BURGER KI NG I S RUN BY CHI LDREN

TheCEOwasntalivein
the70s.TheCFOisyounger
thanBritneySpears.
Meetthekidsrevolutionizing
theburgerbusiness
p42
July 28 August 3, 2014 | businessweek.com
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Snowpiercer, with the
right campaign, was a
commercial movie. And
when you have that, going
straight to VOD is
like killing it in the crib
p21
There are only two
types of companies in
Japan: the ones that have
been attacked and
the ones that just dont
know it yet
p32
There were already
a lot of smoke and mirrors
in how pet food was
advertised, and that was
the sort of stuf we were
good at
p52
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Opening Remarks The MH17 disaster gives Putin a way out in Ukraine. Can he take it? 6
Bloomberg View A lack of will hobbles Dodd-Frank Reforming the World Bank 8
Global Economics
Ethiopia and other African nations vie for the low-wage factory jobs vanishing in China 11
Amit Shah is the new leader of Indias ruling party. Hes also facing murder charges 13
Russias propaganda machine kicks into high gear 13
Clearing up the fuzzy service-sector gures 14
Americas shrinking workforce 15
Lithium could power Bolivias economic future 16
Companies/Industries
Jef Bewkes made Time Warner the worlds biggest target 19
Could Snowpiercer have been a contender? 21
Legroom may soon go the way of free meals and ne china on airlines 22
Briefs: Obamacares endless day in court; closing time in Margaritaville 23
Politics/Policy
A ood of children crossing alone into the U.S. is taxing immigration and border agencies 24
When hospitals buy clinics, often the only change is higher prices 27
Killing chickens on the run 28
Technology
Internet providers and Netix battle over the cost of streaming 31
With cyberattacks on the country increasing, Japan takes its rst hack at stopping hackers 32
One companys plan to make it big building small chips 33
Xiaomi goes after the iPhone in China 34
Innovation: A laser-equipped helmet to stimulate hair growth 35
Markets/Finance
Over a career, the diference between a strong and a weak company 401(k) can be $870,000 36
Microwaves heat up the high-speed trading war 38
IPOs are getting bigger but leaving less for public investors 39
The art worlds gender gap is beginning to shrinka little 40
Bid/Ask: CBS Outdoor Americas gets more billboards; CIT buys OneWest Bank 41
Features
Young Buns The kids running Burger King are great at cutting fat. Now its time to beef up sales 42
Cynk Hole How did a company with no assets and no revenue get a $6 billion market valuation? 48
Dog Food Fight Blue Bufalos nutritional claims have Purina barking madand ling suit 52
Etc.
With his new L.A. hotel, the Line, Andrew Zobler sets out to crush the boutique competition 59
Workplace: Yet another study shows women have a harder time getting ahead. A quiz to see how your ofce stacks up 62
The Critic: NBCs betting its new imported sitcom, Welcome to Sweden, will translate to a U.S. audience 63
Fashion: Ditch the khakis this summer for fun, ofce-appropriate patterned pants 64
Drinks: Canned beer can be quite good. A bartenders top six-pack 66
What I Wear to Work: An EBay PR executive faces the workdays battles in vintage style 67
How Did I Get Here? Robert Pittmans journey from DJ to MTV co-founder to chief of Clear Channel 68
July 28 August 3, 2014

The story is on Burger King
and how its being run by kids.
Like actual children?

Well, the CEO is 33, and the
CFO is 28, so by massive global
corporation standards, yes.
We can just set up a shoot and
pretend theyre children.
Although, we can also just
photoshop diapers on the CEO.
Shoot sounds great.
Triumphant
child king.

Contemplative
child king.
Throne with
a booster seat.

I think the booster seat gets
enough of the point across.
I understand. The children are
a crushing reminder of my
own lost youth, too.
How the cover gets made
Cover
Trail
Hungry
child king.
Three
burger kings.
2
It takes a special kind of compass to understand
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a dream our software could bring to life.
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Lei Jun 34
Lemann, Jorge Paulo 44
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Levin, Gerald 19
LinkedIn(LNKD) 34, 50
Lofgren, Zoe 25
M
Ma, Jack 39
Macedo, Alexandre 44
Maher, Bill 62
Malaysia Airlines(MAS:MK)
6, 13
Male, Jeremy 41
Marc Fisher 11
Margaritaville Casino &
Restaurant Biloxi 23
Maslany, Tatiana 63
McDonalds(MCD) 23, 44
Merkel, Angela 6
Merrick Pet Care 54
Micron Technology(MU) 33
Milhazes, Beatriz 40
Miller, Amanda Christine 67
Miller, Mark 27
Mitsubishi Heavy
Industries(7011:JP) 32
Mitchell, Joan 40
Modi, Narendra 13
Mohn, Jarl 68
Moonves, Leslie 23
Morgans Hotel Group(MHGC)
60
Mt. Gox 32
MTV Networks(VIA) 68
Murdoch, Rupert 19, 23
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NBC(CMCSA) 54, 63, 68
Nestl(NESN:VX) 54
Netix(NFLX) 21, 31
Nine West 11
Noland, Cady 40
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O
Obama, Barack 6, 8, 25
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Roberts, Brian 19
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Samsung
Electronics(005930:KS) 33
Schlosser, Herb 68
Schneiderman, Eric 38
Schrager, Ian 60
Schwartz, Daniel 44
Seacrest, Ryan 68
Severstal(CHMF:RM) 41
Shah, Amit 13
Shanghai Husi Food 23
Siddiqui, Sami 44
Silicon Valley Bank 39
Singh, Rajnath 13
Six Flags(SIX) 68
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de Barcelona 41
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41
Swinton, Tilda 22
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T
T. Rowe Price(TROW) 39
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Time Inc.(TIME) 19
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21st Century Fox(FOXA) 19, 23
Twitter(TWTR) 38, 50
Typhon Capital Management
38
Tyson(TSN) 28
U
Urban Outtters(DRI) 50
V
Van Wagner Communications 41
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Vilsack, Tom 28
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Walt Disney(DIS) 19
Weight Watchers(WTW) 54
Weinstein Co. 21
Weinstein, Harvey 21
Wendys(WEN) 44
Whole Foods Market(WFM)
36, 66
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XYZ
Xu Lele 40
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Yanukovych, Viktor 6
YouTube(GOOG) 50
Yum! Brands(YUM) 23
Zhang Huarong 11
Zobler, Andrew 60
Zuckerberg, Mark 44
Clear Channel Outdoor
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CNBC(CMCSA) 50
Colt Technology Services 38
Comcast(CMCSA) 19, 31
ConAgra(CAG) 28
ConocoPhillips(COP) 36
Cook, Tim 34
Cornyn, John 25
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DiSomma, Bill 38
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EBay(EBAY) 67
Emin, Tracey 40
ETrade(ETFC) 50
Eukanuba(PG) 54
Evans, Chris 21
EvilTwin Brewing 66
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Facebook(FB) 36, 39, 50
Favreau, Jon 60
Fidelity Investments 39
Flanders, Paul 44
Florance, Ken 31
Forrester Research(FORR) 34
Frank, Barney 27
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Galvin, William 36
Gamco Investors(GBL) 19
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Genentech 27
Gentiva Health Services(GTIV)
41
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Goldman Sachs(GS) 14, 44
Google(GOOG) 36, 39
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H
H.J. Heinz 44
Hamid, Tamim 35
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Herms 67
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Hills Pet Nutrition 54
Hollande, Franois 6
Home Depot(HD) 36
Huajian Shoes 11
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I
IbisWorld 60
IDC 33
Iger, Robert 19
Indiegogo 35
J
Janego, Jason 21
Jump Trading 38
K
Kelman, Glenn 39
Kerlikowske, R. Gil 25
Kerry, John 6
Kim, Jim Yong 8
Kindred Healthcare(KND) 41
Kobza, Josh 44
Koons, Jef 40
A
Abbott Laboratories(ABT) 36
ABC(DIS) 63
Abe, Shinzo 32
Ace Hotel 60
Ackman, William 44
Adesto Technologies 33
Adler, Nate 66
Advanced Micro
Devices(AMD) 33
Airbus Group(AIR:FP) 22
AK Steel(AKS) 41
Albright, Madeleine 62
Alfred, Mike 36
Alibaba Group Holding(BABA)
39
Allston Trading 38
Amazon.com(AMZN) 36, 39
American Airlines(AAL) 25
Anderson Valley 66
Andreessen, Marc 39
Anheuser-Busch InBev(BUD)
44
AOL(AOL) 19, 68
Apple(AAPL) 21, 33, 34, 36
Applied Materials(AMAT) 33
Art Agency Partners 40
Artnet(ART:GR) 40
AT&T(T) 19
B
Bain Capital 44
Balazs, Andr 60
Banco Bilbao Vizcaya
Argentaria(BBVA) 41
BBC America 63
Berkowitz, Howard 50
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Bewkes, Jefrey 19
Bishop, William 54
Bizo 34
Blaque Technology 50
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Blue Bufalo 54
Boeing(BA) 6, 22
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23
Burkle, Ron 60
C
Caesars Entertainment(CZR)
23
Cameron, David 6
Canalys 34
Carey, Chase 19
Carrols Restaurant
Group(TAST) 44
Carter, Kenneth 50
Cartier 67
Case, Steve 68
Catalunya Banc 41
CBS(CBS) 23
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Americas(CBSO) 41
Century 21 68
Chicago Mercantile
Exchange(CME) 38
Chipotle Mexican Grill(CMG)
44
Choi, Roy 60
Christies 40
Cisco Brewers 66
CIT Group(CIT) 41
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Clear Channel
Communications(CCMO) 68 J
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Trapped
In His
Own
Labyrinth
By Joshua Yafa
The MH17 disaster has
upended Russias plans in
Ukraine. Never one to back
down, Putin has backed
himself up against a wall
Vladimir Putins shadow war is no longer.
For months, anti-Kiev militantsa collec-
tion of disafected ethnic Russians from
eastern Ukraine, nationalist volunteers
from Russia, and tourist mercenaries
from across the former Soviet Union
have fought a grinding battle with the
Ukrainian state. Their grievances and
fears were local and often genuine, but
the money, supplies, propaganda, and
diplomatic cover were Russian. The war
was an extension of the postmodern and
cynical world of Putin-era politicsin
which the only thing that matters is the
accumulation and preservation of power.
It was a fght as murky as it was grim; and
among civilians trapped in besieged cities
between the two ragtag and poorly trained
military forces, casualties piled up.
The response in Washington and
European capitals was outrage without
actionconcern about the dangers of
6
with the geopolitical catastrophe of seeing
Ukraine and its Western backers achieve
victory. U.S. Secretary of State John Kerry
said that in the days before the shoot-
down, Russia sent a convoy with tanks,
artillery, and armored personal carriers
over the border. The SA-11 missile system
may well have been part of the transfer.
Whats clear is that, as all sides admit, the
weapon is so complex that it requires pro-
fessional assistance to operate.
If Putin wants to stave of world pariah
status and economic sanctions that could
imperil the stability of his rule, hell have
to at least be seen to be making concil-
iatory moves. Under such a scenario,
it would be impossible to continue to
provide heavy weapons to rebel fghters
and allow volunteers to cross the border
into Ukraine. With the fow of money,
arms, and fghters shut of, it will only
be a matter of time before Kiev defeats
the separatists. The end could be bloody,
and costly for the civilian population of
Donetsk, the last stronghold of the rebels,
but in a purely military contest, pro-Kiev
forces would achieve a battlefeld victory.
Putin, emotional and impulsive, has
never been one to back down, but his
Ukraine policies have put him in a corner,
not least inside Russia itself. The annexa-
tion of Crimea and talk of Novorossiya,
a czarist-era geographic construction that
encompasses present-day southern and
eastern Ukraine, has given energy to a
sizable nationalist wing at home. In recent
months, the Russian state has used a
nonstop television campaign to whip the
country into a paranoid, hateful frenzy.
Those are difcult emotions to switch of.
In a speech to parliament in March, Putin
presented himself as a defender of ethnic
Russians wherever they are found.
So how can he abandon them now in
the face of Western pressure? The constit-
uencies inside Russia that are pushing for
a more antagonistic approach in Ukraine
represent Putins most dependable base
exactly the supporters he can ill aford to
anger in rough times.
MH17 has presented Putin with a way
out of the current crisis in Ukraine and its
mounting costs for Russia, but both his
habits and fears may lead him to gamble
again. The danger of a bigger and bigger
wager, though, is that the size of the poten-
tial loss mounts, too.
Putins proxy war but no ideas or will to
stop it. With the shooting down on July 17
of Malaysia Airlines Flight 17, a Boeing 777
headed from Amsterdam to Kuala Lumpur,
the shadow war was brought into the light.
If Putin chooses, the disaster of MH17
could provide a way out of the danger-
ous, increasingly counterproductive con-
fict hes been intent on stoking. But doing
so would cut against his instincts.
The details of how Flight 17 exploded
and crashed into a feld, killing 298 pas-
sengers, may never be fully clear. What evi-
dence is available suggests a sophisticated
anti-aircraft missile systeman SA-11 Buk,
or beechwas fred from rebel-held ter-
ritory in eastern Ukraine, just a few miles
from the Russian border. Militia command-
ers on the ground, perhaps with training
from Russian military and intelligence
operatives, appear to have thought they
were shooting at a Ukrainian An-26 mili-
tary transport plane.
From the beginning, separatist forces
have been in charge of the crash scene,
which quickly devolved into a foul and dis-
organized messquite likely on purpose, to
spoil any chance of a proper investigation
and to remove or destroy incriminating evi-
dence. If the Russian-backed rebels can be
declared conclusively guilty of anything
and they may yet be found culpable for
much moreit is of being disrespectful to
the victims, allowing their bodies to rot
in the midsummer heat. (It was six days
before the remains arrived in Holland.)
Valuable sources of information have dis-
appeared. The hand over of the planes
flight-data recorders to the Malaysian
authorities who traveled to Donetsk was
an odd, theatrical spectacle, all the more so
because the rebels claimed the day before
that they didnt possess them at all.
That Putin is doing little to facilitate
a serious investigation by wielding his
infuence over the rebels is angering the
Obama administration, not to mention
Europeans and their leaders. In a late-
night address, after hours on the phone
with David Cameron, Franois Hollande,
and Angela Merkel, Putinwho looked
tired and on edgeonly called vaguely
for an investigation into the crash, while
warning against countries using the crisis
for mercenary political goals. Hes
hoping the worlds attention moves on.
Delaying and defecting has worked for
Putin before, but further inaction will test
U.S. and European patience more than his
easier-to-mask interventions in Ukraine
to date. That would spur a new round of
sanctions that could push his struggling
economy into recession. More conclu-
sive proof that the separatists, in any way
aided by Russia, were behind the attack
could poison Russias relations with the
West to a level of tension unprecedented
in the post-Soviet era.
For Putin, this means the status quo
is no longer feasiblehe will either have
to abandon his proxy war in Ukraine and
give up on the rebel forces hes used to
back the Kremlins policy goals, or he
will push even harder against the West,
steeling himself and his country for a long-
term standof that could result in Russia
becoming isolated and weakened. Either
scenario will be a great test of a leader
whose 14-year tenure has been marked by
craftiness and an ability to play events to
his advantage. With the downing of MH17,
Putin risks being caught up in events
beyond his control, a nimble tactician
with no moves left to play.
Hes been engaged in a dangerous
high-stakes gamble for months. It began
in late February, when he interpreted the
fall of former Ukrainian President Viktor
Yanukovych, a leader he personally loathed
but knew he could always buy of, as the
culmination of a Western-organized coup.
His frst reaction, visceral and emotional,
was to retake Crimeaproviding a measure
of historical revenge that salved the injury
of the breakup of the Soviet empire.
Beyond that, Putin wanted to secure a
post- Yanukovych order for Ukraine that
would pose no threat to Russia or his rule.
He seized on the discontent of ethnic
Russians in eastern Ukraine and used the
Russian state-media machine to create
support for peoples republics. At once
real and make-believe, these breakaway
territories were meant to be bargaining
chips he could use with Ukraine and the
West, a way to maintain permanent disor-
der and keep the new leadership in Kiev
from consolidating power.
But as time went on, the violence and
disorder allowed paramilitaries in the
rebel-held regions to create their own
momentum. The Kremlin tried to main-
tain leverage, as militia com manders
began to resemble warlords, using the
threat of force and access to resources
to gain infuence on the ground. Still, the
overall chaos served Moscows ultimate
aim: keeping Ukraine weak and bloodied.
After deciding not to extend a cease-
fre earlier in July, Ukraine stepped up
what it called its antiterrorist opera-
tion in the eastern part of the country,
at times through the indiscriminate shell-
ing of civilian areas. Pro-Russian forces
took heavy losses. Putin risked seeing the
rebels efectively wiped out. Following
his own logic, he had no choice but to
step up assistance.
The potential costs of transferring
more weapons and even using Russian
forces directly were hugebut in Putins
worldview, they were small compared
Putin must stave off world
pariah status and economic
sanctions that could imperil
the stability of his regime
Yafa is a journalist based in Moscow.
7
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There will always be a need for a World Bank. There is no need
for a World Bank with more than 10,000 employees.
President Jim Yong Kim is trying to reform the bank, one of
the global fnancial institutions that emerged from the historic
Bretton Woods agreements signed on July 22, 1944. He is getting
strong resistance from a rank and fle protective of its parking
subsidies, business-class travel, and generous meal allowances.
The danger for Kim, however, is that he will be too timid.
By its own admission, the bank is fghting for relevancy now
that many of its customers dont need it anymore. The developing
worlds rising middle class is attracting private capital and reduc-
ing the need for countries to borrow from the World Bank. More
than $1 trillion a year now fows from the private sector and major
philanthropies to developing economies. Ofcial development
assistance, by contrast, totals about $125 billion. Last year, the
World Banks new lending came to less than $35 billion.
As of this month, Kim is switching the organization from six
geographic regions to 14 global practices, or areas of expertise,
including public health, energy, agriculture, and governance.
The idea is that this will encourage more cross-border collabo-
rationso an expert in, say, electricity generation could advise
any government, whether its in Asia or Africa. Kim also intends
to cut $400 million, or 8 percent, from the budget and about
1,000 employees in coming years. At the same time, he is narrow-
ing the banks focus to eradicating extreme poverty and raising
the incomes of the poorest 40 percent by 2030.
This is a useful and overdue refocusing. It could be more
ambitious still. Where private capital is willing to step in, for
example, the bank should step back. Most important, the bank
should rethink its basic approach to fnancing public projects.
Of the handful of institutions that emerged from the three-
week gathering seven decades ago at New Hampshires Mount
Washington Hotel, the World Bank has most outlived its purpose.
It still has a role to play. But to be truly relevant again, it will have
to do more than make changes to its organizational chart.
The Shortcomings
Of Dodd-Frank
Does the World Still
Need the World Bank?
The reforms are four years old but
have yet to be properly implemented
Its president is setting out to x
the institution. He shouldnt be timid
Four years after President Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act into law, polls
suggest most Americans think it hasnt done enough to protect
them from a repeat of the 2008 crisis, a disaster from which the
global economy has yet to fully recover. Theyre right.
At its core, the Dodd-Frank Act was supposed to work like a
three-stage containment system. Better monitoring and limits
on risk-taking would make accidents less likely. If fnancial
institutions did get into trouble, added capital would make them
more likely to survive. If they nonetheless failed, advance plan-
ning and new resolution mechanisms would allow them to do so
without bringing down the fnancial system and the economy.
Regulators have yet to complete any level of this fail-safe system.
At the frst stage, the Volcker Rule prevents deposit-taking
banks from engaging in the kind of speculative trading that
can precipitate sudden losses, and the Federal Reserves stress
tests help ensure that large banks are prepared for the most
obvious risks. Poor global coordination and data difculties,
however, have left regulators far from their goal of creating an
early warning system that could tell them where the risks are
concentrated. If, for example, a big U.S. hedge fund were heavily
invested in foreign banks that were about to be wiped out by
losses in emerging markets, nobody would see the whole picture.
At the second stage, U.S. regulators have set capital require-
ments for bank holding companies at $5 for every $100 in assets,
enough to absorb a 5 percent loss. Thats more than most had
at the last crisis, but still much less than whats needed. Econ-
omists at New York University estimate that the six largest U.S.
banks are almost $300 billion short of the capital theyd need
to survive a severe crisis. Other institutions, including money-
market mutual funds, still face no capital requirements at all.
At the third stage, regulators have made much of what they
call the orderly liquidation authority, which allows the Federal
Deposit Insurance Corp. to swoop in, take over, and recapitalize
a failing bank holding company, all while keeping its important
subsidiaries running as if nothing were amiss. The mechanism,
though, remains untested, and even the FDICs own vice chair-
man doubts it could handle a crisis like that of 2008. Meanwhile,
regulators have so far tolerated banks inability to produce con-
vincing living wills, in which they must show how they could
be safely dismantled through the bankruptcy process.
Markets have ofered their verdict on Dodd-Frank: Studies show
creditors lend money more cheaply to the largest banks on the
assumption the government will rescue them in an emergency.
The International Monetary Fund estimated this implicit tax-
payer subsidy at as much as $70 billion a year in 2011 and 2012.
Dodd-Frank provides regulators with the powers they need
to prevent the fnancial sector from leaning on taxpayers and en-
dangering the economy. All thats wanting is the will to use them.
To read Jonathan
Bernstein on politics
and Chandrahas
Choudhury on Indian
supermarkets, go to

Bloomberg.com/view
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11
July 28 August 3, 2014
Bolivia sees the future,
and its made of lithium
16
Russias press
coverage of MH17 is
very Russian 13
Secrets of the service
sector 14
Amit Shah is head of
Indias ruling partyand
a murder suspect 13
Where have all the
workers gone? 15
Turning Ethiopia Into
Chinas China
Ethiopians make $40 a month stitching shoes. Their Chinese counterparts make more than $400
I pay my rent and I can look after myself. Its transformed my life
Rwanda, Senegal, and Tanzania want
their share of the 80 million manufac-
turing jobs that China is expected to
export, according to Justin Lin Yifu,
a former World Bank chief econo-
mist who teaches economics at Peking
University. Weaker consumer spending
in the U.S. and Europe has prompted
global retailers to speed up their
search for lower-cost producers.
Shaping up employees is one part of
Zhangs quest to squeeze more proft
out of Huajians factory, where wages
of about $40 a month are less than
10 percent of what comparable Chinese
workers may make. Just as companies
discovered with China when they began
manufacturing there in the 1980s,
Ethiopias workforce is untrained, its
power supply is intermittent, and its
roads are so bad that trips can take six
times as long as they should. Ethiopia
is exactly like China 30 years ago, says
Zhang, 55, who quit the military in 1982
to make shoes from his home in Jiangxi
province with three sewing machines.
He now supplies such well-known
brands as Nine West and Guess.
Almost three years after Zhang
began his Ethiopian adventure at the
invitation of the late Prime Minister
Meles Zenawi, he says hes unhappy
with profts at the plant, frustrated by
widespread inefciency in the local
bureaucracy, and struggling to raise
productivity from a level that he says is
about a third of Chinas. Transportation
and logistics that cost as much as
four times what they do in China are
prompting Huajian to set up its own
trucking company, according to Zhang.
That will free Huajian from using the
inefcient local haulers, but it cant fx
the roads. It takes two hours to drive
30 kilometers (18 miles) to the Huajian
factory from the capital along the main
artery. Oil tankers and trucks stream
along the bumpy, potholed, and at
Ethiopian workers walking through the
parking lot of Huajian Shoes factory
outside Addis Ababa in June chose
the wrong day to leave their shirts
untucked. The companys president,
just arrived from China, spotted them
through the window, sprang up, and
ran outside. Zhang Huarong, a former
Peoples Liberation Army soldier,
harangued them in Chinese, tugging
at one mans polo shirt and forcing
another workers into his pants.
Amazed, the workers stood silent until
the eruption subsided.
Zhangs factory is part of the next
wave of Chinas investment in Africa.
It started with infrastructure, espe-
cially the kind that helped the Chinese
extract African oil, copper, and other
raw materials to fuel Chinas indus-
trial complex. Now China is getting
too expensive to do the low-tech
work its known for. African nations
such as Ethiopia, Kenya, Lesotho, I
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Global Economics
times unpaved road. Goats, donkeys,
and cows wander along, occasionally
straying into bumper-to-bumper trafc.
Minibuses and dented taxis, mostly blue
Ladas from Ethiopias past as a Soviet
ally, weave through oncoming trafc,
coughing exhaust.
In a country where 80 percent of
the labor force is in agriculture, man-
ufacturers dont have to worry about
fnding new workers. The population
of about 96 million is Africas second-
largest after Nigerias. Cheap labor
and electricity and a government striv-
ing to draw foreign investment make
Ethiopia more attractive than many
other African nations, says Deborah
Brautigam, author of The Dragons Gift:
The Real Story of China in Africa and
a professor of international develop-
ment and comparative politics at Johns
Hopkins University. They are trying
to establish conditions for a transfor-
mation, Brautigam says. It could
become the China of Africa. Foreign
direct investment in Ethiopia jumped
3.4 times to $953 million last year from
the year before, according to estimates
by the United Nations Conference on
Trade and Development.
Huajians 3,500 Ethiopian workers
produced 2 million pairs of shoes
last year. Located in one of the coun-
trys frst industrial zoneswhich ofer
better infrastructure and tax exemp-
tionsthe factory began operating in
January 2012. It became proftable its
frst year and now makes $100,000
to $200,000 a month, Zhang saysan
insufcient return that he claims will
rise as workers become better trained.
Beneath bright fuorescent lights and
amid the drone of machines, workers
cut, glue, stitch, and sew Marc Fisher
leather boots destined for the U.S.
market. Supervisors monitor quotas on
whiteboards, giving small cash rewards
to winning teams and criticizing those
who fall short.
Zhang spends about half his time in
Ethiopia, he says. During his June visit
to the Huajian plant he spoke to about
200 uniformed supervisors, a mixture
of Ethiopians and Chinese, assembled
in the parking lot. He berated supervi-
sors for their inefciency, then praised
them for their loyalty, his words trans-
lated into Amharic, Ethiopias national
language, and Oromo, the local lan-
guage. He ordered staf to march on
the spot as they all chanted together
in Chinese. Then they recited slogans:
Unite as one. Improvement
together. Civilized and efcient.
They sang the Song of Huajian, which
urged we Huajian people to move
forward, hold the banner of Huajian
high, and keep our business forever.
Chinese supervisors led the song,
while their Ethiopian colleagues stum-
bled over some words.
Later, Zhang explained why he cant
be as tough as hed like. Here the man-
agement cannot be too strong as there
will be a problem with the culture, he
said through a translator. On one hand
we have to have strict requirements, on
the other hand we have to take care of
them. They may be poor, but we have to
respect their dignity.
Five workers interviewed at the
factory describe strict standards,
with rewards for good work and pay
docked for ruined shoes. Taddelech
Teshome, 24, says her day starts at
7:20 a.m. after her Chinese employ-
ers provide workers with a breakfast
of bread and tea. When her morning
shift ferrying shoes from the factory
foor to the warehouse is over, she gets
fed the national staple sour bread for
lunch, then resumes work until 5:15.
After that a Huajian bus takes her to
nearby Debre Zeit, where she rents a
room with her sister for $18 a month.
Taddelech came to work at Huajian just
over a year ago from her home 165 kilo-
meters away in the Arsi region after her
sister started work at the factory. The
work is good because I pay my rent and
I can look after myself, she says. Its
transformed my life.
Huajians Zhang wants to increase
its workforce in Ethiopia to as many
as 50,000 within eight years. A model
of a planned new plant at the edge of
Addis Ababa is displayed at the factory.
It shows a 341-acre complex, partly
fnanced by more than $300 million
from Huajian, that will include apart-
ments for workers, a wooded area, and
a technical university.
In the parking lot, after supervisors
had sung the company song, Zhang
dismissed the Ethiopians but con-
tinued to rail against the Chinese
2m
pairs of shoes a year
Addis
Ababa
A banner reads 100% cooperation
Winning teams
get cash
awards for
beating goals
Foreign direct investment in Ethiopia
2013 labor cost per hour, shoe manufacturing
Mexico
Guatemala
China
El Salvador
India
Vietnam
Bangladesh
Ethiopia
1993 2013
Frontier Manufacturing
Cheap labor makes Ethiopia attractive for ofshoring,
but poor infrastructure is a drawback
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Ethiopian workers
cost a fraction
of what Chinese
workers make
$4 $3 $2 $0 $1
$1b
$0
$0.5b
Ethiopias percentile rank,
World Bank Ease of Doing Business Index
In Ethiopia it costs
an average of
$2,180
to ship a container,
vs. $620 in China 2006 2014
45th
40th
35th
30th
Global Economics
managers. To make his points he thrust
a broomstick toward them repeatedly.
He fnally left the stage, laughing and
raising his fst in triumph.
Kevin Hamlin, Ilya Gridnef, and
William Davison
The bottom line Ethiopians and other Africans
want to attract the low-cost manufacturing
thats becoming too expensive to do in China.
Politics
A Top Indian Politician
Faces Murder Charges
Amit Shah, leader of the BJP, is a
condant of the new prime minister
If Shah is convicted, then Modi
will become vulnerable
Indian Prime Minister Narendra Modi
chose a man with both political gifts and
political baggage to run Indias ruling
Bharatiya Janata Party (BJP). Amit Shah
has a record of winning tough election
campaigns. And he faces murder charges
fled by Indias equivalent of the FBI.
The case stems from the 2005 slaying
of a married couple and the 2006 killing
of a man in the state of Gujarat, where
Shah was home minister. The charge is
that he was a key conspirator in the plots
to murder the victims. Shah denies any
wrongdoing. His bid to have the case
dismissed is pending before a Mumbai
court. Robin Mogera, a lawyer represent-
ing Shah, declined to discuss the specif-
ics of the case. Shah would not agree to
an interview.
That Modi, who in May won in the
biggest landslide in 30 years, picked Shah
for the post on July 9 says a lot about
the confounding nature of Indian pol-
itics. A new low, said Ramachandra
Guha, a historian and author of books
on Indian politics, in an e-mail. That
such a man could be chosen head of the
ruling [party] without a word of dissent
or debate within the party itself is a very
unhappy omen for Indian democracy.
Shah has blamed hostile political
forces for framing him in a case that he
says is built on false testimony. It was
all a political game, thats all, says Ram
Jethmalani, an attorney who handled
an earlier part of Shahs case. There is
no possibility of any conviction under
any circumstances. Shah spent three
months in custody in 2010 on the
charges before being granted bail.
Modi has made his support for
Shah clear. Under his leadership
the party will defnitely see enhance-
ment, he tweeted. Amit has repeat-
edly proven himself through tireless
hard work & determination. Shah is
one of the few people who has been
close to Modi, a man who is consid-
ered to be somewhat of a loner, says
Milan Vaishnav, an associate in the
South Asia program at the Carnegie
Endowment for International Peace
in Washington. When Shah speaks,
people understand he is conveying
a message from the PM. An e-mail to
Modis spokesman, Jagdish Thakkar,
went unanswered, as did a request for
an interview through the prime minis-
ters website. A BJP spokesman, retired
Captain Abhimanyu Sindhu, says the
party believes that the charges are
politically motivated and that Shah will
be vindicated.
The Central Bureau of Investigation
has accused Shah of running an extor-
tion racket while he was Gujarats home
minister, the states top law-and-order
post. The operation, according to the
Supreme Courts summation of the
CBIs case, was protected by the police
under Shahs command. After a sus-
pected criminal named Sohrabuddin
Sheikh allegedly helped kill a man, then
took over his victims protection racket
and started harassing local business-
men, police ofcers pulled Sheikh and
his wife of a bus in November 2005,
according to CBI court flings. A few days
later, the agency says, police murdered
Sheikh, and his wife was thereafter
eliminated. Her body was covered with
hay, doused with gasoline, and set on
fre, according to the agencys account in
a court record. Throughout, Shah was
pivotal to the conspiracy, the CBI
said in a court fling.
A third victim, Tulsiram Prajapati,
whod allegedly assisted Sheikh in a pre-
vious killing, according to a CBI court
fling, was also taken of the bus. He
appeared in court on a separate case in
November 2006 and said he believed
Propaganda Russias Reality Distortion Field
Russian media ofer a jumble of theories about what felled the Malaysia Airlines plane
over Ukraine on July 17. The idea is to create confusion until the Kremlin comes up with a
nal version, says Oleg Kashin, a dissident journalist in Moscow. Carol Matlack
Eyewitnesses: Right
before the air
catastrophe a
warplane was seen in
the sky
RIA Novosti,
July 17
Source: The target of
the Ukrainian missile
could have been
Vladimir Putins plane
Militias have no
weapons to hit planes
at high altitude
Boeing Debris Falls
On Russia
An
American
satellite and
Ukrainian
warplane
followed the
Boeing
The
destruction of
the airliner
was a planned
provocation
by Kiev
The whole
tragedy was
a play
News2, July 19
The news website says the
CIA hijacked Malaysia Flight
MH370, which disappeared in
March, hid the plane, lled it
with corpses, and crashed it.
Kommersant, July 21
The business daily chides the
West for intensifying pressure
on Moscow before the crashs
cause is determined.
Izvestia, July 18
The newspaper
attributes this to
separatist leaders
in eastern Ukraine.
Komsomolskaya
Pravda, July 23
The newspaper
suggests that a
Ukrainian SU-25
ghter jet shot
down the plane.
Itar-Tass, July 18
The state-owned news
service contradicts its
own June 29 report
that rebels had seized
such weapons from
Ukraines military.
RT network, July 17
The state-owned
broadcaster says the
likely target was the
Russian presidents
plane, a four-engine
Ilyushin-96 that RT said
could be mistaken at a
distance for the
two-engine Boeing 777.
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Global Economics
Indicators
Solving the Mystery of
The Service Sector
Figuring out the size and growth of
services is trickier than it looks
The economic data remain
highly skewed

The U.S. government thoroughly mea-

sures the output of American farms.
On July 18, for example, the Agriculture
Department announced that milk pro-
duction per cow averaged 1,888 pounds
in June. The government collects less
hed been targeted for a fake encoun-
terslang for murder by cop. A month
later, he was killed just as he predicted,
according to the Supreme Courts
description of Gujarats legal flings.
Gujarat ofcials initially explained that
Sheikh died in a shootout with police.
The Gujarat government has since said
the slaying was stage-managed.
Shah is from a wealthy family, while
Modi is the son of a tea stall owner; they
met in a conservative Hindu group. Modi,
chief minister of Gujarat and Shahs boss
at the time of the murders, has never
been connected to the case. In Mays
national election, Shah ran the cam-
paign in Uttar Pradesh, where the BJP ran
fourth in the 2009 parliamentary contest.
With Shah in charge, the BJP took 71 of 80
seats there, helping Modi win the biggest
mandate since 1984.
The implications of Shah running
the BJP with charges pending are hard
to predict. If at any point Amit Shah
is convicted, then naturally Modi will
become vulnerable, says Satish Misra,
information about services, which
range from $10 manicures to $1,000-
an-hour legal advice. Thats a problem,
because services account for 77 percent
of private-sector output in the U.S.
There are only six principal economic
indicators for services (including ones
for construction and retail trade), vs. 17
for agriculture, construction, manufac-
turing, mining, and energy. The eco-
nomic data collected by U.S. statistical
agencies remain highly skewed toward
more traditional industries, writes
economist Kris Dawsey, author of a
new Goldman Sachs report.
The lack of information about the
service sector mainly afects the govern-
ments frst two stabs at calculating gross
domestic product each quarter. By the
third try the governments calculation is
more accurate, because it has more data
to work within particular the Quarterly
Services Survey, which is prepared by
the Census Bureau. Those squishy early
estimates matter because they can infu-
ence public opinion and potentially
even afect the decisions of the Federal
Reserve and Congress. This year the
Bureau of Economic Analysis, a branch
of the Commerce Department, initially
estimated that health-care usage rose
at a 9.9 percent annual rate in the frst
three months of 2014. It later concluded
that it declined at a 1.4 percent annual
ratea huge swing by any measure.
While waiting for the hard data from
the Quarterly Services Survey to arrive,
the Bureau of Economic Analysis might
do a better job at its early estimates
if it tapped into data it now ignores.
Goldmans Dawsey wrote that surveys
of business executives are an accurate
and earlyindicator of service sector
activity. He took six existing monthly
business surveys, all of which are con-
ducted by other organizations, and syn-
thesized them into a single service
sector survey tracker. Dawsey found
that the tracker is a better predictor of
what the government eventually will
report than the governments own frst
and second estimates.
The six monthly surveys that Goldman
rolled into one are the Institute for
Supply Management Non-manufacturing
Index, the Chicago Purchasing Managers
Index, the Texas Service Sector Outlook
Survey, the Markit Purchasing Managers
Index, the Federal Reserve Bank of
Richmond Survey of Service Sector
Activity, and the New York Fed Business
Leaders Survey. Right now those surveys
indicate that the economy is stronger
an analyst at the Observer Research
Foundation in New Delhi. At the news
conference where Shahs role was
announced, he and Modi sat together,
wearing traditional tunics. When outgo-
ing BJP President Rajnath Singh spoke
of Shahs acumen, Modi made a show
of approval, then handed Shah a sweet
and wreathed him in fowers. As Shah
faced the cameras, someone leaned in
to ask, Are you going to speak? Shah
shook his head no. Tom Lasseter and
Andrew MacAskill
The bottom line Amit Shah is a skilled political
operative who could become a liability to the
ruling party if convicted of murder.
The #1
heart care
in the nation.
20 years
in a row.
Its why 23,713
people traveled
to Cleveland
last year for
heart care.
U.S. News & World Report 2014-15
Call 1.855.299.APPT
clevelandclinic.org/1heart
Same-day appointments available.
Global Economics
than the latest report on GDP shows.
In an interview, Brent Moulton, the
BEAs associate director for national eco-
nomic accounts, said that it is interest-
ing that theres some data that might
potentially be helpful to us that were
not currently using. But he added that
his frst impression from looking at the
Goldman report is that incorporating the
business surveys would produce rel-
atively small improvements relative to
what were doing.
Moulton and his team have some
other ideas about how to improve their
early readings on the service economy.
The BEA is talking to the Census
Bureau about getting earlier delivery
of the Quarterly Services Survey, says
Moulton. There have also been con-
versations inside the BEA about incor-
porating Big Data, such as credit card
receipts, says Nicole Mayerhauser,
chief of the BEAs National Income and
Wealth Division. Meanwhile, you can
get a pretty good early read on the
service sector by looking at those busi-
ness executive surveys. Peter Coy
The bottom line The Bureau of Economic
Analysis has ignored data that could improve
early measures of the service sector.
Employment The Great Shrinking Workforce
In 2007, 66 percent of American adults were either working or looking for work. This
year that number dropped to 63 percent. The White Houses Council of Economic
Advisers estimates that about two-thirds of this decline comes from baby boomers
retiring and the recession. The rest? Its not completely clear. Brendan Greeley
220
80
150
The economys lost potential
Actual hours worked, in billions The Congressional Budget Ofces 2007 projection for potential hours of
work with economy operating at full capacity The CBOs lower 2014 projection
1960 2017 (proj.) 1989 2000
Recession
Female workforce participation rate
Share of women aged 25 to 54 in workforce
1948 2014
The Council
of Economic
Advisers
suggests that
maternity leave
and better child
care could nudge
growth up.
Fewer prime-age
women
Education,
contraceptives, and
better jobs moved
women into the
workforce, but growth
in their numbers
has plateaued.
100%
30%
40%
60%
70%
80%
90%
50%
Male workforce participation rate
Share of men aged 25 to 54 in workforce
1948 2014
100%
30%
40%
60%
70%
80%
90%
50%
In 1950,
96 percent of
prime-age men
were employed.
Today its
88%
Far fewer
prime-age men
Men have been
dropping out of the
labor force since the
early 1950s. Their
jobs are often easy to
automate or export.
GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: CONGRESSIONAL BUDGET OFFICE, BUREAU OF LABOR STATISTICS, COUNCIL OF ECONOMIC ADVISERS
Broken cycle
The number of hours
worked rises and falls
with the business
cycle, but since 2000
the overall trend has
attened.
The #
1
urology
care in
the nation.
Its why people
from 59 countries
traveled to
Cleveland last
year for
urology care.
Call 1.866.876.9556
clevelandclinic.org/number1
Same-day appointments available.
U.S. News & World Report 2014-15
Energy Bolivias Battery Ambitions
The Bolivian government has long wanted to become a player in lithium ion
batteries, which are used in electric cars, cell phones, laptops, and other gadgets.
The countrys vast salt ats contain half of the global reserves of lithium, and the
government wants to make up for a painful national history of foreign exploitation of
its natural resources. Early this year it opened a pilot plant near La Paz. The factory,
built by a Chinese company, will be used to make small batches of batteries and
train workers. The government says commercial production will begin next year.
Johnny Langenheim; photographs by James Morgan
Salar de
Uyuni
Global Economics
In 2015 a battery factory
capable of making
1,000
cell phone batteries
and 40
electric vehicle batteries
a day is scheduled
to start commercial
production near La Paz
The Salar de Uyuni salt at,
almost 12,000 feet above sea
level, is one of the attest places
on earth. NASA uses it to help
calibrate one of its satellites,
and pink amingos call it home
BOLIVIA
La Paz
Linyi L-ion factory
Salar de Uyuni salt at
16
P
A
N
O
S

P
I
C
T
U
R
E
S
A gateway constructed from
bricks of salt at ats where
lithium is extracted from
evaporating saltwater. The gate
was built to help guide vehicles
to the plant when heavy rains
obscure the way
Global Economics
17
Edited by Christopher Power
Businessweek.com/global-economics
Register at oracle.com/openworld
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Briefs: Obamacares
never-ending day
in court 23
Did Harvey Weinstein
leave some money
on the table? 21
The race is on to
make your ight even
more hellish 22
P
H
O
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S
T
Jef Bewkess
Disappearing Act
The CEO turned Time Warner into an acquisition target
Hes a businessperson. Hes not a romantic
On July 16, Jefrey Bewkes, the chief
executive ofcer of Time Warner,
took to the Internet to fend of the
advances of Rupert Murdoch and 21st
Century Fox. In a short video directed
at his employees, Bewkes insisted that
Time Warner wasnt for sale and that it
would be better of on its own. Wearing
a gray suit and dark tie, his hair more
tousled than usual, he spoke ear-
nestly, concluding with an irreverent
smirk that suggested everything was
under control. It was a solid perfor-
mance, but it didnt have the desired
efect. Time Warners share price leapt
17 percent that day, as investors sal-
ivated and rumors circulated that
Murdoch would up his bid.
Bewkes is a victim of his own
success. Hes spent much of the last
six and a half years carefully trans-
forming what was once the worlds
largest media company into a smaller
amalgam of cable-TV and flm pro-
duction units destined to become an
acquisition target. Murdochs ofer is
the culmination of a strategy that ulti-
mately might cost Bewkes his job.
That may have been his intention
all along. Running a media company
is considered one of the more desir-
able jobs in business. You get to go to
parties with movie stars and are more
likely to be seen in the pages of Vanity
Fair than, say, the leader of Home
Depot. Its hard to imagine Murdoch
giving up his gig, even at 83. (And he
doesnt have tohis family controls
almost 40 percent of the voting shares
of 21st Century Fox.)
Bewkes is diferent. He keeps a fairly
low profle, often eating a sandwich at
his desk rather than going to a glitzy
Manhattan restaurant where he might
be noticed. Friends and former Time
Warner colleagues say hes unsenti-
mental about his company. I dont
think he ever wanted to be CEO for
life, says Michael Nathanson, a media
analyst at MofettNathanson. Hes a
business person. Hes not a romantic.
After an early stint at Citibank,
Bewkes joined what was then Time Inc.
in 1979, taking a job at HBO, the com-
panys fedgling pay-TV network. He
struck colleagues as both shrewd and
self-aware, and he was clearly going
places. Most people thought he would
have a really good chance of being
19
CEO of Time Inc., says friend and
former HBO executive Curtis Viebranz,
who started at the network a year after
Bewkes and worked there for 17 years.
Bewkes eventually made it to the
top, but not before the company went
through three turbulent mergers
orchestrated by former CEO Gerald
Levin, who fancied himself a visionary.
In 1989, Time Inc. joined with Warner
Communications to form Time Warner,
the worlds biggest media company.
Seven years later, Time Warner con-
sumed Turner Broadcasting, owner of
CNN and the Atlanta Braves. Combining
the companies wasnt easy. Executives
clashed, and Time Warners stock price
languished until the late 90s.
In 2000, Levin announced the
AOL-Time Warner merger. The new
company was valued at $186 billion,
but that shriveled to $114 billion a year
later with the popping of the Internet
bubble. In 2002, AOL Time Warner took
a $54 billion writedown, at the time the
largest in corporate history. Bewkes
was one of the few Time Warner exec-
utives who warned of a coming disas-
ter, according to two former executives.
After Levin left, Bewkes helped hasten
the departure of the AOL guys. It was
a hollow victory. The AOL people had
been enriched by the merger, while
many veteran Time Warner executives
and investors lost out.
The last thing Wall Street wanted
was another visionary leader at Time
Warner. Friends and former col-
leagues, who declined to be identi-
fed because they werent comfortable
publicly discussing their old boss,
say Bewkes was acutely aware of how
employees and share holders had suf-
fered. When he was named CEO in
2008, they say, he felt it was his duty
to increase shareholder value. This is
something CEOs often talk about, but
Bewkes took the responsibility espe-
cially seriously. Im sure Jef never
imagined that he would recapture all
the equity that was drained into the
rathole, but he was going to do his
best, Viebranz says.
Bewkes started by disposing of what
he considered Time Warners noncore
assets. In 2009 the company spun of
Time Warner Cable and the troubled
AOL division. Earlier this year, Time
Warner completed a long-anticipated
public ofering of Time Inc. Bewkes
wasnt unhappy to shed these busi-
nesses, some of which had defned the
company for decades, according to two
former Time Warner executives. It irked
him, they say, that the magazine division
didnt deliver the same proft margin as
the flm and television divisions.
Investors were relieved as Bewkes
dismembered Time Warner, and
the company repurchased its stock.
Finally, they were being rewarded.
Hes basically been raising the value
of the company by buying stock back,
says Mario Gabelli, founder of Gamco
Investors and a longtime Time Warner
shareholder. Whats wrong with that?
Bewkess job certainly wasnt as glamor-
ous as that of Walt Disney CEO Robert
Iger, who negotiated deals to purchase
Marvel Entertainment and Lucasflm
during this period, or even Comcasts
Brian Roberts, whose company swal-
lowed NBCUniversal. But Time Warners
investors didnt care about that. Before
Murdochs ofer, the companys stock
had already climbed 145 percent in the
past three and a half years.
The media industry is in the middle
of another consolidation. In February,
Comcast announced it would buy
Time Warners former cable divi-
sion for $45 billion. And in May, AT&T
struck a deal to purchase DirecTV for
Time Warner: Serial Romance
Formed by the merger of Time Inc. and Warner Communications in 1989, Time
Warner quickly became the worlds largest media conglomerate, with divisions that
include Warner Bros. Entertainment, Turner Broadcasting System, and HBO.
The company has evolved through acquisitions, sales, and spinofs. Keith Collins
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DATA: SELECTED TRANSACTIONS COMPILED BY BLOOMBERG
Movies
Snowpiercer: Indie
Savior or Casualty?
Weinsteins acclaimed lm went
video-on-demand, not wide
It would have been a tough sell
at the box ofce
Depending on whom you ask in
the flm world, the U.S. release of
Snowpiercer is either a revolution or
a travesty. Directed by Korean auteur
Bong Joon-ho and starring Captain
Americas Chris Evans, the dysto-
pian fick is set on a futuristic train
hurtling around a frozen earth. With a
94 percent rating on review aggregator
Rotten Tomatoes, its become a critical
darling. In its opening weekend in late
June, the flm made $171,187 from just
eight screens, playing sold-out shows
in New York and Los Angeles.
Then, in its third weekend in release,
when many studios would try to
roll their small movies out to thou-
sands of screens nationwide, dis-
tributor Radius-TWC took a diferent
tack. While expanding to 356 screens,
Snowpiercer also became available in
85 million homes on video-on-demand,
making it the widest-ever simultane-
ous theatrical-VOD release. The flms
per-screen revenue dropped precipi-
tously, to $1,785. But the movie also did
about $2 million on VOD and iTunes
that same weeka record for Radius
and its parent, Weinstein Co. The flm
spent most of its frst week atop the
iTunes charts, beating out hits such
as Rio 2 and The Other Woman. Were
outfanking these bigger players, at a
fraction of the cost, says Radius co-
President Tom Quinn.
Sheer economics has driven the
flms unusual strategy. It would have
cost at least $25 million to market a
$48 billion. Bewkes couldnt have been
surprised when an old friend, Chase
Carey, the chief operating ofcer of
Fox, made an ofer for Time Warner
over lunch in Manhattan on June 9. As
Bewkes told his employees on July 16:
Time Warner has unique and power-
ful brands and leading businesses that
are the envy of our competitors. So its
not surprising that we might attract
attention from others.
While Bewkes might prefer a more
competitive bidding situation, he may
be stuck with Murdoch. Comcast and
AT&T are busy completing their deals.
Investors such as Gabelli are publicly
encouraging a sale. I think the deal
gets done at $100 a share, Nathanson
says. Bewkes would walk away with
$79 million because of a change-of-
control provision in his contract.
Bloomberg News has reported that
Murdoch has asked Bewkes in a letter
to stay on if a deal happens, although
its clear hed no longer be in charge.
His former colleagues dont expect
Bewkes to stick around for that. Such
a departure would be unthinkable to
a guy like Murdoch, but Bewkes may
decide that his primary jobmaking
his shareholders wholeis done. I bet
if you gave Jef the truth serum, hed
probably say: Gosh, I wish I was still
back at HBO running HBO, Viebranz
says. He probably had more fun at
HBO than hes had with running Time
Warner. Devin Leonard
The bottom line Investors have cheered
as Bewkes dismembered Time Warner and
raised the value of its stock.
S
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21
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G
Aircraft
Your Knees Will Soon
Ache Even More
Plane makers are adding seats to
help airlines boost prots
Seating so tight it would be even
beyond the pale of Spirit Airlines
Steven Ekovich, a Tampa-based golf
course broker, has devised some cre-
ative strategies to eke out a little extra
space in coach during frequent busi-
ness fights on Southwest Airlines,
which has open seating. I always try
to grab a seat in the aisle or window,
says the 6-foot-1 managing director at
real estate frm Marcus & Millichaps. To
fll the middle seat next to him, he says,
I always fnd the skinny woman in the
crowd and invite her to sit down.
Soon, that might not be enough to
minimize Ekovichs discomfort. In an
industry where every square inch is
mined for revenue, the big squeeze is
on in the back of the plane. Carriers are
changing the shape of lavatories, stream-
lining galley areas where they store drink
carts, and adding slimline seats with
thinner padding to shave centimeters of
the distance between rows.
Boeing announced this month that it
will build a new version of the narrow-
body 737 Max 8 aircraft with as many
as 200 seats. Thats 11 more than the
Max 8 that was already under develop-
ment. Airbus Group is adding 9 seats to
the coach cabin in a competing jet, the
A320neo, increasing the total to 189.
most projects lose money, bottom-line
concerns often trump art. We joke that
were in an industry built on perceived
success, Quinn says. But at some
point, you need to have actual success
to survive. Bilge Ebiri
The bottom line The lm Snowpiercer needed a
$25 million marketing budget to release widely
in the U.S. So it went video-on-demand instead.
Per-screen revenue,
on 8 screens on opening
weekend
Per-screen revenue, three weeks
later on 356 screensconcurrent
with the video-on-demand release
Tilda Swinton, a
Snowpiercer villain
2,500-screen theatrical release for
Snowpiercer, Quinn says. While he
wont divulge what Radius spent to
market the flm, multiple outside esti-
mates put it at about $5 million. The
low-cost VOD approach makes it a lot
more likely the flm will be proftable.
Having acquired North American
rights after seeing early footage and
reading the script, Weinstein co-founder
Harvey Weinstein initially envisioned
releasing the flm in theaters on thou-
sands of screens. When I saw the fnal
movie with the very artistic fourishes
that we all love, I thought, Its not for a
wide audience, its a smart movie for a
smarter audience, he told Indiewire,
a flm site, in July. So he renegotiated
for a smaller release through Radius,
Weinsteins boutique distribution arm,
run by Quinn and Jason Janego. They
were eager to test a model that sent a
flm to VOD while also screening it in
many more theaters than the handful
usually used for an independent flm
simultaneously released on VOD.
Indiewires Anne Thompson and
Tom Brueggemann crunched the
numbers, comparing the potential
returns of a successful wide theatri-
cal release for Snowpiercer and a suc-
cessful theatrical-VOD combination.
Their conclusion: The theatrical option
would have ultimately netted about
$18 million, after deducting all other
costs and factoring in ancillary revenue
from later VOD, home video sales, and
streaming services such as Netfix. The
current limited-release-VOD option may
end up netting about $13 million.
Given the critical praise for the flm,
some insiders say Weinstein may have
misread the theatrical market for the
flm and left money on the table. Every
once in a while, a smart movie comes
along that also has the potential to be
really commercial, says David Poland,
editor-in-chief of flm business site Movie
City News. Snowpiercer, with the right
campaign, was a commercial movie. And
when you have that, going straight to
VOD is like killing it in the crib.
Yet Quinn points to other critically
acclaimed genre moviessuch as
Children of Men and Drive, each of
which made a disappointing $35 million
in the U.S.as proof that great reviews,
action elements, and star power dont
always guarantee success. He also
made note of Snowpiercers stalled box-
ofce performance in France last year.
It sold a total of $5.3 million in tickets
there after an opening weekend of
$2.2 million, despite being based on a
popular French graphic novel. All that
suggests the flm might face challenges
reaching a wider audience.
As good as this movie is, it
would have been a tough sell at the
box ofce, says Gitesh Pandya of
researcher Box Ofce Guru. They have
tremendous competition from other
summer action movies. He also points
out that VOD allows word of mouth to
build without the specter of a dwin-
dling number of screens showing the
flm: You can have people still seeing
this movie two months from now
thats hard to do theatrically.
That hard-nosed business approach
doesnt sit well with many flm insiders,
who prefer the theatrical-release model
because it gets people talking, attracts
press coverage, and makes a flm part of
the cultural conversation in a way VOD
rarely does. But in a business where
22
Companies/Industries
Lauren Penning, a Boeing spokes-
woman, says its up to airlines to deter-
mine how to add the extra two rows.
That could mean changing the size or
location of lavatories or reducing space
between seats by 2 inches. Were just
giving our customers another option
to make more revenue, Penning says.
Industry consultants say Boeing is likely
to fnd buyers for the 737 Max 8 variant
outside the U.S. The 200-seat model is
meant for all-economy airlines, such as
Dublin-based Ryanair, which are more
prevalent in other countries.
Low-cost carrier Spirit Airlines is
known for its leg-cramping 28-inch
pitchthe distance from one seat to the
same point in the row aheadvs. the
30-inch industry standard. Bob Mann,
a Port Washington (N.Y.)-based consul-
tant, says Boeing may need to shrink
the distance even more to add 11 seats.
It is so austere that it would be even
beyond the pale of Spirit, he says.
Penning says only that an airline
could add 11 seats to the new 737
Max 8 variant without dropping
to 27 inches. For now, Spirit only
has single-aisle Airbus jets in its
feet, but it might look at Boeing
in the future, says Charlie Rue,
the vice president in charge
of the carriers supply chain.
We look at a lot of things, Rue says
of Boeings new 200-seat ofering. I
wouldnt say anything more than that.
In recent years, airlines have con-
stantly tweaked their coach cabins to
add seats and improve economics,
says Ranga Natarajan, a senior product
manager at travel website SeatGuru.com.
In Boeings popular 777 widebody jet,
most airlines have moved from a roomy
9 seats across to a tighter 10. Carriers also
narrowed coach seat widths to 17 inches
from 18 inches and introduced seats that
dont recline as much, he says.
Airbus may have the most radical
idea yet for saving space: a bicycle-like
seat with a back rest. According to
European patent documents, the seat
folds down when not in use. Mary
Anne Greczyn, an Airbus spokes-
woman, plays down the patent applica-
tion as a nonstory and says the seat
is a concept only. Frequent fyers hope
shes right. Michael Sasso
The bottom line The next version of Boeings
737, the worlds most popular jetliner, will have
200 seats. It was introduced in 1967 with 100.
Briefs
Obamacare Snags
By James E. Ellis
Edited by James E. Ellis and Dimitra Kessenides
Businessweek.com/companies-and-industries
GTwo federal appel l ate courts i ssued
opposing rulings on the legality of the subsidies
used to pay for coverage under the Affordable
Care Act. A three-judge panel in Washington, D.C.,
found that under the law, the government can pro-
vide subsidies only to poor people who purchase
coverage using one of the 14 insurance market-
places run by states. A panel in Richmond, Va.,
said the government can also provide tax cred-
its for policies bought on the federal exchange, in which 36
states participate. The conflict-
ing rulings could bring another
Supreme Court review of the
law. In another sign of
weakness in the gambling mar-
ket, the Margaritaville Casino &
Restaurant Biloxi on Mississippis Gulf Coast said it will close
by Sept. 19. Magaritaville is the newest of nine casinos in
Biloxi, which has seen a glut of gaming operations. In June,
Caesars Enter tainment closed its Harrahs casino in Tunica,
Miss. In Atlan tic City, one casino shut down in January and two
others are slated to close later in 2014. N A Florida jury
issued a $23 billion punitive judgment against a unit of tobacco
giant R.J. Reynolds. The award, to a Pensacola woman whose
husband died of lung cancer, may not stand on appeal,
because it far exceeds the 2003 standard
the Supreme Court set for determining dam-
ages. China ordered spot checks of
restaurants that bought meat from Shanghai
Husi Food, a U.S.-owned supplier to Western
fast-food oper ators on the mainland, after it
was shut down for selling expired products.
McDonalds, Yum! Brands, Papa Johns Inter-
national, and Burger King Worldwide say they
have removed some items from the supplier.
PepsiCo, bolstered by
strong sales of Lays
and Doritos, reported
second-quarter prots
that beat Wall Streets
expectations. The
resultsand a stock
price jumpcould help
Pepsi stave of activist
investor Nelson Peltz.
CEO
Wisdom
Nobody ever
competes well against
Rupert.
Leslie Moonves, CBS,
when asked about 21st
Century Fox Chairman
Rupert Murdochs bid
for Time Warner
Share of Toyota Motors
sales in the U.S. so far in
2014 attributed to
Hispanic buyers. The
Japanese carmaker says
its been the top brand
for Latino buyers for
10 consecutive years.
14%
$95
$75
7/2013 7/2014
23
Companies/Industries
The Logistics of Deporting
57,000 Immigrant Kids
Before they can be sent home, they need to be housed, fed, and given court dates
The recent dramatic increase is difcult and distressing on a lot of levels
July 28 August 3, 2014
24
A locally killed chicken
in every pot 28
Hospitals nd another
way to hike prices 27
E
R
I
C

G
A
Y
/
R
E
U
T
E
R
S
with permission to remain in the U.S.
Children from Mexico can be deported
without a formal hearing. But a 2008 law
intended to combat sex trafcking says
those from nonbordering countries
such as Guatemala, El Salvador, and
Hondurasmust be allowed to plead
their cases before a judge. The infux
has pushed wait times for immigra-
tion cases to a record high of 587 days,
or more than a year and a half, accord-
ing to researchers at the Transactional
Records Access Clearinghouse at
Syracuse University.
As of June 30, fewer than 500 of
the 57,000 have been sent home,
and more children continue to arrive
every day, despite pleas from the
Obama administration to Central
Americans not to come. The Federal
Emergency Management Agency has
been tapped to coordinate the govern-
ments response. Ofcials are scram-
bling to charter planes and buses,
sending more agents to the border
region, and hunting for more shelter
sites and people to run them. Even
the U.S. Coast Guard has been brought
in to assist with transportation. The
recent dramatic increase is difcult
and distressing on a lot of levels, CBP
Commissioner R. Gil Kerlikowske said
at a congressional hearing in July.
The White House has asked Congress
for $3.7 billion in emergency funds,
including $1.8 billion to care for the
newly arrived children and $879 million
to pay for detention, prosecution,
and what is ofcially referred to as
removal. Much of that would go to
private companies and contractorsa
list that runs from American Airlines
to medical practitioners and shelter pro-
viders. Senate Democrats have proposed
covering $2.7 billion of the request.
House Republicans say they will con-
sider approving as much as $1.5 billion,
but only if the 2008 law is relaxed to
make it easier to turn kids away.
One proposal, put forward in mid-
July by a pair of Texas lawmakers
Senator John Cornyn, a Republican,
and Representative Henry Cuellar, a
Democratwould change the 2008
antitrafcking law to treat Central
American children more like Mexicans,
expediting their cases and keeping
them in government custody rather
than releasing them to stay with
had ballooned to almost 25,000. Since
October, more than 57,000 children
have arrived by themselves, most from
Central America, and 22,000 more have
been detained with their parents. While
the majority of those caught are teen-
agers, the greatest increase has been
among children younger than 12.
U.S. Customs and Border Protection
(CBP) agents fnd that most dont try to
run; in fact, they want to be caught. The
kids hope that being apprehended will
begin another journey, one that will end
In recent weeks, President Obama and
congressional Republicans have begun
to ofer the same simple-sounding solu-
tion for dealing with the food of chil-
dren crossing the U.S. border alone:
Send the kids home. But with tens of
thousands of them churning through
the system, some just toddlers, the
logistics are overwhelming. A decade
ago, the Ofce of Refugee Resettlement
(ORR), which cares for minors soon
after they are picked up, handled just
6,200 kids a year. By 2013 that fgure
A Customs and
Border Protection
holding cell in
Brownsville,
Texas
25
family members or other sponsors
while their claims are considered. But
that would require both additional bed
space and more judges, both of which
are already in short supply.
The frst stop for apprehended chil-
dren is one of the CBP processing
centers scattered among the Southwest
border states, where agents conduct
screenings. Its one of more than
a dozen federal agencies they may
encounter. Many of the children arrive
with little more than a phone number
of a parent or relative in Los Angeles or
Houston. Those lacking identifcation
may undergo bone or dental X-rays to
help determine their age if they appear
to be about 18 to fgure out whether
they should be legally treated as adults.
The CBP is also charged with making
children ft for travel, according to
a March report from the University of
Texas at El Paso. That includes feeding,
bathing, and clothing them. At one
station, in Fort Brown in Brownsville,
Texas, agents trained to patrol the
border routinely wound up buying
sandwich fxings and drinks for the
kids at local grocery stores and taking
the childrens blankets to wash and
dry of-sitewhether at a laundro-
mat or at their own homes, the report
doesnt say.
The CBP turns them over to the
Ofce of Refugee Resettlement (ORR),
a division of the Department of Health
and Human Services, which contracts
with private companies and nonprof-
its to run shelters. The agency had
budgeted for 5,000 beds this year,
far fewer than it needs. As a result,
some children wind up staying in CBP
holding cells much longer than the
72-hour maximum prescribed by law.
We saw one 3-year-old child who had
been held for 12 days, Representative
Zoe Lofgren, a California Democrat,
said after touring stations in the Rio
Grande Valley in July. The ORR, looking
to expand capacity at shelters, has put
out bids ofering to pay shelters an $80-
a-day rate per childroughly the price
of a night at the Washington Dulles
Airport Marriott in Northern Virginia.
Providers must ofer services including
classroom instruction, exercise, and
medical care.
The Department of
Defense has stepped
in to help the ORR by opening
emergency shelters on military
bases in Oxnard, Calif., Fort Sill,
Okla., and San Antonio. Private
DATA: U.S. CUSTOMS AND BORDER PROTECTION, UNITED NATIONS OFFICE ON DRUGS AND CRIME
Where They Come From
In recent years, most immigrants to the U.S. have come from Mexico, but from
October to June the majority of children detained at the border have come from
Central America, where violence has spiked in the past year. Alex Tribou
Other countries
978
Texas
42,164
12,614
Mexico
13,301
El Salvador
09 14
14,086
Guatemala
09 14
16,546
Honduras
09 14 09 14
*Homicides per 100,000 people
21.5 41.2 39.9
90.4
Childs country
of origin
Where
each child was
apprehended
57,525
Total number of
children detained from
October to June
728
485
295
6,945
794
177
2,803
3,134
Arizona
Apprehensions of
Mexican children
have declined
Most of the children
were caught in
the Rio Grande
Valley sector, one
of nine along the
Southwest border.
New Mexico
Murder
rate*
California
Annual U.S. apprehensions
26
Politics/Policy
sites under consideration include a
former convent in Syracuse, N.Y., that
could house as many as 200 kids; plans
for converting an ofce park on Long
Island have been dropped. Some pro-
posals have been stymied by local
opposition; federal ofcials backed
out of plans to move kids into a shut-
tered college in rural Virginia even
after signing a fve-month lease. About
85 percent of the kids in shelters are
released after about a month to rela-
tives throughout the U.S. or sponsors
who will house them while their cases
are deliberated; since October, more
than 40,000 children have been dis-
persed this way.
In recent weeks, immigration
lawyers say, the government has
begun giving priority to asylum inter-
views for children over adults. In some
cases, hearings are being conducted
by videoconference because of the
shortage of judges in border areas.
This is an abrupt change in policy in
order to speed everything up for the
kids, says Virgil Wiebe, a law profes-
sor at the University of St. Thomas in
Minneapolis who runs a clinic ofering
legal assistance to immigrants.
A growing chorus of immigrants
rights advocates and scholars argues
that the gang violence terrorizing
Central American countries, particu-
larly Honduras, means many of these
children should be treated as refu-
gees and allowed to stay. White House
Press Secretary Josh Earnest has said
he expects most will ultimately be
repatriated. Immigration and Customs
Enforcement carries out deportations
on 135-seat chartered jets informally
known as ICE Airthrough a con-
tract with CSI Aviation, based in
Albuquerque. The agency recently
added two aircraft to the feet at
Brownsville, a hot spot for cross-
ings. ICE fies other deportees com-
mercial, though under Department of
Homeland Security guidelines, each
unaccompanied child is supposed to
be fown home during daylight hours
escorted by at least two ICE agents
potentially adding a gargantuan task
for already overwhelmed agents.
Even before the recent infux,
the system wasnt perfect, accord-
ing to Amy Thompson, who followed
fights from Houston to Tegucigalpa,
Hondurasone of the largest points of
origin for the current group of migrant
childrenwhile researching the repa-
triation process for the Center for
only signifcant diference that we pri-
marily see is the [patient] gets a wrist-
band placed on them.
Hospitals have long charged more
than freestanding medical ofces for
similar services. Its part of how they
pay for higher operating expenses such
as running 24-hour emergency rooms.
As the Afordable Care Act attempts to
steer people away from pricey inpa-
tient admissions, hospitals have begun
buying up doctors ofces in hopes of
increasing their revenue and market
share. The number of oncology prac-
tices owned by hospitals increased by
24 percent from 2011 to 2012. By turning
what used to be independent medical
ofces into so-called hospital outpatient
centers, hospitals are creating networks
that, critics say, give them the power to
set prices and ultimately raise costs for
private insurers and government pro-
grams such as Medicare.
Watchdogs, including the Medicare
Payment Advisory Commission, which
advises Congress, are sounding the
alarm. In May, MedPAC Executive
Director Mark Miller testifed before
a House panel that these price difer-
ences need immediate attention.
Medicare should align rates to limit
the incentive to shift cases to higher
cost settings, he said.
Cancer drugs, already expensive,
often double in price when hospi-
tal systems charge for them. A treat-
ment of Herceptin, a breast cancer
drug from Genentech, cost private
insurers $2,740 when used in an
independent clinic and $5,350 in a
hospital outpatient setting, accord-
ing to an analysis of 2012 claims by
PricewaterhouseCoopers Health
Research Institute. The price of Avastin,
another Genentech cancer drug,
Health Care
When Hospitals Buy
Clinics, Prices Go Up
Charges for cancer drugs
and other services can double
Hospitals say additional payment is
deserved because of higher costs
For the past four years, Pennsylvania
insurance company Highmark has
watched its bills for cancer care sky-
rocket. The increase wasnt because of
new drugs being prescribed or a spike
in diagnoses. Instead, the culprit was
a change that had nothing to do with
care: Previously independent oncol-
ogy clinics and private practices have
been acquired by big hospital systems
that charge higher rates, sometimes
three times as much, for chemotherapy
drugs. The site of care and the type
of service provided does not change at
all, says Tom Fitzpatrick,
Highmarks vice presi-
dent of contracting. The
Wheres your bill to repeal
the nancial reform bill?
If you have the courage of
your convictions, bring it on.
Retired Democratic Representative Barney Frank defending
his Dodd-Frank Act in testimony on July 23 before the House
Committee on Financial Services, which he used to chair.
Quoted
Public Policy Priorities, a nonproft
based in Austin, Texas. In some cases,
Thompson says, she saw ICE agents
leave children to wander airports alone
after landing back in their home coun-
tries. Its just been politically unten-
able to even improve services for these
kids we were seeing, let alone prepare
for emergency situations, she says.
Esm E. Deprez
The bottom line The task of managing the ood
of children arriving at the border is challenging
more than a dozen federal agencies.
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Politics/Policy
Agriculture
You Cant Get a Chicken
Fresher Than This
The locavore movement graduates
from greens to meat
If were going to do this right,
we need cattle
In Marthas Vineyard, its not hard to
grow, harvest, and sell local produce to
residents and summer visitors. Many
customers are happy to even pick their
own berries, tomatoes, and sweet corn.
Locally raised meat, though, is a chal-
lenge: Livestock has to be killed, a messy
business that can be unwelcome in the
afuent enclaves where demand for arti-
sanal foods is highest.
Enter the Island Grown Initiative, a
nonproft that sends trained butchers
to slaughter, scald, and pluck chickens
and ducks at the small farms where the
birds are raised. They arrive in pickup
trucks towing everything they need to
process poultry: knives, a scalder, and
a board lined with stainless steel kill
cones to drain blood from the birds
necks. The animals are cleaned and
packed on plastic folding tables set out
under white tents.
Like the farmers markets and
food trucks that have proliferated to
feed the farm-to-table craze, mobile
abattoirs ofer low overhead and fex-
ibility with none of the hassle and
expense of building a stationary oper-
ation. Island Grown is one of about
20 rolling slaughterhouses the U.S.
Department of Agriculture says
operate around the country, butcher-
ing not just fowl but also cows, pigs,
and sheep for small producers.
Growers outside Seattle were among
the frst to start mobile slaughter oper-
ations a decade ago, but theyve multi-
plied in recent years. Roving units now
process lambs and goats in California,
elk and boar in Texas, and bufalo in
Nebraska. Some stick to regional game:
Kentucky State University runs one for
turkeys, pheasants, and quail, and the
University of Alaska campus in Nome has
a mobile unit for processing reindeer.
The projects have gotten a boost
from the USDA, which has given out
$17 million in grants to small-scale meat
producers since 2009, including at least
four mobile slaughterers. It ofers
local opportunities, says Agriculture
Secretary Tom Vilsack. You dont have
to be a large operator, or a production-
sized operator, to get into this business.
In some ways, the mobile operators
restore a link in the food-production
chain that was lost in the post-World
War II consolidation of American
agriculture, when small operators
were squeezed out by bigger facil-
ities that could ofer economies of
scale. Island Grown formed in 2007
to jump-start a local poultry indus-
try on Marthas Vineyard. The group
spent about $15,000 on a bare-bones
processing unit and received $9,300
from the USDA for technical training
and promotion. Theyve since invested
in equipment for processing ducks,
whose waterproof feathers require
a dry plucker rather than the hot
scalders used to de-feather chickens.
In its frst year, Island Grown killed 100
chickens; now, its up to 10,000 annu-
ally. We dont ft very well with Tyson
and ConAgra, but we have customers
who are willing to pay for the meat,
increased from $6,620 to $14,100, the
Health Research Institute says.
Its not just cancer care thats getting
more expensive. Hospital outpatient
visits for echocardiograms jumped
33 percent from 2010 to 2012, MedPAC
found, while visits to independent
ofces declined. Echocardiograms cost
more than double in hospital-owned
locations. If Medicare
paid the lower ofce
rate for 66 outpatient
services even when
theyre performed in
hospital-owned facil-
ities, the government
would save $1 billion
a year and lower
Medicare patients bills
by $200 million, Miller
said before the House panel. Medicare
insured 49 million Americans at a cost
of $573 billion in 2012.
Medicare doesnt track how much
care is delivered in of-campus hos-
pital outpatient clinics, though it has
proposed to begin recording that infor-
mation next year to determine whether
to make changes in Medicare payment
policies, says spokesman Aaron Albright.
Medicare ofcials dont have the author-
ity to level rates across settings without
Congress changing the law.
At the moment, Medicare is going in
the reverse direction, says Ted Okon,
executive director of the Community
Oncology Alliance, which represents
independent cancer clinics. (The
group gets funding from drug compa-
nies.) The alliance says Medicares pro-
posed rates for 2015, released July 3,
would pay hospital outpatient centers
84 percent more than physician prac-
tices for chemotherapy.
This leaves insurance compa-
nies on their own as they fght hos-
pitals over how much to pay for
treatment in hospital-owned clinics.
Its been a messy battle in Pittsburgh,
where Highmark is in a spat with
the University of Pittsburgh Medical
Center over prices.
Highmark rene-
gotiated some
contracts with hos-
pitals to pay lower
rates for outpa-
tient chemother-
apy. For those it
couldnt change,
the insurer cut
reimbursements,
citing irrational
billing practices. UPMC says the deci-
sion unilaterally and willfully vio-
lated terms of existing contracts
that Highmark itself negotiated. The
insurer says reverting to lower pay-
ments for roughly 20,000 Pennsylvania
chemotherapy patients should save
$200 million a year.
Hospitals insist they have to charge
more because they provide emergency
care for patients even when they cant
pay, a requirement that doesnt apply
to physician practices. There are addi-
tional costs associated with the service
being provided in that setting, and
thats why we think additional payment
is deserved, says Tom Nickels, senior
vice president of federal relations for
the American Hospital Association.
Medical providers and insur-
ers at least owe patients an explana-
tion of why their care costs what it
does, Steven Weiss, spokesman for
the American Cancer Societys Cancer
Action Network, said in an e-mail. For
years, patients have paid diferent
prices for the same procedure or drug,
depending on where they are treated,
he said, and long-standing trends like
this one continue to threaten patient
access to lifesaving care. John Tozzi
The bottom line Hospitals are buying up
doctors ofces and raising prices for patients
and insurance companies.
The only
signicant
diference that we
primarily see is the
[patient] gets a
wristband placed
on them.
Tom Fitzpatrick
33%
Increase in hospital
outpatient
echocardiograms
from 2010 to 2012
Politics/Policy
28
as much as twice the grocery store
price, says Daniele Dominick, owner
of Scottish Bakehouse, a restaurant
in Vineyard Haven that sells pulled-
chicken plates made from birds raised
across the street. You cant just buy
from everyone who stops by wanting to
sell you kale, Dominick says. Livestock
is an opportunity. Alan Bjerga
The bottom line Small farmers are turning to
rolling slaughterhouses to sell locally grown,
butchered poultry and meat.
Edited by Allison Hofman
Businessweek.com/politics-and-policy E
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Other groups, though, say theres
a value in staying mobile. Glynwood,
a nonproft dedicated to rural preser-
vation in New Yorks Hudson Valley,
is looking to get back into the rolling
slaughter business after the dairy farmer
who ran its previous mobile operation,
from 2010 to 2012, opened a brick-and-
mortar meat plant to serve farmers in
the Catskills. That left out chefs and arti-
sanal butchers in the area who want to
cut and wrap the animals they kill, says
Sara Grady, Glynwoods vice president
for programming.
Vineyard-killed chicken sells for
says Ali Berlow, who helped design
Island Growns slaughter truck.
As with other rolling outfts, success
has prompted thoughts of setting down
roots. With a $40,000 grant from the
USDA, Island Grown recently con-
ducted a study that concluded a fxed
slaughterhouse with capacity for han-
dling cows and sheep along with chick-
ens could be built for what it costs
farmers to take their animals to the
mainland for slaughter. If were going
to do this right, we need cattle, says
Richard Andre, who is coordinating the
efort for Island Grown.
The Mobile Unit
Island Growns
slaughter equipment
arrives by truck

Kill Cones
Chickens are
hung upside down
and drained of blood
Chill Tank
Prior to being
butchered, the birds
are cooled down in ice
Ready for Sale
Packaged poultry
is delivered to local
grocery stores
Fresh
chickens
1
1
2
2
3
3
4
4
Politics/Policy
29
The company hit 50 million customers. Now its battling Internet carriers over streaming fees
I will make Netix content magically show up wherever
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Innovation: Fight hair
loss with an $895
plastic helmet 35
Chinas Xiaomi goes
after Apple with a
$320 iClone 34
A memory-chip
startup thinks
small 33
Japan moves to x its
surprisingly slack
cybersecurity 32
July 28 August 3, 2014
Ken Florance wasnt born in Northern
California, but his biography reads
like a ClifsNotes version of the areas
countercultural history. He dropped
out of school and, in between Grateful
Dead concerts and acid trips, made a
pilgrimage to the Oregon home of Ken
Kesey, the novelist and proponent of
psychedelia. In the 1980s and 90s,
Florance taught himself IT and even-
tually worked his way into the frst
dot-com boom, managing large web-
sites and learning the inner workings
of the Internet. Now 51, he shufes
barefoot each morning into the garage
of his Santa Cruz home to kneel before
a Buddhist shrine and meditate for
an hour before heading to work. His
ofce is in the headquarters of Netfix,
where Florance is the vice president
for content delivery.
The streaming company accounts
for about a third of North Americas
Internet trafc on a typical evening,
and Florances team of 50 is charged
with keeping the movies and TV shows
rolling. Its an enormous responsibil-
ity. On July 21 the company said its sub-
scriptions had crossed the 50 million
mark, accounting for $1.15 billion in
revenue for the second quarter, up
from $837 million in the same period
last year. Florance, a happy-go-lucky
pacifst with a cackle of a laugh, is now
defending Netfixs interests in one of
the nastiest fghts in online history: the
battle with Internet service providers
(ISPs) and regulators over the funda-
mental structure of the Web.
Florance says Netfix has spent hun-
dreds of millions of dollars in the past
three years to rebuild and expand its
independent content delivery network
(CDN). The network consists of sets of
customized streaming servers (it takes
12 to hold the sites entire catalog)
placed in hundreds of data centers that
belong to ISPs or other companies with
which Netfix has trafc- sharing agree-
ments. The idea is to spread out the
servers far enough geographically that
all users will be reasonably close to
some of them, keeping service through
the ISPs fast and relatively free of



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Netfixs struggles with the ISPs are
in some ways a refection of its failure
to negotiate trafc-sharing partner-
ships. For much of the Webs history,
companies with popular services
struck informal deals among them-
selves to directly connect their net-
works, reducing trafc delays and
sharing costs, a process called peering.
The engineers would meet at con-
ferences, agree that it made sense to
interconnect, shake hands, and con-
fgure their systems at the back of the
room, says William Norton, author of
The Internet Peering Playbook.
That kind of freewheeling mentality
is increasingly a thing of the past. As is
Netfixs charge-forward-and-sort-out-
the-details-later attitude toward its busi-
ness. In 2011 it infamously decided to
spin out its DVD mailing business and
call it Qwikster; consumers were out-
raged, and Netfix dropped the idea.
Its streaming business is growing so
quickly that the company has sometimes
struggled to keep up.
In February, Netfix announced it
had a deal to pay Comcast for direct
access to its networks and high-speed
connections; news of a similar paid
deal with Verizon soon followed.
Florance grimaces as he says there are
more that have yet to be disclosed.
Netfix is lobbying to outlaw the fees,
but that will be much tougher now
that its started paying, says Norton.
There are people for whom this is a
religious issue, and they will argue that
the deals set a terrible precedent, he
says. From a practical perspective,
though, there really is no longer much
of a choice.
Florances hippie history gives him
perspective on the cultural shift in the
industry. He and his future wife once
lived in a tiny fshing cabin in Oregon,
where he worked at a lumber mill. In
1984 they moved to Santa Cruz, where I
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interruption. For years, Netfix out-
sourced this work to content deliv-
ery specialists. This summer its own
equipment took on 100 percent of the
load, according to Florance. The big
hitch, he says, has been the toll ISPs
charge to ensure smooth delivery.
While Netfix pays, Florance argues it
shouldnt have to. I will make Netfix
content magically show up wherever,
he says. In exchange, [ISPs] should
provide the network your subscribers
are paying for.
This is a part of the eye-glazing
net neutrality debate that actually
concerns ordinary folks50 million
customers care about whether they
get to enjoy House of Cards, Orange Is
the New Black, and the rest of the com-
panys catalog. Netfix isnt the kind
of little guy typically associated with
arguments for Internet freedom, but
the basic question remains the same:
Should ISPs such as Comcast and
Verizon be able to demand fees for
faster connections, or should they have
to treat all trafc
equally?
ISPs argue that
Netfix takes up too
much bandwidth
and so any inter-
ruptions arent
their problem.
Netfix sends out
an unprecedented
amount of trafc,
Verizon spokesman
David Young said
in a statement on
July 10. For whatever reason (perhaps
to cut costs and improve its proftabil-
ity), Netfix did not make arrangements
to deliver this massive amount of trafc
through connections that can handle it.
As Florance sees it, Netfix has helped
drive demand for high-speed Internet
access, and the ISPs should be grateful.
Florance turned a shift at a local com-
munity colleges supply warehouse
into a long-term IT job. After learn-
ing to code and manage the schools
infrastructure, he went on to work
for technology consultant NaviSite in
1998 before moving to Netfix in 2003,
when the company had fewer than
1 million customers and was all about
mailing red envelopes. By 2007, when
Chief Executive Ofcer Reed Hastings
decided on a whim to reveal Netfixs
nascent streaming service at a confer-
ence in New York, it was Florance who
took a cross-country fight to make
sure the demonstration went smoothly.
He sounds nostalgic about the more
communal way the business used to
work, even as he rails against the ISPs.
To me, $0 is a stable price point, he
says. If its not $0, one party always
wants to go up, and the other always
wants to go down. The reason the
Internet scaled so quickly is precisely
because it lacked that kind of friction.
Right on, man. Ashlee Vance
The bottom line Netix has built an
independent content network thats at
the heart of its battle with carriers.
Cybersecurity
Japan Takes Its First
Step to Fight Hackers
A proposed law would compel
companies to add digital protection
Its tough to dispel the widespread
belief that it cant happen here
Shortly after the alert sounded at
9:10 p.m., Yahoo Japans risk team
knew it had a problem. Some 20 million
user names and passwords were being
dumped into a fle that could then be
stolen. What the hell are you doing?
the team asked the employee whose
account was copying the encrypted data,
recalls risk manager Motonobu Koh.
Im not doing anything, the worker
That means all the
sites users connect
to the same servers,
and it takes longer the
farther away they are.
Most websites
store all their
content on a
single server
or set of
servers.
It takes a set of 12
servers to house Netixs
entire library of TV
shows and movies. The
company has hundreds
of such setups.
Major websites like
Netix duplicate their
content on multiple
sets of servers spread
around the globe.
1. Netflix 34.2%
2. YouTube 13.2%
3. HTTP 11.7%
4. iTunes 3.6%
5. SSL 3.4%
6. BitTorrent 3.4%
7. MPEG 2.9%
8. Facebook 2.0%
9. Amazon Video 1.9%
10. Hulu 1.7%
Downstream
Trafc
Services that use the most bandwidth
during peak periods
Scaling Up
32
Technology
replied. Im at home. The responders
managed to block the download.
The April 2, 2013, breach of Yahoo
Japan, controlled by SoftBank, was an
attempt to grab the identities of visitors
to Japans most-trafcked website. It
remains one of the biggest attacks on
the data of the Japanese public. Other
targets in the past few years included
Sony, defense contractor Mitsubishi
Heavy Industries, the Japan Aerospace
Exploration Agency, and once-
preeminent Bitcoin exchange Mt. Gox.
In the coming months, Japans govern-
ment is expected to pass a law designed
to beef up the countrys surprisingly
slack cybersecurity. Only about half of
Japanese companies have an IT secu-
rity policy, according to the National
Information Security Center (NISC),
a government agency. The biggest
problem, and the biggest ally of cyber
attackers aiming at Japan, is the wide-
spread belief that it cant happen here,
says William Saito, an information tech-
nology strategy adviser to Prime Minister
Shinzo Abes cabinet.
Companies in Japan are among the
worlds most vulnerable, and hacking
attacks on state entities have more
than doubled since 2010 to one every
30 seconds, according to data from
Japans government and the Ponemon
Institute, a U.S.-based security
researcher. Attacks in Japan surpassed
1 million in 2012. Among those hit: the
government trade negotiations team,
the lower house of Parliament, and a
nuclear power research institute. Part
of the problem, NISC said in a report last
year, is that the country has a shortage of
80,000 information security engineers,
and that most of the ones in place lack
the skills to counter online threats.
The proposed law would name NISC
the cabinets primary cybersecurity
coordinator and require companies to
report all incidents regardless of bad
publicity. The legislation was spurred in
part by the need to prepare for Tokyos
2020 Summer Olympic Games, says
Takuya Hirai, a lawmaker with the ruling
Liberal Democratic Party who drafted
the bill. It passed the lower house and is
awaiting a vote in the upper house.
While its hard to pinpoint where
the growing attacks against Japan
are coming from, security compa-
nies agree that most of the servers
used by hackers are in China and that
viruses are often written using Chinese-
language operating systems. Although
groups from more than one country
appear to be involved and the hackers
may just be using the servers, the
attacks are on the same scale as those
that prompted the U.S. to accuse China
of state-backed industrial espionage,
says Itsuro Nishimoto, chief technology
ofcer at LAC, a Japanese cybersecurity
consultant. (The Chinese government
has denied the U.S. accusations.)
At Yahoo Japan, Koh says he has a
good idea where his adversaries are
from but declines to say. His experi-
ence helps illustrate the challenges that
NISC and Japans companies will face.
A month after the April 2013 breach,
just as his team had fnished its inves-
tigation and had patched faws in
its network, the attackers returned,
exploiting a diferent system weak-
ness. They also changed tack, copying
smaller batches of data. Kohs unit
again blocked the attack, but not before
the intruders made of with informa-
tion belonging to 1.5 million custom-
ers. Last October the same intruders
attacked for a third time but were
repelled, says Koh. All three attacks
used malware designed specifcally for
Yahoo Japans computers; the compa-
nys name was written into the code.
At this point there are only two types
of companies in Japan: the ones that
have been attacked, and the ones that
just dont know it yet, says Saito, the
government adviser. Theres no shame
in that. We just have to realize were
all victims here, and we need to work
together to change it. Yuriy Humber
and Gearoid Reidy, with Isabel Reynolds
The bottom line Companies in Japan, among
the worlds most vulnerable to cyber threats,
are attacked once every 30 seconds.
Semiconductors
Adesto Wants to Make It
Big With Small Chips
A memory-chip maker eyes smart
gadgets as an untapped market
We have a huge opportunity over
the big memory players
Adesto Technologies is trying to
break into one of the toughest busi-
nesses in the technology industry:
memory chips. Chief Executive Ofcer
Narbeh Derhacobian is betting that
the big namesSamsung Electronics,
Samsung
38.6%
Micron
23.2%
SK Hynix
21.1%
Toshiba
9.7%
Others
7.4%
DATA: IDC
The Big
Four
Micron Technology, SK Hynix, and
Toshibaare so focused on making
large chips used in memory-hungry
laptops and smartphones that theyve
forgotten to think small. He wants to
control the growing market in chips for
smart gadgets, such as ftness-tracking
wristbands and other Web-connected
devices, which cant hold enough
battery power for the bigger, faster
chips. We have a huge opportunity
over the big memory players, he says.
Its going to be interesting how these
com panies react, even if they react.
The big four companies control
92.6 percent of the $67 billion global
memory-chip business, according to
market researcher IDC. Its always
been a war of attrition among the
major rivals, says Derhacobian, a
former executive at Advanced Micro
Devices. The industry is fnally emerg-
ing from a years-long period of supply
gluts that drove down memory prices,
culminating in a round of failures and
acquisitions. Micron is on course to
make its frst annual proft since 2011.
Part of Adestos gamble is that the
big names will continue to war over
their established turf by building
more powerful chips that also suck
more energy. That, Derhacobian says,
will provide an opening for Adestos
conductive-bridging random access
memory (CBRAM), which can get by for
years on the juice of a watch battery.
Adesto makes chips that store
between 32 kilobits and a megabit
of data. The largest is one-quarter
the size of the smallest part listed on
Microns website. The chips, which
Derhacobian says use as little as
one-hundredth the energy needed to
power a conventional fash-memory
33
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Mobile
Xiaomi Takes Direct Aim
At the iPhone
The Mi4 looks like Apples cash
cow at less than half the price
Dressed as Jobs, Xiaomis CEO
says, Our white color is whiter
Chinese smartphone upstart Xiaomi
is turning the release of high-end,
low-priced gadgets into something of
a ritual. At a July 22 press conference
in Beijing, Chief Executive Ofcer Lei
Jun unveiled the Mi4, a metal-backed
iPhone-esque smartphone with a
5-inch display, the latest Qualcomm
Snapdragon chip, and a $320 price
tag that puts the Mi4 in much easier
reach of Chinas middle class than the
iPhone 5S, which sells in that country
for more than $850. Our product
device, make possible a future of
gadgets like blood transfusion bags that
track their own location and the age
and viability of their contents. Low-
power memory can also be used for
devices such as Apples iBeacons, the
tiny location-tracking transmitters that
allow stores to pitch ads to passing
iPhone users.
Such gadgets will be part of a $7.1 tril-
lion market by 2020, according to esti-
mates by IDC. Sunnyvale (Calif.)-based
Adesto is selling chips to medical
and aerospace companies and is for
real, says Jim McGregor, an analyst at
Tirias Research. However, they are
just flling a very small niche at this
time. As Adesto tries to grow and get
its technology used more broadly, the
company will face resistance from
device makers that are reluctant to
depend on a single source for low-cost,
low-power chips, he says. Samsung,
Micron, and Toshiba declined to
comment for this story.
Derhacobian co-founded Adesto in
2007, and during the global fnancial
meltdown managed to secure funding
from investors, including the venture
arm of Applied Materials. Apart from
CBRAM, Adesto has sold more con-
ventional memory chips and devel-
oped self-charging sensors for soldiers
clothing for the Pentagon.
Derhacobian says Adestos gross
margin (a measure of proft calculated
by subtracting production expenses
from sales revenue) is more than
45 percent, though he wouldnt share
revenue fgures. Gross margins for
Micron and SK Hynixwhich unlike
Samsung and Toshiba get all their
revenue from memory
chipsare at about
35 percent. We have
proft margins that would have
others throwing their hats in the air,
Derhacobian says.
He says Adesto doesnt need more
investors. If it can get its own chips
into as many smart devices as possible
and establish a low-power standard
for such equipment, the 100-employee
company will be able to maintain
a strong enough position to force a
memory giant like Samsung, with
1,000 times the personnel, to license
the technology from its smaller rival.
Ian King
The bottom line Memory startup Adesto
is building small, low-power chips to try to
establish a lead in smart devices.
really is better than the iPhone,
bragged Lei, dressed in jeans and a
black shirt, the kind of uniform Steve
Jobs used to wear at product introduc-
tions. Even our white color is whiter.
Founded only four years ago,
the company says it hopes to sell
60 million handsets this year, up
from 18 million last year. Next years
target: 100 million phones. In the
frst quarter of this year, Xiaomi was
the third-largest smartphone vendor
in China and sixth-largest globally,
according to research frm Canalys.
Xiaomi has put together a team of all-
star Chinese technologists under Lei,
but its most important innovation may
be its business model. The company
sells mostly onlinerarely in stores
and spends little on advertising. It sinks
the savings into top-notch components
while keeping prices down.
The Mi4s unveiling isnt neces-
sarily a broad release. The smart-
phone will probably go on sale in small
numbers and sell out quickly. The
Mi3, i ntroduced in September 2013,
has been sold in limited batches and
is difcult to buy, even in China and
nearby markets such as Singapore
and Taiwan. Recently, the company
made only 3,000 Mi3s available in the
Philippines. In India, it worked with
local e-commerce site Flipkart; the
phones sold out within 30 minutes.
The scarcity strategy not only boosts
the desirability of the Xiaomi brand
in the eyes of many consumers but also
allows the company to avoid keeping
pricey, unsold inventory in warehouses.
Those savings help fund its expansion
into new product categories and interna-
tional markets. Xiaomi wants to extend
Amount LinkedIn agreed to pay on July 22 for Bizo, an online marketing
company focused on ad targeting and analytics.
Digits
Thats 46 percent more
than the price LinkedIn paid
in February for job-search
startup Bright
A week earlier, LinkedIn bought
news aggregator Newsle for an
undisclosed sum
Xiaomi Mi4
$320 in China
2.5GHz quad-core
Snapdragon 801
processor
3GB of RAM
13MP main camera
8MP front camera
5-inch screen
Apple iPhone 5S
$868 in China
1.3GHz dual-core
Apple A7 processor
1GB of RAM
8MP main camera
1.2MP front camera
4-inch screen
Our product really
is better than the
iPhone.
Lei Jun
34
Technology
Edited by Jef Muskus
Businessweek.com/technology
Next Steps
Hair restoration surgeons, beauty salons, and other businesses sell Theradome,
which is so far approved only for use by women. Hamid says he hopes to get
the device approved for men by the end of 2015. Jerry Davis, director of patient
education at Advanced Hair Restoration in Bellevue, Wash., says the device
is by far the easiest to use of any of the devices weve ofered in the last 10
years. Ariel Cooper
Price The helmet
retails for $895,
although early
preorders cost $795.
Funding Theradome
raised more than
$450,000 through an
Indiegogo campaign
last year.
Origin Hamid
founded Theradome
in 2008, two years
after stumbling
upon a 1965 cancer
study in which lasers
accidentally caused
hair growth in rats.
Background Hamid
was a research
engineer at NASA
before moving into
biomedical devices.
Innovator Tamim Hamid
Age 50
Founder and chief executive
ofcer of Theradome, a
startup in Pleasanton, Calif.,
with a dozen employees
Form and function
Theradome, approved by the Food and Drug
Administration, is a lightweight plastic helmet that
can limit hair loss, using a laser technology to
deliver light therapy in 20-minute sessions.
Innovation
Hair Helmet
its sales to 10 additional countries this
year, including Mexico, Brazil, and
Russia. That expansion hasnt been easy:
Its entrance into Brazil and Indonesia
has been slowed by regulatory hurdles.
On Xiaomis home turf, Apple has
been growing stronger. In January the
U.S. company completed an agree-
ment that was six years in the making
with leading carrier China Mobile to
sell iPhones and iPads in the country.
While still in fourth place in China,
Apple sold 48 percent more iPhones
there in the second quarter than it did
a year earlier, CEO Tim Cook said on
a July 22 earnings call. China, hon-
estly, was surprising to us, Cook said.
We thought it would be strong, but it
went well past what we thought. The
countrys fast-growing smartphone
market remains a target in Cupertino
as Apple readies new iPhones with
larger screens, as well as a smart -
watch that it received a U.S. patent
for on July 22.
Speaking of smartwatches, the Mi4
wasnt the only gadget Xiaomi unveiled
in Beijing. Lei also introduced the
Mi Band, a wearable device that comes
in fve colors and includes various
ftness-tracking features, an alarm clock,
and the ability to unlock the users
Mi phone without a password. It costs
$13compared with $99 for the Fitbit in
the U.S.though Xiaomi neglected to
announce when its ftness tracker might
go on sale in China, or elsewhere.
A truly global rollout of all Xiaomis
productsthe slick, cheap smart-
phones, connected TVs, home media
servers, and so forthprobably isnt
far in the future. In some coun-
tries, including the Philippines and
Indonesia, the company is beginning to
team up with local e-commerce opera-
tors to smooth its expansion. Katyayan
Gupta, an analyst at Forrester Research
in New Delhi, says local tie-ups like
Xiaomis sale through Flipkart will
be essential to the companys expan-
sion abroad if its to stand alongside
better-known brands like Apple. No
one knows Xiaomi in India, Gupta
says. I dont even know their phones.
Theyll have a lot of education to do.
Brad Stone, with Adam Satariano and
Bianca Vzquez Toness
The bottom line The $320 Mi4 gives Apple
another reason to be wary of Xiaomi, though
the Chinese company may have limited stock.
Lighting Lasers in the helmet
generate less than 1C of
heat, using microprocessor-
controlled algorithms to
ensure that neither the device
nor the user is overheated.
1.
Growth The lasers increase
blood ow to the scalp,
stimulating mitochondria in
follicle cells to produce more
protein, which encourages
hair growth.
2.
Technology
35
Whos Got the Best
Retirement Plan?
July 28 August 3, 2014
Some companies will put in money even if employees dont
Others are sheer prot machines
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When Daniel Baker joined
ConocoPhillips after graduating from
Oklahoma State University, he had a
child and was struggling to cover his
familys living expenses. Yet by saving
just 1 percent of his salary to qualify
for the companys 9 percent match,
he started accumulating a hefty 401(k)
balance. Now, after 13 years with the
company, Baker, 35, is feeling confdent
about his eventual retirement. My
wife and I have peace of mind, he says.
Were well on our way.
ConocoPhillips tops Bloombergs
rankings of the best 401(k) plans among
the 250 largest companies in the U.S.,
largely because of its generous matching
formula. And its one of about 90 com-
panies that put money into employees
accounts even if the workers them-
selves dont. Facebook, Whole Foods
Market, and Amazon.com are among
the least gener-
ous companies
in the rankings,
which are based
on 2012 data, the
most recent year
for which sufcient information on the
companies was available. Whole Foods
ofers a maximum company contribu-
tion of $152 a year.
The rankings compare plans on
seven factors, including company
match, investment options, and
the time it takes to vest. More than
40 percent of companies let workers
vest immediately, allowing them to
take company contributions with
them if they leave. Home Depot and
Amazon make employees wait three
years, Oracle four. Some compa-
nies have the philosophy that its their
job to take care of employees, says
Mike Alfred, chief executive ofcer of
BrightScope, which evaluates retire-
ment plans. Others are sheer proft
machines who will do only what they
have to to be competitive.
The diferences in plans can add up
to hundreds of thousands of dollars
over the course of a career. Take the
case of an employee with a starting
salary of $50,000 at age 25, who was
granted annual pay increases of
3 percent, reaching a fnal salary of
$163,102 at age 65, and assume that he
made the average annual contribu-
tion for his age group and that the port-
folio generated an annual return of
5 percent. Under those conditions, the
individual would have $1.6 million at
age 65 if he worked at ConocoPhillips,
according to Jack VanDerhei, research
director of the Employee Beneft
Research Institute. And that doesnt
include the companys additional con-
tributions of 6 percent to 9 percent
a year. The same person would have
ended up with less than half in his
401(k), or $730,340, if he worked at
Whole Foods. (The fgures are not
adjusted for infation.)
Created by federal legislation in 1978
as a supplement to traditional pen-
sions, 401(k)s have supplanted pensions
as corporate Americas primary retire-
ment vehicle. Participants increased
to 61 million in 2011, from 7.5 million in
1984, according to Department of Labor
data. Americans held $4.3 trillion in
36
Bid/Ask: CIT Group
and BBVA both buy
a bank 41
Speed traders have a
new favorite appliance:
Microwave towers 38
IPOs now have more
heft, less upside 39
In the art world, women
are doing (a tiny bit)
better 40
1. ConocoPhillips 9% 6%-9%
2. Philip Morris International 5% 15%
3. Amgen 5% 5%
4. Boston Scientic 6% 0
4. Caterpillar 6% 3%-5%
4. DuPont 6% 3%
4. Mead Johnson Nutrition 6% 2%-4%
4. Visa 6% 0
Potential
match
Additional
contribution
Additional contributions can vary over time. The data
are from 2012. Ten companies couldnt be ranked.
Levels of Largesse
Company match and additional contributions were
among the seven factors used to rank plans.
232. Amazon.com 2% 0
232. Carnival 3% 0
232. Forest Laboratories 3% 0
232. Nielsen 3% 0
236. Costco Wholesale $500 3%
237. Whole Foods Market $152 0
238. Broadcom 2% 0
239. Wynn Resorts $500 0
240. Facebook 0 0
401(k) plans as of March 31, according to
the Investment Company Institute.
Even as 401(k)s mushroomed, com-
panies carefully guarded the details
of their plans, making compari-
sons difcult. Not until 2010 did the
Department of Labor begin to post
information companies were required
to provide about their 401(k) plans.
Yet the details were so difcult to gain
access to and understand that few
employees could decipher them.
Eforts to make plans more trans-
parent are vital, according to
Massachusetts Secretary of the
Commonwealth William Galvin. Its
very hard to do a comparison of
your plan vs. other plans, and employ-
ees are also in the dark about how
much theyre getting and any changes
to the plan, he says. No one ever
envisioned when 401(k)s started that
people would become so dependent
on them for retirement, and regulation
hasnt kept pace.
Energy companies generally scored
high in the Bloomberg rankings. They
can aford to be generous, since they
tend to have strong cash fows and
high profts per employee. Many also
used to ofer pensions to all employ-
ees and have continued the tradition
of funding the bulk of savings needed
for a secure retirement even as they
switched to 401(k)s. Our goal is to help
employees replace at least 80 percent of
their incomes in retirement by provid-
ing two-thirds of what they need while
they save one-third, says Lynn Tramel,
a benefts manager at ConocoPhillips,
where about 9,700 employees are
enrolled in the 401(k) program. Its
a partnership.
Some biotechnology and medical
companies also did well. They rely on
highly educated employees, many of
whom have Ph.D.s or M.D.s., and sub-
stantial retirement plans serve as pow-
erful recruitment and retention tools.
At Abbott Laboratories, which made
Bloombergs top 10, employees who
save just 2 percent of their annual sal-
aries get a 5 percent match from the
company. We want to give incentives
to young employees without a lot of
discretionary income, says Stephen
Fussell, executive vice president for
human resources at Abbott.
Near the bottom are retail companies,
including Whole Foods, Home Depot,
and Costco. Retailers say they con-
sider a broad range of benefts and costs
and give special consideration to rising
health-care expenses. Whole Foods
automatically enrolls employees in its
401(k) plan, but the company doesnt
pay its $152 match until the following
year. In addition to our 401(k) plan, we
ofer benefts that our more than 80,000
team members have the opportunity to
actually vote on, including paying only
$0 to $15 per paycheck for health insur-
ance premiums, and a broad-based
stock plan, says Mark Ehrnstein, global
vice president for team member ser-
vices at Whole Foods.
Home Depot employees
must wait three years to
be vested. The company
also doesnt match their
contributions until they
have worked there for
a year. Then it puts
in a maximum of
3.5 percent if employ-
ees save 5 percent
of their salaries or
more. Our view is, if you hold
up your end, well hold up ours, says
Brant Suddath, Home Depots director
of benefts.
While Google and Apple ranked
in the top half, other tech giants such
as Facebook, Amazon, Oracle, and
Yahoo! lagged. One reason technol-
ogy companies scrimp on 401(k) plans
is that some highly skilled employ-
ees share in stock ownership. Until
this year, Facebook didnt ofer any
match in its plan, which started in
2006. This April it started matching
50 on the dollar, up to a maximum
company contribution of 3.5 percent
of salaries, for employees who save
7 percent of their pay. Although
Facebook is a young company, we take
a comprehensive approach to the ben-
efts we ofer all our people, which
include a robust 401(k) match as well as
other retirement benefts, said Renee
Whitney, Facebooks benefts manager,
in an e-mail.
Amazon matches 2 percent of
employees incomes if they contribute
4 percent. Yahoo provides one-fourth of
workers contributions, up to $4,375 for
those who save $17,500, the most cur-
rently allowed under government rules.
(Workers aged 50 or older can contrib-
ute another $5,500 annually.) At Oracle,
employees arent fully vested for four
years. Amazon, Yahoo, and Oracle
declined to comment.
ConocoPhillips estimates that an
employee could retire at 60 after
35 years of service with savings of
$3.8 million, adjusted for infation,
assuming a starting salary of $75,000
and salary increases of 4 percent a
year. While he declines to disclose his
balance, Baker, now a senior analyst
Leaders
Laggards
37
Investing
Using Military Towers in
The Speed-Trading War
High-frequency rms nd
microwaves are faster than ber
It really comes down to defending
your position
An 800-foot microwave tower in a
Belgian cow pasture transmitted mes-
sages for the U.S. armed forces during
the Cold War. Now it has been enlisted
in fnancial combat, as high- frequency
traders fght to shave microseconds of
transmission times. Jump Trading,
a Chicago-based high- frequency frm,
bought the tower last year through
a U.K. afliate called Toren Navo
Aansluiting, according to documents
fled in the U.K. and Belgium. The
companys name is Dutch for NATO
connection tower.
Fiber-optic cable used to be the
choice of electronic trading frms such
as Jump that are locked in a contest
to be the fastest. Now theyre adopt-
ing microwave technology, which can
convey data in almost half the time, to
squeeze proft from tiny, feeting price
discrepancies in assets traded around
the world. It really comes down to
defending your position, says Peter
Nabicht, a senior adviser to the Modern
Markets Initiative trade group and the
former chief technology ofcer at high-
frequency trader Allston Trading. If
one person goes to microwave, they
have a distinct advantage, so other frms
have to go to microwave, too, to main-
tain their relative speeds.
Jumps purchase of the tower in
Houtem, Belgium, comes as high-
frequency traders in the U.S. face ques-
tions sparked by Michael Lewiss book
Flash Boys, in which he accused the
after the announcement, the former
employee says. The automated trades
exploit price diferences between
exchange-traded funds based on the
Standard & Poors 500-stock index and
futures based on the S&P 500 traded
at CME Group. Jump applies a similar
strategy to other pairs of stock indexes
and futures in the U.S., the U.K., and
Germany, the person says.
To succeed in the U.S., Jump needed
the fastest connection between
Mahwah, N.J., where the New York
Stock Exchange has a data center, and
Aurora, Ill., where CME Groups servers
in the companys treasury depart-
ment, says he has increased his contri-
butions as his income has risen. Now
I tell interns, dont just think about
salary, he says. Think about the ben-
efts youll get. Margaret Collins
and Carol Hymowitz, with Ekene Bones-
Ijeoma and Judith Sjo-Gaber
The bottom line For a worker starting at
$50,000 a year, the diference between a good
401(k) plan and a weak one can be $870,000.
industry of rigging markets. Jump was
one of the frms to receive subpoe-
nas from New York Attorney General
Eric Schneiderman, whos looking into
whether electronic traders proft from
nonpublic information, a person with
knowledge of the matter said in April.
Co-founded by Chicago Mercantile
Exchange foor traders Bill DiSomma
and Paul Gurinas, Jump has spent
15 years ascending the ranks of high-
frequency frms to become one of
the most active traders on the CME,
where $925 trillion of derivatives
changed hands last year. The secretive
company, which makes few disclosures
about its inner workings or fnances,
has about 350 employees who work in
ofces in Chicago, New York, London,
and Singapore. In 2010, Jump reported
net income of $267.8 million and
operating revenue of $511.6 million for
that year, according to flings with the
Securities and Exchange Commission.
At the end of March it owned stocks
valued at $239 million, according to
data compiled by Bloomberg from
a regulatory fling. DiSomma and
Gurinas did not respond to requests
for interviews.
Jump guards its privacy. In April it
sought to force Twitter to disclose who
was posing as one of its employees.
After the reports of Schneidermans sub-
poena, Jump erased most of its website.
From what I understand, theyve made
billions in profts, says James Koutoulas,
chief executive ofcer of Typhon Capital
Management in Chicago, who says he
has friends with ties to Jump.
The frm, which invests only its own
money, hired programmers to build
complex algorithms for trading U.S. and
European equities, futures, currencies,
and bonds. Unlike other frms that lease
microwave towers, Jump buys them.
We have become an industry leader,
quietly setting the standard for sophis-
ticated trading strategies, Jump said on
an older version of its site.
One of the frms specialties is trading
on information contained in govern-
ment statistical releases, according
to two competitors of the frm and a
former employee. In advance of the
monthly announcement of the U.S.
unemployment rate, for example,
Jump might load its computers with
one program designed to proft from a
rise in the rate and one geared to proft
from a fall in the rate. The computers
are programmed to initiate the correct
strategy tiny fractions of a second
100km
Maximum distance
between towers to avoid
transmission problems
Microwave towers:
5 milliseconds
Fiber-optic cable:
6.6 milliseconds
New Jersey
CME Chicago
data center
CME Aurora
data center
0 mi. 250 mi.
Light-Speed Trading
A Jump afliate owns a network of microwave towers
that can convey data between New Jersey and Illinois
about 1.6 milliseconds faster than ber.
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38
Markets/Finance
T
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Financings
IPOs Are Getting Bigger,
Maybe Not Better
As companies stay private longer,
public investors miss out on gains
Now were sighting unicorns
everywhere
Initial public oferings used to ofer
investors chances to get in on the
ground foor of young, fast-growing
companies. There was risk, of course,
but also the possibility of enormous
rewards. Amazon.com went public
in May 1997, less than three years after
it was incorporated, and has since
returned almost 24,000 percent to
people who got in at the IPO price.
These days IPO investors are more
likely to get in somewhere around the
sixth foor, when companies are well
beyond infancy and maybe approach-
ing middle age. Alibaba Group
Holding, the Chinese Internet giant,
is a case in point. Founder Jack Ma has
waited 15 years to take it public, raising
money along the way from Yahoo! and
SoftBank. The companys IPO on the
New York Stock Exchange later this year
could value it at $150 billion, making it
the biggest in U.S. history.
The size of recent IPOs is a sign that
companies are stretching the limits
on how big they can get while remain-
ing private. It used to be rare to spot a
tech company that had a valuation of
$1 billion based on private investments,
but now were sighting unicorns
everywhere, says Kate Mitchell, manag-
ing director at Scale Venture Partners.
Since 2001, companies have had an
average age of 11 at the time of their U.S.
IPOs, compared with 5 at the peak of
the dot-com bubble in 1999-2000 and
are based. The frm was among the frst
to use microwave towers to send data
between Illinois and New Jersey, accord-
ing to executives at rival frms. World
Class Wireless, which has the same
address and senior managers as Jump,
holds more than 130 microwave licenses
in the U.S. and has transmission loca-
tions in Illinois, Ohio, Pennsylvania, New
Jersey, New York, Delaware, Maryland,
Indiana, and Washington, D.C., accord-
ing to the Federal Communications
Commission website.
A disadvantage of fber is that it has
to be routed around obstacles such as
roads, rivers, and mountains, length-
ening transmission times. Also, light
travels more slowly through cable
than it does through the atmosphere.
Microwave has the potential to be faster
because data gets shot in a straight line
through the air from tower to tower. A
drawback is that it cant carry as much
data as fber because the bandwidth is
narrower and transmissions can be dis-
rupted by poor weather.
Firms in the U.S. started experi-
menting with microwave transmis-
sions four or fve years ago, according
to Hugh Cumberland, a manager at Colt
Technology Services in London, whose
clients include high-frequency traders.
Microwave use has more recently moved
to Europe. Custom Connect, based in
Amersfoort, Netherlands, owns a micro-
wave network completed in March 2013
that cut the round-trip time it took data
to travel from Frankfurt to London to
4.43 milliseconds, about half the time
it took to travel by cable, according to
Jan Willem Meijer, the companys CEO.
Trading frms pay Custom Connect to
use the network.
Most frms that use microwave
transmission back it up with a cable
network, says Cumberland. Traders
need multiple towers because signals
run the risk of breaking up over
distances of more than about 100 km
(62 miles). Controlling a single tower
wouldnt beneft a trader, unless the
goal was to force rivals to go around
it in a slower, less direct route or
to hoard the frequencies that com-
panies rely on to transmit fnan-
cial data, according to Cumberland.
There are rumors in the indus-
try that people have bought tower
space or have bought frequencies that
they dont use, Cumberland says.
We call it frequency squatting or
tower squatting.
Houtem, part of the municipal-
ity of Veurne, is about an hour and a
half west of Brussels by car, near the
English Channel. The U.S. Air Force gave
up leasing rights to the tower when it
decided to switch to a fber network in
2006, according to a spokesman. The
Belgian Ministry of Finance later sold
the tower. Veurne Mayor Peter Roose
says he was told the purchase price
was 5 million ($6.7 million), though he
was not told the identity of the buyer.
Someone paid a lot of money for it, he
says. Jesse Westbrook, Sam Mamudi,
Saijel Kishan, and Matthew Leising
The bottom line An afliate of HFT rm Jump
Trading paid $6.7 million for a microwave tower
in Belgium to shorten transmission times.
The
Houtem
tower
Sold for 5 million,
according to the mayor
of Veurne
130+
Number of microwave
licenses Jump holds
in the U.S.
39
Markets/Finance
$4.3m
Auctions
Women Artists Begin to
Narrow the Gender Gap
Six women have set personal sales
records in the past two months
Joan Mitchell has a long way to go,
but she is catching up
British artist Tracey Emin was in the
crowd when My Bedan unmade
bed with rumpled sheets, empty
vodka bottles, underwear, and cig-
arette packetssold for 2.5 million
($4.3 million) on July 1 at Christies in
London, more than fve times her previ-
ous high. I was really nervous, and then
six people started bidding, Emin says. I
thought it was just brilliant.
A fve-year rally in prices for con-
temporary and modern art is lifting
the value of works by women in a
market long dominated by men. Six
women set personal records in the past
two months at auctions at Christies,
Sothebys, and Phillips in New York
and London. A 1960 Joan Mitchell
abstract painting sold for $11.9 million at
Christies in New York in May, the most
ever for a work by a woman.
Since 2004, works of art by the best-
selling women have brought in 12 per
dollar spent on those of their male coun-
terparts, according to fgures compiled
by Bloomberg from the database of
research frm Artnet. Women are start-
ing to narrow that huge price gap as
global collectors hunt for undervalued
works. There are more women artists
who are getting their due, says Amy
Cappellazzo, who runs advisory frm Art
Agency Partners in New York.
Emin ranks 15th among living female
artists, with sales of $13.1 million since
2004. David Maupin, her New York
dealer at Lehmann Maupin gallery,
called the price for My Bed a bargain
for a very important work. It sparked
debate about the meaning of art when
it was originally exhibited in London in
1998. In 2000 advertising mogul Charles
Saatchi paid $255,000 for it. In the July 1
sale, it was bought by Emins London
dealer, Jay Jopling of White Cube gallery.
Mitchell, who died in 1992, is the top-
selling woman of the past three decades:
Her works brought in $293.3 million from
1985 through June 30. Her total tripled
over the fve years through June 30. It
is becoming apparent that she is equal
to her male peers de Kooning, Kline,
7 to 9 in the previous two decades,
according to Jay Ritter, a University of
Florida fnance professor.
The number of U.S. companies taking
their shares of public exchanges has
exceeded the number of new listings,
causing the ranks
of public compa-
nies in the U.S.
to fall 36 percent
since 2000, accord-
ing to the World
Federation of
Exchanges.
Venture capitalist
Marc Andreessen
sees all of this as
a sign of trouble.
In an interview with the website Vox
posted in June, he mourned the
efective death of the IPO and said
that small investors are disadvan-
taged because by the time companies
go public, their boom days are over.
Gains from the growth accrue to the
private investor, not the public inves-
tor, said Andreessen, general partner
of Andreessen Horowitz in Menlo Park,
Calif. (Bloomberg LP, the parent of
Bloomberg Businessweek, is an investor
in Andreessen Horowitz.)
In Andreessens opinion, overregu-
lation is largely to blame. CEOs of start-
ups are choosing to stay private to avoid
having to comply with Regulation FD,
issued by the Securities and Exchange
Commission in 2000, and the Sarbanes-
Oxley Act of 2002, both of which heaped
new disclosure requirements on public
companies, he said.
The changing nature of the IPO market
isnt all badand its not clear how much
regulation has to do with it. Todays
newly public companies are more sea-
soned and less likely to go bust, says
Ritter. Many still have a lot of growth
ahead of them, says Greg Becker, chief
executive ofcer of Silicon Valley Bank:
Companies are disrupting traditional
businesses in ways we havent seen
before, going after bigger market oppor-
tunities and growing faster.
Compared with the past, companies
have many more ways to raise funds,
according to Glenn Kelman, CEO of
Redfn, an online real estate broker-
age thats private. Companies such as
Fidelity Investments and T. Rowe
Price are putting money into companies
before they go public, allowing them
to stay private longer. And more entre-
preneurs have no intention of going
public. Their goal is to be absorbed into
companies like Facebook or Google.
In contrast, theres been a boomlet in
IPOs in biotech, where CEOs are betting
their companies can stand alone, at
least for a while. The IPO is not, as
Andreessen would have it, efectively
dead. But it does appear to be aging.
Peter Coy
The bottom line Companies average age
when going public has hit 11, up from 5 at the
height of the dot-com boom.
Emin poses in front of My Bed,
which sold at Christies on July 1
$150b
Potential market
value of Alibaba
after its IPO later
this year
Joan Mitchell
Untitled
$11.9 million
Yayoi Kusama
No. 2
$5.7 million
Cindy Sherman
Untitled #96
$3.9 million
Million-Dollar Sellers
40
Markets/Finance
and Twomblyand that her prices were
kept back only by her gender, says
John Cheim, co-founder of New York
gallery Cheim & Read, which represents
Mitchells estate. There is still a long way
to go, but she is catching up.
Works by German painter Gerhard
Richter, the best-selling living male
artist, brought in $1.29 billion since
2004, according to Artnet. Jef Koons,
who sold a blue stainless-steel dolphin
resembling an infatable plastic toy for
$5 million last month at Switzerlands
Art Basel, ranks second, with his work
generating $581.8 million. The record
for a single work is also held by a man.
The late Francis Bacons 1969 triptych
Three Studies of Lucian Freud sold for
$142.4 million at Christies in New York in
November. For $10 million less than that,
you could buy the most expensive work
by each of the top-selling 15 women,
according to Artnet.
Women are being helped by thought-
ful, groundbreaking exhibitions at
major museums, says Suzanne Gyorgy,
head of art advisory and fnance at
Citi Private Bank. Beatriz Milhazes,
a Brazilian known for abstract prints
and paintings that fuse Latin American
and European imagery, has pieces in
New Yorks Museum of Modern Art and
Madrids Museo Nacional Centro de
Arte Reina Sofa. The subject of a retro-
spective at the Prez Art Museum Miami
starting on Sept. 19, she ranks eighth
among living female artists, with sales of
$22.7 million since 2004. Twenty years
ago we couldnt get anyone to pay atten-
tion to her work, says Ann Marshall,
owner of Durham Press, a Bucks County
(Penn.) gallery and studio.
Sales for leading painters Elizabeth
Peyton and Xu Lele, and sculptor Cady
Nolandwho holds the price record for a
living woman artist at $6.6 millionhave
climbed more than 3,000 percent in fve
years. Collectors and dealers say trophy
pieces by women will eventually start to
go for tens of millions of dollars. They
will reach those levels in a decade, but
only a handful, says Valeria Napoleone,
a collector in London who owns about
290 pieces by women. The talent, the
consistency and seriousness in which
they approach their practice will be
recognized. Mary Romano
The bottom line Top women artists have
brought in 12 per dollar generated by their
male peers since 2004.
Bid/Ask By Evan Applegate
Edited by Eric Gelman
Businessweek.com/markets-and-nance
$3.7b
$3.4b
$2.3b
$1.6b
$635m
$404m
$300m
BCE takes Bell Aliant private. Canadas biggest
telecommunications company agreed to buy the
56 percent of the company it didnt already own.
CIT Group acquires a reconditioned bank. The business
lender agreed to buy OneWest Bank, which was known
as IndyMac when it was taken over by the FDIC in 2008.
Severstal divests its U.S. steel units. The Russian
company sold mills in Columbus, Miss., and Dearborn,
Mich., to Steel Dynamics and AK Steel, respectively.
Banco Bilbao Vizcaya Argentaria buys a once-
distressed bank. Spains second-largest lender will take
over Catalunya Banc, which was nationalized in 2011.
Kindred Healthcare raises bid for Gentiva Health
Services. The $17.25-per-share ofer is 23 percent higher
than Kindreds rst bid for the hospice provider.
Suez Environnement takes full control of a water utility.
The company will buy the 24 percent of Sociedad General
de Aguas de Barcelona it didnt already own.
Yahoo! acquires an analytics startup. The Internet giant
continued its mobile-focused buying spree with Flurry,
which provides user data to advertisers and app makers.
CBS Outdoor Americas buys Van Wagner Communications bill-
board business. The deal adds 1,100 billboards to its portfolio, which
includes more than 329,000 advertising spaces on U.S. subway cars,
bus shelters, and billboards. Chief Executive Officer Jeremy Male said
in March that the company would acquire smaller players to compete
with Lamar Advertising and Clear Channel Outdoor Holdings.
$690m
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Markets/Finance
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44
ast summer a trim guy with wavy brown hair, high
cheekbones, and a broad smile could be found making
Whoppers, working the drive-through window, and
scrubbing bathrooms at a Burger King in Miami.
His name was Daniel Schwartz. He learned to make
a Whopper in less than 35 seconds and blended in
well with his fellow employees, except
for the fact that Schwartz had a guy with
a video camera trailing him. I cleaned
about 15 toilets in the past two days, he
boasted at one point, as if hed just com-
pleted a marathon.
Schwartz was justifably pumped. That June hed been named
Burger Kings chief executive ofcer, with a $700,000 annual
salary and a potential cash bonus of twice that. There was
another reason for Schwartz to be exuberant: He was only 32
and well on his way to becoming a star in the fast-food industry.
Making sure the fxtures in Burger Kings restrooms gleam is
only one of Schwartzs challenges. Hes Burger Kings 21st CEO
since the company was founded in 1954. The chain has had six
owners and sufered from years of neglect and strategic inco-
herence. Unlike his predecessors, Schwartz isnt just competing
with McDonalds and Wendys. He has to keep customers from
straying to trendy newcomers such as Chipotle Mexican Grill and
Panera Bread. Their sales in the U.S. last year grew 17 percent
and 12 percent, respectively, according to Technomic, a food
industry consultant. Sales were essentially fat for Burger King
and its two primary rivals.
Schwartz looks much as he did when he was a student on the
deans list at Cornell University, all the way back in the Aughts.
He had no experience in fast food before going to Burger King;
he spent almost a decade on Wall Street after college. And
hes sur rounded himself with a similarly eager and fresh-faced
inner circle. Josh Kobza, the chief fnancial ofcer, is 28. He
and Schwartz are usually joined on conference calls by Alex-
andre Macedo, Burger Kings ancient 36-year-old president
for North American operations, and Sami Siddiqui, the head
of investor relations, whos 29. Only one of the four saw a day
of the Seventies.
Schwartz is an outlier in the corporate world. Matteo Tonello,
managing director at the Conference Board, a nonproft research
organization that studies such things, says chief executives that
young are a rarity outside of tech enclaves such as Silicon Valley.
He says the average age of an incoming CEO at a company in the
Standard & Poors 500-stock index was 53 last year. Schwartz
would be the second-youngest CEO on the Fortune 1000 (behind
Mark Zuckerberg) if Burger King made that list, according to fgures
from BoardEx, a frm that analyzes data about corporate execu-
tives and directors. The conventional wisdom is that you need
an experienced candidate, Tonello says. Theres still a lot of
skepticism toward younger ones.
These days, however, Burger King is behaving more like a
startup than a typical burger chain. In 2010 it was purchased
for $4 billion in a leveraged buyout by 3G Capital, the Brazilian
private equity frm that also owns H.J. Heinz with Berkshire
Hath away and whose principals are among the controlling share-
holders of Anheuser-Busch InBev. Jorge Paulo Lemann, 3Gs
74-year-old billionaire co-founder, likes to enlist young exec-
utives and put them in top positions at the frms companies.
Who says you have to be old to be good? says William Ackman,
the New York hedge fund manager who runs Pershing Square
Capital Management, Burger Kings largest inves tor after 3G.
Schwartz and his co-workers are apostles of 3Gs ferocious
approach to cost reduction. They talk about the need to instill
everybody at Burger King with an ownership mentality,
meaning mainly that employees should husband the com panys
money as if it were their own. Thats put an end to some cher-
ished perks. After InBev swallowed Anheuser-Busch in 2008,
the American brewerys executives were informed that theyd
no longer get free cases of beer. In September, Bloomberg News
reported that executives at Heinz, bought three months earlier
by 3G and Berkshire Hathaway, had been commanded to turn
in their mini-fridges.
Schwartz, who did not cooperate for this article, has over-
seen much chiseling. McDonalds owned 19 percent of its 35,429
restaurants worldwide in 2013. Wendys owned 18 percent of its
6,557 outlets. Histori cally, Burger King operated much the same
way: When 3G bought the chain in 2010 it owned 11 percent of
its 12,174 restaurants around the world. Since then, Burger King
has sold all but 52; it keeps the last few for training executives
and testing products.
Thats such a departure from the way its competitors
operate that some people are questioning the companys strat-
egy. Unless you keep a certain percentage of stores, you dont
really know how the business is operating, says Malcolm Knapp,
a New York restaurant industry consultant. He contends that
Burger Kings management is interested primarily in siphon-
ing cash out of the business. Howard Penney, managing direc-
tor of Hedgeye Risk Management, a research frm in Stamford,
Conn., is similarly skeptical of Schwartzs methods. Its fnancial
engineering, he says. Burger King disputes this, but such sus-
picions are reasonable. After unloading more than 1,200 res-
taurants, the companys corporate head count has fallen from
38,884 to 2,425 in 2013. Now its income fows almost entirely from
royalty fees from franchisees, on average 4 percent of franchi-
sees monthly revenue. Thats less money than before overall,
but Burger King has become a cash machine. And 3G hasnt been
shy about helping itself to some of that money.
At the same time, Burger Kings business has been growing.
Schwartz negotiated agreements with restaurant operators and
fnanciers in Brazil, China, and Russia, where American ham-
burgers are still a novelty. They havent just purchased restau-
rants from Burger King, theyve also constructed new ones. As
a result, the number of Burger Kings worldwide rose by 1,493
in 2013, to 13,667. And the company hasnt had to spend much
money; its partners are putting up the bulk of the cash.
Wall Street has responded enthusiastically. Burger King went
public again in June 2012 in an ofering that put a $4.6 billion
value on the company. As of early July, its market cap had risen
to more than $9 billion. The doubters are in the minority now,
and many in the investment community would like McDonalds
and Wendys to mimic the kids at Burger King. These things
are seemingly working at Burger King and causing questions to
be asked about the strategy of others in fast food, says David
Palmer, an analyst who covers the restaurant industry for RBC
Capital Markets. Like, why arent you doing what theyre doing?
Schwartz grew up in Albertson, N.Y., an upper-middle-class
Long Island suburb near the border of Queens. He went to
the Wheatley School, where he played basketball and was an
honors student. Carol Vogt, his history teacher there, thinks
hell make an accomplished fast-food company CEO. Hell do
fne if hes anything like he was when he was younger, she says.
Hes a very hard worker. Schwartz made no secret of his big
dreams. He summed them up with a quote from Shakespeares
Twelfth Night that he chose to go with his senior picture in the
schools 1998 yearbook: Some are born great, some achieve
greatness, and some have greatness thrust upon them.
At Cornell he majored in management and applied econom-
ics. Friends say he was a bright if somewhat colorless guy who
spent his time studying and working out. After college he worked
as an analyst at Credit Suisse First Boston and did time at a
45
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hedge fund in Stamford. When he learned that 3G was opening
an ofce in New York in 2005, he applied for a job, thinking it
would be a good ft, according to a Burger King spokeswoman.
It was a prescient move for a 24-year-old. Schwartz started
as an analyst and was soon promoted to the private equity
group. He was involved in a campaign to win seats on the
board of CSX, the American railroad company, with Childrens
Investment Fund, a charitably inclined British hedge fund. 3G
made a proft, but the interlopers also endured a long, nasty
courtroom battle with CSX. The documents that surfaced in
the case reveal how much responsibility 3G was willing to give
Schwartz despite his youth.
In 2010, Schwartz orchestrated 3Gs purchase of Burger King,
ofering a 46 percent premium on the chains stock price. That
inspired some head- scratching. Burger King was a mess and had
been for decades. James McLamore and David Edgerton had
opened the frst Burger King in Miami. They struggled to get
by until they noticed crowds focking to someone elses ham-
burger joint in Jacksonville, Fla. The other place was dirty; the
door to the mens room was hanging by a single hinge. But the
burgers were tastyand huge.
McLamore would write in his surprisingly good auto biography,
The Burger King, that the idea for the Whopper came to him later
that afternoon as he got pleasantly buzzed on the drive back to
Miami. I had a small bottle of bourbon in the glove compartment
and so I poured a little of it into a 7-Up I had just bought at the
gas station, he wrote. All he could think about was the sand-
wich hed just eaten and how he might clone it.
The Whopper made its debut in 1957. It was an immediate
hit, and Burger King established itself as McDonalds doppel-
ganger and its closest competitor. McLamore dreamed of being
No.1. It didnt happen. Pressured by his investors, he agreed
to sell the company in 1967 to Pillsbury. He soon regretted it.
Pillsbury had little interest in opening restaurants as rapidly
as McDonalds. Burger King fell further and further behind. In
1988, Grand Metropolitan, a British conglomerate with inter-
ests in liquor, tobacco, and gambling, bought Pillsbury, and
Burger King became even less of a priority. Nine years later,
Grand Metropolitan merged with Guinness to create Diageo.
The new company wanted to focus on Johnnie Walker, not
Whoppers. In 2002 it sold Burger King in a leveraged buyout
to Texas Pacifc Group, Bain Capital, and Goldman Sachs for
$1.5 billion. Franchisees welcomed TPG and its partners. They
couldnt have been happier to escape from Diageo. This is
the frst day of a new era for Burger King, proclaimed Julian
Josephson, chairman of the chains franchisee association, in
a 2002 statement.
The good feelings didnt last. In 2009, Burger King put the
$1 Double Cheese Burger on the menu. The item increased
sales, which meant Burger King collected more in royalties.
But franchisees abhorred it: They couldnt make money selling
a big cheeseburger for a low price. The Burger King fran chisee
asso ciation sued the company to get the burger of the menu.
It was beyond toxic, says consultant Knapp of the chains
relationship with its franchisees at the time.
This was the moment when Schwartz and the rest of the
3G squad showed up with an ofer to buy Burger King for
$4 billion$1.6 billion in equity, the rest in debt. TPG and its
partners took it.
3G had a blueprint for making Burger King work. Once the
deal closed in October 2010, the new owners raised double cheese-
burger prices and settled the franchisee lawsuit. Meanwhile,
Burger Kings new CEO, Bernardo Hees, a 41-year-old former
railroad company head, purged 375 people from the Miami
headquarters and 275 more around the world, according
to flings with the Securities and Exchange Commission. In
46
THIS SPREAD: GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: COMPILED BY BLOOMBERG
October, Schwartz, then Burger Kings new deputy chief
fnancial ofcer, showed up in Miami to perform more sym-
phonic cutting. Bernardo was the conductor, says Martin Frank-
lin, a Burger King board member. Daniel was the frst violin.
According to Franklin, Schwartz played an integral role in
rooting out what management considered to be heedless spend-
ing. The Burger King corporate jet was promptly sold. The 3G
guys did away with the comfy ofces that top executives and
their secretaries had enjoyed, which people at Burger King called
Mahogany Row. Executives now sit in a Spartan open-plan ofce.
3G discovered that the companys Europe, Middle East, and
Africa division had been throwing an annual $1 million bash at
a chateau beside an Italian lake. The party is over.
Some cuts appeared to be less about fnding big savings than
creating an oppressive cheapness. Employees were instructed
to use Skype to make long-distance calls instead of running
up a cell phone bill. They were urged to scan docu-
ments and e-mail them rather than use FedEx. They
were ordered to turn in their personal printers and
use large communal ones.
That all paled compared with Burger Kings restau-
rant dis posal initiative. The rationale was simple: Who was
better qualifed to operate a Burger King than an experienced
franchisee? The plan would also relieve 3G from having to spend
more than $400 million to remodel its restaurants, many of
which still had old-style metal chairs and bright blue booths.
The new owners would put up the money instead. (Burger King
says it has contributed some cash to cover remodeling costs,
though it wont provide a number.)
Early results under the new management were promising.
In 2012 net income rose 34 percent, to $118 million. Same-store
sales swung from a decline of 0.5 percent the previous year
to a gain of 3.2 percent. Part of the reason was that Burger
King introduced the largest number of new menu items in
its history. There were salads, wraps, chicken strips, smooth-
ies, and frapps. Meanwhile, Schwartzs deals with foreign
restaurateurs were spawning hamburger joints globally and
bringing in more royalty income.
Everything went so well that 3G was able to sell Burger King
shares to the public. As part of the deal, 3G sold 30 percent of
its stock to a group of investors led by Ackman for $1.5 billion,
retaining the other 70 percent. The amount was about what
3G had put up in equity to buy Burger King. They basically
ended up owning the company for nothing, Knapp says.
In June 2013, Hees departed to run Heinz, and Schwartz
became Burger Kings CEO. He spent his frst months toiling
in Burger Kings and discovering what it was like for the chains
cooks and dishwashers. Brendan Berg, Burger Kings senior
director for global learning, was Schwartzs guide during his
training. He remembers his boss struggling to keep up with
orders for items from the expanded menu. Theres nothing
like standing in the back of the house, and the lunch rush is
upon you, and you have complicated sandwiches, Berg says.
We had three diferent barbecue sauces. Some burgers had
raw onions. Some had red onions. We had sweet potato fries.
Were standing there side by side, and hes saying, Brendan,
this seems like a lot here.
After a few of these midday scrabbles, Schwartz
thought it was time to simplify the menu with
new products that were easier to assemble and
didnt require a multiplicity of ingredients, such as
Satisfries, which were introduced last September
and have fewer calories and less fat than Burger
Kings traditional fries (which are still available, of
Have It Your Way,
Burger King
2009 2013 2009 2013
Burger King
0.4%
company owned
2009 2013
Wendys
18%
company owned
2009 2013
McDonalds
19%
company owned
2009 2013
Chipotle
100%
company owned
Panera Bread
49%
company owned
10k
0
20k
In 2010, the company
owned 11 percent of
its restaurants; since
then its sold all but
52 Miami outlets
Number
of stores
47
course). For customers in need of something more flling, there
is the Bacon Cheddar Stufed Burger.
Schwartz also shook up the management team, elevating
people closer to his age to top positions. As a result, the average
age of the Burger King executive team dipped from an already
young 41 to 39. Its a youthful, energetic team, says Frank-
lin, the board member. These are really intelligent guys.
After surviving a few overwhelming lunches, its not surprising
that Schwartz looked for simpler products. But he needed to
reinvent the menu for other reasons. By 2013, Burger King had
completed almost all its cost-cutting. That meant it had to sell
more burgers and fries to keep its numbers from weakening.
The U.S. in particular threatened to drag those numbers
down. Annual sales at Burger Kings restaurants in the country
declined by 1 percent to $8.5 billion in 2013, according to Tech-
nomic. Schwartz also had to come up with new menu items
and unlike the $1 Double Cheese Burger, these would need to
generate profts for his franchisees. Burger King doesnt break
out their margins, but its largest franchisee, Carrols Restau-
rant Group, a Syracuse (N.Y.)-based publicly traded company
that owned 538 outlets last year, does. In May 2012, Carrols
purchased 278 restaurants from Burger King, which received
$16 million in cash, a 29 percent stake in Carrols, and two seats
on the board, one occupied by Schwartz. Last year, Carrols
lost $13 million, because it borrowed so heavily to fund the
remodeling plan it agreed to as part of the deal with Burger
King. Paul Flanders, Carrolss chief fnancial ofcer, says the
company hopes to refnance its junk-bond debt next year
and cut its losses. He praises Schwartz and says Satisfries are
Donald Thompson
McDonalds
1990
Electrical engineer
1998-99
Manager, San Diego
1999-2000
Regional vice president
2001-04
President, McDonalds USA, West
2004-05
Executive vice president for
restaurant solutions, McDonalds USA
2005-06
Chief operating ofcer,
McDonalds USA
2006-10
President, McDonalds USA
2010-12
President and chief operating ofcer
2012-present
CEO
Total years
24
Daniel Schwartz
Burger King
2010
Executive vice president and deputy
chief nancial ofcer
2011
Chief nancial ofcer
2013-present
CEO
Total years
3
Under the Heat Lamp,
Or Hot Of the Grill?
helping. Incrementally, were selling more fries,
Flanders says. But its not replacing the existing
fries. People say one thing and eat another. In July,
Carrols bought 21 more Burger Kings.
Meanwhile, Burger King has 140 people who
spend all their time in the feld coaching franchisees
on how to boost proftability. On a recent morning, Leslye
Johnson, an indefatigably cheerful Burger King coach, sat in
the upstairs dining room of a Burger King in Midtown Man-
hattan with Kishana Scotchman, the restaurants manager.
Johnson produced an iPad and showed Scotchman scores of
charts ranking her establishment on everything from ham-
burger sales, cleanliness, and service to the congeniality of
her staf. Scotchman, a petite 29-year-old with long eyelashes,
listened intently, jotting things down in a pink notebook.
Some nights were generating lousy results. Scotchman
thought she knew why: She said one of her night managers
was slacking of. I try to look on the camera a lot to see what
goes on at night, she said.
Good, good, Johnson said, smiling. What are you notic-
ing at night?
He stays in the ofce.
Ill come back over here and see whats going on, Johnson
said. Tell him he has a date with me.
Burger Kings interventions are working. According to
RBC, the companys same-store sales were up 2 percent for
the frst quarter of the year, while McDonalds increased only
0.5 percent. The franchisees, who made a lot of noise in the
past when they were upset with Burger Kings management,
are also happy with Schwartz. I dont focus on how much
experience they have, says Tom Garrett, CEO of GPS Hospital-
ity, which has bought 61 Burger Kings from the company since
2012. They are extremely smart, which makes them very, very
fast learners.
In late July, Burger Kings stock had risen 15 percent;
McDonalds was down 2 percent. Wendys, meanwhile, was
down 6 percent, despite the release of its much-discussed Pretzel
Bacon Cheeseburger. Even a skeptic such as Hedgeyes Penney is
impressed. The stock has done better than I thought, he says.
Burger Kings stock performance may not be based entirely
on burger sales, however. The companys been talking publicly
about refnancing its debt in coming months. This might enable
the chain to do something nice for share holders. Burger King
wont say what that might be, though RBCs Palmer expects
the company to pay a special dividend. He says theres no
question that this has been driving the recent share appreci-
ation. Of course, the biggest benefciary would be 3G, Burger
Kings largest shareholder.
Schwartz spent most of June overseas, communing with
foreign franchisees and investors. He didnt attend the Piper
Jafray Annual Consumer Conference at the New York Palace
on Madison Avenue. There were a lot of middle-aged restau-
rant people in coats and ties, who run steakhouses, noodle
places, and Cheesecake Factories. They faced a roomful of
analysts who wanted to know about their menus and plans
for expansion.
CFO Kobza was there. In his slim-cut suit and open-collar shirt,
he looked like a Wall Street guy, and gave the impression of having
been coached to smile as often as possible. He talked opaquely,
but appetizingly, about the refnancing: That could free up a
decent amount of cash for us to potentially return to sharehold-
ers. He noted that Burger King had returned to France after a
15-year hiatus: They still remember the Whopper, he said. We
walked through the airport with Burger King logos on our shirts.
The security people asked us, Wheres the Burger King?
Additional reporting by Danielle Muoio
$9,496,664 $4,770,787
2013 publicly disclosed compensation
Fast-food experience
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49
market value
and
By Zeke Faux
and Dune Lawrence
50
he Matalon, a six-story glass building in
Belize City, Belize, towers over a lot lit-
tered with old refrigerators and washing
machines. Jagged rebar sticks out of unfn-
ished cinderblock structures nearby, and
the view, across Haulover Creek, is of a
cluster of corrugated metal shacks. This is
the listed address for Cynk Technology, a
company with no assets, no revenue, and
one employee, that for one hour in July
had a market value of more than $6 billion.
Until that inconceivable run, no one had ever heard of Cynk or
the social network it claimed to operateno one, that is, outside the
murky, volatile market for penny stocks, where fraud is rampant
and regulation scant. Cynk had begun trading in 2013, for a few
cents a share. The price stayed there, hugging the bottom, until
June 17, 2014, when shares that had last changed hands at 6 spiked
to $2.25, a gain of 3,650 percent. The stock kept surging, drawing
the attention frst of penny stock gossips, then the sharper fnance
blogs, and fnallyas Cynks gain topped 36,000 percent, giving it
a greater worth on paper than companies such as Urban Outft-
tersall of Wall Street. On CNBC, in the New York Times, and all
over Twitter, the strangest story of the summer was the mystery
listing from Belize.
Calls to Cynk go unreturned. In flings with the Securities
and Exchange Commission, Cynk lists its ofces as the Matalons
Suite 400. There is no Suite 400. The building manager says the
company has never had an ofce there. There are no $6 billion
companies in all of Belize, a country where workers earn as little as
$80 a week. What Belize does have is a reputation as a haven for of-
shore businesses with difcult-to-trace records and little oversight.
Among the operations that have set up shop are penny stock
promoters who blast out e-mails and tweets hyping shell com-
panies. One of the biggest boosters tied to Belize, AwesomePen-
nyStocks, was able to stay anonymous until the Bugatti- and
Lamborghini-driving 26-year-old behind it was sued in March by
U.S. regulators. He settled on July 7 for $3.6 million without ad-
mitting the allegations. Another promoter, Victory Mark, lists an
address in the nearby town of Ladyville. A visit there confrms the
road exists, but it has no street numbers and is patrolled by stray
dogs. Victory Mark didnt respond to a phone call and an e-mail.
The person identifed in flings as Cynks chief executive ofcer
until mid-June, Javier Romero, grew up in the island town of San
Pedro, where everyone knows everyone. Romero worked as a park
ranger at a local marine reserve, says Daniel Guerrero, San Pedros
mayor. On YouTube, under the name Young Soldier, Romero can
be seen singing the hook on a reggae music video titled San Pedro
(I Love You). His weathered
family home, constructed of
plywood sheets, stands out
as particularly decrepit in a
poor settlement a little out
of town. An overturned golf
cart lies in front amid ferns strewn with buckets and trash.
Theres an outhouse of to one side.
Romeros grandfather, Joe, is sitting outside on a recent
afternoon. He says Javier, whose age he gives as 26 or 29,
has left for the U.S., where hes studying to be a pilot.
Asked about Cynk, he explodes. He doesnt own any-
thing! he says. That is crap. All the crap on the Internet
those are crap! He has nothing to do with it.
Cynk Technology was born on May 1, 2008, when a
Seattle man named John Kueber incorporated a company
in Nevada under the name Introbuzz, according to state
records. Nearly four years passed, with no apparent activ-
ity, until January 2012, when Introbuzz fled with the
SEC to sell shares to the public. The startup wanted to
raise as much as $100,000 to launch a new type of social network
competing with the likes of Facebook and LinkedIn. The difer-
ence was that Introbuzz users would pay for introductionsto
celebrities, business contacts, or even the right squash player.
The company would make the networking lunch pass: Instead
of paying for a lunch that neither party wants to eat, parties can
get down to business knowing that their time has been valued.
Kueber (pronounced Keeber) sold Introbuzz in late 2011 to a
Las Vegas man named Kenneth Carter for $600, the documents
say. The risks section of the SEC fling noted, in capital letters, that
Carter had zero public-company experience. Carter, who went by
the name Kenny Blaque, ran a promotions company called Blaque
Technology, which lists life-size stickers called Wall Dawgz and
Wall Dolls among its products.
The SEC showed some concern, asking Introbuzz a series of
questions in four comment letters, before approving the ofering.
The shares began trading on Feb. 7, 2013, on the over-the-counter
market, the modern, electronic version of the sidewalk trading
that used to happen outside the stock exchange. Carter resigned
a month later, replaced by Marlon Luis Sanchez, who worked as
a spokesman for the medical tourism industry in Tijuana, Mexico.
Sanchez approved a 75-for-1 stock split and a name change. On
July 23, 2013, Introbuzz ofcially became Cynk Technology Corp.
Three weeks later, the company issued a notice that it had
moved ofshore, to a building in Belize called the Matalon. Cynk
soon ceased making its required quarterly and annual reports.
The CEO merry-go-round continued, with Sanchez replaced in
February by Javier Romero, who was himself replaced on June 18
by Howard Berkowitz of Costa Mesa, Calif. That was the day after
Cynk shares made their curious 3,650 percent leap.
Attempts to reach Sanchez, Romero, and Berkowitz were
unsuccessful. Carter, reached by phone, says he wasnt involved
in the stock spike: Im not a stock man. I just create Internet work.
I dont know why they would manipulate everything. Its mind-
boggling to me. Kueber, also reached by phone, says he doesnt
know who is running Cynk. No idea whats going on, he says.
Ill let you guys fgure it out from there.
Even the august New York Stock Exchange has been described as
a casinoa place where individuals risk big losses by betting on
single stocks. If thats true, then the market for penny stocks is like
a more perilous game held in a gambling houses backroom, with
fewer protections, greater threat of going bust, and more outright
scams. It can take the SEC years to shut down any given scheme,
and an unknown number go unchecked.
Why do these markets keep going? Some legitimate small com-
panies do use them to grow. But many investors are lured by the
jackpot appeal of a stock they bought for a cent or two
doubling or quadrupling in value overnight. And some
think they can spot scams in the making and dart in and
out at a proft.
Thats what excited Matthew Fromm. With a day job at
a Chicago telecom brokerage, Fromm, 27, trades stocks in
his spare time. Hed discovered Cynk in the spring of 2013 as
he poked around ETrade on his laptop after his infant son
went to sleep; he noticed Cynks low price and suspiciously
high volumes. The company seemed bogus, but Fromm
didnt care. He saw what he considered the telltale signs of
a pump and dump.
Pump-and-dump schemes are as old as the stock market
itself. The playbook: A promoter buys a long-dormant
company with tradable shares, or creates a new one and
issues stock. The promoter controls most of the shares out-
standing but keeps his name out of ofcial flings, appointing
Both
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51
a token ofcer. Then he starts trading shares back and forth with
confederates at gradually increasing prices, using spam promo-
tions now sent by e-mail or social networks to lure in marksreal
investors on whom the schemers can dump shares at a huge proft.
Penny stock scams have a long history of seizing on the hot indus-
try of the momentgold mines in the 1930s, or, today, legalized
marijuana and digital currencies.
Fromm aimed to ride the pump. The trick with trading penny
stocks is being ahead of the curve, he says. Youve got to get there
before the pumpers do. He bought 2,500 shares for $250, or 10
each, in 2013 and tucked them away in a fle labeled Lotto Picks.
Theres another way to proft on pump-and-dump schemes:
spot an obviously infated stock and short it. Thats what Tom
Laresca, a market maker at New Jersey brokerage
Buckman Buckman & Reid, did on July 8 after a
widely read blog called ZeroHedge brought Cynk
to national attention. Laresca, who has 30 years
of experience on Wall Street, says he bet against
the shares at about $6 each. Shorting involves
borrowing shares and selling them, in hopes of
buying later at a cheaper price so the borrowed
shares can be returned at a proft. Its not for
the faint of heart: Stock lenders can recall those
shares at any time. If the price has gone up, the
short sellers can be forced to cover at theoret-
ically unlimited losses.
Larescawho had put on an even riskier form
of the trade known as a naked shortfgured the
stock would fall on its own as more people dis-
covered its absurd balance sheet and nonexis-
tent product or if the SEC suspended trading.
Instead, the shares doubled on July 9, starting
a short squeezea mad rush among traders
to buy stock and reverse their short positions.
Laresca, who declined to give the size of his
losses, lost his job. I just dont understand how this was allowed
to happen, he says, sounding forlorn.
Another theory emerged on July 10, as Cynk hit $21.95 in
intraday trading and its valuation eclipsed $6 billion. Paulo Santos,
an independent trader from Portugal, wrote about the stock in a
blog post, on the website Seeking Alpha, that quickly went viral
on Wall Street. Santos described a modifed pump and dump:
Cronies controlling virtually all of the shares had set a trap for
short sellers by lending them stock, he posited. After bidding the
price up further among themselves, the theory went, they recalled
the shares, forcing the shorts to pay a price of their choosing.
Regulators fnally stepped in on July 11, when the SEC suspended
trading for two weeks, citing concerns about the accuracy of disclo-
sures and potentially manipulative transactions. Both shorts and
longs got trapped by the halt. Short sellers must still pay for bor-
rowed shares during the stoppage. Longs are stuck with paper gains
until trading resumesat which point their shares may head to zero.
Fromm, at least, won big. When the stock hit $20 on July 10, an
automated sell order kicked in, giving him a 200-fold gain of almost
$50,000. I should have never got a chance to sell at $20, he says.
If the SEC really cared about the people playing the pennies, they
would have halted it. If the government really cared, they could
clean it up. I think they just think its gamblers.
In the Wild West of penny stocks, along with the gamblers and the
scammers, theres something like a vigilante brigade, private indi-
viduals who take it upon themselves to fnd the promoters behind
the shadiest listings. As Fromm, Laresca, and others were making
their bets, these amateur investigatorsposting on online forums
such as Investors Hubnoticed John Kueber, the guy in Seattle
who had founded Cynks predecessor in 2008. His brother, Phil,
had been afliated with several small companies whose shares had
popped before collapsing, state and SEC flings show. Financial
authorities in Canada had cited him in 2005 as running an unau-
thorized banking scheme. A Phil Keeber was listed on a form
releasing the name Cynk Technology to Introbuzz in Nevada in
2013. In a phone interview, Phil Kueber says hes consulted for
Cynk but wasnt involved in manipulating its stock or any other.
I never bought a share, I never sold a share, he says.
Phil Kuebers rsum is a bizarre mix of entertainment ven-
tures and energy-related investments. He has a screenwriting
credit for Screwball Hotel, a 1988 pranks-and-boobs comedy in
which teen heroes save the hotel
by uncovering a corrupt minis-
ters fnancial shenanigans. He
later teamed up with the direc-
tor, turning a flm studio into a
penny stock company in 1997.
Phil Kueber arrived in San
Pedro shortly after Cynks relo-
cation to Belize in August 2013.
Kueber wouldnt stand out among
the aging, sunburnt gringos cruis-
ing the towns three bar-lined
streets in golf carts after dive and
fshing trips. He bought a condo
there in September, according
to Lisa McCorkle Guerrero, the
real estate developer who sold
it to him.
Back on t he mai nl and,
while theres no sign of Cynk
Technology on the fourth foor
of the Matalon building, the
company does have a link to that foor: Titan International Se-
curities, whose blue centurion logo is visible behind a glass door.
The ofshore brokerage held millions of shares of Cynk stock for
clients this year, according to documents obtained by Bloom-
berg. In a statement, Titan said it returned the shares because
they didnt meet internal compliance rules.
Titan came up recently in a U.S. sting operation. When the FBI
tricked some penny stock promoters into hawking a bogus listing,
they called Titan when they needed to sell the shares, an SEC
lawsuit against the promoters claims. Titan says its cooperating
with authorities on the case.
Gian Ghandi, 81, has been in charge of Belizes ofshore fnancial
businesses since regulation began 15 years ago. The industry now
generates about $13 million a year in fees for the government,
he says. He works of a dark corridor in a government building
in Belmopan, the countrys capital, where security guards wave
visitors through a broken metal detector. He says he hasnt heard
about the FBI sting. Is that so? Ghandi says. Nobody asked
me these questions, quite honestly.
Asked for Titans regulatory fle, he retrieves a manila envelope
from his ofce and puts on his thick glasses to review the fgures.
The summary for May shows the brokers business consisted
almost entirely of liquidating unlisted penny stocks unloading
352 million shares at an average of 1.6 each. April was similar.
Ghandi asks if this is suspicious. He doesnt request the full list
of stocks and trades, he says, unless he receives a complaint.
The whole thing, all the trades, it was too much for us, he
says. I do not assume that theyre doing something illegal or
fraudulent. Ghandi says he checked, and Cynk was never regis-
tered as a company in Belize. He says hes never been sure why
it used that address. Its still a little mystery to me, he says.
With Jing Cao
got trapped
S
2/8/2013
$0.0068
7/10/2014
$21.95
MONEY CYNK
DAILY HIGH PRICE, SPLIT-ADJUSTED. DATA: BLOOMBERG
Shares
halted
FIRST WORLD D
PURINA IS BARKING MAD OVER BLUE BUFFALOS CLAIMS THAT IT
Is that kale free-range?
52
DOG PROBLEMS
S DOG CHOW IS HEALTHIERAND IS TAKING ITS RIVAL TO COURT
Looks a bit ruf
By Paul M.
Barrett
Photographs by
David Brandon
Geeting
53
t the executive ofces of
Blue Bufalo, in Wilton,
Conn. , Labr ador s
and golden retrievers
wander the halls, nosing
around for lunch left-
overs, and members
of William Bishops 300-person work-
force all call the 75-year-old founder and
chairman Bill. A basketball and lacrosse
player at Ohio-Wesleyan University in the
late 1950s, Bishop, 6-foot-5, walks with a
slight slouch but retains the loping gait of
a college jock. His white hair thinning, he
wears an open purple shirt over a black
tee, blue jeans, a cloth belt decorated with
skulls and crossbones, and running shoes
the size of rowboats. He notes proudly that
his sons, Billy and Chris, have senior execu-
tive jobs, making the Buf, as he calls the
company, a real family operation.
Started in 2002 and propelled by adver-
tising techniques the elder Bishop honed
hawking Kool-Aid, Tang, and later SoBe,
a beverage company he co- founded in
the 1990s, Blue Bufalo last year tallied
$1 billion in sales, making it Americas
fastest- growing major purveyor of dog
and cat food and the largest specializing
in the all-natural kibble niche. He named
his latest company in memory of Blue, a
beloved family Airedale. The Bufalo part
refects his afection for cowboys, Indians,
and Western kitsch. Also its good to have a
strong icon that people will remember, he
explains. SoBe had the lizard. The Buf has
the American bufalo. Undercutting the
Great Plains motif, orange-labeled bottles
of Veuve Clicquot Champagne line shelves
outside Bishops corner ofce. You have
to like to drink to work here, he jokes.
Weve had a lot to celebrate.
The companys rise can be measured
not only by its near-ubiquitous retail pres-
ence but by pervasive advertising that
Bishop boasts is deliberately in-your-
face, and encourages pet parents to
compare the Buf to the competition. Blue
Bufalos television spots and Internet
videos have become so familiar theyve
been parodied on Saturday Night Live.
The mock commercial for Blue River
dog food aired on NBC in April. Guest host
Seth Rogen and SNL cast member Cecily
Strong played the sort of overwrought con-
sumers who philosophize about pet nutri-
tion in Blue Bufalos actual ads. The char-
acters sufer an emotional meltdown as
they discuss what theyve fed their bug-
eyed pug mix, Peanut.
Purina is notably not amused. The
St. Louis-based company, owned by the
Swiss conglomerate Nestl, has manufac-
tured feed and animal chow for 120 years.
It controls about a third of the $20 billion-
a-year pet food market but lately has seen
customers lured away by such premium
brands as Hills, Merrick, and Blue Bufalo.
Competition is one thing, but execu-
tives at Purina headquarters say they cant
abide Bishops advertising, which they
claim is misleading. Contrary to its care-
fully cultivated reputation for authentic-
ity, Blue Bufalo is built on lies, alleges
Steven Crimmins, Purinas normally even-
tempered chief marketing ofcer for U.S. pet
food. Although Bishop stresses his company
is family run, theyre owned by a big Wall
Street frm [and] outsource all their manu-
facturing, Crimmins says, not trying to dis-
guise his indignation. Their key ingredient
claims arent true, and they have a history
of exaggerating what their products do.
In May, Purina sued Blue Bufalo in
federal court in St. Louis for false adver-
tising, commercial disparagement, and
unjust enrichment. Bishops lawyers fred
back with equally heated counterclaims
about an unlawful Purina smear cam-
paign seeking to stem the exodus of
Nestl Purina customers to Blue Bufalo.
In a taunting open letter posted on his
companys website, Bishop accused
the larger company of relying on
voodoo science when it cited in
its court papers lab tests supposedly
showing that Blue Bufalo used poultry
byproduct mealan ingredient Bishops
company promises never to include.
Purina v. Blue Bufalo has riveted vets,
retailers, and everyone who follows the
expanding market for fancy
pet eats, says Jennifer
Larsen, an assistant pro-
fessor of clinical nutrition at the University
of California at Davis veterinary school.
The emotional appeals to treat dogs and
cats like human children have gone to an
extreme, she adds. This case shows how
far the manufacturers are willing to go to
try to persuade consumers theyre right
and the other guys are making it up.
At a more basic level, the litigation
illuminates the success of Bill Bishop, a
classic ad guy who unapologetically cashes
in on the markets latest whimshuman,
canine, or other. Setting aside the merits
of poultry byproduct meal (to which well
return), one cant help but speculate that
the wily Bishop has lured Purina into a
fght where attention is the real prize.
Before sweetened beverages and pet
food, Bishop frst had to sell himself. Just
out of the U.S. Marines in 1962, he took
the commuter train from Westchester
County, N.Y., to Grand Central Terminal.
Armed with a roll of dimes, he stood at
a pay phone in the lobby of the old Pan
Am Building, cold calling ad agencies in
hopes of landing a job interview. BBDO
said yes, he could come in for a tryout.
He worked on Tareyton cigarettes (Id
rather fght than switch). Later he moved
on to Ogilvy & Mather, Ted Bates, and
then in-house with General Foods, where
he promoted Kool-Aid and Tang. Nice
margins in artifcial drinks, he recalls.
In the early 1990s, Bishop opened
his own ad firm and circled back to
beverages, this time as a producer, as
well as promoter. Introduced in 1996 as a
challenger to Snapple, South Beach Bev-
erages initially fopped, burning through
$2 million in seed capital, Bishop says.
Luckily, his son Billy, only a year out of
college, stepped up with some youthful
ideas. They shortened the name to SoBe,
focused attention on a funky lizard logo,
and supplemented the companys black
tea with a compound they called 3G
for ginseng, guarana, and ginkgo. Sales
exploded. In 2001, Bishop and a small
circle of co-investors sold SoBe to PepsiCo
for $380 million. Our ship had come in,
he says. Now what? Many people would
BLUE
BUFFALO
IS BUILT
ON LIES,
CRIMMINS
SAYS
BEST IN SHOW?
A
BLUE
BUFFALO
LifeSource
bits
Provides
essential
phytonutrients,
antioxidants,
and enzymes
Cold formed
to retain
their
potency
Selected
by holistic
veterinarians
and animal
nutritionists
PURINA
We formu-
late our food
with real meat,
poultry, or
fsh to increase
bioavailability
Taste that
makes mealtime
sensational
Optimal nutri-
ent absorption
throughout your
dogs body
The special-
ized formula
thats just right
for your dog
54
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have retired. My golf game is crap.
Bishop shares credit liberally for his
good fortune in business. A former col-
league from General Foods, John Bello,
proposed starting South Beach Beverages
in 1996 and oversaw operations. Bishop
credits Billy for efective marketing ploys
aimed at 16- to 24-year-old males: endorse-
ments from X Games athletes; sponsor-
ship deals with the likes of Cannondale
mountain bikes; a retroftted reptile- motif
school bus that raided Mountain Dew and
Coca-Cola promotional events to blast
the insurgents urination-themed slogan,
Drain the Lizard.
SoBe named products for aspirations
Power, Wisdom, Eroswhile stopping just
short of specifically telling consumers
theyd actually enhance their infuence,
intelligence, or sex appeal. In February
2000, the U.S. Food and Drug Adminis-
tration sent a warning letter ordering
the company to cease certain misleading
health claims. The FDA noted, for example,
that dairy-based Lizard Blizzard claimed it
was loaded with natures most powerful
cold and fu fghters. That falsely implied
that the product was intended to treat,
prevent, cure, or mitigate disease, the
FDA said. SoBe amended two or three
of its labels, but the issue didnt prevent
PepsiCo from buying the company. Shortly
thereafter, advertising critic Rob Walker
observed in his column
for Slate that SoBes
most salient character-
istic is phoniness.
Flush with PepsiCo
cash, Bishop and his
family were coping with
Blues canine cancer
when they decided to
investigate the commer-
cial potential of healthy
dog food. Bishop saw
parallels to sweetened
beverages: high margins
and low barriers to
entry. You can get into
the market small with
contract manufactur-
ers making the stuf, he
says, displaying an easy
candor. Slap on a good
label, come up with a
slogan, and of you go,
he says. There were
already a lot of smoke
and mirrors in how pet
food was advertised,
and that was the sort of
stuf we were good at.
He commissioned a local holistic veter-
inarian to design recipes. The top ingre-
dients are meat, vegetables, fruit, whole
grainsexpensive stuf equal to whatever
Wellness and Eukanuba have, he says,
referring to other premium brands. Then
we add the extra supplement in LifeSource
Bits, nuggets advertised as providing
kelp, blueberries, and other ingredients
rich in antioxidants.
Blue Bufalo commissioned consumer
research and discovered that pet owners
have strong ideas of what they dont want
their animals eatingabove all, anything
called a byproduct. Consumers just dont
like the sound of byproduct, says Bishop.
Joseph Wakshlag, a nutritionist on the
faculty at Cornell Universitys College
of Veterinary Medicine, recalls becom-
ing aware of Blue Bufalo in 2005 when
he worked at a vets ofce in Woodbury,
Conn.: They had salespeople who paid
for lunch and learn sessions where they
talked about the owners dog, Blue, who
had died of cancer, and now they had a
new dog food that prevented cancer. I
asked for the data, some evidence. They
said, Look, it has blueberries. There was
no data. Wakshlag, who since has done
paid consulting for Purina, says he doesnt
think Blue Bufalo is necessarily worse
than other brands, but theres no real
evidence its any better. (Bishop specu-
lates that Wakshlag misinterpreted the
sales pitch. We have never claimed the
product prevents cancer.)
Many pet owners considering health-
ier fare for their animals turn to vets for
advice. With at least some of the experts
skeptical of its health claims, Blue Bufalo
didnt take of immediately. So Bishop
hired a staf of in-store representatives to
sidle up to customers overwhelmed by
the profusion of natural brands and steer
them toward the Buf. PetSmart, a national
discount chain, went along with the strat-
egy, in part because Blue Bufalo ofered
retailers relatively high margins. The new
brand began to break through.
Its success drew the attention of Invus
Group, a New York-based private equity
frm that had made successful investments
in such diverse brands as Weight Watch-
ers and Keebler cookies. In 2006, Invus
cash allowed Bishop to launch Internet
and television ads that further fueled Blue
Bufalos growth. Invus now holds a con-
trolling stake in the company.
Blue Buffalos ad campaign targets
big name food manufacturers. In one
video, a woman sitting on a living room
couch, holding her collie, says: I didnt
know how my big name food stacked up,
so I went to Blues website and I took the
True Blue Testan ingredient compari-
sonand it was clear Blue had everything
that I wanted and none of the stuf I didnt
want. Many of Blue Bufalos come-ons
vow that its food contains NO chicken/
poultry byproduct meals.
What is byproduct meal? Generally
speaking, its ground-up chicken necks,
feet, undeveloped eggs, and intestines. Its
not supposed to include feathers. When
pet parents learn the truth about big name
dog foods, Bishops promotions assert,
they switch to Blue Bufalo.
Customers who do convert to the Buf
pay more. While prices vary from store
to store, one comparison cited in court
papers shows that Purina One Smartblend
Chicken & Rice Formula retails for $39.99
for a 31 pound bag, or $1.29 per pound. A
slightly smaller bag of Blue Bufalos com-
parable Life Protection Formula Chicken
& Brown Rice Recipe goes for $59.00, or
$1.97 per pound. Whatever the brand,
says UC Daviss Larsen, consumers seem
willing to pay more for pet food thats
natural and special, because, I think, it
makes them feel good about themselves.
No visit to 1 Checkerboard Square, the 50-
acre, 16-building Purina campus in St. Louis,
is complete without a stop at the nutrition
laboratory. At least thats what Purinas
public-relations guys most want to show
me frst. Inside the immaculate warren of
rooms, a dozen of the 30 staf scientists
some of whom wear white lab coats
are doing molecular- level research
Bishop at
Blue Bufalos
head ofce
55
DATA: EUROMONITOR INTERNATIONAL, MINTEL
to relieve animal arthritis and strengthen
immunity to disease. People stare through
safety glasses at lab tables flled with test
tubes. Centrifuge machines hum. Weve
got Ph.D.s on the cutting edge of keeping
animals healthy, says Keith Schopp, the
companys top spokesman. The last eight
consecutive winners of the Westminster
Dog Show have eaten Purina Pro Plan.
Granted, Purina Pro Plan serves as the main
sponsor of the Westminster show, but still,
one assumes the American Kennel Clubs
top dogs dont get fed garbage.
People bring their dogs to work at
Purina, too. The companys employees
are ofended by Blue Bufalos suggestion
that they feed pets junk. But we dont
pretend that our product is so good that
we feed it to our families, says Crimmins,
the marketing chief.
Purina wasnt alone in its resentment
of Blue Bufalo. Beginning in 2008, Hills,
the longtime manufacturer of Science
Diet, complained repeatedly about Blue
Bufalo to the National Advertising Divi-
sion (NAD) of the Council of Better Busi-
ness Bureaus, an industry-sponsored
panel that reviews advertising disputes.
In March 2014, at the conclusion of an
elaborate proceeding during which Blue
Bufalo had the chance to defend itself,
the NAD issued a detailed ruling con-
cluding that Bishops company has not
provided any evidence that big name pet
food manufacturersare actively conceal-
ing the truth about the ingredients in their
products. The NAD recommended that
Blue Bufalo correct its TV ads to remove
unsubstantiated references to competitors
and amend website claims generated by its
True Blue Test. Bishop says his company
is appealing the NAD decision. A spokes-
man for Hills declined to comment.
The NADs enforcement powers are
limited. Suspecting that Blue Buffalo
wouldnt feel overly concerned about
the panels ruling, Purina says it took
samples of its smaller rivals products to
an independent laboratory for testing. In
April, Purina asserts, the outside lab found
that Blue Bufalos no-poultry- byproduct-
meal claim just isnt true. The Purina-
sponsored tests showed, for instance, that
Blue Bufalos Life Protection ofering was
one- quarter byproduct meal.
Whether or not Blue Bufalos claims
about avoiding ground-up chicken intes-
tines and feet are false, theres actually
nothing wrong with such ingredients, says
Kurt Venator, a Ph.D. vet employed by
Purina. Included in a balanced diet, he
adds, byproducts are actually an excel-
lent source of nutrition for petsa point
reinforced by the NAD decision in March
that scolded Blue Bufalo.
The Lanham Act of 1946 prohibits
false or misleading product advertis-
ing and allows for imposition of penal-
ties of as much as three times the actual
money damages attributed to wrong-
doing. Purina is also seeking disgorge-
ment of Blue Bufalos profts linked to
its contested promotions. In theory, the
total bill could come to tens, if not hun-
dreds, of millions of dollars. In its lawsuit,
Purina asserts that Blue Bufalo preaches
a message of truth, but it is not practicing
it. Blue Bufalos behavior is unlawful and
just plain wrong.
What can you do? asks Bill Bishop,
shrugging. Litigation is part of modern
business. He declines during our inter-
view to discuss the Purina suit further,
other than to point out that so far the
larger company hasnt publicly shared
its supposedly independent lab analysis.
In Dear Pet Parents letters posted on
his company website, though, Bishop has
been full-throated in his counterattacks on
Purina. Just last year they had to recall all
of their Waggin Train and Canyon Creek
Ranch treats that were made in China
with unapproved antibiotics, he said in
a May 8 post. Now theres something that
might be worth a little explaining.
Pouncing when competitors have
recalls is a familiar Bishop tactic. In
2007, Purina and other major brands
recalled tons of dog and cat food after
the FDA found it was contaminated with
melamine, an industrial chemical traced
to Chinese suppliers. Blue Bufalo ran
advertisements bragging that its prod-
ucts didnt contain the chemical. But that
turned out not to be correct, and Blue
Bufalo eventually had to pull a third of
its product line. At the time, Blue Bufalo
said it had been deliberately deceived by
one of its contract manufacturers.
Thats what they doblame it on their
outsourced factories, says Purinas Crim-
mins. We make all of our food in our
own factories, so we know the quality.
His colleague Schopp says that Purinas
antibiotic-related recall involved trace
residue that never threatened animal
health, while the 2007 episode showed
the company doing the right thing when
it learned of a problem.
Later this year, Blue Bufalo plans to
begin operating its frst food plant, in
Joplin, Mo., practically in Purinas back-
yard. Some of Blue Buffalos product
will still come from contractors. Thats
common throughout the industry, says
Bishop. We have people in the [outside]
factories all the time checking on quality,
and we buy all the ingredients ourselves
and have them shipped to the plants.
Bishop is more pleased than troubled
that hes provoked Purina. Both sides
have hired top-fight law frms. Pre-trial
skirmishing is scheduled for later in the
year, and after several rounds of motions
and document demands, such litigation
usually results in a confdential settle-
ment. In a way, the courtroom hostilities
could be classifed as just another line
item in Blue Bufalos marketing budget.
Their inability to compete successfully
with natural pet foods is the key motiva-
tion for this frivolous lawsuit, Bishop said
in his May 6 open letter. We look forward
to seeing Nestl Purina in court.
BISHOP
ACCUSES
PURINA OF
VOODOO
SCIENCE
FANCY FEASTING
U.S. dollars,
in billions
44%
of the $2.7 billion
growth in dog and cat
food sales was in the
premium segment
between 2008 and 2013
72%
of U.S.
consumers
consider their
pets part of the
family
BLUE BUFFALO AND NATURAL BALANCE GREW AT THE EXPENSE
OF LARGE, MID-PRICED BRANDS FROM MAJOR MANUFACTURERS
MID-PRICED
DOG AND CAT
FOOD
PREMIUM-PRICED
DOG AND CAT
FOOD
4
5
6
7
8
9
10
14 12 00 10 08 06 04 02
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Managing Director and CEO
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59
With his new Los Angeles
hotel, the Line, Andrew Zobler aims
to crush the cutesy, hip, and
quirky competition. By Zak Stone
WILL YOU
GET A RAISE? SUMMER SIXPACKS
A NEW COMEDY FROM
SWEDEN
PATTERNED PANTS
FOR MEN
Photographs by Van Robinson
WARRIOR
BOUTIQUE
60 HE WANTS TO LEAVE THE
NEGOTIATING TABLE WITH THE OTHER
GUY GOING, I GOT SCREWED
Kimpton found success in the past decade by ofering corporate
loyalty programs along with rooftop nightclubs, trendy menus,
and minibars full of gummi bears. The segment bounced back
from the recession more quickly than the mainstream compe-
tition, according to hospitality researcher IbisWorld, which
predicts that boutique hotel growth will increase 6.9 percent
annually through 2019. Much of that will likely be driven by
a third wave of brands, including Seattles Ace, Los Angeless
Standard, Chicagos James, and Schragers new national line
of Public hotels, the frst of which opened in Chicago last year.
At 388 rooms, the Line is larger than most of these competi-
tors, and Zobler projects $30 million in revenue its frst year, with
a 10 percent return on the capital he and his partners invested by
year three. If that sounds optimistic, Zobler, a 55-year-old wearing
boot-cut jeans and a ridiculously oversize watch, is quick to point
out his bona fdes. In 2000 he left his career as a real estate lawyer
to work as Starwoods vice president of acquisitions. Next he took
a similar role working for Andr Balazs at the Standard. He thought
Balazs was a genius when it came to branding and design but
wasnt convinced the hotels glitz-and-expensive-art approach
was the most proftable business model. Andr was not what I
would call a gifted developer, Zobler says. There had to be a
better way to be more responsible to capital but still be able to
deliver a product that was really compelling.
So in 2006, Zobler started the Sydell Group, a development
frm that hunted down underutilized property, then leased it
to hip hotel companies, restaurants, and retailers that could
increase the buildings worth. (Most of the backing for Sydell
comes from billionaire investor Ron Burkle.)
For his first big project, Zobler partnered with Allen
Gross of New York real estate
frm GFI to acquire and develop
the former Breslin Hotel, on a
rundown corner at 29th and
Broadway in Manhattan. The
turn-of-the-century building had become a fop-
house, according to Gross, full of rent-regulated
tenants who shared communal bathrooms. We had
I
f its disturbing, its supposed to be, Andrew Zobler
says as he rides an elevator at the Line, his Los Angeles
hotel. The interior is wood but has been painted to
look like cartoon animal fur. The shock of the ele-
vator emphasizes the sedateness of the rooms, he
explains. The brutal concrete building, which rises
12 stories over an unremarkable block of Wilshire Boulevard
in Koreatown, is intended to have a similar efect. From high
foors, you can see color ful Mexican grocery stores below and
the Hollywood sign to the north. The artwork here is the
views, says Zobler. I love the opportunity to create value
where other people dont see it.
On this July afternoon, the Line feels like a sleepaway camp
for adults. Attendants serve comfort food to sunbathers on the
poolside deck, where food-truck pioneer Roy Choi hangs out
on a cushion. His restaurant downstairs, Pot, serves Korean,
and he also runs Commissary, a vegetable-focused cafe in the
pool area. Soon, guests will be able to drink at Speek, a speak-
easy in the basement. Already they can shop at Poketo, an
outpost of a local design store. The hotels rooms, which start
at $240, feature king-size beds, king-size windows, and tiny
chairs upholstered with Southwestern blankets.
Boutique hotels such as the Line have existed since the
1980s, when Ian Schragers Morgans Hotel Group introduced
its urban resorts at the Delano in Miami and Mondrian in
West Hollywood. Larger brands such as Starwoods W and
Etc. Travel
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Choi in the kitchen at
Pot restaurant
The hotels pool,
on a rare cloudy day
The Lines
Koreatown views
61
to go look for an operator who could put bathrooms in hall-
ways, Gross says. You cant exactly go to Marriott with that
proposal. Instead, they recruited Ace Hotel, a nascent West
Coast brand with properties in Seattle and Portland, Ore., that
appealed to a younger, cooler clientele.
We put them on the map, Zobler says of the Ace, perhaps
over stating his involvement in the project. In Zoblers telling,
Gross helped obtain equity for the $40 million lease while Zobler
worked closely with Ace founder Alex Calderwood to execute
the hotels vision. (Calderwood passed away last November.)
Theres no question that basically for fve years I was the one
that ran every meeting, Zobler says. Its hard to fnd anyone else
involved who agrees with that version: Hes a diabolically bright
business guy, says Ken Friedman, who runs two restaurants
with chef April Bloomfeld in the Ace. But he wants to leave
the negotiating table with the other guy going, I got screwed.
Zobler and the Ace group split up shortly after the hotel
opened, and he became obsessed with fnding his own com-
peting project. In 2009, Sydell bought a building one block
south of the Ace and built the NoMad, taking the moniker for
the neighborhood, North Madison Park. The NoMad is more
luxurious than the Ace, with $525 rooms, an on-site Parisian
The Ace
Founded 1999
Hotels 7
Tourist Gripe
Guys from a bachelor
party were lounging
around the pool area.
I would not choose the
Ace [in Palm Springs,
Calif.,] for a weekend away
with my husband, but
I would consider going
back with girlfriends,
even at my advanced age.
DianaMR, Lake Bluf, Ill.
The Standard
Founded 1999
Hotels 5
Tourist Gripe
The Standard is a
beautiful hotel in a great
area, but the service is
truly horrible. From the
moment we arrived to
check in, the staf was
all cool New York
pretension with little
idea how to actually
serve customers.
AnujN, San Francisco
The James
Founded 2005
Hotels 3
Tourist Gripe
Upon check-in [in
Miami], we learned that
the hotel overbooked
for double guest rooms
and we would be
upgraded to a suite. The
upgrade sounded great
until we realized the suites
only had one bed per
room and one of us would
have to stay on a cot.
Bergellie, Charlotte
The SLS
Founded 2008
Hotels 3
Tourist Gripe
Entering the [L.A.] lobby,
I thought there had been
a power outage! Very dark
and austere. Mirrors every-
where you look. Room
was spacious but not user-
friendly. Lots of bells and
whistles, but not at all
practical for families.
LizS, Sydney
The Public
Founded 2011
Hotels 1
Tourist Gripe
The restaurant and
bar were fantastic [in
Chicago], but the rooms
made me feel as if I was in
a nice college dorm room
with Ikea-like sparse fur-
nishings. And its the only
place in recent history
where I had to ask for a
bar of soap after the room
had been attended to.
23PaulH, Chicago
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A look at the Lines
biggest compet-
itors and a sam-
pling of what
grumpy visitors
think of them
boutique, and a New York Times three-star restaurant. He takes
good people and lets them do their thing, says Will Guidara,
co-owner of Eleven Madison Park, whom Zobler tapped to run
the NoMad restaurant. Theres a lot of developers who think
you just need to ft in the mold theyve created.
The NoMad was successfulit did about $20 million in just
food and beverage in 2013so Zobler went into expansion mode.
In 2012 he opened the lower-end Freehand, a stylish Miami hostel
where four-person bunk-bed rooms go for $100 per night. He
also built two Saguaro desert innsin Scottsdale, Ariz., and Palm
Springs, Calif.by teaming up with a resort chain. Hes planning
to expand the Freehand to 10 other cities, starting with one in
downtown L.A. The Line was an outcome from this piece of
real estate, he says. We bought this building for $35 million out
of bankruptcy, which was less than $100,000 a key. After the
full renovation the per-room price doubled to $200,000, which
Zobler says is still half the cost of L.A.s other designer hotels.
Zobler diferentiates himself as a developer by specializing
in one-ofs, each with its own pricing structure and design strat-
egy. The NoMad, for instance, is romantic, with velvet in the
lobby and claw-foot bathtubs in the rooms. The Line is mostly
white with Asian-inspired accents. Zobler didnt originally plan
to open a hotel in Koreatown, but now that hes there,
hes making the most of it. Five years ago you never
really heard anything about Korean culture, and all
of a sudden its everywhere, he explains. Choi, who
grew up nearby, agreed to run the hotels two restau-
rants in exchange for a fnancial stake in the project
and a share of its profts. Before the hotel opened,
Zobler accompanied Choi on an idea-generating trip
to Seoul. Zobler was game to go to every alley and
eat anything, Choi says.
Zobler has a sizable ego but isnt comfort-
able being the face of his brand. He leaves that
to Choi. Rather than have a picture of me, its
more interesting to have him front and center,
Zobler says. He cant help but add: Even if it
makes it look like Roy had a lot more to do with the
design and the vibe.
On a summer evening at the Line, locals and tour-
ists queue up to eat guava cheesecake and Cubano
sandwiches at an event to promote Chef, a movie
about a food truck directed by and starring Jon
Favreau. Despite the actors recognizable face behind
the DJ booth, fans spent more time swarming Choi
for pictures. Zobler hovers in the background, satis-
fed to watch the crowd.
R
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The elevators
dizzying interior
IS YOUR BOSS A MAN?
Workplace
YES: +1
IF HES MARRIED, DOES HIS WIFE WORK?
DOES HE HAVE A DAUGHTER?
DO YOU FLIRT AT WORK?
ARE YOU BLOND?
DO YOU DRESS UP FOR WORK?
HOWS YOUR WEIGHT?
DO YOU HAVE GOOD POSTURE?
No surprise there. According to a 2013
Gallup poll, 54 percent of U.S. workers
have a male boss, vs. 30 percent with a
female one (the rest are self-employed).
While 35 percent of Americans would
rather work for a man, 40 percent had
no preference.
Female bosses wont
necessarily help you
succeed. In 2012, MIT studied
U.S. bank branches where half
the managers were women. They
were just as unlikely as men to
promote underlings.
YES: +1
NO: +0
The same research
showed married men
with stay-at-home
wives viewed female
colleagues unfavorably
and had a tendency
to pass them over for
promotions.
Eek. Based on the
same study, when
CEOs have a son, all
employees wages drop.
Fortunately, its by less
than half a percent.
Excellent. If a male CEO has a
frst child whos a girl, a female
employees wages rise 1.1 percent
on average. Male employees see
a much smaller rise, according
to a 2012 issue of Administrative
Science Quarterly.
In 2012, Berkeleys
Haas School of
Business found that
female car buyers were able to negotiate
better prices when they firted with male
sellers. In 2009 former Secretary of
State Madeleine Albright told Bill Maher
that she firted to get her way with
foreign dignitaries.
Well done. People think
women who wear makeup
look more competent and
professional than those who dont,
according to psychology research
conducted at Harvard University
and funded by Procter & Gamble.
Many studies have proven a
womans weight has a signifcant
efect on her earning potential.
The Journal of Applied Psychology
reported in 2010 that even very
thin women are punished when
they gain a little.
Theres a sad scientifc correlation:
According to a 2005 New York
University study, when a
womans BMI increases, her
income decreases. Her spouses
does, too. The efect is most
profound on younger women
without established careers.
Probably just as well. A 2013
Academy of Management
report said that even though
big law frms encouraged
strategic firtation, the
women who tried it were
looked down upon and
mistreated.
In a study titled Intolerance
of Sexy Peers, a McMaster
University researcher
discovered women were put
of by other women who
looked too fancy85 percent
preferred a thin blonde in
khakis to the same woman in a
short skirt and tall boots.
University of
Queensland
researchers found that
blondes earn 7 percent
more than brunettes.
A Harvard
Business School study says
youll look more powerful.
Could you be blond?
Stand up
straight!
IM GOOD: +1
I COULD LOSE
A FEW: -1
R
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l
t
s
YES: +1
YES: +1
>5 PTS 0-5 PTS <0 PTS
NO: -1
NO: -1
NO: -1
NO: -1
NO: +0
YES: +1
YES: +1
YES: +1
NO: +1
You get a
raise!
Tread
carefully. Oh,
and maybe
get some
highlights.
Have
you thought
about
quitting your
job?
Etc.
CAN WOMEN EVER WIN AT WORK?
Sorry, ladies: Yet another study*
claims its hard to get ahead.
How screwed are you?
Take this quiz, culled from the
glut of research on ofce
gender dynamics, to fnd out.
By Claire Suddath
Start Here
Answer questions honestly.
Add or subtract to get your
fnal score.
N
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t

m
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0

a
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s
k
i
p

t
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t
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i
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q
u
e
s
t
i
o
n
.
Great! A recent
*University of
North Carolina Kenan-
Flagler Business School
study found that male
managers married to
working women were
more likely to recommend
female candidates over
males for new positions.
A
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Etc. The Critic
COMING TO
AMERICA
Welcome to Sweden is the latest foreign TV
production to air in the States. Does the comedy translate?
By Emma Rosenblum
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heres a recurring joke in Welcome
to Sweden, a new half-hour comedy
airing on Thursday nights on NBC,
about how Americans are short.
The show stars Greg Poehler as
Bruce, a milquetoast accoun-
tant from Ohio who moves over-
seas to be with his Scandinavian
girlfriend, Emma. Hes average? asks
Emmas mother, played by Swedish actress
Lena Olin, upon meeting our Midwestern
straight man. She answers her own ques-
tion: Maybe if you include children and
Asian people! There are also gags about
how Swedish people drink a lot, sing weird
songs at dinner, and like to take saunas
naked. Bruce prefers to steam in board
shorts.
This humor might land better if U.S.
viewers had strong views
on Swedish stereo types,
but most of
our familiarity
comes from Ikea desks and that zany
Muppet chef. And in the frst episode, at
least, meatballs and Kermit dont make
an appearance. The action switches back
and forth between English and subtitled
Swedish, and during
a bit in which Bruce
is humiliated yet
again for not under-
standing the lan-
guage, it becomes
clear that the series
might play better
elsewhere. Like, in
Sweden?
It did. Poehler
created the semi-
autobiographical
show while living in
Stockholm with his
wife and kids. It was commissioned
by Swedens TV4 as its frst-ever
English series, aired for a success-
ful 10-episode run this spring, and has
been re-upped for a second season. Its
also executive produced by Poehlers
sister Amy, whose NBC comedy Parks
& Recreation is heading into its seventh
and fnal season this fall. The American
network acquired Welcome to Sweden in no
small part because of that relationship. We
adore Amys sense of humor, and because
theyre siblings, we believe Gregs comedy
sensibilities are similar, says Quinn Taylor,
executive vice president for movies, mini-
series, and international co-productions
at NBC. With her vast television experi-
ence, Amy helped shepherd Greg through
the process of getting the show picked
up, he says.
Acquiring already-produced series
from other countries is becoming more
popular for networks trying to fnd cheap
ways to fll year-round lineups. Welcome to
Sweden is the frst from that country, but
there are a number from Canada, including
BBC Americas Orphan Black, ABCs Rookie
Blue, and the CWs Seed. And Welcome to
Sweden is followed at 9:30 by a Canadian
import called Working the Engles, about a
rich family who, after the patriarch dies,
discovers its severely in debt. (Its a sour
version of Arrested Development; skip it.)
While these programs may be produced
elsewhere, we often fnd ones that can
reach a diverse audience, Taylor says.
What works in Europe and Canada, for
example, could easily work in the U.S.
Not so sure about that. Certainly action-
driven dramas such as Orphan Black, in
which the remark-
a b l e a c t r e s s
Tatiana Maslany
plays a boatload
of clones, trans-
late easily. And
British TV appeals
to our collective,
growi ng angl o-
philia, as proved by
PBSs success with
Downton Abbey
and Sherlock. But a
sitcom from a non-
English-speaking
country, even one written by an American,
is trickier. Humor is highly subjective.
What we find funny over herecome-
dies about science nerds, Ellen, nostalgic
BuzzFeed listsisnt necessarily going to
make someone in Sweden laugh, and vice
versa. NBC says the use of subtitles isnt a
concern, nor should it be. Audiences are
sophisticated enough not to be put of by
some words on the screen.
The larger issue is: Are those words
amusing? On that count Welcome to
Sweden has some work to do. At an NBC
press conference, Greg Poehler said
that in Sweden, we got above 2 million
viewers in a country of 9 million. Its
a crazy hit there. Here it had a soft
debut, pulling in 3.5 million viewers.
The shows not badits appealingly
sweet. The second episode is better
than the frst. It centers on how
Bruce and Emma, living with her
parents, cant fnd a time to have
sex, and ends with the couple
listening to Emmas mom and
dad getting it on. Clearly, the good old
parents-boning-loudly gag is something
every country can get behind.
Poehler with his co-star, Josephine Bornebusch
64 PICK YOUR PATTERN
Put away the khakisfun pants can still be ofce-appropriate, especially on a summer Friday
C
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,

$
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Pair bold pants with
crisp white shirts.
Clyde trousers Mr. Turk, $288
S
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.
Cuf twice, but only
if the pant leg is narrow
to begin with.
Wear neutral,
solid socksor skip
them altogether.
65
Etc. Fashion
Beware: A bright paisley
might spark ofce teasing.
(Theyre just jealous.)
Summer-weight crown-prints trousers Bonobos, $128
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Chunky Donegal pants
Todd Snyder, $395
A gray-and-black check
is a safe way to get in on the
trend. Baby steps.
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Drinks
1. Anderson Valley
Summer Solstice
Seasonal Ale
Like cream soda for
adults. If that doesnt sound
delicious, this sustainable
brewery in Boonville, Calif.,
churns out more than a
dozen other options, all
worth seeking out.
2. Stillwater Classique
Postmodern Ale
Marketed as your
grandfathers new beer,
this ale, brewed with corn,
rice, and pilsner malt,
is reminiscent of a classic
American lager. It tastes
sort of like Budweiser
but with more complexity
and enough bite to
compete with spicy foods.
5. 21st Amendment
Hell or High Watermelon
Fruit beers arent
typically great, but this
one, brewed with fresh
watermelon juice, nails it.
And its even better in a
can than on draft. Ice it
until very cold, then wash
down hamburgers,
hot dogs, or smoky
barbecue.
6. EvilTwin Brewing
Nomader Weisse
Sour ales are having
a resurgence. This one,
in the old German style
of a Berlinerweiss, is among
the best. At less than
5 percent alcohol by
volume, it tastes like cider,
making it perfect for a
hot afternoon and some
raw or cured seafood.
3. Otter Creek
Fresh Slice White IPA
This hybrid combines
the light body and spice
of a Belgian witbier with the
hoppiness of a traditional
India pale ale. Throw
an orange slice on top,
put a whole fsh on the
grill, then drink up.
4. Cisco Brewers
Grey Lady
A wheat beer made
with fresh fruit and spices,
brewed on an island of
the Massachusetts coast
known for its fshing. A great
drink to bring to the beach,
and also fantastic for a clam
or lobster bake.
SIPPING PRETTY
A bottle-hating New York bartender suggests his top summer six-pack
N
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66
1 6 5
2
3
4
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Etc. What I Wear to Work
Interview by Arianne Cohen
AMANDA
CHRISTINE
MILLER
35, senior manager of corporate
communications, EBay, San Jose
Do your outfts
afect your work?
They dont. Its not
clothing, its armor.
What do you do
all day?
Corporate PR.
I spread good news.
Whats your fashion
strategy at work?
Its not a strategy, its
who I am. If I wake up
feeling like Nanook of
the North, Ill wear fur.
If I feel like a czarina,
I might wear velvet.
ANTIQUE
FROM INDIA
Armor?
Protection against
the day. If I feel
comfortable and
confdent, that puts
me in the state of
mind to manage the
work ahead.
Tell me about your watch.
Its an antique Cartier that
my mother gave to my
father. Its engraved, and
it says, Daddy, always
have time for me, Amanda,
12/25/78. I wear it every day.
How do you deal with
sizes when you shop for
vintage online?
For example, clothes made
before or after World
War II have extra fabric in
the seamtheres room to
let it out. But not during
the war, because they
were rationing.
Any EBay tips?
Always open up the search
to worldwide, because the
world is now fat.
How can you tell?
The listing often has the
measurements, and
theyll show you pictures
of the seams close up.
CARTIER
VINTAGE HERMES
MANOLO BLAHNIK
ERDEM
HERMES
Is the scarf part
of the bag?
No. The scarf is vintage
Herms, and I recently
purchased the purse as
a gift for myself. As long
as my computer fts in it,
its a work purse.
68
1969
Radio announcer,
WCHJ-AM
1971-77
Disc jockey and station
programmer, various
radio stations
1977-79
Program director, WNBC
1979-86
Co-founder, MTV and the
Movie Channel;
CEO, MTV Networks
1987-89
Founder,
Quantum Media
1989-95
President and CEO,
Time Warner
Enterprises; president
and CEO, Six Flags
1995-96
CEO, Century 21
1996-2002
President, AOL
Networks; chief
operating ofcer, AOL-
Time Warner
2003-
PRESENT
Co-founder, Pilot Group
2010-
PRESENT
Chairman and CEO,
Clear Channel
Communications
Etc. How Did I Get Here?
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)
ROBERT PITTMAN
Chairman and chief executive ofcer of Clear Channel Communications, co-founder of the Pilot Group
WORK
EXPERIENCE
LIFE LESSONS
Brookhaven High School,
Brookhaven, Miss., class
of 1971
EDUCATION
At MTV in
1983
As a DJ in the 70s
With
Ryan
Seacrest
in 2013
In Esquire
in 1985
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1. Treat other people how you want to be treated. 2. Theres no such thing as a plan for your life. 3. Dont be afraid of making mistakes.
I needed a job to pay for
fying lessons. I walked into
the radio station. The owner
said, Do you have good
grades? I said yes. He said,
Youre hired.
NBC sent me to New
York. When I got there, I
thought, You know
what? Im not going to
fnish college.
I retired for a year.
Im a pilot and a very avid
fyer, and I took of
around the world with my
plane. The problem was
that after less than a year,
I had seen most of
the stuf I wanted to see.
I had a great mentor,
Herb Schlosser, the head of NBC.
Herb gave me a TV show,
and my co-host was Jarl Mohn,
who is now the CEO of NPR.
[Former Time Warner CEO] Steve
Ross supported everything I did. I
got to sit in meetings that a kid my
age probably would never have had
a chance to see otherwise.
We bought DailyCandy
and backed Thrillist with
Ben Lerer. One of our
other projects was Casa
Dragones, one of the
bestselling tequilas over
$200 in Mexico.
I pitched the idea of
a music video radio
station, which became
MTV. We launched
Aug. 1, 1981.
I told Steve Case I wanted
[Century 21] to be the real estate
section on AOL and Id pay them
a million dollars a year. Steve
said, Why dont you be on my
board of directors?
Join 25,000 industry professionals for the most important three days of
business aviation this year, with over 1,000 exhibitors, 100 business aircraft
on static display, and dozens of education sessions. Visit the NBAA2014
website to learn more and register today.
www.nbaa.org/2014/Businessweek
BUSINESS AVIATION CONVENTION & EXHIBITION | OCTOBER 21, 22, 23 | ORLANDO, FL