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Wilbur Ross, Donald Trump’s billionaire for Commerce, is pro-trade. No—anti-trade.

No, wait—pro? Anti? p38

: 44 NB Y p RB OR AI T D HIS AN LD ER TO UB UN E

TH January 30 — February 5, 2017 | bloo

“When you’re starting a company, it never goes at the pace you want. ...You start, you build it, and you think everyone’s going to care.

But no one cares, not even your friends” Airbnb’s Nathan Blecharczyk, Brian Chesky, and Joe Gebbia

COURTESY AIRBNB

p44

“The more north you get, the more South you are”

“My early, early ancestors were kicked out of France, the British kicked us out of Canada back in the 1750s, and now Mother Nature is threatening to kick our people out of south Louisiana”

“This is the best market for defense in many years, across the board”

p34

p23

p12

1

Cover Trail

January 30 — February 5, 2017 How the cover gets made

Domestic Cover

Opening Remarks How uncertain will Trump’s economic policy be? No one’s certain

6

Perspectives China’s Li Keqiang praises “reform, openness, and free trade”

8

Bloomberg View I (cough)

9

(wheeze) London • Tom Price gets ethical, late in the game

Movers And Best Picture goes to … Amazon? The risks of leaving the TPP

11

Global Economics

① “We profile Trump’s pick for commerce secretary, Wilbur Ross, and what it could mean for the administration.”

“Probably great things, right?”

“You should read the story.”

Defense contractors love the new put-up-or-shut-up standard for NATO

12

To the Kremlin, Putin and Trump don’t look like BFFs anymore

13

Oil is on the rebound, but the size of the industry’s workforce is another story

14

In the Year of the Rooster, China’s luxury market is crowing again

15

“I did. But I don’t really trust the media. I’m just going to settle on ‘it’s going to mean great things.’ ”

Companies/Industries Those bound things with paper and ink are actually selling pretty well—ask Bertelsmann

17

It’s stimulating! It’s relaxing! It’s weed!

18

The Trumpchi starts rolling toward U.S. shores, with Chinese carmakers’ hopes in tow

19

Prince is gone, but his estate aims to boost his riches

21

Politics/Policy 2

Trump vowed the GOP could replace Obamacare quickly. Good luck with that

22

Louisiana officials craft a climate change policy as the ground washes away beneath their feet

23

Efforts to revise Nafta could put a big dent in U.S. carmaker jobs

25

Technology

International Cover

Snapchat tries to keep the public out of its initial public offering

27

Apple joins the long line of antitrust litigants suing Qualcomm

28

Jeplan wants to turn old clothes into fuel. Hey, it worked in Back to the Future

29

While promising to hire domestically, IBM moves jobs offshore

30

Innovation: What Wi-Fi can do, Li-Fi may soon do better

31

Markets/Finance Navient’s student loan advice may have left borrowers confused—and poorer

33

“Nearshored” to Jacksonville, Wall Streeters dream of ordering Indian at midnight

34

Money managers’ climate positions are all over the map

35

Forged seals. Bogus letters. Phony documents. Welcome to China’s bond market

36

The Arctic may open up for drilling. But with $55-a-barrel oil, what’s the point?

36

COVER: PHOTO ILLUSTRATION BY 731; ROSS: MELISSA LYTTLE

Features Rich Man, Cabinet Man? Wilbur Ross embodies Trump’s plutocrat-into-bureaucrat model

38

Twin Peeks Brad Stone’s The Upstarts lifts the veil on Uber’s and Airbnb’s strategic smarts

44

Etc. Jacobe Chrisman’s Wonder Forge keeps board games from being bored games

55

Design: Replace your sad office supplies with classier brass alternatives

58

Real Estate: Should you move from San Francisco to South Lake Tahoe?

59

Health: Sit and sweat in an infrared sauna—just like celebrities!

60

The Critic: The government couldn’t get Steve Cohen. Black Edge tells why

62

What I Wear to Work: Interior designer Lisa Turner’s wardrobe is dog-friendly

63

How Did I Get Here? Glassdoor CEO Robert Hohman spent a year playing World of Warcraft full time. For his job

64

① “We have an exclusive excerpt from a forthcoming book about how Airbnb and Uber came to dominate the sharing economy and made billions of dollars as a result.”

“This makes me feel bad about abandoning my billion-dollar app idea.”

“What was it?”

“You open it, and it hacks into banks around the world, taking fractions of cents from each over an extended period, until you get to a billion dollars.”

Index People/Companies P

Aetna (AET) 11 Afgani, Mostafa 31 Agility Research & Strategy 15 Airbnb 46 Airbus (AIR:FP) 31 Akamai Technologies (AKAM) 31, 46 Alcoa (AA) 6 Alexander, Lamar 22 Amalgamated Bank 40 Amazon.com (AMZN) 11, 17 Amazon Web Services (AMZN) 46 American Funds/Capital Group 35 Aniston, Jennifer 60 Anthem (ANTM) 11 Apple (AAPL) 17, 28 Arconic (ARNC) 6 Arcview Market Research 18 Avenue Strategies 6 AXA Investment Managers Asia 15

Pai, Ajit Paltrow, Gwyneth PayPal (PYPL) Pearson (PSON:LN) Pelosi, Nancy Piaget Porsche (VOW:GR) Price, Tom PureLiFi Putin, Vladimir PwC

B

4

BAE Systems (BA/:LN) 12 Bain 15 Baker Hughes (BHI) 14 Banco Bilbao Vizcaya Argentaria 36 Bank of America (BAC) 12, 34 Barra, Hugo 11 Barsoom, Peter 18 Barton, Rich 64 BCBG Max Azria 11 Bennett, Barry 6 Berenberg Bank 17 Bertelsmann 17 Bharara, Preet 62

44 Jay Bregman

BlackRock (BLK) 11, 35 Blank, Arthur 11 Blecharczyk, Nathan 46 Bloom Farms 18 Blumenthal, Richard 40 Boeing (BA) 11, 12 Boston Consulting Group 6 BP (BP) 14, 23, 36 Brandt-Pearce, Maite 31 Bregman, Jay 44 Brewin Dolphin 17 British Telecommunications (BT) 31 Bush, George W. 22, 40 Butters, David 40 BYD (1211:HK) 19

23 Louisiana underwater

11 60 46 17 22 15 15 9, 22 31 13 17

Q Qualcomm (QCOM)

28

R

Collins, Susan Commerzbank (CBK:GR) ConocoPhillips (COP) Cordray, Richard Corey Rich Cote, David Couchsurfing.com

22 36 36 33 59 6 46

D Davie Shoring De Blasio, Bill Deutsche Bank (DB) Diamond S Shipping Dunne Automotive Dunne, Michael

23 46 34, 35 40 19 19

E EBay (EBAY) 27 Economist Group 17 Energy Transfer Partners (ETP) 36 Equidate 27 Erdogan, Recep Tayyip 6 Evercore ISI 14 EXCO Resources (XCO) 40 ExxonMobil (XOM) 13, 36 EY 36

F Facebook (FB) 27, 46, 59 Fallon, John 17 FedEx (FDX) 11 Feng Xingya 19 Fiat Chrysler Automobiles (FCAU) 19, 25 Fidelity Investments 35 Fields, Mark 6 Ford (F) 6, 25 Forrest-Pruzan Creative 56 ForwardKeys 15

C

G

Camp, Garrett 46 Cantor, Eric 6, 22 Carr, Roger 12 Cassidy, Bill 22 Cheh, Mary 46 Chesky, Brian 46 Chesnakov, Alexei 13 Chevron (CVX) 36 China Guangfa Bank 36 Chow Sang Sang 15 Chow Tai Fook Jewellery Group (1929:HK) 15 Chrisman, Jacobe 56 Cigna (CI) 11 Cisco Systems (CSCO) 31 Citigroup (C) 34, 36 Clinton, Hillary 34, 64 Cohen, Steve 62

Garg, Saurabh 31 Gebbia, Joe 46 General Motors (GM) 25 Glassdoor 64 Glenn, Anthony 34 Global Music Rights 21 Goldman Sachs (GS) 27, 34 Google (GOOG) 11, 17, 27, 46, 59 Graham, Jim 46 Graham, Lindsey 22 Graves, Garret 23 Gray, Vincent 46 Great Wall Motor (2333:HK) 19 Grebow, Edward 40 Guangzhou Automobile Group (2238:HK) 19 Gucci (KER:FP) 15

H

Koppelman, Charles Kortunov, Andrey

Haas, Harald 31 Hailo 46 Harvard Management 11 Hasbro (HAS) 56 Hawkins, Paula 17 Hmbldt 18 Hohman, Robert 64 Homeward Residential (OCN) 40 Honda (HMC) 19, 25 Honeywell International (HON) 6 Hovaizi, Fraidoon 31 Hsieh, Tony 59 Huawei 28 Humana (HUM) 11 Hyundai (005380:KS) 19

I IBM (IBM) IHS Markit (INFO) Instagram (FB) Intel (INTC) Invesco (IVZ) Iwamoto, Michihiko

30 36 27 28 40 29

J Jafco (8595:JP) 29 Jay Z 11 Jeplan 29 Joel, Billy 21 Jones Lang LaSalle (JLL) 34 JPMorgan Chase (JPM) 11, 34

21 13

L Lauder, Leonard 40 Lavrov, Sergey 13 Lewandowski, Corey 6 Li Keqiang 8 Liberum Capital 17 Liguori, Peter 11 Lions Gate (LGF/A) 11 Lockheed Martin (LMT) 12, 31 Louis Vuitton (MC:FP) 15 Lucibel (ALUCI:FP) 31 Lucror Analytics 36

M Macierewicz, Antoni 12 Macquarie Group (MQG:AU) 34 Madonna 11 Marley, Damian 11 Marriott International (MAR) 46 Martoma, Mathew 62 Mattis, James 13 McMillan, L. Londell 21 McNamara, Chris 59 Medvedev, Dmitry 13 Merkel, Angela 12 Microsoft (MSFT) 28, 56, 46 Mitsubishi (8058:JP) 29 Moelis 6 Monness, Crespi, Hardt 27 Moody’s Analytics (MCO) 40 Morgan Stanley (MS) 27 Mott, Rodney 40 Murkowski, Lisa 36 Murphy, Bobby 27

N Nabors Industries (NBR) 14 National Oilwell Varco (NOV) 14 Navarro, Peter 40 Navigator Holdings (NVGS) 40 Nelson, Bill 40 Nelson, Tyka 21 1906 18 Nissan (7201:JP) 25 Noshad, Mohammad 31 Novus Select 59 NPD Group 56 NTT Docomo (9437:JP) 29

21 Carole King

K Kalanick, Travis Kennedy, Thomas Khan, Sadiq King, Carole KKR (KKR) Kleinfeld, Klaus Kolhatkar, Sheelah

46 12 9 21 17 6 62

O Obama, Barack 6, 22, 33, 46 OGL Services 59 Oppo 28 Oriental Watch (398:HK) 15 Oz, Mehmet 60

Rabe, Thomas Ravensburger Ray, Michael Raytheon (RTN) Reeves, Martin Remondi, Jack Rihanna Rometty, Ginni Romney, Mitt Ross, Wilbur Ryan, Paul Ryohin Keikaku (7453:JP) Rémy Cointreau (RCO:FP)

17 56 18 12 6 33 11 30 40 40 22 29 15

S Sacca, Chris 46 Sallie Mae (SLM) 33 Samsung (005930:KS) 28 Schumer, Chuck 22 Sealand Securities (000750:CH) 36 Seashols, Matt 18 Seibel, Michael 46 Seven & I Holdings (3382:JP) 29 Simes, Dimitri 13 Slover, Leslie 34 Smith, Fred 11 Snap 27 Solanki, Deepak 31 Solovei, Valery 13 Spiegel, Evan 27 Spotify 21 Sprint (S) 11 State Street (STT) 11, 35 Strategic CFO 6 Subaru (7270:JP) 59 Sullivan, Dan 36 Summers, Larry 6

T Tahoe Mountain Lab Takao, Masaki Target (TGT) Teal Group Tesla Motors (TSLA)

59 29 11, 56 12 34

Thales (HO:FP) 12 Theroux, Justin 60 Tidal 11 Tiffany (TIF) 15 Tillerson, Rex 13 Toyota (TM) 19, 25 Toys “R” Us 56 TransCanada (TRP) 36 Transocean (RIG) 14 Tribune Media (TRCO) 11 Trinity Mercantile & Design 63 Triton Research 27 Trulia (Z) 11 Trump, Donald 6, 9, 11, 12, 13, 19, 22, 23, 25, 30, 34, 36, 40 Turner, Lisa 63 Twitter (TWTR) 6, 27

U Uber 46 UBS (UBS) 14, 34 Udemy 14 Union Park Automotive Group 19

V Vanguard Group Velmenni Vivendi (VIV:FP) VLNcomm Volkswagen (VOW:GR) VRBO (EXPE)

35 31 21 31 25 46

W Wallace, Rett Walmart (WMT) Walt Disney (DIS) Warner Bros. Records Wells Fargo (WFC) West, Kanye Wilder, C. John Wilkinson, Jim WL Ross & Co. Wonder Forge Wood MacKenzie

27 11, 56 56 21 34 11 40 6 40 56 36

X Xiaomi Xi Jinping

11, 28 15

Y Yang, Dennis Yoo, Salle YouTube (GOOG)

14 46 21

Z Zhejiang Geely Holding Group 19 Zimmer Biomet (ZBH) 9 Zwicker, Laura 21

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MAIN: DERICK E. HINGLE/BLOOMBERG; BREGMAN: JOHN PHILLIPS/GETTY IMAGES FOR TECHCRUNCH; KING: PAUL MORIGI/WIREIMAGE.COM

A

Opening Remarks

During Barack Obama’s two terms in the White House, business executives complained that uncertainty about government policy was messing up their decision-making. “Operating a business under conditions of excessive uncertainty is like playing a game when you don’t know the rules. Without rules, it is impossible to develop a strategy or playbook,” then-Federal Reserve Bank of Dallas President Richard Fisher said in a 2010 speech that was cited approvingly by the Business Roundtable, a lobbying group for large corporations.

Now that Mister Unpredictable is president, you’d think executives would be more concerned than ever. Donald Trump is personalizing and improvising economic policy, which is contrary to executives’ preference for clear, consistent rules of the road. No one knows which American company will be his next Twitter victim. He wants to impose an unprecedented “border tax” on companies that move jobs abroad. His goals for the economy are ambitious but vague.

The Economic Policy Uncertainty Index, which is maintained by academic economists, shot up after Trump was elected.

Yet it’s hard to hear a peep of disapproval or concern from CEOs. “What somebody’s saying is not necessarily what they’re going to do,” says David Cote, chief executive officer of Honeywell International. Ford CEO Mark Fields emerged from a two-hour meeting with other manufacturing executives and Trump on Jan. 23 proclaiming it “very, very positive.” Arconic CEO Klaus Kleinfeld told Bloomberg he was favorably impressed by his first meeting with the president, which ended in the Oval Office. “We had a very open dialogue, extremely open dialogue,” said Kleinfeld, who was CEO of Alcoa before it split from Arconic last year. “He did not have positions he was fixated on. He was asking questions and listening.”

That sort of bonhomie led former Treasury Secretary Larry Summers to grumble in a Bloomberg Television interview that business leaders who “two, three months ago were saying he was a man they’d never do business with are now hailing him as a great statesman.”

One factor in the CEOs’ good cheer, no doubt, is that they don’t want to get on the wrong side of the prickly president. But the executives also appear to genuinely believe that however volatile he might be, Trump will be a better friend than Obama was. “The Obama administration was hostile to business

Trump’s Uncertainty Principle

By Peter Coy

6

Pay no attention to the strongman who may or may not be behind the curtain

formation and pro-growth policies,” says Eric Cantor, a former leader of the House’s Republican majority who’s now vice chairman of Moelis, an investment bank. “We’ve had a tectonic shift in the way Washington looks at business.”

The open question is whether Trump will, on net, be good or bad for business.

The first billionaire president could help companies by cutting their taxes, reducing regulation, and generally understanding their needs in a way the community organizer who preceded him never could.

But Trump could also make a mess of things if erratic policies create fear, uncertainty, and doubt. Trade wars could break out. Interest rates could soar to punishing levels if Trump manages to persuade Republicans in Congress to pass the giant tax cuts he’s seeking without corresponding spending reductions.

The cloud of uncertainty Trump has kicked up may be a big deal for the economy, or not. “Uncertainty About Uncertainty” was the title of a November speech by Kristin Forbes, an external member of the Bank of England’s Monetary Policy Committee.

She cited 17 studies going back to one

by Ben Bernanke in 1983 that found,

PAST

NOW

variously, that uncertainty curbs business investment and hiring, causes consumers to retrench, makes companies less productive, and raises the cost of capital by churning financial markets. But Forbes concluded, “Measuring uncertainty is hard. Measuring the impact of uncertainty on the economy is even harder.�

For one thing, uncertainty isn’t necessarily bad. It simply means the distribution of possible outcomes—both upward and downward—has widened. Investors in the stock market seem to be betting on the upside of the distribution, judging from the 6.5 percent rise in the S&P 500 since the election. It’s also possible that what looks like economic uncertainty is really just scary reports in the news media.

Stanford economist Nicholas Bloom, an originator of the Economic Policy Uncertainty Index, joked (I think) in an e-mail, “It may simply be the news has no connection to reality—as you know from Trump, you guys are the biggest liars.�

The one thing certain is Trump’s volatility. Businesses are employing a range of coping strategies. One is to do nothing. “Postponement is a rational strategy, in a sense,� says Martin Reeves, a senior partner at Boston Consulting Group.

Another game plan is to play along in hopes of earning some of the incentives Trump is dangling in front of companies that locate plants in the U.S. It’s not clear, though, that insourcing is always the right idea: “The last thing the auto industry needs is more capacity,� Marina Whitman, a University of Michigan professor and former General Motors chief economist, said after Trump met with auto execs on Jan. 24. Doing stuff in the U.S. that could be done more cheaply abroad raises consumer prices. And there’s no glut of skilled autoworkers in a U.S. labor market whose unemployment rate (after eight years of Obama’s supposed hostility to business) is already down to 4.7 percent.

Pretty much no businessperson is openly defying Trump. The Business Roundtable, which long supported the Trans-Pacific Partnership, was maximally meek on Jan. 23, when Trump tore up the trade deal as one of his first acts in office, referring blandly to “executive action made today by President Trump� and then saying it’s “encouraged by the Administration’s commitment to pursue trade agreements.�

What CEOs can do, and are doing, is to gather every scrap of information

FUTURE

“What somebody’s saying is not necessarily what they’re going to do� they can get about Trump’s intentions.

Following his Twitter account has become de rigueur. The president knows he can get busy CEOs to show up at the White House on extremely short notice— invitations to the manufacturing summit held on the morning of Jan. 23 went out on the evening of Jan. 21. As reported by Bloomberg Businessweek, former Trump aides Corey Lewandowski and Barry Bennett have cashed in on the demand for closeness to Trump by founding a lobbying firm, Avenue Strategies, that’s coupled with a pro-Trump super PAC. Clients are flocking to it.

What business wants is for Trump to fulfill all the promises they like and forget the ones they don’t, such as the border tax, which would wreak havoc on global supply chains. Jim Wilkinson, who runs the Strategic CFO, a Houston consulting firm for chief financial officers, had 10 of them in his offices just before the inauguration. Their mood was positive. “I said, ‘OK, what happens when the honeymoon’s over?’ ‌ I don’t think it’s going to be evident for some time who’s going to win and who’s going to lose.â€?

Even if businesspeople could get a fix on what Trump will do, “we don’t know the reaction to the policy� by other actors, such as China, says Boston Consulting’s Reeves. “Violent social and political reactions are possible.�

Daron Acemoglu, who was born and raised in Turkey and is a top economist at MIT, says business executives are missing the danger Trump presents. He likens him to Turkish President Recep Tayyip Erdogan, who’s consolidated power while weakening institutions such as the judiciary and the press. “We can probably withstand four years of bad economic policy, but with some of these other things the damage can be even deeper,� Acemoglu says. “In Turkey, I remember, there was a huge amount of complacency, as there is in the United States, that it will all work out.�

Cantor, the former Republican congressman, scoffs at the comparison. “I don’t think that most businesses really think that we’re in an era of a strongman president,� he says. No, they don’t.

That’s just one more thing to be uncertain about. —With Matthew Campbell, Keith Naughton, and Thomas Black

7

Perspectives/ China

“Economic Openness Serves Everyone Better�

8

This is a testing time.

Almost a decade on, the world is still reeling from the fallout of the global financial crisis. China faces its fair share of challenges, but we choose to confront them head on.

Above all, we remain convinced that economic openness serves everyone better, at home and abroad. The world is a community of shared destiny. It’s far preferable for countries to trade goods and services and bond through investment partnerships than to trade barbs and build barriers. Should differences arise, it behooves us all to discuss them with respect and a keen sense of equality.

China stands resolute with the World Trade Organization and multilateral free-trade agreements designed to be inclusive. Economic globalization has enabled the creation and sharing of wealth on an unprecedented scale. There are problems, too, more on the sharing side. These can be addressed, but only if countries work together to ensure that a rising tide really does lift all boats.

At home, the government is opting for a lighter, more balanced touch while engaging the market. To make doing business in China easier, the state is consolidating administrative reviews and focusing more on compliance oversight, risk preparedness, and providing services. We keep improving implementation of the VAT reform to make sure that tax costs drop across the board.

We are opening new sectors of the economy to investment and widening access to many others. We are piloting a “negative list� model before a nationwide rollout, where investment access is assumed unless specifically restricted. More measures are in the pipeline to ensure all businesses registered in China are treated equally. Companies can enjoy additional incentives if they invest in less-developed western regions or in the northeastern industrial belt.

While the government is continuing to invest in infrastructure to boost domestic demand, more resources are going to improving rural roads, water supply, sewage systems, and information networks—areas that traditionally haven’t been as

visible. In parallel with such hardware improvements, we’re continuing efforts to expand the safety net, not least for the more vulnerable members of society.

Structural reforms are showing results.

In 2016, China shed more than 65 million and 290 million tons of inefficient steel and coal-mining capacity, respectively.

We plan to raise those numbers to 140 million and 800 million tons within the next three to five years to restore healthier fundamentals to those industries. Meanwhile, the government is working with business communities on various retraining programs. In 2016 alone, 700,000 workers once employed in downsized industries moved on to new jobs.

At the same time, new growth drivers are emerging strong.

Services, which have surpassed manufacturing as a share of the economy, keep consolidating their lead. Consumption now contributes 60 percent of the growth in China’s gross domestic product. While creating new value, these drivers are also boosting the efficiency and competitiveness of traditional sectors, with high-tech and equipment manufacturing leading industrial expansion.

Entrepreneurship and innovation are taking root. Meanwhile, new business models are thriving, transforming many previously unimaginable services into daily conveniences. The mobileinternet-enabled sharing economy is only one obvious case.

Besides ordering takeout or hailing cars, housekeeping, health consulting, and many more services are now just a swipe away.

The numbers bear out the case. The economy grew a healthy 6.7 percent last year. More important, despite industrial consolidation and ever more robots finding their way into factories, the job market is proving resilient. The economy has added more than 13 million jobs every year since 2013. Unemployment stands at a multiyear low.

In a world with a plethora of uncertainties, China offers an anchor of stability and growth with its consistent message of support for reform, openness, and free trade. The times may be difficult. But that’s all the more reason not to lose sight of these principles, which have stood China—and the world—in good stead.

Li has been the premier of the People’s Republic of China since March 2013.

INTS KALNINS/REUTERS

How China plans to face a world of uncertainties

By Li Keqiang, premier of China

Bloomberg View

To read Justin Fox on Trump’s “American carnage� and Michael Schuman on how anti-trade policies hurt the poor, go to Bloombergview.com

The Great Cities of Britain Can’t Breathe High levels of nitrogen dioxide are poisoning Londoners and others

The U.K. government, concerned about costs and the inconvenience pollution-reducing policies may cause drivers, has so far been slow to help. The government has, for example, blocked plans to charge diesel cars entering high-pollution areas, and it’s adopted overly optimistic emissions models.

Courts have twice ruled that its air-quality plans are insufficient and illegal.

Britain’s government will have to move quickly to create clean-vehicle incentives, accelerate and expand the introduction of Clean Air Zones around the country, and introduce requirements for more accurate diesel emissions testing.

Cities can get cleaner, as even Delhi and Beijing are starting to demonstrate. But in every case, it requires firm limits on cars, trucks, and traffic.

Tom Price’s Delayed Ethical Epiphany

ILLUSTRATION BY TOMI UM

He has a realization other members of Congress should come to as well

The worst air pollution is generally found in Beijing, Delhi, and other metropolises of the developing world, where headlong growth stirs up construction dust and energy providers still burn a lot of coal. But the air in London is dangerously polluted, too, with concentrations of nitrogen dioxide in some parts of the city measuring among the highest in the world.

The foul air around the U.K.’s capital and other cities is a testament to the polluting power of buses, cars, and trucks—and the need for governments everywhere to keep these vehicles operating within limits.

In 2014, London’s major shopping thoroughfare, Oxford Street, was by one measure the most polluted street on earth;

by Jan. 5 of this year, parts of London had already exceeded pollution limits for all of 2017. In some neighborhoods, cyclists have taken to wearing pollution-filtration masks.

Long-term exposure to NO2 and particulates in the air causes damage to the lungs and blood vessels. Such pollution is responsible for almost 9,500 premature deaths in London alone each year, according to a 2015 report. The only way to clear the air is to tighten emissions standards and drastically reduce the number of polluting vehicles.

London Mayor Sadiq Khan plans to give drivers of black cabs incentives to upgrade to cleaner vehicles and intends to replace diesel double-decker buses with electric or hydrogen-powered ones—as Paris, Mexico City, and Madrid have pledged to do. The mayor has also promised to speed the introduction of Ultra Low Emission Zones, in which vehicles will pay a hefty daily fine for not meeting exhaust standards, in addition to the congestion charges already in place.

These efforts should help, but the national government needs to act, too—if only because the problem isn’t confined to London. Birmingham and Leeds are among the many other towns and cities in the country in breach of safe particulate and NO2 levels.

Representative Tom Price, Donald Trump’s nominee for secretary of health and human services, seems to understand the need to separate public service from private gain. To avoid conflicts of interest, Price has said he will divest from several dozen companies in which he’s a shareholder within 90 days of being confirmed by the Senate. All public servants should make such a robust and transparent commitment to high ethical standards.

What’s curious is that Price has come to this realization so late in his public career. His nomination is embroiled in charges that he profited from his position in Congress. Last March, Price purchased shares in a medical device manufacturer; within days, he introduced a bill that would benefit the company, Zimmer Biomet, by easing regulation. Price has said his shares were purchased by a broker without his knowledge. But the question remains: Why would a House Republican leader on health-care policy, author of a bill designed to restructure the multitrillion-dollar system, be trading in health-care stocks at all? Yet according to a Bloomberg BNA analysis of financial disclosures, almost one-quarter of federal lawmakers sitting on committees that handle health issues hold investments in pharmaceutical or health-services companies.

The Stock Act, passed by Congress in 2012, makes it illegal for members of Congress and staff to trade on their access to privileged information—including legislative information. If it makes sense for the HHS secretary to divest from healthcare stocks—and it does—then it makes sense for any member of Congress with great influence over policy to divest from stocks that policy could affect. Members should be required to put assets in a genuine blind trust over which they have no control, or they should restrict their investments to what the House ethics committee calls “widely diversified� mutual funds or exchange-traded funds, such as an S&P 500 index fund.

9

Movers

By Kyle Stock

Ajit Pai, a longtime Washington lawyer, was promoted from FCC commissioner to chairman. In December, Pai promised to Target introduced a sweeping “fire up the weed whacker” policy requiring suppliers to list to cut telecom regulations. chemical ingredients in everything from cosmetics to cleaning supplies. Walmart embarked on a similar effort in July, banning eight chemical groups.

Sprint paid a reported $200 million for one-third of Tidal, Jay Z’s music-streaming service.

The rapper originally bought the site for $56 million and arranged ownership stakes for more than 20 major artists, e including Arcade Fire, Coldplay, Damian Marley, Kanye West, Madonna, and Rihanna.

Boeing issued a bullish outlook for 2017 with plans to deliver as many as

765 commercial planes, up from 748 last year.

Sales will dip as the company shifts to smaller jets, but it forecasts higher profits.

CLOCKWISE FROM TOP LEFT: MARY ALTAFFER/AP PHOTO; EVERETT COLLECTION; RYAN KANG/AP PHOTO; RAYMOND BOYD/GETTY IMAGES; ILLUSTRATIONS: OSCAR BOLTON GREEN

A women’s march in Washington and dozens of affiliated events around the world on Jan. 21 brought more than 3 million participants to the streets to protest the inauguration of President Trump and many of his proposals.

Atlanta Falcons owner Arthur Blank plans to take all

500 of the franchise’s employees to the Super Bowl in Houston. It will be the team’s second appearance in the championship game.

Ups

Downs

Hugo Barra, the architect of Google’s Android, said he’s stepping down as global vice president of Xiaomi, a Chinese smartphone startup.

He plans to return to his “comfort zone” in Silicon Valley.

Tribune Media CEO Peter Liguori said he will step down in March.

During his threeyear tenure, he split the company’s TV business from its publishing arm and sold Chicago’s iconic Tribune Tower for $240 million.

BlackRock said it would have JPMorgan Chase act as custodian for $1 trillion in client assets, shifting the business from State Street to lower costs.

State Street, which had $29 trillion under custody at yearend, will still do some work for BlackRock.

20k The Dow Jones industrial average closed above 20,000 for the first time U.S. shipments of dryers, dishwashers, on Jan. 25. and other major appliances rose 8.5 percent in December, after a 13 percent increase in November. Also, house-flipping hit a 10-year high in 2016, according to real estate transactions tracked by Trulia.

Aetna will pay Humana a breakup fee of

$1b after a federal judge blocked the $37 billion merger of the insurance giants on antitrust grounds. The industry is bracing for another decision, expected

by Jan. 30, on the proposed $48 billion Anthem-Cigna deal.

Fashion brand BCBG Max Azria said it would close all

570 of its retail stores.

The company is shifting focus to web sales, department stores, and licensing.

Amazon became the first web producer nominated for a Best Picture Oscar, with Manchester by the Sea. Lions Gate, the company behind La La Land, had the biggest haul, with 26 nominations.

The Academy Awards will air on Feb. 26.

Signet Classics will print an additional 75,000 copies of George Orwell’s 1984.

The dystopian novel surged to the top of A ’ bestb Amazon.com’s s ll list iin recent seller w k . weeks.

“Ninety-five percent nt of the world’s consumers aren’t in the United States. … So the United States being cut off from trade would be like trying to breathe without oxygen.”

FedEx CEO Fred Smith criticized Trump’s decision to pull out of the Trans-Pacific Partnership

Harvard Management is firing half of its investment staff and hiring outsiders to handle the university’s $36 billion endowment.

The fund’s average annual return of 5.9 percent for the last five years was the worst in the Ivy League.

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Jan Janu J Ja anu an a nu n ua arry ary ry 3 30 0—F Feb Fe e ruar uar ary 5 ar 5,, 2 201 20 0117 0

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NATO Makes It Rain Defense contractors exult as Trump tells NATO members not to rely on the U.S. “If you’re a participant, you should be a contributor” Donald Trump is right when he says America’s allies in the North Atlantic Treaty Organization aren’t paying their fair share. Just 5 of the 28 member states have devoted 2 percent of gross domestic product to defense as stipulated in NATO’s guidelines: the U.S., the U.K., Greece, Poland, and Estonia. But, to the delight of the arms industry, the Europeans may be revising their views.

Trump himself is the change-maker.

Although not famous for his policy consistency, his positions on NATO have held fairly steady—leaving European leaders wondering whether they can still rely on the American security umbrella. “Let’s not fool ourselves,” German Chancellor Angela Merkel said on Jan. 12. “There is no infinite guarantee.”

Germany and many other European nations are finally boosting military budgets. The plans have been around since before Trump, and, under NATO rules, they should’ve been carried out long ago. But they haven’t, and the shortfall added up to about $121 billion last year at 2010 prices, according to Bloomberg calculations based on NATO estimates.

Because Trump is promising to increase the already enormous U.S. military budget, the additional prospect of a European armsshopping spree is a win-win for weapons suppliers. Shares of defense contractors—Raytheon, Lockheed Martin, and Thales, among others— have hit record highs since his election.

“This is the best market for defense

in many years, across the board,” says Richard Aboulafia, an aerospace analyst with Teal Group in Fairfax, Va. NATO was established after World War II to protect Western democracies against the Soviet Union. An underlying tenet is that an attack on any alliance member is considered an attack on all. Trump has questioned that assumption. If Russia moved against one of NATO’s Baltic members, he told the New York Times in July, he’d come to their aid only after reviewing whether they have “fulfilled their obligations to us.”

Before the Trump ascendancy, NATO members had agreed in 2014 to move toward the 2 percent threshold. One-fifth of that money is supposed to buy hardware. Germany,

No severance e needed d d for this oilfield d roughneck 14 4 The Chinese buy b bling g ot the again—but no h pricey stuff 15 5

PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (1); NATO (1); *BUDGET ESTIMATES BASED ON 2010 PRICES AND EXCHANGE RATES; DATA: NORTH ATLANTIC TREATY ORGANIZATION

which spent 1.2 percent of GDP on defense last year, according to NATO figures, has announced the biggest increase in 25 years—an additional €10.6 billion ($11.4 billion) through 2020. France has approved more outlays for 2017. Nineteen of NATO’s 28 members have increased military budgets in the past 18 months, a Bank of America Merrill Lynch report shows.

Antoni Macierewicz, Poland’s defense minister, says the country plans to complete a deal this year for a missile defense system. The nation also is weighing new submarines, helicopters, r of and potentially “a large number” an. 18 fighter aircraft, he said in a Jan. 8 news conference in Warsaw.

Even as Europe confronts a strategic reality where NATO guarantees are no longer uncon-will ditional, some defense budgets w probably fall short, says Jan Techau, director of the Richard C. Holbrooke Forum at the American Academy in Berlin. “The Europeans will have to do something,” he says. “But I have my doubts that we’ll get across-the-board 2 percent spending.”

Trump’s presidency may increase the likelihood they’ll follow through.

Big and Little Spenders Defense budgets, as estimated by NATO*

Raytheon Chief Executive Officer Thomas Kennedy sees a parallel with Middle Eastern nations that stepped up spending during the Obama administration as the U.S. signaled its attention would shift elsewhere. “These countries were given a message to beef up their defensive systems,” Kennedy said at an industry conference in November. Raytheon “saw that writing on the wall” and registered “significant international growth.” The company signed a $2 $2.4 billion deal in 2014 to sell a m missile defense shield to Qatar, fo for example. Middle Eastern arm ms spending increased by abou b ut one-third during Obama’s first fi six ix years, according to the Stockh tockholm International Peace Research Institute, which monitors the weapons trade.

The chairman of BAE Systems, Europe’s biggest defense contractor, welcomes the pressure from the new U.S. president. “I personally agree with his stance on the whole business of NATO,” Roger Carr told Bloomberg TV in Davos on Jan. 17. “If you’re a participant, you should be a contributor.”

Trump’s international policy remains embryonic. His nominees for key posts have sounded less conciliatory toward Russia: Secretary of Defense James Mattis branded it

U.S. 2016*

$608b

NATO target

$337b

U.K. $60b $54b France $50b $56b Germany $45b

2 percent of nation’s GDP

$75b Italy $23b $41b Canada $18b $37b 22 other NATO members $88b $133b

a “strategic competitor” at his Senate confirmation hearing on Jan. 12 and stressed the importance of NATO. Mattis did echo Trump, though, by saying he’d encourage alliance members to spend more on defense.

Some of the extra European cash would go to local suppliers, but the U.S. has an advantage with big-ticket items such as Lockheed’s fighter jets, says Loren Thompson, chief operating officer of the Lexington Institute, a public p bli policy li y think hi k tank in Washington. pressu ““Given the p ure that Trump is exerting, it’s easy e e to imagine more will w sign g on to the F-35 program, to t the tank ker program, to the train t ner program,” says Th Thompson, who’s also

a Lockheed consultant. The ta anker program supplies aerial refu ueling planes, and trainers are aircraft i that pilots train on to fly fighter jets.

The new administration isn’t all upside for defense contractors.

Trump has called out companies such as Lockheed and Boeing for high prices. But the combination of a maverick president, insecure allies, and unresolved conflicts probably suits the industry. “Threats are rising,” Thompson says. “Although that is bad news for most people, it’s good news for arms makers.”

—Rick Clough The bottom line NATO members will increase military spending, though some members will fall short of the mandatory 2 percent of GDP.

Diplomacy

Putin Isn’t So Sure Trump’s a Pal The Russians now see the president as unpredictable “There is a sensible shift of expectations in the Kremlin”

Russia gave Donald Trump’s inauguration the kind of fawning television coverage usually reserved for Vladimir Putin. But inside the Kremlin, the initial euphoria over having a Putin admirer in the White House is fading into skepticism that any meaningful détente with the U.S. can be achieved, according to four senior officials in Moscow, who insisted on anonymity.

Controversies over alleged Putinordered hacking to help Trump get elected and a leaked dossier claiming the Kremlin has blackmail material on him have transfixed Washington, where a bill to impose even harsher sanctions on Russia is gaining bipartisan support.

The backlash appears to have forced many of Trump’s cabinet picks to be tougher on Russia in their confirmation hearings than the Kremlin had anticipated, the officials say.

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Global Economics

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The uproar has energized Putin’s U.S. critics, says Alexei Chesnakov, a former senior Kremlin staff member who continues to advise authorities.

“There is a sensible shift of expectations in the Kremlin,” Chesnakov says.

“The leadership understands clearly now that restoring ties won’t be easy.”

Trump’s own, often contradictory, statements are as worrying for Russia.

In December, Trump said the U.S. should “greatly” expand its nuclear capability; he seemed to be calling for a new arms race. Yet in an interview with European media that appeared on Jan. 15, he said both countries’ atomic arsenals should be cut “very substantially” and linked sanctions relief to a possible arms deal with Putin.

Foreign Minister Sergei Lavrov said on Jan. 23 that “we see a lot of overlapping points” between Trump’s foreign policy goals and “how President Putin sees Russia’s.” A poll conducted in November by the state-run Russian Public Opinion Research Center found that almost half of Russians surveyed anticipated better relations with the U.S. “soon” after Trump takes office.

But Prime Minister Dmitry Medvedev, who served as president during Russia’s last thaw with the U.S., warned at a Jan. 22 meeting of the ruling party that “it’s time to part with any illusions that sanctions against our country will be lifted.” He added, “There’s no reason to pin hopes on somebody else’s elections.” Lavrov said on Jan. 25 that the Kremlin knows Trump believes he’s a dealmaker, but “Putin also knows how to negotiate, and always in Russia’s interests.”

State broadcasters, carefully controlled by the Kremlin, have been adding “no need for illusions” caveats to their Trump coverage, though Russian news anchors still went out of their way to reassure viewers that tough comments by Rex Tillerson, Trump’s choice as secretary of state, and James Mattis, the new secretary of defense, were posturing to ensure Senate approval.

That’s not how Russian officials saw it, according to Valery Solovei, p a political scientist at the M Moscow State Institute of International Relations. He sees a “threatening subtext” in the hearings that suggests t administration will make the

only one attempt at reconciliation.

“The recent scandals are a nasty background for future talks,” Solovei says.

“Trump won’t try more than once.”

Andrey Kortunov, director general of the Russian International Affairs Council, a research group set up by the Kremlin, says Tillerson’s testimony showed how deeply anti-Russian sentiment runs in Washington. Tillerson, the former ExxonMobil chief who’s known Putin since 1999 and received a medal of friendship from him in 2012, called Russia a “danger” to U.S. interests. “It was like he had to sign in blood that he opposes Putin,” Kortunov says.

Both Tillerson and Mattis expressed views that clashed with some statements of Trump’s, including about NATO and Russia. Those differences, coupled with Trump’s unpredictability, worry the Kremlin, according to Dimitri Simes, president of the Center for the National Interest in Washington. “The leadership definitely preferred Trump to Clinton,” he says, “but now they’re concerned. Trump is very impulsive and takes things very personally, so a nice beginning could have a sour conclusion.” —Henry Meyer, Ilya Arkhipov, and Irina Reznik The bottom line The Russians think Trump will make only one attempt to put U.S.-Russia relations on more solid footing.

Energy

Drilling Is Back. What About the Workers?

As it recovers, the oil industry replaces many with machines For field hands, “now your main tool is a laptop”

The robot on an oil drillship in the Gulf of Mexico made it easier for Mark Rodgers to do his job stringing together heavy, dirty pipes. It could also be a reason he’s not working there today. The Iron Roughneck, made by National Oilwell Varco, automates the repetitive and dangerous task of connecting hundreds of segments of drill pipe as they’re shoved through miles of ocean water and oil-bearing rock. The machine has

also cut the need for the number of roustabouts like Rodgers from three to two, he estimates. Rodgers, who took a job repairing appliances after being dismissed from Transocean, says, “I’d love to go back offshore.”

The odds are against him. As the global oil industry begins to climb out of a collapse that took 440,000 jobs, anywhere from a third to half of those positions may never come back. A combinaU.S. employment in oil tion of more effiand gas extraction cient drilling rigs 205k and increased automation is reducing the need 185k for rig workers.

Because of its reliance on large, 165k complex equip12/2013 12/2016 ment for drilling and maintaining wells, the industry is well-positioned to benefit from automation, says Dennis Yang, chief executive officer of Udemy, a San Francisco company that trains workers from all industries whose careers were derailed by advanced machinery. “It used to be you had a toolbox full of wrenches and tubing benders,” says Donald McLain, chairman of the industrial programs department at Victoria College in Texas. “Now your main tool is a laptop.” McLain, who worked as a rig hand for 25 years, is helping retrain laid-off oil workers for more technical jobs.

During the boom, companies were too busy pumping to worry about head count, says James West, an analyst at Evercore ISI: “We got fat and bloated.”

He says the 2½-year downturn gave companies time to reconsider the mix of human labor and automated machinery in the fields. After the world’s four largest oil service companies spent $3.1 billion in severance costs in 2015 and 2016, the industry was acutely aware of its heavy dependence on manpower, says Art Soucy, president of global products and technology for Baker Hughes.

Nabors Industries, the world’s largest onshore driller, expects one day to cut the number of workers at each well site from 20 to about 5 because of more automated drilling rigs. Rigs have gotten so efficient that the U.S. oil industry needs only half as many as it did at the height of the shale boom in

A Porsche driver in Shenzhen

2014 to suck the same amount of oil out of the ground, says Angie Sedita, an analyst at UBS. The impact of technology extends far beyond the wellhead. “The biggest thing will be the systems,” says Ahmed Hashmi, head of upstream technology for BP. In layman’s terms, the systems are all the processes involved in drilling and fracking a well. That means an engineer could design an oil well at his desk. With the press of a button, an automated system would identify the equipment needed from a supplier, create a 3D model of the well, send the details to the rig, and tell the rig to do the job, Hashmi says.

“That is automation.” —David Wethe The bottom line The number of jobs lost globally in the oil downturn may never fully come back because of automation and more efficient rigs.

Consumption

The Chinese Rediscover Luxury The dampening effect of the bribery crackdown is lifting

ILLUSTRATION BY SIMON ABRANOWICZ; CHRISTOPHER ANDERSON/MAGNUM PHOTOS; DATA: BUREAU OF LABOR STATISTICS

“People still come to buy,” but they want “more affordable items”

To ring in the Chinese New Year, Cathy Zhang is opening her wallet. A whitecollar worker from eastern China’s Jiangsu province, the 33-year-old traveled to Hong Kong before the holiday.

On a recent weekday afternoon, she navigated the crowds, looking for her favorite European luxury brands.

Zhang spent HK$3,400 ($438) on a Gucci belt she plans to give her husband as a New Year’s gift. And she’s treating herself to a HK$10,500 Louis Vuitton handbag. “I give myself something special at the yearend,” she says.

As the Year of the Rooster begins on Jan. 28, the world’s luxury retailers are hoping Zhang and others are in the mood to celebrate. The slowing Chinese economy and President Xi Jinping’s anticorruption campaign depressed demand for bling in 2015-16, with the market for luxury goods contracting 5.5 percent, to $18.2 billion from 2015, according to Bain. “Last year, the market—oh,

my God,” says Alain Lam, executive director at Hong Kong-based Oriental Watch, which sells European timepieces that can command prices above HK$200,000. Net income at Oriental Watch fell HK$13.8 million in the 12 months ended in September.

Chinese gross domestic product expanded 6.8 percent in the final quarter of 2016, up from 6.7 percent in the previous quarter and the first quarterly acceleration in two years.

Retail sales rose 10.9 percent in December from a year earlier, the best monthly result in 12 months.

Chinese imports of Swiss watches are up after falling for seven consecutive months through July, rising 7.9 percent in November from a year earlier. Led by its best-selling Macan SUV, Porsche had a 12 percent sales increase in 2016. Tiffany on Jan. 17 reported “strong growth” in China. On Jan. 19, Luca Marotta, chief financial officer of Rémy Cointreau, said the outlook for the Chinese New Year was “very, very positive.” Xi hasn’t ended his anticorruption drive, but its chilling effect on spending is easing. “A rebound across all luxury categories is now in progress,” Bloomberg Intelligence analyst Deborah Aitken wrote on Jan. 9.

During the Lunar New Year holiday, millions of Chinese will travel and shop at home and overseas. Bookings for international air travel made in December for Chinese New Year rose 9.8 percent from the previous year, according to ForwardKeys, an analyst of tourism data. Mainland tourist arrivals in the gambling hub of Macau jumped 7.8 percent in December, the largest increase since February 2015. Chinese consumers “are still very confident,” says Amrita Banta, managing director of Agility Research & Strategy, a consulting

firm focusing on the affluent.

Yet they may not be prepared to spend as much. Rather than purchase expensive items as bribes for officials, Chinese are buying more for personal use, says Bruno Lannes, a Bain partner in Shanghai. “When you buy for yourself, you are a bit more cautious.

The mix is therefore more to entrylevel, lower-priced products.”

Chow Tai Fook Jewellery Group, the world’s largest jewelry chain, last year launched the first of a line of mainland shops selling lowerpriced jewelry, with average prices of 2,000 yuan ($291), about a third the prices at its flagship stores. Average prices for gem-set jewelry at the Hong Kong and Macau shops of Chow Sang Sang, a retailer based in Hong Kong, have dropped more than 14 percent since 2015, according to Bloomberg Intelligence. Instead of spending HK$200,000 for a Piaget watch in a precious metal, Oriental Watch customers can buy a stainless-steel version for HK$80,000. “People still come to buy,” Lam says, “but they are looking for more affordable items.”

The Chinese market is worth the effort, says Aidan Yao, senior economist for emerging Asia at AXA Investment Managers Asia in Hong Kong. The market “is getting out of that extraordinary period and embracing the new normal,” he says. “And the new normal is not bad. We are talking about steady, single-digit growth going forward.” —Bruce Einhorn and Daniela Wei, with Christoph Rauwald The bottom line The Chinese are spending again, with mainlanders booking 10 percent more international flights for New Year’s than last year.

Edited by Christopher Power Bloomberg.com

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Companies/ Industries

Ganjapreneurs aren’t just blowing smoke 18

China’s long road to selling cars in the U.S. 19 When doves cry: Prince’s wishes may go unfulfilled 21

January 30 — February 5, 2017

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Spread Your Wings and Fly, Penguin Germany’s Bertelsmann is poised to invest more in publishing as Pearson bows out

PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (3)

“The book market is in much better shape than people predicted five years ago” Remember books—you know, those things printed in ink on paper?

They’ve been killed by the advent of e-readers such as the Amazon Kindle, right? Nope. Sales of physical books have risen for the past three years in the U.S., and Thomas Rabe sees big profits in selling them. Publishing “is and will remain one of our strategic core businesses,” says the chief executive officer of Bertelsmann, a German conglomerate founded in 1835 as a printer of church hymns that today employs 117,000 in TV, magazines, education, and more.

Rabe is poised to boost his 53 percent stake in Penguin Random

House after partner Pearson said it plans to sell its 47 percent share. The two companies in 2012 merged their publishing assets to gain more clout with the likes of Amazon.com, Apple, and Google. Penguin Random House, the world’s No. 1 book publisher, in 2015 increased sales to €3.7 billion ($4 billion) from €2.7 billion in 2013.

That’s thanks to its foothold in fastgrowing markets such as India and blockbusters like Paula Hawkins’s thriller The Girl on the Train and E L James’s Fifty Shades series. Profits at the publisher in 2015 jumped by more than half from the year before, to €557 million, and Pearson’s stake

could fetch $1.5 billion, Liberum Capital estimates.

Pearson announced the sale on Jan. 18 as it acknowledged major challenges in its biggest business, U.S. higher education, after months of optimistic forecasts from CEO John Fallon.

College enrollments and textbook sales have proved weaker than expected, spurring him to seek ways to shore up the balance sheet. The bad news triggered a sell-off at Pearson—its shares lost a quarter of their value, their worst day ever—and put Fallon’s job in jeopardy. Offloading Penguin Random House would be the company’s third A-list divestment since 2015, when it

Companies/Industries better shape than people predicted five years ago,” says Liberum Capital analyst Ian Whittaker.

Although Penguin Random House’s audiobook titles and 115,000 e-books help boost its value, they’re less important than many in the industry expected. Global sales of e-books will account for less than a quarter of industry turnover in 2020, even as revenue from physical books remains largely unchanged, hovering at about $46 billion for the next three years, according to consulting firm PwC. In the U.S., though, the shift away from physical books is reversing as e-book prices rise. U.S. e-book sales fell 20 percent in the first half of last year, while paperbacks and hardcovers jumped 4.8 percent, to $2 billion, according to the Association of American Publishers.

Seema Shah, an analyst at Bloomberg Intelligence, predicts those trends will continue as consumers again seek the ease and comfort of simply opening up a title and reading. Moreover, some categories—such as children’s books and coffee table books—can’t easily be digitized, she says. “E-books today are just another format, like paperbacks,” Shah says.

Sarah Simon, an analyst at Berenberg Bank, says Bertelsmann should proceed with caution. The company already controls Penguin Random House, so spending more on a largely analog asset runs counter to the company’s goal of expanding its digital businesses, she says. Simon also says Bertelsmann’s $6.8 billion in debt may force Rabe to seek a partner, which could be “quite a challenge.”

Rabe says he’s ready to take the plunge, provided the price is “fair.”

Penguin Random House’s combination went smoothly and created significant synergies, he says, and investing would

E-Books Lose Their Appeal

Who’s Reading Print?

Share of U.S. adults who read a print book last year

Yearly Y Yea rly change in U.S. sales 1120%

College graduates 80% 8

79%

18- to 29-year-olds

72%

Women 40% 4

E-bo

ok

Suburban 0% 0

Print 2011

-40% 2015

70%

Urban

69% 64%

Men

61%

65 and over

61%

Rural

61%

Less than high school education 38%

strengthen Bertelsmann’s foothold in the U.S., its second-largest market.

“We have been writing an entrepreneurial and creative success story since 2012,” Rabe says. “And we will continue to write it.” —Stefan Nicola, with Rebecca Penty and John Ainger The bottom line After years of decline, book sales are bouncing back, spurring Germany’s Bertelsmann to double down on the business.

Small Biz

Peddling Weed Like It’s Coca-Cola A new breed of pot seller takes a page from mainstream marketing “It’s the new cocktail; it’s the new ladies’ night out”

Visit a dispensary in one of the 28 states that legally sell marijuana, and you’re likely to find products with street-smart monikers such as God’s Green Crack, Super Lemon Haze, or Skywalker.

That’s all about to change as a new breed of ganjapreneurs swoop into the fledgling industry. In a classic consumer products move, they’re getting rid of the stoner slang and replacing it with supermarket-friendly names that purport to help customers live better.

Their message: Weed is no longer just for getting high. It’s to help you through your stress, to ease you into sleep, and to get you in the mood for love. In other words, these marketers want to transform the image of marijuana so that it competes with scores of products already in liquor stores, supermarkets, and pharmacies.

“I think of our competition not as other edibles,” says Peter Barsoom, a former Merrill Lynch and Morgan Stanley manager who’s now chief executive officer of 1906, a company that makes cannabis-infused chocolates.

“It’s that cup of coffee in the morning; it’s the pill of Ambien to help you sleep; it’s that cup of chamomile tea.”

Legal marijuana sales in the U.S. are set to increase from $5.9 billion in 2016 to $18.1 billion by 2021, according to Arcview Market Research, and a small group of companies are racing to give legitimacy to their products by

FROM TOP: COURTESY BLOOM FARMS; COURTESY 1906; COURTESY LORD JONES; COURTESY HMBLDT; DATA: NIELSEN BOOKSCAN, PEW RESEARCH

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sold the Financial Times and its stake in the Economist Group. Fallon failed to build “a working model that is suitable for current times,” says Stephen Williams, an analyst at fund manager Brewin Dolphin.

So far, Bertelsmann, controlled by Germany’s billionaire Mohn family, hasn’t laid out any specifics on what a Pearson buyout could look like. “We will do everything to guide this business to further growth,” Rabe says. A purchase would follow his pattern of increasing his commitment to what he sees as key industries. In 2014 he bought the 25 percent of German magazine publisher Gruner + Jahr that Bertelsmann didn’t own, ending a 45-year-old partnership with the Jahr family. A year earlier, Bertelsmann took over full ownership of music publisher BMG Rights Management from private equity house KKR. Doubling down on books would represent a big bet on an industry that just a few years back was being written off as an analog dinosaur stumbling through the digital jungle. If you look at data since the turn of the century, with the rise of digital titles, audio books, and self-publishing (which cuts out the likes of Penguin Random House), there’s cause for concern.

Publishers’ revenue has been largely unchanged this decade, and the information from book categories that were once big moneymakers—think dictionaries, encyclopedias, and atlases—can now be accessed online for free. Yet books still produce healthy margins for giants that benefit from economies of scale as they churn out hits from best-selling authors. Penguin Random House, which owns 250 publishers on five continents, released 5 of the 10 best-selling print books in the U.S. last year. “The book market is in much

Companies/Industries High-End Highs Bloom Farms FullFlower hand roll (Sativa) Promoted as headclearing and creatively stimulating, it’s available in extremely limited quantities “for the true cannabis connoisseur.”

1906 THC-enhanced chocolates The edibles come in different varieties to suit your mood, including Go (an energy booster) and Midnight (a sleep aid).

Whoopi & Maya cannabis soak Entertainer Whoopi Goldberg’s venture says that combining Epsom salts with cannabis and therapeutic-grade essential oils makes for a perfect PMSrelieving soak.

Lord Jones 5:1 Pain & Wellness Formula body lotion The product is pitched as an extra-strength formula to ease sore muscles, joint pain, and skin conditions.

Altai dulce de leche e bon bons These artisanal edibles were nspired supposedly inspired very of by the discovery a princess’s mummy n in the Siberian permafrost, alongside annabis to a vessel of cannabis ease her pain.

Hmbldt Bliss Cannabis product maker Hmbldt says that its dose pen delivers a precise amount of cannabinoids and terpenes, “working with your endocannabinoid system to help you feel just the right amount of good.”

adopting product segmentation techniques to broaden cannabis’s consumer appeal.

The first step is lowering potency and classifying weed according to specific mood-enhancing qualities. Then it gets down to good-old fashioned brand segmentation. For example, 1906 (named for the year U.S. statutes first cracked down on marijuana) is introducing products with names such as Go (an energy booster), Pause (for kicking back), Midnight (a sleep aid), Present (to focus), and High Love (for arousal).

Whether those products deliver such altered states is almost beside the point. Barsoom’s reasoning is that a new generation of consumers will flock to stylish cannabis products to deal with life’s assorted ailments and annoyances. He’s not alone. A host of entrepreneurs and pot businesses also offers mood-tailored products.

Lowering the amount of drug per hit, bite, or swallow is paramount for appealing to new consumers, according to Michael Ray, founder of Bloom Farms, which makes prefilled vape pens and prerolled joints. “I think micro-dosing is the way of the future,” says Ray, a former Wall Street trader.

Matt Seashols, for one, was frustrated that he couldn’t go to a dispensary in Northern California and get something that would give him a specific feeling without getting so high it would knock him out of commission. So he co-founded Hmbldt, a company that makes prefilled vape pens aimed at specific “need state solutions”: bliss, sleep, calm, relief, focus, energy, and control.

Hmbldt also claims to make highs easier to control by designing its pen to vibrate after the user inhales 2.25 milligrams of oil—m oil—most rival pens don’t measure how much is smoked. “I wanted to be able to take care of some of these ne core needs that I had from a quality-of-li perspective through cannaity-of-life Se bis,” Seashols says. “I wanted it to help m sleep better, I wanted it to decrease me i inflammation, I wanted it to help me relax, as opposed to some ulterior methods, and I couldn’t find that.”

Ray’s father bought a property called Bloom Farms in Northern California in the 1970s and hosted a hippie commune there. Now Ray is using the farm’s name as the masthead for a cannabis business that makes products that would fit in at a Whole Foods or a suburban boutique.

The packaging for its Highlighter, a portable oil vapor pen, doesn’t scream stoner. It’s made of recycled paper embossed with calligraphy and an artfully designed marijuana leaf. The Bloom Farms’ oils that go inside the device come with four designations: Daytime, Nighttime, Anytime, and Single Origin varieties that come from one farm. “It’s the new cocktail; it’s the new ladies’ night out,” Ray says.

Such talk is part of a necessary shift in brand positioning, 1906’s Barsoom says, to make cannabis products more like wine and less like Everclear, the 190-proof grain alcohol brand that’s been a staple of frat party punch bowls for decades. “For those who have kids, it gives them a chance after they put the kids to bed to take the chocolate and know they’re not going to be blasted for the next three hours,” Barsoom says. “Most of us don’t have six hours to have a date with an edible.” —Jennifer Kaplan The bottom line U.S. entrepreneurs are applying mainstream marketing to legal marijuana products, whose annual sales may hit $18 billion by 2021.

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Autos

Is China’s Trumpchi Coming to America?

Guangzhou Auto is angling to sell its mainland-made cars in the U.S. “Chinese brands are fast closing the quality gap”

American automakers sold 2.96 million vehicles in China last year. But no mainland car brand has yet to crack the U.S. market. It hasn’t been for lack of trying.

Zhejiang Geely Holding Group and BYD, two large Chinese carmakers, had set—and failed to achieve—timetables to begin U.S. sales as far back as a decade ago. They’d underestimated the difficulties of meeting American regulatory standards and consumer expectations. Now Guangzhou Automobile Group believes that the third time could spell success.

GAC, as the automaker is known, displayed its Trumpchi brand on the main show floor of the North American International Auto Show in Detroit

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in January, flanked on three sides by Toyota, Lexus, and Volvo Cars, the only other Chinese-controlled brand represented this year at the biggest car exposition in North America.

State-owned GAC jointly produces cars with Toyota, Honda, and Fiat Chrysler Automobiles (FCA) in China.

In 2010 it started Trumpchi—a phonetic rendering of the brand’s Chinese name that’s also a play in English on “China’s trump card”—as part of a broader push by the country to promote indigenous brands. “If we make it work in the U.S., it’ll help us with our international expansion and greatly enhance our brand image in all markets,” says GAC President Feng Xingya.

He says he recognizes how tough it is for a new overseas brand to make it in the U.S. But his job could be made even more difficult because of the wild card of U.S.-China relations, with President Trump’s positions on trade, currency manipulation, and the One China policy already raising tensions between the world’s two biggest economies. (Trumpchi’s name has no relation to the American president, and GAC has no plans at present to change it, according to Feng.)

GAC knows first-hand how international tensions can pinch its operations. When bilateral ties between China and Japan nose-dived in 2012, GAC suffered a 74 percent plunge in profit that year as Chinese consumers boycotted Japanese brands, including those that GAC manufactures on the mainland.

GAC’s plan is to export its Chinamade cars to the U.S. until sales reach a level that would justify starting production in the U.S., which Feng says

3m 0 U.S. cars sold in China, 2016

Chinese-branded cars sold in the U.S., 2016*

automakers typically set at 200,000 vehicles a year. “I hope the new U.S. administration would take a balanced policy that would not only encourage local production but also be tolerant to imports” in the early stages when volumes are small, he says. “When water flows, a canal eventually forms,” Feng adds, using a Chinese idiom that describes how something will naturally happen when the conditions are ripe.

To achieve its goal of hitting U.S. showrooms as early as 2018, GAC will open a research and development center in America this year to make the Trumpchi brand compliant with regulations. Even then, the company won’t actually begin sales until it has a “solid understanding of consumer preferences, regulations, laws, pretty much everything, and be fully prepared accordingly,” Feng says.

The automaker has been laying the groundwork for its U.S. entry for several years, featuring its GS5 sedan in a Transformers movie in 2014 and airing commercials for its GS7 SUV on giant electronic billboards in New York’s Times Square in November to raise consumer awareness.

While the Trumpchi didn’t exactly wow the automotive press at the Detroit auto show, it at least won concessions that a Chinese carmaker entering the U.S. market, as Car and Driver put it, “isn’t a question of if, but when.” The motoring magazine went on to opine that the GS7 SUV , while far from leading the class in material quality, fit, and finish, wasn’t a “horror show” either.

Motor Trend advised its readers not to “necessarily expect the products to be laughable when they arrive— at least not for long.” GAC appears to have achieved the quality level “Korea managed a couple of vehicle generations ago,” it said.

“Chinese brands are fast closing the quality gap with Western automakers, but they will need to meet much tougher U.S. emissions and safety standards,” says Michael Dunne, the author of American Wheels, Chinese Roads who’s working on a book about Chinese automakers coming to America.

“Chinese carmakers will have to earn American consumers’ trust, just as the Koreans and Japanese before them.

This could take 10 years.”

Chinese carmakers—at least those

with international ambitions—have come a long way from the days when they were synonymous with blatant rip-offs and poor quality. Car owners had an average of 116 more complaints per 100 cars for Chinese brands than foreign nameplates in a J.D. Power quality survey in 2009. By last year, that gap had narrowed to 14, with Trumpchi topping the list of Chinese nameplates for quality.

GAC exports the made-in-China Trumpchi to Kuwait, the United Arab Emirates, and Chile. At home, the sixyear-old brand has sold 800,000 units.

The GS4 SUV, which starts at 99,800 yuan ($14,600), is the secondbest-selling sport utility vehicle in China after Great Wall Motor’s Haval H6.

To build a U.S. distribution network to sell and service its cars, GAC will have to convince American dealership owners that it can become a lasting and profitable venture—no easy task.

“How much would dealers be willing to invest in an unknown brand from China?” asks Frank Ursomarso Sr., whose Union Park Automotive Group sells Honda, BMW, Volvo, Buick, and Jaguar cars in Wilmington, Del. “Not much money, I believe.” He says with a new brand dealers get no revenue from servicing cars or selling used ones. “I would rather sell more vehicles for brands I have than be a pioneer for a new Chinese brand,” he says.

Feng says GAC could seek help from FCA, with which it manufactures Jeeps in China, in building a network of dealers in the U.S. He declined to go into specifics. An FCA spokesperson said there is nothing to announce at this time.

To persuade American consumers to take a chance on an unfamiliar brand, GAC may have to borrow from Hyundai’s playbook. South Korea’s largest automaker began offering a 10-year warranty on its vehicles in 1998 in part to overcome a reputation for poor quality. “Hyundai only gained real, sustained traction after it offered a 100,00-miles, 10-year warranty,” says author Dunne, a Hong Kong-based former GM executive who now runs his own advisory firm, Dunne Automotive.

“Chinese companies won’t find any shortcuts here.”

Back in Detroit, in the main hall of Cobo Center where the auto show was under way, GAC’s display found a

FROM LEFT: COURTESY NORTH AMERICAN INTERNATIONAL AUTO SHOW; PHOTO ILLUSTRATION BY 731; PHOTO: GETTY IMAGES; DATA: CHINA ASSOCIATION OF AUTOMOBILE MANUFACTURERS, *EXCLUDING SOME CHINESE-MADE VOLVO AND GM VEHICLES

Companies/Industries

Companies/Industries fan in security employee Donna Miles Baldwin, who was enjoying the perk of seeing the season’s new cars before the paying public.

“I love it. I would buy it if it is good quality, easy to maintain, and good for my wallet,” Baldwin said of the Trumpchi brand while checking out its EnSpirit plug-in hybrid concept vehicle. She’s planning to buy a third car sometime in the next two years to add to her family’s Dodge Journey and Volvo S60. “I have no problem buying Chinese brand cars as long as they are good,” she said. GAC’s Feng likes the sound of that. —Bloomberg News The bottom line American carmakers have become big players in China. Guangzhou Automobile Group wants to do that in the U.S.

Entertainment

After Prince’s Death, His Subjects Get to Rule

The lack of a will means his executors can’t follow his wishes The artist’s “intent is irrelevant because he never wrote it down”

In a career spanning four decades, Prince broke with his record label, changed his name, and yanked his songs off popular streaming services to prove a point: No one could tell him what to do with his music, even if that meant leaving money on the table.

The impassioned insistence on controlling his catalog inspired fellow artists, but it limited Prince’s exposure and hurt the value of his music. Now, because he died without leaving a will, the pop icon’s strictures are taking a back seat. Prince’s estate, represented by music industry veteran Charles Koppelman and entertainment lawyer L. Londell McMillan, has a court mandate to make what it can from a

catalog of about 1,000 songs, including Purple Rain and When Doves Cry, while interest in him remains high.

The estate could be worth $50 million to $200 million, depending on how relevant the music remains over the years, estimates Laura Zwicker, who oversees estate planning at law firm Greenberg Glusker Fields Claman & Machtinger in Los Angeles. That’s because for every Michael Jackson, there are 50 Laura Nyros whose catalog value fades over time.

Koppelman and McMillan have selected some of the music industry’s most powerful insiders, including Vivendi’s Universal Music Group, as stewards of the Purple One’s legacy.

That means his music, absent from most major streaming services because of his disdain for the meager sums they paid, is likely to be widely available in time for the Grammy Awards telecast on Feb. 12, which is expected to feature an homage to the late entertainer.

Prince’s name and likeness will soon be showing up on merchandise. “We are putting the estate and the entertainment assets in the hands of the best companies and the best people to create the biggest value,” says Koppelman. “Each new deal is state of the art with the best companies, and the best terms and conditions.”

Koppelman, a towering music industry figure who led EMI and has worked with legends including Billy Joel and Carole King, is under pressure to act quickly for a variety of legal reasons, including a looming deadline for the estate to value the assets and begin paying its tax liability on them—typically due nine months after death. In Prince’s case, that would be late January.

Because he left no will, the estate and its administrators have a legal responsibility to maximize the return—regardless of what the artist may have wanted.

“His intent is irrelevant because he never wrote it down,” Zwicker says.

“That’s why it’s so imperative to get people to write their intent down. Even if they knew his intent and wanted to follow it, they can’t.”

It’s better to get deals done now than wait, Koppelman says. The estate administration won’t last forever, and at some point the entertainer’s heirs will take over the assets. It isn’t clear who those will be. Several prospective ones have stepped forward, including

Prince’s sister, Tyka Nelson, a halfbrother, and four stepsiblings, according to Billboard magazine.

So far, Prince’s estate has chosen companies to oversee his catalog of songs, public performance rights for his music, and merchandise, and it’s close to selecting a company to represent his master recordings.

It’s even offering tours of the artist’s estate at Paisley Park in Minnesota for $38.50. Those deals will remain valid regardless of who ultimately ends up in charge of the assets, according to Zwicker.

Prince reclaimed most of his music to ensure he was the biggest beneficiary of his work. In the 1990s he broke with Warner Jump in artists’ Bros. Records U.S. album sales because he felt in year of death he lacked artistic control. In 2007 he Notorious B.I.G. 2,613% considered suing Whitney Houston 2,151% YouTube for not 734% removing unauDavid Bowie 694% thorized postings Prince Michael Jackson 597% of his songs, and in 2015 he yanked his DATA: NIELSEN music off Spotify.

Yet that approach meant there were no deals in place to take advantage of his songs or personal brand when interest spiked after he died last April at age 57. “The revenue was never maximized, so the asset wasn’t maximized,” Koppelman says. The deals being struck will add value to the estate in the short and the long term, he says.

While the latest dealmaking may seem like a mad dash for cash, Koppelman says he and McMillan are trying to balance Prince’s wishes against their legal obligation. New licensees, including Universal, the world’s largest music company, and Irving Azoff ’s Global Music Rights, have pledged in writing not to abuse their power over a musician’s legacy.

That means, for example, we’re unlikely to see any Prince bobbleheads anytime soon. Says Koppelman: “The main entertainment assets of the estate are in better hands today than they were before.” —Lucas Shaw The bottom line Prince, who held the rights to about 1,000 songs at his death, didn’t maximize the value of those assets. But his estate will try.

Edited by James E. Ellis Bloomberg.com

21

Politics/ Policy January 30 — February 5, 2017

Repeal and The GOP grapples with how to craft a better version of Obamacare “Now Republicans own the difficulty of improving the health sector”

22

After spending much of the past seven years trying to repeal Obamacare, Republicans in Congress finally have the power to do it. And they got off to a quick start. A week before Donald Trump was sworn in as president, the House and Senate voted to begin the process of repealing the law.

Yet as Republicans rush to roll back President Obama’s signature healthcare achievement, they’re still struggling to come up with something to replace it. At the heart of the problem is figuring out how to undo the intricate framework of mandates and taxes that form the basis of the Affordable Care Act. If you require insurance companies to cover someone, regardless of preexisting conditions, premiums would skyrocket. To keep premiums at reasonable levels, you have to insist that everyone buy insurance—even healthy people who think they don’t need it. To make sure lowincome people can pay the premiums, you have to offer them subsidies.

To fund it all without increasing the budget deficit, you need taxes.

Removing any one piece of the puzzle can lead the whole thing to collapse.

This is the conundrum congressional Republicans face as they gather in Philadelphia on Jan. 25 for a threeday strategy session, where the prime focus will be devising a replacement plan. Even Republican veterans of the Obamacare fight admit the GOP hasn’t been able to solve the riddle. “We’ve struggled to try to coalesce around a replace plan, and it was always a

challenge to come up with the funds needed,” says Eric Cantor, the former Republican House majority leader who led the fight against the ACA during much of the Obama presidency and lost his congressional seat to a Tea Party challenger in 2014. “If you repeal the revenue measures, what do you do? Republicans don’t like to raise taxes. If that’s the case, where does the money come from?”

President Trump plans to join lawmakers in Philly. While his election sealed their ability to dismantle Obamacare, in many ways he’s made Republicans’ job harder by promising to replace it with something that’s cheaper and provides “insurance for everybody.” The president has also vowed to keep one of the most costly pieces of Obamacare: the requirement that insurers cover people with preexisting medical conditions.

On his first day in office, Trump signed an executive order directing federal agencies to do everything they can to diminish the financial burden of the ACA, including waiving or delaying taxes on health insurers, medical devices, and prescription drugs. Yet those taxes are a key source of revenue for Obamacare. If they are eliminated in any repeal effort, Republicans

Trump has boxed in Congress with pledges of a cheaper plan that covers everyone

would have to find the money from somewhere else if they don’t want to increase the budget deficit. That could put them in a position of having to raise taxes, which would violate a promise many Republicans made when they signed the “no new taxes” pledge promoted by Grover Norquist’s Americans for Tax Reform.

Signs of GOP disunity have already appeared. Early on, some more conservative party members wanted to repeal the law right away and figure out how to replace it sometime later.

More moderate Senate Republicans concluded that rushing a repeal bill through might damage the insurance market if a replacement was uncertain. A Congressional Budget Office report suggests that repealing the ACA without an immediate replacement plan would lead to 18 million people losing their insurance within one year.

To avoid a Democratic filibuster in the Senate, Republicans decided to use the budget reconciliation process as the mode to repeal the ACA. Yet they can’t repeal the whole thing through reconciliation and will almost certainly need Democrats to help replace the law.

Democrats are in no rush to help.

House Minority Leader Nancy Pelosi is reminding her members that a strategy of unconditional opposition helped them bury President George W. Bush’s attempt to privatize Social Security in 2005. Democrats are sponsoring the kinds of rallies and town halls they held then, reminding voters of the benefits of the ACA and railing

How redoing Nafta could unravel the U.S. auto industry 25

against the Republican effort to dismantle it. “Democrats are thrilled to have the ACA off their backs, and now Republicans own the difficulty of improving the health sector,” says Doug Holtz-Eakin, an economist and former head of the CBO. Of the several Republican replacement plans floating around, GOP leaders seem likely to build on ideas from House Speaker Paul Ryan and Georgia Representative Tom Price, Trump’s pick to lead the U.S. Department of Health and Human Services (HHS). In 2015, Price introduced a health-care bill that included tax credits to help people buy insurance on the private market, expanded health savings accounts, and federal funds for states to create high-risk purchasing pools designed to cover the sickest people. It would also eliminate Obamacare’s Medicaid expansion.

Together those provisions would reduce the number of people who get insurance and could lead to significantly higher deductibles. At his Senate confirmation hearing on Jan. 24, Price refused to say whether people would lose coverage under his plan.

Republican Senators Susan Collins of Maine and Bill Cassidy of Louisiana have a replacement plan that allows states to decide whether to keep the ACA or pursue different approaches funded by the ACA’s taxes. This has the backing of a handful of prominent Republicans including Lindsey Graham of South Carolina and was designed to attract Democrats, but Senate Minority Leader Chuck Schumer has already rejected it as “an empty facade that would create chaos.”

This is all made more difficult by the Republicans’ self-imposed deadline. Now that Congress has begun the push to undo the ACA via the budget process, key committees are aiming to propose repeal legislation

by Jan. 27. Lamar Alexander, the head of an influential Senate health panel, wants Congress to have a plan to “repeal and replace” Obamacare by March. “The Republicans have dined out on that phrase for three elections in a row,” Mike Leavitt, former HHS secretary under President Bush, told Bloomberg TV on Jan. 23. “They have to deliver.” —Zachary Tracer, Anna Edney, and Laura Litvan The bottom line Republicans are trying to introduce ACA repeal bills by Jan. 27 but are struggling to come up with a replacement.

Climate Change

The Incredible Shrinking State Trump wants to downplay global warming. Louisiana won’t let him “We’re not just giving up because they say we have to”

On a recent morning in Baton Rouge, a thousand miles from where Senate Democrats were jousting with Donald Trump’s nominee to run the U.S. Environmental Protection Agency about whether humans are warming the planet, the future of U.S. climate policy was being crafted in a small room in the east wing of the Louisiana

Capitol. The state’s 7,700-mile shoreline is disappearing at the fastest rate in the country. Officials had gathered to consider a method of deciding which communities to save—and which to abandon to the Gulf of Mexico.

Bren Haase, chief of planning for the Coastal Protection and Restoration Authority (CPRA), was presenting his team’s updated Coastal Master Plan.

Five years in the making and comprising 6,000 pages of text and appendices, the document details $50 billion in investments over five decades in ridges, barrier islands, and marsh creation. Tucked into the plan was a number whose significance surpasses all others: 14 feet, the height beyond which Haase’s agency has concluded homes couldn’t feasibly be elevated.

In areas where a so-called 100-yearflood is expected to produce between 3 ft. and 14 ft. of water, the plan recommends paying for homes to be raised and communities preserved. In places where flood depths are expected to exceed that height, residents would be offered money to leave. “We’re trying to make the best decisions for the most people,” said Haase, adding that Louisiana’s strategy could become a model for other states. “The plan is really a framework to make those tough decisions.”

As Trump’s administration prepares to unravel federal policies aimed at reducing carbon emissions, state and local governments are trying increasingly aggressive steps to cope with the consequences of those emissions. In New Jersey, a state program offers residents in flood zones the pre-Hurricane Sandy value of their homes, turning the land into a buffer against the

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next storm. In Alaska, entire coastal towns are petitioning the federal government for money to move inland.

But nowhere is the rush to adapt to climate change more urgent than in Louisiana. Levees built in the aftermath of the Great Mississippi Flood of 1927 reduced inundations but also the deposit of sediment that had offset the gradual sinking of the marshlands—a process that accelerated with the expansion of the area’s oil and gas industry. Meanwhile, canals built to service the oil and gas wells let salt water penetrate deeper into the marshes, killing vegetation and speeding erosion. Since 1932, the state has lost 1,800 square miles of land, roughly equivalent to 80 Manhattans. On top of all that, Louisiana must contend with sea-level rise. If it does nothing, the state is expected to lose as much as 4,000 additional square miles of land in the next half-century. Its residents have no choice but to retreat from the coast; the question officials are trying to answer is where that retreat can be postponed and for how long.

The federal government announced last year that it would relocate the residents of Isle de Jean Charles, a town of some 25 families that’s lost 98 percent of its land, at a cost of $48 million— the first such project to be funded by Washington. If the plan Haase presented in Baton Rouge takes effect, Isle de Jean Charles will become the precursor to a much larger effort.

going higher just costs more.)

“My early, early ancestors were One of the people who stayed in kicked out of France, the British Empire after Katrina is Richie Blink, kicked us out of Canada back in the who serves as Plaquemines community 1750s, and now Mother Nature is outreach coordinator for the Restore threatening to kick our people out the Mississippi Delta Coalition, a of south Louisiana,” says Reggie grouping of conservation and environDupre, a former state lawmaker who mental groups. He says area resigrew up near Isle de Jean Charles, dents survive by hunting and fishing. adding, “I’m trying to buy two or “They’re not going to do well in a three generations.” Dupre helped random suburb somewhere.” Still, create the CPRA after Hurricane like many interviewed, Blink broadly Katrina and runs the local agency agreed with what the coastal authority that oversees levees. is trying to do. “You can’t fight nature, Elsewhere in the state the end could and we shouldn’t continue to invest in come sooner. Near the top of the list areas that are not savable,” he says. is Plaquemines Parish. The towns that Others are defiant. Darilyn Demolledot the ever-narrowing strip of land Turner, a member of the parish school have fewer people than they used board, says her constituents got by to. In the 2000 census, Empire had without government help after Katrina, 2,211 residents. Then Katrina hit; by and they can do it again. “Resettlement 2010, census takers recorded a popand relocation, it’s not an option,” she ulation of only 993. Many homes are says. “We’re not just giving up because trailers perched on cinder blocks. they say that we have to.”

If Haase’s 14-ft. threshold takes Louisiana hopes to fund the Coastal effect, Empire could get a lot smaller.

Master Plan’s $50 billion cost partly Davie Shoring, a Louisiana company with funds from BP’s settlement folthat elevates homes throughout the lowing the 2010 Deepwater Horizon oil state, recently raised a home in Empire spill. But that’s expected to cover less 24 ft. off the ground—because the than 20 percent of the tab; some of the authorities said that was the height rest would come from the state’s cut of required to protect against floods. oil and gas revenue (“There’s nothing as well as grant particular about Demolle-Turner funding. That 14 feet,” says means much of the Tom Haralson, project will hinge the company’s on Congress. director of sales The state’s best and marketing—

DERICK HINGLE/BLOOMBERG (2); ILLUSTRATION BY 731

A home in Plaquemines Parish, La., that’s been elevated to protect it from floods

Politics/Policy hope for getting Capitol Hill to pony up may be Republican Representative Garret Graves, whose district extends to the coast. Graves is uniquely qualified to explain to his colleagues what Haase’s agency does, because he served as its chairman until 2014. He says winning GOP support for climate adaptation might not be as hard as it sounds. What matters is how you ask the question. “There’s a lot of taint or stink that goes along with, ‘Hey, we need to make investments to adapt to climate change,’ ” he says. “Within the Republican Party especially, as soon as you utter those words, there’s probably a bias.”

So instead, Graves has been trying to emphasize that preparing for stronger storms and sea-level rise is fiscally prudent. According to the coastal authority, its plan would prevent $150 billion worth of damage over the next 50 years. “Many members of Congress believe we can’t afford to come in and make these investments in adaptation in these coastal areas,” Graves says. “I would argue that we can’t afford not to.”

—Christopher Flavelle The bottom line Louisiana has drawn up a $50 billion plan to cope with climate change. The challenge will be getting Washington to help.

Trade

Trump Threatens to Undo Nafta’s Auto Alley The trade agreement has been particularly good for carmakers The U.S. has “to play whack-amole with every low-cost country”

In his first week in office, President Trump made good on his campaign promise to overhaul U.S. trade policy.

On Jan. 23 he signed a memorandum to pull out of the Trans-Pacific Partnership and made clear his desire to renegotiate the North American Free Trade Agreement with Canada and Mexico.

The next day Trump summoned executives from the Big Three U.S. automakers, Ford, Fiat Chrysler, and General Motors, to the White House.

He set the tone with a tweet saying he

wants “new plants to be built here for cars sold here.” It’s impossible to know what benefits may have been lost with TPP, which died before it ever came into force. What is certain, however, is that Nafta has benefited the auto industry in North America, and unraveling it may cut more jobs than it brings back.

Under Nafta’s common market, a supply chain of automotive assembly lines and parts makers has developed over the past 20 years, stretching some 2,500 miles, from Toronto through Detroit and the U.S. Midwest and south to the Mexican border states.

This auto alley employs more than 1.5 million people; and though it encompasses three countries, it functions as one integrated production region, says Thomas Klier, an economist at the Federal Reserve Bank of Chicago.

There’s been so much investment in Mexico, intertwining both assembly lines and parts suppliers with U.S. and Canadian operations, that bringing final assembly back to the U.S. would be like taking eggs out of an omelet. A new car can contain upwards of 10,000 parts, says Klier, many of which move back and forth across borders as they’re combined into dashboards or transmissions, before being installed as a car rolls off the line. Labor-intensive parts such as a wiring harness or seats can be made in lower-cost Mexico, while more complex parts are made in the U.S. As carmakers have standardized their operations, using the same chassis for multiple models, it’s become easier to shift production. If Trump levies a big tax on Mexican-made cars, it’s not completely certain that assembly and parts production will return to Michigan.

Carmakers may instead shift production to a cheaper offshore site. “Then you have to play whack-a-mole with every low-cost country,” says Bernard Swiecki, senior analyst with the Center for Automotive Research in Michigan.

If that happens, the U.S. could lose about 31,000 jobs, according to CAR. Here’s why: About 40 percent of the parts in all Mexican-made products come from U.S. plants. The share is even more pronounced for the U.S. carmakers. GM gets more than 70 percent of its parts from the U.S. for its Mexican factories, says Alan Batey, the

Is That Car Good for America?

Percentage of vehicle’s value contributing to the overall well-being of the U.S. economy Ford F-150

85%

Honda Accord

81%

Toyota Camry

79%

Toyota Corolla

67%

Chevrolet Silverado

66%

Ford Escape

66%

Nissan Altima

62%

Dodge Ram 1500 Ford Fusion Toyota Rav4

60% 49% 47% DATA: 2016 KOGOD MADE IN AMERICA AUTO INDEX

company’s North America president.

Start building those cars in low-cost Asian plants to avoid tariffs, and the parts would likely follow, Swiecki says.

Crucially, it’s not only GM, Ford, and Fiat Chrysler that make cars in Mexico for the U.S. market. Volkswagen, Nissan, Honda, and Toyota do, too. If they all move production to their home countries, they’d have less reason to buy U.S. parts.

In a 2016 working paper, Thierry Mayer, an economist at SciencesPo in Paris, and Keith Head of the Sauder School of Business at the University of British Columbia looked at two policy scenarios: 35 percent tariffs and countertariffs at the U.S.Mexico border (as Trump threatened during the campaign) and the complete dissolution of Nafta. Using data on auto-part sourcing by brand and model, they estimate that Mexico’s share of global auto production would plummet under both scenarios.

As a negotiating threat, the tariff is effective. It’s less effective as policy.

Mayer and Head estimate that the U.S. would win only a small share of global production with a 35 percent tariff and lose a small share with the end of Nafta.

Winners in both cases: Germany, South Korea, and particularly Japan, which would simply bring their Mexican production home. —Brendan Greeley, David Welch, and Austin Weinstein The bottom line Renegotiating Nafta by putting tariffs on Mexican imports could result in the auto industry losing 31,000 U.S. jobs.

Edited by Matthew Philips and Cristina Lindblad Bloomberg.com

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Apple’s high-stakes showdown with Qualcomm 28

IBM pledges 25,000 U.S. jobs as it sends more posts abroad 30

In Japan, used clothing becomes fuel 29

Innovation: Like Wi-Fi—but without the radio waves 31

January 30 — February 5, 2017

Snapchat

ep It e K n’t Ca

Private

The company’s culture lt off secrecy iis att odds dd with ith it its IPO IP plans

ILLUSTRATION BY ORI TOOR

“Investors learned their lesson with Twitter” Many Snapchat employees first learned about the company’s video-shooting Spectacles from the news. In September a report on a leaked commercial led staffers to ask their bosses whether the smart glasses were real. After the inquiries, according to people familiar with the matter, an e-mail went out: You may have seen reports about a product that we may or may not be working on.

Don’t talk about it.

Hours later, Chief Executive Officer Evan Spiegel publicly announced the glasses were part of a strategy to redefine five-year-old Snapchat as a camera company called Snap. Again, this was news to employees. And that’s the way things have continued to work at Snap, where workers are unlikely to know what other teams are doing. Even by Silicon Valley standards, the company’s culture of ultrasecrecy stands out.

“Certain people should get certain pieces of information, others shouldn’t—it’s like the military,” says Ethan Kurzweil, a partner at Bessemer Venture Partners.

This is largely because of Spiegel, whose advocacy for increased privacy online has informed much of the development of his disappearing-messages app. He’s also the only person who

knows the full picture of the company’s next steps, and he tends to frame that fact as something resembling a strategy. “Keeping secrets gives you space to change your mind, until you’re really sure that you’re right,” he wrote in a 2015 note to employees.

Snap’s initial public offering, planned for March, will test Spiegel’s commitment to secrecy. He’ll have to travel the country and venture abroad to convince potential investors that Snap has concrete, long-term plans to make more money and outmaneuver rivals. Snap declined to comment for this story.

In the runup to the IPO, the company has already made its secrecy more intense, not less. In November, after Bloomberg News reported details of how much stock Snap planned to offer (as much as $4 billion worth) and its projected market valuation (at least $25 billion), executives assumed the leaks had come from the banks underwriting the IPO and threatened to cut some underwriters’ fees, say people familiar with the matter. While confidentiality is a priority for companies going public, making fees contingent on strict confidentiality is an unusual requirement. Lead underwriters Morgan Stanley and Goldman Sachs declined to comment.

Snap executives began providing underwriters with more detailed data on app use in January, people familiar with the matter say, but they’ve been reluctant to release any details to investors that aren’t legally required. Wall Street analysts say clients regularly ask for introductions to executives or for details about Snap’s proxy filing, which was filed confidentially under the Jumpstart Our Business Startups ( JOBS) Act, an Obama-backed law that eased disclosure requirements and other securities regulations on small businesses. “Everyone’s kind of flying blind on this,” says James Cakmak, an analyst with brokerage Monness, Crespi, Hardt.

The roadshow will have to overcome skepticism from investors who see Snap more as the next Twitter than the next Facebook. Twitter, the last major social media company to go public, had a successful IPO but has since struggled, demonstrating that having a popular, influential product isn’t the same as having a promising business. “Investors learned their lesson with Twitter,” says Rett Wallace, CEO of Triton Research, which analyzes Silicon Valley companies preparing IPOs. “They now know what metrics to ask about.”

If Snap won’t explain in detail how it sees its future, investors will be left

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to judge whether they trust Spiegel.

From broad strategy to the shape of Snapchat’s buttons, he has the final say on Snap’s moves and tends to rely on instinct rather than data and testing, employees say. He’s also made sure that he and co-founder Bobby Murphy will retain majority voting control after the IPO, according to an analysis by Equidate, a stock market for private technology companies.

Snap employees, unlike their Valley peers, don’t have a main corporate campus or all-hands strategy meetings.

Spiegel communicates with executives scattered among a handful of Venice, Calif., offices primarily via Snap messages, which vanish after they’re read.

Employees were told not to use their phones at the company’s recent New Year’s party, says a person familiar with the matter.

Some of these policies have less to do with Snap’s business model than with its products. That kind of caution is more common in the Valley: The secrecy around Snap Spectacles wouldn’t sound crazy to anyone who saw the quarantined room where Steve Jobs tested the first iPad. And Snap’s gamble on word-of-mouth worked. The first week the glasses were available, people lined up for hours to pay $130 and, in some cases, resell them for upwards of $1,000 on EBay. Spiegel also has reason to worry about copycats. In October, Facebook added Snapchat-like effects to the camera on its app, the latest in a string of Facebook features that imitate those of Spiegel’s company.

“I wonder if there are more people at Facebook working on Snapchat than at Snapchat,” venture capitalist Josh Elman tweeted. Facebook-owned Instagram’s version of Snapchat’s Stories feature, also called Stories, recently reached 150 million daily users—the same number Snapchat gives for its global audience.

With the name change in September, Spiegel made an effort to broaden his company’s purpose to one that resembles Facebook’s (connect everyone) or Google’s (organize the world’s information). His new pitch, which amounts to helping people express themselves and live in the moment, is closer to those of Facebook and Google than Snapchat’s earlier incarnation.

For now, proving Snap can become

a profitable growth machine on that level remains the biggest priority for investors, says Cakmak, the brokerage analyst. But the company’s lack of transparency could loom large, too. “It’s an issue,” he says, “if they’re not making as much money as everyone thinks they are.” —Sarah Frier and Alex Barinka The bottom line Snap’s pitch for an IPO of as much as $4 billion likely requires its CEO to open up his intense culture of secrecy.

Mobile

Apple Tries the Full-Court Press Its lawsuit against Qualcomm is a bid for better licensing deals “They’ve got to get their margins higher”

For much of the past 20 years, Qualcomm has successfully defended itself in court against those who don’t want to pay it for technology that’s at the heart of all modern phone systems.

As smartphone sales growth has flattened, governments and phone makers have taken more notice of Qualcomm’s enviable profit margins. Apple is the latest to take the chipmaker to court under antitrust claims, which may ultimately help the iPhone maker negotiate a better deal.

Qualcomm makes most of the advanced 4G chips in the world’s smartphones. Like Microsoft did with Windows, it also controls patents that cover the fundamentals of phone systems, so it charges manufacturers $8b

Qualcomm’s Licenses To Print Money Licensing profit

$6b

Chip unit profit

$4b

$2b

$0 FY2003

FY2016

to license its intellectual property even when they’re not using its chips.

Qualcomm gets a percentage of the retail price of each phone whether or not the phone carries its chips. And as purchases of high-priced phones exploded over the past decade, its profits from licensing fees have eclipsed its gains in chip sales.

Apple’s Jan. 20 federal lawsuit, which follows similarly themed regulatory actions and fines in several countries, seeks to base Qualcomm’s royalties on the price of its components, rather than the phones. Like other complaints against Qualcomm, including a Jan. 17 lawsuit filed by the Federal Trade Commission, Apple’s alleges that the chipmaker has unfairly used its market position and patent portfolio to squeeze out competition.

“We welcome the opportunity to have these meritless claims heard in court, where we will be entitled to full discovery of Apple’s practices,” Don Rosenberg, Qualcomm’s general counsel, said in a statement.

Qualcomm is a fat target. In its last five fiscal years, the company has turned $37 billion of licensing revenue into $32 billion of pretax profit. Its gross margin, the slice of revenue remaining after deducting production costs, is 61 percent. Analysts expect that to rise.

By contrast, Apple and rival Samsung each reported gross margins of 39 percent in their most recent fiscal years. Smartphone shipments likely increased by less than 1 percent last year, researcher IDC estimates. As recently as mid-2015, the market was growing by double digits annually.

In December antitrust regulators in Samsung’s home country of South Korea announced a record 1.03 trillion won ($880 million) fine against Qualcomm for violating antitrust laws and called for the chipmaker to reduce its royalties. (The company is appealing.) In China, Qualcomm paid $975 million to settle an antitrust suit with regulators in 2015.

Apple’s been feeling pressure, too. Last year marked the first-ever annual decline for iPhone sales, and the average price dropped from a 2015 peak of $691 to $619 in the most recent fiscal quarter as the company introduced cheaper models to better compete with Chinese rivals including Huawei, Xiaomi, and Oppo. With

DATA COMPILED BY BLOOMBERG AKIO KON/BLOOMBERG (2); COURTESY JEPLAN (2)

Technology

Technology The Essentials

Discarded clothing is fed into a machine at Jeplan’s Tokyo plant CEO and co-founder Takao sits in a replica of the DeLorean timemachine featured in Back to the Future

A vat of fermenting glucose, part of the fuelfrom-cotton process Ethanol produced from used clothing

the iPhone 7, it’s also shifted some versions to modems from Intel instead of Qualcomm. “They’ve got to get their margins higher,” says Mike Walkley, an analyst at investment bank Canaccord Genuity. “This is Apple’s posturing to get a lower rate going forward.”

A settlement that lowers fees is a better bet for Apple than a yearslong legal fight, Walkley says. “Apple is trying to overturn 20 years of history,” he says.

But if they manage to do so, Qualcomm will be in real trouble, he adds. “Then everyone else will then want their money back.” —Ian King and Alex Webb The bottom line Apple’s pile-on lawsuit against Qualcomm is more likely to lead to a compromise settlement than a prolonged courtroom battle.

Manufacturing

A Real Mr. Fusion Feeds on Used Clothing A Tokyo company aims to make fabric recycling common practice “Nobody is doing it, because it’s so difficult”

At the end of the movie Back to the Future, mad scientist Emmett “Doc” Brown reappears with his time-traveling DeLorean, newly powered by garbage thanks to a fictional recycling reactor from the future called Mr. Fusion. A

company in Japan is building its own Mr. Fusion. It’s even bought a replica of the iconic car to promote it.

Recycler Jeplan is working to extract cotton fiber from used apparel and convert it to fuel. Jeplan says 1 ton of junked clothing can generate about 700 liters of ethanol, sparing land and water resources that could be used to grow food. The company says it’s also developed a way to recycle polyester. That compound is blended into many fabrics to reduce costs, improve durability, and make outfits wrinkle-resistant. It’s used in about 60 percent of the clothing produced worldwide each year, according to Jeplan, and can be a valuable resource when broken down and reused in new clothing.

Recycling plastics, paper, and metals is common, but much of the clothing produced annually around the world ends up in landfills and incinerators. “Only 10 percent of clothing gets recycled, and that includes secondhand sales,” says Masaki Takao, co-founder and chief executive officer of Tokyo-based Jeplan. “That’s true in every country.”

Takao and his team are working on a technique that extracts polyester fibers from clothing through multiple distillation and vaporization cycles. The process generates half the amount of carbon dioxide that’s produced when making the material from scratch. Getting the polyester to a high level of purity is the hard

part, Takao says: “Nobody is doing it, because it’s so difficult.”

Takao left graduate school to found Jeplan in 2007 with Michihiko Iwamoto, a textile salesman for trading companies. The company collaborated with Osaka University to develop the cotton-recycling technology. It began commercial operations in 2010, consulting on recycling matters for clients including Mitsubishi and NTT Docomo. Jeplan has raised about $13 million since its founding and counts Docomo and venture capital firm Jafco among its investors.

In Back to the Future, Doc Brown— played by Christopher Lloyd—fed banana peels and a half-full can of beer into a coffee-grinder-size Mr. Fusion.

Jeplan’s process requires a factory.

The company is building a plant on the southern island of Kyushu, expected to begin operating this summer, to handle 2,000 tons of clothing per year.

Polyester is currently being stockpiled until the factory opens.

To promote Jeplan’s recycling efforts, Takao ordered a full-size replica of the DeLorean from the movie. He had to submit a formal request to Universal Pictures before the studio sold him the car and granted him promotion rights. He won’t say what he paid, but flying the model to Japan cost 5 million yen ($44,000).

The DeLorean will spend more time on the road, traveling to shopping malls across Japan to promote Jeplan’s work. To compete with

29

Technology

The bottom line Recycling polyester can reduce the clothing that winds up in landfills and cut back on chemicals used in making textiles.

Employment

IBM’s Big Jobs Dodge Its pledge to hire Americans contrasts with massive offshoring “They have my exact job … for other people to get hired into”

On the eve of the December summit between technology executives and Donald Trump, IBM Chief Executive Officer Ginni Rometty publicly pledged to hire about 25,000 U.S. workers and spend $1 billion on training in four years. Rometty, one of the only tech CEOs among Trump’s so-called Strategic and Policy Forum—a collection of advisers from the business world— described the Rometty

move as an adaptation to a changing global economy.

She was also certainly aware of Trump’s vows to punish U.S. companies that send jobs overseas. And IBM, like many of its peers, has been doing exactly that.

In late November, IBM completed at least the third round of firings it carried out in 2016, say four current and former employees. They don’t know how many have lost their job but say it’s probably in the thousands, with many replaced by cheaper workers in Asia and Eastern Europe. The firings, known internally as resource actions, have continued into the new year. In January, IBM started notifying more U.S. workers they would be let go, according to a current employee, who says colleagues in the services businesses are bracing for further cuts.

“Ginni Rometty is terminating thousands of IT workers and touting herself as some hero who’s out to hire 25,000 workers,” says Sara Blackwell, a lawyer and an advocate representing about 100 ex-IBMers who’ve filed discrimination and other complaints.

“To me, that’s hypocritical.”

IBM declined to say how many it fired in 2016. In an e-mailed statement, spokesman Doug Shelton noted that the company generates more than twothirds of its services revenue overseas and said it will increase the size of its workforce over the next four years.

In reference to Rometty’s 25,000-job pledge, he said, “If we are able to fill these positions, we expect IBM U.S. employment to be up.”

The company doesn’t disclose how many of its 300,000-plus employees work in the U.S. or in particular divisions. But the services businesses, which generate more than half of IBM’s sales, have significantly shifted overseas. Early last year, the technology services division aimed to have only 30 percent of permanent employees located in the U.S. by the end of 2016, say two former managers, who received the information from superiors. Later in the year, the target had been reduced to 20 percent, says one of the former managers.

Shelton disputes those figures.

IBM says the turnover is partly a result of its expansion into businesses such as cloud computing and AI, which have become priorities since Rometty took over in 2012 and sold off arms dedicated to servers and chips. Some employees say they don’t believe that explanation. “The quoteunquote reason for my termination was it was a ‘skills transformation,’ ” says Sean Ott, a 20-year IBM veteran asked to clear out his desk a couple of months ago and train foreign workers who might replace him, despite what he describes as a strong performance rating. “At the same time, they have my exact job out there, they have my colleague’s job out there, for other people to get hired into.”

As recently as three years ago, it was easier to track IBM’s staff cuts.

Employees losing their job received a list of colleagues being fired, too, along with their positions, departments, ages, and other data. They were able to use the information to determine whether they wanted to waive agediscrimination claims and receive severance. IBM stopped providing these disclosures in 2014, when it stopped asking employees to waive claims.

Governments have taken notice of some of IBM’s cutbacks. In 2015 local and federal officials lambasted IBM for dismissing 1,200 workers in Iowa and Missouri just five years after opening facilities there. The firings were a blow to the cities of Dubuque and Columbia, which had given the company a combined $84 million in tax breaks.

Today, IBM gets rid of people quietly and in smaller batches, seven current and former employees say. The firings have become so commonplace, they say, that many workers assume they’ll lose their job and simply wait for their name to be called. Like Ott, they’re often asked to train potential replacements overseas. In Ott’s case, those people were in China, India, and Argentina. “Clearly,” he says, “my skills are still relevant.” —Jing Cao

The bottom line IBM, which has pledged to add 25,000 U.S. jobs, is continuing to fire American workers and move their jobs abroad.

Edited by Jeff Muskus and Dimitra Kessenides Bloomberg.com

FROM LEFT: PATRICK T. FALLON/BLOOMBERG; MALCOLM COCHRANE/PURELIFI

30

conventional production methods, the company needs 30,000 tons of polyester clothing per year. Takao is hoping the car will draw crowds that, after learning more about Jeplan’s recycling, will donate items.

The company has placed usedclothing collection boxes in 2,100 locations throughout Japan, including at the malls, and teamed with Ryohin Keikaku, the owner of retailer Muji, and 7-Eleven owner Seven & I Holdings. Takao also plans to enlist several apparel makers in the collection efforts and ultimately sell clothing made from the recycled material to the manufacturers.

Jeplan is in talks with sports brands and soccer teams in Japan about similar initiatives. Takao sees an opportunity to tap into a strong fan base; plus, players’ uniforms are high in polyester content, perfect for recycling. “It’s hard to motivate consumers with appeals to earnestness or concern for the earth, but they will join if it’s something fun,” he says.

“By doing these kinds of events, we hope to effect a cultural change around recycling.” —Pavel Alpeyev

“Ginni Rometty is terminating thousands of IT workers and touting herself as some hero who’s out to hire 25,000”

Technology

Innovation Li-Fi Wi-Fi networks dependent on radio waves are growing more congested all the time—and can’t be used everywhere—so various researchers and companies are betting light waves from LED lamps and overheads can also stream data and connect people to the internet. So-called Li-Fi technology, which uses a much more abundant slice of the wireless spectrum, is also more energy-efficient than Wi-Fi, though for now people need a special USB drive to use it. Light waves can’t pass through walls like radio waves do, but that also makes the networks more secure. A group from the world’s largest technical association, IEEE, will have draft standards for Li-Fi ready by yearend for companies that want to commercialize the technology, says its chairman, Bob Heile. —Nick Leiber 2.

1.

Setup LEDs outfitted with Li-Fi technology can embed and stream data in the light they emit by modulating the light’s intensity faster than the human eye can detect.

Use A USB drive that serves as a receiver and transmitter picks up the signals from the LEDs and uploads data to them from a connected PC or mobile device.

3.

31 Wi-Fi

Li-Fi

Privacy Because light, unlike radio waves, can’t penetrate a wall, Li-Fi isn’t as all-purpose as Wi-Fi. But it’s more secure.

PureLiFi

VLNComm

Velmenni

Innovators Harald Haas and Mostafa Afgani: co-founders (chief scientific officer; chief technology officer)

Innovators Mohammad Noshad and Maite Brandt-Pearce: co-founders (chief technology officer; adviser)

Innovators Deepak Solanki and Saurabh Garg: co-founders (chief executive officer; chief technology officer)

Founded 2012 Based Edinburgh

Founded 2013 Based Charlottesville, Va.

Founded 2012 Based Tartu, Estonia

Funding £9 million ($11.4 million)

Funding $1.6 million

Funding Declined to disclose

Background Haas, a professor at the University of Edinburgh, became a public face of Li-Fi research with a 2011 demo in a TED Talk. The lecture has been viewed online about 2.4 million times.

Background University of Virginia professor Brandt-Pearce and former student Noshad, who recently completed a postdoc at Harvard, spun VLNComm out of their optical communications research.

Status The 25-employee startup is testing its technology with customers including Cisco Systems and British Telecommunications.

Afgani says it transmits data at up to 43 megabits per second. (The average U.S. broadband speed is about 16 Mbps, cloudservices company Akamai Technologies estimates.) PureLiFi has also partnered with French lightmaker Lucibel, which introduced its Li-Fi-equipped overhead lights in the fall and plans to unveil the next model by April.

Status Co-founder Fraidoon Hovaizi says their nine-person team, backed by the U.S. Department of Energy and the National Science Foundation, has been in funding and partnership talks with U.S. government agencies and companies including Lockheed Martin. Their latest overhead-light prototype is as fast as 25 Mbps; Brandt-Pearce says the next one will hit 100 Mbps given their advances in coding, modulation, and signal processing. VLNComm plans to bring a Li-Ficapable desk lamp to market this year.

Background Hardware developer Solanki and software developer Garg started working on Velmenni in India. The 11-person team has created a credit-card-size prototype router capable of converting off-the-shelf LED lights into Li-Fi transmitters.

Status Solanki says the technology can reach 10 Mbps today and will reach 100 Mbps by yearend. Velmenni, which completed an Airbus business-accelerator program in Hamburg in 2015, says it’s developing Li-Fi applications for airplane cabins and cockpits with clients it declined to name, as well as hardware for outdoor use.

Markets/ Finance

Jacksonville, bustling hub of high finance 34

Look very, very closely at those Chinese bonds 36

What does your money manager think about climate change? 35

The GOP is eager to drill in the Arctic. Big Oil, not so much 36

January 30 — February 5, 2017

Student Loans The Right Way:

The Easy Way:

Before you contact your loan servicer to discuss repayment plans, you can use a Repayment Estimator to get an early look at which plans you may be eligible for and see estimates for how much you would pay monthly and overall. Your options may include the

ILLUSTRATION TEXT ADAPTED FROM STUDENTAID.ED.GOV; PHOTO: TERESA GUERRERO/GETTY IMAGES

Standard Repayment Plan, the Graduated Repayment Plan, the Extended Repayment Plan, the Revised Pay As You Earn Repayment Plan (REPAYE), the Pay As You Earn Repayment Plan (PAYE), the Income-Based Repayment Plan (IBR), the Income-Contingent Repayment Plan (ICR), and the Income-Sensitive Repayment Plan. If you have multiple federal student loans, you can consolidate them into a single Direct Consolidation Loan. If the options above don’t work for you and you simply can’t make any payments right now, you might be eligible to postpone your payments through a deferment or forbearance. However, depending on the type of loan you have, interest may still accrue (accumulate) on your loan during the time you’re not making payments.

A loan servicer is accused of giving rushed and costly advice “Navient chose to shortcut its obligations”

The U.S. government’s $1.3 trillion student loan program has a dizzying array of repayment plans that can overwhelm borrowers. That’s one of the things loan servicers are supposed to help with.

Navient, the nation’s largest student loan servicer, handles accounts for more than 1 in 4 Americans who owe money for their higher education.

The company sends borrowers their monthly bills, collects payments, and counsels them on their options.

Government lawsuits filed on Jan. 18 accuse Navient of taking shortcuts that minimized its costs. They say that hurt some borrowers who could have paid off debt more quickly, while simultaneously putting distressed borrowers in more debt by steering some into plans that put off payments—leading to ballooning balances—instead of income-based repayment programs.

Regulators estimate that households’ debt burden may have been inflated by billions of dollars.

Navient has called the allegations unfounded and “agenda-driven,” noting in a statement that the U.S. Consumer Financial Protection Bureau’s case was filed just before the end of the Obama administration.

Along with the CFPB, the attorneys general of Illinois and Washington state also sued. Authorities say they reviewed thousands of pages of company documents, analyzed thousands of consumer complaints, and listened to recordings of hundreds of phone calls between the company and consumers during a yearslong investigation.

Student loan servicing is a lowmargin, high-volume business: It doesn’t cost much to service an account for a borrower who pays automatically through her bank account.

For those who are late on their payments, however, a servicer can rack up expenses that are “many, many multiples” of the average servicing cost, Steven McGarry, chief financial officer at student lender Sallie Mae, told investors on Jan. 19. Navient was split off from Sallie Mae in 2014.

Borrowers with federal loans are eligible for help, but a servicer may

33

Markets/Finance

34

have to go the extra mile to get them in the most appropriate program and keep their paperwork up to date. Dilu Nicholas’s troubles with Navient began after he enrolled in a plan that allows a struggling borrower to make payments pegged to earnings rather than loan balances. Borrowers must annually recertify their income information to stay on the plan.

Nicholas, of Louisville, attended one year of college in the early 1990s before dropping out to care for his ailing grandfather. After working steadily for more than a decade, he began school again, graduating from a state college, but found he couldn’t Navient afford his monthly share price $18 student loan payments. The income-based plan $15 was a godsend.

Nicholas, now Election Day 42, missed an $12 annual deadline, resulting 10/24/16 1/23/17 in the addition of $7,000 to his federal loan balance, now almost $80,000. Navient did send e-mail reminders about deadlines.

Nicholas remembers one that told him to retrieve a message on the company’s site, but its importance wasn’t clear.

The lawsuits allege this was common for Navient. Over more than four years, e-mail reminders directed borrowers to log on to their account without telling them why. For almost three years, reminders in the regular mail didn’t provide borrowers the date of their deadlines. The company changed its e-mail practices around March 2015.

Since then its income-based plan recertification rate has more than doubled, the consumer bureau says.

Another problem at Navient, authorities claim, was that people ended up in plans that didn’t make the most financial sense for them. A borrower who sees a drop in pay could, like Nicholas, ask to switch to an incomedriven plan. A person in those plans can earn credit toward eventual loan forgiveness, and if their income is low enough the monthly payment could be zero. A borrower can also simply ask to postpone payments. That’s an easy idea to understand. But the borrower may accrue more interest—and eventual forgiveness isn’t part of the deal.

The CFPB says borrowers were steered into such short-term forbearance too often. It estimates that from January 2010 to March 2015, as much as $4 billion in extra interest charges was added to principal balances of loans repeatedly put in forbearance.

The reason, authorities claim, was simple: Postponing payment is easier and cheaper for the servicer. “Navient chose to shortcut its obligations,” said CFPB Director Richard Cordray in a conference call with reporters.

In 2013, before Sallie Mae split off its servicing business as Navient, its chief executive officer said in an earnings call that “it’s very expensive work, for example, to enroll a borrower into something like an income-based repayment program … which we are doing. But we don’t actually get paid for outperformance in that side of the equation.” The CEO, Jack Remondi, now leads Navient.

The state of Illinois lawsuit claims that Navient for years promised higher pay to its customer service representatives to rush borrowers off the phone.

One former, unnamed employee is quoted saying that bonuses were paid for calls that lasted less than six minutes. A review of call recordings by investigators showed that plans that postponed payments were frequently mentioned in the first six minutes of the typical call. Half the time, Navient employees didn’t bother to mention income-based repayment plans.

Navient argues that this description is wrong. Many of the loans it services are owned by the government, which in 2010 became the only issuer for loans with federal backing. Of the four major servicers used by the Department of Education, Navient, at 40 percent, has the second-highest share of loan balances enrolled in income-based plans, according to the most recent government figures. The company also receives much less pay from the government for borrowers who postpone payments, “debunking claims that servicers have an incentive to place borrowers in forbearance” rather than income-based plans, according to a Navient statement.

That pay structure has been in effect only since September 2014. The earlier contract, which covered the previous five years, mandated that the government pay almost the identical amount

to servicers for borrowers current on payments and for those postponing their payments. Navient has a similar arrangement for loans owned by private investors.

The lawsuits represent potentially billions of dollars in fines and restitution. But the CFPB’s future in a Donald Trump administration is a wild card.

Many investors have already bet that Washington may become a friendlier place for Navient. The day after the election, the company’s stock shot up 17 percent, and even with the lawsuit it’s kept most of that gain.

—Shahien Nasiripour and Janet Lorin The bottom line A federal regulator says student loan borrowers may have accrued billions of dollars in avoidable interest charges.

Banks

Trading Wall Street For Jacksonville Financial companies “nearshore” jobs to less expensive U.S. cities “Indian food at 11:30 at night does not exist”

When Deutsche Bank sent senior Wall Street executive Leslie Slover to run its expanding outpost in Jacksonville, Fla., she wasn’t entirely ready for the lifestyle. Gone were the skyscrapers and subways. In their place was a corporate campus with a pond and vast parking lots, flanked by rows of new town houses, some inhabited by employees. The on-site culinary options? A cafeteria and some food trucks. Suddenly, Slover had to relearn to drive.

“It’s hard—it’s not Manhattan,” says Slover, 52, who spent her career in the Northeast before becoming the regional head of the bank’s operations in Jacksonville and Cary, N.C. “Indian food at 11:30 at night does not exist.”

Transplants from the city that never sleeps may feel at first like aliens in this northern Florida city 35 miles south of the Georgia border, but their numbers are growing. Global financial companies including Frankfurt-based Deutsche Bank and Sydney-based Macquarie Group have been moving

DATA COMPILED BY BLOOMBERG; ILLUSTRATION BY CAROLINE DAVID

Markets/Finance executives here and hiring locally, even while paring staff elsewhere.

It’s part of a Wall Street trend known as nearshoring, in which banks are moving operations away from expensive financial centers like New York to places such as Jacksonville and North Carolina’s Research Triangle. Also in Jacksonville are roughly 19,000 employees of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Meanwhile, Goldman Sachs has established operations in Salt Lake City, and UBS has a site in Nashville. It’s a way to improve profitability without going overseas. Conveniently, it also happens to comport with President Trump’s demands that employers keep good jobs on U.S. soil.

In the early days, investment banks mainly transplanted back-office workers such as accountants, technology staff, and lawyers. But in Deutsche Bank’s case, the Jacksonville campus has grown into the company’s secondlargest U.S. location. The bank has about 2,000 employees there—up from 1,400 in 2013—and plans to add more in 2017.

Increasingly, the site is a microcosm of its U.S. business, even the trading functions. On campus, in a building alongside the man-made pond, a young team recruited from universities such as Emory and Vanderbilt sells securities in tandem with their counterparts in New York. When a client calls in an order, a Jacksonville salesman glances at a live video feed of desks at 60 Wall St., finds a trader standing by, The unit of Frankfurtand relays the order. based Deutsche Bank Slover says the tech- voted green every time nology allows the two locations to function like one seamless floor. She’s come to enjoy living in Florida, noting it has more elbow room than Manhattan and the people are unusually nice.

According to Jones Lang LaSalle, high-end corporate office space in Jacksonville can be leased for about $22 a square foot, cheaper than all but four major U.S. cities tracked by the company. That’s about a quarter the rate in New York. Banks pay Jacksonville employees about 30 percent less on average than those in New York, according to Cathy

Chambers, a senior vice president with the JaxUSA Partnership, a division of the local chamber of commerce. A financial analyst, for example, might earn $67,000 in Jacksonville, compared with $99,700 in New York.

The local and state governments also offer tax incentives to lure companies.

For Anthony Glenn, who runs an office Macquarie opened in Jacksonville last year, advantages include escaping for lateafternoon surf sessions at a local beach. Another perk is his 15-minute drive to work. He says his office includes people from 21 countries, plus big U.S. cities such as Houston, New York, and Philadelphia.

Many of them came to escape punishing commutes from far-flung suburbs.

“In most cases, it’s been a lifestyle decision,” Glenn says. “They’re weighing a compensation change vs. a huge increase in quality of life.” Macquarie’s Jacksonville office employs people whose jobs might otherwise have been filled in India. It provides a support staff that’s more convenient for its U.S.-based employees, while its Indian

operation continues to focus on the Asia business.

Jerry Mallot, president of JaxUSA, brushes aside criticism that Jacksonville can’t cater to big-city tastes. “We’re not New York, but we wouldn’t want to be New York,” he says. He points out that the city has its own NFL team, craft breweries, and “more golf courses than you could play in 10 years.” There’s a Tesla Motors store, too. Companies are eager to establish operations in a place with year-round sunshine and no state income tax, Mallot says. They typically start by transferring managers to the region, then build staffs by hiring from the area. The salaries are attractive by Jacksonville standards.

The influx of financial-services and other white-collar jobs has brought money and diversity to the area and may even be influencing the political landscape, says Michael Binder, an associate professor of political science at the University of North Florida in Jacksonville. In a county that George W. Bush carried by more than 15 percentage points in two presidential elections, Trump beat Hillary Clinton by

Funds Money Managers Weigh In on Climate In 2016 corporate shareholders voted on 68 proposals related to climate change.

For example, many asked companies to report on the risk to their business from global warming. Here’s how the biggest asset managers voted. —Emily Chasan

Assets

Share of proxy votes in favor of climate-related proposals

Deutsche (DWS)

$0.8t

Principal Financial

$0.6t

Northern Trust

$0.9t

Natixis

$0.9t

State Street

$2.5t

TIAA-CREF

$0.9t

Legg Mason

$0.7t

40%

Goldman Sachs

$1.4t

39%

Up from

Affiliated Managers

$0.7t

38%

UBS

$0.6t

T. Rowe Price

$0.8t

12%

13%

Invesco

$0.8t

12%

Prudential

$1.3t

Franklin Templeton

$0.8t

J.P. Morgan

$1.7t

5%

BNY Mellon

$1.7t

4%

BlackRock

$5.1t

0%

Vanguard

$3.9t

0%

Fidelity

$2.1t

0%

American Funds/ Capital Group

$1.3t

0%

100% 76% 64% 54% 46% 42%

19%

12% 10%

in 2012

Vanguard says social policy issues are primarily the responsibility of companies’ management

ASSETS ARE LATEST FIGURES DISCLOSED; DATA: CERES, FUNDVOTES.COM

Markets/Finance just more than 1 percentage point.

“In a lot of ways, Florida is the inverse of America: The more north you get, the more South you are,” Binder says, referring to cultural and political preferences. “But slowly this is changing, like a lot of the urban cities in the New South.” —Jonathan Levin The bottom line Former Wall Streeters are adjusting to Jacksonville, and they may be changing the city, too.

Bonds

China’s Bond Market Has a Forgery Problem A pair of scandals shakes mainland traders’ confidence “We will see more and more naked swimmers”

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Forged seals, fake letters, and counterfeit documents. They’re all part of a recent spate of fraud in China that’s added to worries about the country’s $3 trillion corporate bond market, where defaults have been rising and companies are finding it increasingly difficult to sell debt issues.

Within two weeks in December, two cases emerged that shook the market.

China Guangfa Bank said documents and seals in its name had been forged for use on a letter that supposedly guaranteed the bond payments of another company, which wasn’t implicated. The bonds had defaulted. The debt was “a junk bond sold to individual investors,” says He Xuanlai, a Singapore-based credit analyst at Commerzbank. “Nobody would’ve bought it without that letter of guarantee from Guangfa Bank.”

Separately, the brokerage Sealand Securities said former employees conducted as much as 16.5 billion yuan ($2.4 billion) of bond trading with a forged company seal. Sealand has said police are investigating. The allegedly forged stamps were on so-called entrusted holdings, used widely as a way to boost leverage—and magnify potential gains and losses. To legally skirt rules limiting bond holdings or leverage, brokerages and institutional investors can entrust their bonds to a

emerging markets at Lucror Analytics in third party and agree to buy them back Singapore. “Unfortunately, these frauds later. That frees up funds they can use may be difficult to detect.” to purchase even more bonds.

China’s securities regulator stepped While China is no stranger to fraud, the Sealand case has made the market in to the Sealand case. In an emergency meeting, it ordered representatives especially jittery. Liquidity shrank as from the financial institutions involved market makers became more relucwith the entrusted-holdings trades tant to serve as intermediaries in bond not to leave the room until reaching transactions, Citigroup’s Hong Kongbased analyst Judy Zhang wrote in a an agreement on how to handle them, Dec. 21 note. “It all points to the severe according to Beijing News. The brokerage said later it would honor the bond lack of risk control within China’s contracts, sharing responsibility with financial institutions,” says Xia Le, a 19 financial institutions.

Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria. “China’s Xia, the Hong Kong economist, says financial market is developing very there ought to be a broader response.

“China should use legal procedures fast, but the legal infrastructure has to pin down who is responsible for not been keeping up.”

The bond market is under pressure in entrusted bonds or forging documents rather than acting on an ad hoc basis,” other ways. At least 29 bonds defaulted he says. in 2016, up from seven in 2015. “We expect to see Like China’s $5 trillion stock At least 117.5 billion yuan of more of this type of behavior given sales were canceled or postcrash in 2015, the bond shakethe increasingly poned in December, almost up shows how quickly markets problematic quadruple the amount in can change. Fraud adds environment for refinancing in another layer of uncertainty.

November, according to data the domestic “Traders have the incentives compiled by Bloomberg. bond market.” to take on risky investments Meanwhile, an index of —Lucror Analytics’ Charles MacGregor government bonds plunged and find regulatory loopholes 1.7 percent in December, the for personal gains,” says Oliver biggest monthly decline since Rui, a professor of finance October 2013. Investors were selling and accounting at China Europe in response to signs of tighter moneInternational Business School. “The tary policy and in many cases trying to financial institutions behind them often unwind leveraged positions. turn a blind eye to it, because the punThere’s a saying among traders that ishment is so weak.” —Bloomberg News when the tide goes out, you find out The bottom line With defaults rising, Chinese who isn’t wearing a swimsuit. As market companies may have a harder time rolling over debt, which is likely to expose new problems. conditions make it harder for Chinese companies to sell notes to repay maturing debts, analysts expect even more of them to be exposed as default risks.

It may also mean more scandals. “We will see more and more naked swimEnergy mers,” says Zhu Ning, deputy director of the National Institute of Financial Research at Tsinghua University in Beijing. “We won’t see systemic risks in the immediate term, but if the govern A push to tap the wildlife refuge ment doesn’t rein in the wrongdoing, may work this time risks will escalate.”

A survey by EY last year found that “There are a lot of other, cheaper 56 percent of Chinese executives polled areas that are currently open” said unethical behavior could be justified to help a company survive a Far above the Arctic Circle, one of the downturn, compared with 36 percent longest-running controversies in U.S. globally. “We expect to see more of oil is about to reignite. Republicans this type of behavior given the increasare pushing to allow exploration in the ingly problematic environment for refiArctic National Wildlife Refuge, the nancing in the domestic bond market,” frigid wilderness in northern Alaska says Charles Macgregor, head of that’s been a political battleground

Time to Debate Arctic Drilling Again

SIMON BRUTY/GETTY IMAGES; DATA: ALASKA DEPARTMENT OF NATURAL RESOURCES, NATURAL EARTH, ALASKA DEPARTMENT OF REVENUE TAX DIVISION

Markets/Finance for drillers and conservationists for decades. With the party in control of Congress and President Donald Trump vowing to boost energy production—on Jan. 24 he moved to advance the controversial Keystone XL and Dakota Access pipelines—the industry’s chances of getting into the refuge look better than they have in years.

There’s just one catch. No one really knows how much oil actually lies beneath the refuge or how much big producers such as ExxonMobil and ConocoPhillips care about it in a world awash in cheap oil.

While the government estimates the area could hold billions of barrels of crude, making it one of the biggest untapped reserves in the U.S., no one’s drilled there since an exploratory well in the 1980s.

“Its value is hard to gauge because it’s always been a bit theoretical,” says Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions in Houston. “No administration has really wanted to take on the challenge of going for ANWR.” That may be about to change. Although it could take a decade for ANWR to start producing oil, the new supply would go a long way toward ensuring the survival of the Trans-Alaska Pipeline System and the jobs that go with it, according to U.S. senators Lisa Murkowski and Dan Sullivan. The two Alaska Republicans introduced legislation in January to allow development of as many as 2,000 acres in the refuge.

The aging pipeline, once the symbol of energy independence for an oilstrapped nation, is on the verge of obsolescence. The 800-mile system links northern Alaska to the rest of the world, but its output has been falling as fields outside the refuge fade out and supplies from shale oil in the Lower 48 and other parts of the globe grow.

Created by Congress in 1980, the refuge provides a critical habitat and breeding ground for polar bears, wolves, migratory birds, and caribou, among other species. It covers 19 million acres in northeastern Alaska, stretching from the mountains of the Brooks Range, through boreal forests, to a vast, snowy coastal plain that slides into the Arctic Ocean. Yet from the moment it was created, ANWR has been coveted for its untapped oil. The

Pushing for Oil in the Far North

Barrow

Legislators have introduced a bill to give oil companies access to a patch of the Arctic National Wildlife Refuge

Prudhoe Bay oil field Beaufort Sea

North Slope Arctic National Wildlife Refuge Trans-Alaska Pipeline

ALASKA The proposed law would open up about 2,000 acres of this region, known as the 1002 Area, to drilling Valdez

An oil pipeline snakes across the North Slope toward Prudhoe Bay

refuge was set aside even as the U.S. ramped up production in the North Slope in response to the shock of oil embargoes in the 1970s.

Just how rich the prize is remains to be seen. A 2005 review by the U.S. Geological Survey, based on decadesold data, said ANWR may hold as many as 11.8 billion barrels of crude.

If that were proven true, it would rival the mammoth Prudhoe Bay field that sparked the Alaskan oil rush 40 years ago. Such a find could generate income for decades, appealing to companies looking for alternatives to the short life spans of shale fields and the risks of operating in more politically fraught parts of the world.

Only one well has been sunk in the refuge, a 1985 exploratory project

by BP and Chevron. The results were never made public. BP referred questions to Chevron, which said it doesn’t comment on the results of exploration evaluations.

Subzero temperatures and remote distances mean drilling in Alaska typically costs three times as much as it does in the Lower 48, according to industry researcher IHS Markit. Given the extreme conditions, oil would have to sell at about $70 a barrel to make most of it economical to recover, according to the 2005 USGS report.

Today, prices hover around $55 a barrel.

ExxonMobil, one of the main producers in Alaska, referred questions

to the American Petroleum Institute, the industry’s Washington lobbying group. The institute said in a statement that it believes the refuge can be developed in a “safe and responsible” way.

ConocoPhillips, which is Alaska’s top oil producer, agrees. Company spokeswoman Natalie Low wrote in an e-mail that if ANWR were to be opened, “we’d consider it within our opportunities.”

But the area, she wrote, “would have to compete with other regions for our exploration dollars.”

Many questions about ANWR’s oil remain. Are the reserves concentrated or spread out? Mixed with natural gas? The potential profitability of drilling there could hinge on the answers. But at the oil prices likely for the foreseeable future, they hardly matter, says Imran Khan, a senior research manager in Houston at Wood MacKenzie, an industry consultant.

“There are a lot of other, cheaper areas that are currently open to exploration that big companies can attack,” he says. If not for the change of power in Washington, “I don’t think anybody would be talking about it right now, because I don’t think it can work.”

—Alex Nussbaum The bottom line There might be 12 billion barrels of oil in the ANWR, but it may not be economical to drill for it in a world full of cheap petroleum.

Edited by Pat Regnier Bloomberg.com

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agreements, and a Trump spokesman has said Ross will be the administration’s leader on setting trade priorities, a role usually reserved for the U.S. Trade Representative. To the extent that the Trump administration is an experiment in government by—and possibly for—the ultrawealthy, Ross would be its public face. hat face is an evocative one. Ross reminds people of a professor, an owl, or the Simpsons moneybags C. Montgomery Burns. He has a taut, bald dome; squinting eyes behind rimless spectacles; and thin lips that, in conversation, can curl downward, as if he’s slightly displeased. It’s the mug of someone who’s been very sharp for a very long time.

Born in 1937, Ross graduated from the Manhattan Jesuit high school Xavier, describing himself in the 1955 yearbook as a country boy who wanted to go to Notre Dame and become a lawyer. Instead he went to Yale, then Harvard Business School. He landed on Wall Street, spending much of his career working for the Rothschild financial dynasty. Ross became one of the world’s most sought-after bankruptcy advisers and then, around age 60, started a private equity fund to make investments in distressed companies.

Ross has been married three times. His wedding in 1995 to his second wife, Betsy McCaughey, had to be postponed because he was still married to his first; the couple eventually

PREVIOUS SPREAD: PHOTOS: ALAMY (1); AP PHOTO (1); EVERETT COLLECTION (1); THIS SPREAD: FROM LEFT: THE PALM BEACH POST/ZUMA PRESS; JASON COHN/REUTERS

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n the last day of November, President-elect Donald Trump chose Wilbur Ross as his nominee for secretary of Commerce. A few hours later, Ross, a 79-year-old Wall Street multibillionaire, stepped into Gramercy Tavern, a tasteful restaurant for the Manhattan elite, off Park Avenue. A woodbeamed and chandeliered private dining room had been reserved for Navigator Holdings, a liquefied gas shipping company whose biggest investor is Ross’s private equity firm, WL Ross & Co. He and David Butters, Navigator’s chief executive officer, both arrived early. “Your interest is aligned to mine,” Butters recalls Ross saying. “The U.S. economy will grow, and Navigator will be a beneficiary.”

When the other guests arrived, they took turns congratulating Ross. As the executives enjoyed a menu that offers sherry-sauce sea bass and pear buckle, the mood was jovial, Butters says. One of their own could soon be running the cabinet department that is the conduit between government and corporate America. “It was like—we have a chance now,” Butters says. “We have a chance to make some differences.”

Although Trump ran as a populist, railing at the elite on behalf of blue-collar workers, he surrounded himself during his campaign with plutocrats. And now that he’s president, he’s elevating them to power. Trump’s proposed cabinet has a net worth of more than $6 billion. Ross is by far the richest, worth $2.9 billion, according to a Bloomberg estimate. And how he achieved his fortune—a well-known Wall Street tale of “vulture” investing at its shrewdest—takes on a different cast in light of his nomination.

Ross got rich in part with government assistance, taking advantage of bankruptcy laws and tariffs and having others pick up the bill for pensions owed to employees. He’s been on both sides of perhaps the most pivotal issue of the 2016 campaign—free trade—depending on how it affected his own wealth. If confirmed as Commerce secretary, as is widely anticipated, Ross would be expected by Trump’s electorate to deliver on promises of working-class jobs and an industrial renaissance. Yet he would have the means to continue rewarding the Establishment. Even before taking office, he’s pushed policies that would enrich private investors in public projects.

Ross is positioned to become the most powerful Commerce boss in years. The department calls itself the voice of U.S. business, but it’s less a single creature than a dozen agencies rolled together. Ross would oversee the census, patents, economic analysis, the development of minority- owned businesses, and even, under the aegis of the National Oceanic and Atmospheric Administration, the monitoring of the effects of climate change. In addition, Trump has said he’ll direct Ross to identify every violation being committed under existing trade

Ross wouldn’t comment for this story. After his assistant asked Bloomberg Businessweek not to contact anyone who works or has worked for WL Ross, a spokesman e-mailed a list of outside people Ross wanted to make available. It included two mayors, one governor, and six billionaires, among others.

One of the nonbillionaires was C. John Wilder, a colleague Ross picked in 2015 to be executive chairman of the hobbled oil explorer EXCO Resources. “He wants to win, but business to him is not filled with a lot of emotion,” Wilder says. “Very emotionless, very deliberate, very calculated.”

held a reception for hundreds of guests on the USS Intrepid.

(They told the New York Times they couldn’t even estimate the number of attendees.) Ross funded McCaughey’s 1998 run for governor of New York until she announced, just days before the primary, that he’d withdrawn funding. They divorced.

In 2004, Ross married the society writer Hilary Geary. They paid $7.8 million last year for a 5,000-square-foot duplex in Manhattan’s art deco River House co-op. It has five bedrooms, not counting three maid’s rooms.

For his 70th birthday, Ross was feted with Tin Pan Alley songs whose lyrics were changed to praise his investments, his globe-trotting, and, to the tune of Ain’t We Got Fun, his shoes: “So many pairs of velvet slippers, hard to choose one.” His art collection, which Bloomberg estimates is worth $250 million, is heavy on the midcentury Belgian surrealist René Magritte.

At a gala in 2012, Ross pulled back his tuxedo sleeve for a reporter to reveal a custom Van Cleef & Arpels timepiece with two Magritte-inspired apples on a pink face. “It’s our painting,” he said. “It’s hanging in Palm Beach.”

Ross belongs to at least three private clubs in London and four in South Florida. In and around New York, he’s a member of Mory’s Association, the Harvard Business School Club, the River Club, Southampton Bath & Tennis Club, and Kappa Beta Phi, a secret banking fraternity founded before the 1929 stock market crash. Ross has served as grand swipe, the title given to the frat’s leader.

fter Ross shifted from adviser to investor, he explained his thinking to a Bloomberg News reporter in 2003: “All we could do was make recommendations—now we’re actually doing what we think is right. I wish I’d done this years before.”

In February 2002, Ross had a hand in a record-setting deal.

He announced he was buying the bankrupt Cleveland steelmaker LTV. One month later, the Pension Benefit Guaranty Corp.—a government entity funded by private industry—said it was taking responsibility for the pensions the company had promised its employees. Covering about 82,000 workers and retirees, it was the largest pension takeover in U.S. history, and it meant that the agency, not Ross, would have to fulfill LTV’s multibillion-dollar obligations to steelworkers.

It wasn’t a coincidence. After decades of witnessing deals come together as an investment banker, Ross understood how to use bankruptcy to his advantage—acquiring only assets while others shouldered the burdens. “He taught me so much,” says Rodney Mott, who ran International Steel Group, the company Ross formed. “Purchase the assets through bankruptcy, which would make them free and clear. There is no pension obligation. The government takes over.”

The PBGC’s pension takeover record didn’t even last until the end of the year. In November 2002, Ross began work on a deal to buy bankrupt Bethlehem Steel, and one month later the PBGC took over benefits for about 95,000 people.

Pensions were sometimes slashed in half.

“It didn’t happen once, it happened a number of times,” Vince Snowbarger, a former acting director of the PBGC, says about the takeovers. “So when you’d hear that Wilbur Ross was considering purchasing a company … I’m not going to say [we] were terribly thrilled to hear that he was involved.”

The pattern repeated at least three more times. As Trump’s Commerce secretary, Ross would be one of three directors overseeing the PBGC. Union leaders have praised Ross for bringing companies back from bankruptcy, but he wasn’t bringing back all of the previous employees. Mott figures that on average they employed about half the number of workers they had employed before. “At the time, I think we did the right thing,” he says. “You only feel really bad on a personal basis if you ever meet any of those employees. You go off on

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week after Ross announced the LTV deal, President George W. Bush said he’d protect U.S. steel by putting tariffs as high as 30 percent on imports, breaking with some members of his own economic advisory team who said it would hurt consumers. Ross went on a buying spree, assembling the second-biggest steelmaker in the U.S. Without the tariffs, he told a trade commission in 2003, “none of this would have been possible.”

At the time, Ross spoke unequivocally against free trade.

“America’s standard of living is being systematically destroyed by our international trading partners,” he said in a public appearance, “and the people must be made aware of this economic disaster.” In late 2003, the World Trade Organization ruled the Bush steel tariffs were illegal. But they did their job for Ross: In the period after the tariffs were announced, steel prices soared. Within months, he and his backers announced they were selling their steel company to an Indian billionaire for $4.5 billion, reaping more than an eightfold profit.

By then, Ross had also bought the bankrupt textile

companies Burlington Industries and Cone Mills, the largest denim maker in the world. Burlington had operations in Mexico and India, and Ross wanted to expand worldwide.

At the end of 2003 he invited dozens of industry executives to a conference room in downtown Washington, where he persuaded them to sign a statement backing a trade agreement that would allow Mexican textiles to be sewn in Central America and imported duty-free into the U.S. The next day he gave a speech in North Carolina, telling textile makers that protectionism was “the way to extinction.”

Now loudly for free trade, Ross began embracing countries he’d recently accused of systematically destroying America.

His textile company announced that it was building a plant in China, a complex in Vietnam, and an 850-worker facility in Nicaragua that drew the country’s president to the opening ceremony. In September 2008, Ross’s private equity firm announced a joint venture with a subsidiary of China’s largest state-owned power producer. Ross called it “living proof of the financial and intellectual interconnectedness of two of the world’s great powers.” Three years later, he and the sovereign fund China Investment Corp. invested in a shipping deal together. “I think that it’s total political nonsense, all the China bashing,” Ross said at the time. “The trade deficit we have with the rest of the world is almost equal to the trade deficit we have with China, so what’s the big deal about China?”

It proved a big deal to Trump, of course. “We can’t continue to allow China to rape our country,” the then-candidate said at an Indiana rally last spring. A few months later, Ross publicly reversed himself on this issue, too. “China has used a potent arsenal of unfair trade practices to shut over 70,000 American factories and kick millions of American workers to the curb,” he wrote with the economist Peter Navarro in an August op-ed in the Pittsburgh Post-Gazette. In a September white paper for the campaign, they called China the “biggest cheater in the world,” blaming the U.S. trade deficit on a flood of subsidized imports. Ross also repudiated the Trans-Pacific Partnership, a trade agreement he’d endorsed in 2015. He told senators in January that his feelings changed when he delved into details.

In business, switching positions is considered pragmatic.

In politics, it’s flip-flopping.

After Ross spent a lifetime on Wall Street, what he really thinks about the issues is anyone’s guess. In 2012 he defended Mitt Romney’s comments about 47 percent of Americans being freeloaders; the same year, WL Ross invested about $50 million into the longtime union lender Amalgamated Bank. “I would watch him on CNBC at 6 in the morning, taking positions totally adverse to the bank and its customers,” says Edward Grebow, Amalgamated’s then-CEO. “And then at 9:00 I would have breakfast with him, or a meeting with him, and he could not have been more supportive.”

FROM LEFT: MANUEL BALCE CENETA/AP PHOTO; LUCAS JACKSON/REUTERS

vacation, run into an ex-Bethlehem employee that’s been forced into retirement and has a reduced pension—you try to avoid conversation.” On a trip to Florida a decade ago, Mott recalls, “I was at Daytona at a flea market, and somebody there was selling wares. And we just got to talking, and I could tell from the accent they were from the North, and he was an exsteelworker. Nobody I knew, but just an ex-steelworker. You don’t identify yourself at that point, ’cause you don’t know how people think of you.” He says he walked away without buying anything.

Ross defended his practices in a 2003 interview with Businessweek, saying he saved jobs that would have vanished. “What we do is a very countercultural activity,” he said. “Confrontational things, admission of error, admission of defeat, restructuring, laying people off: Those are not American ideals.”

rump, too, has benefited from Ross’s support. In 1990 the Trump Taj Mahal casino in Atlantic City opened with a ceremony featuring red ribbons, green lasers, and a talking genie. Like many of the buildings that marked Trump’s rise, the casino had been funded with borrowed money, including $675 million worth of junk-bond sales. It quickly slid into bankruptcy, and Ross represented bondholders who could have cut Trump out. Instead, the two men struck a deal that allowed Trump to keep a major stake.

By tapping Ross to head Commerce, Trump is rewarding his former savior with oversight of almost 47,000 federal employees, more than the Education and Labor departments combined. The century-old department was run by Herbert Hoover just before he became president and Pete Peterson before he became a private equity billionaire. If confirmed, Ross will be expected to fulfill some of the campaign pledges to the Rust Belt that got Trump elected. “Your steel has been decimated,� Trump said during an October rally in Pennsylvania. “We know all about the games where China is dumping all over the place. They are dumping steel. Your steel will come back.�

Most politicians make promises to blue-collar workers, but the stakes for Trump are higher. The conservative Tax Foundation has warned that his plan to slash taxes would add trillions to the national debt. In his September white paper

in to make money,� he said before the hearing. “In my Palm Beach world, no one is complaining about him having screwed them.� Lauder predicted that Ross would do well at his hearing. “Is he rich? He’s rich,�

Lauder said. “Will he be grilled by some people about his investments in coal mines? Yeah, I guess he will, because he was a big coal mine guy.� (In 2006, 12 workers at Sago Mine, one of Ross’s holdings, died in the worst West Virginia mining disaster in decades. One miner, age 51, had time to write a message on a scrap of paper that was found afterward. It read in part, “It wasn’t bad I just went to sleep.�)

Lauder was wrong about the coal questions. When Ross sat alone at a table in front of the Commerce committee in Washington, he wasn’t grilled about the years he spent putting together the International Coal Group, nor Homeward Residential, which Ross had made into the second-largest servicer of subprime mortgages during the housing crisis. There were few questions on his steel or textile conglomerates. The

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co-written with Navarro, Ross promised that, by improving deals, boosting exports, replacing some imports with American products, and using tariffs, Trump would cut the trade deficit so dramatically that new tax revenue would mostly make up for all those tax cuts. Moody’s Analytics wasn’t as optimistic. In June it said Trump’s economic proposals could trigger a trade war and a recession.

Ross, who sold his company to Invesco a decade ago, offered some indication of how his business history might play out in his new role: Days before the election, he and Navarro, now the head of a new White House National Trade Council, released a paper on Trump’s infrastructure plans.

Dams, railroads, pipelines, airports, bridges, ports, tunnels, and highways are crumbling, it warned—an assessment on which both parties agree. But rather than calling for more public spending, as Democrats would prefer, the Ross-Navarro plan advocates about $140 billion in tax breaks for private investors. Critics say these developers could build toll roads and other revenue-producing forms of infrastructure while leaving alone unprofitable but essential structures, such as rural water mains and levees. ne day in January, as Ross was getting ready for his confirmation hearing in the Senate, he attended a party hosted by one of his friends, the cosmetics heir Leonard Lauder, who’s worth about $10.4 billion. Lauder was glad for Ross’s good fortune. “All I know is that here’s a guy who’s

senators were chummy, tranquil, and distracted. At one point, Connecticut Democrat Richard Blumenthal praised Ross for planning to divest hundreds of millions of dollars in assets to take the job, even though a half-hour earlier Ross had told the committee that he wouldn’t part with his stake in Diamond S Shipping, a tanker company that his private equity firm had invested in alongside China’s sovereign wealth fund.

Near the end of the hearing, the ranking Democrat, Senator Bill Nelson of Florida, commended Ross’s wife for not letting her eyes wander during the proceedings. “Let me assure you that this hearing is a piece of cake compared to some of the other nominees,� Nelson said. Everyone grinned. Ross had sent Nelson $4,800 for his last run.

As Trump settles into the White House, some Americans have expressed fears that the Wall Street financiers he’s bringing into government will usher in an era of cronyism, corruption, trade wars, and disregard for the plight of the poor. Trump, of course, argues otherwise. “One of the networks said, ‘Why, he put on a billionaire at Commerce!’ Well, that’s ’cause this guy knows how to make money, folks,� he said about Ross at a December victory rally in Cincinnati.

Trump stepped away from the microphone, spreading his arms. “I’d like to put on a guy that failed all his life, but we don’t want that, do we?� The crowd hissed. “No, I put on a killer. I’ve been honest. I said, ‘I am going to be putting on the greatest killers you’ve ever seen.’ We need that. It’s time.

It’s time. It’s time.� —With David Carey

How Uber Fought City Halls,

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d e t s a l t Ou , s l a Riv and

and Airbnb Won Over the Citizenry, Figured Out the Sharing Economy

BY BRAD STONE

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From the book The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World by Brad Stone. © 2017 by Brad Stone. Reprinted by permission of Little, Brown & Co., New York, N.Y. All rights reserved.

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In January 2009 the three founders of a littleknown website called Airbedandbreakfast.com decided at the last minute to attend the inauguration of Barack Obama. Brian Chesky, Joe Gebbia, and Nathan Blecharczyk were all in their mid-20s and had no tickets to the festivities, or winter clothes, or even a firm grasp of the week’s schedule. But they saw an opportunity. Their online home-sharing company had limped along for more than a year with little to show for it. Now the eyes of the world would be on the nation’s capital, and they wanted to take advantage.

They found a cheap crash pad in D.C., an apartment in a drafty three-floor house near Howard University that, like so many other homes during that desperate time, was in foreclosure. The rooms were unfurnished save for a pullout sofa, which the three founders gave to their friend and adviser, Michael Seibel, who ran the streaming-video site Justin.tv. At night they crowded onto the hardwood floor on inflatable beds.

Their host was a tenant waiting for eviction. He lived in the basement apartment and had used the AirBed & Breakfast website to rent out the empty first floor and, to three other guests, his own bedroom, living room, and walk-in closet. Sensing a promotional opportunity, Chesky e-mailed the staff of Good Morning America about the closet, and a producer included it in a roundup of unusual accommodations for the inauguration.

By day the founders and Seibel passed out AirBed & Breakfast fliers at the Dupont Circle Metro station. “Rent your room! Rent your room!” they cried to the bundled-up commuters, who mostly ignored them. At night they met other AirBed & Breakfast hosts in the city, talked their way into inaugural parties, and answered multiple e-mails from a disgruntled customer—the guest in the basement bedroom. The woman had driven her

Volkswagen bus from Arizona to D.C. with her support dog, a Chihuahua, and she wasn’t keen on the crowded accommodations. In a barrage of complaints, she said she was certain she smelled marijuana, that the juice she’d left in the fridge had been taken, and that the house didn’t comply with the Americans with Disabilities Act. At one point she threatened to call the police.

Chesky, Gebbia, and Blecharczyk sat just a few feet above her head, typing out apologetic replies.

On the day of the inauguration, they awoke at 3 a.m. to claim a good viewing spot on the National Mall. They walked 2 miles to get there, buying hats and face masks at a kiosk along the way. By 4 a.m. they’d found a space on the green in the area open to the general public, a few football fields away from the presidential podium.

“We just kind of sat back to back in the middle of the Mall and tried to stay warm,” says Chesky, the chief executive officer of the startup, now named Airbnb. “It was the coldest morning of my life.

Everyone cheered when the sun came up.”

Garrett Camp and Travis Kalanick also attended the festivities that week. A friend on the inaugural committee, the investor Chris Sacca, had persuaded them to come. Kalanick, a Los Angeles native who’d recently sold his startup to web

Screenshot taken before the company name was shortened to Airbnb

PREVIOUS SPREAD: ILLUSTRATIONS BY SIMON ABRANOWICZ. THIS SPREAD: COURTESY AIRBNB

infrastructure company Akamai, made a $25,000 donation to the inaugural committee and split the expense with Camp. They were both in their early 30s and, despite the global economic meltdown, full of optimism about the transformative effects of technology. They were largely ambivalent about politics but didn’t want to miss a historic moment or, just as urgently, a seminal party.

They also arrived in D.C. fully unprepared. The night before the inauguration, they found themselves stuck in a line outside the Newseum, trying to get into a party hosted by the Huffington Post. It was windy and cold, and they had only one wool hat between them, which they took turns wearing, 10 minutes each, while frantically texting one of the party’s hosts, asking to be allowed inside.

On the big day, Camp and Kalanick woke up late.

Kalanick had rented a swank home near Logan Circle on the vacation-rentals website VRBO, but it was a few miles away from the Mall, and no taxis were available. They ended up sprinting down the wide D.C. avenues. When they finally got to their seats, perched with Sacca and his high-powered Silicon Valley friends above the inaugural platform, the sweat on their bodies cooled, giving way to a chill. “By the end of the day, I was definitely sort of pre-hypothermic,” Kalanick says. “Everyone was like, ‘What’s wrong with you?’ ” At the time, Camp had been trying to get Kalanick excited about a business idea he was developing that would allow anyone with a smartphone to call a black town car with a click of a button. Kalanick was interested but not particularly enthusiastic, conceding that it was a good idea, just not a big one. He had his own startup ideas, including one that he called “Pad Pass,” a network of furnished high-end apartments.

Yet here in Washington was clear evidence that Camp’s car service was needed. A car that could be summoned, tracked, and rated via a smartphone would be a godsend for getting around big cities, especially during huge events such as inaugurations.

“See?” Camp said to Kalanick, as the crowd chanted “O-bam-a! O-bam-a!” and the world waited for the new First Family to take the stage. “We really need this.”

Camp even had a name for his high-tech car service: Uber.

That was eight years ago. Much has changed since—the president, for starters. But few companies have altered city life as deeply and as swiftly as the two started by the entrepreneurs shivering anonymously in the crowd that day.

Airbnb and Uber, their headquarters only a mile apart in San Francisco, are among the fastestgrowing startups in history by sales, market value, and number of employees. Together they embody the third phase of internet history, the

post-Google, post-Facebook era of innovation.

They’ve attained these heights, and a combined worth of $99 billion, despite owning little in the way of physical assets. Airbnb can be considered one of the biggest hotel companies in the world— currently valued at $30 billion, about the same as Marriott International—yet it possesses no actual hotel rooms. Its founders are billionaires three times over, at least on paper. Uber is among the world’s largest car services, yet it doesn’t employ professional drivers or own any vehicles (save for a small, experimental fleet of self-driving cars).

Uber is valued at $69 billion, more than any other privately held tech startup in the world. Kalanick and Camp have an estimated net worth of about $6 billion each.

Both startups offered age-old ideas (share a vehicle, rent your home) with new twists and fostered a remarkable degree of openness among strangers. And both companies have been generating nearly nonstop controversy in every urban market they enter. They’ve come to represent, at least to some, the hubris of the techno-elite. Critics blame them for destroying the basic rules of employment, exacerbating traffic, ruining neighborhoods, worsening housing shortages, and generally bringing unrestrained capitalism into liberal cities. Airbnb and Uber didn’t anticipate this degree of pushback, which might have undone less zealous, more circumspect entrepreneurs.

So how did it all happen? How did each company maneuver past entrenched, politically savvy incumbents to succeed where others had failed? How much of their success was luck?

There are two little-known chapters in the histories of Uber and Airbnb, two pivotal moments when each discovered the secret weapon that would drive its rise. Both stories are at odds with the creation tales the founders like to tell, and both are crucial to understanding how these two companies defied odds, mayors, and city councils, and became widely admired, bitterly resented, and valued into the stratosphere.

The Growth Hacker By the spring of 2009, the newly renamed Airbnb was small and struggling. After graduating from Y Combinator, a startup school in Silicon Valley, Chesky, Gebbia, and Blecharczyk worked out of their apartment on Rausch Street in San Francisco’s South of Market district. They hadn’t solved the chicken-and-egg problem that confronts any new online marketplace: To get listings, you need customers, and to get customers, you need listings.

An early Airbnb PR stunt: Presidentialthemed cereal.

(Cap’n McCain’s not pictured)

47

“Every day I was working on it and thinking, ‘Why isn’t it happening faster?’ ” Chesky says.

“When you’re starting a company, it never goes at the pace you want”

Airbnb founders (from left) Chesky, Gebbia, and Blecharczyk

from middle school one day at age 12, when he took a book about computer languages off his dad’s shelf and devoured it. For Christmas, he asked for a book about Microsoft’s programming language QBasic, and he plowed through that one in three weeks.

Blecharczyk ran cross-country at his Boston public high school and excelled in his classes, but at home he had a far less conventional life. After learning to code, he started writing increasingly sophisticated programs and giving them away on the internet, asking for voluntary donations. One early piece of shareware allowed computer users to place digital sticky notes on their screens. Later, another program of his interfaced with America Online, which was then walled off from the broader web, and gave programmers a way to send internet messages into the e-mail and IM accounts of AOL members.

Soon after he posted that program, Blecharczyk got a phone call. The caller had seen the e-mail tool and offered him $1,000 to write something similar. When he told his dad about the offer, Paul Blecharczyk responded: “Son, no one from the internet is going to pay you $1,000.”

Blecharczyk wrote the program anyway and got his money. He later found out his customer had himself been hired to create it and was merely subcontracting out the work (and was surely paid more than a grand). The customer then introduced Blecharczyk to his client and to other potential clients, and suddenly Blecharczyk was earning considerable money coding a variety of tools for a nascent industry. Its practitioners innocuously dubbed it “e-mail marketing.” The world came to know it as something else: spam.

Continuing with this side work through college, Blecharczyk eventually developed a suite of e-mail marketing products to help spammers organize and orchestrate their campaigns and maneuver around internet service providers that were desperately attempting to shut off the deluge. The orders poured in, as did the cash.

His company went by several names at various times, including Data Miners and, eventually, Global Leads, which he incorporated in the State of Massachusetts after his freshman year at Harvard in 2002. At first he couldn’t accept credit cards, Blecharczyk recalls, so he had customers enter

Rooms available, New York, January 2016

115k

40k

Hotels

Airbnb

The spam operation earned Blecharczyk close to $1 million, he says, and paid his college tuition and more

DATA: STR, INSIDE AIRBNB.COM

48

The few apartments on the site drew few guests looking for travel accommodations, and the lack of guests didn’t inspire potential hosts to make their homes available to total strangers over the internet.

“Every day I was working on it and thinking, ‘Why isn’t it happening faster?’ ” Chesky says.

“When you’re starting a company, it never goes at the pace you want. … You start, you build it, and you think everyone’s going to care. But no one cares, not even your friends.”

He and his co-founders like to recount their early misadventures trying to ignite the business.

They sold boxes of presidential-themed cereal, Obama O’s and Cap’n McCain’s. While Blecharczyk stayed behind to code, Chesky and Gebbia kept trying to build up early listings by visiting New York, Las Vegas, and Miami, among other cities, and organizing meetups with any potential hosts they could find. They also cold-called propertymanagement companies, asking them to add multiple listings to the site, then abandoned that tactic when Chesky concluded these types of listings didn’t represent “the spirit of what Airbnb was”— hosts inviting travelers into their homes and facilitating authentic travel experiences.

The official company history focuses on Chesky and Gebbia’s prodigious ability to light up an online community through clever design and their enticing ideology of a new, open, noncorporate world order. But what really got it all going was the more technical, clever, and some might say devious work of Blecharczyk.

Just 24 at the time, Blecharczyk had coded the entire site himself, using what was then a new open source programming language called Ruby on Rails.

He devised a flexible, global payment system that allowed Airbnb to collect fees from guests and then remit them to hosts, minus commission, using a variety of online services such as PayPal. He’d also presciently hosted the site on Amazon Web Services, a new division of the e-commerce company that allowed businesses to rent servers via the internet only as needed, a huge cost savings that would become standard practice for an entire wave of new businesses.

“Joe and I would have crazy dreams and visions,” says Chesky of his co-founder. “Nate would find a way to make the wildly impractical possible.”

But that wasn’t the full extent of Blecharczyk’s talents. He was born in Boston, the son of a homemaker mom and an electrical-engineer dad who worked for a local industrial equipment manufacturer. His father, Paul, would have his sons do mechanical tasks around the house, and he brought home discarded equipment, such as an old Xerox copier, and encouraged them to take it apart in the backyard. “There is no job too big or too small for PB and sons,” he would say to his boys.

Soon, young Nate was consumed with computers. According to family lore, he was home sick

PHOTOGRAPHS: COURTESY AIRBNB. DATA: AIRBNB, EQUIDATE, AIRDNA.CO

their bank account details on his site, and then he printed the bank numbers on blank OfficeMax checks, wrote down the amounts he was due— typically around a thousand dollars—and went to the bank to deposit them. “Amazingly, this is legal,” he says, recounting his early success with delight.

“I was literally printing money!”

At the end of every week and after every three months, he gave his parents a financial report.

Naturally, Paul and Sheila Blecharczyk were mystified. “This was a whole new world,” Blecharczyk says. “I don’t think anyone really knew what to expect or what this was.”

The spam operation earned Blecharczyk close to $1 million, he says, and paid his college tuition and more. It also earned him a spot on an online blacklist called Register of Known Spam Operations, maintained by a London-based anti-spam organization called the Spamhaus Project. On its page devoted to Data Miners, Spamhaus alleged: “Data Miners (aka: Nathan Underwood Blecharczyk) is one of the main sources of broken/open e-mail relays (used by spammers), and the tools to help locate and exploit them,” meaning Blecharczyk was finding SMTP servers that had an open connection between sender and receiver, which allowed him to slip in spam e-mails. Blecharczyk says he shut his business down in 2002 to focus on his college studies, because the work was taking up all his time.

He discusses all this years later from Airbnb’s offices and is unapologetic about how he earned his first considerable fortune. “All this was new,” he says. “There were frankly no rules around it.” That is technically true—the Federal CAN-SPAM Act that made sending or facilitating spam a federal crime wasn’t passed until 2003. But for years before that, spam was a well-known scourge that frustrated e-mail users and overwhelmed internet companies.

“It’s part of being a pioneer,” Blecharczyk says.

“It’s not just exciting to build things but to explore new fields and to recognize what comes with that is a lot of uncertainty. That’s very true today, and it has been true of Airbnb. It’s a whole new concept.”

When he graduated from college, Blecharczyk wasn’t just a skilled programmer but also the embodiment of a new Silicon Valley hero: the growth hacker. Growth hackers use their engineering chops to find clever, often controversial ways to improve the popularity of their products and services. Blecharczyk’s talents are recognizable behind two of Airbnb’s early, crafty schemes to usurp Craigslist, which had a far larger audience at the time.

In late 2009, a few months after Airbnb graduated from Y Combinator, Craigslist users in some cities began to notice something annoying.

Whenever anyone posted a property for rent on Craigslist, even if that person had specified that

he didn’t want to receive unsolicited messages, he would get an e-mail touting Airbnb. If the apartment was listed in, say, Santa Barbara, the e-mail would read: “Hey, I am e-mailing because you have one of the nicest listings on Craigslist in Santa Barbara and I want to recommend you feature it on one of the largest Santa Barbara housing sites on the Web, Airbnb. The site already has 3,000,000 page-views a month.”

All these e-mails were identical except for the city, and they typically emanated from a Gmail account bearing a female name.

Dave Gooden, another online real estate entrepreneur, recognized the soaring popularity of Airbnb in 2010 and became curious about it.

Suspecting what was going on, he posted a few dummy listings on Craigslist, and then wrote a blog post in May 2011 about his findings. He concluded that Airbnb had registered Gmail accounts en masse and set up a system to spam everyone who posted on Craigslist. In his opinion, Airbnb’s activity was a nefarious “black-hat” operation. “Craigslist is one of the few sites at massive scale that are still easily gamed,” he wrote. “When you scale a black hat operation like this you could easily reach tens of thousands of highly targeted people per day.”

After Gooden’s post, a few technology blogs picked up the story and Airbnb was put on the defensive. Its explanation, which is somewhat difficult to believe, was that it had hired contractors who may not have been up to the company’s ethical standards. “One of the lessons you learned is you have to be very close, provide constant management and guidance to the people you’re working with,” Chesky said when I asked him about it onstage at an industry event after Gooden’s blog post.

A few years later, Blecharczyk offered a little more detail. They’d hired foreign contractors on Elance, an online staffing service, and were paying them per lead, or for every new host that would list on Airbnb. “Many companies bootstrap themselves off of finding a user segment on Craigslist and then building a better experience,” he says. The whole effort, he insists, was ineffective because Craigslist users were typically looking for long-term tenants, or roommates, rather than vacationers. “It did not

Airbnb guest arrivals

80m

40m

0 2009

2016

Company valuations $60b

$40b

$20b

Uber

Airbnb $0 4/2009

1/2017

Airbnb is worth $30 billion, which comes to

$198 per guest arrival

Blecharczyk at home, 1999

49

technique. He says Chesky apologized, stopped the campaign, and sent him two boxes of Obama O’s as a peace offering.

Blecharcz yk pioneered a clever use of Facebook’s early rudimentary ad system, which for the first time allowed companies to tailor and target ads to the interests and hobbies that members specified in their profiles. If a user said he liked yoga, for example, he would see an ad from Airbnb on Facebook that announced “Rent Your Room to a Yogi!” If a person liked wine, he’d see “Rent Your Room to a Wine Lover!”

Facebook ads were cheap, and people tended to respond to these eerily targeted messages. By February 2011, Airbnb had passed 1 million nights booked. Less than a year later, in January 2012, it passed 4 million. The chicken-and-egg problem was solved.

Most listings, Airbnb ① Paris ② London ③ New York City ④ Rio de Janeiro ⑤ Los Angeles

Travis’s Law It started with a tweet. On Jan. 11, 2012, almost three years after Camp and Kalanick discussed the idea for a luxury car-hailing service while freezing at the Obama inauguration, a short, cryptic message from a rider-advocacy group called D.C. Taxi Watch quoted the top taxi official in the U.S. capital.

“Chairman Linton: @uber DC is operating illegally,” it read.

At the time, Uber was operating in only six U.S. cities and was moving cautiously. Although Kalanick and his colleagues had come to distrust taxi ordinances as schemes designed to protect incumbents and their shoddy levels of service from new competition, they examined local laws closely and were flexible when required. Uber was by and large a law-abider, not a law-bender. That was about to change.

The tweet was sent from inside the drab, postwar D.C. Taxicab Commission headquarters in Anacostia. The city’s taxi drivers had packed a normally sleepy hearing to make their voices heard. Uber’s town-car drivers, they argued, had been illegally operating for the past two months.

Ron Linton, appointed only six months before

by Mayor Vincent Gray to head the taxicab commission, was inclined to agree. Linton, in his early 80s, was an avuncular policy planner and longtime reserve officer in the city police department who wore a stern disposition and an obvious toupee. He fashioned himself an agent of change and was determined to modernize the capital’s pitifully antiquated taxis, which ignored minority neighborhoods and didn’t accept credit cards. Back then they didn’t even have dome lights or a uniform color to distinguish them from other cars.

But Linton was hellbent on reforming the

Kalanick: Granada Hills High School, Los Angeles, class of 1994

The Uber app’s “de Blasio mode” was a dig at the New York City mayor

DATA: NEW YORK TAXI & LIMOUSINE COMMISSION

50

end up driving any meaningful business,” he says.

But another strategy unquestionably did. A few months after the bulk e-mailing campaign to Craigslist users, Airbnb tried a new tactic.

Instead of luring Craigslist users to Airbnb, the company did the opposite: It allowed Airbnb users to take a streamlined version of their elegant listing and cross-post it with a single click on Craigslist. “Reposting your listing from Airbnb to Craigslist increases your earnings by $500 a month on average,” the site informed prospective hosts. “By reposting your listing to Craigslist, you’ll get the benefit of more demand, while still being able to use Airbnb to manage and moderate your inquiries.”

The tool, which Chesky says was originally the idea of adviser Seibel, was a boon for the company.

It established Airbnb as a way to create more visually appealing Craigslist ads and, in effect, dropped ubiquitous Airbnb ads into the network of its largest competitor. “It was a kind of a novel approach,” Blecharczyk says. “No other site had that slick an integration. It was quite successful for us.”

Other growth hackers noticed this and applauded it as a sophisticated technical achievement. Craigslist has different versions of its site in hundreds of cities, each with different web domains and menu formats. Blecharczyk had designed a way for Airbnb to post seamlessly onto the right site. “It’s integrated simply and deeply into the product, and is one of the most impressive ad-hoc integrations I’ve seen in years,” wrote Andrew Chen, a fellow growth hacker who now works at Uber, in an admiring blog post.

“Certainly a traditional marketer would not have come up with this, or known it was even possible.

Instead it [would] take a marketing-minded engineer to dissect the product and build an integration this smooth.”

Airbnb removed the tool in 2012 after Craigslist objected to these kinds of tactics, but by then it was too late. Like sucking through a straw, Airbnb was pulling listings and users over from Craigslist. It helped, of course, that its site was better designed and far easier to use and that it was constantly working to provide easier forms of payment, better mobile apps, and a safer experience where hosts and guests used their real identities and reviewed one another.

Blecharczyk also ran productive online ad campaigns during these early years. If people searched Google for an apartment in Boston, for example, Airbnb ads would pop up at the top of the page.

Blecharczyk and his marketing team became experts at finding the cheapest and most frequently searched keywords and at generating crisp ads that sometimes directly attacked rival home-listing sites.

“Better than Couchsurfing.com!” some of Airbnb’s early search ads blared. Dan Hoffer, a Couchsurfing co-founder, e-mailed Chesky to complain about this

FRANCE: GEORGES GOBET/AFP/GETTY IMAGES. DATA: UBERESTIMATE.COM

industry from the inside and preserving the jobs of the region’s 8,500 licensed drivers. Uber is “operating illegally, and we plan to take steps against them,” Linton assured the boisterous drivers at the meeting, which was duly tweeted

by D.C. Taxi Watch.

That morning, Uber’s then D.C. general manager, Rachel Holt, was just settling into her new office.

As in the other cities Uber had entered, the maze of local taxi regulations didn’t seem to explicitly prohibit the company’s service. In D.C., yellow cabs had to use taxi meters to calculate fares, while limos could charge only a prearranged fare. But there was a third classification in the bylaws, under section 1299.1 in the District of Columbia Municipal Regulations, which seemingly contradicted the other two rules by stipulating that sedans carrying six passengers or fewer could charge on the basis of time and mileage. Uber’s approach clearly qualified.

After she saw the tweet, Holt e-mailed Linton’s office asking for a clarification. She was told she would hear back within 48 hours. That was a Wednesday, and Linton was true to his word.

On Friday, his office tipped local press to assemble outside the Mayflower Hotel on Connecticut Avenue. The chairman then ordered an Uber town car from the Cleveland Park neighborhood and took it to the hotel, where he was met at the circular driveway by five hack inspectors from the D.C. Taxicab Commission.

As three reporters watched, the officers slapped the stunned driver with $1,650 in fines for driving an unlicensed vehicle in the District and not having proof of insurance on hand, among other infractions. Then they impounded his car for the Martin Luther King Jr. Day long weekend. Standing in front of the press, Linton slammed Uber for unleashing regulatory havoc in the city. “What they’re trying to do is be both a taxi and a limousine,” he said. “Under the way the law is written, it just can’t be done.”

Holt, who’d arrived three minutes late to the scene after being alerted by the driver that trouble was afoot, was perplexed. According to the actual citations, Linton was going after the driver himself, a Virginia resident, not Uber, and he was doing it based on one of the city’s more arcane and senseless rules—that limo drivers must present a fare to the passenger in advance, rather than using a meter that measures time and distance. The fines seemed mostly aimed at intimidating drivers and keeping them from signing up with Uber. Nothing Linton did affected whether Uber could continue to operate in the city, much less slow its rapidly growing business there.

Over the next few months, Uber’s business in D.C. grew briskly. By then the issue of Uber’s regulatory status had fallen into the lap of a D.C. city councilwoman, Mary Cheh, the chairperson

Dummy fixed to a taxi during a protest in France, January 2016

of the Committee on Transportation and the Environment.

She’s a graduate of Harvard Law and a Democrat who’d struggled for years to drag anachronistic D.C. cabs into the modern age. “Even while Uber was coming around, I was in the process of trying to reform the taxicab industry, which was in the 20th, maybe the 19th, century,” she says.

She was also a pragmatist who sought peaceful compromise among many of the powerful local taxi interests in what was turning into a radioactive topic. That spring she sent a letter to Linton and the D.C. Taxicab Commission, asking them to stop towing Uber cars, and then started working toward a compromise among all the parties, including those who were increasingly incensed

by Uber’s success.

What was needed, she reasoned, was an unambiguous clarification of Uber’s legal status that cut through the contradicting regulations and allowed it to operate in the city. Cheh spent the week after Memorial Day 2012 negotiating with Uber executives, and the result of those talks, Cheh thought, was an elegant short-term compromise that she called the “Uber amendments.” The regulations would give Uber legal sanction to operate.

But they also added a price floor, which required Uber to charge several times the rate of a taxicab.

What happened next would mold the political tactics of Uber and many of the tech startups that sought to emulate it.

In San Francisco, Kalanick had never fully agreed to a minimum fare. Now recognizing the approaching competition from companies such as Hailo, a competitor in the U.K., and realizing that services like UberX would require aggressive price cuts, he decided he wanted to fight—to the consternation of his own lobbyists, who’d already provisionally agreed to Cheh’s deal.

Kalanick started hurling rhetorical hand grenades, labeling Cheh’s proposal a “price fixing scheme” on Twitter and accusing the councilwoman of “doing everything to protect the taxi industry.”

But Uber was going to need more than tweets to sway the D.C. City Council, so Kalanick decided to go right to his customer base. He sent an impassioned e-mail to thousands of Uber users in D.C.,

Most Uber surges during the week of Jan. 16 ① Los Angeles Intl.

Airport ② Waikiki, Honolulu ③ McCarren Intl.

Airport, Las Vegas ④ Ronald Reagan Washington National Airport ⑤ Downtown Las Vegas ⑥ Newark Liberty Intl.

Airport ⑦ San Francisco Intl.

Airport ⑧ Midtown New York ⑨ Portland Intl. Airport ⑩ Westwood, Los Angeles

“I know that you like to cast this as some sort of fight,” Cheh told Kalanick.

“Do you understand that? I’m not in a fight with you”

51

of fight,” she said. “Do you understand that? I’m not in a fight with you.”

“When you tell us how to do business, and you tell us we can’t charge lower fares, offer a highquality service at the best possible price, you are fighting with us,” Kalanick replied.

“You still want to fight!” Cheh said in exasperation. The conversation turned to surge pricing, Uber’s controversial practice of charging more— sometimes a lot more—during rainstorms, blizzards, presidential inaugurations, and other times of peak demand. “I am curious about whether that is somehow a kind of gouging,” she said. “If there’s more demand, why should the rider have to pay more money?”

Kalanick launched into an explanation of the economy of Communist Russia and how long lines formed at stores for essentials such as toilet paper.

“It’s because the price of toilet paper was too low,” he said. “There wasn’t enough supply. Everybody could afford toilet paper, but they could never get it because there were too many people that wanted it and not enough people willing to supply it. And so that’s kind of the situation that gets created when you’re not able to change price.”

“So they didn’t have any toilet paper,” Cheh said with mock amazement.

“It was a rough situation,” Kalanick replied.

“Look, price controls by governments, you know, they don’t always go well. In fact, I’d say 99 percent of the documented cases don’t go well.”

“But what I’m trying to figure out is why you get the advantage,” Cheh said, as she recalled standing in a long hot line in 1968 to view Robert Kennedy lying in state after his assassination and being horrified as vendors jacked up their prices for water. “I’m not sure I fully agree with you that this is really an economic mechanism that makes everybody happy!”

In San Francisco, Salle Yoo, Uber’s relatively new chief counsel, was watching a webcast of the hearing. According to an Uber lobbyist named Marcus Reese, at around this point in the testimony, she started texting him, asking him to pull Kalanick from the stand as soon as possible. “He’s in the middle of a public hearing,” Reese texted back. “I can’t just walk up to him and say you’ve got to go!”

Pro-taxi councilman Jim Graham, wearing a taupe suit and a gold bow tie, was sitting to Cheh’s right. “I’m trying to make a point,” he scolded Kalanick. “And the point that I’m trying to make is that if you remain unregulated, and the taxicabs remain increasingly more regulated, there’s a fundamental inequity to that.” He urged Kalanick to reconsider a minimum fare. “I don’t want this city to be [all] Uber. I really don’t. Because there’s too much of a history of our taxicab industry.”

“If you allow competition, what you’ll get is a better taxi industry,” Kalanick said.

“Brian would come back saying, ‘We have to be tougher!’ ’’ says an Airbnb exec of Kalanick and Chesky’s dinners. “And Travis would come back saying, ‘We have to be nicer!’ ”

Trips per day, New York, November 2016

337k

216k

Yellow cabs

Uber

DATA: UBERESTIMATE.COM

52

complaining that the City Council would make it impossible for the company to lower fares and ensure reliable service. “The goal [of the Uber amendments] is essentially to protect a taxi industry that has significant experience in influencing local politicians,” he wrote, basically accusing Cheh and her colleagues of corruption.

Then he supplied the phone numbers, e-mail addresses, and Twitter handles of all 12 members of the City Council and urged his customers to make their voices heard.

On Uber’s website the next day he posted an open letter to the council members, writing ominously, “Why would you so clearly put a special interest ahead of the interests of those who elected you? The nation’s eyes are watching to see what D.C.’s elected officials stand for.”

Cheh was taken aback by the ferocity of the response. Within 24 hours the council members received 50,000 e-mails and 37,000 tweets with the hashtag #UberDCLove. When they arrived for the last session of the summer on July 10, Cheh’s colleagues all turned to her in confusion and fear.

The overwhelming response from its customers in the capital presaged the political campaigns Uber would later mount in places such as London, New York, Florida, and California.

Cheh’s price-floor idea was gone by midmorning, and an alternative amendment was proposed allowing Uber to operate legally in D.C. until the matter was revisited at the next meeting in September.

Kalanick got plenty of advice from his lobbyists in advance of his testimony that month in the historic Wilson Building on Pennsylvania Avenue.

Play it straight. Just stick to the talking points and don’t engage in a philosophical back-and-forth.

The real advocacy takes place in other forums. In public hearings, try to act benign and respectful.

He started testifying at 1:15 p.m., after a morning that had included appearances by Linton, various drivers, and Hailo founder Jay Bregman, who wore a suit and tie and pointed out that Hailo worked harmoniously with regulators in London and Dublin and planned to do so in D.C. as well.

But Kalanick wasn’t in the mood for gentle courtship. Facts and intellectual arguments, not charm, were his weapons, and unlike Bregman, he wasn’t ready to kiss any political rings. Wearing a blue blazer, white shirt, and no tie, he interrupted Cheh’s first question with the words “I would disagree with that characterization.” Things went downhill from there.

“You wanted to make sure that there was a minimum fare on our services so that only rich people could use Uber, not people of middle income,” Kalanick told her.

Cheh pointed out that the proposed and discarded price floor was meant as a way to ensure a peaceful transition to a more permanent arrangement. “I know that you like to cast this as some sort

DATA: UBER. TOTALS AS OF JUNE 2016

“You can’t have competition where one party is unbridled and able to do whatever they please whenever they want to do it and the other party has their hands and feet tied,� Graham said. “That’s not competition.� “That means drivers are making a better living and riders are getting a better service,� Kalanick said. “And that doesn’t sound bad to me.�

Graham said that many taxi businesses in the District were small businesses. “This is a good thing. This is something we want to protect and nurture. This is not something we want to destroy for the sake of some kind of consolidation into a big company.� Kalanick tried to interrupt him. Graham snapped, “May I be a member of this committee, please? Do you mind?�

Kalanick laughed. “Go ahead.�

After Kalanick left the stand, Graham, visibly infuriated, suggested reinstating and even increasing a proposed minimum fare. Janene Jackson, a deputy chief of staff to Mayor Gray, came up to Reese and Claude Bailey, a well-known local lawyer that Uber had also hired, and offered her own memorably harsh review of the testimony. “Never bring that guy back here!� she said, according to Reese. Later, Jackson couldn’t recall saying that specifically. “The hearing was probably a bad one, because I have no recollection of it, except that he pissed almost everyone off,� she tells me.

And yet. By December, with Uber growing by 30 percent to 40 percent each month in the capital, Cheh and her colleagues, knowing that its users were ready and willing to defend the service, succumbed to the tide of political advocacy and essentially rolled over. On Dec. 4, the Public Vehicle-for-Hire Innovation Amendment Act defined without ambiguity a new class of sedans that could be dispatched via a smartphone app and could charge by time and distance.

It passed the Washington, D.C., City Council unanimously, garnering even Graham’s vote, without debate. “The real issue is how receptive the government is to the progress of the people,�

Kalanick told me a few years later. “It’s not about the city council or the government, it’s actually about how the incumbent industry is persuading them, let’s say, to do what I would consider the wrong thing.� Ultimately, he added, “D.C. was very receptive. But it took them time to see it and feel it.�

When traditional advocacy failed, Uber mobilized its users and directed their passion toward elected officials. The company wasn’t the first to employ this tactic, but it quickly became among the best at it, leveraging it in early battles with Cambridge, Mass., Philadelphia, and Chicago—and usually winning.

Kalanick had broken every rule of advocacy.

Nevertheless, Uber’s lawyers and lobbyists, who’d begged him, unsuccessfully, to seek compromise and testify with humility, began to whisper in

reverent tones about a new political dictate that contravened all their old assumptions. Travis’s Law. It goes something like this: Our product is so superior to the status quo that if we give people the opportunity to see it or try it, in any place in the world where government has to be at least somewhat responsive to the people, they will demand it and defend its right to exist.

Over the years, Chesky and Kalanick struck up a sporadic friendship. Every few months or so, they would go out to dinner in San Francisco, first by themselves, then with other entrepreneurs or with their girlfriends to discuss their companies’ twin successes and their common experiences battling regulators and lawmakers. “I think we learned a lot by watching each other,� Chesky says. “There are only so many people in the world that you can relate to [who share] your position.�

Employees at both Airbnb and Uber remember these dinners well. Says one Airbnb executive who was also close to Uber employees: “Brian would come back saying, ‘We have to be tougher!’ and Travis would come back saying, ‘We have to be nicer!’ �

Kalanick’s realization may have come too late.

His company’s reputation as a ruthless aggressor was molded by such tactics as introducing ridesharing in Europe, where it was expressly illegal, and adding a “de Blasio mode� to its app over the summer of 2015. It was a dig at New York City Mayor Bill de Blasio, which showed a hypothetical alternate reality with 25-minute wait times for Uber cars, should his proposed vehicle cap be put in place.

As the D.C. City Council had done years before, de Blasio meekly withdrew the proposal when confronted with a torrent of criticism and activism from Uber drivers and riders.

Chesky and his team watched Uber’s travails, following Kalanick’s series of defiant stare-downs with city councils and regulators, and insisted somewhat dubiously that Airbnb’s approach was different and softer than Uber’s. “They have their own way of seeking growth,� says Jonathan Mildenhall, who joined Airbnb as chief marketing officer in 2014. “I think for us, our community and the humanity of our community actually drives a lot of the things we do. So we approach any kind of awkward situation or any challenge with a lot of empathy and a lot of open collaboration. ... We don’t want to kind of bulldoze our way into success. We actually want to partner our way in.�

Airbnb’s reputation survived this period of feverish empire building far better than Uber’s. But like Uber, when confronted by laws it found unjust, or perhaps just inconvenient, Airbnb didn’t slow down. As Airbnb grappled with unfriendly governments in New York and other cities, it turned out that the upstarts were far more alike than Chesky and his colleagues cared to admit.

Uber rides 1b

0.5b

0 2010

2016

53

Uber’s top destinations, by number of rides ①Los Angeles Intl.

Airport â‘Ą San Francisco Intl.

Airport ③ JFK Intl. Airport ④ O’Hare Intl. Airport ⑤ Newark Liberty Intl.

Airport

SSAN FRAN’S’S NEW W EXURB

S

SOS

CO N

RED O ALL ABOUT HOT SAUNAS BRASS SS HO SU S B

Game On! Jacobe Chrisman,s Wonder Forge has perfected the not-boring board game

By Da David Dav avvidd Sa Sax axx Photograph P hot oto tog ogr gra raaph by Me Meron eroon Me Menghistab Meng engh nggh ghhistab isttab

Etc.

56

n a large, reclaimed-metal conference table in the lofty, brightly painted Seattle offices of Wonder Forge—among roaming dogs, treadmill desks, a surfboard, and Snoopy and Darth Vader figurines—the company’s latest board game is ready for play. Flight of the Jaquins, which is scheduled to be released in May, is based on the Disney Channel’s Elena of Avalor; Elena, as anyone with young kids knows, is a Latina princess with magic powers. The game’s cardboard playing surface and other components will look familiar to adults who grew up with Monopoly, Sorry!, and the Game of Life: illustrated instructions in English (and Spanish); colored dice that correspond to treasure cards; a stack of spell-casting cards; and four plastic Jaquins, which are mythical flying jungle cats. The centerpiece is a pop-up Mission-style castle where Elena and her friends live, and it presents Wonder Forge Chief Executive Officer Jacobe Chrisman, 43, with a challenge. “How do we do something big and real but also make it safe for kids and resilient enough that it won’t break if your brother steps on it?” he asks, examining the prototype. “All of which has to fit into a $15 package.”

It’s not the first time Chrisman has had to ask this question.

Potential smushings by rambunctious siblings are a habitual concern for the company, which, since its founding a decade ago, has become the dominant maker of licensed children’s board games. Many in the toy industry assume that the way to win a kid’s heart is via apps and other technological gewgaws, but Wonder Forge has carved out a lucrative niche in the board game market. You might not recognize the name, but chances are you’ve come across a Wonder Forge invention: The company sells 8 million games annually, for age 3 and up, at retailers such as Walmart, Target, and Toys “R” Us. Its 120 titles feature characters including Peppa Pig, Curious George, and Mickey Mouse, as well as those from the Frozen film and the Marvel universe.

Spurred by hits such as Settlers of Catan and Cards Against Humanity, the overall U.S. board game market grew from $794 million in 2008 to $1.6 billion in 2015, or more than 100 percent, according to NPD Group’s retail tracking service.

The service doesn’t break out figures for preschool and children’s sales. But in a separate report from November, NPD found that in the first three quarters of 2016, children’s and preschool game sales took in $400 million, a 20 percent increase over the same period in 2015.

“Wonder Forge is able to reach beyond that niche of progressive parents” who worry about the havoc wreaked on their toddlers’ brains by too much screen time, says Jon-Paul Dyson, a director of the International Center for the History of Electronic Games at the Strong National Museum of Play in Rochester, N.Y. Like smoothies blended with spinach, Wonder Forge games are designed to sneak healthy stuff into something kids enjoy. None of it’s something a boy or girl would notice while playing Disney Princess Enchanted Cupcake Party, but it’s the velvet rope separating Wonder Forge’s games from its competitors’. Its licensing deals allow beloved characters such as, say, Frozen’s Elsa, to teach skills both social (negotiation, empathy, cooperation) and cognitive (pattern recognition, strategy, balance). “Playing a game, you learn simple things like how to take turns, how to be part of a team, how to bluff, how to win or lose without being a jerk,” says Stephen Conway, a board game designer who runs the blog Major Fun. “But you also get to know the people you’re playing with. You learn about them, and they learn about you by how you play.”

Ironically, Chrisman turned cardboard evangelist during the late-’90s dot-com boom. In 1999, after selling for an undisclosed amount a data-mining software company he founded, he intended to go into the video game business. Instead, Chrisman was recruited to work at a new board game company two former Microsoft employees had started the previous year. It was called Cranium. The Trivial Pursuit-Pictionary-charades hybrid game of the same name that it designed for age 12 and up sold 15 million copies before Hasbro bought it and the rest of Cranium’s catalog in 2008 for $77.5 million.

Although Chrisman left Cranium in 2004, he remained, he says, a “significant shareholder.” (He won’t disclose his takeaway from the sale.) After returning from a 2005 surfing sabbatical, he realized there was a gap in the board game market, which skewed toward innovative adult strategy games or

Marketing uninspired games for children. “What people were used to 10 or 12 years ago were licensed games that were either so simple you’d throw them away or something you’d played before,� like a Disney version of Monopoly, Chrisman says. His idea was to combine the originality of adult game design with the popular characters youngsters love.

Wonder Forge began by licensing popular preschool book franchises—Dr. Seuss’s The Cat in the Hat, Eric Carle’s The Very Hungry Caterpillar, and Richard Scarry’s Busy, Busy Town—and inventing games that brought these stories to life. Rather than base each one on the predictable “roll and move� formula most competitors rely on, Wonder Forge makes products that reward different styles of play—tabletop-based strategizing, performing physical challenges, and simple memory matching.

(Wonder Forge works with Seattle design firm Forrest-Pruzan Creative to shape the look of its merchandise; the principals were colleagues at Cranium.) The Cat in the Hat’s I Can Do That! requires players to crawl backward under a foam stick with a plastic boat between their knees. All props are included.

PHOTOGRAPH BY MERON MENGHISTAB FOR BLOOMBERG BUSINESSWEEK; COURTESY WONDER FORGE (4)

Like smoothies blended with spinach, Wonder Forge games are designed to sneak healthy stuff into something kids enjoy The company’s games are imagined for the youngest of the young but geared no less to parents. “A great kid’s game is great because it’s a great game� regardless of what age range it’s intended for, says Steve Tassie, chief curator of Snakes & Lattes, a popular game cafe and store in Toronto. (Put another way: “Any preschool game worth its salt is a fabulous drinking game,� Chrisman jokes.) This whole-family approach isn’t easy. The younger the players, the more limited a toy’s ability to engage kids who are even slightly older. Wonder Forge games have won industry awards for their cross-generational appeal—the instructions for I Can Do That! explicitly recommend adjusting or ignoring rules depending on the players, which isn’t the industry norm.

And Flight of the Jaquins will be

Etc.

one of the company’s first attempts at growing with its fans: The rules will change depending on which of three challenge levels are accepted; in each one, a player adds additional cards, characters, and pieces in what Chrisman calls a “graceful graduation of difficulty.�

Wonder Forge and Disney began working together in 2012 after an executive played I Can Do That! with his daughter and was impressed enough to reach out to Chrisman. Since then, the entertainment company has been Wonder Forge’s biggest source of licensing revenue growth. Disney’s Eye Found It! is evidence of how Wonder Forge envelops kids in all things Disney. The board is 6 feet long, and players have to work together to get their favorite character to Cinderella’s castle before midnight. To advance, participants dive into a Where’s Waldo?-style treasure hunt—or, depending on your perspective, branding buffet—for items from dozens of Disney movies: the orange pylons from the Cars auto repair yard and roses from the little French town in Beauty and the Beast, for example. The game, introduced in 2013, has sold more than 750,000 units, encouraging other versions with Disney properties such as Star Wars. The sequels aren’t just re-skins either. Instead of a 6-foot-long rectangle, the Star Wars rendition is made up of seven planets, including the Death Star; elements of game play change, too.

Sales of Wonder Forge games have increased more than 30 percent annually over the past four years, and Chrisman says yearly revenue is in the “double digit millions.� This month the company will formally merge with Ravensburger, a German game and puzzle giant that’s been around since the 19th century and has had a controlling stake since 2011. The arrangement promises to help Wonder Forge leverage its licensing relationships to enter the puzzle market. Wonder Forge is also making nonlicensed games skewed to an older audience. Last summer it rolled out three exclusively at Target, including a Clue-like jewel thief game called Suspicion.

Wonder Forge spends nothing on advertising. It markets, in part, through parent and toy blogs; the company has a database of 3,000 tester families across the country who receive reviewer copies. Ultimately, Chrisman says, good games sell themselves. His fiercest critics remain his daughter, 7, and son, 5, who make the slightly unreasonable demand that he bring home a new game every night. “When I didn’t have kids, I always second-guessed myself,� Chrisman says. “Now, if I see them getting into a game, I say, ‘We have something here.’ �

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Etc.

Design

Top Brass

Made of six interlocking brass pieces, it’s a great thing to fiddle with while you’re brainstorming— or just want to look like you are.

Outfit your desk in the metal of the moment

By Monica Khemsurov

15

14

1

1 Ball puzzle

by Charles O. Perry $80; thefutureperfect.com

5 Oversize paper clip

by Carl Auböck From $220; odetothings.com

11 Brass Hemisphere

by Fort Standard From $110; fsobjects.com

2 Brass OK magnifying glass

by Jonathan Adler $150; jonathanadler.com

6 Rollerball pen

by Ystudio $99; store.leibal.com

12 Metallic assorted mini softcover notebooks $8 for a set of three; poppin.com

3 Bureau d’Architecte tape dispenser by Joseph Dirand for Puiforcat $4,600; Cristina Grajales Gallery, 152 W. 25th St., New York

7 Brass pencil cup

by Appointed $95; needsupply.com

4 Brass tray

by Tenfold New York $72; theline.com

13 Archer bookends

by Aerin $725; aerin.com

8 Brass letter opener

by Sir/Madam $31; burkedecor.com

14 Wave card holder

by Nina Cho for Souda $24; soudasouda.com

9 Gold outline clips set by Hay $12; poketo.com 10 Midback desk chair

by Meelano $335; wayfair.com

8

Even Patrick Bateman would have found this worthy of his business cards.

15 Strum organizer

by Umbra $10; umbra.com

11

5

7

2

12 9

4

6 10

3

Read the fine print and signal your agreement with the help of this cheeky magnifier.

Gold- and silver-plated, it might be the most expensive tape dispenser ever made.

PHOTOGRAPH BY ROBIN STEIN FOR BLOOMBERG BUSINESSWEEK

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13

Real Estate

IF YOU BUILD IT, WILL THEY COME? South Lake Tahoe, three hours from the Bay Area, wants to recruit San Franciscans. By Daniel Duane

PHOTOGRAPH ILLUSTRATION BY SIMON ABRANOWICZ; PHOTOS: MOLLY MATALON FOR BLOOMBERG BUSINESSWEEK

C

hris McNamara, an experienced rock climber and BASE jumper, was dangling from a cliff near the city of South Lake Tahoe in March 2016 when he had a vision: “It was snowy and super beautiful, and I realized this place ought to be a world capital of outdoor recreation— San Francisco’s cool, alternative mountain city, like what Boulder is for Denver,� he says. “We’ve got skiing and mountain biking. There’s sailing and stand-up paddling. I’m trying to get other entrepreneurs to realize they can do what I did, trade in their commute for a better lifestyle and still pop down to San Francisco for meetings.�

South Lake Tahoe sits at 6,000 feet above sea level in the Sierra Nevada mountains on the California-Nevada line.

It has 21,000 year-round residents, spectacular nature—and a long way to go in the charm department. Tawdry casinos, strip malls, and run-down motels dominate the landscape. Still, it’s just three hours from the Bay Area; gondolas to the immense Heavenly Ski Resort depart from downtown; and the average home price is $390,000, compared with $1.16 million in San Francisco.

McNamara’s vision shouldn’t b e t h a t f a rfetched: Of all the areas along the lake, South Lake Tahoe has the best combination of affordability and

convenience to skiing and beaches. “My inspiration comes from what Tony Hsieh did,� he says, referring to the Zappos chief executive officer’s $350 million attempt at revitalizing downtown Las Vegas.

McNamara, 38, moved to the area in 2004 and co-founded OGL Services,

which tests and reviews outdoor gear.

Others have followed more recently: In 2015, David and Jamie Orr, formerly of Silicon Valley, bought and remodeled the old South Lake newspaper building to create Tahoe Mountain Lab, an 11,000-square-foot co-working space. “We’re 100 percent occupied, with over 50 businesses represented,� says David, who used to work in sales for Valley startups. He says more than 20 percent of his

Etc. tenants have moved to South Lake Tahoe in the last three months from the Bay Area, Sacramento, and Colorado.

McNamara recruited friend Corey Rich, an outdoor photographer, to invest in a 2,500-square-foot headquarters for Rich’s video production company, Novus Select, in June 2016. Rich has 12 full-time employees serving an international client roster that includes Google, Facebook, and Subaru. “We fly out of Reno once a week� for international appointments, he says. “Clients love coming out for meetings, too. It’s not a hard sell.�

Across the street from Rich’s business, McNamara rents a 3,000-square-foot commercial space at $1-per-square foot—San Francisco’s average is $70—for his own companies. He also bought three empty lots for mixed commercial-residential development to increase density and lure restaurants. (The Lake House opened last October, and three breweries are in the works, though none is on his property.)

McNamara spends weekends building bike trails and hanging off cliffs with a power drill, installing safety hardware to create a family-friendly rock-climbing area. The local chamber of commerce is putting in sidewalks and bike lanes.

Still, South Lake Tahoe has as many problems as there are types of snowflakes. The city barely existed before the 1960 Winter Olympics at Squaw Valley, and then it developed so quickly that horrified locals enacted zero-growth regulatory policies. These are under review.

But right now, the only way you can build a hotel is if you tear down an old one of comparable size; the closest thing to a pro-development incentive in South Lake Tahoe is that if the hotel you tear down is in an “environmentally sensitive� area, and you return that property to a state of nature— and then you buy a separate property closer to downtown—your downtown hotel can have three times as many rooms as the one demolished. Wholesale urban renewal could obviously take a while.

Rich, for one, thinks it’ll be worth the wait. “There’s a lot of people living in the Bay Area making big money but, given the cost of living, are essentially lowermiddle class,� he says. “I just pulled into the parking lot of my own office building, and I can see my employees inside with big grins because we just got 12 inches of fresh snow. Everybody’s going to knock off early to ski powder all afternoon.�

59

Etc.

Health

Why are these a thing now?

The technology behind infrared saunas isn’t new, but the buzz around them has been growing since 2009, when Dr. Mehmet Oz went on The Oprah Winfrey Show and extolled their benefits. (No, audience members didn’t receive free infrared saunas.) Since then, gyms, spas, and wellness centers across the country have been installing the rooms. Gwyneth Paltrow endorsed them in her lifestyle publication, Goop, and power couple Jennifer Aniston and Justin Theroux installed one in their home gym.

250° Traditional saunas can reach 220F

200°

60

150° Infrared saunas hover at about 150F

Does this really work?

A 2012 study in the Journal of Environmental and Public Health found traces of lead, arsenic, cadmium, and mercury in participants’ sweat and concluded that “sweating deserves consideration for toxic element detoxification.” As far as infrared’s particular effectiveness, there’s no scientific evidence. But many people find heat treatments of all types relaxing, and destressing has its own health benefits.

See the

The popularity of infrared sau

How are they different fr Proponents say the lower temperatures of infrared saunas let you stay in them longer to reap greater benefits—from weight loss to increased circulation to “cellular detox.” “There are two components to detoxing: One is supporting your detox pathways, so that your body is able to flush out the toxins”—everything from environmental pollutants such as cadmium and arsenic to alcohol and sugar—“and

Etc.

e Light

unas heats up. By Laura Bolt

Where can I try one of these?

New York

rom a traditional sauna? the other is repairing the damage done by the toxins,” says Dr. Amy Myers, author of the New York Times best-seller The Autoimmune Solution. “Traditional saunas cause your body to sweat out toxins.

Infrared saunas not only flush out toxins more effectively, they also help your cells and tissues regenerate and support your immune system, which is why I recommend them to my patients.”

Higher Dose $65 for 60 minutes; higherdose.com Booths are equipped with medical-grade chromotherapy lighting in several color options. Red is said to be good for energy, blue for relaxation, and yellow for stimulating creativity.

Floating Lotus $65 for 30 minutes; floatinglotus.com In addition to its infrared sauna, this airy Midtown Manhattan space also has a Himalayan salt cave—a room made of pink sea salt, which is said to treat inflammation.

Los Angeles Sweatheory $35 for 60 minutes; sweatheory.com This Hollywood-based sweat studio offers lavender- or eucalyptus-scented towels for your post-session rinse.

If you’ve got time, or just happen to be a Bowie fan, add on a Ziggy Stardust—a crystal healing treatment said to refocus and realign your energy—for an extra $150.

Saunabar $70 for 40 minutes; saunabar.com

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Saunabar’s giant clamshell-style, single-occupancy SaunaPods are lined with more than 400 jade stones— nonporous, naturally antibacterial rocks—to conduct infrared heat, while the air around you stays cool.

Chicago Cleanse Chicago $30 for 30 minutes; cleansechicago.com This holistic health center uses hypoallergenic basswood in its infrared sauna rather than the more typical Nordic spruce or cedar, making it a good choice for even the most sensitive sweaters.

What if I want to be like Jen and Justin and not leave the house?

Clearlight Saunas (starting at $2,295; healwithheat.com) has been selling infrared booths to consumers for more than 30 years, complete with accessories such as stereo systems. SaunaRay booths (saunaray.com) boast pure ceramic heaters, which are thought to generate purer infrared radiation, and basswood grown near its headquarters in rural Ontario.

PHOTOGRAPH BY LAUREL GOLIO FOR BLOOMBERG BUSINESSWEEK

“Does it look like I’m under a french fry lamp? Yes. Do I care? No.”

Etc.

The Critic

THE COMEBACK KID

62

teve Cohen had a target on his back. The government was determined to prove that the hedge fund manager, known on Wall Street for eye-popping annual returns of 30 percent, made some of his billions trading on inside information. Sheelah Kolhatkar, a staff writer at the New Yorker (and a former correspondent for this magazine), has written a fast-paced tale of how the feds worked for almost a decade to build a case against him, and why they couldn’t indict him, in Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (Random House, $28).

The story follows Cohen from his early days managing money at a scrappy brokerage firm, Gruntal & Co., to his founding of SAC Capital Advisors in 1992 and its dissolution in 2014. Along the way, SAC grew to manage almost $17 billion, much of it Cohen’s own money. He outbid other titans for fancy real estate and modern art, including Damien Hirst’s shark suspended in 4,360 gallons of formaldehyde, for which Cohen paid $8 million.

Kolhatkar paints a picture of a reclusive man who’s quick to anger, driven by greed, and insecure about his place in moneyed society. (Growing up, the Cohens were on the “low end of the financial spectrum� in prosperous Great Neck, N.Y.) He’s also an unflappable trader. At least one employee Kolhatkar quotes said his understanding was that giving Cohen your best trading ideas meant giving him inside information—the “black edge� of the book’s title. While he was at Gruntal, allegations emerged in a sincedismissed lawsuit from Cohen’s ex-wife

that he traded on nonpublic information.

At SAC, Cohen didn’t ask for details on how a portfolio manager got his ideas, just his level of conviction.

The narrative weaves Cohen’s middle-class-to-riches story into the government’s simultaneous decade-long pursuit of other suspected Wall Street wrongdoers. Slowly, the U.S. Securities and Exchange Commission and the FBI uncovered consultants sharing

nonpublic information with their hedge fund clients and analysts passing along inside information to their friends and bosses. Some conversations were caught on wiretaps. Time and again, the FBI approached these analysts and portfolio managers at their homes or after a workout: “We want to talk to you about insider trading,� agents would begin.

Usually, the targets folded, confessing to illegal activities and turning on their contacts or their superiors.

The government’s pursuit of insider trading, and Cohen in particular, was covered extensively by major media outlets, including Bloomberg News.

Kolhatkar smartly pieces together the best of that reporting and refines our understanding of the saga with as-yet-unpublished tidbits she gleaned through interviews and court documents.

(Cohen declined to be interviewed for the book.) Most interesting among these details are government missteps. The SEC sat on reports of suspicious trading at SAC for almost a year, and the FBI put a wiretap on Cohen’s Connecticut home just when he was spending most of his time in the Hamptons.

Kolhatkar started her reporting in 2012, when Cohen’s future looked bleak, and she undoubtedly expected a different ending for the book. The government had just arrested Mathew Martoma, a SAC portfolio manager who they alleged had received inside information on the results of a drug trial and who’d had a 20-minute phone call with his boss that caused Cohen to reverse a giant trade. The feds expected Martoma would testify against him to avoid going to jail.

Instead, Martoma refused to cooperate and went to prison. Later, a court threw out some of U.S. Attorney Preet Bharara’s convictions, including one against another of Cohen’s senior traders.

The government wanted to put Cohen in jail—or, failing that, keep him from managing clients’ money forever. Instead, SAC, not Cohen himself, pleaded guilty to securities fraud in 2013, and the fund paid a record $1.8 billion fine. After dissolving SAC, he set up a family office, earning back the fine and more in the year after the guilty plea. The SEC banned Cohen from managing outside capital for two years starting in January 2016. He’s already plotting his return.

ILLUSTRATION BY MATIJA MEDVED; PHOTO: SIMON DAWSON/BLOOMBERG

S

Sheelah Kolhatkar’s Black Edge dissects the government’s failed case against hedge fund giant Steve Cohen. By Katherine Burton

What I Wear to Work

LISA TURNER

Etc.

Tell me about that necklace under your scarf. It’s bone and raffia?

Yes. I found it in an antiques store where the owner had collected lots of African things. I enjoy oddities and curios like that—skulls and bones and such.

59, interior designer, Trinity Mercantile & Design, Decatur, Ga.

SOLOMON BROTHERS What’s your job?

I’m in and out of my store creating new spaces. I take meetings with clients and try to keep their dogs off me while I’m at their houses.

It’s glamorous and unglamorous.

JUDY PARADY STUDIO

How would you describe your style?

I dress monochromatically or bichromatically.

I don’t ever wear prints.

URBAN OUTFITTERS 63

LACES OF LORE

Your shoes must be functional, too.

I love how high the heel is.

They’re still comfortable, even though they’re so tall.

I wear these practically every day.

URBAN OUTFITTERS

PHOTOGRAPH BY PETER B. SAMUELS FOR BLOOMBERG BUSINESSWEEK

Are those jeans or pants?

They’re jeans, even though you can’t quite tell. Most of my pants for work are jeans, because I have to do physical stuff—measuring and moving furniture, or directing people with light fixtures. I have to wear things I can function in.

That’s a colorful jacket.

It’s the only green thing I own. It’s a heavy linen, and you can wear it when it’s cool. You don’t need thick coats here.

7 FOR ALL MANKIND Your scarf is huge.

Getting it around my neck requires a lot of looping and knotting so it doesn’t hang all the way to the ground.

SOL SANA

That’s a nice wedding ring.

When I was looking for one more than 16 years ago, I owned a construction company and was in the field, so I needed a ring that wouldn’t get knocked off or hooked on something. It’s the constructionpractical ring with diamonds.

Interview by Jason Chen

ROBERT HOHMAN Co-founder and chief executive officer, Glassdoor

“I was a nerd: I started the computer club and was an avid member of chess club.”

Education

With a Stanford roommate, 1989

Louisville High School, Louisville, Ohio, class of 1989 Stanford, class of 1992

“In college I started a company with a debating friend of mine. We sold debate briefs, which are books on how to debate. It was supernerdy, but it was pretty successful.”

Work Experience

1990–94 Co-founder, Victory Briefs

64

“Steve Jobs talked to my computer science class, and he was just this interesting, relatively normal guy in a black turtleneck.”

“There were these gods of tech at Microsoft. The engineers were the most talented individuals that, to this day, I’ve ever gotten to work with.”

choose to do that.” 3. “Don’t optimize career changes to make the most money. The money will come later if you learn.”

Stanford School of Engineering, class of 1993

As one of Louisville High’s Most Likely to Succeed, 1989

1993–96

Development lead, designer/developer, program manager, Microsoft

Getting his head shaved in solidarity with Expedia founder Rich Barton, who lost a bet to Hohman, 1998

1996–2003

Development manager, vice president for hotels and packages, senior VP for store and cruises, SVP for cruises and packages, Expedia

“Back then it was hard to build a website. We had to invent almost anything we needed. I was building one of the world’s largest vacation packagers, and I couldn’t go near a Ritz-Carlton without being invited to stay in the presidential suite.

It was so awesome.”

“It was the superluxury-vacationpackaging brand of Expedia.

We were the largest tour provider to Hawaii, so I spent a lot of time there, which was fun.”

2003–04

President, Classic Custom Vacations

2004–06

President, Hotwire

2006–07

“I took it seriously: I wanted to be an amazing Orc warrior.

And I learned what it feels like to be part of an online community. I hit the maximum level, and the next day I went and started Glassdoor.”

2007– Present

Co-founder and CEO, Glassdoor

Glassdoor is an online database offering transparent salary information, anonymous company reviews, and job listings.

Life Lessons

With Hillary Clinton at a roundtable on pay inequality, 2016

“People were making a decision about where to work and how much money to take for that work with almost no information. This year, for the first time, we have a rich enough data set to see pay transparency and gender inequality in individual companies. I’m proud of that.”

av e to

“Hotels don’t give presidential suites to the discount outlet guy.”

Player, World of Warcraft

1. “Amazing people are normal people who have done amazing things.” 2. “A balance between family, personal, and work time is mostly an act of will. You

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How Did d I Get t Here?

Courtesy subject (5). Courtesy World of Warcraft (1).

Getty Images (1)

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