/ MAGZUS.COM / Bloomberg businessweek 19 january 2015

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January 19 — January 25, 2015 | businessweek.com

Labor Crisis

Maternity leave isn’t working for working women p54


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There will be 3.8 billion new consumers of electricity in the world by 2050, in addition to the billions already on the grid. “The 1.3 billion people who currently don’t have access to electricity, and the 2.5 billion new people coming into the world by then, will increase the importance of innovative solutions for energy,â€? says Eirik WĂŚrness, Chief Economist at Statoil, a global leader in oil and gas production. “Technology is an obvious driver of innovation, but to power the future, the world needs innovative thinking, investing and collaboration, too.â€? 5HQHZDEOH VRXUFHV RI HQHUJ\ÂłFKLHĂ \ wind and solar—are the innovations championed in the name of sustainability, but by 2040, according to WĂŚrness, renewables will contribute roughly 10 percent of all energy use. One simple reason for that forecast is the reality that renewables only produce electricity, which, for WĂŚrness, begs the questions: “How quickly can we electrify our societies? How quickly can

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the global transportation sector use more electric cars? How quickly can we develop our heating systems so they use more electricity, and less gas and oil?â€? It’s worth pausing to consider that thorny issues like the growing consumer electricity market and CO2 emissions are correlated with some positive trends. The annual report of a European environment-monitoring JURXS QRWHG WKDW LQ IRU WKH Ă€UVW time, “a ‘decoupling’ of the increase in CO2 emissions from global economic growth took place, which points to a shift toward less fossil fuel-intensive activities, more use of renewable energy and increased energy saving.â€? Likewise, electricity demand in developed countries continues to fall.

Collaboration for the common good Wherever there is a chance for partnership in the name of reducing CO2 emissions and making the use of carbon fuels more HIĂ€FLHQW FRPSDQLHV DQG VRPH JRYHUQPHQWV

are showing enthusiasm. In North Dakota’s %DNNHQ RLO Ă€HOG 6WDWRLO *( DQG )HUXV 1DWXUDO *DV )XHOV UHFHQWO\ H[SDQGHG D SLORW SURMHFW WKDW FDSWXUHV Ă DUH JDV DQG XVHV LW WR SRZHU 6WDWRLO¡V VL[ GULOOLQJ ULJV DQG RQH K\GUDXOLF IUDFWXULQJ Ă HHW ORFDWHG LQ WKH VWDWH Statoil estimates that the project increased LWV Ă DUH JDV FDSWXUH WR ² PLOOLRQ VWDQGDUG cubic feet per day by the end of 2014—the HTXLYDOHQW RI UHPRYLQJ ² cars from the road. The shale and “tight sandsâ€? oil production methods seen throughout the U.S. and HOVHZKHUH DUH H[DPSOHV RI IRVVLO IXHO RSHUDtions favoring smaller-scale and more quickly productive projects. Then there’s the houseby-house approach to powering homes and feeding the grid that the solar industry is now pursuing. Nathaniel Bullard, Lead Solar Analyst for North America with Bloomberg 1HZ (QHUJ\ )LQDQFH %1() H[SHFWV WKH UXQ rate of residential and commercial solar to H[FHHG FRQVHQVXV H[SHFWDWLRQV “The track record shows us that the growth rate of new consumer technology is typically underestimated,â€? says Bullard. “Solar as a share of total energy production has its limits over the coming decades, EXW VRODU HQHUJ\¡V SDWWHUQV RI Ă€QDQFLQJ marketing and distribution will contain a lot RI OHVVRQV DQG ZLOO LQĂ XHQFH GHFHQWUDOL]Dtion in general—it will show us some new ways to deliver and consume.â€? The major legacy utility companies are advised, in his view, to watch this process closely. “New models pose enough of a threat to the old system,â€? Bullard believes, “that an inability to adapt could be a mortal threat to big U.S. utilities.â€? The energy challenge of the 21st century can be approached from multiple angles with multiple strategies—and indeed will have to be. — David Gould

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OLE JĂ˜RGEN BRATLAND/STATOIL ASA

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to discover more than you were looking for.

Russell, Manager at Statoil

No one can do it alone. At Statoil, we believe collaboration is the key to success and that ideas grow bigger when you share them. In our US onshore operations, we are working together with multiple partners and local communities. By combining our progressive technologies and operational expertise, we are exploring new solutions to capture otherwise flared natural gas and using it to power our operations. Wherever we go, we always seek to collaborate with local partners and communities to contribute to economic growth, develop sustainable solutions and more than anything – to keep challenging what’s possible. Learn more at statoil.com/stories Statoil. The Power of Possible

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Davos Perspective

A Future Built On Resilience The destiny of your business depends on its ability to bounce back and evolve in today’s interconnected risk landscape

A profound confluence of global geopolitical, economic, social and technological factors is the backdrop for this week’s annual meeting of the World Economic Forum in Davos, Switzerland. The leaders in attendance aim to discuss a new global context in which to view the challenges of this transformative world—and perhaps help shape how businesses, governments and other organizations address them. The risks to your business in a truly globalized world are too numerous and too interconnected to be completely avoided—the more immediate risks are often easier to recognize, but there can be existential threats from pervasive risks that slowly drain your business of its vitality. “For a modern business to survive and prosper requires a holistic view of the world and the interconnected risks that permeate it,” says Axel Lehmann, Chief Risk Officer, Zurich Insurance Group. “For example, technology has made it possible for nearly any business to operate on a global level, but along with that, cyber breaches and disruptions have become the new norm. The ripple effects of this have real implications.” A strategy of resilience In a global risk landscape that is now commonly described as a “not if, but when” proposition, it is tempting to focus solely on a defensive risk management strategy. However, history is full of

In a truly globalized world, the risks are too numerous and too intertwined to be completely avoided.

examples of static approaches to risks inevitably leading to failure: nations conquered; entire business sectors upended; natural resources depleted. For your business to continually evolve, thrive and stay ahead of the competition requires proactively rethinking your risk management strategy to incorporate reinvigorated strength and layer upon layer of resiliency. “Resilience is an absolutely key concept,” says Lehmann. “If your business or part of your supply chain is located in a coastal area that’s about to be hit by a hurricane, there’s nothing you can do to avoid it. Nor can you opt out of the possibility that your business will suffer a cyber attack—you can never prevent everything that you’d like to see prevented. Prevention is obviously important, but so is resilience—the ability to bounce back at least as strong as before, and maybe stronger. The starting point is to understand the exposures you face. This is not just a technical matter,

but requires a view across all dimensions of your company.” Lehmann and his colleagues at Zurich Insurance Group are among the thought and action leaders ushering in a new era of business resilience focused not just on reaction, but on action fueled by knowledge and uncommon insights. Their goal is to encourage businesses to think more broadly about how to enhance the long-term sustainability of an organization against a backdrop of constant change. In so doing, businesses will not abandon measures that help manage and mitigate short-term disruptions, but they should seek to expand existing risk management activities and supplement them with a broader focus on the factors that contribute to resilience. Moving from urgency-driven risk management to more collaborative efforts to strengthen risk resilience can benefit not only the business itself, but the local and global communities it serves, as well. — Evan Rothman

“Prevention is obviously important, but so is resilience—the ability to bounce back at least as strong as before, and maybe stronger. The starting point is to understand the exposures you face. This is not just a technical matter, but requires a view across all dimensions of your company.”

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ZURICH INSURANCE. FOR THOSE WHO TRULY LOVE THEIR BUSINESS. zurich.com/internationalprograms

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About half of men over 40 have some degree of erectile dysfunction (ED).* VIAGRA (sildenafil citrate) helps guys with ED get and keep an erection. And you only take it when you need it. VIAGRA usually starts to work within 30-60 minutes. Individual results may vary. Ask your doctor if VIAGRA is right for you. VIAGRA is a prescription medicine used to treat erectile dysfunction. VIAGRA is not for women or children. IMPORTANT SAFETY INFORMATION BELOW. Do not take VIAGRA if you: • Take any other medicines called nitrates, often prescribed for chest pain, as this may cause a sudden, unsafe drop in blood pressure. • Are allergic to sildenafil, as contained in VIAGRA and REVATIO, or any of the ingredients in VIAGRA. Discuss your health with your doctor to ensure that you are healthy enough for sex. If you experience chest pain, dizziness, or nausea during sex, seek immediate medical help. VIAGRA can cause serious side effects. Rarely reported side effects include: • an erection that will not go away (priapism). If you have an erection that lasts more than 4 hours, get medical help right away. If it is not treated right away, priapism can permanently damage your penis. • sudden vision loss in one or both eyes. Sudden vision loss in one or both eyes can be a sign of a serious eye problem called non-arteritic anterior ischemic optic neuropathy (NAION). Stop taking VIAGRA and call your healthcare provider right away if you have any sudden vision loss. • sudden hearing decrease or hearing loss. Some people may also have ringing in their ears (tinnitus) or dizziness. If you have these symptoms, stop taking VIAGRA and contact a doctor right away. Before you take VIAGRA, tell your healthcare provider if you: • have or have had heart problems such as a heart attack, irregular heartbeat, angina, chest pain, narrowing of the aortic valve, or heart failure • have had heart surgery within the last 6 months • have had a stroke • have low blood pressure, or high blood pressure that is not controlled • have a deformed penis shape • have had an erection that lasted for more than 4 hours • have problems with your blood cells such as sickle cell anemia, multiple myeloma, or leukemia

• have retinitis pigmentosa, a rare genetic (runs in families) eye disease • have ever had severe vision loss, including an eye problem called NAION • have bleeding problems • have or have had stomach ulcers • have liver problems • have kidney problems or are having kidney dialysis • have any other medical conditions

Tell your healthcare provider about all the medicines you take, including prescription and over-the-counter medicines, vitamins, and herbal supplements. VIAGRA may affect the way other medicines work, and other medicines may affect the way VIAGRA works, causing side effects. Especially tell your healthcare provider if you take any of the following: • medicines called nitrates • medicines called alpha-blockers such as Hytrin (terazosin HCl), Flomax (tamsulosin HCl), Cardura (doxazosin mesylate), Minipress (prazosin HCl), Uroxatral (alfuzosin HCl), Jalyn (dutasteride and tamsulosin HCl), or Rapaflo (silodosin). Alphablockers are sometimes prescribed for prostate problems or high blood pressure. In some patients, the use of VIAGRA with alpha-blockers can lead to a drop in blood pressure or to fainting • medicines called HIV protease inhibitors, such as ritonavir (Norvir), indinavir sulfate (Crixivan), saquinavir (Fortovase or Invirase), or atazanavir sulfate (Reyataz) • some types of oral antifungal medicines, such as ketoconazole (Nizoral) and itraconazole (Sporanox) • some types of antibiotics, such as clarithromycin (Biaxin), telithromycin (Ketek), or erythromycin • other medicines that treat high blood pressure • other medicines or treatments for ED • VIAGRA contains sildenafil, which is the same medicine found in another drug called REVATIO. REVATIO is used to treat a rare disease called pulmonary arterial hypertension (PAH). VIAGRA should not be used with REVATIO or with other PAH treatments containing sildenafil or any other PDE5 inhibitors (such as Adcirca [tadalafil]). VIAGRA does not protect against sexually transmitted diseases, including HIV. The most common side effects of VIAGRA: headache; flushing; upset stomach; abnormal vision, such as changes in color vision (such as having a blue color tinge) and blurred vision; stuffy or runny nose; back pain; muscle pain; nausea; dizziness; rash. Please see Important Facts for VIAGRA on the following page or visit viagra.com for full prescribing information for VIAGRA (25 mg, 50 mg, 100 mg) tablets. *

Data taken from the Massachusetts Male Aging Study. Of 1,290 respondents, 52% stated they had some degree of ED.

You are encouraged to report negative side effects of prescription drugs to the FDA. Visit www.FDA.gov/medwatch or call 1-800-FDA-1088. For more information go to viagra.com or call 1-888-484-2472 (1-888-4VIAGRA).

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GENTLEMEN: helps guys with ED

get and keep an erection.

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IMPORTANT FACTS

(vi-AG-rah)

IMPORTANT SAFETY INFORMATION ABOUT VIAGRA VIAGRA can cause your blood pressure to drop suddenly to an unsafe level if it is taken with certain other medicines. Do not take VIAGRA if you take medicines called “nitrates� for chest pain (angina). A sudden drop in blood pressure can cause you to feel dizzy, faint, or have a heart attack or stroke. Tell all your healthcare providers that you take VIAGRA. If you need emergency medical care for a heart problem, tell your healthcare provider when you last took VIAGRA. Stop sexual activity and get medical help right away if you have chest pain, dizziness, or nausea during sex. Ask your doctor if your heart is healthy enough to handle the extra strain of having sex, especially if your heart is already weak from a heart attack or heart disease. VIAGRA does not protect you or your partner from getting sexually transmitted diseases, including HIV—the virus that causes AIDS.

WHAT IS VIAGRA? VIAGRA is a prescription medicine used to treat erectile dysfunction (ED). VIAGRA helps a man with erectile dysfunction get and keep an erection only when he is sexually excited (stimulated). VIAGRA is not for use in women or children under 18 years of age.

DO NOT TAKE VIAGRA IF YOU: • Take medicines called “nitratesâ€? (such as nitroglycerin) • Use street drugs called “poppersâ€? (such as amyl nitrate or nitrite, and butyl nitrate) • Are allergic to sildenafil, as contained in VIAGRA and Revatio, or any of the ingredients in VIAGRA

• Other medicines or treatments for ED • VIAGRA contains sildenafil, which is also found in another drug called REVATIO. REVATIO is used to treat pulmonary arterial hypertension (PAH). VIAGRA should not be used with REVATIO or with other PAH treatments containing sildenafil or any other PDE5 inhibitors (such as Adcirca [tadalafil]).

POSSIBLE SIDE EFFECTS OF VIAGRA What are the possible side effects of VIAGRA? VIAGRA can cause serious side effects. Rarely reported side effects include: • An erection that will not go away (priapism). If you have an erection that lasts more than 4 hours, get medical help right away. If it is not treated right away, priapism can permanently damage your penis. • Sudden vision loss in one or both eyes. Sudden vision loss in one or both eyes can be a sign of a serious eye problem called non-arteritic anterior ischemic optic neuropathy (NAION). Stop taking VIAGRA and call your healthcare provider right away if you have sudden vision loss in one or both eyes. • Sudden hearing decrease or hearing loss. Some people may also have ringing in their ears (tinnitus) or dizziness. If you have these symptoms, stop taking VIAGRA and contact a doctor right away. The most common side effects of VIAGRA are: • Stuffy or runny nose • Headache • Back pain • Flushing • Muscle pain • Upset stomach • Nausea • Abnormal vision, such as changes in color vision (such as • Dizziness having a blue color tinge) and • Rash blurred vision In addition, heart attack, stroke, irregular heartbeats, and death have happened rarely in men taking VIAGRA. Most, but not all, of these men had heart problems before taking VIAGRA. It is not known if VIAGRA caused these problems. Tell your healthcare provider if you have any side effect that bothers you or does not go away.

BEFORE YOU START VIAGRA Tell your doctor if you have or ever had: • Heart attack, abnormal heartbeats, or stroke • Heart problems, such as heart failure, chest pain, angina, or aortic valve narrowing • Heart surgery within the last 6 months • Low or high blood pressure • Severe vision loss, including an eye problem called non-arteritic anterior ischemic optic neuropathy (NAION) • An eye condition called retinitis pigmentosa • Kidney or liver problems • Blood problems, such as sickle cell anemia, multiple myeloma or leukemia • A deformed penis, Peyronie’s disease, or an erection that lasted more than 4 hours • Stomach ulcers or any kind of bleeding problems • Any other medical conditions

Tell your doctor about all your medicines: Include prescription and over-the-counter medicines, vitamins, and herbal supplements. VIAGRA may affect the way other medicines work, and other medicines may affect the way VIAGRA works causing side effects. Especially tell your healthcare provider if you take any of the following: • Medicines called nitrates (see “important safety information about VIAGRAâ€?) • Medicines called alpha-blockers such as Hytrin (terazosin HCl), Flomax (tamsulosin HCl), Cardura (doxazosin mesylate), Minipress (prazosin HCl), Uroxatral (alfuzosin HCl), Jalyn (dutasteride and tamsulosin HCl), or Rapaflo (silodosin). Alpha-blockers are sometimes prescribed for prostate problems or high blood pressure. In some patients, the use of VIAGRA with alpha-blockers can lead to a drop in blood pressure or to fainting. • Medicines called HIV protease inhibitors, such as ritonavir (Norvir), indinavir sulfate (Crixivan), saquinavir (Fortovase or Invirase), or atazanavir sulfate (Reyataz) • Some types of oral antifungal medicines, such as ketoconazole (Nizoral) and itraconazole (Sporanox) • Some types of antibiotics, such as clarithromycin (Biaxin), telithromycin (Ketek), or erythromycin • Other medicines that treat high blood pressure

These are not all the possible side effects of VIAGRA. For more information, ask your healthcare provider or pharmacist. Call your doctor for medical advice about side effects. You may report side effects to FDA at 1-800-FDA-1088.

HOW TO TAKE VIAGRA • • • •

Take VIAGRA exactly as your healthcare provider tells you to take it. Your healthcare provider will tell you how much and when to take Viagra. Your healthcare provider may change your dose if needed. Take VIAGRA about 1 hour before sexual activity. You may take VIAGRA between 30 minutes to 4 hours before sexual activity if needed. • VIAGRA can be taken with or without food. If you take VIAGRA after a high fat meal (such as a cheeseburger and french fries), VIAGRA may take a little longer to start working. • Do not take VIAGRA more than 1 time a day. • If you accidentally take too much VIAGRA, call your doctor or go to the nearest hospital emergency room right away.

NEED MORE INFORMATION? This is only a summary of important information. Ask your doctor or pharmacist for complete product information OR Go to www.viagra.com or call (888) 4-VIAGRA (484-2472).

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PHOTO ILLUSTRATION BY 731; FANDUEL (9); GETTY IMAGES (5)

9

“We’ve never said we’ve attached ourselves for eternity to Bitcoin” p43

“I went to college and found something I loved. I got a job. I married and had babies and just assumed maternity leave was something that existed. Nobody told me it would be like this”

“I’ve had dozens of meetings over the years with leaders from around the world who have asked how they can build their own Silicon Valley. It never works”

p54

p49

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Cover Trail January 19 — January 25, 2015

How the cover gets made

Opening Remarks Mexico’s cycle of hope, hype, and heartbreak keeps repeating itself

14

Bloomberg View Take the gag off grand juries • Getting Sri Lanka out of China’s grasp

16

Global Economics Greece’s coming election may lead to a confrontation with the rest of Europe

18 20

A weaker euro may be good for the EU The working poor are working harder than academics suspected

21

Some soap operas dish out life lessons along with the sex

22

Companies/Industries Sony Pictures’ top brass go on a magical apology tour

① “The cover story is on how the U.S. has some of the worst maternity leave laws, and many people aren’t aware of this.” “Like, how bad?” “Twelve weeks, unpaid.” “Yikes. We can set up a shoot that shows a mother in labor who’s being forced to work at the same time.”

25

Dealers in China are tired of automakers pushing them around

27

Are you sitting down? Delta may owe taxes … someday

28

McDonald’s and Burger King fling chicken nuggets at each other

28

Briefs: GM’s longer-range electric car; Amazon orders up some Woody Allen

29

Politics/Policy Yet another sign that Elizabeth Warren is the queen

30

Washington state head shops take potshots at medical dispensaries

31

Less competition may mean lower insurance rates for some in Minnesota

32

Charlie Rose talks to Marco Rubio

33

Politicians love traffic cameras. Drivers hate them

34

State of the Union: The drinking game

35

COVER: PHOTOGRAPH BY STEVEN BRAHMS FOR BLOOMBERG BUSINESSWEEK; SET DESIGN: JASON SINGLETON; GROOMING: ANGELA DI CARLO

“Agreed, it seems to do the trick. So we’re all good, then?” “Yep.”

Technology

10

② “Looks great!”

Google leads the charge to be Web-friendlier in India

37

In a Dutch prison, an alleged hacker tries to avoid the long arm of the U.S. law

38

PCs pick up steam, and Apple climbs up the ranks

39

Chinese phone maker Xiaomi is spending big to branch out

40

If hydrogen can power cars, why not homes?

40 41

Innovation: A brighter look at the brain

“It’s pretty early in the week.” “Yes, it is.” “I mean, I’m happy with it, really happy. But I also feel strangely empty. Should we start thinking about next week?” “I don’t know what we’re doing next week yet.”

Markets/Finance Bitcoin finds a new purpose in life

43

Got milked? How currency rigging hurt British dairy farmers

44

Meredith Whitney’s heartland-loving hedge fund isn’t getting much love

45

Steven Major, almost alone in correctly predicting low bond rates in 2014, sees more of the same

46

Bid/Ask: Onex stocks up on crisis gear; Chefs’ Warehouse loads up on meat

47

Focus On/Davos Innovating innovation at the World Economic Forum

49

The big magnet for investment in 2015: The U.S.

51

Davos lays a Golden Egg

51

“Right, right, no problem. It was a bit of a long shot. [Pause] Have you seen Birdman? It’s sooo good!” “You do have other things to work on, don’t you?” “Of course I do! I apologize for trying to relate to you on a human level. I’ll go back to my hamster wheel now.” “Sigh.”

Features Mother of a Problem U.S. maternity leave policies still fail women and children

54

Triumph of the Dorks Guys who’d be lost on the field make a killing playing fantasy sports

60

Tiger by the Tail Joe Sigelman, celebrated outsourcing pioneer, faces trial for bribery

64

Etc. How the two Brits behind Men in Blazers are getting Americans to watch English soccer

71

Workplace: Beautiful ways to stay organized at the office

74

The Critic: Jane the Virgin doesn’t soft-pedal its telenovela ridiculousness, which only adds to its charm

76

Startups: Club W ships oaky Rhônes and bright Chardonnays to your doorstep for about 15 bucks a bottle

77

Caffeine: Starbucks’s flat white—a little like a cappuccino, a lot like a latte—lands stateside

78

What I Wear to Work: Target publicist Dustee Jenkins doesn’t leave home without blowing out her hair

79

How Did I Get Here? Panthera’s Alan Rabinowitz on a life spent saving tigers and jaguars

80

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Index People/Companies

Abe, Shinzo 40 ABN Amro Bank 20 Abraaj Group 47 Abramovich, Roman 72 Accel Partners 49 Adobe Systems (ADBE) 29 Aetna (AET) 29 Air France-KLM (AF:FP) 28 Alcoa (AA) 64 Allaire, Jeremy 43 Allen, Woody 29 Alstom (ALO:FP) 64 Altschuler, Randy 64 Amazon.com (AMZN) 29, 37 American Airlines (AAL) 28 American Express (AXP) 51 AmerisourceBergen (ABC) 47 Anderson, Richard 28 Andreessen Horowitz 43 Anheuser-Busch InBev (BUD) 43 Apollo Global Management 29 Apple (AAPL) 29, 39, 40 Apple Pay (AAPL) 43 Arnold, Georgia 22 Asustek (2357:TT) 39 Atlantic, Gulf & Pacific 64 Audi (NSU:GR) 49

BCD

12

Baidu (BIDU) 40 Bank of America (BAC) 47 Barclays (BCS) 44 Barton, Dominic 51 Bechtel 64 Bennett, Roger 72 Bezos, Jeff 37 Biogen Idec (BIIB) 41 BiscoMisr 47 BitPay 43 Blackstone (BX) 64 Blair, Tony 51 Blue Bottle 78 BlueBay Asset Management 46 BlueCrest Capital Management 45 BMW (BMW:GR) 27 Bono 51 Boston Consulting Group 49 BP (BP) 64 Bragman, Howard 25 Branson, Richard 51 Bravo 72 Breyer, Jim 49 Burck, William 64 Burger King 28, 30 Burns, Michael 25 Bush, George W. 30 Bush, Jeb 33 Caesars Entertainment (CZR) 29 Cameron, James 29 Carrefour (CA:FP) 38 Caviezel, Tarzisius 51 CBS (CBS) 76 Chandler Macleod (CMG:AU) 47 Chefs’ Warehouse 47 Chevron (CVX) 64 China Market Research Group 40 Chipotle Mexican Grill (CMG) 28 Christie, Chris 34 Cinven 47 Circle Internet Financial 43 Citigroup (C) 43, 45, 51 Clinton, Hillary 56 Clooney, George 25 Club W 77 Cohen, Adam 41 Cohen, Sacha Baron 25 Coinbase 43 Comcast (CMCSA) 60 Conference Board 49 Conn’s (CONN) 45 Cooper, Bradley 25 Credit Suisse (CS) 51, 64 Crowe, Cameron 25 Cullen/Frost Bankers (CFR) 45 Culpepper, Clint 25

CW Davies, Michael Del Monte Meat Dell Delta Air Lines (DAL) Deutsche Bank (DB) Dimon, Jamie Discover Financial Services (DFS) Dish Network (DISH) DraftKings Draghi, Mario Drinkman, Vladimir DTZ Zadelhoff

76 72 47 39, 43 28 46 29 38 43 60 20 38 51

EFG Eccles, Lesley 60 Eccles, Nigel 60 Ecopetrol (EC) 64 Eilers Research 60 Ellison, Megan 25 Encana (ECA) 51 ESPN (DIS) 60, 72 Evercore Wealth Management 34 Expedia (EXPE) 43 Facebook (FB) 37, 49, 56 FanDuel 60 FAW Group 27 Fidelity Biosciences 41 Flipkart 37 Foundation Medicine (FMI) 47 Fox Sports (FOX) 72 Frank, Barney 30 General Electric (GE) 56 General Knot & Co. 72 General Motors (GM) 27, 29 Gerbounka, Richard 34 Ghosn, Carlos 20 Gillibrand, Kirsten 56 Gilt Edge Soccer Marketing 72 GlaxoSmithKline (GSK) 41 Godard, Ellis 51 Goldman Sachs (GS) 20, 30, 56, 64 Gonsalves, Norma 34 Gonzalez, Albert 38 Google (GOOG) 29, 37, 40, 56 Groupe Danone 51 Guppy, John 72

HIJ Hannaford Bros. (DEG) 38 Happy Madison Productions25 Hart, Kevin 25 Hawn, Goldie 51 Heartland Payment Systems (HPY) 38 Herrera, Miguel 72 Heuer, Rolf-Dieter 49 Hewlett-Packard (HPQ) 39 Hill, Jeremy 60 Home BancShares (HOMB) 45 Horizon Media 72 HSBC (HSBC) 20, 46 Intel (INTC) 29 Intelligentsia Coffee 78 InterContinental Hotels Group (IHG) 51 Jackman, Hugh 78 Jacobs, Paul 49 Jenkins, Dustee 79 Jolie, Angelina 25 JPMorgan Chase (JPM) 29, 51

KLM Kasich, John Kellogg (K) Kenbelle Capital KKR (KKR) Kley, Karl-Ludwig Koh, Lucy Kohl-Welles, Jeanne KPMG Laughing Man Lazard (LAZ) Lei Jun Lenovo (992:HK) Lewis, Michael Lin, Bin Longoria, Eva

34 47 45 60 51 29 31 51, 64 78 30 40 39, 40 45 40 76

27

Selling cars in China Lynton, Michael 25 Major, Steven 46 Mangano, Ed 34 Manziel, Johnny 60 McConnell, Mitch 30 McCulloch, Robert 16 McDonald’s (MCD) 28, 78 McKinsey 51, 60 Merck KGaA (MRK:GR) 51 Microsoft (MSFT) 37 Miller, Jon 72 Milner, Yuri 40 Misfit Wearables 40 Mizuho Financial Group (MFG) 27 Montagu Private Equity 47 Mourinho, Jose 72 Mozilla 37 MTV (VIA) 22 MWI Veterinary Supply (MWIV) 47

NOP Nadella, Satya 37 NBC Sports Network (CMCSA) 72 Netanyahu, Benjamin 51 Nickelodeon (VIA) 56 Nielsen (NLSN) 72, 76 Nine Point Growth Industries 31 NPD Group 28 NPS Pharmaceuticals (NPSP) 47 Nyong’o, Lupita 22 Obama, Barack 14, 25, 30 Obst, Lynda 25 Office Tiger 64 Onex (ONEXF) 47 Orbotech (ORBK) 56 Oxman, Xander 77 Padoan, Pier Carlo 20 Panasonic (6752:JP) 40 Pani, Arvind 37 Panthera 80 Papandreou, George 18 Pascal, Amy 25 Peña Nieto, Enrique 14 Peoplebank Holdings 47 PetroTiger 64 Petróleos Mexicanos 14 Piffaretti, Christophe 51 Piton Capital 60 Platt, Michael 45 PreferredOne 32 Premium Credit 47 Process Nine Technologies 37

QRS Q-State Biosciences Qualcomm (QCOM) Rabinowitz, Alan Rajapaksa, Mahinda

41 49 80 16

RealNetworks (RNWK) Recruit Holdings (6098:JP) Rede Globo Reid, Harry Reitman, Ivan Renault (RNO:FP) Reverie Language Technologies Rhimes, Shonda Riordan, Tim Rivera, Angélica Rivers, Ann Robins, Jason Roche (RO:SW) Rodriguez, Gina Rogen, Seth Rothschild Royal Bank of Scotland (RBS:LN) RR Donnelley (RRD) Rubin, Robert Rubio, Marco Rubio, Paulina Rudin, Scott Ryan, Paul

49 47 22 30 25 20 37 25 34 14 31 60 47 76 25 51 20 64 30 33 76 25 21

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60 38 27

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76 30, 33 64 30 51 43 45 40 60 40 56 37 51

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By Tim Padgett

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Peña Nieto was hailed as a reformer, and his country was called the Aztec Tiger. But drug violence has undercut progress

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U.S. corporate honchos in Ciudad Juárez, on the border. One of them, the pushiest, angrily huffed and jabbed his finger into my ribs, telling me that reporters had to get with the program. Eventually, public concerns about Mexico were allayed, and Nafta won U.S. and Canadian passage two years later. But the moment it took effect in 1994, the illusion of the First World Mexico that Salinas and the U.S. had so finely crafted shattered. First came an armed uprising by

destitute Maya Indians, then a spate of political assassinations, including the murders of Salinas’s designated successor and his ex-brother-in-law. (The president’s own brother went to prison for ordering the latter, but his conviction was later overturned.) Then came the discovery that Salinas’s dapper tecnócratas were hiding foul fiscal data, such as vanishing hard-currency reserves. The result: Foreign investors fled in droves, the peso imploded, the economy collapsed, and the U.S. had to send its neighbor a $50 billion bailout. It was years before either country could enjoy the fruits of Nafta, especially a stronger consumer market in Mexico.

BRETT GUNDLOCK

In Mexico, History Is Repeating Itself

When Mexican President Enrique Peña Nieto visited President Obama on Jan. 6, hundreds of Mexican Americans demonstrated outside the White House. Hundreds more picketed at Mexican consulates across the U.S. It was an unusual display of solidarity with Mexicans south of the border, who have taken to the streets almost daily since September— when 43 college students were massacred by narco-gangsters—to denounce corruption and violence in their country. Peña Nieto’s approval rating, which hovered above 60 percent two years ago, has plummeted into the 30s as marchers call for his resignation. That’s a dramatic fall considering how ardently U.S. and international boosters lionized him when he took office in December 2012. Then, it seemed like every financial gazette on the planet was declaring Peña Nieto’s Mexico “the Aztec Tiger.” New York Times columnist Thomas Friedman said it was poised to become a “more dominant economic power in the 21st century” than China. All that turned out to be familiar hyperbole. Mexico, after all, is a place where history can’t help repeating itself. Peña Nieto’s approval numbers are the lowest for a Mexican president since 1995, when the peso was suffering one of the worst crashes in its history. And that’s fitting, because while another peso collapse may not be imminent, there’s a lot about Mexico in 2015 that feels eerily similar to Mexico in 1995. To better understand what I’m talking about, let me take you back not just to 1995 but to 1991, when I was Newsweek’s Mexico City bureau chief, covering the political and business campaign to ratify the North American Free Trade Agreement. The pact would join developing Mexico in open-border commerce with the developed U.S. and Canada—provided the public in the U.S. and Canada could be sold on the idea. As the three countries began negotiating Nafta, it became clear that a big hurdle would be the stories emanating from Mexico about poverty and inequality, political corruption and business monopolies, lawlessness and narco-violence. Thus began a concerted public-relations campaign by politicians and businessmen to burnish Mexico’s image. For starters, the bold free-market reforms of Mexico’s Harvard-educated president, Carlos Salinas de Gortari, were to be cast in the most adulatory light possible. U.S. media were also urged to lay off Salinas’s dictatorial Institutional Revolutionary Party, the PRI (which is also Peña Nieto’s party). That summer some journalist colleagues and I met with a group of visiting


Twenty years later, there’s a keen sense of déjà vu. For one thing, the scandals rocking the country—including the acquisition of a $7 million mansion by Peña Nieto’s wife from a construction firm that won lucrative public contracts when he was a state governor—have erupted in the wake of a campaign to glorify Peña Nieto. (The first lady, TV soap opera star Angélica Rivera, says there is nothing illegal about her dealings over the house.) When Peña Nieto came to power,

Mexico had been through a decade of unprecedented drug-war carnage and dismal economic growth. Its political and business classes wanted desperately to expunge the cartels and decapitated bodies from the front pages. There was, in fact, better news to report: Gross domestic product was improving; manufacturing exports were tops in Latin America. The World Bank noted how much easier it was to do business in Mexico than in Brazil—a country whose ascent as the region’s new economic power had been harder to swallow in Mexico City than cheap mescal. Peña Nieto was pursuing a laudable reform agenda, including a landmark measure to usher private and foreign

investment into production projects at Mexico’s anemic state-run oil monopoly, Petróleos Mexicanos (Pemex). He also pledged to make the PRI—back in power after a 12-year hiatus—less larcenous and more democratic. Everyone from investors to think tanks to diplomats began to hype these signs of hope. Even organizations like the World Bank in 2012 suggested Mexico was now majority middle-class—despite the government reporting that 59 percent of

Two decades ago, the pursuit of Nafta overrode a realistic assessment of Mexico’s problems

of law via police and judicial reform— could be back-burnered. The complacency deepened last year after the capture of a top drug lord, Joaquín “El Chapo” Guzmán, which was great news but hardly indicative of a new law enforcement culture. What mattered most to U.S. politicians and businessmen, even to many Mexicans, was Peña Nieto’s energy reform—just as the only thing that mattered 20 years earlier was Salinas’s Nafta crusade. Until Sept. 26. That’s when a group of leftist student protesters from a teachers college in Mexico’s southern Guerrero state came to the town of Iguala. The mayor and his wife, who have family ties to a local drug gang, allegedly got irritated and ordered police to attack the students and hand them over to the narcos—who federal officials say have confessed to murdering 43 of them and burning their corpses. The mayor and his wife deny the allegations. Suddenly, deprioritizing the rule of law didn’t look so shrewd. Suddenly, Mexicans were reminded that even in the Aztec Tiger, gangland and government are all too often monstrous Siamese twins. In late November, as protests swelled into an antigovernment movement, Peña Nieto announced a major anticrime overhaul, conceding, “Mexico cannot go on like this. After Parents of missing Iguala, Mexico must change.” students lead a It would be nice if change march through started with the PRI. But since that Mexico City on speech, more scandal has hit the Oct. 23, 2014 administration—including a Wall Street Journal probe into an alleged sweetheart real estate deal involving Luis Videgaray, the finance minister and reform archithe population was still lower-class or tect. Videgaray denies any wrongdoing. Where does all this turmoil leave U.S. in poverty. Although Mexico’s mafia mayhem didn’t and other foreign investors, the same folks recede (narco-related murders—90,000 who canonized Peña Nieto two years ago? since 2007—keep mounting), it became a Feeling wary at best, by most reports, and taboo subject. Just before Peña Nieto took warier still as falling oil prices make investoffice, I interviewed him for Time. “Mexico ment with Pemex less appealing. And, by needs a more integrated approach to com- the way, the peso since September has bating narco-violence,” he said. But that fallen more than 10 percent. seemed about the extent of his enthusiasm Peña Nieto, who doesn’t leave office for that effort. Los Pinos, the Mexican pres- until December 2018, can still break idential palace, often chastised journalists Mexico’s cycle of hope, hype, and heartfor what one Peña Nieto aide told me was break. But he needs to get real about the rot. And so does the U.S. our “obsession” with the drug war. That lulled everyone, including the U.S., into believing Mexico’s hardest but Padgett is the Americas editor at NPR most critical mission— establishing rule affiliate WLRN in Miami.

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for district attorneys looking to escape public accountability. The Brown case, along with the Eric Garner case in New York, has led many Americans to question why the U.S. is virtually the only country that still uses the grand jury system, a relic of medieval England. Some states do not use grand juries, but in the federal system, the Fifth Amendment to the U.S. Constitution requires them for all capital and “infamous” crimes. It’s hard to see how grand juries still serve any useful purpose, and the U.S. needs to ask whether they should be abolished altogether. In the meantime, those who serve on them should not be prohibited from talking about it. Jurors of trials are free to speak after their service. Grand jurors should have that right, too.

Silence of The Grand Jurors Justice can be safeguarded without a relic from medieval England

Extricating Sri Lanka From China’s Embrace

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There are few ideas more un-American than government censorship of private citizens. It’s especially disturbing when a governing body demands that the vow of silence be lifelong and on matters of public record. Yet this is what U.S. governments do every day to any citizen who serves on a grand jury. One such citizen has brought a lawsuit challenging the gag order, and it is time for judges—and legislators—to lift it. When the grand jury in the Michael Brown case in St. Louis County, Mo., declined to return an indictment, the local district attorney, Robert McCulloch, held a news conference. He offered a lengthy summary of the evidence, characterized the credibility of some witnesses, and described the grand jury’s deliberations. He refused to say, however, whether its decision was unanimous. Under state law, that would have been one detail too many. No public purpose was served by concealing this vote—or, for that matter, by forcing grand jurors to accept McCulloch as their public spokesman. His decision to speak to the news media and release all transcripts and documents involved in the case was highly unusual. Most district attorneys decline to comment on grand jury deliberations, and in some states they are prohibited from releasing a case’s most basic details. Whether McCulloch handled the Brown case properly remains a matter of debate, but his loquaciousness serves to demonstrate that transparency isn’t fatal to the justice system. Like McCulloch, the grand juror who filed the lawsuit deserves the right to speak about the case without facing criminal prosecution that could land him in jail for a year. The secrecy involved in the grand jury process is primarily intended to protect the reputations of those who aren’t indicted. But many people outside the grand jury process are charged without being found guilty. The secrecy is also intended to encourage witnesses to come forward. There are other ways to encourage testimony, and at any rate a blanket prohibition on grand jurors’ speech isn’t the best way to protect a witness’s anonymity. While grand juries can help guard against politically driven prosecutions, they can also provide political cover

Is Sri Lanka the next Myanmar? After the stunning ouster of strongman Mahinda Rajapaksa in Jan. 8 elections, another small, strategically vital Asian nation would appear to have rejected China’s embrace. Whether the U.S. and India can exploit this opportunity, however, will depend on whether they recognize what’s unique about Sri Lanka. The first thing to appreciate is that voters weren’t necessarily driven by resentment of China. They elected Maithripala Sirisena as president because they had tired of the opacity and perceived cronyism of Rajapaksa’s administration, symbolized in part by multibillion-dollar projects handed out to Chinese companies with little oversight. The second thing that’s different about Sri Lanka’s transition is that it has sidelined the people who have been most directly implicated in past human-rights abuses—including Rajapaksa and his brother Gotabaya, who served as defense secretary during the last stages of the brutal war against Tamil Tiger insurgents. This should make it easier for the U.S. and India, which has a large Tamil minority, to work with the government and strengthen military-to-military ties. The U.S. shouldn’t drop its backing for United Nations-led efforts to investigate allegations of Sri Lankan war crimes, but it should allow the new president a chance to promote internal reconciliation and accountability. Finally, China still has a legitimate interest in expanding its presence in the Indian Ocean, given its dependence on the region’s shipping lanes. Sri Lankans could benefit greatly if Beijing’s plans for a “Maritime Silk Road” integrate the infrastructure and economies of the whole region. Ideally, China will continue to cultivate its interest in Sri Lanka as one investor among several—and play by rules more aboveboard than before. Needlessly provocative actions—such as the docking of Chinese submarines at Sri Lankan ports, which Rajapaksa allowed—should cease. Sirisena’s incoming government has as much reason as the U.S., India, or Japan to broaden foreign involvement in his country. After all, it’s what Sri Lankans voted for.

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ILLUSTRATION BY BLOOMBERG VIEW; PHOTO: GETTY IMAGES

The U.S. and India have an opportunity to reassert influence


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January 19 — January 25, 2015

Greekonom A   snap election will allow voters to vent about austerity, but Greece’s problems will be harder to solve

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On Jan. 25, Greeks will turn out for a general election that three weeks ago they didn’t know was coming. The trigger: a provision of the country’s constitution that required conservative Prime Minister Antonis Samaras to call a snap election when his candidate for president—a ceremonial position— couldn’t muster enough parliamentary votes to get the job. The consequences, however, will not be trivial. For more than four years, Greeks have lived under austerity policies imposed by international lenders and the European Union. Many hope a new government will offer a reprieve from higher taxes, fewer jobs, lower wages, and more expensive goods and

services. “At this point, the government is destroying the country,” says Myrto Rigopoulou, a psychologist and translator in Athens. Fearful about Greece’s stability, people aren’t planning for the future, says Maria Karaklioumi, a pollster and political analyst in Athens. “They don’t think about what will happen in two or three years. They’re in a continuous race for daily survival.” The austerity measures, including public-sector job cuts, reduced spending on education and health care, and privatizations that have led to unemployment, were required under the terms of a loan agreement with the European Commission, the European Central Bank, and the International

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Monetary Fund. Since 2010, Greece has received about €240 billion ($283 billion) in loans. The measures were introduced under the socialist government led by George Papandreou, who left office in November 2011, and continued under the governing coalition led by Samaras’s center-right New Democracy party. At the start of the crisis, private-sector employment in Greece was 3.74 million, including self-employed and salaried workers; by the end of 2013, the number had fallen to 2.78 million, according to data from the Hellenic Statistical Authority. With government job cuts required under the terms of Greece’s loans, the public sector also shrank, dropping to 723,000 workers in 2013

DATA: EUROSTAT, HELLENIC STATISTICAL AUTHORITY, HELLENIC MINISTRY OF ECONOMICS, ATHENS STOCK EXCHANGE, EUROPEAN COMMISSION

“At   this point, the government is destroying the country”


America’s working poor are working more 20

€317.5b

Fighting HIV with Africa’s Gossip Girl 22

Outstanding Greek debt, 2Q 2014

mics

A weak euro is the recipe for a strong Europe 21

Estimated net emigration per 1,000 inhabitants

0.2 4.7 2008

2013

from 869,000 in 2008. The country’s population is about 11 million. Members of the middle class say austerity has left them in the ranks of the poor. “High taxes and unemployment, that’s what most voters say is the biggest problem right now,” Karaklioumi says. Retirees, for example, face higher taxes than before the crisis, along with cuts of about 30 percent to 50 percent in pension benefits, she says. In late 2011, for the first time, Greeks started paying taxes on residential and commercial properties. “The real problem with property taxes is that they were sudden. Started from zero and went up from there,” says George

Prokopakis, a management consultant and former adviser to the Athens Stock Exchange. Kolonaki, an upscale neighborhood in Athens, is now a landscape of empty storefronts. Its apartment buildings, once some of the most sought-after in the city, have high vacancy rates. “What you see is very quick turnover in terms of businesses and shops,” says Errikos Koen, a physical therapist. An example, he says, is Mitropoleos Avenue in the heart of Thessaloniki, Greece’s second-largest city. Koen, who was born and raised

in the city, has run his practice on Mitropoleos for the last 11 years. “The quality of the goods and the level of services, it all went down.” Voter surveys put the blame for the current situation squarely on the political system and the politicians, Karaklioumi says. Her polls have consistently registered dissatisfaction with and distrust of the Samaras government. Most Greeks appear ready to support opposition candidate Alexis Tsipras, the Unemployment rate

7.2% 25.5% 3Q 2008

3Q 2014

New annual registrations of passenger cars on the road

296k 2008

84k 2014

Quarterly GDP

€63b €48b 3Q 2008

3Q 2014

Athens Stock Exchange General Index

2,856 819 Sept. 30, 2008

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Jan. 14, 2015


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40-year-old leader of the leftist Syriza party, which has been leading in the polls for 10 months. Syriza has campaigned on a message of relieving the economic pain and asserting the Greeks’ right to choose the best course for their own future. Some members of opposing parties say that means Tsipras would untie the country from the euro zone and the EU. In rallies and party conferences, he takes a hard line against austerity, saying it has stripped Greece of its civility and humanity. He wants to renegotiate the terms of the bailout and plans to ask for debt forgiveness from the EU, though he’s stopped short of advocating an exit from the euro. Samaras’s party is stoking fears that Tsipras’s anti-austerity stance could push Greece out of the shared currency—and invoking the financial chaos such a break might bring. Prokopakis and Karaklioumi are wary of Tsipras’s message and question whether he and his party can implement the changes needed to create a sustainable, functional government. Greeks are used to populist leaders, who for decades have rewarded special interests. “Everything is so volatile,” Karaklioumi says. “It’s a very short election period. Everyone has to form his or her own opinion in a few days.” For a while the government seemed to be meeting its austerity goals, “even overperforming and hitting some targets early,” says Harry Theoharis, who from January 2013 to May 2014 served as secretary general of public revenues, a role established as a requirement of the loans. “Now we’re regressing. The problem is a dysfunctional political system that micromanages the economy through the state.” Theoharis, responsible for revamping tax collection, resigned for personal reasons, according to the government. % “The government’s priorities were shifting, and that shift Share of Greeks wouldn’t allow who say the worst me to perform my is still to come duties in the best in the job market way,” he says. Finance Minister Gikas Hardouvelis told Bloomberg TV the budget for 2014 had a big cushion despite a recent slowdown in tax collection. “Whatever miss we have, it’s not going to affect the eventual target.” “Greeks tend to hope for and even believe in miracles,” Prokopakis says. “That somehow the magic wand of

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somebody will turn the situation back to what it used to be in 2008,” before Greece fell into its six-year recession. And, he says, they’re not prepared to make the sacrifices needed, because the government has done a poor job of presenting them in a way that’s acceptable. “You have to subsidize municipalities and local governments; you need to build infrastructure,” he says. “You need money for all this.” —Dimitra Kessenides The bottom line Austerity, which hasn’t made life better for Greeks, may provoke a clash with the EU if voters put a leftist party in power.

Currencies

Can Europe Save Itself By Weakening the Euro?

Its best hope for growth may be a cheap currency A devalued euro “is crucial for generating growth and inflation”

The euro celebrates its 16th birthday this month, and like a lot of teenagers, it’s hitting some rough patches. The currency has fallen 14 percent against the dollar over the past year, to $1.17 on Jan. 14, its weakest level in almost a decade. While he’s keen to avoid sparking an international currency war by actively encouraging its slide, European Central Bank President Mario Draghi is doing almost nothing to prop up the euro. That’s because a weak currency could be the region’s best shot at reviving its stagnant economy. Exports account for almost half of Europe’s gross domestic product, compared with less than a fifth of U.S. and Japanese GDP. By making European goods more competitive, both at home and abroad, a cheaper euro could help boost growth and inflation. The ECB’s economic models suggest that a 5 percent decline in the euro’s tradeweighted exchange rate might lift GDP by 0.3 percent and inflation by as much

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as 0.5 percent. That may not sound like much, but it would be welcome news: The ECB expects the euro area to grow by just 1 percent this year, with an inflation rate of only 0.7 percent. The benefits have been scant thus far. Europe flirted with recession in 2014. Consumer prices fell across the region in December for the first time in more than five years. Inflation remains below the ECB’s target of about 2 percent, and economists predict prices will keep declining this year. “We badly need more inflation,” Italian Finance Minister Pier Carlo Padoan told a European Parliament committee on Jan. 12. “We also could be helped by a weaker euro exchange rate vis-à-vis the dollar.” Strategists surveyed by Bloomberg News predict the euro will continue to lose ground against the dollar through 2015. This month, Goldman Sachs became the latest bank to join the growing minority that expect the euro to fall to parity with the greenback by the end of 2016. Investors are betting that the risk of deflation will force Draghi to deploy even more monetary stimulus by buying up government bonds, which would further weaken the euro by increasing its supply. By contrast, the U.S. Federal Reserve is adding to the dollar’s appeal by considering raising interest rates for the first time since 2006. “The ECB has come round to the idea that the currency matters and getting it down is crucial for generating growth and inflation in a very export-driven economy,” says Nick Kounis, head of macro research at ABN Amro Bank in Amsterdam. A cheaper euro could be a boon for some of Europe’s largest companies, which depend on exports for much of their sales. Sanofi, France’s biggest drugmaker, gets almost a third of its revenue from the U.S. Carlos Ghosn, chief executive officer of French carmaker Renault, told reporters on Jan. 7 that the euro’s drop “is good news, because it helps exports from Europe to other markets, or at least prevents imports to Europe.”

ILLUSTRATION BY 731

Global Economics


Global Economics A weaker euro may still not be enough to accelerate growth in the region. Some of the benefits of a cheaper currency will be lost because European countries conduct so much trade with one another: About 45 percent of euroarea exports never leave the currency union. Whatever benefits producers gain in lower costs get canceled out by consumers’ lower purchasing power. A slowdown in China and Japan will also limit foreign demand for European goods, as will those countries’ efforts to weaken their own currencies. That’s a problem for the euro zone, which is desperately trying to improve competitiveness, says Janet Henry, chief European economist for HSBC. As flawed a strategy as it is, lowering the value of the euro may be the best tool Draghi has at his disposal. The benefits of more monetary stimulus may not easily filter down to the broader economy, says Alberto Gallo, head of European credit research at Royal Bank of Scotland. Banks remain weak and may not pass the ECB’s stimulus on to consumers through lower interest rates. Companies will be reluctant to invest and hire until they see demand improve. Given those troubles, Gallo says, of the strategies available, a cheaper euro “is the only one which will obviously work in the euro zone.” —Simon Kennedy The bottom line The euro has lost 14 percent against the dollar in the past year, and the ECB is choosing not to intervene.

Labor

The Working Poor Confound the Experts Labor force participation by lowerincome families has risen sharply “I’m out here every day trying to do the right thing”

The left and the right alike have pounced on the drop in Americans’ labor force participation rate to score political points. The rate tied an almost 37-year low of 62.7 percent in December, according to data released on Jan. 9 by the U.S. Bureau of Labor Statistics. And the poorest families are the least likely to be in the labor force. So this factoid should come as a big surprise: Low-income families are the

only ones whose participation rate has risen. The average for families in the lowest tenth of households by income rose by 11 percentage points over a 13-year period, to just under 44 percent. The participation rate of families in the top tenth of incomes fell by a little more than 3 percentage points, to just under 80 percent. To put it simply, the poor have been stepping forward while the rich have been stepping back. These calculations were made by Nicolas Petrosky-Nadeau, a senior economist at the Federal Reserve Bank of San Francisco who is on leave from Carnegie Mellon University. He dug up the new data in collaboration with Robert Hall, an economist at the Hoover Institution and Stanford University. Petrosky-Nadeau says he and Hall were surprised by what they found, as are other economists who have seen the numbers. “They’re fascinated,” he says. “It goes against their priors”—that is, what they previously believed. The labor force participation rate is defined as the share of people who have jobs or are actively looking for work out of all people age 16 and older, excluding those in the armed forces, prison inmates, and residents of nursing homes. The rate is on a downward trend overall because of the retirement of the Baby Boom generation. Petrosky-Nadeau and Hall compared participation rate averages from March 1998 to February 2000 with those from August 2011 to July 2013, as well as points in between. They found that the rise in the participation rate for the lowest-income households continued through the deep 2007-09 recession, then leveled off around 2010. What makes the increase more surprising is that the starting point for the analysis was a period when the economy was extremely strong; the unemployment rate got as low as 3.8 percent in 2000. Yet the poorest Americans are more likely to be working now than then. The research undermines the Democratic case that rapid economic growth is essential to alleviating poverty, because it makes labor markets so tight that employers have no choice but to hire people some would prefer to avoid, such as racial minorities, the long-term jobless, the handicapped, and ex-convicts. “The movement to full employment draws on a reserve army

As the Rich Get Richer, the Poor Get Working Percentage-point change in U.S. average labor force participation rate from 1998-2000 to 2011-2013

+11 -3.3 -2.7

Lowest-earning tenth of population

Highestearning tenth of population

Overall population

DATA: NICOLAS PETROSKY-NADEAU, ROBERT HALL

of the underemployed as well as of the unemployed,” Brookings Institution economist Arthur Okun wrote in an influential 1973 paper called Upward Mobility in a High-pressure Economy. A 1999 working paper by Richard Freeman of Harvard and William Rodgers III of the College of William and Mary found that the strong demand for workers in the ’90s expansion disproportionately boosted the employment and earnings of less-educated young men, “especially young African American men in tight labor markets.” If the data from PetroskyNadeau and Hall are right, then Okun’s “high-pressure economy” isn’t essential to drawing more marginal workers into the labor market. The research also weakens the Republican case that the welfare state keeps people from working. Wisconsin Representative Paul Ryan, in the Republican response to the State of the Union address in 2011, warned of “a future in which we will transform our social safety net into a hammock, which lulls able-bodied people into lives of complacency and dependency.” In 2012 the Heritage Foundation criticized the food stamp program for discouraging people

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Global Economics Entertainment …

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from working and said it should be turned into “a work activation program [that] would seek to increase employment among able-bodied, nonworking food stamp households.” Yet it now appears that low-income families were entering the labor force even as the food stamp rolls set records during and after the last recession. Jerome Ellison, 57, is one of those people on the bottom of the income scale working harder than ever. At night he unloads United Parcel Service trucks at Philadelphia International Airport. During the day he’s a housekeeper at a nursing home. He earns enough to rent a $350-a-month room in a house in West Philadelphia. Most nights, dinner is microwave noodles. “I’m out here every day trying to do the right thing,” Ellison says, “and prevent myself from going on welfare.” Petrosky-Nadeau says he and Hall haven’t had time to figure out why low-income households have bucked the downward trend in labor force participation. One possible explanation, he says, is rising income inequality: The poorest families worked more because they needed the money. The richest worked less because they didn’t need it as much, and they spent their time on other things. There’s also a possibility that the new numbers are wrong, but Petrosky-Nadeau says the data came from the best source for information on the benefits and

Brazil Rede Globo, a broadcaster specializing in telenovelas, expanded rapidly in the 1980s. Characters on its shows had few or no children; viewers began to have fewer babies.

work patterns of the poor, the U.S. Census Bureau’s Survey of Income and Program Participation. He and Hall plan to check their numbers against other sources, such as the Current Population Survey. If the research stands up to scrutiny, a lot of people are going to have to revisit their beliefs about why the poor do and don’t go to work. —Peter Coy, Matthew Philips, and Rich Miller The bottom line About 44 percent of the lowest-income households in the U.S. are now in the labor force.

Television

Fighting Poverty and HIV With Soap Operas MTV uses economic research to effect change in Africa “I would say that it’s an African version of Gossip Girl”

Before she won an Academy Award in 2014 for her role in 12 Years a Slave, Lupita Nyong’o starred in two seasons of the TV drama Shuga. Set first in Nairobi and then in Lagos, Shuga features young, attractive people who sleep with each other. It’s wildly popular and shown on broadcast channels that reach

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72%

Female characters on Rede Globo with no children

500 million people, mostly in Africa. “I would say that it’s an African version of Gossip Girl, but with sexual-health messages weaved through,” says Georgia Arnold, executive director of MTV’s Staying Alive Foundation, which produces the show with the twin goals of promoting safer sex and removing the taboo around HIV. Shuga isn’t a commercial project; it’s sponsored by donors including the Bill & Melinda Gates Foundation. Now in its fourth season, the show recently added a new member to its production team: Eliana La Ferrara, a professor at the University of Bocconi in Italy who specializes in a mix of behavioral and development economics. La Ferrara wasn’t hired for her writing talent. MTV and its donors want to apply a more rigorous approach to make sure Shuga’s message actually creates change where it airs. Governments have long known that TV can have an impact on poverty by changing behavior. In the 1970s, after the launch in Peru of Simplemente María, a telenovela about an aspirational maid, the country’s government noticed a rise in demand for literacy classes. More recently, economists have tried to measure these effects with greater precision. In 2009, Emily Oster, an economist at Brown University, found that the arrival of cable television in rural India had decreased the acceptability of domestic violence against women and led to a drop in fertility rates. At about

FROM LEFT: COURTESY YOUTUBE; GLOBO COMNUNICATIONS; COURTESY YOUTUBE (2); DATA: ELIANA LA FERRARA, WORLD BANK, MTV STAYING ALIVE FOUNDATION

Peru After Simplemente María aired, from 1969-71, enrollment in adult literacy classes increased, and households started treating their maids better.


Global Economics

300%

… With Benefits

Short-term increase in calls to a government debt hotline

South Africa The World Bank researcher who worked with South African soap opera Scandal! on a story line about debt says an emotional connection to the character is important for changing behavior.

the same time, La Ferrara began working on a paper that uncovered a similar effect in Brazil, where birthrates had declined in households within the signal range of Rede Globo, a Brazilian broadcaster specializing in telenovelas. The phenomenon of people changing their behavior as they identify with characters became known as the telenovela effect. It’s seen not just in the developing world. In 2014 the U.S. National Bureau of Economic Research released a paper suggesting the MTV reality show 16 and Pregnant had led to a 5.7 percent reduction in births among teenage mothers during the 18 months after it premiered. In the U.S., TV has been on the leading edge of evolving social trends at least since The Mary Tyler Moore Show and Maude. The news isn’t universally good: A paper by Benjamin Olken of MIT showed that social ties in Indonesia weakened with the arrival of TV. The challenge, La Ferrara says, is to take a passive effect and turn it into an active policy. “Now that we know what happened, we can leverage the good side.” With Shuga, La Ferrara applies the rigorous standards of economic research to the development of the show. She pulls existing data on attitudes to get a baseline before programming starts and suggests themes for the writers to consider. When the show’s third season was ready to air in 2014, La Ferrara screened it for community groups. This spring,

Nigeria In Shuga, a series filmed in Kenya and Nigeria, young people go out, sleep with each other, and learn tough lessons about HIV. The series is a nonprofit project of MTV’s Staying Alive Foundation.

those groups will respond to a survey measuring what behaviors actually changed. Such data-driven decisions are increasingly important for donors, in particular the Gates Foundation. Last season, while studying a Nigerian survey on attitudes about HIV, La Ferrara found that only 47 percent of women and 61 percent of men had heard of antiretroviral drugs, which can prevent the onset of AIDS. A plot line on the show then featured a woman who discovered the drugs in her lover’s dresser and asked her friends what they were. TV producers can’t always share an economist’s rigor. La Ferrara suggested that MTV produce several plot lines on domestic violence to see which was most effective, but the network decided not to shoot multiple versions of the same scene. In 2013, Bilal Zia, an economist with the World Bank, published the results of a randomized field trial around Scandal!, a soap opera on South Africa’s E.TV. He worked with the show’s writers on a plot line about personal finance. At first, “we were worlds apart,” he says. “They wanted something with a lot of spice, and we wanted a lot of messaging. They said if you put on a show with a lot of information, no one’s going to watch.” Eventually the writers agreed to do a plot about a woman who buys furniture on an expensive installment plan, gambles, and then calls a government debt hotline for help. Zia found in field studies that

87

Number of broadcasters globally that aired Shuga

people who watched were less likely to buy on installment or gamble. The World Bank is beginning to think about behaviors in the developing world, in addition to its traditional focus on infrastructure and the workforce. The bank’s 2015 World Development Report includes a section on the work of La Ferrara, Oster, and Zia. Karla Hoff, the report’s author, says the bank is intrigued by the telenovela effect, but more research is needed before it becomes a regular part of funding decisions. One early conclusion, La Ferrara says, is that it’s easier to provide information than to change behavior. That is, it’s more likely that a TV show will encourage someone to call a debt hotline than to refrain from hitting his wife. “It’s ambitious to think that with a soap opera you can change these very deeply rooted values,” La Ferrara says. On Shuga, at least, medium and message work particularly well together. “It’s young people, a social network, and how they’re linked by sex,” says Arnold of the Staying Alive Foundation. “That’s a pretty easy brief in terms of entertainment.” —Brendan Greeley The bottom line Producers find that TV can have an impact on poverty and public health, changing social behaviors.

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Edited by Christopher Power and Matthew Philips Businessweek.com/global-economics

23


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Big carmakers clash with their dealers in China 27

Weaponizing chicken nuggets 28

Something’s landing at Delta: A tax bill 28

Briefs: GM noses into Tesla’s lane; Ceasars rolls snake eyes 29

25

Why   Sony Pictures CEO Michael Lynton and studio chief Amy Pascal may yet have a happy ending

LYNTON AND PASCAL: JOE SCARNICI/GETTY IMAGES; SUNSET: GETTY IMAGES

“Relationships   are built over years, they fall apart in minutes, and they are rebuilt over months” Amy Pascal didn’t waste any time. Within days of Sony Pictures’ discovery in late November that hackers had taken down its computer system in protest over its film The Interview, the studio’s co-chairman began sending warnings to key producers and creative talent around town: Executives’ e-mails—many filled with embarrassing comments about some of the company’s most important business partners—may have been looted. That sparked a series of preemptive calls to producer Megan Ellison, director Ivan Reitman, actress Angelina Jolie, and other frequent collaborators. And for weeks Pascal kept working the phones. Damage control has been Job One at Sony since the cyber attack dumped reams of unflattering disclosures onto file-sharing websites

that the media raced to publish. The firestorm has died down as awards season has gone into full swing, but for Sony the fence-mending is likely far from over. “Relationships are built over years, they fall apart in minutes, and they are rebuilt over months,” says Howard Bragman, a crisis expert whose client roster has included Monica Lewinsky and Michael Sam. Soothing bruised egos is essential for Pascal, whose primary job is attracting—and keeping—talent and promising film projects. With an enthusiastic following among some filmmakers, who see her more as a creative partner than corporate honcho, she’s part mother, part producer, part hustler, part shrink. She climbed the ladder at Sony thanks in large part to her relationships with

directors such as Cameron Crowe, who made Jerry Maguire for Sony’s TriStar in 1996 and has returned for his latest, an as-yet-unnamed feature starring Bradley Cooper and Emma Stone. That was the movie whose script Pascal in a hacked e-mail slammed as “ridiculous”—one of the milder disses the breach exposed. Pascal, whom the studio did not make available for an interview, continued to work with Crowe on the movie, people close to Sony say, and it’s still scheduled for release in May. “Amy and the other people over at Columbia and Screen Gems [two of Sony’s studio brands] have spent a lot of time reaching out into the community,” says Michael Lynton, the studio’s chief executive officer. “I have no doubt some people were upset, but I think

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Companies/Industries

$6.6b

Global box office gross of films featuring Will Smith

Angelina Jolie $5.5b Global box office gross of films with Jolie as a featured actress $116m Box office through Jan. 12 of Universal’s Unbroken, which Jolie directed and produced

Hollywood’s highest-paid actress in 2013

26

Kevin Hart

Megan Ellison

15.6 million Number of Twitter followers. He’s sent more than 23,000 tweets.

3 Best Picture Oscar nominations in 2013 and 2014 for movies produced by Ellison

75% Share of revenue generated outside the U.S. for Will Smith’s 2013 film After Earth

4 Movies featuring Hart that were among the top 100 grossing movies of 2014

$812.2m Global box office gross of films produced by Ellison, who heads Annapurna Pictures

113m Views on Vevo of the music video for Willow Smith’s Whip My Air

$925.8m Worldwide box office gross of films featuring the comic actor

the relationships are so strong that they can be repaired. We don’t think we will have lost any business.” Why, in a town where so many studios and production companies compete for projects, would creative types continue taking their ideas or talents to a lot where the executives talk trash about their biggest stars? One reason: Sony makes lots of movies. In 2014 it distributed 34—more than any other major Hollywood studio—and so far this year it has 21 on tap, including Spectre, the latest James Bond offering, due in November, and Grimsby, a Sacha Baron Cohen comedy. The pull of a potential hit is a powerful salve for hurt feelings. In Hollywood, “whoever has the best script wins,” says Lynda Obst, producer of Sleepless in Seattle and Interstellar. “And Amy has always had the keenest eye for material. No one in his or her right mind would leave a lucrative and successful studio deal for something as nutty as leaked e-mails.” Agrees Michael Burns, vice chairman of Lions Gate Entertainment, the studio behind The Hunger Games movies: “When Sony is making its next big film with a great script and a terrific director, people will want to work on it.” As for the insults the in-box dump revealed, “people will get over it. That’s Hollywood.” Some may not have much choice. Actor and producer Adam Sandler, whom Pascal in an e-mail labeled an “asshile” [sic] and whose work was trashed as mundane in other hacked Sony documents, is contractually

The Smiths

$602.9m Worldwide ticket of movies with Jaden Smith

Scott Rudin $6.2b Global box office gross of films produced by Scott Rudin 6 Movies produced by Rudin that were nominated for a Best Picture Oscar Rudin is one of only 14 people who’ve won an Oscar, Grammy, Emmy, and Tony award

tied to the studio—and vice versa. His deal gives Sony the first option to make movies developed by his Happy Madison Productions company in return for residence on the lot in Culver City, Calif. The studio has distributed seven Sandler-produced films since 2009 and will release his next two, Paul Blart: Mall Cop 2 and Pixels, this year. There are so many projects at various stages of production and predistribution at Sony that it may be too soon to know if the dust has really settled, because it’s unlikely anyone offended by an e-mail insult would sabotage a multimilliondollar movie midstream by pulling out in a tiff. And deals continue to be made. In early January, Sandler and Sony extended their television production pact. Sony Pictures Kevin Hart, accounts for among the most 11 percent of bankable of Sony’s Sony’s revenue regulars, took one of the hardest hits in the download: Sony Screen Gems President Clint Culpepper called him a “whore” for wanting to be paid for promoting films to his massive social media following. But a few weeks after the slight made headlines, Hart and Culpepper were all smiles at the premiere of the Hart vehicle The Wedding Ringer. The actor told the Hollywood Reporter that Culpepper hugged him. “He’s good,” Hart said. “Everything is fine.” Hart remains on board to make

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Adam Sandler 7 Number of movies Sandler has produced that Sony has released since 2009 $518.4 million Combined worldwide ticket sales of Sandler’s two critically panned but successful Grown Ups movies made for Sony

the action flick Black Phantom with Sony Screen Gems and, according to a person close to the studio, has made other commitments to Sony. Ellison’s in a similar position. The e-mail blast about her came from producer Scott Rudin, a frequent Sony collaborator who won an Oscar for Best Picture in 2008 for No Country for Old Men. Rudin discussed Ellison’s mental state in colorful language. She replied on Twitter: “Bipolar 28 year old lunatic ..? I always thought of myself more as eccentric.” Lately she’s been making the awards season rounds for Foxcatcher, which she produced and Sony Pictures Classics released. She’s also working on a coming Sony effort, Seth Rogen’s next project after The Interview, called Sausage Party. It was Rudin who called Jolie a “minimally talented spoiled brat” and engaged in an embarrassing exchange with Pascal of supposed jokes about President Obama’s preference for films with black actors. Pascal and Rudin delivered public mea culpas, and a person close to the studio, who was not authorized to speak on the matter, said one of Pascal’s apology-tour calls was to Shonda Rhimes, a powerful screenwriter, director, and TV show creator who questioned on Twitter why some media labeled the banter as racially insensitive instead of racist. Lynton says he doesn’t expect heads will roll at Sony Pictures because of the hack, and so far the studio’s Japanese owners have been publicly supportive. When asked whether Pascal can continue to do her job effectively, Lynton replied,

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Meowwww … Sony’s hacked e-mails dissed some of Hollywood’s most wanted


Companies/Industries “Amy is a great talent. I expect so.” Despite that endorsement, Pascal knows that in Hollywood, financial success is the surest way to offset a host of sins. She noted as much in one of the hacked e-mails she sent to actor George Clooney, who was mortified after The Monuments Men, a film he directed and starred in for Sony, was a critical flop. Pascal told him not to worry. “We will protect you by making money,” she wrote. “That’s the best revenge.” That also may be the best way for Lynton and Pascal to have their own happy ending. —Lucas Shaw and Anousha Sakoui The bottom line Sony distributed 34 movies in 2014, more than any other big Hollywood studio. That clout could help it overcome its data hack.

Autos

China Dealerships Flex Their Muscles As sales slow, they’re demanding car companies pay for distribution “Growth has been falling, and dealers have been taking the hit”

together under the state-backed China Automobile Dealers Association (CADA) to demand lower sales targets and a bigger share of profit from vehicle sales. BMW on Jan. 4 agreed to pay 5.1 billion yuan to its dealers (who say it will include bonuses and onetime payments to help with dealership losses), a move that has emboldened distributors for VW and Toyota Motor to press for similar concessions. The rising tensions mean companies such as VW and GM face the choice of narrower profit margins or slower growth in China, a market that increasingly determines global carmakers’ fortunes. Total vehicle sales in China in 2014 rose 6.9 percent, half the pace of the preceding year. China’s vehicle sales are set to rise 7 percent this year, about the same rate as in 2014, because of cooling economic growth and as more cities impose quotas on new-vehicle registrations to fight smog, says the China Association of Automobile Manufacturers. “We can’t just keep on sucking it up,” says Richard Li, a Toyota dealership owner who lost about 300,000 yuan last year after offering markdowns of as much as 16 percent on some models. “We have to negotiate with them and defend our rights. I will stop buying cars from them unless they step up their financial support.” Almost all the country’s dealerships are offering discounts and selling some models at losses to meet carmakers’ sales targets, according to a survey by the China Auto Dealers Chamber of Commerce. Dealers must meet those targets to qualify for yearend bonuses,

When Carson Guo set up his dealership for BMW’s Mini brand two years ago, he had to follow BMW’s every command concerning how much he had to invest, the size and location of the two-story showroom, even what paint colors he should use. He ended up putting 82 million yuan ($13.2 million) into the first independent Mini store in Beijing. Guo says he was told by thenBMW management that the company wouldn’t approve any other dealerships in Beijing within about five years, which would have let him break even in about three years. It didn’t turn out that way. “There are so many Mini stores in China now, and dealers have to cut prices to sell cars,” says Guo, who estimates he’s lost more than 20 million BMW dealership yuan since opening his store. “Selling in Beijing cars is costing us money instead of helping us make money. If automakers are not helping us out here, their interests will ultimately be undermined.” China car dealers are in open revolt over industry practices that have slashed profits, threatening growth for companies such as General Motors and Volkswagen in the world’s biggest auto market. The retailers have banded

which typically are less than 10 percent of the value of total sales. They account for more than half of dealers’ annual profits from selling cars, the trade group says. “We can’t just keep “When auto sales were on sucking it up. booming in China, dealers We have to …  defend our rights. would do anything the I will stop buying automakers asked them cars from them to do in order to gain unless they step their authorization to sell up their financial cars,” says Han Weiqi, an support.” analyst with brokerage CSC —Richard Li, International Holdings. Toyota dealer “With the expected slowdown in demand growth, manufacturers and dealers will have to find a way to make peace and secure their common interests.” BMW in an e-mail said it has reached an understanding with its dealers in China and can’t comment on individual cases. CADA, the dealer association, is asking FAW-Toyota Motor Sales, a joint venture between Toyota and China’s FAW Group, for 2.2 billion yuan in subsidies to help offset the cost of dealers’ excess inventory. Ma Chunping, an FAW-Toyota spokeswoman, didn’t respond to a request for comment. “Vehicle demand 27 growth has been falling, and dealers have been taking the hit,” says Song Tao, a deputy secretary-general of CADA. “Dealers need to make a living as well.” Talks were held in early January between dealers selling imported VW models and the automaker, according to CADA. VW sold more than 10 million vehicles for the first time in 2014, reaching the milestone four years earlier than originally targeted, because of its strong car sales in China. VW believes in having

$823m Amount BMW will pay its dealers in China to help offset their losses

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Includes an $8 billion noncash gain related to an accounting change

Companies/Industries a financially sound dealer network as “satisfied dealers create satisfied customers,” spokeswoman Larissa Braun in Beijing said in an e-mail. Chinese dealers’ fortunes are unlikely to improve anytime soon, says Ole Hui, a Hong Kong-based analyst at Mizuho Financial Group. He predicts profit margins at Chinese dealerships will shrink by more than half, from about 9 percent in 2011 to 4 percent this year. “They were printing money,” Hui says of auto distributors in China. “Those kinds of margins were never sustainable.” —Tian Ying and Alexandra Ho The bottom line BMW in January said it will pay $823 million to its dealers in China. Other brands are being pressured for similar payouts.

trans-Atlantic flights could then be kept the big three U.S. in Europe and not booked as U.S. profit. carriers, Delta “These hard assets are more mobile may face an IRS than most,” says Jennifer Blouin, an $12b tax payment first, accounting professor at the University of given its profits of Pennsylvania’s Wharton School. $4.5 billion in 2014 Tax bills or not, investors ought to be $6b and as much as Projected pleased. “It’s a good problem to have,” $1 billion more in says Jim Corridore, an analyst with S&P 2015, according to Capital IQ. —Justin Bachman its forecasts. The $0 drop in oil prices The bottom line Partnerships with foreign 2010 2014 alone will save airlines could help Delta avoid the burden of future U.S. tax bills. the airline roughly $2 billion in jet fuel expenses, executives told investors. At the end of 2014, Delta still had $12.4 billion in past losses to offset future earnings, according to Securities and Fast Food Exchange Commission filings. American had about a $10.6 billion carryforward following its merger with US Airways in 2013. United’s latest report to the SEC claimed about $11 billion in tax offsets. All three airlines declined to comment. With beef prices soaring, cheap On the December call, Anderson nuggets are the latest weapon praised as “very prescient” an analyst’s question about how the airline might “You’ll drive some visits, but you’re reduce its future tax expense, promisnot making a whole lot” ing that Delta was “all over” a tax strategy. The U.K. and the Netherlands—with For many years, McDonald’s and corporate tax rates of 21 percent and Burger King fought for fast-food dominance based on demand for their signa25 percent, respectively, compared with ture hamburgers, with the epic struggle the U.S. rate of 39 percent—could play a between the Big Mac and the Whopper role in the company’s efforts. becoming a fixture of the Burger Wars. “We have a good piece of it figured These days the combatants have shifted out,” Anderson said. “But we’re their focus to a different menu item to not ready to talk about it, but we’re woo diners: chicken nuggets. working on it. When you have Burger King in early January brought those big joint ventures that back its 15¢ chicken nugget promoare euro-dominated, and tion, offering a 10-piece box for $1.49, you own 49 percent of 20¢ or about half the regular price. The an airline in London, deal, introduced for the second time and you already have a in three months, was revived soon big commercial office in Amsterdam for joint- after McDonald’s rolled out a campaign venture pricing and yield trumpeting a 50-piece order of Chicken McNuggets for $9.99, or 20¢ each. management, Amsterdam “They’re competis a good place.” Anderson said Delta ing aggressively with would provide further details later this McDonald’s, and they’re year about how the Netherlands doing it as a very low could fit into the carrier’s tax price to draw people strategy. Its Amsterdam-based 15¢ in,” says Darren Tristano, partnership with Alitalia executive vice president at and Air France-KLM, covering the four carriers’ transresearcher Technomic. Atlantic routes, accounted for The chicken nugget price war 17 million passengers last year comes as fast-food restaurants are and $13 billion in sales. turning to discounts and new menu Yair Listokin, a tax professor at Yale items to keep millennials Law School, says the airline could transfrom fleeing to fast-casual fer assets, such as its brand name or eateries such as Chipotle some planes, to a wholly owned Mexican Grill. With wholesale beef prices near a subsidiary based in Europe and record—up 40 percent charge a royalty. Income from Delta net income

Aviation

Read Delta’s Lips: No New Taxes 28

Years of financial losses come with a silver lining: No income taxes “We’re not ready to talk about it, but we’re working on it”

Delta Air Lines expects profits totaling almost $10 billion for the two-year period ending in December 2015. The amount it expects to pay in U.S. taxes: $0. That’s because of the net operating loss carryforward, a provision of the U.S. tax code that allows businesses to claim deductions for past losses on a tax return for as long as 20 taxable years after the loss occurred. The idea is to reduce taxable income in a profitable year by applying the earlier losses. From 2001 to 2010, U.S. airlines combined lost about $55 billion and had only three profitable years—2006, 2007, and 2010. With more people traveling as the economy improves and jet fuel prices dropping, American Airlines, Delta, and United Continental Holdings expect to report more than $8 billion in pretax profits for 2014. None of them will pay U.S. taxes on those profits, thanks to their billions in losses. At Delta’s annual investors conference in December, Chief Executive Officer Richard Anderson said he expects the airline will face a U.S. tax bill in 2017. Among

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NUGGETS: COURTESY MCDONALDS; COURTESY BURGER KING; DIMON: SCOTT GRIES/AP PHOTO; DATA: COMPILED BY BLOOMBERG

Playing Chicken in The Burger Wars


Companies/Industries since 2012—McDonald’s and Burger King are hoping cheaper nuggets will help boost sales to price-sensitive diners. By Kyle Stock Franchise operators of McDonald’s restaurants, mired in an extended U.S. sales slump, are likely using the 50-piece nugget offer as a Super Bowl promotion, says McDonald’s spokeswoman Lisa McComb. So you may not see buckets of nuggets too long after the ○q○ General Motors steered definitively into NFL crowns a champion on Feb. 1. Tesla territory, unveiling an all-electric concept Burger King ran its half-price nugget deal last year for about six weeks, car that it said will be able to travel 200 miles on ending it in the middle of November a single charge and will cost $30,000 after fedafter demand surpassed the company’s The sequel to 20th expectations and supplies waned. At the Century Fox’s Avatar, eral rebates. The Bolt is expected to hit dealertime, McDonald’s best McNugget offer the top-grossing movie ships in 2017, around the time that Tesla plans of all time, has been was a 20-piece order for $5, or 25¢ each. delayed a year. Director Tiny pieces of fried chicken aren’t the to start selling a more affordable version of its James Cameron said only nonbeef offerings to be drafted for he’s busy writing three Model S electric sedan. ○ ○ Amazon.com is new Avatar films discounting duty recently. Burger King simultaneously. brought back to its low-priced promoon its way to becoming a TV production powertional menu last month the Yumbo, a house. Transparent, one of the retailer’s first original shows, hot ham-and-cheese sandwich that had been officially retired in 1974. won two Golden Globe Awards. Two of the sandwiches go for a The horsepower of a race car introduced by Two days later the company said total $5, vs. more than $4 for a Ford, which hopes to take on Ferrari at the Whopper at many restaurants. it had signed Woody Allen to write racetrack. The GT is Last year also saw the similar to the one the and direct a TV series. Amazon rebirth of Burger King’s U.S. company used to 29 dominate the European chicken fries, breaded fried ordered a full season of half-hour circuit in the 1960s. chicken strips served in a fryshows from Allen. It will stream style box. First sold in 2005, the item was taken off the menu seven them on its Prime Instant Video service. ○G○ Aetna said it would years later, only to be resurrected for raise wages for its lowest-paid workers by as much as one-third about two months beginning in August. Chicken fries helped Burger King post in a bid to increase recruiting and reduce turnover. Some 5,700 a 3.6 percent sales gain at established employees at the insurance giant—many of them customer-serstores (those open at least 13 months) for the third quarter in the U.S. and Canada. vice representatives—will see their hourly rate bumped up to $16. McDonald’s saw sales at its established ○H○ Caesars Entertainment took steps toward a possible stores in the U.S. fall 4.6 percent in November—a seventh straight monthly bankruptcy filing, a move following failed efforts to reduce decline and the biggest drop since 2001. billions of dollars in debt assumed after a 2008 buyout by Apollo With fast-food visits forecast to grow about 1 percent this year, chains are Global Management and TPG. The hotel-casino outfit sufexpected to keep up the discounts. The CEO fered during the recession and failed to win a risk of waging price wars is that resWisdom taurants will condition customers to license in Macau, the world’s biggest gamlook for deals and pass up full-priced bling market. ○w○ Apple, Google, Intel, and items, says Warren Solochek, a restaurant analyst at researcher NPD Group. Adobe Systems reportedly have reached a “You get into the chicken nugget wars revised settlement to resolve claims that and things like that and you’ll drive some visits, but you’re not making a whole incumbent upon all they colluded to stop poaching each oth- “It’s of us—merchants, lot,” he says. “It becomes an ugly circle.” er’s employees. A class-action suit was banks, retailers, —Craig Giammona, with Leslie Patton

Briefs Electric Rides

600

The bottom line With beef prices up 24 percent in 2014, McDonald’s and Burger King are turning to nuggets and ham-and-cheese sandwiches. Edited by James E. Ellis and Dimitra Kessenides Businessweek.com/companies-and-industries

filed against them in 2011. A $325 million settlement reached last year was rejected as too low by U.S. District Judge Lucy Koh.

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everyone—to come up with a better system.” —Jamie Dimon, CEO, JPMorgan Chase, on widespread data breaches


January 19 — January 25, 2015

Wall Street’s 30

Fall Guy Antonio   Weiss had everything lined up—except for one senator “Why   did you do something that Warren thought was so bad?”

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Elizabeth Warren’s latest victory over Wall Street arrived in the form of a letter. The second weekend in January, Antonio Weiss, a top investment banker at Lazard, sent President Obama a note withdrawing from consideration for under secretary for domestic finance, the third-ranking position in the Treasury. Weiss, who was nominated in November, has drawn vehement criticism from Warren, the Democratic senator from Massachusetts, and other liberals for his Wall Street ties. Since Weiss wasn’t confirmed last year, Obama would have had to renominate him in the new, Republican-led Senate. Weiss spared him the trouble. “I do not believe that the Treasury Department would be well served by the lengthy confirmation process my renomination would likely entail,” he wrote the president. The news, which caught even Warren’s staff by surprise, is a big deal. It’s evidence that while Democrats’ fortunes have suffered amid Republican advances, Warren’s own power keeps growing. “It used to be that the philosophical piece mattered—if you could demonstrate you’re committed to the president’s economic agenda, that’s what mattered,” says Ben LaBolt, a former Obama spokesman. “She’s established a new litmus test that you can’t have worked anywhere near Wall Street if you’re going to a regulatory agency or even an agency that touches on economic policy.” Weiss spent years and plenty of money setting himself up for the Treasury job and had made himself a near-perfect candidate by traditional measures. Friends and allies of both Weiss and Warren say the Lazard banker began eyeing a highlevel government job several years ago and deftly positioned himself to land one. The firm’s long lineage of senior partners who have served in top government positions gave him no shortage of patrons and advisers. Weiss was a major donor and bundler for Obama’s presidential campaigns. He also donated generously to the Center for American Progress, a liberal think tank that allowed him to burnish his policy credentials by co-authoring a 2012 white paper on tax reform with Democratic luminaries such as Robert Rubin and Larry Summers. Shrewdest


STÉPHANE GIZARD

“I do not believe that the Treasury Department would be well served of all, Weiss hired by the lengthy two seasoned Obama veterans, Pete Rouse confirmation and Mark Patterson, process my to shepherd his nomrenomination ination. Rouse, who would likely entail” was once Obama’s longest-serving aide and handled nominations for the White House, and Patterson, chief of staff to the last two Treasury secretaries, run a strategic affairs practice at the law firm Perkins Coie. Both are well regarded by liberals in Warren’s orbit. Hiring them, as Weiss was no doubt aware, had the effect of dissuading potential critics from speaking out. It didn’t stop Warren. “Enough is enough,” she wrote in a November op-ed for the Huffington Post lambasting the White House for choosing Weiss. “It’s time for the Obama administration to loosen the hold that Wall Street banks have over economic policy making.” Even after Warren’s intention to oppose him became clear, Weiss was able to summon an army of Wall Street heavyweights to make private calls to lawmakers on his behalf. They included Summers, Treasury Secretary Jack Lew, and politically connected bankers with links to both parties from Goldman Sachs, Lazard, and elsewhere. The appeal to Republicans: Warren’s effective veto power over nominations would hurt their interests, too. “It’s really a shame,” former George W. Bush Treasury and White House official Tony Fratto told Politico after Weiss’s withdrawal. “The things we put nominees through only to be upended by ill-informed, myopic demagoguery. The White House should have fought for him.” Weiss didn’t appear to fit the mold of someone who could be easily demagogued by liberals. He doesn’t work for a big Wall Street bank, and Lazard didn’t receive a federal bailout. But Warren and her allies were able to broaden the list of politically inexpiable financial sins to include tax inversions, which doomed Weiss. As she put it in November, “One of the biggest and most public corporate inversions last summer was the deal cut by Burger King to slash its tax bill by purchasing the Canadian company Tim Hortons and then ‘inverting’

the American company to Canadian ownership. And Weiss was right there, working on Burger King’s tax deal. Weiss’ work wasn’t unusual for Lazard.” Warren’s critique encompasses all of Lazard and, presumably, any firm that does similar work. In the war between Warren and Wall Street, hers is the army gaining territory. Curiously, the Republican gains in the midterm election strengthened Warren’s personal power, even as they weakened her party. As one Weiss ally noted, Senator Harry Reid could have scheduled a quick confirmation vote and likely prevailed if he and his fellow Democrats still controlled the Senate. The new Republican leader, Mitch McConnell, however, would have relished dragging out Weiss’s confirmation for months, allowing Democrats to tear each other to shreds. That same dynamic will remain for at least the next two years for any nominee Warren cares to target. And the fact that the White House was too weak to push Weiss through or to enlist powerful Democratic senators like New York’s Chuck Schumer to help do it for them augurs poorly for the next nominee. Former Representative Barney Frank, who co-authored the DoddFrank financial reform law, suggests Warren may have been motivated by frustration at Obama’s refusal to defend the post-2008 banking reforms as vigorously as he has defended Obamacare. “People use the power they have if they feel they’re going to be outmaneuvered on the substance,” says Frank, who served alongside Warren in the Massachusetts congressional delegation. “Much of her leverage comes from the fact that Democratic representatives and senators all over the U.S. don’t want voters to ask them, ‘Why did you do something that Warren thought was so bad?’ Very few people are important to other people’s constituents. She’s one of them.” The White House has not yet named a substitute candidate. Weiss, for his part, will make the best of being a political casualty. Ironically, he’ll wind up in the same position Warren did after political controversy scotched her

A cut-rate Minnesota insurer cuts out of Obamacare 32

Angry drivers have their revenge against traffic cameras 34

Charlie Rose talks to Marco Rubio 33

State of the Union: The Game 35

chances of Senate confirmation to lead the Consumer Financial Protection Bureau: He’s moving to Washington to become a counselor to Treasury, a position that doesn’t require Senate approval. And he’ll already be well known when he arrives, though less for his expertise and ideas than as a symbol of Warren’s growing power. —Joshua Green The bottom line Even in the Senate minority, Elizabeth Warren has the power to buck her own party and cause trouble for Obama.

Marijuana

Head Shops Want to Squash Dispensaries A fight for market share goes to the legislature in Washington state “In the cannabis industry, things are very loose, until they’re not”

Washington state’s first recreational marijuana stores opened last July, the culmination of a broad-based and long effort to legalize the drug. In 1998 voters passed a ballot initiative offering pot smokers legal protection against prosecution if they had a doctor’s note saying they needed the drug for medical reasons. A legal loophole let marijuana dispensaries sell pot to people with the notes. Washington’s lightly regulated system—it’s the only state that didn’t set up a patient registry or issue ID cards—allowed a medical marijuana market to flourish. In 2012, Washington passed a ballot measure legalizing the sale of marijuana for recreational use. Finally adults could get high without a medical excuse. The initiative established a tax and licensing regime for pot growers, processors, and retailers overseen by the Washington State Liquor Control Board, which mandates extensive product testing and package labeling for marijuana products. That’s made recreational pot about 50 percent more expensive than medical marijuana. “Those are all extra costs that are incurred under the law that medicinal pot doesn’t have,” says Lynsee Swisher, director of Nine

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Politics/Policy

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Point Growth Industries, a licensed grower of strains such as Opal OG Kush. Now the new retailers are hiring lobbyists to push state legislators in Olympia to regulate medical cannabis. They want medical marijuana to meet the same safety standards as recreational pot and say customers who aren’t true patients should have to buy the high-tax retail product. Some dispensaries are bringing in their own lobbyists to make sure they don’t get squeezed out. Amber Lewis was hired in November by an alliance of medical and recreational businesses that want to figure a way that’s fair to both sides. “I’ve learned that in the cannabis industry, things are very loose, until they’re not,” says Lewis. While the state doesn’t have an exact count of medical dispensaries, they far outnumber the 334 recreational marijuana stores licensed to open. In Seattle alone, about 300 dispensaries operate, but only 21 retail licenses were issued, says Rick Garza, director of the Washington State Liquor Control Board. The licenses for the new retail stores were doled out by lottery last May. It cost just $250 to enter, and more than 1,000 people applied for licenses. That included newcomers to the pot business who hadn’t participated in the political battle to legalize marijuana and had no common bond with medical marijuana sellers. Swisher was among them. Last fall she joined the newly formed Washington CannaBusiness Association, which represents licensed recreational pot sellers. Its executive director, Vicki Christophersen, has also lobbied for the Boys & Girls Clubs Washington State Alliance and the Washington Refuse & Recycling Association. The group supports a bill sponsored by the state’s Republican Senate Majority Whip Ann Rivers that

requires medical dispensaries to meet licensing and product testing standards and restricts the state’s medical-use designation to oils, edibles, and other concentrated forms of cannabis. Only recreational stores would be allowed to sell dried bud for smoking. Another bill, drafted by Democratic Senator Jeanne Kohl-Welles, would make retail outlets responsible for distributing medical pot alongside commercial products. “You have patients on one side and recreational users on the other,” says Lewis. “There is not a legislator I have met who is not carefully watching.” —Karen Weise The bottom line Newly legal pot sellers in Washington are pushing for laws that would limit competition from medical dispensaries.

Health Care

An Upside to Failure Under Obamacare Minnesota’s federal subsidy goes up after a cut-rate plan bails out “They think these low premiums ... will attract low-risk enrollees”

A year ago, the small Minnesota insurer PreferredOne looked like an Obamacare success story. By offering some of the lowest premiums in the country, the company beat bigger rivals to become the leading insurer on the state’s exchange, winning almost 60 percent of Minnesota’s roughly 55,000 enrollees. Owned by three local medical groups, PreferredOne seemed to show how the Affordable Care Act could encourage competition in the health insurance industry

How to Price Pot in Washington

My brother’s friend

Medical

Medical marijuana is subject to local and state sales taxes; the highest rate is 9.6 percent

Recreational

per gram Not taxed DATA: RANDY SIMMONS, DEPUTY DIRECTOR, WASHINGTON STATE LIQUOR CONTROL BOARD

Recreational pot is subject to various excise taxes, totaling an effective tax rate of 44 percent built into the retail price; sales taxes are added on top of that

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and deliver cheaper care through small health networks. “We believe that our excellent networks, flexible coverage options, and lowest-cost premiums will make PreferredOne a great choice for Minnesotans,” spokesman Steve Peterson said in 2013. It turns out PreferredOne’s deal was too good to be true. In September the company announced it was pulling out of Minnesota’s Affordable Care Act exchange, known as MNsure, explaining that it was “not sustainable” to continue. PreferredOne declined to comment, but filings with regulators show the company was paying out more in medical claims on policies sold directly to individuals than it was collecting in premiums. In October the company hiked rates for individual policies by 63 percent. Across the U.S., at least 77 new insurers joined Obamacare markets for 2015. But 14 companies that sold coverage for 2014 in ACA marketplaces have left the program, according to a preliminary tally by the Department of Health and Human Services. None of them served as much of the market as PreferredOne did in Minnesota. Some insurers who have run into problems are still selling on the exchanges. A nonprofit co-op health plan in Iowa that got $145 million in government loans under the ACA was placed under supervision by regulators in December because it’s running out of money. Roger Feldman, an economist at the University of Minnesota, says some insurers bet—wrongly—that using low rates to attract lots of customers would lower their costs. Having more patients can give a plan leverage when negotiating fees with doctors and hospitals, but many insurers also believed offering lowball rates would bring in younger, healthier buyers. “They think these low premiums will not only attract more enrollees, but will attract low-risk enrollees,” he says. PreferredOne’s exit from the MNsure market may turn out to be a good thing for shoppers buying other policies via MNsure. Under Obamacare, the federal government offers subsidies to individuals who can’t afford insurance sold through their state exchanges. Those payments are calculated using a formula that takes into account the cost of policies offered in each state marketplace. With PreferredOne’s supercheap plans off the MNsure exchange, federal subsidies increased, 34 helping Minnesotans afford the


Charlie Rose talks to ... Marco Rubio The GOP senator from Florida, who’s mulling a presidential bid, discusses inequality, entitlements, and immigration

How do you balance the need for tax reform and entitlement reform? The drivers of our long-term debt are Medicare and Medicaid programs and, to some extent, Social Security. I talked about this in my book [American Dreams]—that I don’t want to make any changes for people like my mother, who are in the system now, or people near retirement. If we act now, we can save Medicare and Social Security. We can place our country on a sustainable spending path without making disruptive changes for current beneficiaries—in fact without making any changes at all for them. The people who we would need to ask to accept a different system are people like me. I’ll be 44 in May.

“What I now argue is that the only way for us to achieve immigration reform is through a process, not a comprehensive bill”

Will economic mobility be a defining theme of the 2016 campaign? I think it’s a defining theme of our time. My experience in this country is largely through the lens of someone raised by two people with very limited education who, as a bartender and a maid, achieved the American dream. They were never rich, but they owned a home in a safe and stable neighborhood. All four of their children went to college. There are millions of [Americans] today living one brokenOr one illness? down car Or one illness or, you know, one leak in the away from roof. You see this all the time in people that are catastrophe. really struggling. What’s happening now is that people wake up in the morning and they read the news about how the economy’s taking off again; Wall Street’s having a great year; the GDP’s growing again. But they’re saying to themselves, “Why isn’t this reaching me?” The truth is, if you’re willing to work for $9 an hour, you could probably find a job in this economy, but you may not be able to pay your bills. We have to address that, How did this happen? And because if you lose how do we make it better? that upward mobility, The answer is that, yes, we’ve had you’ve lost the soul, some bad political leadership in both the crux, of what parties, but the fundamental reason makes us special. this is happening is not because of a cyclical downturn that we’re going to recover out of. It’s a structural issue. The entire structure of the economy has rapidly transformed. My parents raised us in a national economy. Today we truly live in a global one, where factors halfway around the world could have as much impact on how much you get paid as something that happens halfway across town. We have more global competition than ever, and America is increasingly less competitive. Second, many of the better jobs being created require skills that many people don’t have.

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Have you backtracked on immigration? No. What I now argue is that the only way for us to achieve immigration reform is through a process, not a comprehensive bill. Step One is to win the confidence of the American people that illegal immigration is truly under control— border security, electronic verification, an entry/exit tracking system. Second is modernizing our legal immigration system towards a merit-based system. And third, if you do these two things, I believe you’re going to have strong bipartisan support to deal reasonably with those who are here illegally.

What differentiates you, politically, from Jeb Bush? That’s a great question. The answer is, I don’t know, because Jeb has not been engaged in the debate … for about 10 years. I’m sure he has ideas, and we’ll hear them. That’s why if he runs for president and I run for president and others run for Watch Charlie Rose on Bloomberg TV Weeknights at 7 p.m. and 10 p.m. ET president, these are the sorts of things we’ll talk about. WorldMags.net

ANDREW HARRER/BLOOMBERG

In your book you say you agree with Senator Elizabeth Warren that the game is rigged in America right now. Yes, but we disagree on why it’s rigged. She believes it’s rigged by the moneyed class that uses Republicans and others. I believe it’s rigged by the government itself. If you’re an established business in a heavily regulated industry, sometimes you don’t mind a lot of regulation, because only a big company like you can afford to comply.


Politics/Policy

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The bottom line A Minnesota insurer pulled out of Obamacare, leaving its customers to face higher prices without subsidies.

Road Safety

States Abandon Traffic Cameras, at a Cost

Politicians loved them but have caved to drivers who hate tickets “It’s an easy way to raise revenue without raising taxes”

Traffic-light cameras were once promoted as a low-cost way to reduce car accidents. Rather than assigning cops to monitor a crash-prone intersection, municipal and county governments could deploy electronic eyes to scan traffic, letting law enforcement agencies issue tickets remotely. The early results

were positive: Cities with cameras saw a 24 percent drop in fatal crashes. The camera programs, which were tested in New York City in the late 1980s, spread to California, Florida, and everywhere in between. Drivers weren’t happy. Now politicians around the country are moving to get rid of the cameras. Nationally, the number of red-light camera programs in the U.S. has dropped to 469, from a high of 540 in 2012, according to the Insurance Institute for Highway Safety (IIHS), which monitors traffic issues for the insurance industry. On Dec. 16, New Jersey’s Department of Transportation ended a five-year trial program after Republican Governor Chris Christie chose not to renew it, directing local governments that had participated to disconnect the systems and take down warning signs “as soon as is practicable.” A few days later, Ohio Governor John Kasich, a Republican, signed a bill requiring towns to post officers alongside cameras to witness traffic violations, a rule intended to make it too expensive for local governments to continue camera programs. “There’s some evidence that perhaps they do promote safety,” says Bill Seitz, the Republican state senator who argued that Ohio’s camera program amounted to an unfair levy on drivers, some of whom found themselves cited for making legal right turns on red lights. “The costs outweigh the benefits, and the revenue-enhancement feature of this predominates over safety.” Other areas have canceled camera programs targeting speed-limit scofflaws. In December, Long Island’s Nassau County pulled speed cameras from school zones. They’d produced more than 400,000 tickets in just two months but triggered a public outcry. “The program angered residents to a point where it was outweighing the improved safety,” says Cristina Brennan, a spokeswoman for Norma Gonsalves, presiding officer of the Nassau County Legislature. Neighboring Suffolk County announced it was scrapping plans to install speed cameras near schools in 2015. Speed cameras are banned in at least a dozen states, according to the IIHS. The turn against the cameras has left officials scrambling to make up budget shortfalls from lost ticket revenue. Local governments in at least 35 states, including New York and New

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Jersey, face restrictions on how much they can increase property taxes, limiting the sources of revenue used to pay for public services. “It’s an easy way to raise revenue without raising taxes,” says Howard Cure, head of municipal research at Evercore Wealth Management in New York. But, Cure says, “they’re a political liability.” Nassau County expected to raise $30 million annually from its speed cameras over the next three years. The Republican county executive, Ed Mangano, used that projected revenue to help persuade a state oversight board to end a three-year wage freeze for Nassau employees. “The cameras were one of the shiny k objects the county seems perpetually attracted to,” Number of tickets issued in the said Chris Wright, two months after a member of the Nassau County control board who added traffic voted against lifting cameras the wage freeze in May. The county was already facing a deficit of about $200 million next year. Mangano and the Republican majority in the Nassau County Legislature have agreed to make up the $30 million by increasing a surcharge on mobile phones for 911 service, ending a subsidy to a hospital, and selling billboard advertising space, says Brian Nevin, a spokesman for Mangano. For Linden, a city of 41,000 in suburban northern New Jersey, the end of the red-light camera program means losing as much as $1.5 million from a $100 million budget, says Mayor Richard Gerbounka. The city was planning to use the money to add as many as eight police officers. “You can forget about that,” he says. Dayton will lose $1.4 million of the $150 million it takes in annually, says City Manager Tim Riordan. To close the gap, the Ohio city will reduce the number of police cruisers to 8 from 16 and cut its street-resurfacing budget to $700,000 from $1.7 million. “These cuts will have a direct impact on people that they’ll see,” says Riordan. —Freeman Klopott and Terrence Dopp

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The bottom line Traffic cameras reduce accidents and raise revenue, but politicians are scrapping them to placate angry drivers. Edited by Allison Hoffman Businessweek.com/politics-and-policy

ILLUSTRATION BY 731. OPPOSITE PAGE: GETTY IMAGES (3); YOUTUBE (2)

remaining, higher-priced policies. Unless they switch, customers who enrolled in Obamacare plans last year will be automatically renewed in those same plans, even if the insurers have left the exchanges. But the federal subsidies are available only for people who buy plans through the ACA marketplace—so a PreferredOne policy that cost $190 a month in 2014 with a subsidy could jump to as much as $440 a month out-of-pocket in 2015, according to an analysis by Wakely Consulting Group that MNsure published in December. About 12,000 people who bought PreferredOne policies in 2014 still haven’t moved to other plans, according to Joe Campbell, communications and marketing director for MNsure. MNsure twice extended the Dec. 15 deadline to get coverage starting on Jan. 1, and people who didn’t change their coverage for the start of the year have until Feb. 15 to switch for the remainder of 2015. “Momentum really works against you,” says Campbell. “Once people are in health coverage, they tend to stay in it.” —John Tozzi


Politics/Policy

State of the Union The Drinking Game

Brew up a batch of White House Honey Ale

Cheers!

On Jan. 20, President Obama will deliver his seventh annual address to Congress describing the condition of the nation. Here’s a spirited way to enjoy the speech: Pick one of three ways to play, and take a sip each time something on your list happens. Bottoms up! —Mark Glassman and Margaret Talev

Get Buzzed Before the speech …

House Speaker John Boehner chain smokes on the dais Obama wears a tan suit

Get Drunk House Majority Leader Kevin McCarthy (R-Calif.) hugs a Democrat Obama hugs a cabinet member

Bonus Round Over/Unders Guess whether the actual number will be higher or lower than the average for Obama’s previous speeches. You lose, you drink.

Get Hammered

Time elapsed between the sergeant-atarms announcing the president and Obama beginning to speak

Boehner chitchats with Biden

80

Obama chuckles as he greets Boehner

jabs during the 2014 address*

46

1:02:03

chops made during the 2014 address*

0

instances of mansplaining since 2010, when Obama did it twice

The audience

Guests acknowledged during the address The karate chop

The Clinton thumb

The finger point

Hillary Elizabeth Warren Vladimir Putin Kim Jong Un Internet Wall Street Main Street Look ...

Medicare Immigration Growth Strong Family mentions Banks on average Republicans Oil Dream

Terrorism Economy College Health care Energy Trade Jobs Hacking Homeownership

Justice Clarence Thomas attends

Justice Samuel Alito attends

Justice Ruth Bader Ginsburg nods off

A Republican heckler shouts, “You lie!”

Bipartisan standing ovation

Democrats-only standing ovation

Michelle Obama nods with her eyes closed

Michelle mouths “thank you” and waves

Michelle hugs the person next to her

Biden starts a round of applause

Biden fidgets in his seat

Representative Vice President Joe Joe WIlson (R-S.C.) Biden drops an F-bomb did in September 2009, not at a State of the Union

5

14

mentions on average

152

3.8

Mentions of God

2.3

Obama namechecked eight people in 2014, more than any other year

mentions since 2009

It’s been the energy secretary the last two years

Justice Stephen Breyer succeeded retired Justice David Souter as her designated nudger DATA: AMERICAN PRESIDENCY PROJECT, C-SPAN

*Bloomberg estimates

Times Obama says “thank you” to quiet the room The shortest speech was in 2009 (51:44) and the longest was in 2010 (1:09:20) Duration of the address

14

Obama does …

Obama says …

5:45

WorldMags.net

Freebie! The Designated Successor Each year, one cabinet member is absent from the State of the Union so that he or she can assume the presidency in the event of a catastrophe. Guess right, and skip a drink!

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See the new Anthem at antheminc.com

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Hackers make a rare visit to court 38

Apple climbs the desktop 39

New uses for hydrogen in a box 40

Xiaomi spreads the wealth to two dozen startups 40

Innovation: Voltage tracking reveals more brain activity 41

January 19 — January 25, 2015

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Google   is leading a wave of U.S. companies looking to better serve non-English speakers

ILLUSTRATION BY 731

“It’s   about, what Internet do they find when they get there?” Internet giants such as Amazon.com and SoftBank are investing in India to cash in on the country’s spiking Web use. In less than two years, 100 million people have moved online, bringing the country’s total to 302 million in 2014, according to the Internet & Mobile Association of India. That makes India second only to China in its number of Internet users. U.S. corporate chiefs, including Amazon’s Jeff Bezos, Microsoft’s Satya Nadella, and Facebook’s Mark Zuckerberg, have visited India in the past year to explore opportunities. But an enormous slice of India’s population can’t make use of anything those companies have to offer online. G. Venkatesh, a 42-year-old office worker in Chennai, is one of hundreds of millions of Indians the Internet largely ignores. He’s a native speaker of Tamil, a language common in India’s

southern states, and doesn’t understand much English. He says he can check his e-mail online and can sometimes use the Internet to look up addresses and phone numbers, and that’s about it. Even Indian websites that focus on his main reading interests—yoga, movies, sports—are of little use to him, because they’re mostly written in English. “So I depend on books,” he says, or Tamil newspapers for box scores and movie reviews. “I have not read about them on the Internet.” Almost all the websites in India are available only in English, a language that’s familiar to many middle-class city dwellers but a mystery to a vast portion of the population. About one-third of the Indians online don’t speak English, and they “can be considered as partially served or not served at this time because of lack of localized content,” says Rakesh Kapoor, managing director

of Process Nine Technologies, a software company in Gurgaon. Among the country’s smartphone users, fewer than 40 percent have devices that can display Hindi, the most common local language. Support for India’s nine other major languages is even worse, says Reverie Language Technologies Chief Executive Officer Arvind Pani. Gujarati, the language of Prime Minister Narendra Modi’s home state, “would not even have 1 percent coverage,” he says. U.S. companies seeking to expand in India have to wrestle with this disconnect, and Google has taken the lead. In November the Android developer announced partnerships with 18 Indian companies, including Process Nine and Reverie, to develop online content in languages other than English. “India is going to get to 500 million Internet users, but 300 million are not going to be proficient in English,” says

WorldMags.net


Technology researcher Analysys Mason in New Delhi, says offering government services online in local languages would be nice, but government websites are unlikely to drive the spread of local languages online because most people rarely need to visit them. That said, there are a few clear missed opportunities, including scheduling for train network Indian Railways. About 23 million people a day ride the trains, including millions of speakers of Tamil, Bengali, Gujarati, and other local languages, but the Indian Railways website is available only in English and Hindi. —Bruce Einhorn, Mahesh Sharma, and Ganesh Nagarajan The bottom line English is the Internet’s language in India, even though one-third of the online population doesn’t speak it.

Cybersecurity

Fighting U.S. Extradition At All Costs An alleged hacker of 160 million credit cards makes a final stand “ ‘Hacker’ is an elastic notion. … Every third person is called a hacker”

Muscovites Vladimir Drinkman and Dmitriy Smilianets met online in 2003, playing Counter-Strike, a PC shooting game. Pitting terrorists against security agents, Counter-Strike, released in 1999, has long been notorious for the “hacks” that players could use to gain advantages by altering the game’s code. Tweak the program one way, and you can fire weapons through walls; another way, and your cross hairs automatically track enemies. U.S. authorities are concerned The Other about a different kind of Guys hack: They’ve charged

In addition to Vladimir Drinkman and Dmitriy Smilianets, three other men—all still at large—have been indicted in the biggest data-breach prosecution in U.S. history.

Drinkman and Smilianets in the biggest data-breach prosecution in U.S. history. The federal indictment accuses the men of stealing 160 million credit card numbers by hacking into the systems of at least 17 companies, including foreign operations of Visa and Discover Financial Services as well as 7-Eleven, the Hannaford Bros. grocery chain, French grocer Carrefour, and Heartland Payment Systems, which processes payments for hundreds of thousands of businesses. Prosecutors allege that Drinkman penetrated corporate networks while Smilianets sold stolen card numbers online, and that their hacks at just three of the companies caused losses of more than $300 million. Three other alleged co-conspirators, two from Russia and one from Ukraine, remain at large. In the indictment, the prosecution alleges that, beginning in 2005, Drinkman and Smilianets were part of a group of hackers who collaborated through simple methods to attack companies’ websites and infiltrate their databases. The hackers disabled security programs designed to log traffic to and from the networks, rented the servers they used for attacks under false names, and communicated through a series of online aliases. On black market websites, they charged $10 per stolen U.S. card, $15 for Canadian cards, and $50 for European ones, according to the indictment. Credit card thief Albert Gonzalez, now serving two concurrent 20-year prison terms, was convicted of, among other things, participating in several of the attacks. Smilianets, 29, has pleaded not guilty and is awaiting trial in jail in Morristown, N.J., having agreed to be extradited shortly after his arrest in Amsterdam. Drinkman, 34, is sitting in a Dutch prison awaiting a Jan. 27 final ruling on his extradition to the U.S., which he’s been fighting for two and a half years. In an

Mikhail Rytikov From Odessa, Ukraine

Roman Kotov From Moscow

Aleksandr Kalinin From St. Petersburg

Allegedly provided servers to host the attacks, store data, and disguise the hackers’ locations

The accused hacker about whom the least is known

Helped create 76service, one of the first “criminalto-criminal” service providers, in 2006, says Don Jackson, director of threat intelligence at U.S. cybersecurity firm PhishLabs

Also indicted in hacking cases in Virginia and Pennsylvania

Smilianets has pleaded not guilty and is awaiting trial

WorldMags.net

The U.S. claims his specialty was scouring data from compromised networks

COURTESY PLACE 2 PLAY/7 DAYS PUBLISHING

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Google India managing director Rajan Anandan. To avoid squandering that advertising opportunity, Google is also focusing on targeting ads to nonEnglish speakers. On Dec. 15, the search giant introduced AdSense in Hindi, enabling owners of Hindi-language sites to buy Hindi keywords. In September, Google made India the first market for the Android One smartphones, priced at about $100, which it developed working with Indian phone makers such as Micromax and Karbonn. The Android One supports English and Hindi and will add five more local languages when Google releases the next version of its mobile operating system. In November, Google added Hindi voice-search capabilities to its phones. Google India product manager Kapil Khosla says the company has been able to expand its language options without a big hiring push, because it already has employees from throughout India whom it’s enlisted for these projects. “There’s a huge diaspora of Indianlanguage speakers in the U.S., and we have a lot across Google itself,” he says, adding that this includes languages such as Hindi and Tamil. Microsoft last year began offering users the ability to input Hindi text on their mobile phones. During his visit to New Delhi in October, Facebook’s Zuckerberg announced a contest to encourage developers to create locallanguage mobile apps. Mozilla, which controls the open-source browser Firefox, is using India as a testing ground for software that customers who buy Firefox-branded smartphones can use to create local-language websites and apps. “This is not about getting people on the Internet,” says Mark Surman, Mozilla’s executive director. “It’s about, what Internet do they find when they get there?” Among local companies, e-commerce site Snapdeal.com is a leader, introducing Hindi and Tamil versions last year. The country’s other two big e-commerce companies, Amazon India and homegrown rival Flipkart, are available only in English. India’s government is mostly working on more basic issues, such as helping Indians get online in the first place. Modi’s government is promoting an $18 billion Digital India campaign to expand broadband Internet access and services; the government’s program to connect 250,000 villages to the Web by 2016 is far behind schedule. Sourabh Kaushal, a manager at


Technology interview with Bloomberg Businessweek, his first with American media, he says he’s innocent of the charges and that he’s not the hacker the U.S. Department of Justice claims. “ ‘Hacker’ is an elastic notion,” he says. “Now every third person is called a hacker because he has technical skills, and not because he is actually using them.” Smilianets’s father, Viktor, says his son is considering a plea deal but wonders about the strength of the evidence against him, as the authorities don’t possess his computer. Through a spokesman, U.S. Attorney Paul Fishman says prosecutors are “confident that we have sufficient evidence to obtain a conviction at trial,” declining to comment further. Drinkman grew up in Syktyvkar, a small city in northern Russia, where his father managed technology supplies for a state university. The younger Drinkman studied computers and worked as a system administrator at the school but dropped out in 1998 to serve three years in the military. A couple of years later, he was playing Counter-Strike online when he met Moscow teen Smilianets, a competitor in international gaming tournaments. Smilianets graduated from college in 2006 with a specialty in information security but couldn’t find employment in his field, says his father, a lawyer. Drinkman says he and Smilianets became drinking and fishing buddies. He says he was working as a financial consultant and wondering where his friend was getting the funds to run his gaming team but never got a direct answer. Like Smilianets, he denies that their camaraderie led to a hacking partnership. Drinkman has, however, admitted to at least some hacking. Two years ago he wrote a confession to the Russian Ministry of the Interior, saying that beginning in 2010 he helped plan and conduct intrusions at Russian banks, according to documents reviewed by Bloomberg Businessweek. In June 2012, Smilianets and Drinkman traveled to Amsterdam with their wives on vacation. On their fourth morning there, the Drinkmans were told Smilianets had been arrested. They jumped in a cab, only to find their path barricaded by police, who took Vladimir Drinkman away in handcuffs. How did American authorities find out the duo were in the Netherlands, which has an extradition treaty with the U.S.? According to Drinkman and his Dutch lawyer, Bart Stapert, the source was

Hardware Apple Sneaks Up on Cheaper PCs The drop in worldwide PC shipments slowed last year, from 10 percent to about 2 percent, according to market researcher IDC. The biggest winner among the top companies was Apple, which boosted shipments by almost 16 percent and took the No. 5 spot from Asustek. —Shawn Hasto 400m

The PC slump largely stabilized in 2014 after a painful three years for the industry

19

%

300m

Lenovo

Lenovo’s approximate market share, a slight edge over Hewlett-Packard

HP 200m

Dell Acer Apple

Shipments from Dell and China-based Lenovo each rose by more than 10 percent

100m

65

%

Market share of the top five PC makers combined

Other

39 0 2010

2012

2014 GRAPHIC BY BLOOMBERG BUSINESSWEEK; DATA: BLOOMBERG, IDC

vacation photos that Smilianets had posted to Facebook. In jail, Smilianets is mastering Spanish and studying Chinese, his father says, while Drinkman passes time in the Dutch prison reading books in the series that gave rise to HBO’s Game of Thrones. At Drinkman’s final hearing on Jan. 13, his attorney, Stapert, said there was “no proof” his client took part in the massive hacking conspiracy the U.S. has alleged. Noting that most of the charges against Drinkman and Smilianets were added to the indictment after their arrests, he said prosecutors may be trying to pin unsolved cases on the defendants. “There are many Russian hackers, but it doesn’t mean they all cooperate,” Stapert said. Smilianets’s lawyer, Andrey Tikhomirov, declined to comment. Russia filed its own extradition request for Drinkman in August 2013. Although Drinkman wouldn’t discuss his confession to the Russian interior ministry or the charges being pressed by his homeland, he says he’s been told they could bring a maximum of 10 years in Russian prison, vs. 25 in the

U.S. The major U.S. charges he faces, for conspiracy and wire fraud, carry maximum sentences of 30 years, usually served concurrently. The Americans “show me as a leader of a group that was damaging U.S. strategic financial infrastructure for 10 years,” says Drinkman. “That will be the end—the end of my family life and maybe the end of my life in general. Of course I’m afraid.” The Russian Foreign Ministry’s human-rights representative, Konstantin Dolgov, says Russians extradited to the U.S. “are very likely to experience a politicized approach by judicial authorities” and that his country will keep trying to protect Drinkman’s rights. André ten Broeke, a lawyer representing the Dutch government, said at the hearing that politics shouldn’t factor into the decision. For U.S. authorities, the case is a relatively rare chance to show there are consequences for hackers who target American companies. That problem is only getting worse, says Jason Weinstein, a former Justice Department lawyer and a partner at law firm Steptoe & Johnson. For

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Technology

The bottom line The U.S. may have a rare chance to prosecute two Russians charged with hacking 160 million credit card numbers.

Deals

Xiaomi Puts a Windfall to Work Beyond Phones

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The Chinese mobile company goes on an investment spree “Xiaomi has its work cut out … to fight the big giants”

In China, Xiaomi smartphones outsold Apple and Samsung within three years of the first model’s 2011 release. Last year, Xiaomi’s sales more than tripled, to 61.1 million smartphones, making it the world’s No. 3 phone manufacturer in the third quarter. Now valued at $45 billion, the private company is flush with cash and is spending big in an effort to expand into other devices. Xiaomi announced in December that it had raised $1.1 billion from investors, including Russian Web pioneer Yuri Milner. Since November the company has also participated in more than $600 million worth of investments in cloud services, online video, and health-tracking accessories companies, and announced undisclosed stakes in more than two dozen startups. “Investing in startups will allow us to build other types of hardware without doing all of the design and development,” says Xiaomi President Bin Lin. Founder and Chief Executive Officer Lei Jun has also committed to spending $1 billion on digital entertainment for Xiaomi’s devices, including its phones, Web-connected TVs, and video-streaming Mi Boxes.

In November, Xiaomi said it would invest in Youku Tudou, China’s most popular streaming-video site. About a week later it teamed up with Lei’s investment firm, Shunwei Capital Partners, to invest $300 million in Baidu’s video website, IQiyi. Soon afterward, Xiaomi joined a $296 million round of funding for cloud services company 21Vianet Group and was part of a $40 million investment in Misfit Wearables, its first investment in a U.S. company. Lin says Xiaomi’s main areas of focus are mobile devices, Internet-connected TV equipment, and wireless routers. The company is also investing in startups that make everything from air purifiers to low-energy lightbulbs. “Xiaomi is expanding into the smart home and following the lead of Apple, Samsung, and others,” says Neil Mawston, executive director of researcher Strategy Analytics. “We expect Xiaomi to build an ecosystem of Mi devices and apps for the home, office, and car.” Like Apple and Samsung, Xiaomi aims to persuade customers to use the company’s products together. It has supplemented its highly customized version of Google’s Android operating system with its own popular apps for messaging, restaurant reviews, movie ticket purchases, package tracking, and medical appointments. “Most other Android players are not software companies; they have hardware DNA,” says James Roy, an analyst at China Market Research Group. “Xiaomi seems to be different.” The custom-made apps played a big role in helping Xiaomi flourish in China, where Google is largely absent, says Neil Shah, a research director at analyst Counterpoint Technology Market Research. At an Internet conference in the southern Chinese town of Wuzhen in November, Lei said his company has the chance to surpass Apple and Samsung to become the world’s top smartphone maker in 5 to 10 years. Spokeswomen for Apple and Samsung declined to comment. Despite Xiaomi’s dizzying rise, taking the top spot wouldn’t be easy. Lenovo’s acquisition of Motorola m Mobility will likely push Xiaomi back down to No. 4. The number Competing outside of smartphones China will be a Xiaomi sold challenge for the last year company until it proves its apps and

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devices—and its new investments—work as well together as those of its larger rivals, Shah says. “Xiaomi has done a fair bit to differentiate itself,” he says. “But Xiaomi has its work cut out to develop the scale of applications, software, and services to fight the big giants.” —Edmond Lococo The bottom line Xiaomi, which raised $1.1 billion in December, is pouring money into its own investments.

Energy

Powering Your Home With a Box of Hydrogen Japanese companies pitch the environmental upside of fuel cells “The cost of the device needs to be significantly reduced”

Just as Toyota is working to replace the gasoline in its cars with hydrogen fuel cells, Japanese companies are leading the charge to convince homeowners they’re better off using hydrogen to power their lamps and TVs, too. The electricity is generated by so-called energy farms, or ene-farms, about the size of a refrigerator. They’re made by companies such as Panasonic and Toshiba and sold by leading utilities, including Tokyo Gas. Ene-farms dangle the promise that the most abundant element in the universe will offer a safer, cleaner, more efficient alternative to nuclear power or fossil fuels. Because a standard home unit costs about $16,700, most consumers have been hesitant to buy. Since commercial sales began in 2009, more than 100,000 Japanese households have installed generators that use hydrogen. That’s a long way from where the government wants to be. Prime Minister Shinzo Abe has set a goal of 5.3 million hydrogen-powered homes, roughly 10 percent of Japan’s total, by 2030. “The use of hydrogen can contribute to saving energy, tackling environmental issues, and increasing energy security,” says Chihiro Tobe, head of the office promoting fuel cells at the Ministry of Economy, Trade, and Industry. On Dec. 27, Abe’s cabinet endorsed legislation that would cover as much as 350,000 yen ($2,970) per home ene-farm purchase, according to the newspaper

ILLUSTRATION BY 731. SCAN: COURTESY Q-STATE

every arrested corporate hacker, “there are 15 or 20 others who don’t get caught,” Weinstein says. “It’s like a hydra. There are many others waiting to take his place.” —Stepan Kravchenko, Carol Matlack, and Dune Lawrence


Technology Yomiuri Shimbun. The subsidy, however, is less than in previous years. To generate electricity, an ene-farm pumps natural gas from a local utility into its fuel cell, which uses a processor to extract the hydrogen and mix it with oxygen from the surrounding air. The reactions produce enough power to cover about half the demand of an average family, Tokyo Gas says, and the byproduct is excess heat that can supply a home with hot water. Toshiba estimates that its ene-farms can cut a home’s carbon dioxide footprint in half. Tokyo Gas estimates that ene-farms save a household about $400 to $500 a year on their power and heat bills. To persuade more people to buy an ene-farm, “the cost of the device needs to be significantly reduced,” says Ali Izadi-Najafabadi, an analyst at Bloomberg New Energy Finance in Tokyo. Panasonic says it’s made its ene-farms cheaper by refining the design to use fewer and smaller components. Panasonic says it’s trying to reduce sizes further but wouldn’t provide details. Large hydrogen fuel cells power a smattering of factories and commercial buildings in the U.S. and Europe, and California’s Self-Generation Incentive Program subsidizes as much as 60 percent of project costs for electricity consumers who install their own alternative or renewable power supplies, up to $5 million. Desert expanses make solar power a more attractive option for the environmentally conscious in the western U.S., but Masami Hihara, a Japanese trade ministry official, says his country’s space constraints may leave fuel cells as the most attractive option. In April, Tokyo Gas began selling ene-farms adapted for use in condos. The fuel cell unit, hot water unit, and backup heat source are all compact enough to fit in a typical apartment building. The latest ene-farms can also go fully off-grid for short periods of time (keeping homes lit during a blackout, for example) with separate battery storage systems that run an additional $5,000. Expanding into large apartment buildings may put the ene-farm market in reach of Abe’s goal, Hihara says. But, he adds, “they need to be cheaper and smaller.” —Chisaki Watanabe The bottom line About 100,000 Japanese households have hydrogen fuel cells, but high costs are keeping them from wider use. Edited by Jeff Muskus Businessweek.com/technology

Innovation Neural Tracking Form and function

Innovator Adam Cohen

Using a protein that converts energy into light, scientists can track individual neurons as they fire to better study complex brain activity. The protein may aid research into disorders such as epilepsy and Lou Gehrig’s disease.

Age 35 Harvard neuroscientist and co-founder of startup Q-State Biosciences, which has 10 full-time employees

1.

Light Cohen’s team took a protein that converts light into energy—found in a singlecelled Dead Sea organism— and reversed the process. Their version of the protein senses changes in voltage and turns them into light.

Origin In 2009, Cohen began experimenting with light-sensitive proteins. His first success at reverse engineering came two years later. Startup Cohen and his co-founders opened Q-State in April 2013 to commercialize their findings.

Funding Q-State has received money from investors including Fidelity Biosciences Research Initiative and grants from the National Institutes of Health. It wouldn’t say how much.

2.

Clients Biogen Idec and GlaxoSmithKline are among Q-State’s early customers. Cohen declined to name others but says he’s talked with almost “all the big pharma companies in the world.”

Study Cohen infected braincell cultures with a virus that carried the DNA code for the protein to observe a sea of neurons’ electrical activity. It provides a level of detail unmatched by dyes or calcium imaging.

Next Steps John McNeish, GlaxoSmithKline’s head of research in regenerative medicine, says Q-State’s techniques helped him complete what would typically be a monthslong cardiac-drug-safety study in less than two weeks. Cohen says he’s begun to observe activity in neurons harvested from mice that were bred with the protein, and he wants to start working with live animals. —Caroline Chen

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Rate rigging on the farm: E-I-E-I-Ow! 44

The guy who got it right on bonds 46

Why Meredith Whitney’s office is for rent 45

Bid/Ask: Onex looks to survive (and thrive) with Survitec 47

January 19 — January 25, 2015

FORGET

EVERYTHING YOU DIDN’T

43

UNDERSTAND ABOUT

BITCOIN It   may succeed as software rather than a medium of exchange

SCOTT GRIESSEL/GETTY IMAGES

For “the buying of goods and services, Bitcoin is a non-event” Jeremy Allaire doesn’t talk about Bitcoin like he used to. Allaire’s startup, Circle Internet Financial, has pulled in $26 million in venture capital over the past two years with the promise that it would help “make Bitcoin mainstream” by developing simple tools for using it. Visit Circle’s website today, and references to Bitcoin aren’t prominent. Allaire’s current sales pitch is that his company can move your money—be it in dollars, euros, or yen—quickly, securely, and for free. “We’ve never said

we’ve attached ourselves for eternity to Bitcoin,” Allaire says. “Users around the world understand monetary value in their local currency.” As interest in Bitcoin as a new currency wanes, Allaire’s shift points the way to a potentially different legacy. Conceived as a substitute for conventional currency, without the involvement of established institutions, Bitcoin is poised to evolve into a money transfer system that would do what Western Union or

Citigroup does, only more cheaply and efficiently. In the early days of 2014, partisans of the digital currency looked forward to what they hoped would be the year of Bitcoin. They spoke of it going mainstream as a replacement for “government-issued” currencies or as an inflation-proof store of value. Coinbase in San Francisco—“We make it easy to get started with Bitcoin”— joined with Budweiser to distribute small amounts of Bitcoin at summer

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“The payment industry should be at least an order of magnitude smaller than it is today.” —Chris Dixon

concerts (people got drunk). BitPay, an Atlanta-based startup that processes Bitcoin payments, sponsored the Bitcoin St. Petersburg Bowl on Dec. 26 (North Carolina State beat the University of Central Florida, 34 to 27). Anyone who saw holding the currency as a path to riches has been disappointed. The value of Bitcoin— measured in dollars—fell almost 70 percent last year and has continued to plunge in 2015. The price drop, together with the collapse of a major Bitcoin exchange based in Tokyo, undermined the idea that Bitcoin— beyond the reach Bitcoin price of government regulators—is a $1,000 safe haven. And despite the marketing efforts, the use of Bitcoin $500 for ordinary purchases has stagnated. Just because $0 customers can 1/2013 1/2015 use it to pay Dish Network for TV service, Expedia for hotel rooms, and Dell for PCs doesn’t mean they do or that they will, says Jeffrey Robinson, a money-laundering expert who wrote a book titled BitCon. Transactions didn’t rise above 55,000 a day during 2014, according to Blockchain.info, which compiles Bitcoin data. “If you measure Bitcoin as a transactional currency, the buying of goods and services, Bitcoin is a non-event,” Robinson says. “A complete non-event.” Yet even Robinson praises the technology underlying Bitcoin. Satoshi Nakamoto, the name used by Bitcoin’s anonymous creator, called it “the blockchain.” It’s the public ledger on which every transaction, whether it’s for 1,000 Bitcoins or one-onethousandth of one, has been recorded since the currency appeared in 2009. Bitcoin “miners” use powerful computer technology to maintain the ledger, confirming that the same Bitcoin isn’t spent twice and recording transactions. They get freshly issued Bitcoins as a reward. The miners perform the same function as a bank or wire transfer service— acting as a trusted intermediary. The difference is that with Bitcoin, the transfers are generally free. Despite global integration of financial markets, moving cash is expensive and often

slow. Merchants pay about $48 billion in fees to banks for debit card usage annually, while immigrants sending money home pay about $37 billion in fees each year to companies such as Western Union. International wire transfers can take four or five days and are costly enough to make small payments pointless. Circle, Allaire’s company, is using the blockchain technology to build a Bitcoin-based transfer system. It would allow American parents, for example, to deposit dollars in an account where they would be converted to Bitcoins and sent to a daughter studying in South Korea, who would change them into won, all at no charge to the parents or daughter. Costs would be low because Circle avoids the banks and payment processors that services such as Apple Pay and Venmo rely on. Circle won’t say how it plans to profit from the business. Coinbase and BitPay have similar ambitions for Bitcoin-based payment systems. Banks and payment companies make money by charging a fee for something that “mostly involves moving bits around the Internet,” wrote Chris Dixon, a Silicon Valley venture capitalist, in a December 2013 blog post. “The payment industry should be Weekly Bitcoinat least an order of related stories magnitude smaller 700 than it is today.” Dixon, a partner at Andreessen 350 Horowitz, wrote that he sees Bitcoin as “a new software 0 protocol through 1/2013 1/2015 which you could rebuild the payments industry in ways that are better and cheaper.” (Bloomberg LP, which owns Bloomberg Businessweek, is an investor in Andreessen Horowitz.) Allaire contends that if sending money were cheaper, it would become much more common. He compares money transfer to text messaging, unknown 20 years ago, now ubiquitous. Develop the infrastructure, he says, and sending cash among friends and family and for businesses small and large will become common. Circle is seeking licenses, hiring experts to ensure compliance with regulations, and talking with regulators. So the future of Bitcoin may rest with entrepreneurs seeking to build straightforward, regulated companies

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that do a straightforward thing that is now more expensive than it needs to be: moving money. That might not be up there with creating a global currency, but it would be no small accomplishment. —Carter Dougherty The bottom line With transactions staying below 55,000 a day, companies are looking at Bitcoin as a money transfer technology.

Currencies

How Rate Rigging Squeezed U.K. Farmers Traders drove down the euro, cutting the value of EU subsidies It’s “stealing money that’s essential to keeping food on the shelves”

Last year six banks were fined a total of $4.3 billion by regulators in the U.S. and Europe for colluding to rig the price of currencies. Such market manipulation profits banks at the expense of pensioners, investors, companies—and farmers like Ed Gribble. Gribble gets up at 5 a.m. to feed the 180 cows on his farm in Sussex on the south coast of England. He barely scrapes by: If it weren’t for the subsidy he gets from the European Union, he’d have to sell his Holstein Friesian cows. Gribble’s payout has to be exchanged from euros into pounds, putting him at the mercy of currency traders sitting behind computer screens 50 miles away in London’s financial district. Each year the EU awards one bank the job of converting about €3.4 billion ($4 billion) of subsidies to sterling. The banks have tried to maximize their profits by pushing down the value of the euro just before they convert the subsidy, according to four traders and salespeople who asked not to be identified discussing the practices. “It’s despicable what these traders have been doing,” says Gribble. “They are stealing money that’s essential to keeping food on the shelves of supermarkets across the U.K.” The EU required the U.K. government to convert the subsidy from euros to pounds at the European Central Bank benchmark rate on the last trading day of September each year. The price, set at 1:15 p.m. in London, is derived from a sampling of transactions and

DATA COMPILED BY BLOOMBERG IN MAJOR MEDIA OUTLETS

Markets/Finance


Markets/Finance Sussex, England

£108,000

Subsidy Gribble received in 2013 for his 988 acres of eligible farmland. Gribble says the money helps make up for the 5 pence he loses on every liter of milk he produces.

SIMON DAWSON/BLOOMBERG

Gribble has 180 Holstein Friesian cows, the highestyielding breed

is supposed to be an independent measure of the value of currencies. It’s been anything but, the traders say. When Barclays won the job for 2011, the first thing its foreign exchange traders did was to place bets with the bank’s money that the euro would fall against the pound, knowing that the subsidy conversion would move the market lower, says one trader with direct knowledge of the deal who asked not to be identified because he still works in banking. Then they started selling euros with the goal of moving the exchange rate lower so that when it “fixed” they could buy the euros back for even less, three former Barclays employees say. Their profit was the difference between what they sold the euros for and the price at which they bought them back. Salespeople at Barclays, the world’s third-biggest currency dealer, told their best customers, including some of the largest hedge funds, that the bank would be selling euros in the expectation the clients would adopt the same trading strategy, turbocharging efforts to push the exchange rate lower, the former employees say. The value of the euro relative to the pound was lower by almost three-quarters of a percentage point between Sept. 28, 2011, and the ECB fix on Sept. 30, 2011, according to data compiled by Bloomberg. While it’s impossible to know how much of that drop was a result of Barclays’s activities, two traders at other banks who employed similar tactics say such maneuvers could move the rate by at least half a percentage point. A drop that size could have cost U.K. farmers more than £16 million ($24.4 million) on a subsidy that year of €3.2 billion.

Gribble would have lost £580. Barclays, which was not part of last year’s rate-rigging settlement, is negotiating with regulators over similar allegations. Giles Croot, a spokesman for Barclays, declined to comment. After lobbying by farmers concerned about market volatility, the EU last year gave the U.K. the option of exchanging currency using an average of all ECB fixes in September, which will make it harder for banks to rig the rate. Gribble is among more than 100,000 people in the U.K., including Queen Elizabeth and Prince Charles, who receive EU farm subsidies. “I’ve always assumed I was getting a fair rate,” says Gribble. “You’re not going to make a fortune in farming, but it’s the only way of life I’ve ever known.” —Gavin Finch and Julia Verlaine The bottom line Driving the value of the euro down by half a percentage point could have cost U.K. farmers more than $24 million in 2011.

Hedge Funds

Meredith Whitney’s Dubious Debut Her American Revival Fund falls 11 percent in 11 months “Even if you have the story right, a lot of it is about timing”

It took less than a year for Meredith Whitney’s American Revival Fund to begin unraveling. In June 2013 she published a book predicting that the central part of the U.S. would thrive while coastal states stagnated. In November

her new hedge fund started investing in heartland stocks. While parts of the region did well, she made losing bets on companies including Conn’s, a retailer that sells mattresses and stereos on credit in Texas. In October she was headed for the year’s eighth monthly drop when her main backer, a fund tied to billionaire Michael Platt’s BlueCrest Capital Management, asked for its money back. Whitney’s firm refused, and BlueCrest sued. Her office on New York’s Madison Avenue is on the market, and top executives have left. Poorly timed stock picks, starting her hedge fund without a staff of analysts to help choose investments, and relying too much on one backer’s money helped lead Whitney astray, says a person with knowledge of her firm who asked to remain anonymous discussing private matters. Robert Whitelaw, chairman of the finance department at New York University’s Stern School of Business, says a successful fund needs more than an interesting angle. “What’s a thesis? A thesis is a story,” he says. “The first thing is you may have the story wrong, and the second thing is, even if you have the story right, a lot of it is about timing.” Whitney, 45, was a banking analyst when she became famous for being among the first to warn of the coming financial crisis, predicting in 2007 that Citigroup would have to cut its dividend. That call got her the cover of Fortune, lionization in Michael Lewis’s The Big Short, and a nickname, the Prophet. Three years later she told 60 Minutes that hundreds of billions of dollars in municipal defaults were coming. Instead, muni bonds thrived. Whitney later said she had made a “guesstimate.”

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46

Whitney’s American Revival Fund starts trading in November 2013 $80

ended its first two months up 4 percent, helped by a 30 percent gain in Conn’s Conn’s stock, says the person familiar with the firm. Conn’s, which sells to low-income families who buy on credit, hit a rough $40 patch as many customers fell behind on their payments. By June the stock was $0 down about 40 percent for the year. 1/2013 1/2015 The fund lost more than $2 million on the pick, and hundreds of thousands of Cullen/Frost Bankers dollars on San Antonio-based Cullen/ $80 Frost Bankers and Home BancShares in Arkansas, the person says. Overall, $40 American Revival lost 11 percent in the first 11 months of 2014. $0 Whitney didn’t return calls and 1/2013 1/2015 e-mails seeking comment. Many new fund managers struggle, and few Home BancShares investors predicted last year’s market $40 swerves, says her attorney, Stanley Arkin. “I know lots of guys who’ve $20 had trouble getting their funds off the ground—there’s a lot of competition out $0 there,” he says. “Meredith is somebody 1/2013 1/2015 who doesn’t run away and doesn’t put her head into a bunker.” Whitney told Kenbelle colleagues She outlined her pessimism about last year that investors bought in to the coasts and enthusiasm for the central the fund for her ideas and wanted her corridor, which features lower taxes and doing the research, says the person less regulation, in her June 2013 book, familiar with the firm. “She herself is Fate of the States. Predicting people and a substantial expert,” Arkin says. “I businesses would move to the heartland, don’t know precisely what was in her she wrote that her “brain instinctively mind for staffing, but I do know she’s a works to connect the dots in life, turning crack analyst.” mosaics of information into narrative In mid-October, as investors fretted tales of how things came to be and what over Ebola infections in Dallas and I think will happen as a result.” the Standard & Poor’s 500-stock index That was an inspiration for her firm, dropped almost 5 percent in three Kenbelle Capital, and its American days, BlueCrest told Kenbelle that Revival Fund. She told potential invesit wanted back the $46 million that tors at a conference in New York that remained from its initial $50 million she started her own hedge fund in part investment, according to the person because she was tired of others profitfamiliar with Whitney’s firm. The withing from her ideas, says one attendee drawal of its biggest backer would who asked not to be identified because have left the firm without most of its the meeting was private. funding. The deadline Her 2013 presentation for came and went. Whitney investors listed 16 heartdoesn’t have to comply, Whitney land states and predicted Arkin says, because her that the region’s growth investors agreed not to over a decade would redeem for two years, be twice the national and her performance average. Companies in wasn’t bad enough the Russell 2000 Index to trigger an exception allowing earlier that are based in those withdrawal. states performed about Kenbelle’s the same as the total 5,500-square-foot office index, which climbed is available for subalmost 10 percent, lease, with a listing that according to data compiled by Bloomberg. advertises good views, American Revival an executive bathroom,

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and furniture. Arkin wouldn’t make predictions about what will happen to Whitney and her fund. “I don’t know,” he says. “I have many skills, but none of them are fortunetelling.” —Max Abelson The bottom line Whitney’s fund has been battered by losses including more than $2 million on the stock of Texas retailer Conn’s.

Bonds

A Contrarian Call for Another Low-Rate Year One strategist sees parallels to the global slump after World War II “Some investors thought we were completely bonkers”

Steven Major did something most people didn’t: He got the bond market right in 2014. While many Wall Street bond forecasters said yields on 10-year Treasuries would approach 4 percent, Major, the London-based head of fixedincome research at HSBC Holdings, correctly predicted in August 2013 they would drop to about 2.1 percent by the end of 2014. “Some investors thought we were completely bonkers,” he says. One client called urgently while Major was on a trip to Dubai because he thought 2.1 percent was a typo. This year, Major is defying the consensus again. Wall Street sees the bond market headed for a big selloff: Accelerating growth, the argument goes, will lead the Federal Reserve to start raising interest rates to make borrowing more expensive and keep the economy from overheating (bond prices fall when rates move higher). The median estimate of 74 forecasters in a Bloomberg survey is that the 10-year Treasury yield will hit 3 percent by yearend. Major says yields will keep dropping, possibly to as low as 1.5 percent, before turning up to end the year at 2.5 percent. The yield stood at 1.9 percent on Jan. 13. Major says central banks won’t raise rates while global growth remains weak. He says economic weakness will persist in part because of the vast amounts of debt governments took on during and after the financial crisis. The global government bond market has ballooned more than 40 percent to $100 trillion as

WHITNEY: PATRICK T. FALLON/BLOOMBERG, DATA COMPILED BY BLOOMBERG

Three Bad Calls


BID/ASK ILLUSTRATIONS BY OSCAR BOLTON GREEN

Markets/Finance nations bailed out banks and plunging tax receipts deepened deficits. Major draws parallels between the state of things today and the years immediately after World War II, when slow growth pinned Treasury yields below 2.5 percent, on average, for 10 years. Globally, public debt reached 108 percent of gross domestic product in 2012, a level not seen since World War II ended, according to the International Monetary Fund. Even after some nations adopted austerity measures, the ratio will be 106 percent this year, says the IMF. In the 1940s, central banks bought bonds to finance the war and the subsequent rebuilding of Western Europe under the Marshall Plan—helping to keep rates low. Since the economic crisis, the Fed and other major central banks have bought $10 trillion of bonds, according to Deutsche Bank analysts. The value of the Fed’s bond holdings is equal to about 24 percent of U.S. GDP, exceeding the post-World War II high of 20 percent, data compiled by HSBC show. The Bank of England holds debt equal to about 30 percent of U.K. GDP. “We have a backdrop that’s more like the 1940s, when governments were saddled with debt after the war and central banks held a big proportion,” Major says. Still, most Wall Street forecasters see yields rising this year. With the price of crude oil below $50 a barrel, lower fuel bills will act as a tax cut and boost growth, says Mark Dowding, the co-head of investment-grade bonds at BlueBay Asset Management. “People are extrapolating low oil prices to mean economic slowdown, but we disagree,” he says. Dowding expects 10-year yields to rise toward 3 percent as the Fed lifts rates from close to zero, which economists say will happen in the third quarter. Making the right call for last year has had at least one perk, Major says: fewer unannounced phone calls from skeptical clients. “Sometimes forecasts are right for the wrong reasons and/or have had bad timing, but this one was spot on,” he says. Making forecasts for a living means there’s always the risk of being wrong, he adds, so when one goes well “we should enjoy it while it lasts.” —Anchalee Worrachate The bottom line HSBC’s Major sees 10-year Treasury yields ending the year at 2.5 percent, well below the Wall Street consensus. Edited by Eric Gelman Businessweek.com/markets-and-finance

Bid/Ask

By Kyle Stock

$680m

Onex gets into survival gear. The Canadian private equity firm bought Survitec Group, a U.K. company that sells lifeboats, fire hoses, distress flares, and antigravity suits for fighter pilots. Survitec, which has been outfitting soldiers and sailors since the 19th century, has been a private equity darling. Onex is acquiring it from its rival Warburg Pincus, which bought it from Montagu Private Equity, a third private equity firm, in 2010. Britain’s Shire buys a U.S. drugmaker. NPS Pharmaceuticals specializes in treatments for rare diseases such as short bowel syndrome. AmerisourceBergen acquires an animal health business. MWI Veterinary Supply gives the drug wholesaler a line of pet food, drugs, and vaccines. Roche takes a majority stake in a tumor-testing specialist. The Swiss pharmaceutical giant covets Foundation Medicine’s gene-sequencing technology. Cinven acquires Premium Credit. A unit of Bank of America until 2012, U.K.-based Premium finances insurance premiums and professional fees. Japan’s Recruit Holdings buys two Australian staffing firms. Chandler Macleod and Peoplebank Holdings will move Recruit toward its goal of being the global No. 1 in HR. Chefs’ Warehouse gobbles a California meat supplier. Del Monte Meat provides ingredients to many high-end restaurants in the San Francisco Bay Area. Kellogg wins a bidding war for an Egyptian biscuit maker. BiscoMisr shareholders agreed to the sale after private equity firm Abraaj Group withdrew its offer.

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The U.S. takes center stage in Switzerland 51

Focus On/ Davos

Davos’s new fivestar flop 51

January 19 — January 25, 2015

Creativity Patents R&D

Venture capital

Entrepreneurship

What’s in the Innovation Sandwich? High-tech manufacturing

Productivity 49

College education Patent applications

Experimentation

Magic

Top-down   approaches don’t work. Often the best thing a government can do is stand back

ILLUSTRATION BY 731

“There’s   a love for entrepreneurship and for experimentation that needs to occur” Billionaire venture capitalist Jim Breyer is heading to the Swiss Alps this year with an upbeat message. “This is a magical time,” says Breyer, a partner at Accel Partners, which invested early in Facebook and RealNetworks. He rejects the argument that the world economy is stagnating. From San Francisco to Shanghai, new ideas are bubbling up. “Innovation is happening in centers of excellence around the world faster than ever before,” he says, “largely because it’s more inexpensive than it was even five years ago to develop a product or service for a global audience.” His optimism is likely to be a

welcome contrast to the troubleahead warnings that leaders of business and government will hear at the annual meeting of the World Economic Forum, beginning Jan. 21 in Davos, Switzerland. Japan and Europe are on the brink of deflation, and onetime dynamos like Brazil, China, and Russia are losing speed. The best antidote to stagnation is innovation: the creation of products, services, and processes that make life better. The good news on the eve of Davos is that there has been some innovative thinking about innovation itself, some of which will be shared at a forum panel moderated by Breyer

and including Qualcomm Executive Chairman Paul Jacobs and Rolf-Dieter Heuer, the director-general of the European Organization for Nuclear Research, the Swiss lab that discovered the Higgs boson. Innovation has been a major theme at Davos since the 1970s, when a courtly Austrian professor of management named Klaus Schwab launched the high-powered confab. It’s one of the 12 “pillars” of the World Economic Forum’s annual Global Competitiveness Index. This past year the forum ranked Finland first for innovation, followed by Switzerland, Israel, Japan, the U.S., Germany,

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Focus On/Davos Bloomberg’s Innovation Rankings Fifty countries* were ranked according to an index of six factors: Intensity of R&D, research personnel, number of high-tech enterprises, high-value manufacturing, patent activity, and postsecondary graduates 1

South Korea

96.30

11

2

Japan

90.58

12 Canada

Denmark

83.82

21 Ireland

75.55

31 Czech Republic

68.26

41 Latvia

60.28

83.43

22 China

74.87

32 Hungary

65.37

42 Slovakia

58.97 57.94

3

Germany

88.41

13 Australia

81.33

23 Spain

74.01

33 Ukraine

64.68

43 Lithuania

4

Finland

88.38

14 Russia

80.96

24 Italy

73.66

34 Hong Kong

64.11

44 Tunisia

57.93

5

Israel

86.97

15 Norway

79.86

25 Poland

73.51

35 Turkey

64.04

45 Malta

55.61

6

United States

86.92

16 Switzerland

79.48

25 Slovenia

73.51

36 Iceland

63.84

46 Thailand

54.15

7

Sweden

86.52

17 Austria

79.21

27 Malaysia

71.54

37 Romania

61.89

47 Brazil

54.06 50.42

8

Singapore

84.92

18 New Zealand

77.28

28 Luxembourg

70.00

38 Croatia

61.55

48 Argentina

9

France

84.66

19 Belgium

76.01

29 Greece

69.64

39 Bulgaria

61.26

49 South Africa

50.16

20 Netherlands

75.79

30 Portugal

69.02

40 Serbia

60.81

50 Morocco

50.07

10 United Kingdom 83.90

*ONLY COUNTRIES FOR WHICH DATA FOR ALL SIX FACTORS WAS AVAILABLE WERE RANKED

50

Sweden, the Netherlands, Singapore, and Taiwan. The purpose of the index isn’t to furnish certain countries with bragging rights. It’s “to build a shared understanding of the main strengths and weaknesses of each of the economies covered, so that stakeholders can work together” to make improvements, Schwab wrote in the preface to the 2014-15 report. In other words, the value of the ranking is more in the information it brings to the surface than in who finished in what place. Bloomberg’s own ranking zeroes in on quantifiable inputs to the innovation process. Among the factors considered are the intensity of research and development, the amount of high-value manufacturing, college graduation rates, and the number of high-tech companies. In Bloomberg’s ranking, the top 10 countries for innovation in 2014 were South Korea, Japan, Germany, Finland, Israel, the U.S., Sweden, Singapore, France, and the U.K. The WEF’s ranking is more qualitative, as it relies heavily on a poll of 15,000 executives asked to grade the

nations where they operate on factors such as “capacity for innovation” and the degree of cooperation between industry and university researchers. A third approach, used by the Conference Board and others, is to measure what economists call total factor productivity. That’s the portion of an economy’s output not explained by the combination of workers and machinery used in production. The theory is that this extra output can be attributed at least in part to innovation— say, a smarter way to run an assembly line or organize a restaurant kitchen. For advanced economies, innovation requires pushing on the frontiers of science and technology. That can’t happen without heavy government funding for basic research, along with pathways to its commercialization. The Internet and the Global Positioning System (GPS) are only two of the crucial technologies that originated as projects of the U.S. federal government. Singapore and South Korea have likewise used R&D to vault themselves into the top tier of economies, says Bart van Ark, Research-heavy companies such as Samsung have lifted the whole economy

Drilling Down Into the Bloomberg Numbers Switzerland

#1

Finland

Russia

South Korea

Value added in manufacturing, per capita

Employment in R&D, per capita

#1

#1

#1

The host nation of the World Economic Forum is also the headquarters of pharmaceutical giants Novartis and HoffmannLa Roche. Production of high-tech goods, such as drugs, requires constant innovation.

After Nokia’s fall from grace in mobile phones, the Finns vowed to diversify and make better use of their engineering talent.

Russia’s appearance in the No. 1 spot shows the limitation of quantitative measures. Russians may be well educated, and the country has an illustrious tradition in science and math, but innovation is not a national strength.

Patents can be a mixed blessing if they overprotect inventions, but there’s no question that they’re a mark of advanced economies.

The hottest new sector is gaming, exemplified by Angry Birds

Share of the labor force with a postsecondary education

Utility patents issued to residents, per capita

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the Conference Board’s chief economist. That’s not to say that governments can conjure innovation simply by spending money. Breyer, the venture capitalist, says that while government can foster collaboration between universities and business, ultimately innovation must trickle up from the bottom. “I’ve had dozens of meetings over the years with leaders from around the world who asked how they can build their own Silicon Valley,” he says. “It never works. There’s a magic. There’s a love for entrepreneurship and experimentation that needs to occur.” Less-developed economies can make lots of progress in living standards just by playing catch-up. For them, innovation mostly means adopting and adapting existing technologies. “In some corners of the world it requires a lot of creativity and innovation to physically survive,” says Kim Wagner, a New York-based senior partner at Boston Consulting Group. A favorite theme at Davos is “frugal innovation” in the developing world, which has produced ultracheap laptops, cell phones, refrigerators, and even EKG machines. Regulators can be slow to accept new ideas. Audi CEO Rupert Stadler says that because of strictly interpreted driving rules in Germany, his company has done all of its work on automatic driving systems in the U.S, where “there is more freedom and liberty to do it.” That’s why sometimes the best thing a government can do to promote innovation is get out of the way, says Bronwyn Hall, a professor emerita of economics at the University of California at Berkeley. Take Uber, the mobile app that connects drivers and riders. Taxi drivers all over the world hate it. The difference is that in some countries, such as the U.S., customer


Focus On/Davos demand has mostly overwhelmed resistance to the new idea. France banned one Uber service as of Jan. 1. “In Paris it’s impossible to get a taxi,” Hall says. “It’s illustrative of the resistance to innovation.” — Peter Coy The bottom line The true value of innovation rankings is not crowning a winner but gaining a deeper understanding of what works.

Dealmaking

Move Over, BRICs; 2015 Is All About the USA Expect Davos dealmakers to troll for opportunities stateside

COURTESY WORLD ECONOMIC FORUM; COURTESY ELLIS GODARD

“The U.S. is now regaining its position in the world economy”

The World Economic Forum has long been considered a coming out party for emerging economies, which regularly dispatch politicans and executives to Davos to drum up investment. This year, with Brazil stagnating, Russia entering a crippling recession, and India’s new government struggling to win support for economic reforms, the big magnet for investment may be an older player on the global stage: the United States. The U.S. economy grew at its fastest pace in over a decade in the third quarter of 2014, reaching an annualized rate of 5 percent. “The pendulum has shifted,” says Jacob Frenkel, chairman of JPMorgan Chase International, who’s been making the annual pilgrimage to Davos since the mid-1980s. “The U.S. is now regaining its position in the world economy. It’s the place where the recovery took hold in the most robust way.” While this year’s Davos agenda continues to focus more on emerging markets than on the U.S., the tone is less upbeat about their prospects. Last year’s program featured sessions such as “Fulfilling North Africa’s Promise” and “Eurasia: The Next Frontier?” This year, a panel titled “Achieving Africa’s Growth Agenda” will weigh the impact of falling commodity prices. Another, “The Arab World Context,” will address rising youth unemployment and social tensions. In the corridors, cafes, and bars at Davos, much of the talk will be about America’s resilience, says Martin Reitz, who oversees the German business of investment bank Rothschild.

Companies “not present in the U.S. or for a long time,” says John Veihmeyer, who are sub-scale in the U.S. are thinkglobal chairman of consultant KPMG, ing about how to address this,” he says. who is attending this year’s event. “You Stuck in a small ski town surrounded don’t want to make decisions today you by snow, forests, and mountains for will look at in 10 years and regret.” the better part of a week, top CEOs use That said, the atmosphere in Davos the conference to catch up with other will be markedly different from 2006, executives, and the talk often turns to when India’s government and companies sponsored parties and dinners with acquisitions. That could lead to more a campaign called “India Everywhere,” foreign takeovers of U.S. companies; or three years later when Vladimir $259 billion of such deals took place in Putin took the stage to promote Russia 2014, more than double the previous as an island of economic stability in the year’s tally and the highest annual total since 2007. Topping the list last year was global financial crisis. This year, “the strength of the U.S. Merck KGaA’s $17 billion bid for Sigmais definitely going to be a major theme Aldrich, a producer of chemicals used in Davos,” says Dominic Barton, global in laboratories. “If you want to participate in innovation, you have to be in the managing director at consultant U.S.,” says Merck Chief Executive Officer McKinsey. “The U.S. is very economically dominant and powerful, and I Karl-Ludwig Kley. “No country on earth think it’s just going to get better.” is investing as much in innovation.” —Matthew Campbell and Jacqueline In May, Japanese distiller Suntory Simmons completed its $16 billion acquisition of 219-year-old bourbon producer Jim The bottom line The Davos agenda Beam. A few months later, Calgaryemphasizes emerging markets, but the U.S. economy may dominate the conversation. based Encana made a $5.9 billion bet on the Texas oil patch with its purchase of Athlon Energy, the largestever U.S. oil and gas deal by a Canadian company. And in March, Qatar’s sovereign wealth fund joined a group of Hospitality investors that agreed to buy half of American Express’s business-travel unit for $900 million. Franck Riboud, chairman of France’s Danone, often describes the U.S. as an “emerging To keep the organizers happy, market” for his company’s yogurt; he residents backed a five-star hotel says only 6 percent of households buy yogurt monthly. For big companies, “They considered looking at “the U.S. is the safest and best harbor,” alternative destinations” says Manuel Falco, Citigroup’s head of At last year’s World Economic Forum, corporate and investment banking for the global elite flocked to the new Europe, the Middle East, and Africa. InterContinental Davos, booking all 216 Still, the Davos crowd is a long way rooms. A giant cocoon encased in golden from writing off Asia, Latin America, bands of steel, the five-star and Africa. “Most companies hotel is known locally as the I meet with believe these are going to be important markets Superfans Golden Egg. There’s a helipad

How Davos Laid A Golden Egg

33 visits to Davos

125 Phish concerts

Cor van Zadelhoff Founder of DTZ Zadelhoff, a property services company in the Netherlands

Ellis Godard Professor of sociology at California State University at Northridge

“Davos has been a big contributor to my internationalism and has opened my mind.”

“At the the Clifford Ball festival in 1996, it was like 60,000 people had finally found each other. It was bliss.”

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51


Focus On/Davos Seen at the hotel

What’s Inside The Golden Egg

Benjamin Netanyahu

Goldie Hawn

Crown Prince of Norway

Accommodations at the InterContinental Davos 216 rooms, plus 38 luxury apartments Cost per night $344+ Amenities Spa, indoor pool, cinema, billiards room, three restaurants Architects Oikos

“Hotels typically make 20 percent to 30 percent of their income during the WEF.” —Karl Wild

52

on the premises, along with three restaurants, a spa, and a play area for younger guests outfitted with a cinema and pool table. Rooms go for upwards of 350 Swiss francs ($344) a night in the offseason—and many times that during the week of the WEF. General Manager Peter Pedersen recalls that one evening last January, Israeli Prime Minister Benjamin Netanyahu and his wife dined at its restaurant, while Tony Blair sipped grappa at the bar. Richard Branson, Goldie Hawn, and Bono were also spotted at the hotel that night. Stilli Park, the Swiss firm that leased the hotel from its owner, a real estate fund managed by Credit Suisse, struggled to fill rooms once the forum’s delegates went home. On June 2, Stilli Park filed for bankruptcy. The Golden Egg is still in business, under new management. And once again it’s sold out for the forum. Yet its fate remains unclear. At the Alpine ski resort, “hotels typically make 20 percent to 30 percent of their income during the WEF,” says Karl Wild, author of an annual ranking of Switzerland’s best hotels. “Davos is dead in spring and summer.” The Golden Egg is the product of a push by the organizers of the WEF to bring more five-star hotels to Davos. “It was a bit of a demand from the WEF that we would start moving toward more luxury hotels in Davos,” says Tarzisius Caviezel, the town’s mayor. Christophe

Gordon Brown

Bono

Piffaretti, the manager of Credit Suisse’s hospitality real estate fund, which supplied 155 million Swiss francs in financing for the Golden Egg, believes the project helped the municipality of Davos clinch a contract with the WEF for use of the town’s convention center through 2018. “They considered looking at alternative destinations for this international event due to the lack of quality accommodation,” Piffaretti says. Alois Zwinggi, the WEF’s head of operations and resources, says its decision to renew the contract was not influenced by plans for the five-star hotel. “As long as we enjoy this level of cooperation, there is no reason to move away,” he says. When Klaus Schwab founded the forum in 1971, the idea of holding the exclusive gathering at a remote location in the Swiss Alps was meant to ensure there’d be a captive audience. This year’s event will draw a record 2,500 participants, according to organizers, including more than 300 heads of state and government ministers. First-time visitors may find the accommodations subpar: Davos has fewer than 400 fivestar hotel rooms, and more than half of those are at the Golden Egg. Most lodgings are of the four-star variety, and many were built more than 30 years ago. Hotels and restaurants are Davos’s biggest employers, so it’s not surprising that the town’s 13,000 residents threw their support behind the Golden

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Richard Branson

Egg. In a 2006 referendum, Davosians approved a rezoning of the land on which the hotel stands. Local officials agreed to defer 275,000 Swiss francs in permit fees—money they must now try to recoup via insolvency proceedings. Investors in the Credit Suisse fund have also taken a hit. In the wake of Stilli Park’s June 2 bankruptcy filing, the value of the Golden Egg’s lease was written down by 6 percent to 204.9 million francs, says Piffaretti, who took over management of the fund this month. Weriwald, the company that now holds the franchise awarded by the InterContinental Hotels Group, plans to drum up business by focusing on conferences, according to Piffaretti. Another priority for the new owners: finding buyers for the luxury apartments built on the premises—only half of the 38 units have been sold. Wild is skeptical that the Golden Egg can draw visitors during the offseason, when most Swiss luxury ski resorts close their doors. “Davos simply does not have a five-star clientele,” he says. “The customer they are targeting goes to Zermatt or St. Moritz.” —Jeffrey Vögeli and Jan Schwalbe, with Catherine Bosley The bottom line Residents of Davos, along with investors, backed construction of a fivestar hotel that’s struggling. Edited by Cristina Lindblad Businessweek.com

BLOOMBERG (2); GETTY IMAGES (6)

Tony Blair


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Mother of a Pro Can the U.S.

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blem ever untangle its mixed-up maternity leave system? By Claire Suddath Photographs by Steven Brahms

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about twice the rate of the previous generation. “I went to college ne week into her new job, Letitia Camire learned she was and found something I loved. I got a job. I married and had babies pregnant. It was 2011, and she’d just been hired as the office manager for United Tool & Machine, a small, family-owned tool and just assumed maternity leave was something that existed,” says and die company outside Boston. Her salary was $30,000 a year. Annalisa Spencer, 31, an electrical engineer in Salt Lake City who Camire clicked with her co-workers immediately. Her boss, the has three children, and got no leave for the third. “Nobody told me owner and president, started asking her about long-term career it would be like this.” goals. “They seemed so family-oriented,” says Camire, now 32. So In 2013, Senator Kirsten Gillibrand (D-N.Y.) introduced legislation when her morning sickness became noticeable (“I just sat at my that would make employers offer new parents three months of paid desk looking like death warmed over”), she felt she owed her new leave at 66 percent of their salary, but the bill, the Family Act, has work family an explanation. She was only a few weeks along when been stalled in Congress for more than a year. Even if it passes, it she walked into the president’s office one morning, shut the door, won’t fix a system that paints a huge segment of the workforce into a and told him she was pregnant. corner. In a country where the median household income is $53,000, “His face immediately changed,” she says. “The first words out 66 percent of a salary might not be enough to support a family. But of his mouth were, ‘You know you’re still on your 90-day probathe Family Act would drastically change the lives of many American tion period.’ So I pretty much knew what that meant.” A few weeks workers. One of the reasons women make less than men—16¢ per later, she was let go. The company told her it was a reorganization dollar less, according to the Pew Research Center—is that they’re move, but she didn’t buy it. She knew that according to the 1978 clustered in lower-paying fields, or in positions where they work Pregnancy Discrimination Act, firing or demoting an employee fewer hours. Yet young women right out of college experience because she’s pregnant is illegal, but she also knew discrimialmost no gap at all. The discrepancy grows as they get older and nation can be hard to prove. The U.S. Supreme Court recently advance—or fail to advance—in their careers. And the first bump considered the case of Peggy Young, a United Parcel Service in the road seems to happen right as they start to have children. employee who was forced into unpaid leave when she told her company she was pregnant and couldn’t carry packages According to the United Nations’ International Labour Organization, heavier than 20 pounds. Young has lost in lower courts because there are only two countries in the world that don’t have some form UPS’s accommodation of disabilities not caused by workplace of legally protected, partially paid time off for working women injuries is gender-neutral. The court will issue its decision later this year. “I didn’t have the financial resources to fight,” Camire says. United Tool & Machine says Camire was let go because her job was eliminated, and that the president was who’ve just had a baby: Papua unaware she was pregnant at the time. New Guinea and the U.S. Camire soon found herself in the awkward position of interviewThe U.S. is also way behind the 78 countries that also offer leave to fathers. Forcing mothers back to work early can have consequences ing for jobs while pregnant. She wasn’t showing yet, but she told recruiters anyway. “I just didn’t want to waste anyone’s time,” she for children. When they’re on maternity leave, their children are says. Luckily, the Israel-based electronics company Orbotech had more likely to be breast-fed and taken to the doctor for checkno qualms about hiring her. Camire was a new employee, though, ups. Studies have found that a year after having a baby, women so she didn’t qualify for the short-term disability insurance that it, who took at least a month like many companies, uses as a workaround to give maternity leave. of leave reported higher Instead, she ran through her sick days and vacation time and relied salary increases. on her husband’s salary to allow her to take nine weeks off, unpaid. With no federal action, “We put a lot of things on credit cards,” she says. They stopped going some states have stepped in. Five states pay new mothers through out to dinner. They streamlined their grocery budget, drove their their disability insurance programs. In 2004, California passed the cars as little as possible, and gave up—for a while, anyway—the idea country’s first paid parental leave law, open to both mothers and of saving for retirement. “Financially, I probably should’ve been fathers. There, new parents get up to six weeks off at 55 percent back even sooner than that,” Camire says. But she couldn’t find a of their current paycheck, up to about $1,000 a week. Since then, local day care center that would take such a young baby. New Jersey and Rhode Island have followed. Her story isn’t unusual. Unless you work for a company that The policies vary widely across industries and pay grades. A BLS voluntarily offers it, or in one of three states, paid maternity leave survey of “business, management, and finance” workers—basically, doesn’t exist in the U.S. A law called the Family and Medical Leave those in white-collar jobs—found that 26 percent of them get paid Act (FMLA) grants up to 12 weeks of unpaid leave every year, but leave. At many Silicon Valley companies, which compete for talent, it applies only to full-time workers at companies with 50 or more new parents have it made. Facebook offers a little more than four employees. About half of all working Americans are covered by months to everyone. Google offers five for mothers and three for FMLA. The other half—freelancers, contract workers, entrepreneurs, fathers or new adoptive parents. The company developed its policy people who work at small businesses—are on their own. Paid leave a few years ago when it noticed that many new mothers were quitis even rarer: Only 12 percent of American workers have access to ting their jobs. After it added two more months and offering full pay, it in the U.S., according to the Bureau of Labor Statistics. the number of new mothers who left the company dropped by half. This comes as a shock to a lot of young women. “Wait, what?” Some older companies also have generous policies. Goldman Kathryn, 33, says about the moment she realized the New York Sachs offers four paid months, and General Electric offers two media startup she’d recently joined didn’t offer maternity leave. months to moms and two weeks to dads or other parents. Wait“I thought we had laws about this.” (Kathryn asked to have her resses and sales clerks are often out of luck; only 6 percent of service last name withheld because of a nondisclosure agreement with workers get anything at all. That means the ability to adjust to parher former company.) enthood, learn to breast-feed, and manage a newborn becomes a Most new mothers are in their 20s or 30s, which means they luxury only certain people can afford. “We have these policies set up from the Mad Men era when dads worked and moms stayed at grew up in a world of female Supreme Court justices, politicians, home. But that doesn’t reflect the American workforce anymore,” and astronauts. They have more college degrees than men, they entered the workforce in near-equal numbers, and they chose says Gillibrand, who as partner at the Manhattan law firm Boies, their careers assuming that having children wouldn’t mean losing Schiller & Flexner wrote the firm’s maternity leave policy in 2002. money. Almost two-thirds of women with children under 6 work, Recently, some companies have started to offer leave to fathers. WorldMags.net

O

“ We h ave t h e s e p o l i c i e up from

the Ameri

SET DESIGN: JASON SINGLETON; GROOMING: ANGELA DI CARLO

56


This decreases the likelihood that an employer will shy away from hiring young women, and it de-stigmatizes the idea that new dads need time off, too. In the 10 years since California adopted its policy, the number of requests submitted by men has gone up each year and stands at 26 percent. In general, the amount of time they take off is much shorter, typically no more than a week or two. And as children age, the cost of day care and nannies starts to squeeze families’ income, sometimes prompting one of the parents to go part-time or decide to stay home. Even today, that person is usually the mother. In most places, the only parent offered time off is the mother; she qualifies for short-term disability insurance after she physically gives birth. That’s what Spencer, the electrical engineer in Utah, used when she got six weeks at half pay after she had her first child. (She skipped payments on her 401(k) to take another six unpaid.) By the time her third child came along, she had dropped down to part-time so she wouldn’t have to pay so much for rising day care costs, which meant she didn’t get any maternity leave at all. “I’m hourly now, so it’s not like I’m getting paid for time I’m not working,” she says. She spent her last maternity leave working from home. Even women in high-income positions have trouble figuring out how the patchwork of policies applies to them. “I have three months of paid leave, 46 days of unused vacation time that I saved up, and then the six weeks that California offers, but I don’t know if it runs concurrently with my vacation time. It was very confusing. For a while I didn’t even know what day my leave officially ended,” Jeanette Barzelay, a civil litigation

attorney in San Francisco, told me. Because Barzelay lives in California, she’s covered under the state’s paid-leave law. Despite the confusing system, Barzelay did take a lot of time off—six months, partially paid. But most people, even in California, aren’t that lucky. Colleen, a fast-talking 44-year-old television director in Los Angeles, didn’t use California’s paid leave when she had her second child in 2008 because it doesn’t include job protection. For years, she has worked 65- to 70-hour weeks with studios such as Walt Disney and Nickelodeon. (Colleen asked to have her last name withheld because she doesn’t want to jeopardize her relationship with the studios.) She’s highly paid, but as with most production workers in Hollywood, her contracts for TV shows run from week to week. Because she’s a contract employee, FMLA doesn’t cover her, and California’s law, which does, doesn’t require studios to let her keep her job. “There’s this kind of unwritten, unspoken thought that you could be replaced at any moment,” she says. So when a TV studio asked her to return to work three weeks after having a C-section, she had to show up. “I told them I needed to recover from major surgery before I go back to running around on set all day. They were like, ‘Umm, we really need you back,’ ” she says. “I wasn’t in a position to argue with them.” Gillibrand’s bill would apply to every company, no matter what size, and would keep people like Camire from having to rely on credit cards or people like Colleen from working right after a C-section. It includes fathers, adoptive parents, and same-sex parents and would be paid through a new payroll tax of two-tenths of 1 percent. It’s endorsed by groups such as the National Partnership for Women and Families and the Small Business Majority. The U.S. Chamber of Commerce and the National Restaurant Association, which have historically opposed paid leave, haven’t

s set the Mad Men era w h e n d a d s wo r ke d a n d m o m s s t aye d a t h o m e . B u t t h a t d o e s n’ t r e f l e c t c a n wo r k f o r c e a ny m o r e ,” s ay s S e n a t o r G i l l i b r a n d

WorldMags.net


Germany

Belgium

100%, with a cap

82% for the first 30 days; then 75%, with a cap

Austria

Slovenia

100%

55% for 15 weeks, with a cap

France

Greece

100%, with a cap

100%

Luxembourg

Portugal

New Zealand

100%

100%, with a cap

Netherlands

100%, or 80% for 21 weeks

Israel 100%, with a cap

How the U.S. Lags In Maternity Leave

Japan

100%

66.7% at minimum

Iceland

Percentage of earnings

Sweden

100%, with a cap

80%

Spain

Sweden is among several countries that also provide separate parental leave

Switzerland

80%

80%, with a cap

Mexico 100%

Weeks off

1

2

Canada

Chile 100%

Denmark 100%

Finland

100%

Turkey 66.7%

Italy 80%

70%, with a cap, plus additional benefits

South Korea

Estonia

Hungary

100%

100%

70%

3

4

5

6

7

8

9

10

11

12 13 14 15 16 17 18

19

20

21

22

23

24

25

U.S. Unpaid, under federal law

58

come out against it. Furthermore, polls suggest that paid family leave is overwhelmingly supported by men and women across the political spectrum. So why is the Family Act at a standstill? Gillibrand says Congress doesn’t think it’s important enough. “The issue isn’t being raised because too many of the members of Congress were never affected by it,” she says, pointing out that 80 percent of Congress is older and male. “They’re not primary caregivers. Most members of Congress are affluent and are able to afford help or able to support their [wives]. It’s not a problem for most of them.” Hillary Clinton has also admitted that while she supports paid leave, it’s a political battle the U.S. isn’t ready to fight. “I don’t think, politically, we could get it [passed] now,” she said in a CNN town hall meeting last June. Washington won’t be able to ignore this forever. “You’re finally starting to see momentum on this issue,” says Debra Ness, president of the National Partnership for Women and Families. Over the past decade, Ness has noticed that young parents are becoming increasingly angry at the lack of employer support when they start to have children. “This will be part of the conversation during the next election,” she says. “The sleeping giant is waking up.” Before it was passed, California’s law was vehemently opposed by manufacturing and small-business associations, which argued that it would be too hard for companies with just a few employees to handle someone’s six-week absence. The California Chamber of Commerce called it a “job killer.” To get it passed, lawmakers

Women’s Forum, puts it, “rewrite employment contracts for every working American.” Lukas is against the act because she’s “worried about the way it’ll change women’s employment prospects. It’s written in gender-neutral language, but every employer in their right mind knows who’s going to take advantage of these benefits.” As hard as it might be for paid-leave advocates to accept, she has a point. That’s exactly what happened in Sweden. In any discussion of parental leave, Sweden is the promised land. Parents are given 16 months of paid leave, two of which are reserved just for fathers, and they can divide the rest however they like until their child is 8 years old. While on leave, the government pays 80 percent of the parent’s income, even if she’s self-employed. “We’ve got it so good here,” says Christine Demsteader, a single mother living in Stockholm. She runs her own communications company but still took 16 months off when her only child was born a few years ago. “The thing is, we have only one system for doing things: Women take a year off, then they go back to work and the kid goes into day care,” she says. “You don’t have another option.” “And it’s understood that a woman who becomes a mother cannot have the same career as a man,” adds her friend Lisa Rydberg, who’d run over to Demsteader’s house when she heard that an American journalist was calling. For all Sweden’s efforts at gender equality, men still make about 35 percent more than women, according to a 2012 Swedish government report. And although the top five spots on the

A ye a r a f t e r h av i n g a b a by, wo m e n w h o t o o k a t l e a s t a m o n t r e p o r t e d h i g h e r s a l a ry i n c r e a s e s agreed to fund the law by taxing people’s paychecks, not busi- World Economic Forum’s Global Gender Gap index are all held by nesses. As a result, a 2011 survey found that 91 percent of Califor- Nordic countries, their percentage of female chief executive offinia business owners said the law either helped or had no effect cers is no higher than the 5 percent achieved by Fortune 500 comon their profitability. The National Bureau of Economic Research panies in the U.S. “I just know I’d get a promotion three years later found that California women in low-wage jobs were more than than a colleague who is a man,” says Rydberg. “That’s how it is.” three times as likely to take some sort of maternity leave under Intentionally or not, Sweden seems to have routed women the law, and returned to their old jobs in higher numbers. Over onto the “mommy track,” a slower, less demanding career path time their wages were higher, too. “Businesses in California don’t for women with children. In the U.S. it often comes under the guise seem to be reporting a strong negative effect. I haven’t seen evi- of the purposefully vague term “caregiver status,” which compadence of a significant downside,” says Christopher Ruhm, a pro- nies use when offering reduced hours and a lower salary to parents fessor of public policy and economics at the University of Virginia. who need flexibility. In academia, universities will often pause the Gillibrand’s bill is a sweeping piece of legislation that would, as so-called tenure clock for female professors who take time off to Carrie Lukas, the managing director of the conservative Independent have children. Some of these policies can be helpful. But they also WorldMags.net


Australia

Norway

Slovak Republic

100%, or 80% for 45 weeks

65%

Poland

82% for the first 30 days, then 75%, with a cap

Australia doesn’t distinguish between maternity leave and broader parental leave, but it offers mothers six weeks of prenatal leave

U.K. First six weeks paid at 90%; then the lesser amount of 90% or about $200 a week for the next 33 weeks

100%

Ireland 80%, with a cap, for 26 weeks

Czech Republic 70%

26

27

28

29

30

31

32

33

34 35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

DURATIONS AND BENEFITS BASED ON 2013 FIGURES DATA: UNITED NATIONS

have the side effect of segregating those who use them into posi- isn’t radically different from the U.S.,” says Ruhm at the University tions where they’re just not expected to advance. of Virginia, which means any program it has could conceivably Most women try to get around this by gaming the system. A be implemented in the U.S. “I’ve become an incrementalist—try biology professor at the University of Pittsburgh planned her preg- something small, see if it’s working, and then tweak it. That’s what nancy so that she’d give birth during the summer, when she already Canada does.” Canada passed its first national maternity leave law had time off. (Unpaid, of course.) Colleen the TV director tried to in 1971 and has been adjusting it ever since. In 2000 it lengthened have her kids between TV seasons; she succeeded two out of three its available leave from six months to a year. About four months times. Of course, this method assumes a woman gets pregnant only of that is reserved for mothers; the rest is available to all parents. when she wants to, she has a healthy pregnancy and delivery, and They receive 55 percent of their salary (up to an income limit), paid her baby doesn’t need special care. “I had this one window when through the country’s unemployment insurance program, and are I had to have the baby,” Kate Lytton, a ballet teacher in Akron, told guaranteed their jobs when they go back to work. me. Lytton had her daughter in July and took six weeks off unpaid, Gillibrand’s Family Act looks a lot like Canada’s model. And but could do that only because classes weren’t in session. “When because it has never been debated or amended—the Senate Finance she was a week late, I worried she’d cut into my leave time.” Committee has been quietly ignoring it for more than a year—it hasn’t In fields without a seasonal break, women put off having chil- yet been muddied up with loopholes or concessions. It won’t turn dren until they’re in a senior position, then cross their fingers and working motherhood into anything resembling “easy.” But it may hope it’s not too late. “The standard practice for women in law is to be the closest thing to a workable solution. make partner first and then start a family,” says Chelsea Petersen, a partner at the law firm Perkins Coie in Seattle. Nine years ago Nine weeks after Camire had her baby, a daughter she named she was 34 and a midlevel associate at the firm, which is exactly Catherine, she went back to work at Orbotech. “I was like, thank the wrong time—professionally—to have kids. “That’s when you’re God I get to talk to someone other than a lump!” she laughs. She really working hard, trying to prove yourself. But with my age, I stayed at the company for two years, where she oversaw sales and couldn’t wait another seven years,” she says. A year after having shipping. In 2013 she became pregnant with her second child. This her first and only child, Petersen found herself crying in a fetal time, Camire qualified for the company’s short-term disability position on the floor of her office, suffering from exhaustion. “Days pay, which allowed her six weeks off at two-thirds of her salary. would go by where I wouldn’t have eaten a real meal or taken care (FMLA provided another six, unpaid.) Then she started thinking of myself for five minutes,” she says. Over the years, Perkins Coie about the future. Day care costs for her children would run about has extended its leave $25,000 a year in Boston. When she factored in gas, meals, and policy to cover fathers and other costs, the amount of money she’d be able to provide for created a support group her family was laughably small. So three months before she was for working parents. Still, supposed to go on maternity leave, Camire told her manager she Petersen can count at least 10 women in her department who’ve wouldn’t be coming back. left, many because the demands on their time were too much. As “The company was completely shocked,” she says. Sure, she far as she knows, she’s the only one who had a baby, made partner, could’ve taken the leave and then refused to come back afterward, and stayed full-time. but Camire didn’t want to do that. “I would’ve burned bridges perNot everyone can work as hard as Petersen. Or even wants to. sonally and professionally. That sat heavily on me.” For the next few years, she’ll stay at home. Her son, Charlie, is “Listen, I know Sheryl Sandberg wants me to lean in,” Colleen told me. In her book Lean In and her 2010 TED Talk, the Facebook COO 7 months old. Catherine is almost 3. Camire’s days are filled with urged women to accept promotions or go for new jobs even when diapers and bottles and nap times that never seem to align. In some they knew they might be pregnant soon. “Well, OK, Sheryl, I think ways, raising a child while working was easier, she says. “At day care, that’s a really great notion,” Colleen says. “But it’s different for us. I had someone to help me figure out the developmental milestones. It just flat out is. There is nothing we can do about it, because bio- They’d send a note saying, y’know, Catherine takes an 8-ounce logically it’s like, well, you’re having babies now.” bottle now instead of 6. With Charlie, I have to figure that out on Luckily, there is some middle ground between the American my own.” She misses Orbotech sometimes and plans to go back to patchwork and Swedish sabbatical—and the best example of it is work in a few years once the kids are in school. She just hopes no Canada. “Unlike the Scandinavian countries, Canada’s tax rate one minds the long employment gap on her résumé. WorldMags.net

h o f l e ave

59


Fanta sy sports for money turns By Adam

Enormous TV screens with live National Football League feeds cover the walls of the ballroom at the Cosmopolitan Hotel in Las Vegas. A sound system blares the broadcasts of all the various games at an ear-shattering volume. Couches and bar stools are scattered around the 14,520-square-foot space, which is playing host today, Dec. 14, to the fifth annual FanDuel Fantasy Football Championship. The 100 finalists—many of them wearing NFL garb, most of them loud, all of them male—know one another by their handles, which tend to the sophomoric (Wanker14, ambassador_of_awesome). A guy in a Tony Romo jersey jumps out of his chair and yells, “Oh my God, make a play!” after a pass is dropped. Some contestants have brought their wives or girlfriends; some came with buddies. The crowd is taking full advantage of the open bar. A Playboy

Playmate attempts to mingle, but no one notices. By 5 p.m., FanDuel, the fantasysports betting site, will give away $7 million in cash prizes. The first-place winner will get $2 million. The contenders and their posses are encamped around the room. Jeremy Bennight ( jbennight22), a ticket broker from Oklahoma City, has been up since 5 a.m. “I just sat there this morning staring at my computer,” he says. “You can’t help but be nervous.” Jacob Schuck (airattack0829) staked out a spot with a good view of the Cleveland Browns-Cincinnati Bengals game. He’s giddy, talking in a thick New Jersey accent about how he’ll request his winnings be in FanDuel shares in lieu of cash. That plan assumes Cleveland quarter back Johnny Manziel has a big game. The early signs aren’t good. “I’m WorldMags.net

going to have an anxiet y attack,” Schuck says. The early leader is a boyish-looking 33-year-old personal trainer from Pasadena, Calif., named Scott Hanson (escot4). “I’m having a hard time sitting down,” he says. “I just want to stand.” Hanson, who’s been into fantasy sports since he was a kid, joined FanDuel in 2014 with an initial stake of $35, entered an FFFC qualifier on a lark, and beat out 59,000 others to earn the free trip to Las Vegas. He’d already put together a spreadsheet to keep track of NFL player stats, Vegas point spreads, and dozens of other variables. His hopes ride on Cincinnati’s rookie running back, Jeremy Hill. Hanson had seen a news item about how the Bengals’ coach might use Hill more than usual against the crummy Cleveland defense. Hanson plugged the extra playing

THIS SPREAD: COURTESY FANDUEL; FOLLOWING SPREAD, FROM TOP: PHOTOGRAPH BY BRAD SWONETZ FOR BLOOMBERG BUSINESSWEEK; COURTESY FANDUEL

60


Scott Hanson, $2 million winner at the FanDuel Fantasy Football Championship

the man cave into a workp lace Satariano 61

time for Hill into his formula for selecting his fantasy roster. He predicts a breakout game. Every major sports league in North America has a corresponding fantasy universe. To play, you select players from different real-world teams, and when your picks do well on the field (or court or rink), your make-believe team gets points. It started in the 1980s with baseball and football, mainly among friends who tracked stats in newspaper box scores. As fantasy leagues moved online, participation soared. More than 40 million people played fantasy sports in North America last year, the equivalent of 30 percent of U.S. adult males. FanDuel, based in New York, brings a couple of twists to the game. The first is that leagues last only a day, so rather than wait all season to declare a winner, players know who won as soon as time runs out

in the last game of the day. Twist two is valued at more than $1 billion during its last money. Small-stakes fantasy leagues aren’t investment round, according to a person new, but FanDuel and similar sites bring it familiar with the company’s finances who to a much larger scale. For a few bucks, a was not authorized to speak on the record person drafts a team and competes against because the information is private. The nexttens of thousands of others online. There biggest site, DraftKings, based in Boston, are thousands of contests to enter each has attracted $76 million in venture capital. night for football, basketball, hockey, and This year the daily fantasy-sports industry baseball, whatever is in season. Like online will collect more in entry fees than all the poker, cash prizes can run to seven figures. sports books at Vegas casinos combined, Unlike online poker, it’s legal in most states. according to Eilers Research, which studies FanDuel has more than 1 million paying the gaming industry. users and controls about two-thirds of the “They’ve surveyed fantasy-sports daily fantasy-sports market. The company players and asked, ‘When do you expect has raised $88 million from investors to quit?’ ” says Nigel Eccles, chief executive including Comcast; private equity firms officer and co-founder of FanDuel. “And the Shamrock Capital Advisors and KKR; and average response is, ‘Never.’ ” the National Basketball Association, whose commissioner has come out in support of Tall and fit, with slightly disheveled legalizing sports gambling. FanDuel was blond hair, Eccles comes across as WorldMags.net


this guy from New York,” he says. “We described this game to him, and he said, ‘That sounds like something I would play with my, like, 12-year-old nephew.’ ” When Eccles asked whether the game would be more appealing if money were involved, the guy responded, “Now you’re talking.” Eccles spent much of 2010 and 2011 trying to recruit invesMax Steinberg, tors, who weren’t con- in his Las Vegas vinced that fant asy apartment sports could become a lucrative business. And even if it did, there didn’t seem much to prevent an ESPN or a Yahoo! from coming in and crushing FanDuel. Eccles says he was turned down by 85 investors. FanDuel, still based in Scotland, almost went out of business before some existing shareholders stepped in to provide enough cash to last six months. Eventually, London-based venture firm Piton Capital put in $4 million. The company relocated to New York and poured its money into advertising. Lesley Eccles, in charge of marketing, is a believer in the 1920s book Scientific Advertising, which preaches that ad campaigns are useless unless their effect on sales can be measured. FanDuel includes promo codes in every radio and TV spot. The codes, which put money in a person’s FanDuel account in exchange for signing up, allow the company to gauge which ads are working. The startup has rolled out a series of cheesy, Hair Club For Men-esque commercials during sports broadcasts, which favor player testimonials. (“I started with a $125 deposit, now I’ve made over $62,000!”) Bringing in a new customer costs about $70, but once they’re in, they stay. “In what business do you buy a customer for $70 and that user generates $100 per year indefinitely?” Nigel Eccles says. “That’s our numbers. We don’t just spend money because it looks good—it works. We have a good product, but it’s really a marketing story more than a technology story.” Eccles is dismissive of his competitor, DraftKings, which he calls an inferior clone. “We’ve raised the same amount of money, and they’ve got a third of the user base,” he says. DraftKings CEO Jason Robins says the market “is large enough for both companies.” FanDuel and DraftKings are spending heavily on ads during live sports broadcasts and are paying teams and leagues for the right to be exclusive marketing partners. Fantasy contests also make sports fans even more addicted, says Brody Ruihley, an assistant professor of sports administration at the University of Cincinnati. “Sports Fans 2.0,” as he WorldMags.net calls them, consume at least twice as

80

%

of fantasy-sports players are male

89.8

%

are Caucasian

many games and other content on TV and online as the average fan. “It’s very much in line with the way people consume media today,” says Sal LaRocca, president of global operations and merchandising for the NBA. “We’re on our phones, looking at our Twitter feeds, looking at headlines, and we consume things in very short periods of time.” Max Steinberg, 26, is a Vegas-based professional poker player with career winnings of more than $2 million. He used to play online. That largely stopped in 2011, on a day known to gamblers as Black Friday, when the government shut down many poker sites. Steinberg had more than $100,000 seized. The crackdown stemmed in part from the 2006 Unlawful Internet Gaming Enforcement Act. But the law has a big loophole: It defines fantasy sports as Average age:

78.1

%

34

have college or advanced degrees

PHOTOGRAPH ILLUSTRATION BY CREDIT TK

62

a younger, calmer version of the f-bomb dropping celebrity chef Gordon Ramsay. Outside the ballroom at the Cosmopolitan, Eccles pulls out his iPhone to show off some numbers. At that moment, FanDuel is raking in $27,500 in entry fees per second. Eccles says he plans to expand the number of live contests, including some at the Playboy Mansion. He’s talking with sports channels about producing a reality show about fantasy players, or maybe a show like CNBC’s Mad Money but about pro athlete values instead of stocks. “I just think that’d be really interesting TV,” he says. Getting started on FanDuel takes only a few minutes. You go to the website or download its app and then sign up with a username. (“Jiggyjabberjaw” and “vahomeboy” are taken.) After entering a credit card number, you put money into an account. Most leagues cost $1 to $25 to enter—some bigger-stake competitions require $2,000 and up—and have names such as “$13K Mon NBA Dribbler.” Tap on a contest name, and up comes a list of player positions to be filled. FanDuelers can pick hundreds of new teams every day, sometimes multiple teams in one league. The site collects 10 percent from each entry fee and leaves the rest for prizes. Revenue last year, after paying out $564.5 million in winnings, was $57.3 million. That’s up from about $14 million the previous year and $1.2 million in 2011. Eccles says the company isn’t profitable, “but we’re building a multibillion-dollar business.” About 80 percent of FanDuel revenue comes from top-quintile spenders such as Bryce Mauro (3rd_and_Schlong), a 21-yearold student at DePauw University. Mauro says he spends about $35,000 on as many as 1,000 NFL contests per week on FanDuel and other sites, plus another $15,000 per night on basketball. He says he made $250,000 in profit last year. “I do it as my full-time job, basically,” he says. Eccles, 40, wasn’t much of a sports fan before starting FanDuel. He grew up on a dairy farm in Northern Ireland and spent a few years at McKinsey, where one of his projects was working with the U.K. military on logistics during the Iraq War. He also worked in the online betting industry. In 2008 he and his wife, Lesley, and three others started a site called Hubdub in Edinburgh that let people bet virtual money on news events. It flopped. One part of the business seemed to find an audience, though: sports. That gave Eccles and his crew the germ of an idea for FanDuel, which they launched in 2009. “We were desperate,” he says. The basic concept was to accelerate fantasy sports. Eccles also wanted to add real-money wagering so the company wouldn’t have to rely on advertising to generate revenue. He took out ads on Craigslist to find people to test ideas. “I remember


Average number of years playing fantasy sports:

9.5

Hours per week spent by players on fantasy leagues, average:

DATA: FANTASY SPORTS TRADE ASSOCIATION

17.89

a game of skill and therefore not subject to the same kind of regulation. So like a lot of online gamblers, Steinberg is now into daily fantasy sites such as FanDuel. He’s been playing for about a year and says it’s like the days when online poker was legal and full of amateurs. “It may be even bigger,” he says. “I wanted to get in early when it’s easiest. So far it’s been really easy.” Steinberg works with his twin brother, Danny, and their older brother, Aaron. Together they wager about $75,000 on hundreds of contests each weekend during football season, and an additional $3,000 per night on basketball. When baseball starts, they’ll spend about $10,000 a night, and more than $1 million over the course of the season. Fantasy prizes aren’t typically winner take all. In one FanDuel NBA contest on

46.9

%

pay to play

Jan. 11, the top 206 out of 1,149 players fan who will drop $5, $10, $15 in there. You won something, from $6.25 up to $500. need to have a healthy balance.” Max says he earned more than $300,000 last year playing on FanDuel and other In the Cosmopolitan ballroom, the crowd sites. On victiv.com, he won $50,000 and is fixated on the New York Jets-Tennessee tickets to Super Bowl XLIX, which he Titans game. It’s almost over, and the teams then sold for $10,000. “I’d rather watch it are out of playoff contention, but several at home and have $10,000 in my pocket,” FFFC finalists have Titans tight end Delanie he says. Walker on their teams. A catch by Walker The brothers’ modus operandi starts would change the final standings. with the Vegas lines, particularly point Someone prematurely cuts the NFL feed, spreads and total points. For example, and the FFFC leader board appears on the sports books had the New York Giants- screens. The crowd shouts in anger, then Washington Redskins game in December surges toward a far corner where a TV still with a combined score of 46.5. Because has the game on. the Giants were favored to win by 6.5, With one second left, Titans quarterthe Steinbergs knew the expected score back Charlie Whitehurst takes the snap. was 27 to 20 Giants. New York had a He throws over the middle to running pass-heavy offense and Washington a bad back Dexter McCluster, who tosses the ball pass defense, so the brothers predicted a back to another player, who flips it back to big game for Giants wide receiver Odell Whitehurst, who throws it to Walker, who Beckham Jr., who went on to catch three starts running. Hundreds of thousands of touchdowns. The brothers also scan dollars ride on how far he makes it. People Twitter for injury updates: If a starter gets yell as Walker avoids one tackler and yell hurt, the backup may be a valuable pick. louder as he sprints toward the end zone. A key challenge is the “salary cap” set At the 10-yard line, New York safety Dawan by FanDuel, typically at $60,000. Every Landry dives for Walker’s legs and knocks real-world athlete is assigned a dollar him out of bounds. value, and users have to make sure their As the Jets celebrate on the field, the quarterback, two running backs, three FFFC players in the ballroom look confused. receivers, one tight end, kicker, and team Nobody knows how it’ll be scored because defense all add up to less than the cap. it was such a bizarre play. Everyone stares “You’re always looking at the players’ at the leader board as FanDuel’s software price because you’re trying to make a team does its thing. After about a minute, the based on the parameters of the limited score appears and the room erupts. salary that you have,” Max Steinberg Then come the checks. John Lovelace says. The brothers have started a website, (k_c_p), a pilot from Orlando, leaps to third dailyfantasywinners.com, to publish their place and $500,000. Jake Sanders (sandanalysis and to earn money from FanDuel, storm), who led the tournament for part of which pays them for referrals. the day, falls to fourth because of the Walker With the popularity of fantasy sports play. He gets $300,000 and looks ill. “I’m in America and the approval of the major just thankful to be in a position where I feel pro leagues, the growth of FanDuel like I’m going to throw up,” he says. “Not and its imitators is showing no sign of to sound all cliché.” The Steinbergs, who slowing down. Eccles is insistent that have already left the premises, win $70,000. fantasy sports and gambling are “comThe $2 million grand prize goes to pletely different categories,” and says a Hanson, the trainer from Pasadena and the recent survey showed that 70 percent of only FFFC contestant to pick Cincinnati’s FanDuel’s players don’t partake in con- Jeremy Hill, who ran for 150 yards and two ventional sports touchdowns. A few well-liquored friends The FanDuel championbetting or play hug Hanson and chant “Scott! Scott! Scott!” ship at the Cosmopolitan poker for money. Someone at a nearby table mutters, “What in Las Vegas The m o r e if I yell ‘F--- that guy.’ ” immediate concern for Eccles and his “I’m having an out-of-body experifellow fantasy-sports entrepreneurs is ence,” says Hanson’s wife, Danielle, who’s the casino-like problem of keeping both been crying. She turns to her husband. “I’m heavy spenders and casual players happy. sorry for telling you to come to bed when The companies count on the big players you wanted to stay up and play your games.” for most of their revenue, but the skill A few days later, after publicity photos, and spreadsheet energy invested by a FanDuel-arranged private jet back to Los people such as the Steinbergs could Angeles, and a visit to a BMW dealership make it difficult for amateurs to win to buy Danielle a new 428i, Hanson says and stay engaged. “You need the sharks he and his wife plan to start a family. He’s and the minnows,” says Adam Krejcik of since won another $25,000 in a fantasy basEilers Research. “If it’s just a bunch of ketball tournament and is thinking about a high-volume guys who run models and new career. “I’d consider doing the whole it’s a hard-core game then you’re never stay-at-home dad slash daily fantasy-sports going to get your average player or sports player thing,” he says. 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FELON OR MARK? 64

Joe Sigelman was celebrated for cleaning up corruption in countries where he did business. Now he faces a trial for bribery By Paul M. Barrett

Standing in his Miami condo, Joseph Sigelman eyed his attorney warily. The two had worked together for eight years, and they considered themselves good friends. But there was something off about this meeting. The lawyer, Gregory Weisman, had called Sigelman two days earlier to say that agents from the Federal Bureau of Investigation had turned up unannounced at his New Jersey home. The FBI questioned Weisman about payments allegedly made by Sigelman’s former oilfield services company in Bogotá to a Colombian government official—payments that appeared to be related to securing a valuable contract. The Bureau had e-mails and bank transfers, and said the Americans had broken U.S. law. They said it was bribery. Weisman told Sigelman he’d professed ignorance to the FBI but that the agents didn’t seem satisfied. Weisman asked to

fly down to meet Sigelman at his home. He arrived on Dec. 15, 2012. When Sigelman greeted him at the door, Weisman seemed rattled. Sigelman, tired after a 30-hour journey from Manila, where he ran another company, did his best to reassure the lawyer. “Whatever this is about,” Sigelman said, “I’m ready to be with you.” “And I’m with you, but I’m extremely scared,” Weisman responded. The FBI was “asking about those payments that you had me make,” he continued. “What deal was that even in connection with? I don’t even know.” Sigelman grew suspicious. Weisman had worked for him at PetroTiger, a company Sigelman started in 2008 to serve oil producers operating in the Colombian rainforest. Their tenure at PetroTiger ended abruptly in 2011 when the

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company’s Colombian-dominated board of directors ousted Sigelman in a bitter management shakeup. Weisman had been a loyal employee but now seemed to be fishing for an incriminating admission. Bizarre as it seemed—like something out of a TV crime drama—Sigelman asked: Was Weisman wearing a wire? He demanded that Weisman lift his shirt. No wire visible. Only later would Sigelman learn that Weisman was wearing a tiny sound-enabled camera and recording the whole thing. Their uneasy conversation continued. “I don’t think there’s anything to be concerned about,” Sigelman said. “We paid a guy. We paid a consultant. ... The point is, this wasn’t a bribe in any way, shape, or form.” A decade ago, Sigelman, now 43, earned widespread notice—and a modest fortune— for having co-founded, run, and then sold a successful Wall Street outsourcing company in Chennai, India, called Office Tiger. This magazine, the Economist, the Wall Street Journal, and many others celebrated Office Tiger for helping banks and law firms to cut costs and send their document work overseas. Harvard Business School, where Sigelman earned his MBA, published an admiring case study. In 2004 the acclaimed journalist Katherine Boo wrote a long, glowing article about Office Tiger for the New Yorker. Even though Sigelman profited by exporting American jobs, Boo portrayed him as a boy scout evangelist of meritocracy. He’d thrived in roughand-tumble India, she wrote, “without the grease of government bribes.” All of which is difficult to reconcile with the Miami Vice scene that played out in Sigelman’s waterside apartment in December 2012. At one point, Sigelman told Weisman that in light of the government’s sniffing around, they needed to stay close, “like this,” which Sigelman illustrated by pressing two fingers together. As it turned out, it was already too late for vows of loyalty or attorney-client confidences. Sigelman didn’t confess to wrongdoing, but the FBI concluded that his fear of surveillance and admonishment of Weisman—“relax, because if you don’t, we’ll be stupid and do something stupid”—bespoke a guilty mindset. Today, Sigelman faces six felony counts related to PetroTiger. Accusing him of bribery, accepting an illegal kickback, and laundering funds, the U.S. Department of Justice is promoting his case as an illustration of its seriousness about fighting corporate corruption. Enacted in 1977, the Foreign Corrupt Practices Act (FCPA) prohibits American businesses, and foreign companies active in the U.S., from bribing government officials overseas.

The Obama administration has stepped up enforcement, bringing more complicated cases and seeking to hold individual executives culpable. Over the last six years, more than 50 corporations, including Alcoa, Total, and Weatherford International, have paid penalties and forfeitures totaling $3.8 billion. Sigelman has pleaded not guilty, and while his lawyer predicts an acquittal at a trial scheduled for April, he has a tough fight ahead. PetroTiger has provided evidence of his alleged wrongdoing to the U.S. government, while Weisman and another former PetroTiger executive have pleaded guilty and are expected to testify against him in exchange for leniency. Sigelman declined to comment for this article, but his legal team agreed to confirm certain facts. “What they say Joe did in Colombia—

where he didn’t understand the business environment or even the language. Seeing himself as an ethical exemplar, he didn’t anticipate that internal feuding at PetroTiger would result in his board turning him over to U.S. prosecutors who happened to be stepping up their hunt for corrupt executives. What remains unresolved, however, is the ultimate question of whether the outsourcing wunderkind crossed the line or was set up—or both. Sigelman is an ordinary-looking man of average height and build. He keeps his hair short and wears unflashy blue suits. He listens and speaks with earnest intensity. Friends say he’s always been a workaholic and kind of a nerd. He came up with the concept for a new kind of Indian outsourcing company

“JOE IS NOT THE EASIEST BOSS. HE COULD BE OBSESSIVE AND A PERFECTIONIST. HE TOOK THE WORK ETHIC TO AN EXTREME. BUT HE HAD ZERO TOLERANCE FOR DISHONESTY” it can’t be true, and I will never think it’s true,” says Vaidehi Krishnan, a former analyst at Office Tiger who now works for a humanitarian group in the Philippines. “Joe is not the easiest boss,” she adds. “He could be obsessive and a perfectionist. He took the work ethic to an extreme. But he had zero tolerance for dishonesty.” Sigelman’s rigidity helps explain his current predicament, says William Tosh, PetroTiger’s former head of security. “Joe wouldn’t put up with the corruption in Colombia. He was firing people and pointing fingers,” Tosh says. The backlash, he adds, proved fierce. His supporters acknowledge that Sigelman’s considerable self-confidence, bolstered by his success in India, may have worked against him in Colombia,

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during a late-night phone call in 1999 with Randy Altschuler, his best friend from Princeton. They’d met a decade earlier: striving, grades-focused, middle-class boys from New York. Sigelman grew up on Staten Island, the son of a family-practice physician and his office manager wife. Joe’s parents enrolled him at Saint Ann’s, an expensive private school in Brooklyn. The hours-long daily public-transit commutes let him get ahead on homework. At college, classmates recall, Sigelman saved time and money by dining on matzo and applesauce in his dorm room. Upon graduation in 1993, standard-issue Ivy League ambition propelled him toward business school and investment banking. In 1999, Sigelman was working for Goldman Sachs and Altschuler for the


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private equity firm Blackstone. Killing time on the phone one evening while waiting for their administrative staffs to generate fresh versions of client presentations, they talked about resentful typists who would’ve preferred to be writing screenplays or Broadway lyrics. General Electric and other efficiency-minded corporations shipped scut work to India, where an educated workforce leapt at salaries a fraction of those paid in New York. Why not start an outsourcer catering to investment banks and law firms? In honor of Princeton’s mascot, they’d call it Office Tiger. Colleagues expressed skepticism that Wall Street would entrust billion-dollar documents to anonymous South Asians supervised by a pair of neophyte entrepreneurs. Sigelman’s mother, Diane, shared this doubt. “You have Princeton, Harvard Business School, and Goldman Sachs,” she told her son, “and now you want to go to India and be unemployed?” Office Tiger started in a sheet-metal shack in Chennai, India’s fourth-largest city. At first, work was sparse, and the company lost money for three years. The post-dotcom-bust recession of 2001-02 helped, though, as Wall Street laid off tens of thousands of back-office employees. Persuaded by Sigelman and Altschuler to experiment with the magic of “wage arbitrage,” Credit Suisse and KPMG signed on as clients; major law firms followed. The company turned a profit in 2003, its fourth year. It expanded to more than 1,000 employees and soon had 8 of the 12 biggest Wall Street banks as customers, recalls former Chief Operating Officer Lonnie Sapp. “We moved from doing just PowerPoints and basic stuff to higher-margin securities research and legal analysis.” Sigelman oversaw operations in Chennai, while Altschuler, who declined to comment on the record for this article, focused on finance from Manhattan. Sigelman lived near the office at the Taj Hotel and traveled by auto-rickshaw. “Tigers,” as he referred to his employees, put their place of employment on their wedding invitations. In a caste-conscious culture, “Joe taught us by example that discipline and achievement matter more than social status,” says his former aide Krishnan. “Joe is our Harvard Business School,” another employee told the New Yorker’s Boo. “We watch his energy and aggression and try to learn.” In India, Sapp says, strict rules were essential to prevent graft. Suppliers offered kickbacks; regulators looked for bribes. Sigelman would have none of it. “I personally saw him throw one guy out of the office” for offering a kickback, Sapp recalls. “Joe got upset at any hint of cutting corners.”

America, told friends that his track record in India portended similar success in Colombia. Another way of looking at it is that he was about to get in over his head.

Sigelman graduates from Princeton in 1993

In 2006 the Sundance Channel broadcast a documentary called Office Tigers that showed Sigelman zealously enforcing Western cubicle culture. In one scene, he demands of employees: “Where’s your tie? Put it on. Put it on right now.” His sternness melts, though, when employees throw him a birthday party with a sheet cake and cardboard hats. “This is the company I call home,” he tells them. “This is my family.” In business, of course, even family gets monetized, and Office Tiger’s growing value attracted suitors waving fat checkbooks. In 2005, this magazine anointed the company one of its 25 “Stars of Asia,” noting its annual revenue of $100 million and a low-wage payroll of 3,000. The next year, one of Office Tiger’s largest clients, Chicago-based publisher RR Donnelley, acquired the seven-year-old company for $250 million, a substantial chunk of which Sigelman and Altschuler pocketed. Looking for new opportunities, Sigelman turned to another Princeton classmate. A well-traveled multilinguist, Knut Hammarskjöld was a grand-nephew of Dag Hammarskjöld, the Swedish diplomat and secretary-general of the United Nations in the 1950s. Knut had pursued unlikely energy-industry investments in such places as Afghanistan. In 2007 he was pitching oil in Colombia. As the Latin American country’s political instability abated, drilling in the rainforest was expanding. At Hammarskjöld’s invitation, Sigelman took a helicopter tour of well platforms in the jungle and chatted in Bogotá with local investors. About a year later, in May 2008, the duo incorporated PetroTiger, which Sigelman conceived of as an energybusiness analogue to Office Tiger. Driven by American efficiency, the new company would provide oil producers with reliable, low-price outsourced services. Sigelman, though he lacked familiarity with Latin

Serving as co-CEOs, Sigelman and Hammarskjöld raised tens of millions of dollars from Colombian pension funds and private equity firms. With that money, they swiftly acquired three small Latin American contractors. By 2010 the consolidated operation had 2,400 employees and revenue of almost $170 million, according to legal filings. PetroTiger wasn’t profitable, however, and its investors grew increasingly impatient over when they’d see a return, legal filings and internal company documents show. Through their lawyers, Hammarskjöld and Weisman declined to comment. The debate over long-term growth vs. short-term profit wasn’t the only source of tension. Sigelman and the small team of non-Colombians he brought in, including Weisman, discovered that the boltedtogether company was leaking millions of dollars as a result of warehouse theft, dubious purchase orders, and payments to ghost employees, company documents show. In contrast to the carefully vetted Indian workforce Sigelman assembled in Chennai, PetroTiger’s payroll was riddled with graft, says Tosh, the former head of security. “The level of thievery was unlike anything I’d ever seen.” Sigelman launched a series of internal audits in 2009 and 2010, including a “reverse sting” in which Tosh arranged for investigators to offer suspect workers money for stolen company equipment. “We were working our way up through the supply chain, firing people by the dozens because they were dirty,” Tosh says. “Some of the people Joe was weeding out had personal ties to the investors’ representatives on the board of directors. It started to get very dicey.” Sigelman took to issuing ethics sermons—delivered via e-mail and companywide memos—that rubbed many Colombians the wrong way, Tosh and another former PetroTiger executive say. Most fatefully, Sigelman made an enemy of Luis Plata, the chairman of PetroTiger’s board. In 2010, while serving as Colombia’s minister of commerce, Plata had introduced Sigelman to representatives of Alberta Investment Management Corp., a giant Canadian pension fund. AIMCo invested some $80 million in PetroTiger. When Plata left government in August 2010, AIMCo designated him as its board representative, and in November he became chairman. According to a subsequent U.S. mediation filing by Sigelman, one

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of Plata’s first moves was to ask Sigelman for a $1 million payment for the AIMCo introduction. Sigelman balked, saying he’d need full board approval. Plata allegedly then suggested that Sigelman make the $1 million payment himself, which Sigelman refused to do, leading to deep antagonism between the two men. In the mediation, PetroTiger denied all of Sigelman’s accusations. Plata, who now heads a corporate-sponsored organization called ProBogotá, didn’t respond to numerous telephone and e-mail requests for comment. A spokesman for AIMCo declined to comment. In a February 2011 memo to senior Pe t ro T i ge r m a n a ge r s , S i ge l m a n denounced what he called the “morally and reprehensibly atrocious rot” within the company and threatened to have wrongdoers prosecuted. He never got the chance. The next month, the board ousted Sigelman, Weisman, and several other senior executives. Explaining the firings in a U.S. court filing last year, PetroTiger’s U.S. law firm, Sidley Austin, said: “Concerns arose regarding PetroTiger’s financial performance and the former managers’ transparency with respect to corporate governance, among other concerns.” Sigelman’s “misconduct has ... resulted in great burden to his former employer,” the law firm added, describing PetroTiger as a “conscientious business.” Sidley partner John Kuster declined in phone conversations to respond to Sigelman’s allegations about Plata or the “rot” within PetroTiger. In June 2011, American lawyers representing Sigelman threatened to sue PetroTiger over his firing and, in the process, reveal the alleged $1 million demand by Plata, among other internal

strife. Shortly thereafter, Sidley Austin approached the U.S. Justice Department on PetroTiger’s behalf, court filings show. Sidley provided prosecutors with e-mail and documents intended to demonstrate that Sigelman violated the FCPA. One way for a corporate board to mitigate prosecution under the anti-corruption law, or avoid it altogether, is to shift blame to individuals. That appears to be what PetroTiger’s board did. The company’s “voluntary disclosures [to prosecutors] were of the type that are routinely conducted by conscientious businesses,” Sidley Austin said in the filing. In return, the Justice Department agreed not to name PetroTiger as a corporate defendant. For a while, Sigelman remained oblivious to the turn his legal situation had taken. In 2010 he married a former banker he’d met during his days in Chennai. They bought the waterfront condo in Miami and started a family. In 2012 he and PetroTiger agreed they wouldn’t sue each other, and Sigelman surrendered claims to millions of dollars in shares. He redirected his energies toward Atlantic, Gulf & Pacific, a down-on-itsluck Manila building contractor he’d begun investing in while still enmeshed at PetroTiger. Eventually he led a buyout that transformed AG&P into a “modular construction” outsourcer serving such customers as BP, Chevron, and Bechtel. Bristling with advanced instrumentation, AG&P’s prefab building blocks travel thousands of miles by ship before they’re fitted together, Lego-like, at production facilities in Australia, Asia, and the U.S. As a hands-on chairman, Sigelman spent much of his time in Manila and swiftly expanded AG&P’s sprawling lowwage construction yards from 300 workers

A 2006 visit to an orphanage in Chennai, India

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in mid-2011 to 7,000 two years later. “I love the Philippines, and the best advantage is the workforce,” he told the Philippine Daily Inquirer in August 2013. Three months later, he won Expatriate Executive of the Year honors at the 2013 Asia CEO Awards in Manila. Despite the unsettling conversation with Weisman in Miami in December 2012, he willed himself not to fret about Colombia and the FBI. In May 2013, Manila immigration authorities, acting on a request from U.S. law enforcement, declined to renew his visa. Sigelman hired attorneys and volunteered to talk to the Justice Department. The visa then came through, and prosecutors said they didn’t need to question him. He tried again to push lingering anxieties out of his mind. But arriving at the Manila airport on Jan. 3, 2014, Sigelman was pulled from the passport line and arrested. Eager to get him into custody within the U.S., FBI agents put him on a plane to the American territory of Guam, where he remained in a stifling island prison for several days. The only person he was allowed to contact while in Guam was a local lawyer; he couldn’t call his wife. The lockup had a deck of cards, a single TV with bad reception, and no other diversions. In the heat, a fellow detainee loaned the businessman a pair of shorts. By Jan. 8, 2014, agents had transported Sigelman via Honolulu to New Jersey. The Justice Department brought the FCPA charges in federal court in Camden, near PetroTiger’s former U.S. mailing address at Weisman’s home. Weisman, who had been cooperating with the FBI for more than a year, formally pleaded guilty on Nov. 8, 2013, to conspiracy to violate the FCPA. Hammarskjöld was charged the same day in a sealed complaint and arrested 12 days later when he arrived at the airport in Newark. Hammarskjöld also pleaded guilty. For a Jan. 8 bail hearing, U.S. Magistrate Judge Joel Schneider ordered that Sigelman’s parents travel from their home on Staten Island to the Camden courtroom. After his family put up $4.4 million in bail money, Sigelman was released pending trial. The government charged him with two schemes. The first is a payment of $333,500—divided into four installments— to an official of the Colombian national oil company, Ecopetrol, for his assistance in securing a $40 million contract for PetroTiger. Wire transfer documents from 2010 indicate that Weisman sent the money from a PetroTiger account in New York to the official in Colombia. The government alleges that Weisman did this at Sigelman’s instruction and with Ham-


HOW COULD SIGELMAN, BY ALL ACCOUNTS AN INTELLIGENT MAN, HAVE CARRIED OUT A CONSPIRACY USING HIS OWN BANK AND E-MAIL ACCOUNTS? marskjöld’s involvement. Weisman initially tried to wire the money to the official’s wife, but when that transfer didn’t work, he sent the cash directly to the official. “Sigelman and his co-conspirators then took steps to conceal the bribe payments from PetroTiger’s board members,” according to the government. The alleged bribe came to light after Sigelman’s ouster, according to Sidley Austin. The law firm said it discovered phony invoices from the Ecopetrol official’s wife for consulting services she never provided. The government learned about the second alleged scheme from Weisman. After the FBI confronted him, Weisman described payments in 2009 to Sigelman from the sellers of a company PetroTiger acquired. The payments were allegedly a kickback provided in exchange for an inflated purchase price. Bank records show that the sellers wired $397,225 to a Sigelman bank account in Manila, the government contends. He allegedly kept $239,015, dividing the remainder between Hammarskjöld and Weisman. According to prosecutors, the three men “created a ‘side letter’ to falsely justify the payments and used the code name ‘Manila Split’ to refer to the payments among themselves.” (It was Weisman who typed “Manila Split” into the subject line of an e-mail to Sigelman.) Sigelman’s lead criminal defense lawyer, William Burck of Quinn Emanuel Urquhart & Sullivan, declined to comment for this article beyond saying his client looks forward to exoneration at trial. Based on court filings and interviews with people familiar with the case, one can discern the essentials of Sigelman’s defense. Burck likely won’t dispute the various payments in question so much as he will try to cast doubt on what they represented to Sigelman. The defense proba-

bly will contend that Hammarskjöld may have known the Ecopetrol executive was a government official within the meaning of the FCPA, but Sigelman didn’t. “This was Knut’s big thing,” Sigelman told Weisman during their recorded Miami conversation. “All this was, was a friend of Knut’s who supposedly was going to be able to help us as an adviser to get a deal.” As far as Sigelman knew, this argument will go, the payments were lawful compensation to an ex-official, akin to hiring a former Washington official as a lobbyist or consultant. As for the abortive ruse with the Colombian’s wife, “I did that as a favor to him, because he didn’t want to pay tax,” Sigelman told Weisman in Miami. “Otherwise he would have wanted more money.” In any event, the defense will likely argue, the failed deception couldn’t have been terribly important, because the Americans ultimately sent the money undisguised to the Ecopetrol official himself. In a similar vein, the defense probably will contend that what the government calls a kickback was in fact part of an innocent side deal that Sigelman did little to conceal. The subtext of the entire defense appears to be that Sigelman, by all accounts an intelligent man, would have to have been an exceedingly dumb crook to arrange a conspiracy using his own bank and e-mail accounts. Where, the defense will ask, posing a question that commonly arises when FCPA cases go to trial, is the evidence of criminal intent? That issue, among others, helped cause the collapse in 2012 of what was known as the Africa Sting prosecution. In that case, prosecutors originally charged 22 gun-industry executives with conspiring to bribe FBI informants they allegedly thought represented the government of Gabon in a small-arms deal. A Justice Department spokesman

declined to comment on the Sigelman case. The government’s comeback on criminal intent will likely be that smart people do stupid things all the time in search of an extra buck. In Miami, prosecutors argued in a Jan. 8 filing, Sigelman demonstrated a guilty conscience when he repeatedly “advised Weisman on how best to evade detection”: “You have a chance to regroup, go on vacation, collect yourself, come out f---ing strong. Greg, I want that,” Sigelman told his attorney. In a speech on the FCPA in November, Leslie Caldwell, the assistant attorney general overseeing the criminal division, cited the Sigelman indictment when describing how the Justice Department is “focusing our attention on bribes of consequence— ones that fundamentally undermine confidence in the markets and governments.” The FCPA remains a department priority, and under pressure some companies are willing to concede misconduct. On Dec. 22, the French power giant Alstom agreed to plead guilty and pay $772 million in penalties. Over 11 years, the government said, Alstom paid more than $75 million in bribes to secure $4 billion in contracts around the world, leading to profits of some $300 million. In announcing the Alstom settlement, the largest ever under the FCPA, prosecutors emphasized that the company had refused for several years to cooperate with the investigation. “We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation,” Caldwell said in a prepared statement. PetroTiger, to Sigelman’s chagrin, provides a case study of the benefits available to a company that heeds prosecutors and hustles into the Justice Department to serve up its former CEO on a platter. While awaiting trial, Sigelman is living with his wife and two small children in Miami. Although he was never much of an athlete, he’s taken up outrigger canoeing and rows 30 miles a week. He remains characteristically feisty, friends say. During the secretly recorded December 2012 conversation in Miami, he told Weisman not to make the same mistake as Mathew Martoma, a former hedge fund manager sentenced last September to nine years in prison for insider trading in the SAC Capital case. When the FBI first approached Martoma at his home, the suspect fainted on his front lawn. “And then that’s when they knew like obviously the guy’s guilty of something,” Sigelman said. “Right,” Weisman answered. “You can’t faint,” Sigelman said. —With Nathan Gill

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YOUR NEW STARBUCKS ORDER

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TARGET’S DRESS CODE

AS THE MEN IN BLAZERS, TWO SCRAPPY BRITISH EXPATS ARE TURNING U.S. FANS ON TO THE W O R L D ’ S B I G G E ST S P O RT. BY I R A B O U D WAY WorldMags.net

Photographs by Logan Jackson


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Sports

he set for the Men in Blazers show measures 11 feet by 11 feet. A decentsize hot tub would fill it. The men in blazers themselves, Michael Davies and Roger Bennett, sit shoulder-to-shoulder on stools and talk to a camera 4 feet away. Their subject is English Premier League soccer, which, to them, is the world’s most elaborate and macho drama. They discuss players’ haircuts and goal celebrations, managers’ wardrobes and fans’ gestures—all with abundant pop culture and literary references. “Do you know Happy Gilmore?” Bennett asks, sitting in a Manhattan office as the two finish writing the show one Monday in early December. “The Bob Barker fight scene?” Bennett, 44 and from Liverpool, is wearing a tweed blazer from Freemans Sporting Club. Davies, 48 and from South London, sports a navy jacket. Their show’s title is not a metaphor. “There’s three things in this world that you need,” Bennett often says, quoting Robin Williams in The Fisher King. “Respect for all kinds of life, a nice bowel movement on a regular basis, and a navy blazer.” In this night’s show, Bennett will compare Chelsea manager Jose Mourinho watching the opposing team score to Barker being punched in the face in Happy Gilmore. During the halfhour, he’ll also reference E.M. Forster’s Maurice, Ty Cobb, Billy Elliot, and The Boys From Brazil. Davies, for his part, segues from clip to clip, adding wry asides and keeping time using an iPhone on the table in front of them. It’s next to the frequently replenished glasses of white wine. The pair of balding Englishmen cracking wise about soccer is NBC Sports Network’s answer to Monday Night Football on ESPN, which averages 13 million viewers. When Men in Blazers first aired on Sept. 22, it drew 24,000 viewers, according to Nielsen data provided by Horizon Media. Each week the show—it airs twice on Monday night and once on Saturday morning—now averages about 160,000 viewers combined. “Monday Night Football is a very tough thing to go up against, unless you are

“THE HOSTS CAN TALK

The Blacklist or The Voice,” says Jon Miller, president of programming for NBC Sports. The midnight re-airing of the show on Dec. 1, after the NFL game had ended, drew a series high of 143,000 viewers while competing against ESPN’s SportsCenter. Soccer has the fastest-growing sports audience in the U.S., as young people from all backgrounds add to a traditionally Hispanic fan base. According to Nielsen, the average viewer’s age during the 2014 FIFA World Cup was 38. No other major professional sporting event has an average younger than 40. “The driver for the sport is millennials,” says John Guppy, founder of Gilt Edge Soccer Marketing, a branding agency in Illinois. “It’s young. It’s tech savvy and very globally aware.” The same crowd follows Men in Blazers, whose median viewer is 38. Guppy divides the U.S. audience into three camps: “agnostics,” who follow the sport anywhere they can; “Europhiles,” who prefer top European leagues; and “Euro snobs,” who watch those leagues exclusively. The core audience for Men in Blazers, he says, are the Europhiles. They’re the same people who read Howler magazine, a highbrow soccer quarterly, and create Lego-man

Davies, left, and Bennett label things with handmade tags instead of standard television graphics. The closet-size studio is filled with Applebee’s-style memorabilia.

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PHOTOGRAPHS BY LOGAN JACKSON FOR BLOOMBERG BUSINESSWEEK; GROOMING: REBECCA GARCIA

Etc.


A N A LY S I S ,

C L E A R LY DEEP SOCCER BUT THEY ALSO HAVE THE ABILITY TO ADD THIS

Etc.

on mixed martial arts, and The Dave Dameshek Football Program. For the World Cup last summer, ESPN sent Bennett and Davies to Brazil to do short segments for its postmatch shows. While the network’s main studio overlooked Copacabana Beach in Rio de Janeiro, the pair was put in a windowless closet they dubbed “Bob Ley’s panic room,” after the longtime ESPN soccer anchor. From that cramped space, the two mused on the sideline antics of Mexico’s manager, Miguel Herrera, the lyrics of Barry Manilow, and the diminutive size of Brazilian bananas. “It was clear to us that 2014 was going to be the big springboard that would put football very much over the top,” Bennett says, “and hopefully create a big enough wave for a suboptimal little product like ours to surf gloriously along with it.” NBCUniversal executives began following the men in blazers in 2012, when the company relaunched its 24-hour cable sports network and paid $250 million for three seasons of U.S. rights to the English Premier League. “We tried to make ourselves as smart as we could about the different aspects of people’s allegiance to the Premier League,” says Miller, the president of programming. “These guys kept coming up.” The network had to wait until Davies and Bennett finished their ESPN contract, which ran through the 2014 World Cup. In August, NBC signed them to a multiyear deal for the new show. The production company Embassy Row, which Davies founded in 2005 and still runs, produces Men in Blazers from its offices on the far west side of Lower Manhattan. (The studio, now a subsidiary of Sony Pictures Entertainment, also makes Bravo’s hit Watch What Happens Live.) There, in what they call “the crap part of SoHo,” the hosts replicated their Rio panic room. “We ended up loving the closet,” Davies says. “It was intimate.” They have three producers. The budget, Davies says, is “a fraction of what any other talk show costs.” The podcast is even cheaper, and it routinely ranks among the top 10 in sports on the iTunes charts. On each episode, before they recap matches, Davies and Bennett conspicuously crack open cans of Guinness. (It may be the world’s most natural product placement.) At the end of the show, they make recommendations for their “Amazon emporium,” which provides them with a small cut of sales. For the holidays, they collaborated with the boutique necktie manufacturer General Knot on a limited edition of 1,000 Men in Blazers ties, for $99 each, which sold out. With the NBC deal, product placement, and merchandise, Davies expects Men in Blazers to reach $7 million in annual revenue within the next three years, most of it profit. “We think we’re able to do this business at about an 80 to 85 percent margin,” he says. Their contract with NBC includes an option to leave when the network’s Premier League rights expire in 2016. As a pair, he says, they’ll likely follow the league and the World Cup wherever they live on American television, which would mean joining Fox Sports for the World Cup in 2018. For now, though, they’re focused on this week’s taping. As recording comes to a close at 6:30 p.m., they’re trying to get soap bubbles to blow across the room for the weekly “moment of wow.” It’s not going well. “You should almost blow them from behind the lens forward,” Davies says to a producer. Three and a half hours later, when the show airs, a few dozen bubbles will float lazily across the screen.

Q UC IO MRE D IKC DYE L,I V E R Y ”

versions of famous goals that get tens of thousands of views on YouTube. Bennett and Davies have no interest in matching the dazzling production of a show such as SportsCenter, for which ESPN just spent $125 million to build a 194,000-square-foot warehouse. “You can have incredible effects and create a Leni Riefenstahl-esque set where the broadcasters are dwarfed by their surround,” Bennett says, “but there is something refreshing about sticking two blokes in a panic room.” The two blokes first met at the New York wedding of a mutual friend in 2006, on the same day as the World Cup final. Bennett was a freelance writer and editor. (He contributed to Bloomberg Businessweek.) Davies was a successful TV producer who brought Who Wants to Be a Millionaire to ABC. They bonded over the misery of being stuck on a boat circling Manhattan during the match. Four years later they met again, when they both had freelance gigs with ESPN writing about the 2010 World Cup. They decided to pool their efforts and record a podcast called Off the Ball. When the tournament ended, they renamed it Men in Blazers and, in 2011, licensed it to ESPN’s sports and pop culture website Grantland. The podcast, now distributed as part of the NBC deal, runs close to two hours and draws in 200,000 to 300,000 listeners weekly, Davies says. Mostly it’s an extended version of the TV show. Bennett and Davies, who call each other “Rog” and “Davo,” leisurely analyze matches and chat about life outside of soccer. Rog: “Why do I hate fist bumps?” Davo: “We are very, very close friends, Rog, but I wouldn’t say that you are a lover of male intimacy.” Rog: “I love shaking hands.” Davo: “Exactly. You are not a big hugger.” Although they’re both middle-age British expats, the two have starkly different personalities. Davies is a bon vivant, openly fond of shallow pleasures. Bennett is dark. Davies backs Chelsea, the London club owned by Russian billionaire Roman Abramovich that’s won the league three times in the past decade. Bennett supports Everton, the second-best club in Liverpool, whose last English league title was in 1987. Each week, the two recommend products to their listeners. Davies goes with golf gloves and chew toys for dogs. Bennett suggests the poetry of John Berryman and Primo Levi’s Holocaust memoirs. “The hosts clearly can talk deep soccer analysis, but they also have the ability to add this quirky, comedic delivery,” Guppy says. “If they get that recipe right, it’s a unique offering.” Bill Simmons pioneered the same approach as “the Sports Guy” in the late ’90s on the Web. Now there are dozens of similar podcasts such as The Fighter & the Kid,

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Etc.

Workspace

Everything in Its Place Get your space in order using the latest crop of designer desk accessories By Monica Khemsurov

Factory Deskstructure by Héctor Serrano for Seletti $58; aplusrstore.com Modeled after buildings, the five porcelain pieces have equal widths, so you can link them up in a skyline that suits your desk. Use the three with lids to hide secret notes and valuables; put writing implements in the others.

Super Stacked Set by Poppin $55; poppin.com Poppin was founded in 2009 by Chris Burch, who was inspired by his father’s complaints as a small-business owner that office supplies were ugly and overpriced. This set, available in 20 colors from navy to coral, includes two letter trays, a smaller one for accessories, a flexible silicone one, and a square jar, plus 12 pens in the same plastic with, of course, matching ink.

Formwork Collection by Industrial Facility for Herman Miller $206 as shown (also sold individually); dwr.com Made of lightweight plastic on a nonslip silicone base, each item is stackable and versatile. All can be arranged vertically or horizontally, and cantilevers extend from most to keep rubber bands or keys in reach. The sizes correspond to the dimensions of common items—a cup, for instance, fits in the middle of a masking-tape roll.

Concrete Desk Set by Magnus Pettersen for Areaware $60; areaware.com The poured-concrete tape dispenser, pencil holder, and tray weigh more than 5 pounds combined, so they have a substantial, industrial feel. Over time, striations will only improve their looks.

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PHOTOGRAPHS BY COREY OLSEN FOR BLOOMBERG BUSINESSWEEK

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Etc.

.Org Deskscape by Ladies & Gentlemen Studio and Pat Kim $250; ladiesandgentlemenstudio.com This U.S.-made wooden organizer includes adjustable metal dividers to prop up mail, along with a zigzag tray for pens, a cork block to tack notes on, and a shallow container for detritus.

W+W Stationery Series by Oliver Franz for Ideaco

Cog Desk Tidy by Tom Dixon

$50; store.leibal.com

It comes with two cups, a paperweight/pen holder, and a paper clip tray made from aluminum blocks. Traditional milling techniques give them the look of machine parts, each brass-plated and polished to a sheen that will impress—or distract—your colleagues.

$290; shophorne.com

Named W+W for the white ceramic and wood tray, which has a cubby for small items, a memo-pad holder, and a smartphone stand. Grooves prevent charging cords from slipping off your desk.

Brass Desk Set by Ferm Living $396 as shown (also sold individually); fermlivingshop.com Designed by the hip Danish brand Ferm, the solid brass set—with its alluring matte polish—features old-school organizational tools in primary shapes. The triangle is for letters; the semicircle is for books and magazines. The square folder holder can also be wall-mounted. A matching dish and tumbler finish off the handsome kit.

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The Critic

Etc.

IN HER PRIME 76

J

Jane the Virgin’s minority themes have made it a serious sitcom hit. By Claire Suddath

ane the Virgin often feels like a soap opera, full of secret identities, love triangles, and over-thetop twists. But the show, which airs on Mondays at 9 p.m. on CW, is more accurately a soap satire— with a snappy script by a former Gilmore Girls writer and an unseen narrator who mocks the show’s implausibility. (Sample voice-over: “And so Jane explained that a man professing his love on a yacht, in the snow, in front of a semirealistic background, was the epitome of romance.”) Based on a Venezuelan show of the same name, it’s basically a telenovela for people who hate telenovelas. The sitcom has also become this season’s biggest sleeper hit. According to Nielsen, roughly 1.9 million people, 68 percent of them female, tune in every week, making it CW’s biggest show in years. The network’s twentysomething audience has slipped away of late as millennials who watched Gossip Girl and The Vampire

READ, SKIM, SKIP

HOLD IT TOGETHER

READ

Diaries abandoned traditional networks for streaming content. CW, jointly owned by Warner Bros. and CBS, was losing as much as $100 million a year, says the New York Times. It needed better programming. Jane filled that void: The show will return on Jan. 19 with a Golden Globe win for its lead actor, Gina Rodriguez. Much of the show’s appeal comes from Rodriguez’s portrayal of Jane, a 23-year-old devout Catholic who’s saving herself for marriage. In the first episode, she gets accidentally inseminated with the sperm of a sexy millionaire she kissed years ago. It sounds ridiculous, and it is. But Rodriguez is charming, not grating like other romcom stars. The clean-cut Latina she plays is reminiscent of the lead from ABC’s Ugly Betty in the mid-Aughts, also adapted from a telenovela. It’s no

coincidence: The creator of Ugly Betty, Ben Silverman, is the executive producer of Jane the Virgin. Silverman’s new show is more firmly grounded in Latin culture than its forebear. There’s a lot of salsa dancing, empanadas, and even a fictional telenovela the characters love. Mexican pop singer Paulina Rubio guest stars. And most episodes explore issues related to Catholicism, language barriers, or immigration. “We wanted Jane’s Latin culture to remain intact … not make it too mainstream,” Silverman says. Betty identified as being from Queens and spoke almost entirely in English, but the Miami residents of Jane the Virgin continually switch between English and Spanish (with some subtitles). Although 17 percent of the U.S. population is Hispanic, their political issues and personal struggles rarely show up in prime time. According to a 2014 Columbia University study, only 3 percent of supporting film or TV roles go to Hispanic men. Less than 10 percent go to women. It’s improving, if slightly: Orange Is the New Black has been a boon for Latina actors and audiences. Actors Eva Longoria and Sofía Vergara have started production companies and are workshopping pilots. Yet Vergara’s Modern Family character is a stereotypical hotheaded woman with a sexy mien. And Longoria’s most successful production, Lifetime’s Devious Maids, is about a group of Beverly Hills housekeepers. “You’re starting to see Latin entertainers becoming a bigger cultural force,” Silverman says. “But most people only play lip service to it.” So, as Jane the Virgin thrives, it’s gotten less soapy. In one January episode, an emergency room doctor discovers that Jane’s grandmother is in the country illegally and says he can’t treat her. Instead, he’ll have to call immigration services. “Is that legal?” Jane’s mother asks. Then these words flash across the screen: “Yes, it really happens. Look it up. #immigrationreform.”

“WE WANTED JANE’S LATIN CULTURE TO REMAIN INTACT”

The Man Who Couldn’t Stop By David Adam The author is a sufferer of obsessive compulsive disorder and an editor at the journal Nature. By mixing his own occasionally scary personal stories with the scientific underpinnings of the disease, he’s created a harrowing and insightful memoir.

SKIM

The Sweet Spot By Christine Carter Finally, a self-help book that teaches you to “die happy.” There’s standard fare, too: unshackling yourself, mending ruptures with colleagues. It’s a bit cloying, but look for the bolded affirmations: “Tolerate the discomfort that comes with growth.”

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SKIP

Meetings Matter By Paul Axtell You could spend a few hours reading about the book’s “eight powerful strategies for remarkable conversations.” Or just while away that time in meetings, which is really the whole point. Either way: “Participate in meetings to have an impact.” That’s No. 7.


Etc.

Startups

HANDLE WITH CARE

PHOTOGRAPH BY COREY OLSEN FOR BLOOMBERG BUSINESSWEEK

X

The wine delivery app with a secret stash of affordable gems. By Gloria Dawson

ander Oxman was at a wedding a few years ago, and the couple was given a wine subscription. It seemed great until the groom tried to redeem it: The website was outdated, plus he had little control over what he received. Still, “there were real virtues to having wine shipped direct,” Oxman says. So he and two friends founded Club W, an app and website that, as of 2014, mails its own private variThe website shows etals. You start with a basic vintages are running palate quiz—do you like salt? which low, so you can stock citrus?—then receive three up on your favorites before they’re gone reds or whites for $45. Once you rate those, a Netflix-style algorithm might suggest the oaky Potager White Rhône Blend or the brighter Little Sur Chardonnay for next month’s trio. Haven’t heard of these wines? That’s by design. Club W teams up with 15 vineyards from California, Chile, and elsewhere to create exclusive vintages, then bottles the juice itself, which offers “the economies of scale of a big winery but the focus and diversity of a small craft one,” Oxman says. So far, Club W has shipped a million bottles. And the company’s raised more than $12 million in venture capital since 2013 to build up its offerings. “E-commerce 2.0 is all about companies that own the product, not just the delivery,” he says. That doesn’t mean the delivery part is easy: Only 38 states permit it, and Club W had to secure various licenses from the U.S. government. “They are still paranoid about the mob running the alcohol business,” Oxman says. “So my wife and I had to go get fingerprinted.”

Club W (clubw.com) offers about 30 wines at a time, sold individually for $13 to $16

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Each bottle comes with food pairing suggestions and recipe cards

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Caffeine

COFFEE, MATE

V 78

Starbucks goes full snob with Australia’s flat white By Venessa Wong

isit any Starbucks this January, and you’ll see a wall diagram trumpeting the company’s newest coffee drink: the flat white, a riff on a latte that’s been popular in Australia and New Zealand since the 1980s. Starbucks romantically describes it as “ristretto espresso shots [that] rise to the surface with velvety steamed milk.” Instead of foam on top, it has more compact microfoam. On the scale of “milk forwardness,” as the chart puts it, the flat white has more dairy than a macchiato but less than a cappuccino. Containing two shots of espresso, “this is a stronger, bolder beverage than a standard latte or cappuccino,” says Starbucks spokeswoman Megan Adams. When Starbucks announces something new, it’s typically for a limited time only; even the pumpkin spice latte—so famous it’s become an Internet meme—has remained a fall exclusive since it was introduced in 2003. But that’s not the case with the flat white; as of Jan. 6, all 12,000 Starbucks locations in the U.S. added the obscure drink to the menu of “espresso classics” that are available year-round. The price varies from $3.75 to $4.25, depending on the market. Historically, product launches have greatly affected the company’s sales. The hazelnut macchiato and vanilla spice latte added two points of comparable-sales growth when they were on sale for a few months in 2013, executives said at an investor conference in 2014. With the flat white, “they’re going to increase understanding of different coffee drinks,” says George Mason University economist Alex Tabarrok, who blogged on the website

Marginal Revolution about the drink. “But it’s hard to imagine a big impact on sales.” When he tried the flat white, he found it too similar to a latte. “They have a little work to do in perfecting the pour.” Before Starbucks discovered the flat white, it cropped up stateside in hip precincts of New York and San Francisco. At Toby’s Estate Coffee, an Australian-owned cafe in the Williamsburg neighborhood of Brooklyn, employees teach $5 classes on making one properly. In 2011 Australian actor Hugh Jackman opened Laughing Man in Manhattan’s Tribeca, where his staff serves a flat white that he describes as “a latte with a little less

milk and more espresso.” Nationally, highend coffee chains such as Intelligentsia and Blue Bottle began serving the drink a few years ago. A barista at Intelligentsia’s Venice, Calif., location says the people who order it are largely tourists already familiar with the beverage: “The flat white is mostly known by Australians and people in the U.K.” Starbucks first tried selling its flat white Down Under, but it didn’t go well: The chain opened 84 Australian stores starting in 2000, but most closed by 2014, the same year Chief Executive Officer Howard Schultz handed the operation over to a licensee. Next, Starbucks brought the drink to British customers in 2010. It took off immediately. “Several competitors in the U.K. are now attempting to play catch-up in our wake,” said John Culver, the president of Starbucks’s international business at the time. Now flat whites are sold at most coffee shops throughout the British Isles. Here in the States, “there’s a lot of curiosity around the flat white,” says Brandon Giles, a Starbucks store manager in Brooklyn. He spoke to one of his morning regulars when it came out, and the customer, a guy who normally orders a latte, said he was just excited that “he got to try something new.” Now that you can get a serviceable latte at a McDonald’s, Starbucks’s main challenge has been maintaining a distinction between its foamy drinks and the many fast-food versions. As Starbucks Chief Strategy Officer Matthew Ryan told investors last month, “We are deeply committed to being the leader at the superpremium level.” Late last year the company built a chic “tasting room” in Seattle that often has lines out the door. Starbucks also announced plans to open 100 “reserve” stores, where it will grind higher-quality beans. The flat white will require a bit more explanation. But there was a time, not so long ago, when no one had heard of a frappuccino.

ONE CUSTOMER WAS EXCITED HE “GOT TO TRY SOMETHING NEW”

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ILLUSTRATION BY SAM ISLAND

Etc.


What I Wear to Work

What’s your job? I oversee all external communications, and I also lead social media—our corporate blog, Twitter, Pinterest, and a number of platforms.

MOSSIMO

ASOS

“Guests”? We want to treat customers as guests.

What’s the dress code? We have a policy called “dress for your day.” It doesn’t have to be business attire.

Are you a big shopper? I always make a point to check out retailers we don’t have in our backyard, to see how they’re mixing and matching and what sorts of products are popping.

79

REBECCA TAYLOR

Platforms or heels? I like a platform. It’s like putting on my armor for the day: I’m serious. I’m going into the office.

J.CREW

WOLFORD

PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK

How do you pick outfits? The evening before, I’ve already thought about what I’ll wear and the one Target piece I’ll incorporate. I enjoy getting ready in the morning— it’s therapeutic. I blow my hair out every morning.

How do you have time to do that with a new baby? The Revlon Hot Air Dryer & Styler. It was a $25 Target purchase. It’s probably the one thing I can’t live without. It only takes me 15 to 20 minutes.

You must be constantly plugged in. I start on my phone at 5:30 a.m. on Twitter, to understand breaking news overnight and see if Target is being mentioned. We get 22 million people in our stores a day, so I’m also looking at what our guests are thinking about.

What’s your style? Polished, sophisticated, and a little bit girlie—I like dresses, skirts, and high heels. I’m very comfortable with the fact that I’m always a little overdressed.

Etc.

STUART WEITZMAN

DUSTEE JENKINS

36, vice president for public relations and social media, Target, Minneapolis

That’s not a typical Minneapolis look. I’m from Texas!

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Interview by Arianne Cohen


Bloomberg Businessweek (USPS 080 900) January 19 – January 25, 2015 (ISSN 0007-7135) H Issue no. 4411 Published weekly, except one week in January, March, June, and August, by Bloomberg L.P. Periodicals postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send address changes to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit4, Mississauga, ON L5T 2N1. E-mail: bwkcustserv@cdsfulfillment.com. QST#1008327064. Registered for GST as Bloomberg L.P. GST #12829 9898 RT0001. Copyright 2015 Bloomberg L.P. All rights reserved. Title registered in the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or e-mail: busweek@nrmsinc.com. Subscriber Services: Call 800 635-1200 or log on to our website: http://www.businessweek.com/ custserv/manage.htm. Educational Permissions: Copyright Clearance Center at info@copyright.com Reprints & General Permissions: The YGS Group at 800 290-5460 x100 or businessweekreprints@theYGSgroup.com. PRINTED IN THE U.S.A. CPPAP NUMBER 0414N68830

How Did I Get Here?

ALAN RABINOWITZ Co-founder and chief executive officer, Panthera

EDUCATION

Lawrence High School, Cedarhurst, N.Y., class of 1970

“I was born with a severe stutter, and the school system put me in special classes for disturbed children. But I learned early that I could talk to my pets: turtles, chameleons, hamsters. The world of animals became my reality.”

Western Maryland College, class of 1974

WORK EXPERIENCE

trap in Bhutan in 2010

1986 Author, William Collins Publishing

1986-90 Staff field zoologist, New York Zoological Society

1991-93 Senior staff zoologist, New York Zoological Society

1993-96 Asia program director, Wildlife Conservation Society

New name for the New York Zoological Society

1997-98 Director of science for Asia, WCS

1999-2005

“I got sidetracked saving the tiger in Thailand. I said I’d give it two years and then spent 10 years there.”

Director, global carnivore program, WCS

2006-08 Executive director, science and exploration program, WCS

“We’re the largest wild cat conservation organization in terms of our financial backing and the 70 scientists we have on staff. Conservation is currently winning battles but not the war. There’s a good chance we might lose the tiger.”

2008PRESENT Co-founder and CEO, Panthera

LIFE LESSONS

Collaring a jaguar in Brazil in 2010 for a 60 Minutes segment

g the strongest, intellectually or physically.”

“I was in very well with the Burmese dictators—the current president is a decent conservationist. I rediscovered the only Mongoloid pygmies in the Setting up world, the Taron.” a camera

Research fellow, New York Zoological Society

“My boss said, ‘How about you go to this little new country of Belize’— it had been British Honduras— ‘and look at jaguars?’ No one knew anything about them. I went with a backpack and surveyed the whole country.”

ein

80

“I didn’t learn to speak fluently until I was a senior, at an experimental clinic.”

M.S., Ph.D. in ecology, University of Tennessee, class of 1981

1982-85

“I wrote Jaguar: One Man’s Struggle to Establish the First Jaguar Preserve. I got on the Today show, and Prince Philip visited the preserve.”

“I ended up in a gang in Queens, so my parents moved to Long Island.”

With Panthera Vice President George Schaller

With a weight lifting medal as a teenager

yb 1. “Failure is not an option. You have to truly believe that.” 2. “Always ask big. If they say yes, you didn’t ask for enough.” 3. “You control the confrontation b

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Courtesy subject (4). Getty Images (1). Alamy (5)

Etc.


Stuck in traffic. Ideas

still moving for ward.

Your whiteboard, reinvented. Imagine you could see and write on the whiteboard when you’re not in the meeting room. With BrightLink Pro, you can. Collaborate in real-time, whether you’re in the room or across the world. Keep writing, without stopping to erase; just add digital pages. When the meeting’s done, share the notes instantly through email or a USB thumb drive, so nobody has to take a picture. BrightLink Pro turns any flat surface interactive; you don’t need a computer or software to use it. Just turn it on and see how easy it is to reinvent your whiteboard. Take a product tour now at epson.com/movingforward. Or contact an Epson collaboration specialist about introductory offers including our 1st-Time Buyer program. 800-374-7300. EPSON is a registered trademark and EPSON Exceed Your Vision is a registered logomark of Seiko Epson Corporation. BrightLink is a registered trademark of Epson America, Inc. Copyright 2014 Epson America, Inc.

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Global Chief People & Legal Officer, Molson Coors

Our goal is to delight the world’s beer drinkers. To Molson Coors, delighting the customer is more than just producing great-tasting beers. It’s the total customer service experience. That’s why the people of Molson Coors are as focused on finding ways to produce, package, and deliver great beer as they are on the recipes that make their brews so satisfying. It’s both process and product, and they are dedicated to continually improving both. At Perkins Coie, we’re as committed to delighting our clients as Molson Coors is to ensuring complete customer satisfaction. Learn more about how Perkins Coie counsels great companies at PerkinsCoie.com.

Perkins Coie LLP ATTORNEY ADVERTISING

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