Private Eyes

Goldman Wins Again

Fri, 16 Jul 2010 14:25:02 GMT

The Senate voted to approve the financial regulation bill yesterday, and in an interesting bit of timing, the Securities and Exchange Commission announced a $550 million settlement with Goldman Sachs just a few hours later. The deal, which remains subject to court approval, resolves a civil fraud lawsuit alleging that Goldman misled investors in the sale and marketing of subprime mortgage-related securities. If the timing of the Goldman announcement was intended to send the message that the government is finally getting tough on Wall Street, that strategy has misfired badly.

The Goldman settlement sets a new record for SEC penalties against a financial company, and at first glance $550 million seems like a lot of money. But we’re talking about Goldman Sachs here, a bank that made over $13 billion in profits last year and earned over $3 billion just in the first quarter of 2010. To put the paltriness of the settlement in perspective: Last year, Goldman earned $550 million in profits in just 15 days.

Not surprisingly, the SEC is putting a very different spin on the matter. Robert Khuzami, Director of the SEC's Division of Enforcement, tried to give the impression that Goldman had paid heavily for its misdeeds: "This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing." Two weeks' worth of profits isn't exactly a heavy price. It seems more like a slap on the wrist, and the market seems to agree: Goldman's shares jumped 5 percent in after-hours trading, more than making up for that $550 million in market value.

Putting aside the financial penalty, the SEC didn't even manage to extract a mea culpa from Goldman. As part of its settlement, the bank would only acknowledge that “the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information." It's hard to see what stark lesson Goldman has learned, if all they admitted to was that they left some information out of their marketing materials. The only lesson Goldman came away with may just be that the firm can engage in fraudulent behavior and emerge relatively unscathed. It's too soon to tell if the financial regulation bill will encourage banks to be more circumspect in the future. But as long as profits are booming, expect to see business as usual on Wall Street.

F.D.A. Preps Ruling In Avandia Case

Wed, 14 Jul 2010 19:04:02 GMT

Today is one of those hold-your-breath moments for GlaxoSmithKline. In a highly-anticipated ruling, a panel of experts will decide if Avandia, the company’s controversial diabetes drug, should be taken off the market in the United States. Based on conflicting reports of its side effects, the case claims that Avandia leaves patients more susceptible to heart attack than other drugs on the market that treat the same type of diabetes. Evidence of this claim traces all the way back to 2007, when respected cardiologist Steven Nissen published a paper warning of the drug’s risk to patients. Unsurprisingly, GlaxoSmithKline has argued that Avandia is a useful and unique diabetes medication, and produced its own experts to help prove that point. While for a time no side seemed to have a real edge, yesterday the panel reviewed evidence that GlaxoSmithKline engaged in an internal cover-up meant to hide Avandia’s dangers from the public. This has led some doctors to call for an immediate boycott of the drug, and may in fact lead to the drug being pulled from the market entirely.

The global healthcare costs of diabetes currently total upwards of $400 billion and all signs point to this increasing over the coming decades. With numbers of that magnitude, it’s no wonder GlaxoSmithKline has fought so hard to keep one of its most successful drugs in play. Just last year Avandia brought in over $1.1 billion in revenue for the company, and losing it would be a crushing blow. After all, there are many drugs on the market that do the same thing as Avandia, and it would be simple enough for doctors to turn to other medications to treat their patients. This glut of drugs causes a key problem for the panel judging the case. They must not only prove that Avandia increases the risk of a heart attack—now an established fact—they also need to prove that Avandia causes a greater risk of heart attack than any of the other medications currently available. Under current F.D.A. rules, proving this can be exceedingly difficult.

The ruling will certainly have an effect on GlaxoSmithKline’s bottom line, and it may also serve to alter the landscape for big pharmaceutical companies in general. For the F.D.A., the solution is simple: if it cannot easily remove unsafe drugs from the market, it needs to make sure those drugs don’t gain approval in the first place. If Avandia is kept on the shelves, F.D.A. officials will have to reevaluate the requirements that new drugs must meet before they go to market. The more time the big pharmaceutical companies spend testing and meeting new requirements, the less potential they have for profits, thus allowing more competitors to gain market share. If Avandia is pulled, the pharmaceutical industry has an entirely different problem. Investors will be far less likely to make bets on a drug if the grounds for taking that risk are unstable. If a drug is approved only to then be removed from the market a few years later, the potential for major profits disappears. Regardless of the ruling today, the headaches for the pharmaceutical industry are just beginning.

Third Time's The Charm?

Fri, 09 Jul 2010 18:23:31 GMT

Four months after Northrop Grumman dropped out of the competition, the race for the $35 billion contract to replace the Air Force's aging aerial refueling tankers is officially back on. European Aeronautic Defence and Space Company (EADS), Northrop Grumman's former partner, filed its bid on Thursday, a day ahead of the Pentagon's deadline for contract submissions. Boeing, which had been expected to be a shoo-in for the contract after Northrop bowed out, is submitting its proposal today. The Air Force expects to announce the winner by mid-November, hopefully ending a procurement saga that began back in 2001, resulting in two cancelled contracts, as well as prison sentences for former Air Force and Boeing officials.

Assuming that both Boeing's and EADS' tankers meet the Air Force's performance criteria, the contract will, in theory, be decided by cost. Defense Secretary Robert Gates has assured Congress that the competition will be “fair and transparent," and President Obama has made similar assurances to French President Nicolas Sarkozy. But as a multi-billion dollar contract with tens of thousands of jobs hanging in the balance, the process will inevitably be influenced by politics, where Boeing has a clear edge. EADS enjoys the backing of Republican officials in Alabama, where it plans to assemble its tankers, but awarding a massive, high-profile military contract to a European company is a tough sell, even with the prospect of bringing much-needed jobs to the ravaged Gulf Coast.

Boeing, which is favored in the Democratic-controlled Congress, has a bipartisan coalition of governors led by Christine Gregoire (D-WA) lobbying on its behalf. The aerospace giant also received a boost last week, when the World Trade Organization ruled that EADS subsidiary Airbus had benefitted from illegal subsidies from European governments. (The European Union has counter-sued, alleging that Boeing also received improper subsidies, but a ruling isn't expected until September.) The Pentagon said that it won't take the issue into consideration in its final decision, however the WTO's findings will serve as good political ammunition for Boeing's supporters nonetheless.

All of this raises the question of why EADS is even bothering to submit a bid, with so many factors working against them. Even Northrop Grumman, which enjoys the advantage of being an American company, had concluded that the odds were stacked so much in Boeing's favor that pursuing the contract would not have justified the costs involved. The answer is that EADS has a lot to gain and very little to lose. EADS already has Defense Department contracts, but nothing approaching the scale of the tanker project. Winning the Air Force bid – which isn't totally outside the realm of possibility, given the strange twists and turns the procurement process has taken – would allow the European company to firmly establish itself in the huge U.S. defense market, opening the door to lucrative follow-up deals with the Air Force.

The wild card is the November elections. If Republicans retake Congress, the politics of the process may tip in favor of EADS, which has Senators Richard Shelby (R-AL) and Jeff Sessions (R-AL) in its corner. But regardless of what happens in November, EADS' bid is still a long shot. Boeing has some Republican supporters as well, and the composition of Congress doesn't change the fact that EADS is a European company without a major American partner. Ultimately, the outcome will test Secretary Gates' assertion of a fair and objective process. With billions of taxpayer dollars at stake, it would be nice if military contracts were determined by the merits of a bid, rather than political jockeying.

Facebook Bids For Global Dominance

Thu, 08 Jul 2010 17:19:39 GMT

Just a few months ago, things were not looking particularly promising for Facebook. The company’s much publicized privacy battles had taken a toll on its image, and gaffes by CEO Mark Zuckerberg made the company seem outdated and out of touch with its own users. However, if BP can survive a catastrophe as immense as the Gulf Oil Spill, surely a force as great as Facebook can survive a little bad press. As summer progresses, the social media giant’s dominance of the market has become nothing less than a worldwide phenomenon. From South America to the Pacific Islands, Facebook has capitalized on the markets that other local social networks have established, and in some cases now seems poised to replace them entirely, as it did with MySpace in the United States.

In the United Kingdom, Zuckerberg’s company has all but eliminated the once hugely popular Bebo, forcing former Bebo owner AOL to sell the company off at a loss of millions of dollars. On the other side of the globe, the company has entered into an agreement with MOL Global, parent company of Friendster, by which Facebook credits will be sold in Asian markets for the first time. This will allow millions of users to have access to Facebook’s many independent applications—and has the potential for an even greater merger between the two companies in the future. Perhaps even more importantly, over the past year Facebook has made huge inroads in India and Brazil, where it has begun to supplant the once ubiquitous Orkut. Not only is this notable for the speed in which it has occurred, but also because Orkut’s owner is the company that has quickly become Facebook’s main worldwide competitor: Google Inc.

As Facebook has expanded, the site has quickly morphed into something well beyond the basic social media platform dreamt up in Zuckerberg’s Harvard dorm room. Today, Facebook users share millions of links from all over the internet with their friends. This is a direct threat to Google’s long-standing dominance of the search engine market and, over time, threatens to change the very nature of internet searches. Even worse for Google, Facebook operates on a closed system where information is available only to users. By nature, this makes vast amounts of information that could be extremely useful to Google’s advertisers hidden, and is quickly making Facebook users the preferred targets for the hyper-personal online advertising industry. Google’s response to this threat has ranged from the initially lackluster (it seemed to ignore the problem for a long time) to the potentially disastrous, with introductions of its now admittedly failed Buzz system, and the disappointingly confusing Wave.

Despite these failures, Google is one company known to put up a good fight. Internet scuttlebutt has increased in recent weeks, and all signs point to a new platform soon to be released by Google, tentatively titled “Google Me.” But do people actually want a relationship with Google similar to the one they have with Facebook? It’s not that far-fetched a concept, since despite the recent personal privacy arguments, users have felt content to use Facebook for games, applications and searches that stretch far beyond the basic functions it was originally intended for. Google’s biggest problem is that it has not even reached the first step in social media; Facebook not only commands the dominant share of the market and a supremely popular design, but has become a home for outside games and applications as well. Google first needs to develop a loyal and consistently growing user base with an effective social media platform before it can even consider competing on the same level as Facebook. Given Facebook’s rapid worldwide growth and extremely popular products, this is a challenge that any company, even one as historically innovative as Google, may simply be unable to meet.

Gone in 48 Days

Fri, 02 Jul 2010 14:57:17 GMT

Last week, Henry Blodget penned a piece in Business Insider with the attention-grabbing title, "The Odds Are Increasing That Microsoft's Business Will Collapse." It seemed like hyperbole – sure, Microsoft has hit a rough patch, but collapse? Now, I'm not so sure. On Wednesday, Microsoft confirmed that it plans to discontinue its Kin phone, after just 48 days on the market. The news wasn't exactly shocking: Verizon's move to slash the price of the Kin in half at the beginning of the week had an air of "Everything must go!" to it, and probably should have tipped everyone off to the impending demise of the product.

Microsoft's decision to pull the plug on the Kin and focus its attention on its upcoming Windows Phone 7 operating system release makes plenty of business sense, given the device's dismal reviews and poor sales. But the company's decision to spend two years to develop the phone and lavish a huge ad campaign on it, only to kill it after less than two months, raises the question of whether Microsoft knows what it's doing. The Kin fiasco is just the latest indication that the company is out of touch with consumers. The Kin, occupying a gray area between feature phones and smartphones, was intended to appeal to teenagers and young adults, with its intense focus on social networking. But in the end, the device – which can't run apps like a smartphone, but is coupled with a relatively pricey Verizon service plan – appealed to no one. And its trying-too-hard-to-be-cool ad campaign certainly didn't help, likely alienating both young people and their parents.

Microsoft now seems to be betting all its chips on the Windows Phone 7 OS, which is expected to be available in October. But with bigger, better, and faster smartphones coming out every other week, three or four months is an awfully long time to wait. In the meantime, Google's Android will continue to gain market share, and the coming Android 3.0 release in the fall will only make life more difficult for Microsoft. The competitive field may get even more crowded, if Palm can get its act together with the help of HP, its new parent company.

I've never been convinced that Microsoft really gets consumers (the Xbox seems like an outlier). The company should stop pretending to be something it's not – the out-Google Google and out-Apple Apple strategy just isn't working. With the desktop PC increasingly becoming an anachronism outside of the office environment, the smart move for Microsoft would be to focus on its remaining strength: the business market, where Google and Apple haven't made as much of an impact. In doing so, Microsoft may just prove Henry Blodget wrong.

Now Online: The Music Video Wars

Thu, 01 Jul 2010 16:57:26 GMT

Remember the days when the music video was king and all it took to be rich and famous was a hit on MTV? The major music labels sure do, and they have spent the past year trying to make music videos viable sources of revenue in the digital age. It’s no secret that the music industry is in serious trouble. File sharing has decimated the CD business, leaving digital music platforms like iTunes as the only steady source of profit for once dominant companies like Universal and Warner. These giants need any extra income they can garner, and so some have turned to the music video, the source of so much early success, as a potential savior.

The biggest name in the current online music video market is Vevo, a joint venture of Universal and Sony. Vevo, which began streaming online music videos back in December, operates on the same basic principle as Hulu: allow free access to high-quality official music videos. In just six months, Vevo now accounts for almost 50 percent of all music videos viewed online. While on the surface that seems to be a major accomplishment, it is also a bit misleading. The secret to the success is a partnership with Google, whereby music videos produced for Vevo are also aggregated on Youtube, the Web’s most popular video site. Indeed, even though all these videos are available on Vevo’s own website, studies have found that between 80-90 percent of Vevo’s content is actually watched on Youtube. Despite the huge viewership, Vevo is anything but a triumph. In a recent interview, CEO Rio Caraeff revealed that the site is not currently making money, and that he hopes to “be profitable in a fairly short number of years.” If a website that apparently already dominates the market in online music videos can’t turn a profit, how can it expect to do so as more competition enters the fray?

Using Caraeff’s bad news to its advantage, Warner Music Group has taken the initiative to launch a new front in the music videos wars. This morning, reports surfaced that Warner has partnered with MTV in a venture that it hopes will reshape the way music videos are used online. Under the agreement, MTV will sell advertisements across a variety of websites (including Youtube) that run with a music video attached. As opposed to making the viewer sit through an advertisement, the music video itself will serve as the ad, as if it were sponsored. The move is incredibly shrewd for a company like Warner, which has struggled to compete with larger rivals. Unlike Sony and Universal, Warner will not have to create and staff an entirely new company to run a website for music videos. Instead, they can take advantage of the powerful brand name of MTV and its sales staff that already triples Vevo’s in size. Perhaps most importantly, MTV has agreed to put priority on selling Warner artists’ music videos to potential advertisers. Not only does this method display sound forward thinking, but unlike Vevo, it seems to have an obvious path towards profit.

Once dominating a worldwide, multi-billion-dollar-a-year market, the major music labels are now struggling hard to adapt to the challenges of the digital age. Music videos, while only a small portion of the industry as a whole, could still represent an important revenue stream, particularly in an era where profit of any kind can have a massive impact on the bottom line. Universal and Sony’s Vevo effort is a bold, but flawed one. A music video is not a television show, and viewers are far less willing to sit through advertisements to watch content they can see without interruption elsewhere. Vevo’s reliance on Youtube presents another fatal mistake, since the site recently announced it would soon allow users to skip over ads and customize their viewing experience. As for Warner, outsourcing its videos for ads is certainly a way to generate income, but it’s unlikely to make a major dent in the way customers choose to purchase, or not purchase, their music files. It’s time for the major labels to stop turning to the past and fighting the future of digital music. The only choice is to embrace the current model and find a way to profit off of it. After all, in a world where the future holds that broadband is the “legal right” of every citizen, peer–to-peer file sharing seems to be unstoppable.

How Motorola Got Its Groove Back (Again)

Fri, 25 Jun 2010 17:55:26 GMT

Apple, as usual, has been monopolizing the limelight with yet another highly-anticipated product launch. On Thursday, it was the iPhone 4, but there was another smartphone announcement this week that caught the attention of techies and industry observers, if not quite with the same breathless anticipation that usually greets Apple pronouncements: Motorola's Droid X will be hitting Verizon stores on July 15. There probably won't be lines snaking around city blocks for the release of Droid X, the successor to Motorola's popular Android-based Droid device. But there have already been a slew of articles comparing Droid X favorably with the iPhone 4, which is remarkable given the fact that just two years ago, Motorola's mobile devices unit was considered such a liability that the company was trying to get rid of the division.

The Droid smartphone has been the biggest factor behind Motorola's stunning turnaround. Before Droid, Motorola had struggled mightily to find a successor to its last bona fide hit, the Razr, introduced back in 2004. The Razr was the engine driving Motorola's last comeback, after years of trailing behind Nokia. But by 2006, the flip feature phone had already become passé, and the handset maker failed to capitalize on the rising smartphone tide – until late 2009, with the debut of Droid. Over one million units of the smartphone were sold in just 74 days, and in a recent survey, the Droid scored an impressive 69% in "very satisfied" customers, second only to the iPhone.

The success of Droid could not have been possible without Google and its Android mobile operating system. Android, which has been steadily winning over application developers and handset manufacturers alike, presents the only real stumbling block to the iPhone juggernaut. Customers who purchase a Droid aren't just getting a Motorola device; they're buying into the whole Google universe. The ubiquitous television ads for Droid reflect this reality, putting as much emphasis on the Android OS and its app marketplace as on the phone itself. The continued success of Droid will depend on Google's ability to keep up with Apple in the mobile OS/apps arms race.

Fortunes can turn on a dime in the rapidly-evolving tech sector, as Motorola knows all too well from past experience. And while the company has found a winner in the Droid, the problem is that Droid is its only real hit. None of Motorola's other smartphone models have made much of an impact, and the handset maker is facing some serious competition from upstart HTC. The company doesn't necessarily need to have several bestsellers if it can develop Droid into a coveted brand that consumers will want to continually upgrade, much as Apple has done with the iPhone. If Motorola can capitalize on the growing popularity of Android, and on the weaknesses of the iPhone (chiefly Apple's exclusive contract with AT&T), Droid may just outlast the fickle tastes of consumers.

The Pirates Keep Their Plunder

Thu, 24 Jun 2010 18:29:44 GMT

Google Inc. scored a major victory yesterday as a New York judge threw out a $1 billion copyright infringement lawsuit that has plagued the company since 2007. The suit, which had been brought by Viacom Inc., was directed at YouTube, the Google-owned video sharing site that has become one of the most visited sites on the Web. Viacom alleged that YouTube built its business model on piracy, allowing users to upload thousands of copyrighted videos while not doing enough to police its own content. Google countered by claiming its policies were not only the best possible ways to monitor online content, but also by accusing Viacom of distorting the truth in its arguments. The rhetoric between the two escalated to downright ugly as of late, and has highlighted the growing desperation of traditional media providers to cope with the challenges of the digital age.

In this particular case, Google owes its win to the Digital Millennium Copyright Act (D.M.C.A.) passed by Congress back in 1998. Among other conditions, the act contains certain laws called “safe harbor” provisions that guarantee the benefit of the doubt to companies that host content online. The law clearly states that a company like YouTube is only responsible for the content its users upload if it does not answer the complaints of any interested parties. The judge referenced one instance in 2007, when Viacom sent YouTube a list of over 100,000 videos it wanted removed from the site. Within a day, the majority of the videos in question were gone. Pointing to this as the reason for his ruling, Judge Louis L. Stanton stated that forcing Google to watch over every single YouTube video that is uploaded would “contravene the structure and operation of the D.M.C.A.”

There is no doubt that Viacom’s initial complaints had merit. YouTube was surely well aware that many of the videos uploaded to the site in its early days contained copyrighted music, television and movies. Since Google purchased the company though, many steps have been taken to combat this image. It currently employs a scanning technology known as YouTube Video ID, which catches and deletes many copyrighted videos within days of them being uploaded. Beyond the technical improvements Google implemented, Viacom’s credibility became particularly bad as the suit progressed. In March, YouTube Chief Counsel Zahavah Levine claimed that even as Viacom brought forth the suit, its employees were secretly uploading their own copyrighted material in order to take advantage of the lucrative promotional value videos on YouTube possess. This kind of hypocrisy likely played a role in influencing the judge’s opinion on who was truly the victim in this case.

While this is a big win for Google, it is not the only company that has reason to celebrate. Facebook, for example, is another of the Web’s biggest sites that relies heavily on user-generated content for its success. Now, a precedent has been set that says companies like Facebook and YouTube need not worry too much about general copyright claims from media giants. As for Viacom and other huge production companies, the writing on the wall could hardly be clearer: the days of the singular media giant are coming to end. Whether it is a Hollywood studio, television production house or major music label, the companies that once held sway over the direction of entertainment are finding themselves shut out by the growing power of the individual user on the internet. Now that it is clear whose side the law is on, Viacom and others must either evolve with the times, or face the reality that the era of its dominance is over.

The Ultimate Pledge Drive

Fri, 18 Jun 2010 18:45:25 GMT

Warren Buffett plans to give away more than 99% of his wealth to charity, and he's hoping that other billionaires will follow his example. Buffett, along with Bill and Melinda Gates, announced an initiative this week aimed at convincing the wealthiest Americans to donate at least half of their net worth to charitable causes, either during their lifetimes or after their deaths. The genesis of the Giving Pledge campaign came about in May 2009 at a gathering initiated by Buffett and Bill Gates, with a guest list that reads like a who's who of billionaires, including Oprah Winfrey, Michael Bloomberg, Ted Turner, and George Soros. So far, the families of Eli Broad (founder of KB Home and SunAmerica, Inc.), John Doerr (venture capitalist and Partner at Kleiner Perkins Caufield & Byers), Gerry Lenfest (founder of Lenfest Communications, sold to Comcast for $6.7 billion), and John Morgridge (former Chairman of Cisco Systems) have agreed to take the pledge. If every member of the Forbes 400 list of richest Americans were to make the same commitment, that would amount to a $600 billion windfall for charities.

Of course, many of the mega-rich are already heavily involved in philanthropy. Michael Bloomberg gave away around $254 million of his fortune just in 2009, and Ted Turner famously donated $1 billion dollars to United Nations programs in 1997. Is the Giving Pledge even necessary, if billionaires are already donating generously, and have tax incentives to continue doing so? What the campaign does accomplish is to raise the standard of what qualifies as generous giving. Sure, $254 million sounds like a lot of money, but it's just a little over 1% of Bloomberg's net worth. The Giving Pledge shifts the emphasis away from the (sometimes artificially dazzling) figure of dollars contributed to a focus on the percentage of wealth given away – which is actually a much better measure of true generosity.

Warren Buffett is, in effect, the poster boy of the Giving Pledge campaign. The famously frugal billionaire explains his philanthropic philosophy in his pledge letter, which can be summarized in one sentence: "Keep all we can conceivably need and distribute the rest to society, for its needs." Buffett's drive to give away the bulk of his fortune stems from his belief that his wealth is ultimately the result of good luck, and that "fate's distribution of long straws is wildly capricious," as he puts it.

The same is true for all of the other billionaires out there. Sure, there's often plenty of hard work involved in amassing an enormous fortune, but many people work equally hard and never manage to earn more than the minimum wage. The moral imperative for billionaires to give away a substantial proportion of their wealth is stronger than ever, as the rich have gotten richer in recent years, while the middle and lower classes have stagnated or even declined, thanks in part to a tax policy favoring the wealthy (the top marginal tax rate now stands at 35%, compared to 91% in 1963).

It's too soon to tell whether the Giving Pledge will have a profound impact on philanthropy, but the campaign couldn't have come at a better time. Nonprofits have been hit hard by the recession: Donations are down sharply, and charities haven't been getting much government support, with state and local authorities suffering from budget crises, and an obsession with fiscal austerity at the federal level. Philanthropy will never be an adequate substitute for good public policy, but the Giving Pledge is a welcome antidote to the endless stream of headlines about greedy bankers and negligent oil executives.