Portfolio.com: Executives

Water Worker

Mon, 12 May 2008 10:00:00 GMT

"No one wants to be the rock star for diarrhea," says Mikkel Vestergaard Frandsen, Danish inventor of the LifeStraw, a $4 drinking tube that removes almost all the disease-causing bacteria, viruses, and parasites in untreated water.

It’s a provocative statement aimed squarely at celebrities like Bono, who have lined up behind AIDS, while unglamorous diarrhea continues to be one of the most persistent and pervasive health disasters in the developing world. According to the World Health Organization, diarrhea kills 6,000 people daily, most of them children under the age of five.

The LifeStraw, which has drawn praise from former president Jimmy Carter, economist Jeffrey Sachs, and singer Peter Gabriel, is clean water’s celebrity product. Since 2005, aid groups in sub-Saharan Africa, Asia, and Latin America have distributed hundreds of thousands of the bright blue purifiers, which house fine mesh, iodine beads, and active carbon and can be used anywhere to suck up surface water and transform it into drinking water. Each lasts roughly one year. In February, Vestergaard Frandsen introduced LifeStraw Family, a $15 water-purification filter that has already outsold the LifeStraw four times over, providing more than a million families with water that meets E.P.A. standards.

Vestergaard Frandsen, 35, didn’t intend to become a humanitarian entrepreneur. His family’s business once manufactured hotel uniforms. But he fell for Africa as a teen, and when handed the keys to the eponymous firm at age 21, he set about devising tools to combat malaria-carrying mosquitoes and waterborne diseases. His first product? Insecticide-laced mosquito nets that go for $5 a throw. The company will sell its 150 millionth net this summer.

The Man Who Saved (or Got Suckered by) Wall Street

Mon, 12 May 2008 10:00:00 GMT

At unpredictable and unpleasantly irregular intervals, a beep resounds through the office of a tired-looking man on the 13th floor of a building in New York’s financial district. The sound is loud and distracting and can fray the nerves. No merry jingles, no downloaded ringtones, just the beep of Tim Geithner’s cell phone.

As president of the Federal Reserve Bank of New York, Geithner, at least at this point in early April, is the man of the moment. Credit-crunched investment bankers are calling to withdraw funds from the discount window, which the Fed uses to loan money directly to banks. Nosy politicians are trolling for scapegoats. Journalists are asking what will happen next.

Everyone is calling at once, and more often than not, their questions pertain to a singular event that rocked the financial markets, the Fed-financed bailout-cum-acquisition of Bear Stearns by J.P. Morgan Chase—a desperate move played out over four hellish days in mid-March, the most significant government intervention in the financial markets since the Great Depression.

Geithner was the central figure in that drama. It was Geithner’s Federal Reserve bank, not the Treasury, that came up with the $29 billion loan that made the deal possible or, more precisely, acceptable to J.P. Morgan. Geithner brought the parties together, hashed out the details, and demanded answers when things got shaky. It was a heady role for a noneconomist who has, to put it kindly, only on-the-job training in the financial markets and who relies on an A-list inner circle. Officially, his advisers include the board of the New York Fed, which counts several heads of financial institutions as members. Unofficially, he has built an impressive career with the help of a number of kingmakers, including some with a financial interest in the industry he oversees. (See a pop-up graphic showing Tim Geithner's unofficial advisors.)

It was in this office, right here, where the Bear deal was done. During that time and in the weeks after, Geithner was getting two hours of sleep a night, and he still looks it. You might even say that this youthful 46-year-old is starting to look his age. The sudden fame clearly unnerves Geithner, a quiet sort who is described by people who know him as shy. “He does not try to blow you away, to overwhelm you,” says Henry Kissinger, Geithner’s first boss.

The Bear bailout is an ordeal Geithner is loath to repeat, even though he knows he may have to. He’s already anticipating the regulatory shifts that must be implemented if the markets are to withstand further shocks. “We’re going to need to change a whole bunch of aspects of our financial system,” Geithner says, speaking quickly and leaning forward in his chair. “We should not have a system that’s this fragile, that causes this much risk to the economy.”

The reform process has started creaking forward, with a wide-ranging (and swiftly dismissed) series of proposals by Treasury Secretary Hank Paulson. Meanwhile, Geithner has begun sending teams of examiners to the major investment banks to pore over their books and risk-control policies. Since the Bear blowup, he has also been urging bankers to boost their capital levels.

It has become something of a Wall Street parlor game to try to figure out why Geithner got as involved as he did in the Bear mess and whether he was had by crafty bankers. Geithner insists that the Bear deal benefited the public and not just the other big banks, who stood to gain from their competitor’s going out of business. (Granted, it did help the banks, assuaging fears of an industry wipeout.) The implicit message is, Weep not for Bear but for what could have happened to the rest of us if it hadn’t been saved. Geithner is impatient with—and a bit teed off by—talk that he is pushing the Street’s agenda. “The Fed’s actions in this financial crisis will benefit Main Street more than they benefit Wall Street,” he asserts. He is certain that calamity was averted and that the people who gain most from the deal are not bankers but “the family who needs to borrow money to finance a house or send their child to college, or the individual trying to build enough savings for retirement, or the worker worried about losing her job.”

That sounds like campaign rhetoric, but Geithner is an avowedly apolitical independent—contrary to the assertion of one columnist that he was an adviser to John Kerry in 2004—and has served under both Republicans and Democrats. But he’s going to have a hard time remaining above the political fray, certainly in this election year, when, given the weak federal response to the subprime-mortgage crisis, the Bear Stearns bailout may anger voters.

Questions linger as to whether Geithner, who’s supposed to represent the public interest, ended up with the best possible deal. He’s an experienced negotiator, having wrangled with foreign powers during his days at Treasury, but some critics contend that he may have been outmatched by Jamie Dimon, J.P. Morgan’s chief executive, and Alan Schwartz, Bear’s C.E.O. “He doesn’t really have what you would describe as a banking or financial background. He’s never taken risk, never worked as a trader or in credit, or even had operational responsibility in a bank,” says Chris Whalen, a vocal critic of the Fed and a managing director of Institutional Risk Analytics, a consulting firm.

After the Bear deal, the Fed wound up with $30 billion in collateral, mostly in the form of subprime-mortgage securities. Even Paul Volcker, the former Fed chairman who served on the search committee that picked Geithner and who still holds him in high regard, has expressed queasiness about the way the deal was structured. In a speech to the Economic Club of New York, Volcker said the Fed took actions that “extend to the very edge of its lawful and implied powers, transcending certain long-embedded central-banking principles and practices.” Volcker later leavened this harsh assessment a bit, telling me that the Fed’s intervention “was a proper action, but it was extraordinary—something that’s never been done before, in terms of calling upon that emergency power. It tells you how seriously they took it.”

Still, misgivings about the deal are hard to ignore, no matter how catastrophic the consequences of not intervening might have been. It doesn’t help that the deal is teeming with connections that are sure to raise questions. Dimon is one of the three class-A directors of the board of the New York Fed, and its head is Stephen Friedman, a former Goldman Sachs chairman, who still sits on the investment bank’s board. The New York Fed’s board also includes Richard Fuld of Lehman Brothers, a firm that is another oft-rumored potential candidate for a bailout. Fuld is a class-B director, meaning that he is elected by member banks, astoundingly, to represent the public. (Friedman is also supposed to be looking out for you: He was “appointed by the board of governors to represent the public.”) Thus Geithner reports to a board that is composed of people who are not only under his purview but would also benefit from any potential bailouts. The structure of the New York Fed’s board bears more than a passing resemblance to that of the New York Stock Exchange in the bad old days, when member firms, regulated by the N.Y.S.E., were heavily represented on its board.

Even more intriguing is Geithner’s informal brain trust, loaded with Wall Street luminaries. Since coming to the Fed in November 2003—recruited by then-New York Fed chairman Pete Peterson, co-founder of the Blackstone Group—Geithner has learned the ways of the financial industry at the feet of some of its biggest legends. He was almost immediately taken under the wing of Gerald Corrigan, a gregarious former New York Fed chief who is now a managing director of Goldman Sachs. Corrigan describes his relationship with Geithner as close, and it has flourished since Geithner’s first days at the Fed. Another frequent adviser—“you don’t want those things to get too formal,” Corrigan notes—is also a preeminent banker, Merrill Lynch C.E.O. John Thain, a Goldman alumnus and former head of the N.Y.S.E. Over the years, Thain has often talked to Geithner—“sometimes I talk to him multiple times a day,” Thain says. Geithner’s network also includes former Fed chairman Alan Greenspan, an old acquaintance, as well as the heads of the European central banks, hedge fund managers, academics, and his immediate predecessor, William McDonough, architect of the 1998 Long-Term Capital Management bailout and now a vice chairman of Merrill.

Geithner’s link to Corrigan will be especially crucial in the months ahead. Corrigan was recently asked by a presidential policy group to form a panel charged with finding ways to protect the financial system. The group is expected to release its findings by the end of July—a rapid but necessary pace if the Street is to have an effective voice in whatever may be done to tamp down risk.

One way of looking at these relationships is that they put Geithner in the loop with people he must know if he is to get a handle on the maddeningly complex financial markets. Corrigan has decades of experience at the Fed and on the Street, and Thain, recently brought to Merrill after the firm wrote down billions in subprime losses, is one of the leading experts on mortgage-backed securities and other intricate financial instruments. You could even make a case that Geithner would be falling down on the job if he didn’t keep in touch with the Thains and Corrigans of the world. “People don’t understand how important those relationships are, especially when you’ve got to deal with complex and difficult situations,” Corrigan says. “Relationships are critical, and Tim has done a terrific job of developing those relationships.”

Corrigan says that they “talk about everything under the sun,” except for monetary policy. “He brings in groups of people. That includes, at times, some of his old Treasury buddies,” like former secretaries Larry Summers and Robert Rubin. “As I said, he has really worked at this networking thing I keep talking about.”

Of course, these aren’t exactly chitchats among people who meet casually at some South Street Seaport bar after work. This is networking between a central banker and the heads of the capital-hungry investment firms over which he holds sway. You might argue that Geithner’s relationship to his charges is even closer than the typical regulator’s. No other regulatory agency is in a position to loan crucial billions to the entities it monitors.

Certainly, Geithner’s friendship with Thain and Corrigan can’t do Merrill and Goldman any harm. One intriguing aspect of the Bear bailout—Geithner’s selection of BlackRock to help the Fed value Bear and then manage the $30 billion in collateral—draws attention to these relationships. Merrill owns 49 percent of BlackRock, which was spun off years ago from Peterson’s Blackstone Group. California Democratic representative Henry Waxman, chairman of the House Committee on Oversight and Government Reform, has asked Geithner to explain how BlackRock got the job, noting that such contracts are usually secured by a competitive bidding process. Geithner told the Senate Banking Committee on April 3 that the selection of BlackRock, which he described as a “world-class adviser” of exceptional expertise, took place amid helter-skelter decisionmaking at the time the deal was being worked out. He said that the compensation of BlackRock, whose board of directors includes Thain, had yet to be determined.

More broadly, the value of the bailout to taxpayers was a theme of the grueling four-hour interrogation of Geithner and other officials by the Senate Banking Committee. Again and again, the senators questioned whether the interests of Bear or the public were being served, and the adequacy of investment bank oversight was the subject of unusually close questioning. While the hearing seemed very civilized—the witnesses were not even sworn in—it rated a solid 6 on the congressional tension-meter, with 1 being an opening prayer and 10 being the Army-McCarthy hearings. Fed chairman Ben Bernanke, Treasury undersecretary Robert Steel (Paulson was conveniently in China), and Securities and Exchange Commission chairman Christopher Cox also testified.

But it was Geithner who had the chore of providing the nitty-gritty, and he bore more than his share of the most pointed questioning. He was scolded, lectured, and interrupted, much like a doctoral candidate who had just presented a weak defense of his dissertation. “Should I try—can I just go through a few important things for the record,” he pleaded at one point in the midst of a barrage of hectoring by Republican senator Jim Bunning, of Kentucky. The New York Times splashed his beleaguered likeness at the top of the front page the next day, with Geithner staring down at the witness table, hand on head, lips pursed, as if saying to himself, “Why the hell did I take this job?”

It's a fair question, and so is this: How did a career technocrat become the king of Wall Street, capable of blessing mergers, starving unworthy firms of cash, and, if one believes the not-unpersuasive official narrative, saving the markets from ruin? The Fed is arguably the least transparent of the financial regulators, and although the Fed itself was created by an act of Congress in 1913 and the chairman of the Fed is a presidential appointee, pretty much everyone else wielding any power is a product of a kind of old-boy network. The presidents of the regional Fed banks are appointed by their nine-member boards of directors, with six seats on each board selected by member banks and the other three by the Federal Reserve’s board of governors.

So in a purely anthropological sense, lack of experience in banking or with the Fed notwithstanding, Geithner was a perfect choice. He was a child of the perma-establishment—born not with a silver spoon in his mouth but with a briefcase tucked under his arm. His father, Peter Geithner, worked for the U.S. Agency for International Development in Africa and Washington before joining the Ford Foundation, where he spent 28 years, holding senior posts in Asia. Tim spent his formative years in Japan and other points east, attending elementary school in New Delhi, where he lived in the upscale New Friends Colony, and he graduated from the International School in Bangkok. From there, he followed in his father’s footsteps to Dartmouth College, then to Johns Hopkins, from which he received a master’s in international economics and East Asian studies in 1985. Soon after, he married a Dartmouth classmate, Carole Sonnenfeld, and they now have a son and a daughter.

Since college, he has gone pretty much straight up the ladder—no detours, no backpacking around Europe, no internship fetching coffee. And every step of the way, his accomplishments and mastery of the details of international finance have been recognized. He has always had what used to be known in the New York Police Department as a rabbi—a high-level official who promotes a person’s career. In his first job, with Kissinger Associates, he worked directly for Henry Kissinger, researching a book. “He did such good work that I still have some of the papers, for another book I may write,” Kissinger says. Then, when Geithner went to the Treasury Department, he held a variety of lower-level positions, including assistant attaché at the U.S. embassy in Tokyo, before being plucked from the great amorphous mass of aspiring civil servants by Larry Summers, then Treasury undersecretary for international affairs, and named his special assistant. With Summers as his backer, he was moved to positions of increasing responsibility, beginning with deputy assistant secretary for international monetary affairs. “He stood out as being in an entirely different league,” Summers recalls. By Summers’ account, Geithner avoided a certain occupational hazard for some young strivers—brownnosing—and spoke his mind. “The ego is disengaged, but he’s very comfortable with himself and very direct—not promoting himself, but just concerned with doing the right thing,” Summers says.

Evidently that was something of a magic formula, as Geithner climbed through the bureaucracy, holding jobs with titles like senior deputy assistant secretary of the Treasury. In the department’s complex hierarchy, the simpler the title, the greater the power. Geithner soon emerged as assistant secretary, then in 1999, undersecretary for international affairs, Summers’ old job. In the interim, Geithner acquired a reputation as a man to be trusted with tough jobs. He negotiated the 1995 U.S.-Japan financial services agreement and served as U.S. negotiator for a 1997 World Trade Organization financial services agreement. Every step of the way, Geithner proved his precociousness. “He was smarter, and he saw problems in much more holistic ways” than his peers did, Summers says. “He was able to see the problem from the perspective of the secretary or the president, who had to decide from the point of view of a wide variety of considerations.”

Geithner truly earned his international-finance stripes during the emerging-markets troubles of the late 1990s—the tumult that led directly to the meltdown of L.T.C.M., which established a template for the Bear Stearns fiasco. “That whole period was one long crisis,” Greenspan recalls, and that was when Geithner proved his mettle in the eyes of the Fed chairman. Geithner showed a “general understanding of the nature of what the problems were and what was required to right the system,” Greenspan says, echoing Summers’ praise.

Geithner’s shining moment came as he negotiated assistance packages for Brazil, South Korea, Thailand, and other teetering countries, helping assemble more than $100 billion in international aid. At the time, the packages raised concerns similar to those surrounding the Bear Stearns bailout, and they elicited much the same defense. But despite the misgivings, Geithner, Summers, and Treasury undersecretary David Lipton were able to contain the now nearly forgotten crisis—only forgotten, mind you, because the bailout was a success.

Geithner moved to the International Monetary Fund near the beginning of the Bush administration but did not stay for long. When McDonough left his post as chief of the New York Fed in 2003, Geithner’s name was floated for the job. With his accomplishments in Asia, he was a shoo-in. A long procession of prominent career advisers dating back to the ’80s, all singing his praises, didn’t do him any harm either. “When his name appeared as a potential candidate, my attitude was ‘Let’s get him before somebody else does,’ ” says Greenspan, who was still chairman of the Fed at the time. Peterson, who led the search committee as well as the board of the New York Fed, recalls that the only possible qualm about Geithner related to his reserved demeanor, his “quiet, diffident personality.” Summers put that notion to rest, according to Peterson, saying, “I don’t think I’ve ever had anyone working for me who, when he disagreed with me, could do it with such direct, unambiguous, and even colorful language.”

Starting out as president of a Federal Reserve bank, Geithner had a friend who was more than eager to help him—the ever-solicitous Gerald Corrigan of Goldman, who recalls, “When Tim got to 33 Liberty Street, he, like most of his predecessors, faced a steep learning curve regarding financial markets.” But, Corrigan hastens to add, “he has worked very, very, very hard to develop that sophistication, and I think that he has done an absolutely terrific job.” (The diplomatic John Thain claims, incongruously, that he doesn’t “remember well enough back to 2003 and 2004” to address the extent of Geithner’s market knowledge when he was starting out at the Fed.)

From the start, Geithner made significant efforts to address systemic risks in the markets, particularly those caused by derivatives. Geithner pressured banks to halt the pernicious practice of assigning their derivatives contracts to risky hedge funds without notifying counterparties. He also worked with the S.E.C. and foreign regulators to persuade firms to improve their general risk management and tighten lending practices for hedge funds. It’s likely that the recent market troubles would have been a lot worse had these measures not been taken—and that the hedge fund implosions that have accompanied the subprime crisis would have been a lot messier than they were.

The wedding of Bear Stearns and J.P. Morgan was undertaken strictly for the money and definitely—definitely—not for love. There are varied opinions as to whether Bear got what it deserved. Bear was the bank known for its “what’s in it for me?” supertraders, the one that had refused to participate in the Fed-sponsored bailout of L.T.C.M. but was now the cause of an even more dramatic federal intervention. Here the tables were turned, and the rapacious bankers and traders were painting themselves as the victims. The spectacle of the C.E.O. of Bear, one of the most aggressive trading houses in history, claiming to be a victim of foul play has to be one of the richest ironies of this crisis.

A reasonable case can be made that Bear might have survived if the discount window had been opened to investment banks earlier, as Bear execs have claimed. Had that happened, “I think you very likely would still have Bear Stearns as a separate entity,” says Roel Campos, who recently left his post as an S.E.C. commissioner. Instead, Bear is being taken into the J.P. Morgan fold in a way that ensures pain for Bear shareholders. That’s largely because of Paulson, who pushed for a bargain-basement price, lest other bankers start to believe that Uncle Sam will bail them out if they continue to take huge risks.

“It would have been nice if the Fed could have done something to prevent that from happening, but since they couldn’t or didn’t, I guess that at the time the crisis arose, I would have done the same thing,” says William Seidman, former chairman of the Federal Deposit Insurance Corp. and an architect of the savings-and-loan rescue in the 1980s. “I used to say that there’s no bank regulator born that will allow a major financial institution to collapse on his watch.”

Paulson’s concern about the share price reflects his fear of creating what economists call moral hazard. The concept can be understood this way: As long as Mom and Dad will bail them out, misbehaving kids will continue to act as if there are no consequences to their actions. To prevent that, Paulson urged that the deal be consummated as cheaply as possible, initially at the humiliating price of $2 a share. Even though the J.P. Morgan bid was raised to $10 a share, that’s a flyspeck compared with the $171 that Bear stock was commanding in January 2007. (In Senate Banking Committee testimony on April 3, the Treasury’s strong-arming was delicately referred to as offering “perspective.”) Paulson’s presence in the deal resembles the placement of his name on the front of a dollar bill: Even though the words "Federal Reserve Note" appear in bold letters at the top, Paulson’s signature is still prominent.

One of the most discussed topics during the crisis was why Geithner was involved in the first place. The Fed, despite its broad financial oversight, does not have authority over investment banks—either to audit their books or lend them money. When Bear finally got its loan, via J.P. Morgan, it was through emergency authority that had rarely been invoked since the Depression. The day-to-day task of overseeing investment banks falls mainly to the S.E.C., but the agency’s primary job is not to ensure that banks operate in a way that won’t cause a meltdown but to enforce its mandate to protect investors.

At the end of the day, Congress will have to increase the Fed’s powers if it is to get a handle on risk-taking among investment banks. “I’m not clear how the Fed becomes a regulator of risk without regulating the institutions that take the risk,” says Seidman, the former F.D.I.C. chairman.

Still, no amount of eagle-eyed regulation can substitute for the power of a marketplace in which no one is willing to do business with a firm anymore. That was certainly the situation Bear found itself in. Geithner testified at the Senate hearing that he would probably not have been comfortable lending money to Bear earlier than he did, “given what we knew at the time.” After all, he said, “we only lend to sound institutions.” It was a jab at Schwartz, who testified a few hours later that “the firm was adequately capitalized and had a substantial liquidity cushion” but was a subject of “unfounded rumors” that caused a run on the bank. Under questioning, he accepted some blame for his own firm’s going belly-up, but it was clear that he didn’t have his heart in it. Indeed, the senators seemed so taken by his story, solicitously homing in on his rumors excuse, that none of them was discourteous enough to push Schwartz on why Bear took such risks with its capital and why it didn’t reduce its risk exposure or raise more capital than it did before the roof fell in.

It was also a slap in the face to the man sitting a few feet to Geithner’s right, S.E.C. chairman Cox, who had told the media on March 11 that the S.E.C. was “reviewing the adequacy of capital at the holding-company level on a constant basis, daily in some cases,” adding, “We have a good deal of comfort about the capital cushions that these firms have been on.” There’s a big difference between a company that’s not sound enough to borrow from the Fed’s discount window and one with a sufficient capital cushion.

In fact, it’s not at all clear that Bear would have survived if the discount window—opened to the Fed’s primary dealers, including some investment banks, by emergency authority on March 16—had been opened to Bear and other investment banks a few days earlier. According to a person with knowledge of Bear’s financial condition at the time, the firm had a far riskier financial profile than other banks, with an excessively heavy exposure to mortgages. The central issue, he contends, is that if “Bear hadn’t put itself in a position where it was vulnerable to this kind of run, none of this stuff would have been necessary. That was the overwhelming, dominant cause of those events. They were left on the edge of insolvency with no options.”

Indeed, Schwartz’s beef, though it appears to have been taken seriously by the S.E.C., reeks of the way C.E.O.’s of money-losing companies routinely blame short-sellers for their own mismanagement. In the end, this once-domineering firm has gone out not with a bang but with a whine.

Geithner believes that a regulatory framework is needed in which “the basic rules of the game establish stronger incentives for building more robust shock absorbers.” That’s a good idea, but so far it’s as feasible as building a Dairy Queen on the far side of the moon. Even with more stringent regulatory safeguards, not even the best system can prevent firms like Bear from taking on too much risk, any more than it can prevent investors from borrowing too much. Nor could it have kept Bear from clearing trades for boiler-room operations in the ’90s, a practice that tarnished its image and caused one of its senior executives to be barred for life from the securities industry.

This hurricane will blow over, but there’s precious little that can be done to stop another from coming. The next storm will undoubtedly involve financial instruments that are under the radar today, and it will be caused by the choices of yet another set of overreaching bankers or traders. Then it may take more than even Tim Geithner to clean up the mess.

Uncle Sam to the Rescue

The Federal Reserve has taken a number of steps to slow the economy’s decline:
Opening its discount window to major investment banks—loaning an average of $28 billion a day.
Offering short-term loans of up to $50 billion to deposit banks through biweekly auctions.
Backing $30 billion in Bear Stearns debt.
Cutting the target interest rate by 2 percentage points since the beginning of 2008. Related Links
The Great Depression Debate
Policy on the Fly
Steady as It Goes

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.

Related Links
Scenes From a Marriage
Media Melee: It's Personal
Diller-Malone Marriage Disected in the 'Journal'

The Age of Attack

Mon, 12 May 2008 10:00:00 GMT

Are we at a tipping point in our corporate culture, at which civil discourse—politesse about our professional peers—is about to become defunct?

This spring, Jack Welch took time off from his whine column to empty a bottle of vinegar on Jeff Immelt’s head. “Jeff has a credibility issue,” said the former C.E.O. of General Electric about his protégé turned successor. “He’s getting his ass kicked.”

Welch’s bruising comments—made on CNBC in the wake of Immelt’s failure to deliver first-quarter profits that matched what he’d promised just weeks earlier—startled many in corporate America, where there has long been a code that you don’t beat up on the person who takes over from you. Reginald Jones, Welch’s predecessor, would never have gone public with criticism in this way, a source at the heart of G.E. told us.

A day later, Welch donned a hair shirt—perhaps after taking a few calls from friends instructing him in basic chivalry. “Nothing, nothing, nothing,” he said, making amends to Immelt—and also, it should be said, to G.E. shareholders—“is as disgusting to me as some old C.E.O. chirping away about how things aren’t as good under the new guy as they were under him.”

To put it in the language of the Street: Nobody was buying.

As drama, Welch versus Immelt seemed to echo a distinctly unfraternal exchange between former Citigroup C.E.O.’s in the Financial Times a few days earlier: John Reed sniped at Sandy Weill, who volleyed right back at Reed—and Chuck Prince too, for good measure. Weill spoke of “very poor management and management decisions over the past couple of years.”

What is going on here? In this, the Age of Attack, these once-mighty men are defending themselves preemptively. Surely Welch has noticed what has happened to Alan Greenspan in the past six months. It is remarkable to behold how the former Fed chairman has turned in the public perception from wizard to whipping boy. Even his immediate predecessor, Paul Volcker, has taken a swipe at him, in between kicks at Ben Bernanke (criticism unprecedented in the annals of the Fed).

One cannot help feeling that Greenspan was caught off guard and took much too long to respond to mounting criticism. This is an iconoclastic time. Bloggers have subscribed to no code of conduct, and business journalists, increasingly, seek the eye-catching—or counterintuitive—angle to make their mark. Maybe Welch, taking his cue from Greenspan’s tardy self-defense, is concerned that someone will one day write unflatteringly about his time at G.E.’s helm. After all, Immelt is still working (à la Bernanke) with methods that he inherited from his predecessor.

So look for predecessor-successor noblesse oblige to fade away and for the start of an era in which a graceful departure at any rung of the corporate ladder becomes a quaint relic, an option rarely embraced. All this makes for terrific copy, but also for the most unwholesome theater.Related Links
Door Wide Open for Rate Cuts
Will 2 Percent Be the Floor?
The Man Who Saved (or Got Suckered by) Wall Street

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.

Related Links
When the Web Goes Dark
A Dark Day for the Web
Wine and the City

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.

So you won’t tell us? No.Related Links
In a Buyers Market, Fewer Buyers
Housing Still 'Grim'
Amazon Doubles Up On First Quarter Profit

Cashing In

Mon, 12 May 2008 10:00:00 GMT

John Mack, Morgan Stanley
After nearly $11 billion in write-downs last year and the first quarterly loss in company history, some investors demanded a showdown over Mack's pay. That confrontation didn’t materialize, and Mack survived without new limits.

James Cayne, Bear Stearns
Long before the recent meltdown, when Bear lost $10 billion in one day, the value of Cayne's stock had skyrocketed to about $1 billion and his compensation had reached $40 million.

Bob Nardelli, Home Depot
The mortgage crisis has made for tough times at Home Depot, which posted a drop in annual sales last year for the first time in three decades. Shareholders sued to stop Nardelli from leaving with a $210 million payout in 2007. Home Depot later settled.

Stan O'Neal, Merrill Lynch
Write-downs in the neighborhood of $30 billion over the past three quarters mean hard times ahead for Merrill. But O’Neal, the recently departed C.E.O., walked away from the mess in October with $162 million.

Flying Solo

Fri, 09 May 2008 04:00:00 GMT

So what’s it like to be fired from your own company? It’s horrible. It’s something you could never imagine happening to you. It’s not something you’d ever want to wish on anybody—that’s for sure.

Ever been fired from a job before? I was fired from Southwest Airlines. Herb Kelleher fired me after five months. I’m going to make a habit of this!

Why are you leaving now? Since the board moved me out of the C.E.O. role and into the chairman’s job, I just haven’t been that involved in the company. My best days were when I was out on the road, serving customers, hanging out in the back galley with crew members. That’s the reason I’m starting an airline in Brazil. I’ve put in $10 million of my own money. I wanted to let my new investors know that I’m serious, I’m dedicated, and I’m not straddling two worlds.

What does it take to start a successful airline today? You need a lot more money. We only had $130 million when we started JetBlue; we have $150 million for Brazil, and we have smaller airplanes. I wouldn’t do it in the United States right now. I wouldn’t even consider it. If someone said, “Here’s a couple hundred million. Go start an airline,” I’d say, “You’re out of your mind.”

With the recent groundings of Southwest and American flights, it seems as if the airlines are skirting the rules when it comes to safety. Should we all be driving instead of flying? Absolutely not. We’re safer now than we’ve ever been.

What was the biggest opportunity you passed up? When JetBlue stock was trading at 40 times earnings per share, I should have sold and bought Exxon Mobil.

What can be done about fuel prices? If I were the president of the U.S., I would convene all the airlines and say, “You get antitrust immunity for the next 12 months. Get in a room and take 15 to 20 percent of flights off the schedule.” If that happened, the price of jet fuel would drop.

You have nine kids. What’s it like packing for a flight with the whole family? I usually fly ahead to avoid the torment.Related Links
Tips for a Sky-High Spring
Achtung, JetBlue
JetBlue: When Irish Skies Are Smiling

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.

Emerging Giants

Mon, 05 May 2008 15:30:00 GMT

Don't look now, but rivals from developing countries are about to give you a run for your money. Consider Mahindra & Mahindra. This Indian automaker's SUV Scorpio has raked in prestigious Car of the Year awards—beating global best seller Toyota Camry. Muscling onto the global automobile stage, M&M now markets the Scorpio in South Africa and Spain.

How to compete with such emerging giants? Don't assume your multinational strength—big-name brands, sophisticated technologies, state-of-the-art innovation systems—will keep upstarts at bay. Instead, understand how emerging giants work around the lack of local business-enabling institutions (regulatory systems, contract-enforcing mechanisms)—a lack that scares global players away. And analyze the steps they take to dominate their own markets, expand into other developing nations, and finally take on advanced economies.

According to Khanna and Palepu, emerging giants use potent strategies to transform themselves into global contenders. For example, they exploit their knowledge of local consumers. Consider Guatemala's Pollo Campero, which provides cooked chicken that suits local palates. Pollo Campero has begun selling to Latino communities in Central and South America and parts of the United States—profitably battling McDonald's and KFC.

Understand how emerging giants compete, and you can counterattack when they start eyeing your markets—as well as go head-to-head with them on their own turf.

The Idea in Practice
A closer look at emerging giants' competitive strategies:

Exploit Knowledge of Local Consumers
Emerging-market companies use their knowledge of local customers' idiosyncratic needs and tastes to build businesses founded on distinctive national characteristics.

Example:
After Chinese appliance maker Haier learned that rural Chinese used its washing machines to clean vegetables, it modified the product to accommodate this need. Haier also made tiny machines that enable Chinese living in humid cities to wash one outfit at a time and thereby change clothes frequently. After cementing its leadership at home, Haier ventured abroad. Ultimately, it established partnerships with American retailers, set up design and manufacturing operations in several U.S. cities—and grabbed a 26% share of the U.S. market for compact refrigerators.

Leverage Familiarity with Labor and Capital Markets
Emerging-market players use their knowledge of local talent and capital markets to cost-effectively serve customers at home and abroad.

Example:
Multinationals operating in India have difficulty sorting talent, because people's skills and the quality of educational institutions vary widely. But Indian information technology companies (Infosys, Wipro) are familiar with local institutions and know where the talent resides. They also hire engineers and technical graduates at salaries much lower then those earned by engineers in developed markets. And as talent becomes scarcer in some urban centers, local firms will maintain their advantage because they know how to secure the best talent from India's second-tier cities.

Treat Lack of Institutions as Business Opportunities
Many developing countries lack institutions that facilitate commerce—such as product-rating companies that advise buyers, insurance firms that offer investment vehicles to locals, and banks that evaluate the credit of small and medium-size enterprises. Local companies that take on these roles can build successful businesses.

Example:
South African insurer Old Mutual realized that South Africa lacked mutual funds and other long-term investment products. It responded by creating insurance policies for poor people that had features of savings accounts. By marketing the policies to millions of South Africans, Old Mutual became a large financial services firm. When the South African economy integrated itself with the world market in the early 1990s, Old Mutual moved into other African countries and listed itself on the Johannesburg and London stock exchanges.
Related Links
Daily Brew
U.S. Hears India's Call for Arms
India From the Inside Out