Portfolio.com: Careers

The Confessions of Barry Diller

Mon, 12 May 2008 10:00:00 GMT

It's a few weeks before Barry Diller almost lost everything, and he is in his element, at the Four Seasons restaurant in midtown Manhattan. Movie producer Harvey Weinstein is here, as is activist investor Carl Icahn. Diller, uncharacteristically, is sharing the spotlight with CBS chief Les Moonves in a panel discussion about the future of media.

Eventually, the subject turns to Diller himself, whose future at this moment looks precarious. For once, a man who has made a career of micromanaging his own myth is scriptless. The following week, a state court judge in Delaware will hear a lawsuit between Diller and John Malone, the media executive and erstwhile Diller ally who is threatening to strip Diller of everything: his control of IAC/InterActiveCorp, the internet company the two have been bickering over; Diller’s perch inside the Frank Gehry-designed IAC building, on Manhattan’s West Side; his reputation as one of the last of the badass brawlers in the media world; and perhaps most important, his peerless—and until now nearly flawless—ability to craft and maintain his own legend, even if IAC’s performance of late hasn’t exactly seemed to warrant it. (View slideshow.)

“It’s very odd that two people who don’t want to give up control of anything are giving control to a judge in Delaware," Diller says. “It’s unfortunate.”

Within a few weeks, Diller was vindicated. In late March, the judge ruled in his favor, Malone was forced to give up his fight, and an embarrassing public showdown ended. But Malone and his colleagues at Liberty Media had managed to use the trial to get to the heart of the Diller myth. With testimony and evidence that seemed relevant only in its capacity to embarrass the mogul, Diller’s adversaries made an issue of his huge paycheck and lavish lifestyle, as contrasted with the subpar performance of IAC, which has recently been an unqualified disappointment. (View an interactive feature explaining the ups and downs of Diller’s career.)

A few weeks after the court’s ruling, in a conference room just outside his spacious office in the IAC building, Diller still has the air of someone who has just survived a car crash. Instead of dismissing every third or fourth question with his trademark disdain, he is displaying an un-Dillerlike mellowness. “It was absolutely not something we sought,” he says somewhat quietly when I ask about the trial. “The only thing that remains is that it’s over.”

Diller then proceeds to make an astonishing admission: After all this time spent selling the world on his idea of an internet conglomerate, he now realizes that he was wrong from the start. Diller says he’s utterly committed to the idea of an anticonglomerate, blowing up IAC and leaving the company’s disparate parts to operate on their own. “We decided, ‘Enough of this integrated-conglomerate pretension.’ We were kidding ourselves if we thought we could pull off an integrated conglomerate that acts like G.E. or P&G in anything less than 10, 20, or 30 years. It took them 100 years to get there.” (Read Lloyd Grove's interview with Diller, here.)

If Diller were running for president, his rivals would label him a flip-flopper, and they would be right. But Diller is no politician, despite a personal magnetism that is reminiscent of Bill Clinton’s. Nor is he a typical businessman. Rather, he is a bundle of contradictions. He is a onetime internet visionary now accused of being a has-been. He is a Hollywood showman out of context in the nerd’s world of the internet. He is a dealmaker masquerading as a day-to-day executive. And more recently, he has become a man whose outsize legend has seemed increasingly at odds with his ability to deliver the goods.

But now, at the age of 66, he has a new plan—to dismantle his 13-year-old company and create five separate units. The part Diller himself will continue to run will be made up of a number of relatively small entities. With so few pieces to keep track of, this so-called new IAC will be a model of transparency compared with the old one.

Diller is forthright in saying that his strategy for IAC over the years has been guided as much by curiosity as by anything that might constitute an actual business plan. This is a novel approach for the leader of a publicly traded company. The only others who practice it so openly are Larry Page and Sergey Brin, at Google. But their curiosity has been justified by wealth creation to the tune of $170 billion, a far cry from Diller’s own. Yet as George Mair wrote in his 1997 book, The Barry Diller Story, “Diller is one of the few executives in the entertainment business who can raise billions of dollars with just his name and vision as collateral.”

IAC’s roots trace back to 1995, when Diller, recently fired from home-shopping network QVC, hooked up with Malone at a broadcasting company called Silver King, which the two later merged with the Home Shopping Network, QVC’s main rival. From there, HSN embarked on a dizzying series of acquisitions, shifting its focus from shopping to entertainment and eventually to the internet. A number of Diller’s moves were particularly well-timed. In 1997, he bought the USA Network and a passel of other entertainment properties from Seagram, sold them at a profit to Vivendi, and secured himself a $275 million gig as a part-time executive in the process. In doing so, he also extracted a concession from Malone about his future autonomy that proved to be his ace in the hole in March.

His early Web moves were prescient. Deals of note include nabbing 50 percent of Ticketmaster from Microsoft co-founder Paul Allen in 1997 in exchange for 17 percent of HSN, snatching up Hotels.com and Match.com in 1999, and paying $1.5 billion for 51 percent of travel website Expedia in 2002. In mid-2003, investors were cheering him on from the sidelines, and the market valued IAC at about $60 billion.

But since then, Diller has seemed less a visionary and more a spastic dealmaker. He has missed some big acquisition opportunities, including MySpace, which was snapped up by News Corp. for a fraction of what it’s worth today, and ticket broker StubHub, which would have folded in nicely with Ticketmaster. Instead, Diller went in for questionable deals, such as the 2005 purchase of the old-media catalog company Cornerstone Brands, an acquisition he has described as a mistake, and the 2006 purchase of ShoeBuy.com, a distant also-ran behind market leader Zappos.com.

His once-vaunted theme of interactivity, which had a sexy sheen 10 years ago, now seems stodgy, akin to making “We sell things” your corporate mantra.

His costliest misstep has been holding onto mortgage middleman LendingTree, which he purchased for $726 million in 2003. Diller could have made a fortune for IAC if he had sold LendingTree at the height of the housing boom in 2005, which is the kind of move you’d expect a master dealmaker to pull off. Instead, he held on, and he now admits that the unit is worth “vastly less” than what he paid for it. IAC wrote down the value of LendingTree by $475.7 million in 2007. Expect more where that came from.

While Diller may be perceived as a titan, Cowen & Co. analyst Jim Friedland says the value he’s created in the recent past has been puny. “Give or take, the return on invested capital has roughly been between 4 and 5 percent over the past several years,” Friedland says, “which is about the same return you could have received if you’d bought a Treasury bond.” If IAC’s cost of capital is 10 percent, which is Friedland’s estimate, Diller and his curiosity have been destroying value to the tune of about 5 percent a year since 2004.

Of course, the most relevant measure of the value of a publicly traded company is the price of its stock. From December 31, 2004, through April 25 of this year, IAC stock was down 63.3 percent, while the Nasdaq composite index had gained 11.4 percent. The company has pretty much been going through one wrenching transition after another for the past several years, and the stock has performed poorly over much of that time. The synergy that Diller so desperately sought among the more than 60 individual brands IAC owns has failed to materialize in any meaningful fashion. Diller nevertheless points out that IAC stock is up 237 percent since the company’s creation in 1995, even as the S&P 500 has risen only 138 percent.

"The best asset they have is Diller, who is running an internet company the same way you'd run a media conglomerate," says senior analyst Jeffrey Lindsay of Sanford Bernstein. “He had a good run for a few years, when the assets were firing on all cylinders. The mark of a very good business, though, is how well it can ride out a downturn. At this minute, it doesn’t seem to be doing it that well.”

The Gehry-designed IAC building is a monument to Diller himself. It’s a flashy, shape-shifting wonder at the edge of New York’s hottest neighborhood. Getting to Diller starts with walking through a lobby that seems designed for a catered cocktail party. A massive video screen showing the traffic on various IAC websites sits behind the reception desk.

The inner sanctum is dead quiet. The offices of just five executives—each with its own balcony—take up the entire sixth floor. It’s hard not to be intimidated. Indeed, many people who have crossed paths with Diller in recent years warned me not to take it personally if he came across as belittling. In fact, he is disarmingly polite, almost soft-spoken. He is smaller than you would expect but gives off an air of bottled intensity.

The Diller legend has been laboriously constructed, put together piece by piece. There were the nights at Studio 54 in New York 30 years ago, when he hung out with Warren Beatty, Calvin Klein, and Mike Nichols. He was named ABC’s programming chief at the age of 26. At 32, he was offered the chairmanship of Paramount. From there he went on to launch the Fox network. The lasting impression is that for a while, Diller was the ultimate Hollywood mogul. “In the flesh, he was power incarnate,” producer Dawn Steel wrote in her book They Can Kill You but They Can’t Eat You. “He was the sexiest man I’d ever met. He handled power differently from anyone I’d ever known, in this very complex, sexual way.... You couldn’t not look at him.” (VIDEO: Watch Diller explain how he broke into the entertainment industry with no college degree.)

Diller was always a hybrid, equal parts business guy and showman. Like his old friend David Geffen, with whom he worked in the mailroom at the William Morris Agency, he is addicted to the deal. At Paramount, he cooked up tax-advantaged deals structured in ways that other moguls couldn’t understand. He’s bought and sold more companies than Rupert Murdoch himself.

More than that, he was making the connections and building the reputation that would last him throughout his career. Some of the most powerful executives in Hollywood in the past 20 years—Michael Eisner, Jeffrey Katzenberg, Dawn Steel, and producer Don Simpson—worked for him at Paramount, where they became known as the Killer Dillers. At Fox, he teamed up with Murdoch, who remains a close friend. When Murdoch sealed the deal to buy the parent company of the Wall Street Journal in August, Diller hosted a party for him on a yacht anchored off Manhattan.

“Sure, he’s a bundle of contradictions. But most people—most people I like, anyhow—are,” says Kurt Andersen, a media veteran who has done business with Diller over the years—including, most recently, the launch of the website VeryShortList.com. “If you’re famous, your public persona can often be reduced to a noncontradictory cartoon. But with Barry, his contradictions are just more vividly apparent than most.”

Diller has also consistently cultivated strong relationships with the media, providing financial support for The Charlie Rose Show, for example. As a result, he’s been a repeat guest on the program. He’s also bankrolling a news-aggregation website headed by former New Yorker and Vanity Fair editor Tina Brown. “He expresses himself better than anyone I know in business,” Brown says.

“Take him on at your peril,” warns Howard Stringer, the chairman of Sony. “People in the press are afraid to ask him a stupid question because the entire world will know in 30 seconds how stupid it is.”

Diller has used his formidable social and media networks to help wall off his public persona from his business one, an invaluable trick in tough times. Social chronicler Dominick Dunne—who sat at the same table as Diller at an awards ceremony only weeks before Diller’s trial was set to begin—makes that clear. “You never would have had a clue from his conversation or his speech that he was dealing with big problems in his life,” Dunne says, referring to the fight with Malone. “I admire him for that.”

Diller crafts his private persona as carefully as his public image. The social life on display is that of a bon vivant who swans around New York and Hollywood with his wife of seven years, fashion designer Diane von Furstenberg. Diller owns one of the world’s largest private yachts, the 305-foot-long Eos, and hosts a lavish pre-Oscars party at his home in Beverly Hills’ Coldwater Canyon. But in fact, Diller is a fiercely private man who spends much of his time while in New York at the Carlyle Hotel. Few know, for instance, that his brother was murdered in California in 1975 after a number of run-ins with the law. And though speculation about Diller’s sexuality has swirled for years, he has never addressed the topic.

There's no denying that Diller is an extremely smart man. He speaks in well-constructed paragraphs. It's received wisdom in media circles that you don’t tangle with him. There’s the story about the time he threw a videocassette at someone’s head and the one about his making a senior executive cry. While his supporters go to great lengths to cast his prickliness in a positive light, the truth is that the guy can be ruthless. “He’s got elephant balls,” David Geffen once told a reporter.

John Malone surely knew this, which is probably why he hired technology executive Greg Maffei as C.E.O. of Liberty Media in 2002. If, as has been speculated, Malone was about to set Liberty on a collision course with IAC—and by extension, Diller—he might as well have a fall guy in the event the strategy failed. While Maffei had an impressive résumé, with senior-executive stints at Microsoft and Oracle, what he also had was a contentious history with Diller. Maffei had been chairman of Expedia when it was acquired by IAC in 2002, and according to his own testimony, somewhere in the confusion, he lost track of some $28 million in options that subsequently expired and became worthless. Maffei appealed to Expedia C.E.O. Dara Khosrowshahi to reinstate the options, but Khosrowshahi refused. Diller testified at the trial that when Maffei asked Khosrowshahi to change the option dates of his agreement, Khosrowshahi told him, “I’m not going to jail for you.”

While to billionaires like Malone and Diller, the loss of $28 million might not mean much, it rankled Maffei. In Delaware, when Malone was asked whether Maffei had a grudge against Diller, Malone understatedly responded, “We knew that there had been a history.” Maffei would proceed to build on that history, spending the next few years slowly ratcheting up the pressure on Diller, who contends that Maffei openly criticized him with growing frequency.

Maffei’s public remarks led Diller to confront him during one of media banker Herb Allen’s Sun Valley, Idaho, retreats, accusing Maffei of acting a little “high school” and asking that they find a way to change the tone. He says that Maffei agreed. But Maffei only redoubled his efforts, inviting a Wall Street Journal reporter to accompany him in the fall of 2007 on the company jet from New York to Colorado, where the reporter met with Malone. That flight eventually led to a front-page hit job that Malone himself participated in but later disavowed.

It’s hard to believe that Malone didn’t see what was coming, especially considering the numerous zingers he offered up to the reporter. On ownership of IAC: “The hook is set. It is our company. Barry ain’t going to be able to spit the hook.” On Wall Street’s view of Diller: “There was a time when there was, I think, a 20 percent Barry premium. Today you could argue there is a Barry discount.” Last, Malone said, “It is a little uncomfortable for Barry. Right now we are the shadow that walks around behind him.”

When I tell Diller that I don’t quite believe his testimony that he was “hurt” by the Journal article, he doesn’t pause for a second. “You’re wrong,” he says. “I was. But I wasn’t hurt by Greg Maffei. Greg Maffei can’t hurt me. But John Malone, with whom I have had a very long relationship? What he did absolutely hurt me.” Diller nevertheless hopes to patch things up with Malone. “Malone was the only credible witness they had,” he says.

While the trial itself was mind-numbing at times, the subtext was riveting: John Malone, slayer of moguls, was looking to destroy the reputation of a man whose myth he had helped create. News coverage of the trial failed to adequately convey this aspect, given the dailies’ need to cover the incremental developments.

The gist of the dispute is this: Diller decided that in the process of splitting IAC into five pieces, he would also strip Liberty of its supervoting rights in four of IAC’s five companies. Liberty owns some 30 percent of IAC’s stock but 62 percent of the votes through its ownership of supervoting shares.

In 1995, Diller made it clear that his motives in joining forces with Malone were to be his own boss and to have a serious piece of the action. The two men agreed that Diller would vote Liberty’s stake in the company through a proxy agreement. But Diller soon found himself in the very situation he’d hoped to avoid. Major shareholders blocked his efforts to buy NBC and then nearly derailed his purchase of Expedia.

As a result, Diller told Malone that unless he could shake off the restrictions, he was out. Malone acquiesced. The question in Delaware was whether Diller had the right to split his own company if he desired. Judge Stephen Lamb decided that he did.

Diller says he had no choice but to bring things to a head. “Because of that article, I thought, one, that we would never be able to make a deal with them, and, two, that I didn’t want to negotiate with them anyway. That was personal. They were really out for the throat of the company.”

During the trial, Maffei seemed to enjoy his moment in the spotlight, smiling and laughing with Liberty’s lawyers during breaks. It helped that he was paid $19.2 million for his efforts in 2007—more than triple his 2006 pay of $5.7 million. Malone, whose natural expression seems almost a scowl, showed practically no emotion, while his neatly combed hair suggested a boy on his way to Sunday school. Diller was confidence incarnate in a blue pinstripe suit. It’s an amazing thing to see charisma on display: Malone, who has almost none, barely attracted a sidelong glance from the gallery. But when Diller walked into the room, it seemed for an instant that no one could look away.

Almost from the start, Maffei and Malone sought to make the trial a referendum on the performance of IAC’s stock and Diller’s pay, even though neither issue was legally relevant. When I asked Maffei about the motivation for Liberty’s lawsuit, he stuck to the company line: “First and foremost, this isn’t about the performance of IAC, or stock performance, or vanity buildings, or anything else like that. This is about the fact that Barry Diller sued us and made a proposal where he would steal our votes.”

Since taking the helm of IAC in 1995, Diller has pulled down $1.1 billion for his efforts. Virtually all of that money came from a few early option grants approved by Malone himself.

Diller is tired of answering questions about his pay but insists that he is not defensive about it. “Look, when you’re dealing with amounts of money this large, none of it is justifiable,” he says. “There is no moral right to any of this. But I earned this money over 10-plus years, not in one single year. And while it’s a genuine waste of time for me to try and explain this yet again, I want you to imagine that you’re a shareholder and you could go back 14 years, when you’re talking about a company that was technically bankrupt, a company that had lost $70 million the previous year. Would you have any problem granting me those options if you knew that 14 years later, even in a depressed market, that company would be worth $13 billion? What would your vote be?”

When I ask Diller how he feels about being called a relic of Web 1.0, he laughs. “I don’t pay too much attention to moments in time. I’ve had too many of them.” He goes on to say that if being labeled Web 1.0 means he owns a handful of internet properties that actually generate revenue and profit, then he’s guilty.

“That’s true of some of our businesses,” he says. “But thank God for that, because they produce the revenue that lets us innovate and create brand-new businesses.” He points to his firm’s initiatives in the online gaming space as an example. GarageGames.com is a site for developers of online games, and InstantAction.com is where those games will live. “That’s $50 million we’ve laid on the table on an idea,” Diller says.

Yet with only a handful of companies to work with, it is unlikely that his greatest skill—using highly complex deals to shift money around—will be of much use. Consider one of his new properties: FiLife.com, a financial site that’s a joint venture with Dow Jones. FiLife—which hired Dave Kansas, a former editor for TheStreet.com and the Wall Street Journal, to great fanfare—seems like it may be a dead man walking. Staffers are bailing, and word is that the site may never enjoy an official launch.

Of course, Diller will continue to experiment with public shareholders’ money, critics be damned. IAC president of programming Michael Jackson, who has worked with Diller on and off for the better part of a decade, says this of the company’s media strategy: “Barry says, ‘We all know there’s something going on here. We don’t quite know what we’re going to do, but we will start, put one foot in front of the other, and find our way. Not everything is going to succeed. Unless you’re out punting, though, you can’t really know what the audience will engage in.’ ”

Diller’s ultimate challenge is to guide IAC to a place where it’s once more earning the respect of the stock market, bringing the reputation of the company and the man in sync. For a minute there, during the panel discussion at the Four Seasons, the world was privy to that rarest of moments: Barry Diller gave us a glimpse of vulnerability. Don’t expect to see that again anytime soon.

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Relocation, Relocation, Relocation

Mon, 12 May 2008 10:00:00 GMT

California biotech firm Amgen promoted Robert Bradway to C.F.O. last year and paid $170,541 to relocate him from New York.

In September, Denver-based Qwest Communications paid $8.9 million for the San Francisco home of its C.E.O., Edward Mueller, whom it had hired from Williams-Sonoma. Qwest sold the home three months later for just $7.1 million.

Last year, Goldman Sachs spent $568,679 on moving chief administrative officer Edward Forst from New York to London.

In the fall of 2006, San Francisco-based utility PG&E paid $337,296 to relocate its new general counsel, Hyun Park, from Allegheny Energy in Pennsylvania.

Borland Software in Cupertino, California, moved C.E.O. Tod Nielsen twice in two years: first from Redmond, Washington, where he’d worked for BEA Systems, and then to its new headquarters in Austin. Grand total: $295,227.

When Jim Jenness became chairman and C.E.O. of Kellogg in 2004, the firm agreed to cover his relocation expenses after he stepped down as C.E.O. He did so in 2006, costing Kellogg $964,613 in moving expenses, a loss on his house’s sale price, and a tax gross-up.

Photoillustrations by Julie Teninbaum.

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Last Founder Standing

Mon, 12 May 2008 10:00:00 GMT

Who knew that Amazon C.E.O. Jeff Bezos chose his wife in part because he felt she could, if necessary, get him out of a third-world prison? Long after most other dotcom founders have moved on, Bezos, 44, remains one of the internet’s success stories. In 2007, his business pulled in revenue of nearly $15 billion, up 38 percent from the previous year. Amazon’s stock keeps rising, and Bezos becomes ever richer. His estimated worth is about $8 billion.

The 13-year-old company is the biggest online retailer in the world, but recently Bezos has taken Amazon beyond retailing; it now sells its computing, warehousing, and delivery services to other companies. Even tiny startups can rent just about anything Amazon does. And the company made news with its debut of the Kindle, a slim electronic book reader with iPhone-like cachet.

Yet Bezos is not without challenges. Slowing consumer spending could put the kibosh on Amazon’s growth, even though it just hired 500 more employees and is building a new distribution center. The company is also pushing hard into the market for digital downloads of music and movies, taking on entrenched leader Apple. Most ominously, Google recently announced that it would launch a competing, and free, service for small businesses called Google Apps.

Condé Nast Portfolio contributing editor Kevin Maney interviewed Bezos before a packed auditorium at New York University’s Stern School of Business. The following is an edited transcript. (Watch video.)

You’re hiring 500 people and building a new distribution center. Aren’t you worried about the economy? The fourth quarter of last year was tough for a lot of consumer companies, and we had a terrific Q4. We’re probably not a good leading indicator for the economy as a whole, just because we don’t have a lot of operating history.

Let’s talk about the Kindle. What do you want it to be? Any book, in any language, ever in print should be available in less than 60 seconds. We worked on it for three years. It’s been selling out since being released.

You sold how many? You asked that so innocently, but you know I’m not going to answer. We have a long-standing practice of being very shy about disclosure, and I’ll stick to that practice. The Kindle has substantially exceeded our expectations.

Every effort at e-books has failed. Why should this one work? We decided we were going to improve upon the book. And the first thing we did was try to determine the essential features of a physical book that we needed to replicate. The No. 1 feature is that it disappears. When you’re in the middle of reading, you don’t notice the ink or the glue or the stitching or the paper—all of that disappears, and you’re in the author’s world. Most electronic devices today do not disappear. Some of them are extraordinarily rude. Books get out of the way, and they leave you in that state of mental flow.

How do you improve on that? We looked at things that physical books could never do. One of them is that you can look up any word that you’re reading. It used to be that if I came across a word that I didn’t know, I guessed from context. I’m astonished at what a bad guesser I am. Now that I’m looking up the words, I’m like, “Huh. Really?”

When you founded Amazon, how did you decide to sell books? I went to a catalogers association and started looking at product categories that do well by mail order: No. 1 was apparel, and gourmet food was very high. Way down on the list, like No. 20, was books. But there are more items in the book category than any other. We thought we could build a store with a complete selection. Big book superstores have about 150,000 titles. When Amazon launched in 1995, it had a million. With that kind of founding idea, we drove across the country.

You and your wife. My wife and I. She drove while I wrote the business plan. I wanted to incorporate the company before I got to Seattle. With internet usage growing 2,300 percent a year, dillydallying would have been a bad idea. I called my friend in Seattle and said, “Can you recommend a Seattle lawyer who can incorporate the company?” And he recommended his divorce attorney. Amazon was incorporated by a divorce attorney.

Are you always extremely methodical about major decisions? With business decisions, yes. With personal decisions, I find that my methodical nature can confuse me, and so I think more about personal decisions, like what job you really want to take or whom you want to marry. Although I did have criteria for that.

You had a list for a spouse? I kind of did. It was a short list. I wanted a woman who could get me out of a third-world prison. It was really just a visualization for resourcefulness, because people who are not resourceful drive me bananas.

What’s a gut call you made? Amazon Prime. It’s an all-you-can-eat buffet, $79, that gives you free two-day shipping on everything you buy for a year. When you do the math on that, it always tells you not to do it.

One of your big initiatives, a search engine called A9, fell flat. What happened? If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table. Companies are rarely criticized for the things that they failed to try. But they are, many times, criticized for things they tried and failed at.

Did you ever get criticized for something you tried that worked out? When we pioneered customer reviews, it was incredibly controversial. I got letters from publishers saying, “You don’t understand your business. You make money when you sell things. Take down those negative customer reviews.” We’ve never done anything of real value that wasn’t at least a little bit controversial when we did it. But if you want to be a pioneer, you have to be comfortable being misunderstood.

In 2007, Amazon had a phenomenal year. Revenue grew 38 percent—is that the right number? Yeah, something like that.

Aren’t you supposed to know? I’m thinking a few years out. I’ve already forgotten those numbers.

Okay. Well, talk about the past year, if you can. Why is Amazon still growing at that pace? Not only is the business growing; those rates are accelerating. There are a couple of factors driving that, all related to the big drivers of our business, which are selection, convenience, fast delivery, and low prices. Our international business is doing well.

What is Amazon’s revenue split internationally? It’s 55 percent in the U.S., 45 outside the U.S.

The music business is changing rapidly. What do you think is going to happen? Well, long term, it doesn’t make sense for music to be distributed on physical media. That transition has been going on for seven years and probably will continue for a number of years.

Was Amazon late to the game in online music sales? Well, certainly, you know, there’s a very big player in that space, and they’re doing very well.

And who would that be? I’m not sure. I forget. [Laughter] I have a list somewhere in my office. But we’ve worked for three years in ways that it’s hard for outsiders to see. We didn’t want to launch a music service that wasn’t based on the MP3 format. The iPod has such significant share. Otherwise, we would visualize the bullet points about our service, and we could have all these great points and then the last bullet point would have to be, “Oh, and it won’t play on your iPod." So our patience has paid off in that regard. We now have a service that will play with any device.

Microsoft buying Yahoo—how would that impact Amazon? Oh, I have no idea.

How is the effort to lease your company’s computing power and business capabilities to other companies going? We worked on our infrastructure Web services for four years. We launched our first one, the Simple Storage Service, two years ago, and I am astonished—I rarely hear about a startup company that isn’t using our services. Now we’re starting to get deployment inside corporate data centers. So it’s very exciting.

Google recently announced that it’s entering into that business and will give some of those same
services away for free. What does that mean to you? We really do have a practice of not talking about other companies. But this, like our retail business, is not going to have one winner. There are going to be multiple winners pursuing different flavors or strategies, offering different kinds of products.

You’ve become a very wealthy man. What are you going to do with your money? Good question. I don’t know. My parents are running the Bezos Family Foundation, and they’re focused on education. I’m still focused on Amazon, but I have some ideas. I’ll keep them to myself for now.

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A Storybook Career

Mon, 12 May 2008 04:00:00 GMT

Job Title: Children’s book illustrator
Employers: Usually self-employed
Openings: Shop your portfolio around
Salary Cap: Low six figures
Number of Jobs: About 2,500

"Almost everybody thinks they can write children's books," sighs prolific author and illustrator LeUyen Pham. They see the cute pictures and the simple story lines, Pham says, and think, "Yeah, I can do that." But most newbies miss the rhythm and cadence that extremely short stories require, she says. Most of all, they don’t realize that the stories need to be just as appealing to parents as they are to children.

"If you're going to be reading a book with a kid 20 to 30 times, the parents better like it as well," says the 34-year-old Pham. "A good picture book creates a bond between a parent and a child, when they're reading it, and hopefully entertains the parent in such a way that they feel some type of nostalgia for what they’re reading."

This instinct for knowing both what kids are going to enjoy and what parents are going to buy has made Pham one of today's most sought-after children’s book illustrators. Last year, Pham illustrated actress Julianne Moore's first children's book, Freckleface Strawberry (the title is a name that Moore was teased with as a kid), which will soon go into its second printing. In addition to collaborating on a followup with Moore, Pham recently illustrated a book written by Archbishop Desmond Tutu, God Has a Dream, and is working on her second solo book (her first, Big Sister, Little Sister, about sibling rivalry and love, was published in 2005).

Pham, whose family escaped the Communist takeover of Saigon (now Ho Chi Minh City), in Vietnam, and immigrated to California when she was two, always knew that she wanted to draw for children but wasn't sure whether she could make a decent living at it. After attending the Art Center College of Design, in Pasadena, California, she landed a job as a layout artist drawing background scenes for DreamWorks Animation SKG, working on movies like The Prince of Egypt and The Road to El Dorado. Despite earning a six-figure salary, she soon grew restless, particularly after hearing stories about traveling and living abroad from her fellow animators, most of whom were older than her. Saving up some money, Pham decided to travel the world and illustrate children's books on the side. She journeyed to Europe, Africa, Australia, and Southeast Asia, her sketchbook in tow (her experience drawing animals in Africa proved especially useful later on). Her first year, Pham made just $12,000.

After three years of on-and-off traveling and illustration work, she decided to present her portfolio to 10 children's book editors, creating a handmade picture book for each. She wrapped each book in brown paper and included a note saying that she would be in New York in a month and would love to meet with them. Seven of the 10 editors called to offer her work.

These days, Pham cranks out about three children's picture books a year, in addition to drawings and many covers for other children's books. She's now besting her former DreamWorks salary.

"I can't even remember half the stuff I have out right now," she says. As a result, Pham's workweeks are packed. She begins her days by emailing sketches to her editors in New York around 7 a.m. and then revising them throughout the morning. In the afternoons, she paints final pages based on those sketches until 6 p.m., unless she's nearing a deadline, in which case she'll work until 2 a.m. or later.

Despite the never-ending deadlines and the long hours, Pham realizes how lucky she is to earn a comfortable living doing something that she loves, while having the flexibility to spend time during the day with her infant son. "The first three years of pure starvation are completely worth it now," says Pham. "This is the kind of life I've always wanted."

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Get in Shape to Lead

Tue, 06 May 2008 14:00:00 GMT

Managers have tough jobs: Under intense pressure to make decisions with incomplete information, even the best among us make mistakes. The good news? Evidence abounds to help us make the right choices. The bad? Many of us ignore it—relying instead on outdated information or our own experiences to arrive at decisions. Some of us fall victim to hype about “miracle” management cures, or we adopt other companies’ “best practices” without asking whether they’ll work just as well for our organizations.

Result? Poor-quality decisions that waste time and money (at best) and risk your company’s future (at worst).

To avoid this scenario, start an evidenced-based management movement in your company: Every time someone proposes a change, ask for evidence of its efficacy. Clarify the logic behind that evidence—looking for faulty reasoning. Encourage managers to experiment with new ideas—rewarding those who learn from these efforts, even if an experiment itself fails. And insist that managers stay current in their field—and provide continuing professional education opportunities to help them do.

Your reward? You and your colleagues face the hard truths about what works and what doesn’t. You expose the dangerous half-truths that mar much conventional business wisdom. And you make smart decisions on the most pressing issues facing your company.

The Idea in Practice
To start an evidenced-based management movement in your firm:

Demand evidence.
Whenever someone makes a seemingly compelling claim, ask for supporting data.

Example:
At DaVita, an operator of kidney dialysis centers, facility administrators use disciplined measures to evaluate patient care quality and operational efficiency—and to make confident claims about DaVita’s performance. Reports and meetings begin with data on patient health as well as operational efficiency—as measured by metrics such as treatments per day and employee retention. Formerly teetering on the edge of bankruptcy, DaVita now lays claim to the best patient care quality in the industry.

Examine logic.
Parse the logic behind evidence presented to you, looking for faulty cause-and-effect reasoning.

Example:
A manager who has benchmarked top-performing companies’ best practices recommends adopting a particular practice. You ask him: 1) Does the benchmarked company’s success clearly stem from the practice you want us to emulate? 2) Are our strategy, business model, and workforce similar enough to the benchmarked firm to enable us to learn from that company? 3) Precisely how did this practice make a difference? 4) What are the downsides to implementing this practice, and how might we mitigate them?

Encourage experimentation.
Invite managers to conduct small experiments to test the viability of proposed strategies.

Example:
Gaming giant Harrah’s offered one control group of customers the company’s typical promotional package worth $125 (a free room, two steak dinners, and $30 worth of free gambling chips). It offered customers in an experimental group just $60 worth of free chips. The $60 offer generated more gambling revenue than the $125 offer did—demonstrating that Harrah’s didn’t have to spend nearly as much as it believed was needed to boost revenues.

Reinforce continuous learning.
When managers constantly expand their knowledge, they acquire increasingly more reliable evidence with which to make decisions. Encourage use of inquiry and observation to gather evidence about causes and potential cures for business problems. And provide resources for the continuing professional education of managers.

Example:
At one computer manufacturer beleaguered by poor sales, top managers initially blamed the firm’s corporate sales staff—initially dismissing their claims that weak revenues were a result of poor product quality. Then senior managers were encouraged to further investigate the problem. When managers posed as customers at retailers who carried their computers, store salespeople dissuaded them from purchasing their company’s product—citing the computer’s excessive price, weak features, and clunky appearance. By practicing inquiry and observation, company managers learned that they needed to reexamine product quality.

Purchase the full-length Harvard Business Review article.

The Perfect Paradox of Star Brands

Tue, 06 May 2008 13:30:00 GMT

A watch costing $58,000. Dresses that look like newspaper. An eyeshadow called “gangrene.” Who needs them? No one. But millions of selective consumers worldwide line up to buy them.

That’s because LVMH—the world’s largest, most successful purveyor of these and other luxury goods—is a master of radical innovation. Through this surprisingly messy activity, the French powerhouse has created irresistible star brands in industries ranging from retailing and cosmetics to jewelry, leather goods, and wines. In 2000 alone, LVMH’s brands generated $10 billion.

The company’s secret? LVMH balances a delicate paradox: Be timeless and modern, fast growing and profitable—all at once.

The Idea in Practice

Balancing the Paradox
Star brands are simultaneously:

•   timeless—eternal. Timelessness takes decades to develop. However, you can create the impression of it sooner through uncompromising quality—by hiring dedicated people with the brand “in their bones” and keeping them for a long time.

•   modern—edgy, fashionable, sexy. A modern brand is so new and unique that people feel they must buy it.

•   fast growing—to show shareholders you’ve struck the right balance between timelessness and fashion, and to allow you to charge premium prices.

•   profitable—through disciplined, efficient, and rigorous manufacturing processes that contrast sharply with freewheeling creativity. LVMH’s manufacturing processes enable it to offer highest-quality products at prices that yield impressive returns.

Unleashing Creativity
To balance the above qualities, apply these counterintuitive principles:

•   Free creative people from financial and commercial concerns. Creative types freeze whenever calculator-clutching managers hover nearby. So hire innovative types who want to see their designs succeed “on the street”—then let them run wild.

Example:
Dior designer John Galliano shocked the fashion world when he clad runway models in newspaper dresses. Yet LMVH never flinched. Blocking the plan would have crushed Galliano’s spirit. Later, when Dior manufactured dresses in newspaper-printed fabric, they sold briskly.

•   Don’t follow consumers. You won’t generate breakthrough products, and people won’t pay premium prices for something they expect. Instead, let creators drive innovation, and listen to focus groups with only one ear.

Example:
Focus groups responded lukewarmly to a new Kenzo perfume, Flower—with its oddly shaped bottle and scentless signature flower, the poppy. LMVH launched Flower anyway, because the design team believed in it. Kenzo’s sales rose 75% early in 2001—largely on Flower’s success.

•   Minimize risk. Don’t put your company at risk by introducing all new products all the time. Let proven products carry you.

Example:
LMVH made only several thousand innovative, $1,800 Dior handbags. The rest of the product line was less radical in fabric and design, but the company made more of them and sold them for less—thus encouraging creativity while minimizing risk.

•   Give star brands time to grow. Star brands need great talent and heritage. Use incubation time to learn.

Example:
Although the highly creative Christian Lacroix fashion house hasn’t been profitable since its 1991 launch, LMVH uses it as a laboratory, learning how to start a brand from scratch and nurturing it until it has some history.

Purchase the full-length Harvard Business Review article.

Predictable Surprises: The Disasters You Should Have Seen Coming

Tue, 06 May 2008 13:30:00 GMT

Even the best-run companies can get blindsided by disasters they should have anticipated. These predictable surprises range from financial scandals to operational disruptions, from organizational upheavals to product failures.

But you can minimize your risk by lowering the barriers—psychological, organizational, and political—preventing you from foreseeing calamity. It isn’t just a matter of better environmental scanning or contingency planning. You need a rigorous approach called RPM:

•   Recognize the threat.
•   Prioritize it.
•   Mobilize resources to stop it.

Failure at any stage exposes your company to predictable surprises. Given the stakes involved, RPM should count among every business leader’s core responsibilities.

The Idea at Work

How We Fail
The most skilled executives may fail at any RPM stage:

•   Recognition. Leaders remain oblivious to emerging threats.

EXAMPLE:
Jack Welch never anticipated that GE’s acquisition of Honeywell might flounder during antitrust reviews. Then the European Commission nixed the deal. Had he attended to the warning signs, Honeywell might be part of GE today.

•   Prioritization. Leaders recognize a threat but don’t consider it serious enough.

EXAMPLE:
Though Monsanto CEO Robert Shapiro knew Europeans had food-related concerns, he entered the genetically modified food industry. His failure to win public acceptance of GMO food products cost him his company.

•   Mobilization. Leaders recognize and prioritize a threat but don’t respond effectively.

EXAMPLE:
After the Big Five accounting firms pressured the SEC to allow auditors to continue providing consulting services to clients, the accounting scandals erupted.

Why We’re Vulnerable
Predictable surprises stem from three kinds of vulnerabilities:

•   Psychological. Cognitive biases lead us to see the world as we’d like it to be—not as it is. We favor only evidence supporting our preconceptions, fail to notice others’ behavior, and ignore problems we haven’t personally experienced.

•   Organizational. In large organizations, decision makers receive fragmented, distorted, and incomplete data. Everyone assumes someone else is accountable; no one acts.

•   Political. Power imbalances lead executives to overvalue some groups’ interests and slight others’. Vested interests can impede action.

What We Can Do
To anticipate and avert crises, first ask yourself and your colleagues, “What predictable surprises are currently brewing in our organization?” Obvious, yes—but rarely asked. People often know of approaching storms but remain silent. Encourage them to speak up.

Then, ferret out threats invisible to insiders by using:
•   Scenario planning. Gather individuals from inside and outside your company to analyze external trends and identify business drivers. Create scenarios for surprises that could emerge over the next two years, then design preparatory measures.

•   Risk analysis. Estimate future events’ probabilities and costs and benefits. Create cross-functional teams of insiders and outsiders to synthesize industry intelligence.

•   Incentives. To promote information sharing, reward managers for balancing corporate and local interests.

•   Networks. Gather internal and external advisers to test and refine early impressions and counter unconscious biases. Build formal coalitions to mobilize people outside direct lines of control.

Purchase the full-length Harvard Business Review article.

The Alternative Workplace:

Mon, 05 May 2008 16:00:00 GMT

Could your organization benefit from the alternative workplace—where employees work off-site, primarily from home?

AT&T, IBM, and even the U.S. Army are saving a bundle in real-estate and infrastructure costs by having workers work from home—even with the added cost of providing these employees computers, software, tech support, etc. Productivity gains are another compelling benefit: in a study of one well-managed office, conversation and other office norms distracted people from work an average 70 minutes in an eight-hour day. Less tangible results, such as increased employee satisfaction that translates to improved attitudes toward customer service, are just as important. Yet, the alternative workplace is not suitable for every company or every job. Like many other business management trends, this one requires careful application.

The Idea in Practice
Notable cost savings from alternative-workplace arrangements lead some business decision makers to think that these arrangements are the wave of the future. Others cling to the notion that a company office is still the most productive place to work—water cooler and all. Some managers argue that alternative workplaces hurt employee cohesion, while others say "just give 'em a laptop and a cell phone, and they'll be fine."

How can you sort through the myths and misconceptions to determine if the alternative workplace is right for your organization? Ask yourself these seven questions:

Are you committed to new ways of operating? For example, rewarding for results brought in from the alternative workplace rather than effort made in the office?
Is your organization industrial or informational? If your structure and systems are designed for face-to-face interaction, the potential for alternative workplaces may be limited.
Do you have an open culture and proactive managers? The effort won't succeed unless managers are enthusiastic, knowledgeable, and ready to leave tradition behind.
Can you establish clear links between staff, functions, and time? What function does the job serve? How is the work performed? Thinking through these issues will help identify jobs that can be filled via alternative workplaces.
Are you prepared for "push-back"? Some managers get uneasy when their direct reports are no longer in close physical proximity.
Can you overcome external barriers? Have you determined, for example, whether most employees have the room at home to set up a workspace?
Are you willing to invest in the tools and training needed to make the alternative workplace succeed?

If your answers favor the alternative workplace, launch a simple pilot project and then phase in more people over time, tailoring the program with employee feedback as you go. Start with sales, project engineering, and other areas where employees are largely self-directed. Divide the pilot group into the office-bound, travel-driven, and independent—then think through the logistics of how they’ll work with each other after some of them have started working at home. Give careful thought to what you’ll do to ensure that remote employees still feel “in the loop.”

Finally, see to it that managers are given guidance in monitoring remote employees, that employees know what results they’re expected to achieve, and that other stakeholders such as customers are fully informed.

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Funding Growth in an Age of Austerity

Mon, 05 May 2008 16:00:00 GMT

You know you can't outgrow your competitors unless you out-innovate them. But in an era of rampant R&D belt-tightening, how can you squeeze more innovation out of every dollar you invest?

First, don't leave innovation to the "experts"; instead, turn all of your employees into innovators. Whirlpool, for instance, trains its 15,000 salaried employees on how to generate innovative ideas. Also, look beyond incremental product or service enhancements for truly radical ideas. And conduct small, inexpensive, low-risk experiments to test new ideas commercial promise. Finally, augment your internal innovation efforts with external resources—such as communities of consumers who are passionate about the same things as your workforce and are dreaming up creative ideas themselves.

The competitive field favors companies that do more with less. Take W.L. Gore. The company's wildly successful signature product, waterproof but breathable Gore-Tex fabric, sprang from a simple experiment conducted during an attempt to create a low-cost plumbers' tape.

The Idea in Practice
Four Ways to Innovate on a Shoestring

Cultivate innovators in your company. Send employees the message that you expect them to generate new ideas. Then give them the time, tools, and space needed to exercise their innovation muscles.

Example:
Mexican cement maker Cemex devotes nine "innovation days" each year to harvesting employee ideas. One such day generated more than 250 ideas about ready-mix cement, 10 of which had immediate value and could be implemented immediately.

Use outside innovators. Use the Web to find people whose passions match your problems. Many of these zealous souls are willing to work for a pittance. Ask, "Who out there cares about the problems my company cares about? How can we build goodwill in this community? What incentives would engender the volunteers' contributions?"

Example:
In its annual Code Jam competition, Google gives developers from around the world the chance to work on its toughest software problems. Cash prizes are modest—the real incentive for contestants is the chance to see their code incorporated into Google's ubiquitous search engine. Google also runs a public Web site where staffers with zany ideas can post their prototypes and solicit feedback on using or improving them.

Invest in the most radical ideas. For the biggest payoffs, avoid retreads, updates, or add-ons in favor of truly original concepts. "Radical" doesn't have to mean "risky."

Example:
The Starbucks debit card was radical: Who'd have dreamed coffee drinkers would pay for their caffeine days or weeks in advance? Yet it wasn't that risky: Debit-card technology was established, and Starbucks could easily test the idea in a few stores first. The payoff? Two months after the card's launch, Starbucks had booked more than $60 million in prepayments. This innovation now accounts for 10% of Starbucks' sales.

Launch low-cost, under-the-radar experiments. It's not always easy to gauge an idea's potential commercial value. Use "quick and dirty" experimentation to explore a radical idea's possible ramifications—while avoiding expensive risk-taking.

Example:
Shell Chemicals talked a major U.K. supermarket chain into letting it install prototype laundry detergent dispensing machines at one location. Frugal U.K. customers liked being able to reuse their containers, and store managers appreciated that the new system saved shelf space. But two additional small-scale experiments uncovered several problems—allowing Shell to avoid the disaster that would have come with an initial large-scale launch.

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What Great Managers Do

Mon, 05 May 2008 15:30:00 GMT

You've spent months coaching that employee to treat customers better, work more independently, or get organized—all to no avail.

How to make better use of your precious time? Do what great managers do: Instead of trying to change your employees, identify their unique abilities (and even their eccentricities)—then help them use those qualities to excel in their own way.

You'll need these three tactics:

Continuously tweak roles to capitalize on individual strengths. One Walgreens store manager put a laconic but highly organized employee in charge of restocking aisles—freeing up more sociable employees to serve customers.
Pull the triggers that activate employees' strengths. Offer incentives such as time spent with you, opportunities to work independently, and recognition in forms each employee values most.
Tailor coaching to unique learning styles. Give "analyzers" the information they need before starting a task. Start "doers" off with simple tasks, then gradually raise the bar. Let "watchers" ride shotgun with your most experienced performers.

The payoff for capitalizing on employees' unique strengths? You save time. Your people take ownership for improving their skills. And you teach employees to value differences—building a powerful sense of team.

The Idea at Work
A closer look at the three tactics:

Capitalize on Employees' Strengths
First identify each employee's unique strengths: Walk around, observing people's reactions to events. Note activities each employee is drawn to. Ask "What was the best day at work you've had in the past three months?" Listen for activities people find intrinsically satisfying.

Watch for weaknesses, too, but downplay them in your communications with employees. Offer training to help employees overcome shortcomings stemming from lack of skills or knowledge. Otherwise, apply these strategies:

Find the employee a partner with complementary talents. A merchandising manager who couldn't start tasks without exhaustive information performed superbly once her supervisor (the VP) began acting as her "information partner." The VP committed to leaving the manager a brief voicemail update daily and arranging two "touch base" conversations weekly.
Reconfigure work to neutralize weaknesses. Use your creativity to envision more effective work arrangements, and be courageous about adopting unconventional job designs.

Activate Employees' Strengths
The ultimate trigger for activating an employee's strengths is recognition. But each employee plays to a different audience. So tailor your praise accordingly.

Tailor Coaching to Learning Style
Adapt your coaching efforts to each employee’s unique learning style:

If an employee values recognition from...	Praise him by...
His peers	Publicly celebrating his achievement in front of coworkers
You	Telling him privately but vividly why he’s such a valuable team member
Others with similar expertise	Giving him a professional or technical award
Customers	Posting a photo of him and his best customer in the office

If an employee is ...	Coach him by...
An "analyzer"—he requires extensive information before taking on a task, and he hates making mistakes	• Giving him ample classroom time • Role-playing with him • Giving him time to prepare for challenges
A "doer"—he uses trial and error to enhance his skills while grappling with tasks	• Assigning him a simple task, explaining the desired outcomes, and getting out of his way • Gradually increasing a task’s complexity until he masters his role
A "watcher"—he hones his skills by watching other people in action	• Having him “shadow” top performers.

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