Thursday, June 26, 2008
Seeking to end an embarrassing dispute that kept live pro football games out of many homes, the National Football League's NFL Network is in talks to form a partnership with Walt Disney Co.'s ESPN cable sports network, according to people familiar with the situation.
An agreement would represent a big shift in strategy for the NFL: abandoning its effort to force cable operators into carrying its own network and thus paying it lucrative monthly fees. It would also send a message to other professional sports, which have enjoyed rising television fees for years, that even the biggest and most powerful league in the U.S. cannot launch a new channel without the consent of giant cable operators such as Comcast Corp. and Time Warner Cable Inc.
For fans, a deal could close a bitter standoff between the league and four of the nation's largest cable operators that has left live games on Thursday and Saturday nights unavailable to many cable subscribers.
NFL executives including Steven Bornstein, chief executive of the NFL Network and previously chairman of ESPN and president of Disney's ABC unit, have been holding high-level discussions with Disney executives in recent months, according to several people familiar with the situation. Some team owners have been briefed on the discussions, and Disney CEO Robert Iger and NFL Commissioner Roger Goodell have been involved, these people said.
One scenario that has been discussed would involve combining the NFL Network with the ESPN Classic network, which has relatively low ratings but wider distribution. ESPN would broadcast eight more games per season on ESPN Classic, and then attempt to wring higher subscription fees than the 16 or 17 cents it currently receives for the channel, according to Derek Baine, a senior analyst for SNL Kagan.
Under such a scenario, ESPN and the NFL could form a joint venture and share revenue, or ESPN could take an equity stake in the channel.
To be sure, there is no guarantee the two sides will reach a deal. Talks have been under way for some time, and an agreement doesn't appear to be imminent, according to people familiar with the situation.
"We have a long-term and extensive relationship with the NFL and to that end we are always in discussion with them about mutual projects,'' said Mike Soltys, vice president of communications for ESPN.
Dennis Johnson, an NFL Network spokesman, said: "We are in talks with ESPN and our other broadcast partners all the time about a wide range of issues."
The NFL ran up against the cable operators in early 2006, when the league decided to withhold eight games from its lucrative TV licensing packages to put on its own channel. In effect, the NFL was giving up the hundreds of millions of dollars it would have received had it licensed rights to those games to a sports network. Instead, it put those games on its own channel, hoping to create a valuable cable asset with no middleman. But the NFL may have misplayed its hand in demanding about 70 cents per subscriber, which cable operators argued was high for a channel with so few games per season. Cable operators balked, and football fans didn't protest as much as the league thought they might.
Time Warner Cable, the country's second-largest cable operator, has refused to carry the NFL Network on the league's terms. Comcast, the country's largest cable operator, pulled the NFL Network from millions of homes after a bruising, bitter battle over the rights to the eight games, for which it had offered over $400 million.
The NFL Network's major distribution is on satellite service DirecTV and smaller providers. It is available in approximately 40.3 million homes, according to Nielsen Media Research, roughly one-third of all households with TV. It averaged 196,000 viewers during prime-time in 2007, according to Nielsen. ESPN Classic is in 62.7 million homes, according to Nielsen.
For football fans who don't already receive the NFL Network, a partnership would likely bring those eight games into their living rooms for the first time. But if ESPN gets a price increase, it could also boost cable fees across the board.
A combination would give an edge to ESPN over its broadcast competitors, and provide a boost in subscriber and advertising revenue for ESPN Classic, which averaged only 107,000 prime-time viewers in 2007, Nielsen says. It may also be a bitter pill for Mr. Bornstein, who at times had a strained relationship with Mr. Iger when he was at Disney, according to people familiar with the situation.
The writing may have been on the wall for the NFL network since late December. The network was scheduled to be the exclusive national broadcaster of one of the most highly anticipated events of the season: the game in which the New England Patriots defeated the New York Giants to become the NFL's first regular-season undefeated team since the 1972 Miami Dolphins. (The Giants later beat the Patriots in the Super Bowl.)
Politicians, including Sen. John Kerry (D., Mass.), urged the league to make the game more widely available -- and the NFL eventually capitulated, allowing both CBS and NBC to broadcast the game. The move undercut its negotiating position, by signaling that the league could be strong-armed into opening up a sufficiently important match-up to a wider audience.
By: Sam Schechner, Matthew Futterman, & Merissa Marr
Wall Street Journal; June 21, 2008
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Monday, June 23, 2008
The $33 billion-plus U.S. children's product industry faces increasing state efforts to regulate its products while Congress wrangles over federal rules that won't be in place in time for this year's holiday shopping season.
That could fuel consumer worries about another slew of safety recalls and leave many makers of children's products uncertain about how to comply with a proliferation of state standards and a federal framework that still is uncertain.
Mattel Inc., which had to recall millions of toys last year because of problems that included potentially deadly high-power magnets, said it supports tougher federal standards that give the industry clear and uniform rules.
"Some states have passed extremely restrictive laws that, depending on how they are implemented, may make it impossible to sell many safe toys in these states," said Mattel spokeswoman Lisa Marie Bongiovanni, who said the company supports uniform national standards of regulation. "Fifty different state standards will create a confusing patchwork of regulations, limit certain toys sold in some states, drive up costs for consumers and will not substantively increase toy safety," she said.
Toy manufacturers must comply with a 1970s-era law limiting lead to 600 parts per million for paint used on houses or toys. The push to tighten those standards follows recalls last year of 25 million toys and millions more children's products such as pajamas, jewelry and furniture. Many of those recalls were for lead.
In an overhaul that is the most sweeping in a generation, manufacturers in the U.S. toy and children's product market would have to ratchet lead down not only in paint but also in most components -- possibly even parts not accessible unless the item is taken apart. Complying with lead content limits of 100 parts per million will prove far easier for large manufacturers and retailers than for small outfits that make up the bulk of certain segments, such as jewelry.
Mattel, Hasbro Inc., Wal-Mart Stores Inc. and Target Corp. have more resources and heft to prepare for anticipated changes and have done so already in the U.S. and the more tightly regulated European market.
Wal-Mart has instructed suppliers they will have to meet new lead and chemicals safety standards by the fall that are more stringent than current government regulations. Target has said it is banning phthalates, a plastics additive linked to developmental problems in children, from its store-branded products by year end. Target also is lowering allowable lead limits in children's products and jewelry, ahead of federal action.
Hasbro Chairman Al Verrecchia said the company already ensures that accessible parts in its toys contain no more than 100 parts of lead per million, a level the federal legislation doesn't envision for at least three years.
The problem for consumers is that children's products for the holidays already are starting to ship from China and elsewhere to the U.S. because the manufacturing cycle is nine to 18 months from design to retailer. Manufacturers already are designing 2009's toys without clear federal guidelines.
Congress repeatedly has delayed release of a final version of the safety standards, which are part of a broader overhaul of the Consumer Product Safety Commission, the nation's chief product-safety regulator.
The bill was expected to come to a vote next week but now could be delayed further, because of arguments among House and Senate negotiators over whether the new federal standards could pre-empt state regulations.
After delays in Congress and continued weak federal oversight, 16 states have devised laws that are in some cases stricter than what Congress envisions. A proposal in Washington state would curb allowable levels of lead in toys and other products to at most 90 parts per million compared with the 100 parts per million proposed by the House and Senate bills. Industry lobbyists said the competing rules will confuse consumers, make compliance difficult and encourage multiple actions against businesses.
The engineering division of car-seat maker Sunshine Kids Inc. already conducts 50 sometimes-overlapping tests to comply with competing state and federal standards, adding as much as 30% to the cost of a child seat, the company said. Sunshine Kids's chief engineer said it could take nine months to check a seat's 150 separate parts for lead content, to comply with coming state and federal laws.
Archie McPhee, a quirky toy shop that is a landmark in Seattle, has said it will close if Washington state enacts a law setting the toughest lead standards in the nation and restricting the use of several other chemicals. The standards, slated to take effect in mid-2009, would be far tougher than the federal proposal, which may or may not ignore plastics additives such as phthalates, which would be banned in Washington and California.
The largest retailers still aren't immune. In April, the Consumer Product Safety Commission, in cooperation with Wal-Mart, issued a recall notice of 12,000 Chinese-made "Hip Charm" key chains distributed by the retailer because of charms that can contain high levels of lead, the agency said. That recall followed an alert from the Illinois attorney general, the agency said.
Smaller retailers are anticipating some challenges. Sharon DiMinico, president of Learning Express, a specialty toy retailer and franchiser, said she expects there could be some delays getting certain products from vendors that might have slowed production because of uncertainty about changing regulations.
The CPSC has suffered for three decades from slashes in budget and staffing initiated during the antiregulatory fervor of the Reagan era. The agency of about 400 acknowledges its struggle to police more than 15,000 products in a global marketplace where 80% of toys sold in the U.S. come from China.
Aside from resolving differences on pre-emption, the House and Senate negotiators also have had to resolve divisions on other measures in the bills, including disagreement on whether a final bill would cover products for children of up to age 7 or as old as age 12. The bills also differ on how soon the lead standards should take effect or whether other chemicals should be included.
Manufacturers are fighting a measure in both bills that would post consumer reports of product-safety problems online, saying the database could provide a forum for baseless claims by competitors.
The Bush administration has said it is committed to continuing a strong product-safety system. The administration said the House bill "takes positive steps" to further protect Americans, and the White House supports "many of the measures" in the Senate bill, but it expressed some concerns with others.
By: Melanies Trottman & Elizabeth Williamson
Wall Street Journal; June 18, 2008
Thursday, June 19, 2008
For small businesses, preventing theft and fraud by employees can be an uphill struggle.
Unlike their big counterparts, small companies usually can't afford a large security staff or big-ticket monitoring technology to keep an eye on things. And they often don't generate enough sales volume to make up for the losses from pilfering.
Now a new generation of security technology aims to give small businesses an inexpensive defense against unscrupulous employees. Some of these systems let business owners who are on the road check their security cameras over the Internet and get email alerts if something unusual happens, such as employees closing up shop early.
Restaurants, meanwhile, can use table-side credit-card readers to prevent cashiers from stealing customers' card numbers or inflating the tips written on bills. And grocery stores can use a combination of security cameras and software to automatically spot cashiers who try to slip free products to their friends and family.
These new products are arriving as stores face mounting losses from theft. According to the latest National Retail Security Survey, losses from "shrinkage" -- which includes theft, fraud and error -- reached a new high of about $40.5 billion in 2006. About half of that -- $19 billion -- came from employee theft. Shoplifting, in contrast, accounted for about a third. (The study, conducted by the University of Florida and the National Retail Federation, was funded in part by grants from makers of security systems.)
Here's a look at some of the most innovative new security systems out there.
WATCHING FROM AFAR
For a small-business owner worried about employee theft, leaving the shop in someone else's hands can be nerve-wracking. Now a host of security providers let bosses check in on things from the road.
For instance, Alarm.com Inc., of McLean, Va., sells a system that allows owners to travel to a Web portal and get remote feeds from security cameras, change entry codes and trigger sensors that monitor systems such as lighting and climate control. If a problem arises with those systems -- such as a power outage -- you can get an alert via a text message or email.
Recently, Kevin Donahue, owner of a Planet Beach Franchising Corp. location in McLean, was in Amsterdam on business when he received a text message from Alarm.com: The spa's alarm system had been armed at 3 p.m., before the usual closing time. He checked the security cameras online and saw the facility was dark.
So he called his manager and got the explanation: The spa had closed early because of a snowstorm..
"The greatest thing is that it gives me the ability to travel and do the things that I do," says the 34-year-old Mr. Donahue, who's also a full-time salesperson for a tech company and often travels outside the country on sales trips. "It gives me the ability to manage my staff remotely. I can call and say, 'What's going on?' "
Mr. Donahue bought the system for under $100 and pays a monthly fee of $39. Alarm.com says the base price for the system is usually $500, with a monthly fee of $29 to $50, although those numbers can vary by reseller and area, as well as the features customers choose.
Another new technology helps small businesses -- particularly restaurants -- protect against "skimming." In this scam, cashiers steal customers' credit-card information for use in identity theft.
About 70% of credit-card-fraud cases involve skimming, according to Trustwave Holdings Inc., a data-security and compliance-management company based in Chicago. In many cases, business owners are ultimately held responsible for their cashiers' crimes -- costing them money and damaging their reputation.
For some businesses, the solution is to let customers become their own cashiers. At Southeast Grille House in Brewster, N.Y., servers bring a wireless gadget called On the Spot to their customers' tables. Patrons can swipe their credit cards on the device -- which is about the size of a brick -- punch in the tip amount and print out a receipt to sign, all from their seat.
Since the customer enters all the information, cashiers can't inflate the tip -- and the receipts don't contain much personal data that could be stolen and used for identity theft.
The device, from VeriFone Holdings Inc. of San Jose, Calif., runs about $1,000. Southeast Grille House owner Domenic Chiera says it was worth the investment. "It's fast, and the receipt has little information, so no names or numbers," says the 57-year-old restaurateur. "I like the system. It works well for us."
CHECKING OUT FRAUD
At grocery stores, thieving employees are almost as much of a problem as shoplifters. About 40% of grocery-store thefts were attributed to employees in 2006, according to the Food Marketing Institute's Supermarket Security and Loss Prevention 2007 report. One of the biggest problems is "sweethearting," in which cashiers give friends and family freebies by pretending to scan items at the register.
Many stores use closed-circuit television to watch checkout lines. But the stores often don't have the time or manpower to review the tapes, so the cameras aren't a strong deterrent. StopLift Inc. of Bedford, Mass., has devised a system that combines cameras with advanced software to spot sweethearting automatically. The technology can recognize when cashiers make unusual movements when handling items -- such as placing a hand over a bar code -- and determine whether the items were properly scanned.
When the system identifies sweethearting, it places blinking squares over the video to show exactly where the theft occurred. Then it gathers the incriminating clips together for owners to review.
Stores "have the cameras but they don't have the manpower to watch it," says Malay Kundu, chief executive of StopLift. "What we've done is sort of automate that."
Three Big Y Foods Inc. stores in Massachusetts and Connecticut have been testing StopLift's Checkout Vision Systems for the past five weeks. Mark Gaudette, director of loss prevention at the Springfield, Mass., grocery-store chain, suspects that employee theft accounts for about 38% to 40% of its total losses.
"We've got pretty much a zero-tolerance policy for any folks that steal," Mr. Gaudette says. "What we're hoping is that all these technologies will help us in loss prevention and educate all of our staff."
The stores had already been using closed-circuit television and software that scrutinizes sales data for abnormal behavior or inconsistencies at the cash register, such as excessive voids or refunds. But those measures weren't enough to stem the losses.
StopLift's system works with those tools to ferret out sweethearting. For instance, if the sales-data software shows that somebody rang up too many coupons on one order, the StopLift system can analyze video from the exact moment this happened.
Big Y is still analyzing the results. So far, Mr. Gaudette says, he has spotted some sweethearting incidents, but he has seen far more cashier errors, such as giving up on hard-to-scan items instead of calling the manager for help.
Pricing for the technology is done on a case-by-case basis, says StopLift's Mr. Kundu. He says that for a typical medium-volume store, monthly subscriptions currently run about $2,000.
Of course, buying these systems isn't the only option available for small stores. Experts suggest that stores could hire fewer part-timers -- who have less attachment to the business and are more inclined to steal -- and conduct more-rigorous pre-employment screenings to weed out potential thieves.
Employers must also hammer home a code of conduct, experts advise. For instance, give new hires talks on integrity and loss prevention and offer anonymous hotlines where employees can notify managers about fellow workers who may be stealing.
The bottom line is that employees must recognize they have a part to play in stopping theft, says Joseph LaRocca, vice president of loss prevention for the National Retail Federation. "Loss prevention is really everybody's responsibility," he says.
By: Raymund Flandez
Wall Street Journal; June 16, 2008
Earlier in this decade, Cold Stone Creamery was one of the hottest franchises around. The super-premium ice-cream stores attracted scores of franchisees hungry for a piece of the "Ultimate Ice Cream Experience."
Now many franchisees are selling their stores, overwhelmed by soaring bills and shrinking profits. Some have lost their homes, broken their retirement nest eggs or filed for bankruptcy.
Even as they rave about the quality of the ice cream, numerous franchisees say the numbers in Cold Stone's business model didn't add up. The cost of running one of the shops was so steep that making a profit was daunting, especially in an economy where a $4 scoop was a pricey indulgence, they argue. They also contend the company cut their margins even further by offering two-for-one coupons and making them buy costly ingredients from a single supplier. Some argue that the company's rapid expansion crowded stores too close together -- and brought in too many inexperienced franchisees.
A number of franchisees also contend the company misled them, giving them promises of profit potential that proved unrealistic or inaccurate revenue numbers from existing stores. And some say that they got little help from the company as their stores went under.
"They have a defective business model, there's no question about it," says Ken Gornall, a former franchisee who closed his Glendale, Ariz., store last October. He adds that the average revenue numbers he received before signing up "were quite misleading," exaggerating likely annual sales.
Cold Stone says more than 100 of its stores closed last year. That's up from 60 in 2006. One list on a Cold Stone Web site recently had 303 stores for sale -- more than 20% of the company's 1,384 as of last December.
This "combination of numbers is very, very high," says franchise attorney Eric Karp of Boston law firm Witmer, Karp, Warner & Ryan LLP. "I think it's a symptom of bad news and not good news." (Mr. Karp, who specializes in representing franchisee associations and individual franchisees, hasn't represented Cold Stone store owners.)
Cold Stone has been franchising only since 1995, and Mr. Karp concludes that 12 years or so would be an unusually short time for first-generation franchisees to be cashing out and retiring.
Chris Prasifka, Cold Stone's president, acknowledges that the "inventory of stores for sale now is higher than it has been." But a company spokeswoman terms the for-sale number "at par with industry expectations," given "the economically challenging times." She adds that about 230 of those listed for sale are stores in operation; the rest are "awards" to develop future stores.
The company also contests the franchisees' charges. Cold Stone insists it doesn't provide profit potential to prospective franchisees. It also says the revenue figures it gave for existing stores were based on franchisee reports.
Costs, meanwhile, "will depend on how well a store is operated," Mr. Prasifka says. Cold Stone says it uses a one-stop distributor to ensure efficiency, quality and economies of scale. It adds that franchisees can buy ingredients elsewhere at lower prices if the product is identical. Cold Stone says it won't distribute national two-for-one coupons this year, after franchisee complaints.
And the company says that it's selective about adding franchisees, typically approving about 2% of applicants. As for their chances of succeeding, Mr. Prasifka asserts that "it's no different from any other business. You've got to work it." He adds, "It does take a year or two to understand the business."
Overall, Mr. Prasifka says, "We want all franchisees to succeed. However, minimal restaurant experience, a lack of desire to do local-store marketing or the inability to be operationally excellent can all contribute to a franchisee's inability to succeed."
Cold Stone was a stand-alone brand for 19 years before being acquired by fast-food franchiser Kahala Corp. last year. Other Kahala brands include Blimpie sandwiches and TacoTime Mexican food. Kahala's plans call for slowing Cold Stone's expansion, reducing new-store construction costs and finding ways to grow average annual store sales to about $500,000 from about $360,000 now.
For many franchisees, the new ownership comes too late. Formerly an independent real-estate agent, Mr. Gornall signed up for a Cold Stone franchise in June 2004. "The stores seemed busy all the time. You assume that 'busy' equates to profitability," he says.
Before buying, Mr. Gornall called half a dozen franchisees. "No one said, 'This is a bad deal,' " he remembers. But it soon became clear that something was amiss. Mr. Gornall already faced high overhead such as a $3,700-a-month lease, he says. Then, he says, the company squeezed his margins further by mandating that he buy what he considered expensive ingredients, in larger quantities than he needed. Mr. Gornall adds that the company's promotional couponing shrank his profits.
Along the way, he says, he didn't get much help, either from Cold Stone or the area developer -- a company representative assigned to sell franchises in the area and monitor the franchisees. The area developer, Sean Brown, visited his store only once, Mr. Gornall recalls, and didn't have any good ideas for boosting sales.
Mr. Gornall and his wife borrowed on their personal credit cards to pay the store's bills. But after their losses exceeded $100,000 last fall, they gave up and closed their store. They lost their house and are filing for bankruptcy. "It's been pretty devastating," he says.
Still, "I share some responsibilities" for failing, Mr. Gornall adds. "Maybe I should have closed sooner, but I kept on thinking things would be better."
The company wouldn't comment directly on the Gornalls' case. But Mr. Prasifka says, "When a franchisee asks for support, we make it a priority to get someone from our team to visit them, discuss their situation and get to the root cause."
He says if franchisees aren't satisfied with the support they receive from their area developer, there are "multiple resources," including an ombudsman, available. But he acknowledges that "during tough times, we will have some franchisees who will struggle."
The company didn't comment on Mr. Gornall's complaints about Mr. Brown, which were echoed by several other ex-franchisees. Cold Stone terminated Mr. Brown in January 2007 after he "habitually failed to pay royalties, rent, advertising and other amounts" on Cold Stone stores he owned, according to a company document in a tax-levy dispute with the government in U.S. District Court in Houston. The dispute arose over who should pay income and employment taxes owed on Mr. Brown's stores. The government looked to Cold Stone, but the company argued that Cold Stone didn't have an interest in Mr. Brown's properties at the time the lien arose. Mr. Brown declined to comment.
Citing surveys of franchisees, Mr. Prasifka says that overall "they're very satisfied with their area developers," whom he calls "world class." He says three of the two dozen or so have left the system in the past two years.
Some franchisees argue that the chain expanded too rapidly in its early years. "They did overbuild across the country, no question about it," says Michael Goldman, a Northern California franchisee with seven stores and a seat on Cold Stone's National Advisory Board, a group of franchisees who meet to discuss the business and give franchisee feedback to management.
The rapid growth meant new stores were frequently close to old ones, cannibalizing sales, Mr. Goldman argues. "I'm sure there are sites that should never have been picked and franchisees that should never have been picked" because of their lack of experience, he says.
But while many failed Cold Stone franchisees were new to franchising, experienced franchisees also have lost money. "This was not our first rodeo," says Deborah Lickteig, whose family had operated KFC chicken outlets in Arizona and New Mexico.
"We worked it real hard for a year," she says. But she and her husband sold their store in June 2006 after weekly sales at the San Antonio outlet fell several thousand dollars short of what she calls "skewed" pro-forma figures from the company. A glut of Cold Stone stores in the area, high food costs and the buy-one, get-one-free coupons made things worse, she says. Cold Stone wouldn't comment directly on the Lickteigs.
Former Florida franchisee Cecil Rolle has become more nettlesome to Cold Stone than most. After the company terminated him last year, it alleged in a Florida circuit court action that he had been caught removing equipment from one of his three Florida stores in the middle of the night. The company also filed suit in federal district court in Tallahassee to recover what it said are substantial sums he owes.
Mr. Rolle acknowledges seeking to remove equipment and withholding payments. But he and his wife have countersued, contending among other things that they were misled when told they would make "right around a 20% profit" on a mall store they bought. Cold Stone wouldn't comment on Mr. Rolle's allegations, but in a recent email to franchisees, a Cold Stone attorney sought to counter what he termed "Mr. Rolle's inaccurate and misleading attacks against us."
Mr. Rolle is trying to organize other franchisees for a possible class-action suit seeking some remedy from Cold Stone and Kahala. He spends much of his days at his Gainesville, Fla., home emailing with disillusioned former and current franchisees. "I feel like I'm doing something good," he says. And last month, Mr. Rolle opened an ice-cream shop in Tallahassee -- on the site of a former Cold Stone store.
By: Richard Gibson
Wall Street Journal; June 16, 2008
Friday, June 13, 2008
Balance-Sheet Woes Most Likely to Force Big Strategic Shift
It is time to sort out the Lehman problem.
With its stock falling two days in a row, investors see Lehman Brothers Holdings Inc. as the latest firm weighing on financial stocks.
The problems in Lehman's balance sheet could force the firm to issue a large amount of equity or to sell part, or all, of itself to a larger financial firm.
While such options would be excruciating for the company's management and existing shareholders, that may be what it takes to bolster confidence in the investment bank and to stop concerns about the firm affecting the wider financial system.
Following an 8.1 percent drop Monday, Lehman shares slid 9.5 percent Tuesday. The latest decline came even though Lehman was buying back large amounts of its own shares. Tuesday in New York Stock Exchange trading, Lehman shares were down $3.22 at $30.61, 22 percent below their book value the measure of a company's net worth based on assets minus liabilities at the end of February.
The steep discount to book value apparently reflects investor discontent about the values Lehman has placed on its assets, many of which are backed by distressed real-estate loans. And the discount is also a sign that investors doubt management's ability to navigate this crunch.
Lehman is scheduled to report a loss for its fiscal second quarter, ended May 30, when it reports results the week of June 16.
Lehman's first option is to raise a large amount of capital. The Wall Street Journal reported Tuesday that Lehman was weighing whether to issue as much as $4 billion in new stock. But Tuesday's drop in Lehman's share price the stock was down about 15 percent at one point during the day makes it harder to sell new stock.
Selling at this level would be more expensive for the firm, especially if a buyer demanded a steep discount to the current depressed price. Lehman's market value has fallen to about $17 billion, so even a $4 billion capital raise is nearly equal to about 25 percent of the firm.
And investors may want to see Lehman raise even more than $4 billion to cover any future losses from marking down the value of its assets. Lehman is likely to report large losses on trades made to hedge assets in the second quarter. And critics argue that Lehman has lagged behind in marking down the value of assets backed with distressed residential and commercial mortgages.
There is another important reason why Lehman may need new capital: It likely needs extra cash to forestall another downgrade by ratings agencies.
Standard & Poor's Corp. Monday downgraded Lehman to single-A from single-A-plus, but kept the firm on negative watch. Lehman had indicated that such a downgrade could force it to post about $200 million in additional collateral to back derivatives trades.
Another downgrade could force the firm to post $5.4 billion in additional collateral, according to a note Tuesday from Brad Hintz, an analyst at Sanford C. Bernstein & Co. and a former Lehman chief financial officer.
Lehman's other option is to sell a stake to another firm or to sell out completely. The problem here is that the credit crisis has left few prospective buyers. So who might be left to step up?
At the right price, Lehman may make an attractive target for a private-equity firm or hedge-fund group that wants to add brokerage and investment-banking operations. Blackstone Group CEO Stephen Schwarzman is a Lehman alum who has long wanted to add more investment-banking businesses to his firm.
Citadel Group, a money manager with some sales and trading operations, may want to do the same. J.C. Flowers proposed buying Bear Stearns before its collapse, so interest from that buyout group wouldn't be a surprise.
A large commercial bank may also be drawn to Lehman at a discount to book value, especially if it gets time to go over the investment bank's assets to assess their value.
It is possible that Lehman, which survived the 1998 market meltdown and the credit crisis in March, can weather the latest storm. Lehman does have some time to work out if it wants to do something drastic, like sell out. Lehman can avoid a short-term funding squeeze since it can borrow directly from the Federal Reserve, but the Fed could get impatient if Lehman doesn't do something soon.
So, it can't put off the tough choices for much longer.
By: Peter Eavis & David Reilly
Wall Street Journal
Comcast Corp. and Time Warner Cable Inc. will Thursday each begin tests of ways to manage Web traffic on their Internet networks, a contentious issue that has drawn scrutiny from regulators and consumer groups.
Comcast said it will test limiting bandwidth available to heavy Internet users at times of network congestion. The cable operator will test the approach in the Chambersburg, Pa., and Warrenton, Va., markets Thursday. Tests will also soon be under way in Colorado Springs, Co.
Time Warner Cable will try a different approach. The cable operator said it plans to start metering new subscribers -- charging them $1 a gigabyte for Internet usage above a monthly allowance -- beginning Thursday in Beaumont, Texas.
"We realize this will require a cultural shift away from the all-you-can-eat model consumers have grown used to and we want to see what our customers' response will be," said Time Warner Cable spokesman Alex Dudley.
The growth of video and music file sharing has created problems for Internet service providers but particularly cable companies, whose Internet networks are shared among users at the neighborhood level. That means users consuming lots of bandwidth can slow the network performance for those living nearby.
Comcast had said it would experiment with ways to cope with surging Internet traffic on its network. The company had admitted to slowing certain types of bandwidth-heavy applications such as peer to peer file sharing technologies. But advocates of so called net neutrality, who say service providers should not prioritize one type of Internet traffic over another, argue Comcast's approach unfairly targets certain applications and will ultimately hinder consumer choice. By curbing the amount of bandwidth available to heavy users rather than throttling particular applications, the company may deflect some criticism.
Congress is considering legislation that would rein in a carrier's ability to throttle traffic on its network, and the Federal Communications Commission is also investigating the issue.
Time Warner says about 5% of the company's subscribers account for half of local bandwidth use. Mr. Dudley said metered billing is an attempt to deal fairly with the explosive growth of Internet traffic, and the huge amounts of bandwidth consumed by a minority of customers. "We want to find the most equitable way to deal with this issue," said Mr. Dudley.
By: Vishesh Kumar
The Wall Street Journal; June 04, 2008
Thursday, June 12, 2008
It has been more than a year since Michael Dell returned to Dell, Inc., but the company doesn't seem to be rebooting very quickly.
Mr. Dell, founder of the computer-making giant, has been overseeing a restructuring since he returned as CEO in January 2007 after a three-year hiatus.
Mr. Dell has replaced executives, pursued new product lines and cut more than 5,300 employees, with at least 3,500 more to go.
Yet as of the end of January, costs were still a problem. Dell's selling, general and administrative expenses were up 50% at the end of the last quarter compared with two years ago, while revenue was up less than 10% over that period. Some of this may be due to current economic conditions, in which many people have turned to buying discount laptops from a variety of online sellers.
Analysts don't expect much better in the current quarter, which Dell will announce after Thursday's close of trading. They forecast net income of 32 cents a share, off about 6% from last year, due to stubbornly high costs, competitive pricing and weaker U.S. business and consumer spending.
“Dell is a show-me story,” says Toni Sacconaghi Jr., a Sanford Bernstein analyst. While he likes it in the long run, it hasn't shown yet.
By: Karen Richardson
Wall Street Journal
Six big technology companies are spearheading a plan to jointly license patents that cover the wireless technology called WiMAX hoping to limit royalty rates that could deter customers from using it.
The participants are Cisco Systems Inc., Intel Corp., Samsung Electronics Co., Sprint Nextel Corp., Alcatel-Lucentand Clearwire Corp., according to people familiar with the situation and a document outlining the group's plans.
They have scheduled a conference call Monday to announce an organization, the Open Patent Alliance, to gather rights to WiMAX-related patents and license them to makers of computers, networking devices and other products, these people said.
WiMAX is a long-range cousin of a wireless technology called Wi-Fi that comes with many laptop computers. Intel, which heavily promoted Wi-Fi, has been pushing to make WiMAX another built-in feature of portable PCs. Sprint and Clearwire plan to build a nationwide WiMAX - network, while Samsung, Cisco and Alcatel-Lucent are expected to make WiMAX equipment.
But hardware makers could be spooked if patent royalties are too high or the potential costs are uncertain. WiMAX backers cite the case ofthird-generation cellular networks; companies such as Qualcomm Inc., Nokia Corp. and Telefon AB L.M. Ericsson separately charge patent royalties for 3G products.
Some industry analysts say cellphone makers face cumulative royalties of more than 25% of the price of handsets, unless they have their own patents to help in negotiating lower rates. One person familiar with the thinking of the WiMAX alliance said it hopes to license WiMAX patents at "much lower" rates than those in the cellular industry.
Such patent pools aren't a new idea. A group called MPEG LA, for example, offers standard royalty rates for licensing patents associated with video compression. Patent pools are "tremendously important," said David Balto, a Washington, D.C., lawyer who handles patent and antitrust issues.
But the WiMAX alliance, which was reported by Computerworld Friday, faces several challenges. One is a competing standard-knpwn as LTE, for long-range evolution-that shares a common technical foundation with WiMAX and is expected to be preferred by many cellular carriers.
And some prominent holders of patents related to WiMAX and LTE-including Motorola Inc. and Qualcomm-haven't joined the patent pool and could continue to make their own claims for royalty payments.
Until they explain their licensing plans, some uncertainty for equipment makers will remain despite the existence of the new patent pool, said Mike Thelander, an analyst with Signal Research Group, in an email.
A Qualcomm spokeswoman said the company wouldn't join the WiMAX alliance. Though patent pools are a valid approach, "Qualcomm has consistently preferred to negotiate license agreements bilaterally," she wrote in an email. Qualcomm has already licensed patents covering technologies used in WiMAX to nine companies, she added.
A Motorola spokeswoman said, "We continue to evaluate the merits and risks associated with every proposal that we hear about, and we continue to make our own suggestions for improvements."
While some LTE backers are also pushing for a patent pool, Mr. Thelander predicted that WiMax and LTE royalties ultimately may be quite similar. But Larry Goldstein, a patent lawyer who wrote a book on patent pools, said the WiMax group could reduce the number of licensing deals to be negotiated even if some patent holders don't join. "It can cut down on the onerous negotiations and cut down on the overall royalty rate," he said.
By: Don Clark
Wall Street Journal; June 9, 2008
Wednesday, June 11, 2008
CBS is about to start showing some skin.
About a year after they were introduced, a handful of video-ad formats -- called bugs, tickers and skin -- are jockeying to become the favorites among marketers.
CBS plans to carry "The Burly Sports Show" on its Web site and will use a format known as a skin to sell ads next to the show.
The skin format, in which the ad appears in a graphic surrounding the window where the video plays, has been slower to gain momentum because it isn't widely available on top video sites. But it is about to get a lift.
On Wednesday, CBS will announce that it has reached a deal to carry an irreverent show called "The Burly Sports Show" on CBSSports.com. The show, which draws two million visitors each month, covers wacky events such as a failed marriage proposal during halftime of a Houston Rockets basketball game and a baseball mascot's fall during a running race. A part of the distribution deal is CBS's plan to use the skin format as the primary tool to sell ads next to the show.
For all the hoopla over online video, the video-ad business still is finding its feet. Just last month, the Interactive Advertising Bureau, a trade group that represents more than 375 publishers, released standards for various types of online-video ads. The new formats, which deal with the technical specifications of the commercials, cover preroll, midroll and postroll ads (ads that appear before, during and after a video), and the formats for skin, bugs and tickers. (Bugs are logos that appear in text or graphics on or next to the video, while tickers are horizontal bars that usually run on the bottom of the video.)
But the formats are just the beginning of trying to build a foundation for these emerging types of video ads. Ad executives still are trying to figure how much to pay for an ad bug or an ad skin -- different publishers use different formulas to come up with their ad rates -- and how to gauge their effectiveness.
"How do you really measure how successful it is? That's the gap that has to be closed with video," said Sean Muzzy, senior partner and media director at Neo@Ogilvy, a digital-ad agency owned by WPP Group's Ogilvy and Mather.
When it all shakes out, it is unlikely a single video-ad format will be the winner. Rather, several are likely to predominate. In addition to trying to see how the formats stack up against each other, marketers also are experimenting with using formats in conjunction with each other. Advertisers are expected to spend $989 million on online-video advertising this year, more than double the $471 million in 2007, according to Forrester Research, of Cambridge, Mass. But that growth is off a small base.
"The Burly Sports Show" is produced by a company called Heavy, which is one of the major companies in the skin-ad business. Heavy, which is trying to strike agreements with other online publishers, said skins are one of the most-effective forms of online-video ads. It claims that click-through rates on the ads displayed in the video skin average 1.68%, compared with the fraction of a percentage point marketers see on most banner ads.
The technology also can include a video-search function, which could carry videos from multiple publishers, and a section to display related videos. Heavy said these features encourage viewers to watch more videos, which would mean a bigger audience a publisher can sell to advertisers.
But marketers said each format has its pros and cons. Marketers like skin ads because they can easily swap out ads to target certain groups of consumers; the skin ad appears behind the video and isn't related to what goes on inside the video. But advertisers also said that because the skin ad appears in the background of a video, viewers can easily ignore them.
Marketers also like preroll, midroll and postroll ads because they can take the TV ads they already have created and chop them up to fit the Web. But marketers said these ads often aren't appropriate for short videos, noting users become annoyed when there is a 30-second ad for a minute-long content clip.
Heavy isn't the only company in the skin-ad game -- InSkin Media, among others, also is courting publishers. And Heavy faces other potential challenges. Founded in 1999 as a producer of online shows aimed at 18- to 34-year-old men, Heavy plans to announce Wednesday that it is splitting off out its video ad-technology business into a company called Husky Media.
It will soon find out whether there is a robust enough market for its skin-ad technology to support a stand-alone company. CBS, for one, said it didn't decide to work with Heavy because of the skin ads; instead, it was attracted to the sports show. CBS said the deal is a way to boost the entertainment on its site.
"[Heavy's video-ad tool] didn't drive why we did the deal. We did the deal for the content," said Jason Kint, senior vice president and general manager of CBSSports.com and CBSNews.com.
By: Emily Steel
Wall Street Journal; June 4, 2008
Tuesday, June 10, 2008
Wall Street Journal; June 6, 2008
Icahn previously has centered his comments on removing Yahoo's board of directors, of which Yang is one of nine members who are up for re-election to a one-year term, when the next annual shareholders meeting is held.
Yahoo announced later in the day that it planned to hold its annual shareholders meeting on August 1 in San Jose, Calif. The meeting was originally scheduled for July 3, but the company announced a delay when one of its board members resigned in May.
Icahn apparently is irate over newly released details from a shareholders lawsuit unsealed Monday, according to the Journal. In the amended lawsuit by two Detroit retirement funds, Yang is portrayed as the architect of a controversial employee severance program, which would be triggered if Yahoo undergoes a change in control.
The change in control applies to not only a buyout, like the one Microsoft had on the table before it withdrew its $33 a share bid for Yahoo on May 3, but also a change in control of a majority of Yahoo's board, as noted in a CNET News.com blog.
"It's no longer a mystery to me why Microsoft's offer isn't around," Icahn said in his Journal interview. "How can Yahoo keep saying they're willing to negotiate and sell the company on the one hand, while at the same time they're completely sabotaging the process without telling anyone."
Icahn noted he believes the unsealed shareholders lawsuit will aid his efforts to win a proxy fight to unseat Yahoo's board, especially given his belief that investors will fear Microsoft will not come back with a buyout bid until Yang and the current board are gone.
The Journal also reported Yahoo's board is expected to meet Tuesday.
Comments left about this story include:
Who does Carl Icahn have tapped to replace Jerry Yang? Hopefully someone with a proven history of web and internet advertising success. Susan Decker might have to be moved out. The Yahoo sales efforts and advertising programs are overpriced and weak at best. Yahoo is not delivering advertisers enough return on investment. When will Yahoo shift focus and actually help advertisers drive conversions and ROI? If Yahoo would focus on advertiser ROI and moving the sale needle for their clients, they could turn the tide and truly compete with Google. I also was expecting Jerry Yang to focus more on quality user experiences. Yahoo is no longer delivering high-quality search results and content for users. C'mon Jerry, restructure the senior management team, trim the top level, take charge, clear the company of unskilled executives that lack "internet marketing" experience and take Yahoo back to its core. Improve Yahoo from the inside out and everything will fall into place.
Yang's Memo to Yahoo Employees ... Sit Tight I'll Get You Paid
As the proxy fight heats up, Yahoo CEO Jerry Yang issued a letter to employees to address the mechanics of a proxy contest and what to expect.
Yang's letter comes as Yahoo and billionaire investor Carl Icahn have exchanged several rounds of proxy fight letters over the past few days. The fevered pitch between the two parties is expected to further accelerate in the coming weeks leading up Yahoo's August 1 annual shareholders' meeting.
Icahn is seeking to unseat Yahoo's board of directors with his own dissident slate, while Yahoo is working to persuade investors to re-elect the current board. Here is Yang on what constitutes a proxy fight and what employees should expect:
To: Yahoo global staff
Subject: proxy contest update
over the last few weeks, i'm sure you've read a lot about a potential proxy contest leading up to our august 1, 2008 annual meeting of stockholders. the proxy contest has now begun.
so what is a proxy contest?
a proxy contest happens when one or more stockholders proposes nominees for the board of directors other than the nominees proposed by the company. and as you know, carl icahn has also announced his intention to nominate an alternate slate of directors for election to our board.
in a proxy contest, it is typical for a variety of positive and negative statements to be made about a company's board and management. we expect these kinds of statements about yahoo! to intensify in the weeks ahead. we intend to respond to statements that we believe are unfair or misleading, and we did so with the press releases we issued this week.
what should you expect in the coming weeks?
we have already filed our proxy statement with the SEC, which includes the board's nominees for election as directors and the other matters to be voted on at the annual meeting. next, we'll mail our proxy statement to all stockholders as soon as it's cleared by the SEC . in our proxy statement, our board unanimously recommends that all stockholders vote for all of yahoo!'s board of director nominees.
we believe the yahoo! board has the independence, knowledge and commitment to navigate the company through the rapidly changing internet environment and to deliver value for yahoo! and its stockholders. as we've said repeatedly, the entire yahoo! board is fully committed to doing what is in our stockholders' best interests. as yahoos, it's more important than ever that we put aside the rhetoric and continue to focus on strategic objectives and our efforts to maximize stockholder value. i want to thank all of you for your continued hard work and dedication through this distracting time. you are our most valued asset.
please remember that there are certain requirements that apply to communications during a proxy contest, but we'll do our best to keep you as informed as possible.
Carl C. Icahn
ICAHN CAPITAL LP
767 Fifth Avenue, 47th Floor
New York, NY 10153
June 6, 2008
701 First Avenue
Sunnyvale, CA 94089
While you may take issue with the content of my letter, I take issue
with your oversight of Yahoo! Again, I stand by my characterization of your
"poison pill" severance plan and I find it humorous to see you attempt to
Roy, it is you who "misrepresents and misstates the details" of the
plan. Much like the rhetoric in many well known political campaigns, you
keep repeating misstatements in the hopes that by repeating misstatements
enough times it will convince your shareholders that these misstatements
are valid. For example, you repeated, "the plan was fully disclosed at the
time of its adoption and should be no surprise to anyone at this point."
This is simply not true. The egregious magnitude of the dollar amount cost
of the plan was never fully disclosed, nor was the email from your
compensation advisor calling the plan "nuts." While you keep repeating that
the severance plan was in the "best interests of shareholders", you neglect
to mention that the financial cost of the plan could be immense. The
documents obtained during discovery and released in the shareholder
complaint show that Yahoo! estimates the maximum change in control
severance expenses to be a staggering $2.4 billion if Microsoft bids $35
per share for Yahoo! You neglected to mention that the true cost to an
acquirer may be even higher as the perverse change in control severance
incentives may diminish the work effort of Yahoo! employees. In case you do
not understand the plan, in addition to the $2.4 billion of severance
expenses, I believe the plan will negatively impact employee behavior and
degrade the ability of an acquirer to successfully integrate the
acquisition. In the event of a change of control, the employee may decide
not to work as hard in the hopes of cashing in on a robust severance
package that awards up to two years salary and benefits, $15,000 of
outplacement expenses, and accelerated vesting of stock options and
restricted stock units. To make matters worse, it is not just the acquirer
firing the employee that can trigger the severance package but the employee
who may decide on his or her own to resign for "good reason" at any point
within two years of a change in control. It is quite obvious to me that
this plan impacts the price an acquirer would pay. Is it any wonder than an
acquirer, once fully comprehending this plan, might not wish to negotiate
any further? I again call upon you to honor your fiduciary duty to your
shareholders and rescind this "poison pill" severance plan.
You asked, "what exactly would happen to our Company if you and your
nominees were to take control of Yahoo!" I will give you my perspective on
-- First, I would work to have the board replace your "poison pill"
severance plan with an acceptable alternative.
-- Second, I intend to ask our new board to hire a talented and
experienced CEO (attempting to replicate Google's success with Eric
Schmidt) to replace Jerry Yang and return Jerry to his role as "Chief
Yahoo". Indeed, it was much speculated that Jerry would serve in the
CEO role temporarily until a permanent CEO was hired after the board
asked Terry Semel to resign.
-- Third, I intend to ask our new board to inform Microsoft that unless
any alternative transaction can insure a $33 or higher stock price (of
which I am skeptical) all talks of alternative transactions are over.
-- Fourth, I will ask our new board to offer publicly to sell Yahoo! to
Microsoft in a friendly and cooperative transaction.
-- Fifth, to the extent Microsoft does not want to make a proposal, I will
ask our new board do a deal on search with Google, but only if it
contains termination provisions that would in no way impede a
subsequent acquisition by Microsoft.
Now let me ask you a couple of questions, Roy:
-- Why don't you, now that you have the opportunity, remove the "poison
pill" severance plan that I find to be ridiculous and thereby remove a
major obstacle to a Microsoft acquisition?
-- In my opinion, Microsoft does not believe you will ever sell the entire
company on a friendly basis. So why don't you stop dancing around the
subject and publicly offer to sell the company to Microsoft for $34.375
per share and promise to cooperate completely?
-- Why are you still giving hope to Microsoft that there is a possible
"alternative deal"? As long as there is the possibility of an
"alternative deal", isn't it obvious that Microsoft will not make a bid
for the whole company?
CARL C. ICAHN
Friday, June 6, 2008
Hose or no hose? That's the working woman's dilemma around this time of year. The weather grows warmer, and the debate heats up: Are bare legs proper?
In today's casual workplaces, many women have peeled off the panty hose, and it is now common to see bare legs even on conservative Wall Street and at business events. Yet the transition has highlighted a generational divide. For women who entered the work force before the 1990s, hose were considered as necessary as underwear. But many twentysomethings have never worn panty hose at all.
The fashion shift has left some baby boomer managers feeling that their hosiery make them look frumpy. Kathy Garland, the 54-year-old chairwoman of the Northern Dallas area for the National Association of Women Business Owners, says she finally threw out a bag full of hose last week. An executive coach herself, she noticed a few years ago that she was the only woman wearing hose at a formal business fund-raiser. "Younger women don't even think about panty hose," she says.
There are certainly weightier issues to ponder these days, what with a presidential election and a war going on. But to managers in offices encompassing several generations, panty-hose policies are an opportunity to set fair rules.
This is the issue that lately has occupied the mind of Jim Holt, president of Mid American Credit Union, a small financial institution in Wichita, Kan. Mr. Holt is 58 and a three-decade member of the U.S. Army Reserves. He joined Mid American, which has 50 employees, four years ago, inheriting a dress code that prohibited, for women, such things as boots and mules, or backless shoes. The company required "hose" at all times -- even under pants.
When Mr. Holt attended a dress-for-success seminar that year, he got advice that caused him to loosen the reins on women's boots and mules. But not bare legs. The rule, "nylons and dress shoes are to be worn at all times," applied even to business-casual contexts. "We're not New York or San Francisco," Mr. Holt says, wearing ironed khaki slacks, an ironed golf shirt, and crisply creased socks. "We're the Midwest."
If there is a male equivalent of panty hose -- forcing wearers to balance comfort and formality -- it is probably the tie. Ties aren't required at Mid American. "The revolution has already taken place in the tie area," says Mr. Holt. He wears ties only on Mondays for his weekly Rotary Club luncheons.
As for fairness, it's hard to say whether ties or panty hose are more uncomfortable. One male reader of this newspaper, after making a bet with a female co-worker, attempted to discover the answer by secretly wearing panty hose under his business suit for several weeks. He claims ties are worse.
About a year and a half ago, Mr. Holt hired Kristen Spear as executive director of administration and human resources. Ms. Spear is 28. Like Ms. Garland in Texas, Ms. Spear found that wearing hose to professional events sometimes made her stand out awkwardly. Yet it was her job to counsel wayward employees on Mid American's dress code, which she did dutifully if not enthusiastically.
One bare-legged 23-year-old clerk in indirect loans -- where she dealt with customers by phone -- confessed she had never owned a pair of hose. Hose are "so foreign right now to Gen Y or Gen X," Ms. Spear says.
Ms. Spear encouraged Mr. Holt to reconsider his stand on hose. "According to her local research, hose are optional," Mr. Holt said in a recent email to me.
He relented just last week. "I didn't want to be so old-fashioned that people would be like, 'Do you require corsets, too?'" he said.
Mid American's newly loosened dress code, allowing bare legs, will be announced to employees in coming weeks in a series of meetings. Women at the credit union would be well-advised to listen closely. Mr. Holt says that when evaluating employees' performance in dress, as well as workmanship, he'll make a distinction between "who is meeting the minimum standards and who is exceeding them." In other words, hose will be optional but advised.
I suspect it is only a matter of time until Ms. Spear's point of view wins out entirely.
For the time being, Ms. Spear says she'll wear hose to board meetings "or if there is reason to exude the highest professional appearance. I will not wear them if I will be in the office all day, because I believe one can be professional-looking without wearing hose."
By: Christina Binkley
Wall Street Journal; June 5, 2008
Gates-Ballmer Clash Shaped Microsoft's Coming Handover
One of the most successful business partnerships in history was coming unraveled. It was early 2000, and Bill Gates had relinquished the chief executive's job at Microsoft Corp. to Steve Ballmer -- for the first time taking a back seat to his college pal and right-hand man of 20 years.
Mr. Ballmer got the title. But Mr. Gates retained the power, triggering a yearlong struggle between the two men that until now has remained largely under wraps.
Things became so bitter that, on one occasion, Mr. Gates stormed out of a meeting in a huff after a shouting match in which Mr. Ballmer jumped to the defense of several colleagues, according to an individual present at the time. After the exchange, Mr. Ballmer seemed "remorseful," the person said.
The conflict between the two men paralyzed business-strategy decisions that the company still wrestles with today. Board members stepped in to try to mediate a truce.
The differences between the two men ended, Mr. Gates and other Microsoft executives say, when in 2001 Mr. Gates had an epiphany, recognizing he needed to accept his role as No. 2. "I had to change," Mr. Gates says.
On June 27, Mr. Gates will fully step aside from management at Microsoft, ending daily work there to focus on philanthropy. If the transition goes smoothly, it will be in large part because the clash eight years ago forced the two men to grapple with the crucial question of whether Mr. Gates can let his friend run the company unencumbered. Microsoft used the lessons of that crisis as it planned for the ultimate succession.
Read edited excerpts from The Wall Street Journal's interview with Bill Gates and Steve Ballmer, as the Microsoft executives talk to staff reporter Robert Guth about their relationship, Mr. Gates's transition and the future of the company.
This summer, Mr. Ballmer moves into the corner office inhabited for years by Mr. Gates, who will work only one day a week and serve as board chairman.
Once Mr. Gates leaves, "I'm not going to need him for anything. That's the principle," Mr. Ballmer says. "Use him, yes, need him, no."
The handover marks the end to a storied business partnership that created a new industry, spawned many millionaires, and redefined how the world uses computers. Under Mr. Gates, Microsoft also fought one of the most heated antitrust battles in U.S. history and created the personal fortune that he is now deploying against global problems such as AIDS.
Mr. Ballmer's challenge is to assure that Microsoft's best days aren't behind it. The company faces one of the widest sets of obstacles in its 33-year history, as nimble rivals try to chip away its traditional software business and broad industry shifts force it to build entirely new businesses. To repel rising titans like Google Inc., Microsoft is taking unprecedented steps, such as its recent bid for Yahoo Inc. Although that effort is now shelved, it would have been the software company's largest acquisition.
Messrs. Ballmer and Gates are attempting a tricky feat by navigating an "ambassadorial succession" -- when a founder steps aside but still makes himself available as an elder statesman, says Yale School of Management Professor Jeffrey Sonnenfeld. They have had eight years of rehearsal, but the approach still has its perils: History is riddled with company founders who stifle their creation when they don't entirely break free.
Mr. Gates and Steve Ballmer introduced the Windows Vista operating software in January 2007 in New York.
In addition, if Microsoft later needs radical change, it would be rare that loyal insiders like Mr. Ballmer can "really tear into their inheritance," says Joseph L. Bower, Baker Foundation Professor of Business Administration at Harvard Business School.
The weight of the transfer on the two men -- both 52 years old, and so close they often complete each other's sentences -- was clear at a March retreat of Microsoft's top executives. Mr. Ballmer gave the opening remarks to the group, his eyes streaming with tears as he noted that it would be the last such meeting with Mr. Gates and Jeff Raikes, a veteran executive and friend who is joining Mr. Gates's philanthropy.
Last month, in a joint interview with Mr. Gates, Mr. Ballmer's eyes welled up as the two men talked about building Microsoft. "It is a little like giving birth to something. Bill gave birth but I was kind of an early nanny in raising this child," Mr. Ballmer said. "There are fun things we get to do together, that's all nice. I mean, it's important, but this is..."
"...this is what we did," said Mr. Gates, smiling.
Their relationship started at Harvard University in the mid-1970s, where the two played poker and thrived by pushing their intellectual limits. Once they skipped a graduate economics class for the entire semester, then teamed up a few days before the final exam to try to learn the material all at once. Mr. Ballmer recalls he got a 97; Mr. Gates a 99.
Elements of their early friendship -- competition and hard work -- defined Microsoft's own culture. Mr. Gates focused on technology and business strategy, while Mr. Ballmer took on diverse roles. Among other things, he was Microsoft's first business manager, and managed development of the first version of Windows and North American sales. Later, he expanded Microsoft world-wide.
Even as the company grew, the two men could jointly manage almost every aspect of the business. "For a certain size organization, it was beautiful," Mr. Gates says.
Their tight relationship allowed for heated arguments that would quickly subside. Indeed, numerous executives say this was a key part of the decision-making culture.
Their centralized management of the company started to break down in the late 1990s as Microsoft grew in complexity. The U.S. Department of Justice alleged that Microsoft had abused its monopoly, and the company fought to keep from being split up. It faced an onslaught of competitors and was rankled by the threat posed by the Internet and the flight of Microsoft's employees to Web start-ups.
Embattled, Mr. Gates sought help. Eventually, in January 2000, he gave his chief executive title to Mr. Ballmer. Mr. Gates became Microsoft's "chief software architect," a new position that, in theory, was below that of Mr. Ballmer.
Soon, the two men clashed as Mr. Ballmer tried to assert himself in his new job. As the firm's iconic leader, Mr. Gates still held sway that wasn't tied to a title: In meetings Mr. Gates would interject with sarcasm, undermining Mr. Ballmer in front of other executives, Mr. Gates and other Microsoft executives say.
Debates spanned various subjects -- personnel decisions, the Xbox videogame machine then being developed, and even the future of Microsoft's core Windows software, Microsoft executives said.
Some major decisions got stuck due to the impasse, Messrs. Gates and Ballmer said. In one case, two vice presidents clashed over the future of NetDocs, a promising effort to offer software programs such as word processing over the Internet. The issue: Because NetDocs risked cannibalizing sales of Microsoft's cash-cow Office programs, some executives wanted NetDocs killed.
Messrs. Gates and Ballmer were unable to settle on a plan. First, NetDocs ballooned to a 400-person staff, then it got folded into the Office group in early 2001, where it died.
Other Microsoft executives tried to step in, calling Messrs. Gates and Ballmer into a meeting with a clear message: Your struggles threaten the company, according to people familiar with the situation.
Microsoft's board held its own discussions with the two men, and also dispatched Dave Marquardt, a director and early Microsoft investor, to have periodic dinners with the two to help sort through the troubles.
"The board was really concerned about what was going to happen," says Jon Shirley, a former Microsoft president who sits on the company's board.
The stress on Mr. Ballmer was clear one morning in January 2001 while he was in Paris for an annual review of Microsoft's businesses. In his hotel room at 3 a.m. after a long day of meetings, Mr. Ballmer posed a telling question to Mr. Raikes, the veteran Microsoft executive: "What is the CEO's job at Microsoft?"
At the urging of the board and their wives, Mr. Gates and Mr. Ballmer agreed in February 2001 to work out their differences over dinner at the Polaris restaurant in the Bellevue Club Hotel a few miles from Microsoft's campus. The two men declined to discuss details of that meeting, saying only that they needed to sort out their roles, with Mr. Gates as the "junior partner" to Mr. Ballmer's "senior partner."
Mr. Gates concluded that it was he who needed to change most. "Steve is all about being on the team, and being committed to the mutual goals," Mr. Gates said. "So I had to figure out, what are my behaviors that don't reinforce that? What is it about sarcasm in a meeting?" he said. "Or just going, 'This is completely screwed up'?"
Mr. Ballmer says that, as the top executive, he had to learn when to override decisions and when to just "let things go," he said. "We got it figured out," he said.
Soon, Mr. Gates started to hold back negative comments in meetings. During one deliberation among the executives who reported directly to Mr. Ballmer, Mr. Gates deferred to Mr. Ballmer on an important decision, prompting Microsoft executives to silently glance at each other with surprise, recalls Microsoft Vice President Mich Matthews.
Making an Imprint
Gradually, Mr. Ballmer made his imprint. He restructured the company to give more decision-making power to executives, and elevated people with general management experience into positions previously held by technology-focused executives. He also worked to settle Microsoft's many lawsuits, taking a more conciliatory line than Mr. Gates typically had, Microsoft executives say.
Mr. Gates, meantime, focused on guiding Microsoft's long-term technology strategy. Among other projects, he coached three younger managers on how to build a case for Microsoft's entry into business-communications software. That work was later launched as a major new business in "unified communications," or merging email, voice mail and other business communications.
In 2003, Mr. Gates let Mr. Ballmer lead secret talks to buy German software maker SAP AG, while he handled the technology-planning side of the talks and provided guidance in line with his job as Microsoft's chairman, says a person familiar with the situation. (Microsoft ended up not buying the company.)
Microsoft also started laying the foundation for Mr. Gates's eventual departure, in March 2005 buying Groove Networks Inc. to bring its founder, software pioneer Ray Ozzie, in house to complement Mr. Gates as a technology guru. Mr. Gates once described Mr. Ozzie -- known as the father of Lotus Notes information-sharing software -- as "one of the top five programmers in the universe."
Messrs. Gates and Ballmer had settled into their new roles by early 2006, when Mr. Gates decided to end full-time work at Microsoft, setting a two-year timeline for making the move.
One concern for Mr. Ballmer was how to preserve Mr. Gates's role of technology visionary inside the company. Looking for guidance, Mr. Ballmer says he cracked open a book from his college years by Max Weber, the German sociologist, on how organizations handle the disappearance of "charismatic leaders."
On March 28, 2006, Mr. Ballmer described the book to Microsoft's board at a retreat in the San Juan Islands near Seattle, Microsoft executives say. One way for a firm to retain the charisma of a departing leader, Mr. Weber wrote some 100 years ago, is for the leader to name his own replacement.
Mr. Gates did just that. In June 2006, he named his own two successors as tech czars: Craig Mundie, one of Mr. Gates's chief technical advisers, and Mr. Ozzie, the programmer.
"The world has had a tendency to focus a disproportionate amount of attention on me," Mr. Gates said at the time of the announcement. He then gave his successors some elbow room, disappearing on a seven-week sabbatical that included a trip to Africa.
In an interview at that time, Mr. Ballmer compared their relationship to that of brothers. "I think brothers tend to argue a lot, and somehow they stay brothers and stay connected," he said. "I think Bill and I have figured out how to do all of that."
Aborted Yahoo Bid
Leading into this year, evidence that the transfer of power has taken hold is in Microsoft's now-aborted bid for Yahoo. Buying Yahoo could have helped Microsoft expand its online-advertising business and build online versions of its personal-computer software -- the same transition it attempted with NetDocs, the project that died back in 2001. But at a price tag of nearly $50 billion in cash and stock, the bid had its risks and would have been the largest acquisition by far at a company that hasn't done many large deals.
Mr. Gates stayed largely on the sidelines, and notes that it was Mr. Ballmer behind the bid, tapping Mr. Ozzie to sort through how the two companies would merge their technologies.
Some Microsoft insiders say Mr. Gates -- who traditionally favored Microsoft building its own way into markets -- wasn't a major proponent of the deal. Whatever the case, Mr. Gates stands by his man. "I don't have a different point of view on the Yahoo thing than Steve does," he said.
The question remains if Mr. Gates can resist the temptation to dive back in if Microsoft hits a crisis point. Over the past decade, several high-profile founders jumped back in when their companies were under siege, including Steve Jobs, who remade Apple Inc., and Michael Dell of Dell Inc. and Howard Schultz of Starbucks Corp. "There is a savior complex that says, 'I'm the only one who can restore it to its glory,'" says David A. Nadler, senior partner at consulting firm Oliver Wyman Group.
Mr. Gates says he's happy to help on some long-term projects, but won't return full-time. "I am done with that," he said.
By: Robert Guth
Wall Street Journal; June 5, 2008
Wednesday, June 4, 2008
Home prices are falling at an accelerating pace, new data show, while a separate report found a shrinking share of Americans plan to buy a home anytime soon, suggesting more price declines in the months to come.
The Standard & Poor's/CaseShiller index for the first quarter showed prices for existing homes nationwide declined 14.1% from a year earlier, compared with a year-to-year drop of 8.9% in the fourth quarter.
A separate S&P index that tracks 20 major metropolitan areas on a monthly basis showed home prices dropped 14.4% in March from a year earlier and 2.2% from February.
Meanwhile, sales of new homes last month rose 3.3% from March. But sales remain well below year-earlier levels and, with a glut of unsold homes on the mar- . ket, any significant improvement in the market remains down the road.
The steepest declines in home prices came in cities that had experienced the sharpest run-ups this decade; prices in Las Vegas fell 25.9% in March from a year earlier, compared with declines of 24.6% in Miami and 23% in Phoenix.
Prices rose in just two cities: Charlotte, N.C., and Dallas. In Charlotte, prices increased 0:2% in March from February and 0.8% from a year earlier, the only annual increase among the 20 cities surveyed. In Dallas, prices increased 1.1% in March but declined 3.3% from a year earlier.
David Blitzer, who oversees indexes at S&P said a turnaround in prices won't be visible until several more cities start showing monthly price rises. "Given the massive amount of supply that's out there, I'm not convinced we're at the bottom yet," Mr. Blitzer said. "It'll be at least a few more months."
Home prices nationwide are now 16% below their peak in the second quarter of 2006. Prices rose almost 90% from the beginning of this decade to that peak and now are at levels seen in the third quarter of 2004.
Despite the declines, prices are still almost 60% higher than at the start of the decade.
Many analysts expect prices to decline an additional 10% or more before hitting bottom as the housing market is battered by tighter lending standards and a wave of foreclosures that is boosting supply.
The rise in sales of new homes, which is a smaller part of the market than existing homes, doesn't mean the housing market has hit bottom.
The 3.3% gain, to a seasonally adjusted annual rate of 526,000, was partly offset by a downward revision of the March figure, which dropped 11%, rather than the 8.5% initially reported. On a year-to-year basis, new-home sales were down 42% from April 2007, the Commerce Department said.
The median price of a new home rose 1.5% to $246,100 in April from $242,500 a year earlier. But the gains aren't expected to continue, given the glut of unsold homes. Inventories fell 11,000 to 456,000, but that still represents 10.6 months of supply.
Consumers' expectations about the economy has grown especially pessimistic. The number of people expecting their incomes to decrease during the next six months outweighed those expecting gains. Assessments of labor-market conditions also worsened, with fewer people saying jobs are plentiful.
Consumers' souring mood about the economy is contributing to the weak outlook for housing. In a survey of 5,000 households by the Conference Board, just 2.1% of respondents said they plan to buy a home in the next six months, down from 2.5% last month and 3.4% in March. However, if you are selling your home, many experts would recommend a home warranty. Home warranties make a home look better to a potential buyer, which retains and improves the value of a home. If the home you are selling is warrantied, the new home owners are protected against many unexpected repairs and replacements of items in the home.
The housing market in general may be weak at this point in time, but there are many individuals who are looking to buy a home, due to the major drop in pricing.
Tuesday, June 3, 2008
The case, filed in federal court in Chicago, claimed that the credit bureau had violated the Fair Credit Reporting Act when it sold consumer information to businesses for their targeted marketing efforts.
Under the settlement, affecting a wide swatch of Americans, any consumer who had a credit card or a mortgage, auto or student loan, or other open credit account or credit line in the U.S. any time from 1987 to May 28 this year will be able to choose from two free TransUnion services for a limited time, according to the settlement terms.
The law allows selling publicly available information but not private data. The Chicago company said it didn't violate the law, and it discontinued the practice in question in 2001.
Seeking to end a class-action lawsuit that has been pending for almost a decade, TransUnion agreed to offer one of two options to consumers:
- Six months of TransUnion's creditmonitoring service free, giving consumers unlimited access to their credit reports and scores, and email notifications, when changes occur on their credit reports. The settlement values this service at $59.75.
- Nine months of the credit-monitoring service, plus access to the credit scores used in insurance decisions, and TransUnion's mortgage simulator service, by which consumers can see how their credit score affects their mortgage rate. Value: $115.50.
The settlement still needs to be approved by the court.
Consumer advocates say the usefulness of such services is mixed. Already, consumers can get one free credit report from each of the three main bureausTransUnion, Experian Group Ltd. and Equifax Inc. - every 12 months.
By: Andrea Coombes
Wall Street Journal; June 2, 2008
That sentiment isn't common among business leaders these days. Many senior executives are more focused on their individual well-being than on furthering their company's goals. They're quick to jump to new employers when they don't feel appreciated.
Some outside H-P had speculated that Ms. Livermore was unhappy about relinquishing part of her portfolio after the company announced plans to acquire Electronic Data Systems, based in Plano, Texas, an IT outsourcing company. Under the agreement, the outsourcing portion of H-P's services businesses -- about 13% of the group she runs -- will become part of EDS under its current chief, Ronald Rittenmeyer. Mr. Rittenmeyer will report to H-P CEO Mark Hurd.
She says she's staying put. "This isn't about me," she said in an interview. "It's about doing what is best for H-P. It makes sense to combine all outsourcing businesses -- and with a merger this big, for EDS to report directly to Mark," to ensure the best integration.
When does staying put and taking on an important No. 2 or No. 3 role benefit you and when is it a sign of surrender? Join a discussion on Front Lines.
This doesn't mean the 49-year-old Ms. Livermore has taken a place on the sidelines. Her division reported $37.7 billion in revenue last year, or 36% of H-P's total. Her office at H-P's Palo Alto, Calif., headquarters is about 20 feet from her boss, Mr. Hurd, who describes her as "one of the best executives I know. She's running a huge business and doing that very well."
Ms. Livermore helped develop strategy for the EDS deal with Mr. Hurd. Like him, she knew H-P on its own couldn't expand its outsourcing services enough to meet demand.
"Just before Christmas, I was talking to two large financial institutions, a manufacturing company and a government organization that all had very large IT outsourcing opportunities for us, but we didn't have the resources to respond,' she says. "By combining our outsourcing business with EDS, we'll have tremendous scale and be able to respond to every opportunity."
She has plenty of growth businesses to lead. Among these: blade systems, the No. 1 growth market in servers.
"I have one of the biggest and best jobs in technology," says Ms. Livermore, who earned $10.4 million in salary and bonus, and had equity valued at $4 million in fiscal 2007. "As much progress as H-P has made in recent years, there's still so much more we can do -- and I'm eager to make that happen."
The 26-year H-P veteran, a Stanford M.B.A., has had her share of setbacks and comebacks. She was on the phone with Mr. Hurd just four days after having a kidney transplant in 2005. She took a five-week leave but hasn't slowed down since returning to work.
In 1999, she lost out to Carly Fiorina for the CEO job. And in 2005, Mr. Hurd was recruited to fill the post. Rather than jump to another company, she became a supporter of Ms. Fiorina, with whom she's still friends, and then of Mr. Hurd. "I realized my own strengths complemented both of theirs," she says.
For one, she says she understands how processes and people work at the company. She also is focused on customers, talking to two or three big ones every day. And she has a reputation for identifying market trends. When she visited a dozen financial-services companies several years ago, she listened when IT executives said they were spending too much time and money operating their data networks.
Out of those conversations came H-P's strategy for building "the next generation of [automated] data centers, which is now driving growth in software and services," says Ms. Livermore.
As one of three senior-ranking women at H-P and the only one in a line job, Ms. Livermore says she was helped early on by a boss who was committed to building a diverse management team. "This was the early and mid-1980s and 25% of his management team was female," she says.
She remembers that when Mr. Hurd first arrived at H-P, he told her, "The numbers tell the story." Her story: In the Technology Solutions Group she heads, operating profit was $4.2 billion, or 11% of the unit's revenue, last year. In the last quarter, operating profit surged 38%.
By: Carol Hymowitz
Wall Street Journal; June 2, 2008