is an
improvement in the economy that will result in
consistent declines in loan losses over the next
No U.S. industry has faster profit growth than banks and two or three years, which will result in huge
increases in bank earnings,” says Richard Bove,
brokers, and no group is more bad-mouthed by investors. an analyst at Stamford (Conn.)-based Roch-
It may be time for them to get over their distaste, says Mark dale Securities. Favorites of Jennifer Thomp-
Giambrone, a fund manager for San Antonio-based USAA son, of New York-based research firm Portales
Partners, include PNC Financial Services and
Investment Management, which oversees about $74 bil- Fifth Third Bancorp, which she says are poised
lion. “The stocks are clearly too cheap,” says Giambrone, to rally.
Some money managers worry that rising
whose USAA Value Fund owns Wells Fargo, interest rates will hurt bank interest margins.
16%
PNC Financial Services, and Bank of America, Bob Doll, who helps oversee $3.2 trillion as
among other financial stocks. “There may be vice-chairman and chief investment officer
some bumps in the road ahead, but for the for global equities at BlackRock, thinks that
most part those are reflected in valuations.” investors need more proof that all the bad news
The Standard & Poor’s 500 Financials Index of is factored into bank stocks. “Are all the assets
78 banks, brokerages, and insurance compa- Rally expected for that are classified as performing going to per-
nies is down 60% since peaking in February financial stocks in the form?” he asks. “That is the concern. We would
2007, more than twice the drop of the S&P S&P 500 in 2010, wait for some price pullback and have patience
500-stock index. based on analyst before buying.” ^
Many of Giambrone’s peers remain un- forecasts
convinced that all the pain has been taken in Data: Bloomberg
financial stocks. A survey by Bank of America

found financial shares the least favored stocks
among 123 money managers. But earnings at
financial companies rose an estimated 120%
in the fourth quarter, accounting for all the
income increase in the S&P 500, data compiled
by Bloomberg show. Those financial company
earnings should triple by 2011, climbing four
times as fast as the market, analysts figure.
Should those estimates prove correct, financial
shares are trading at about a 15% discount to
the S&P 500.
THE BIGGEST GAINER

Analysts are more bullish on financial stocks
in the S&P 500 than on any other sector,
based on average share-price forecasts. Those
ARTHUR GIRON
calculations call for a 16% rally over the next 12

months. That would follow the group’s 140%
runup since last March, which was spurred by
MONTH XX, 2010 I BLOOMBERG BUSINESSWEEK I 63
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INVESTING
FUND MANAGERS by fund performance, which … aligns their in-

terests with the interests of our shareholders.”
BETTING THEIR
That performance-based compensation “is
measured against an appropriate benchmark
index and peer group over multiple periods as
long as five years.”
Four years ago, Royce & Associates, a New
OWN MONEY
By Lewis Braham
York-based fund firm with $28 billion in assets,
created a policy requiring lead portfolio man-
agers to invest at least $1 million in their funds.
Co-portfolio managers must invest $500,000
and assistant managers $250,000. “If you’re
(BOTTOM) PHOTOGRAPH BY JOSH RITCHIE

young and don’t have enough money, we will
defer your quarterly bonus into the fund,” says
Jack Fockler, Royce’s managing director. As a
Bruce Berkowitz believes in treating his shareholders as result, the firm’s 100 employees have $100 mil-
he would treat himself. You can see why—Berkowitz and his lion invested in its funds.
30 employees have $150 million of their own money invested Then there’s Southeastern Asset Manage-
ment, parent of the three Longleaf Partners
in the $11 billion Fairholme Fund. The bulk of that $150 mil- Funds. “If you work for Southeastern or your
lion belongs to Berkowitz.¶ According to a July 2009 study spouse works for Southeastern, you cannot
by fund tracker Morningstar, managers with

more than a $1 million stake in their own funds
beat 58% of peers, on average, over the past five
years. Funds with no manager investment beat
46% of peers. Fairholme’s 13.2% annualized
return has outperformed 99% of peers over 10
years. On Jan. 12, Morningstar named Berkowitz
one of three “Fund Managers of the Decade.”
Funds began to disclose manager invest-
ments only in 2005, after the Securities &
Exchange Commission changed disclosure
rules. So the research is preliminary. And the
level of disclosure is poor—managers need only
report their holdings in broad bands that start
at $0 to $10,000 and stop at “over $1 million.”
Beyond that it could be $1.1 million or $150 mil-
lion. (For trustees on fund boards of directors,
the disclosure cap is $100,000.)
More than half of the 4,383 U.S.-based funds
in the 2009 study had no manager investment;
413 had investments of over $1 million. “It can
be hard for younger managers who’ve just been
promoted to invest more than $1 million in
their funds,” says Laura Lutton, Morningstar’s
editorial director of fund research. “But I have a
hard time understanding why so many manag-
ers would not invest anything at all.”
Some fund companies use compensation
to try to ensure that the interests of managers
Fairholme Fund’s
match up with those of shareholders. A Fidelity
Berkowitz has
spokesperson says that while fund managers many millions of
are encouraged to invest in at least one fund his own money in
they manage, compensation “is largely driven the fund
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PERSONAL BUSINESS
own individual stocks or other non-Longleaf vest over four years. “The
mutual funds,” says Lee Harper, a Southeastern day I became manager of
spokesperson. Spouses of Southeastern em- Janus Fund, I invested in
ployees who don’t have Longleaf funds in their excess of $1 million in it,”
companies’ 401(k) plans must get approval from says Jonathan Coleman,
an “exception committee” before participat- Janus’ co-chief investment
ing. The firm’s 55 employees and its charitable officer and co-manager of
foundation are the funds’ largest shareholders, the firm’s $9 billion flag-
collectively owning $1 billion in fund shares. ship Janus Fund. “We have
The Longleaf Partners Fund has beaten 96% of a saying: ‘You don’t wash
(TOP, RIGHT) PHOTOGRAPH BY JOHN S. ABBOTT
its peers over the past 10 years. a rental car.’ We don’t treat
Fund companies with heavy manager invest- portfolios as rental cars. We
ment tend to be boutique firms. Yet at some treat them as owners.”
big fund companies, including Janus, T. Rowe There is evidence of
Price and Dodge & Cox, manager ownership improvement in ownership
Chris Davis:
is also part of the corporate culture. Janus in among fund boards of directors. According
Employees
particular has long had a culture of owner- have $1.5 billion to a study of 7,690 funds by fund trade group
ship. Its 54 analysts and money managers invested in Davis Investment Company Institute, 28% of funds
have $113 million invested in its funds. Since Advisors funds required directors to own fund shares in 2008,
2005 the firm has paid half of fund manager/ up from 6% in 1996. Longleaf directors, for
analyst bonuses in fund shares, and shares instance, must own fund shares at least equal
in value to their annual directors’ salaries.
“One of the most important responsibilities
of fund boards is to negotiate fees and expense
ratios with fund management companies,”
says Morningstar’s Lutton. “When directors
are paying some of those fees as shareholders,
MAKING THE GRADE they have a good incentive to lower those fees
These funds received “A” stewardship grades from for themselves.”
Morningstar because of strong corporate cultures, low A handful of fund companies lead the way
fees, and heavy manager investment in their funds. in this area. One that makes a big point of
employee investment is Davis Advisors. It touts
10-YEAR RETURN % OF PEERS THE
FUND/TICKER (ANNUALIZED) FUND BEATS the size of its ownership—about $1.5 billion—at
the top of the Davis funds’ home page. (Much
American Funds Funda-
mental Invs. A/ANCFX
3.60% 90% of that money is from the Davis family, whose
patriarch, Shelby Davis, and his son, Chris,
Dodge & Cox Stock/
DODGX
5.65 94 built the firm.) Davis, which manages $45 bil-
lion in mutual fund assets, has “director stock
ownership guidelines” that require directors
Longleaf Partners/LLPFX
5.31 96 of its Selected Funds to own in fund shares at
least three times the annual amount they are
paid to be directors. For independent directors,
Oakmark Equity &
Income/OAKBX
9.80 99 those annual amounts ranged from $67,500 to
$130,000 in 2008. Selected Funds’ mutual fund
Royce Special Equity/
RYSEX
12.02 97 fees are among the lowest in the business.
To find out what a fund’s manager ownership
Selected American
(Class D)/SLADX
2.42 83 levels and policies are, check its Statement of
Additional Information, which accompanies
its prospectus and can be found at fund Web
T. Rowe Price Mid-Cap
Growth/RPMGX
5.67 89 sites and at Morningstar.com. Morningstar also
has stewardship grades that analyze manager
Vanguard Wellington/
VWELX
6.15 97 incentives and pay structure. (Not all funds are
rated yet.) Managers with big investments in
*Annualized returns as of Dec. 31, 2009. Includes capital appreciation plus their own funds receive an “A” for the incentive
reinvestment of dividends. Data: Morningstar
part of their stewardship grade. ~
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68 Tech & You: Nexus One
69 Feedback
72 Outside Shot: The bane
of innovation BUSINESS VIEWS
Stiglitz: Obama
just “rearranged
the deck chairs”
BOOKS By JAMES PRESSLEY
The Meltdown
Barack Obama ran for President
on the promise of “change we can
believe in.” When it comes to the
financial crisis, he has instead
According to “only slightly rearranged the deck

chairs on the Titanic,” writes
OLIVIER ROLLER/FEDEPHOTO/PIXPALACE
Joseph E. Stiglitz in Freefall, his
Stiglitz
unsparing new account of the
meltdown and its aftermath.
Stiglitz, a Nobel prize-winning
economist, is perhaps the closest
The Nobel prize-winning economist argues that Obama’s thing we have to John Maynard
response to the financial crisis was far too timid Keynes in both his theoretical

outlook and his cogent market is a wondrous, income” Americans. That phrase is
kibitzing of policymakers. self-regulating appara- disturbingly vague. If Stiglitz lived in
In Freefall, he brings his tus and those who note Belgium, as I do, he would know how
formidable brain to bear that deregulation often quickly “upper-income” comes to
on how flawed theories wrecks the machinery, mean middle-class families hand-
and misguided policies as economists Carmen ing more than half their wages to the
brought us the worst M. Reinhart and Ken- government (excluding taxes on sales,
crash since the Great neth S. Rogoff showed in dividends, property, and so on). More
Depression. This Time Is Dif- sensibly, he wants people to pay a high
Although Stiglitz spends much of Freefall: America, ferent, a landmark price for greenhouse gas emissions,
the book exploring what went wrong Free Markets, and book released by which would provide incentives to
the Sinking of the
and why—“peeling back an onion,” he Princeton last waste less and innovate more.
World Economy by
calls it—his emphasis is on the future, Joseph E. Stiglitz; September. Over the longer term, Stiglitz seeks
not the past. The message: We have W.W. Norton & Co., Yet Freefall is a new vision of the financial system
a once-in-a-generation chance to 361 pp; $27.95 no academic his- that would return banks to the core
design “a more efficient and a more tory of efficient- functions of providing an efficient
stable economy” by readjusting the markets theory. It’s more a stream of payments mechanism, making loans,
balance between markets and govern- rat-a-tat dispatches from a military and managing risk. He also calls for the
ment. Obama has so far squandered strategist who’s tracking troop move- creation of a new global reserve cur-
this opportunity, Stiglitz says. ments and counteroffensives. After rency to alleviate the need for coun-
The President did engender a sense years of crafting policy for the World tries to stockpile dollars as a safeguard
of hope, he writes. “And yet, in a more Bank and the Clinton Administra- again financial upheavals.
fundamental sense, ‘no drama’ Obama tion, Stiglitz knows all the arguments Above all, he urges Americans to
was conservative,” observes Stiglitz. against regulation. He counters them, pause and reflect on what kind of soci-
“He didn’t offer an alternative vision one by one, and anticipates opponents’ ety they want—and what kind of econ-
of capitalism.” Obama chose instead moves in detailed and often spunky omy is needed to achieve those goals.
to “muddle through”—“to take a big footnotes. Anyone seeking an easy Whatever one’s opinion of Stiglitz, he
gamble by largely staying the course scapegoat for the crisis—be it govern- offers much to think about in this book.
that President Bush had laid out.” ment homeownership policy or the I can only hope Obama makes room for
He retained two leading members of existence of the Federal Reserve—won’t it on his nightstand. ^
George W. Bush’s economic team, Ben get much joy here.
Bernanke and Timothy Geithner. Both Moral outrage courses through these
have garnered their share of withering pages as Stiglitz surveys the wreck-
criticism—Geithner most recently for age: millions of people who have lost Business Exchange
the role he played as former head of their homes and their jobs; a financial Read, save, and add content on
the Federal Reserve Bank of New York. sector that used its political influence BW’s Web 2.0 topic network
During the depths of the crisis, it turns to secure “a trillion-dollar bailout;” a
out, the New York Fed ordered Ameri- U.S. public-debt-to-gross-domestic- Financial Circuit Breakers
can International Group to with- product ratio that surged to almost Joseph Stiglitz is no fan of
hold details of payments the insurer 60% in 2009 and is expected to reach globalization. In a paper
presented at the American
made to banks, according to e-mails at least 70% in the next decade.
Economic Assn.’s annual meeting
between the company and its regula- Stiglitz’ proposals for fixing the this January, he writes that given a
tor. The New York Fed says Geithner mess will be familiar to anyone who choice between complete
wasn’t involved in decisions on AIG’s follows his public comments. Ameri- integration of global financial
disclosures. cans should be prepared for a second markets and total separation, the
latter is better. Stiglitz says the
Obama also brought in Lawrence dose of stimulus spending after the recent crisis shows that just as
Summers, who boasted of having en- current round winds down. “When an with power grids, financial
sured during his stint as Bill Clinton’s economy is weak,” Stiglitz says, “at- networks need proper circuit
Treasury Secretary that derivatives tack with overwhelming force.” breakers to prevent a blackout in
one part of the grid from ruining
would stay unregulated. These were Stimulus money should be spent on
the entire system.
the deck chairs Obama shuffled as the investments to build a brighter, more
ship of state listed. sustainable future, Stiglitz argues. To read the paper, go to
Stiglitz frames Freefall as a book Deficit-financed spending can’t last http://bx.businessweek.com/
about “a battle of ideas.” He means the forever, so he calls, more controver- globalization/
conflict between those who say the sially, for heavier taxes on “upper-

BUSINESS VIEWS
TECH & YOU

contacts. The app icons on the Nexus
By RICH JAROSLOVSKY One are too small and close together.
And its 4 gigabytes of storage is inad-
Nexus One: Not

equate and inflexible—only 190 mega-
bytes are set aside for apps. The home,
back, menu, and search buttons below
the screen require too much pressure to
A Game-Changer
Google’s new smartphone will be the
push, and the trackball seems super-
fluous except when it glows to signal a
new call or message.
Google’s real innovation is in how
it’s selling the Nexus One, a path it
new cool thing–for a month or two. But will continue to pursue with future
it won’t take the wind from Apple’s sails products. Most phones in the U.S. are
tied to one or another carrier, which
subsidizes the cost of the handset
in return for your commitment to a
It’s a nice phone. O.K., it’s a very nice service contract. Google is seeking to
phone. But nothing about the new separate the handset from the service.
Nexus One smartphone from Google You can buy it with a service plan for
comes close to warranting the hysteria $179, or pay Google $529 and purchase
that attended its unveiling last week. service separately.
The Nexus One isn’t revolutionary. At launch, there isn’t much of a
Nor is it an iPhone killer—a phrase we choice for service. The only carrier
should banish to the Tech Writers’ Hall currently offering a plan is T-Mobile
of Clichés. It is, instead, a sleek phone USA, which charges $79.99 per month.
running Google’s Android operating Most folks are probably better off going
system, with some advancements in this route, for now. In theory, you can
display and processor technology that also use a SIM card from AT&T, but
will surely be matched and then over- you’d have to use AT&T’s older, slower
taken by others in the months ahead. Edge network, not its 3G network.
True, the rapidly evolving competi- The choices will multiply over time.
tion among Google, Apple, Microsoft, This spring will see a Nexus One that
and Research in Motion is fascinating runs on the Verizon Wireless network,
to watch. And Google’s plunge into which uses a different technology than
e-tailing—the Nexus One can only be AT&T and T-Mobile. Also in the spring,
bought directly from the company over Vodafone will offer service in Europe.
the Web—has the potential to shake up By compelling carriers to compete
how phones are sold. Still, I find it hard with one other, Google will weaken
to swoon over a business model. their control, meaning more power
The Nexus One, manufactured by microprocessor ever used in a mobile will eventually flow into consumers’
Taiwan’s HTC to Google’s specifica- device. And unlike the iPhone, it has hands—and of course Google’s.
tions, is similar in both size and shape a replaceable battery, a memory-card While all this is interesting, it’s
to the iPhone. If anyone ought to feel slot, and expanded speech-to-text hardly earth-shattering. When Apple
threatened by it, though, it’s Motorola, features so you can dictate your introduced the iPhone in 2007, it
which committed to using Android Facebook or Twitter updates, should changed the entire way people thought
for all its smartphones and now must 140 characters prove too taxing for about wireless devices, ushering in the
compete with its powerful partner. your fingers. era of the mobile Web. The Nexus One?
ILLUSTRATION BY PETER ARKLE
The screen on Motorola’s Droid used At the same time, the Nexus One It’s just a very nice phone. ^
to be my favorite—super-bright, with shares the shortcomings of earlier
higher resolution than the iPhone. The Android and HTC phones. In terms of BUSINESSWEEK.COM
Nexus One’s display is better: a thing the number of apps, Android phones For past columns and additional tech coverage,
of beauty, with an even richer display trail far behind the iPhone. So does go to businessweek.com/technology/
and deeper colors. Under the hood, Android’s ability to sync with Micro- E-mail the author at rjaroslovsky@bloomberg.net
Google’s phone has the most powerful soft Outlook for e-mail, calendars, and
& www.fantamag.com
BUSINESS VIEWS
FEEDBACK
THE JOB MARKET “life is too short.” I do not INVESTING ing tools such as exchange-
regret being away from my traded funds, we will avoid
DON’T CALL ME family and commuting two
NOT EXACTLY the bubble experience as
A VICTIM hours a day to a job. As a SOLID GOLD ADVICE much as possible. But there
I agreed to be interviewed contractor, work doesn’t “Gold’s Sister Act” (Person- is no reward without risk.
for “The Disposable Work- define me; I am defining it. al Business, Jan. 18) claims We need to take risks on be-
er” (In Depth, Jan. 18) Tammy DePew-Smith that some of the “canniest half of our economy, which
because BusinessWeek is a ORMOND BEACH, FLA. Wall Street advisers live far certainly makes more sense
distinguished publication from Wall Street.” Based on than betting against it.
and, having built a home- Your article is the best pos- the advice in this column, Jeffrey L. Feldman
based business I am proud sible argument in favor of I hope they stay there. The NEW YORK
of, I felt it would be a great health insurance reform. asset allocation suggested
opportunity to share my In today’s America, any here crystallizes what is AIRLINE SECURITY
story. To my dismay, the contingent worker is but wrong with our economy.
writers chose to present me one symptom, illness, or It includes 20% to U.S. and
DOWN, ROVER!
as “Tammy, a victim of so- injury away from becoming global stocks. The other WHERE’S THE GATE?
ciety,” which I am certainly uninsurable. 80% goes to currencies, Regarding “Invasion of
not! Contracting energy and re- the Body Scanners” (New
and working from source stocks, Business, Jan. 18): My
home may not be and precious understanding is that
for everyone, but it metals. We bomb-sniffing dogs could
is empowering and need to be have easily prevented the
I like it. I am not a investing in the incident aboard Northwest
victim, nor is my New Economy, Flight 253 on Christmas
home life put on which will Day but that the public-
hold for my job. create the eco- relations campaign has yet
I am a proud nomic utility to be invested that would
business owner and sustainable convince airline passengers
who pays her taxes commerce of a to submit to the indignity
and has ample prosperous age. of allowing canines to sniff
time to be with The allocation their crotches, even if such
her kids. I live in suggested here, searches potentially would
a great neighbor- if adopted by a make the difference between
hood. I chose to start work- Illness or injury means no majority of investors, would life and death.
ing from home in 2006, and income, the first step on the ensure that we achieve no Stacy Harris
I have built a business with road to homelessness, fore- such thing. These are bets NASHVILLE
the work I do contracting closure, and/or bankruptcy. on inflation, a weak dollar,

for LiveOps and operating a And this situation seems and the success of foreign
CORRECTIONS &
virtual-assistant business. perfectly O.K. to about economies at the expense of CLARIFICATIONS
I also have a blog designed 40% of our Congress and a our own. “The Real Value of Tweets”
for individuals to learn more significant percentage of the The coming revolution (New Business, Jan. 18)
about working from home, general public, who can’t in health care and biotech, contained a mathematical
miscalculation that led to er-
especially parents so they imagine themselves ever be- the development of green roneous conclusions. Twitter’s
can be accessible to their ing in such a situation. Time technologies and alternative payments from Google and
children. for them to wake up and fuels, and the evolution of Microsoft work out to $3.13
As the writers indicated, look around to see what we the Digital Age will create per thousand tweets, not 3¢
per thousand. This changes
businesses want flexibility, have created in the U.S. many millions of new jobs
the premise of our story. We
but so does the worker. I Tony Wasserman and trillions of dollars of regret the error.
hear people say all the time SAN FRANCISCO new wealth. Hopefully, us-
How to reach Bloomberg BusinessWeek | LETTERS FOR FEEDBACK We prefer to receive letters via e-mail, without attachments. Writers should dis-
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to receive more detailed information. Global Perspectives. Tangible Business Results.

BUSINESS VIEWS
OUTSIDE SHOT
logic, the logic of what could be. To use
By ROGER L. MARTIN & JENNIFER RIEL abduction, we need to creatively as-
semble the disparate experiences and
Innovation’s
bits of data that seem relevant in order
to make an inference—a logical leap—
to the best possible conclusion.
At Research in Motion, makers of
Accidental Enemies the ubiquitous BlackBerry, abductive

logic is embedded in the culture. Mike
Lazaridis, RIM’s founder and co-CEO,
encourages his people to explore big
Leaders who demand proof that a new idea ideas and apparent paradoxes to push
will work inadvertently stifle innovation. beyond what they can prove to be true
in order to see what might be true.
There’s a better way to react to brainstorms In the mid-1990s, RIM was a mod-
estly successful pager company. But
Lazaridis saw potential in the idea of
Once upon a time there was a very big Not even close. The CEO killed the a portable e-mail device. He began to
bank. Its CEO wanted to better serve idea on the spot. And the very big consider what it might look like, what
its best customers and hired some con- bank’s rivals lived happily ever after. it could do. He imagined something
sultants to tell him what to do. For many companies, innovation is much smaller than a laptop but easier
At the time, the very big bank served the stuff of fairy tales: fanciful ideas to type on than a phone. Laptops were
its high-net-worth customers at state- and lurking dangers—all of it uncon- already shrinking and bumping up
ly private banking offices in downtown nected to reality. So it’s no surprise against limitations on how small a
branches. The consultants discovered that we find it such a QWERTY keyboard
that many of these wealthy custom- struggle. Innovation is could reasonably get.
ers—lawyers, executives, and partners killed with the two dead- Lazaridis stepped back
in big professional services firms—were liest words in business: to consider how a much
unattractive customers. They chose Prove it. tinier keyboard could
plain-vanilla services and were both When faced with a be feasible—and he
demanding and price-sensitive. new idea, the boardroom achieved a leap of logic:
But the consultants found another impulse is to ask for proof What if we typed using
high-net-worth segment that was un- in one of two flavors: only our thumbs? He
derserved: entrepreneurs and partners deductive and inductive. soon had a prototype
from smaller firms. These folks had With deduction, we apply and concrete feedback
diverse needs, such as mortgages for a widely held rule. With from it.
their homes and investment properties, induction, we develop Asking what could
and investor agreements for multi- a new rule from a wide be true—and jumping
partner ventures. But they didn’t want range of data. In both into the unknown—is
to bounce from one banking specialist cases, we use existing in- critical to innovation.
to another to get a deal done, or drive formation to understand Nurturing the ideas
to a fancy branch filled with high- the issue in play. But for that result, rather than
backed chairs and wood-paneled walls, breakthroughs, there is killing them, can be the
paid for with their fees. Instead, they no rule or pool of past tricky part. But once
wanted integrated, personalized service data to provide certainty. a company clears this
in their neighborhoods, with no divide So when a CEO, like our banker friend, hurdle, it can leverage its efforts to
between their commercial and personal demands evidence that an idea will suc- produce the proof that leaders depend
banking services. ceed, he is driving innovation away. on to make commitments—and turn
At the final meeting, the consultants Does that mean we are doomed to the future into fact. ^
presented a strategy built around this live in world devoid of proof—that in-
new segment. As they wrapped up, the novation must be consigned to a realm Roger L. Martin is Dean of the Rotman
OLIVER MUNDAY
CEO asked: “Have any other big banks of cross-our-fingers hopefulness? School of Management at the University
done this?” The lead consultant an- No, it’s not so bleak. Instead, when of Toronto. Jennifer Riel is Associate
swered brightly, “No, you’d be the first,” facing an anomalous situation, we can Director of the Desautels Centre for
certain that this would seal the deal. turn to a third form of logic: abductive Integrative Thinking at Rotman.

www.
www.storemags.
s.co
com & www.fa
co fant
ntam
amag.c
.com
om

January 25, 2010 I

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JANUARY 25, 2010 I BUSINESSWEEK.

KRAFT’S CHOCOHOLIC CEO THE HUNT FOR AN AUTISM DRUG

APPLE VS. GOOGLE

WHY THEY CAN’T

WITHOUT INVESTORS THERE WOULD BE NO INDUSTRY,

INVESTORS ARE THE ONES WHO EARN THE MONEY.

IT’S TIME INVESTORS GOT A BETTER DEAL.

AT SCHWAB, WE BELIEVE INVESTORS SHOULD GET

AND WE BELIEVE IN PRICING THAT LEAVES INVESTORS

READY TO RULE? VISIT YOUR LOCAL BRANCH,

www.storemags.com & www.fantamag.com

FORD FUSION + HYBRID.

www.storemags.com & www.fantamag.com

Kraft CEO Irene

Armed with fresh

JAN UARY 25, 2010 I BLOOMBERG BUSINESSWEEK I 5

www.storemags.com & www.fantamag.com

The Global Report

What’s Next 57 | EPA Crackdown The U.S.

(TOP TO BOTTOM) JAY MALLIN/BLOOMBERG; DAVID JOHNSON/CORBIS; OLIVIER ROLLER/FEDEPHOTO/PIXPALACE

69 | Feedback Permanent temps

6 I BLOOMBERG BUSINESSWEEK I JAN UARY 25, 2010

To find out more, access the results at GrantThornton.com/clientsatisfaction

www.storemags.com & www.fantamag.com

ECONOMICS & POLICY

JUSTIN STEELE/THE NEW YORK TIMES/REDUX; KEVIN WINTER/GETTY IMAGES

8 I BLOOMBERG BUSINESSWEEK I JAN UARY 25, 2010

www.storemags.com & www.fantamag.com

Exports in December jumped

make the government whole their risk management,” said

down, Google may well pull the

10 I BLOOMBERG BUSINESSWEEK I JAN UARY 25, 2010

www.storemags.com & www.fantamag.com

“I should’ve done more to take care of myself.

IMPORTANT SAFETY INFORMATION: INDICATION:

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LOWERING YOUR HIGH CHOLESTEROL POSSIBLE SIDE EFFECTS OF LIPITOR

www.storemags.com & www.fantamag.com

Timothy Fenton, the company’s Pandit, who won a mostly

IDEAS ALL WORKED UP OVER PRIVACY ON THE WEB

to understand how our communication technology to make this possible is not

and showed them to people at church, you Still Important”

BUSINESS OUTLOOK WILLIAM PESEK

AFTER THE STIMULUS BINGE, A DEBT HANGOVER

households are saving more and troubles, be they in China, Greece,

14 I BLOOMBERG BUSINESSWEEK I JANUARY 25, 2010

www.storemags.com & www.fantamag.com

short and dividing it by the average daily trading volume. INDUSTRIALS

Low Expectations: These companies are among the FINANCIALS

most heavily shorted in the S&P 500.

MOST SHORTED S&P 500 SHORT-INTEREST RATIOS*

McCORMICK & CO. 3.0 13% 19.3

VULCAN MATERIALS 9.0 –24% 15.6 INFORMATION TECHNOLOGY DEC. '09

THE SHORT AND THE LONG OF IT

STANDARD & POOR'S 500-STOCK INDEX

3.12 3.42 3.39 3.38 3.31 3.18 3.42

Data: Bloomberg *Figures are mid-month

JANUARY 25, 2010 I BLOOMBERG BUSINESSWEEK I 15

www.storemags.com & www.fantamag.com

16 I BLOOMBERG BUSINESSWEEK I JAN UARY 25, 2010

www.storemags.com & www.fantamag.com

JAN UARY 25, 2010 I BLOOMBERG BUSINESSWEEK I 17