Portfolio.com: Goods

Free for All

Fri, 09 May 2008 04:00:00 GMT

Bob Pittman made music videos free for consumers when he founded MTV 27 years ago. And now he’s pretty sure music in all formats should be free. No more $15.98 CDs. No 99-cent iTunes. Instead, he says, artists should use recordings to build a brand so that they can make money on concerts and T-shirts. Sitting in his New York office, a foot-tall MTV astronaut statue behind him, he says, "Maybe get a sponsor to pay a million dollars and just give the album away."

Pittman has nailed the future of music.

It's fun to watch the flailing going on now. Producer Timbaland—this generation's Phil Spector, though less weird—has cut a deal with Verizon Wireless to produce songs to be sold exclusively through the company's cellular service. Nine Inch Nails released its latest album only on its website. And those Radiohead guys will try anything. Last October, they released their album In Rainbows on the Web—asking, essentially, for tips in return—and have made the raw tracks for one song available on iTunes so fans can mix their own versions. Any day now, I expect to find a flash drive with a Radiohead song on it inside a specially marked box of Cap'n Crunch.

On the business side, the ideas are flying. Apple is reportedly considering a subscription-based iTunes, EMI handed its digital music business to a former Google exec, and Warner Music C.E.O. Edgar Bronfman pitched a "tax" to pay for music—a proposal getting about as much traction as a return to Prohibition.

This flurry of experiments is painful but probably necessary, like a teenager's goth phase. The endgame is clear, however. Sometime in the next decade, Pittman's model will win. Artists will give away recorded music and consider it promotional, just like music videos. All of the revenue in music will be generated in other ways.

How? Through concerts, certainly. CD sales are deflating like a baseball slugger gone off steroids, but consumers pay more than ever for live music. Concert revenue hit $3.9 billion in 2007, up 8 percent from 2006. And while hip bands endlessly test funky business models, Jimmy Buffett, of all people, has it figured out. Most Buffett fans haven't bought one of his albums since they bought their first CD player. They probably wouldn't know MySpace from their sock drawer. But they flock to his concerts, donning parrot hats and partying in tailgate festivities that look like scenes from Girls Gone Wild: Menopause Edition. In 2007, Buffett played 25 dates, with an average ticket price of $136, raking in $35.6 million—up 34 percent from 2006.

Bands will make money on 3-D movies, like this year's U2 and Hannah Montana flicks. They'll branch out, as Elvis Costello will by hosting a Sundance Channel talk show. They'll get creative with sponsorships. How about selling naming rights? The Foo Fighters' drummer might play his Arthur Vining Davis Foundation hi-hat. Or they could emulate Nascar: U2's the Edge could play a guitar bearing a Budweiser logo. Or for the Jonas Brothers, Juicy Juice.

Dedicated fans might cry that their heroes are selling out. But it's the way things already work in China, where what seems to be the music-business model of the future is already in place. Ninety-nine percent of all downloaded music in China is illegitimate, and 85 percent of CDs sold, even in stores, are pirated. Chinese companies and artists, including popular bands such as Yu Quan, start with the understanding that they'll make nothing from sales of recordings but will generate revenue from endorsement deals, commercials, and, of course, concerts. Record labels? Copyrights? Ha. Not in China.

If that's the future of the music business in the U.S., then record labels are toast. They'll have to emulate Live Nation, which looks most like the music company of the 21st century. Originally a concert promoter, Live Nation came to see that everything an artist does must feed a single enterprise. It now handles its clients' concerts, merchandising, videos, and recording. While most old-style labels suffer, Live Nation enjoyed 2007 revenues of $4.2 billion, up 12.6 percent. Artists sense the shift: Madonna signed a deal with Live Nation last year, reportedly worth $120 million, and Jay-Z joined in April for a reported $150 million. You can bet more stars will follow.

It's all part of an unstoppable movement. "For-profit culture will move toward the nonreproducible, more thrilling aspects of music," says economist Tyler Cowen, author of Good and Plenty: The Creative Successes of American Arts Funding. Since perfect copies of music can be made and distributed for almost nothing, he says, the value moves to one-of-a-kind experiences, like a Jimmy Buffett concert. As even Ashley Dupré, Eliot Spitzer's favorite escort and would-be pop diva, can use pitch-correction software to record a perfect track, consumers increasingly will treasure the ephemeral, even flawed, live experience.

"Everybody has gotten accustomed to a kind of flawlessness that doesn't exist in reality," says Mary Davis, a music-history professor at Case Western. "Reality is sometimes awful, but it's more human." And, yeah, we'll pay for that.

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Cable's Fast Last Mile

Thu, 08 May 2008 16:30:00 GMT

To roll out its new high-speed fiber-optic service FiOS in the Philadelphia area, Verizon lifted a page from AT&T’s old playbook—it reached out and invited the neighbors over for a block party.

More than 500 people came to Springmill, an adult community in Middletown, Delaware, to see a home-technology makeover sponsored by Verizon, get their faces painted, play Guitar Hero—and, of course, hear about how dropping cable for FiOS will enhance their lives.

The problem? Just because FiOS is a superior product in some respects, that doesn’t mean it’s going to trounce the cable companies. Not even close. Even when Verizon fully deploys FiOS, it’s estimated to only cover 15 percent of the nation, according to Craig Moffett, Sanford C. Bernstein & Co.’s senior U.S. telecom analyst.

“The numbers are overwhelmingly in favor of the cable companies,” Moffett said. “And the telcos, including Verizon, are peddling to catch up.”

Still, even Moffett admits that FiOS—where it’s available—is a sweet deal. The fiber line offers customers broadband speed of up to 50 megabits per second, and upstream speeds that are higher than cable, a plus for those customers who like to upload files to YouTube and send photos by email. Verizon says its employees are using speeds of 100 Mbps, although that speed is not for customers—yet.

But to get this fiber into the 10.5 million homes that are connected—and the millions more it’s aiming to touch—the company is investing $18 billion (about the gross national product of El Salvador) between now and 2010.

Major urban markets still aren’t on the FiOS map, except for Philadelphia and Boston. In New York City, Verizon is negotiating for a cable-franchise license for video, and it doesn’t expect to have the city fully wired for TV until 2014.

Instead, FiOS has focused its early rollouts on outlying suburbs—Tupperware territory—hence the block parties and pitches targeted at soccer moms.

AT&T is also part of the video chess match. But it’s U-verse service, which currently offers a maximum broadband speed of just 10 Mbps, isn’t going to fully blanket the country either. In fact, Moffett estimates U-verse will have a 25 percent reach—but only when fully deployed.

Verizon and AT&T may be the most aggressive at deploying their connections, but by 2010, “they’re going to be deployed in only half of their own respective operating territories,” Standard & Poor’s analyst Todd Rosenbluth says.

And that makes it easy for cable giants Time Warner and Comcast to continue stealing the telcos’ core voice customers at a pace of roughly 11 to every one video order they lost in the first quarter of 2008.

More to the point, cable companies are offering perks such as call-waiting, call forwarding, even unlimited long distance and local calls all for one flat fee—especially if rolled into a triple play of video, broadband, and voice.

While the phone companies are offering triple plays too—they have a long way to go before they can build a video business as big as cable’s. Plus, they’re adding on the least-profitable portion of these services because the margins on video are going down as the cost of programming goes up. Someone, it turns out, has to pay for ESPN’s $1.1 billion N.F.L. deal after all.

Also, cable is flirting with its own high-speed offering—like FiOS—tagged DOCSIS 3.0, which has hit speeds of 100 Mbps in tests, 20 times the speed of traditional broadband.

Time Warner Cable has run the service in small markets, and Cox Communications is preparing to launch DOCSIS in certain markets depending on the competitive need, according to David Grabert, Cox’s spokesperson. Translation? When FiOS comes calling, Cox customers can expect high-speed options of their own.

But what some say cable is really waiting for is WiMax; think WiFi in hyperdrive. It’s expected to change the way consumers think of mobility by letting them access the internet at high broadband speeds wherever they are.

Time Warner Cable, Comcast, Intel, and Google, among others, are clearly committed to the technology, announcing investments of collectively more than $3 billion in Sprint Nextel and Clearwire’s WiMax venture on Wednesday.

Still, WiMax is very much in the initial testing phase in the U.S, and the first service provider to deploy WiMax in Australia declared it a complete failure just last month, saying the signal could not reach into a structure beyond 1,300 feet from its base station.

So, after all the technological bells and whistles, the final leg could be won by the simple, low-tech act of playing nice. After all, there are few customers who haven’t had a phone-line crackle, a broadband light go dark, or a cable guy who just never shows up.

When a customer is lucky enough to reside where there’s competition for the home connection, a block party and some good customer service isn’t going to hurt.

That is, if the option is even there.

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Happy Birthday iTunes

Mon, 28 Apr 2008 17:30:00 GMT

Since its debut five years ago Monday, Apple's iTunes Store has sold more than 4 billion songs and accounts for approximately 70 percent of digital music sold worldwide. In the next five years, it may well account for a staggering 28 percent of all music sold worldwide.

By 2012, digital music is projected to account for 40 percent of music sold, according to InStat. If Apple holds onto its current market share, it will account for more than one-quarter of all music sales by its ninth birthday. Not bad for freeware.

"I'm very skeptical about whether iTunes can be unseated, because there's not a lot of consumer pain there," said Paul Resnikoff, editor of Digital Music News.

Digital Music News recently found that iTunes is installed on nearly 30 percent of all computers worldwide, making it the most widely installed music store application in the world.

When Apple snapped up a little music program called SoundJam MP back in 2000, no one predicted that the iTunes application it became would lead to a complete restructuring of the music industry.

Like all journeys, iTunes' reinvention of the music business began with a single inauspicious step. The major labels agreed to license their music only to Apple because the iTunes Store ran exclusively on Macs, representing a "sandbox" in which the labels could test the fledgling online music market.

Of course, once the labels saw Mac users snapping up their songs, the Windows version followed soon after, setting the stage for iTunes' dominion over the fledgling digital music market, which it has held onto ever since.

The key to iTunes' continued success has clearly been the iPod, but as iPod sales plateau, Apple may need to rethink its iTunes strategy, especially because its partners in the music business are looking for ways to give its competition an unnatural advantage.

"Apple is under pressure from the four major labels to change its pricing model to a tiered pricing structure," said Susan Kevorkian, an IDC audio analyst. "The way the labels are pressuring Apple is by withholding DRM-free downloads from the service … [while] cultivating other online music services, most notably Amazon's MP3 downloads store."

But despite its compatibility with the iPod, Amazon isn't stealing many customers from iTunes -- only 10 percent of Amazon MP3 customers have bought from iTunes in the past.

"They're playing on the periphery of this dominant iTunes application," Resnikoff said. "Why would I want to go outside of that?"

Despite the apparent toothlessness of the current Amazon threat, pundits agree that Apple needs to make significant changes to maintain its lead.

Kevorkian thinks Apple should cede to label demands for tiered pricing to stave off a possible migration to stores that lack DRM and offer lower prices. Besides, she says, Apple's 99-cents-per-song strategy has served its purpose: to put digital music "on the radar" of the music-buying public.

Apple has other ways to grow iTunes without relying on the iPod -- even ideas Jobs has pooh-poohed in the past, such as music subscriptions. The most obvious (and least likely) scenario is a PlaysforSure-style subscription service, which would require a new, stronger version of FairPlay DRM and rule out compatibility with older iPods.

A more likely option would be an eMusic-style subscription in which customers get a fixed number of songs per month, receiving a better deal than if they'd purchased the songs individually.

Then there's the so-called "unlimited music" iPod, which could be on the horizon. "We think the issue holding things up is how much money per iPod the labels get," Kevorkian said.

If Apple tires of butting heads with the labels, it could eventually cut them out of at least part of the equation by forming its own record label to keep a portion of the estimated 65 cents it currently pays out to the labels for each song sold.

"Digital distribution makes the economics of the industry so different," Kevorkian said. "That, coupled with Apple's tremendous brand name and reputation as an online music distributor, could make it a very important point of departure."

All it would take, she said, is the addition of an A&R department for scouting bands.

Dan Frakes, senior editor of MacWorld, agrees: "I think Apple will eventually work directly with the creators of content, allowing iTunes to sell original content without having to go through the entertainment industry."

Only Steve Jobs knows which of these paths Apple will take, but in general, iTunes' prospects for the next five years looks about as bright as they have been for the last five.

"If Apple keeps doing what it's doing," Resnikoff said, "I don't think you'll see any factors really eroding iTunes' installation percentage. It's an application that works so well."

Designer Deals

Thu, 24 Apr 2008 17:00:00 GMT

When the markets tank and the economy looks grim, smart investors go looking for bargains. And, according to some observers, few industries have more potential upside at the moment than fashion.

“If you’re a strategic investor, it’s a terrific time,” said Haresh Tharani, chairman of the privately held conglomerate Tharanco Group. In February, the company, already the majority owner of the five-year-old brand doo.Ri, purchased Joseph A., a New York-based knitwearmaker.

Since early last fall, with fuel prices high and markets shaky, interest in acquiring smaller fashion brands—as well as larger ones that haven’t yet expanded internationally—has been on the rise. Smaller private equity outfits that had been priced out in recent years are looking for toeholds in the industry for $1 million to $10 million; larger companies outside of the apparel business are seeking to diversify; and foreign investors are trying to capitalize on the weak dollar.

Tharani, for one, is hot on the prowl. “We’re looking at a dress company, which makes sense because we have two other dress companies,” he said. “It will make us more important with sourcing and with retailers. We’re looking at a high-end shoe-and-accessory company and at a men’s designer brand. There are many different opportunities, but most people are gun-shy.”

Calvin Klein owner Phillips-Van Heusen said last month that acquisitions in line with its current brands (read: luxury brands) are its first priority. The company, which said it has both cash and access to credit, is strategically looking to the future, taking advantage of bargains that may be out there in a precarious economy.

“This is the time to make acquisitions that in the future pay significant dividends,” chairman and C.E.O. Emanuel Chirico said on a conference call with financial analysts on March 25. “Chaotic times are the times when good companies do acquisitions that can really fuel growth going forward.”

Deals in the past six months have ranged from tiny to large. A consortium of private equity groups bought Ellen Tracy from Liz Claiborne in February for $42.3 million, a deep discount from the $180 million Claiborne paid for the company five years earlier. The buyers benefited from the economy and from Claiborne’s fire sale of noncore brands.
SK Networks, an energy company based in Seoul, South Korea, bought Asian duo Y & Kei, now selling under the label Hanii Y, and its brand Obzee, one of the most popular in the Korean market, for $60 million in December. SK also holds a stake in the designer business of Richard Chai, a former designer for Marc Jacobs and TSE.

The Marvin Traub-led TSM Capital made investments in Rachel Roy in November 2007 and Matthew Williamson in August 2007.

In the current financial market, the off-the-charts valuations of recent years are history. “People still have hopes of getting the valuations that they would have in 2007, but they won’t,” said one New York-based private investor who has recently put money into several designer companies. Last year, he pointed out, companies were selling for as much as 14 times earnings before interest, taxes, depreciation, and amortization; now that’s down to 9.8.

“When fashion companies are right-on, there’s the potential to make more money than in hedge funds,” he said. “Designers are the masters of spinning nothing into gold.”

Investors are also looking for very specific qualities in the apparel companies they consider acquiring. (See five brands that are well poised for acquisition.)

“Traditionally, if it’s a startup or close to one, it’s not interesting,” because investors want a proven track record, said Robert Burke, principal of Robert Burke Associates, a New York-based luxury fashion consulting firm that advises designers and helps assemble deals. “Young designers are a gamble. There is not much history, and there’s a greater risk. We believe in young designers and have worked with many, but cutting-edge fashion is not always the best investment.”

Clear opportunities for growth are most important, said Burke. “There needs to be expansion potential, domestically and internationally.” A company also has to be willing to expand the number of products it offers and venture into new categories, as Michael Kors did into accessories and shoes after Sportswear Holdings bought his company. Having a few stand-alone stores allows investors to gauge performance—and potential performance.

Most importantly, a company has to be willing to work with new partners. “You have to gauge how open designers are to having a partner or an investor—if they’re truly interested in listening and going in other directions,” he said. No one wants to see a repeat of the Prada-Jil Sander deal. Prada bought the designer’s profitable namesake brand in 1999; she left twice during the next four years.

Time for a new reality show called What Not to Buy?
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Virtual Training for the Modern Spy

Thu, 24 Apr 2008 16:00:00 GMT

In the wake of the intelligence bungles that propelled the United States into the Iraq war, it's no secret that the nation's spies have been working to improve the quality of their analysis. Now the top U.S. military intelligence agency has come up with a new tool for teaching recruits critical thinking skills: videogames.

The U.S. Defense Intelligence Agency has just taken delivery of three PC-based games, developed by simulation studio Visual Purple under a $2.6 million contract between the DIA and defense contractor Concurrent Technologies. The goal is to quickly train the next generation of spies to analyze complex issues like Islamic fundamentalism.

Given a choice between a droning classroom lecture or a videogame, the best method for teaching Generation Y was obvious. "It is clear that our new workforce is very comfortable with this approach," says Bruce Bennett, chief of the analysis-training branch at the DIA's Joint Military Intelligence Training Center.

Wired.com had an opportunity to play all three games, Rapid Onset, Vital Passage and Sudden Thrust. The titles may conjure images of blitzkrieg, but the games themselves are actually a surprisingly clever and occasionally surreal blend of education, humor and intellectual challenge, aimed at teaching the player how to think.

All three games put the player into the shoes of a young, eager but sometimes hapless DIA analyst.

Rapid Onset can best be described as Zen Buddhism meets the National Intelligence Estimate. It begins with the rookie analyst dreaming of meeting a white-robed guru on a mountaintop. The guru proceeds to throw him off the mountain; clinging to a rope, the analyst can only climb back up if he recites the Eight Questions of Intelligence Analysis.

Young Grasshopper then wakes up and goes to the office, where his boss (who just happens to look like the guru) asks him to analyze the implications of a Chinese purchase of a rusting ex-Soviet aircraft carrier. He can only solve the problem by applying the eight analytical questions. For example, does a foreign news report on the sale have a bias or point of view that might color its conclusions? Does the article cite evidence, or does it rely on opinion and conjecture?

The second game, Vital Passage, is a whodunit that begins with scenes of a tanker under attack in the Persian Gulf during the Iran-Iraq war in 1988. The question is, who attacked the tanker and how? In a reminder of the dangers of jumping to conclusions, our young analyst finds himself in a conference room full of bickering colleagues, each stridently advocating his or her particular theory (It was Iran! No, It was Iraq! It was a missile! No, it was a torpedo!). Our hero must use the approved analytical process to analyze and choose among competing hypotheses.

Anti-terrorist forces land by helicopter in Sudden Thrust. The goal of the games is to focus players on epistemology. Photo courtesy of: Visual Purple LLC

Written by Hollywood screenwriter David Freed, Sudden Thrust is the closest of the DIA trilogy to an action-packed videogame. Our analyst finds himself in a crisis situation when terrorists sail a hijacked natural-gas tanker into New York Harbor. Despite limited and inconclusive information, he and his colleagues must determine what the terrorists are up to, and send the analysis to the secretary of defense.

Sudden Thrust has scenes of helicopters and Navy Seals, but those are just atmospherics, like spooky music during a horror flick. The goal of the games is to focus players on epistemology, or how we know what we know. As our hero's boss puts it, "In our business, conjecture is a four-letter word."

Each game only takes about 90 minutes to three hours, and has multiple story lines that branch depending on a player's actions. All DIA analysts will eventually play them, from rookies to old hands who will use them for refresher training. The DIA has about 2,000 analysts, but the agency has been tasked with training another 2,000 in the U.S. military's combatant commands, many of whom work overseas far from training facilities. With classroom space and instructors at a premium, Bennett estimates that every hour spent training with a game saves one hour of classroom instruction, plus travel time and expense.

The DIA isn't alone in turning to videogames for training. The U.S. Army Intelligence Center is using a custom game to train interrogators, or "human collectors," as they are euphemistically known. Known by the staggering title of Intelligence and Electronic Warfare Tactical Proficiency Trainer Human Intelligence Control Cell, the simulation was designed by General Dynamics from the shooter Far Cry.

The Army game features a virtual detainee and interpreter; the player-interrogator speaks through voice-recognition software to the virtual interpreter, who translates the questions to the prisoner. Designed for rookie interrogators and more experienced personnel needing a refresher course, IEWTPTHICC teaches the player how to work through an interpreter, use culturally appropriate speech and analyze a detainee's body language, according to Lt. Col. Cherie Wallace, deputy head of the new systems training and integration office at the Army intelligence center at Fort Huachuca, Ariz.

The game does not teach coercive interrogation techniques, like waterboarding. But it may eventually be modified to show how offensive or abusive questioning will cause detainees to become less cooperative, says Dennis Mitchell, chief of the intelligence center's training devices branch. "One of the persons who helped us out on it was an instructor who trained people on what the current [interrogation] manual is, and what the rules of war are, and how you treat prisoners of war acceptably."

Intelligence videogames are an example of the way in which the government's training methods are changing. Traditional decision-making exercises have been done through the classroom BOGSAT (Bunch of Guys Sitting Around a Table). But videogame technology offers the possibility of running long-distance exercises with human- and computer-controlled avatars.

The National Defense University in Washington, D.C., for example, is experimenting with virtual conference rooms in Second Life. However, network security administrators are less then thrilled with videogames on their systems, which is why the DIA had to purchase standalone laptops so the games are kept separate from the main computer network. By 2009, the three games will be browser-based and capable of operating from classified servers. "In the intelligence world, we don't necessarily have the latest equipment," Bennett says.

A.J. Rossmiller, who served as a DIA Iraq analyst from 2004 to 2006, expects the games to be moderately useful. The classroom training he received as a fledgling analyst was "pretty weak," according to Rossmiller, author of Still Broken: A Recruit's Inside Account of Intelligence Failures, from Baghdad to the Pentagon. But videogames won't fix what he sees as systemic flaws in American intelligence, where conclusions by analysts are distorted as they work their way up the chain of command. "A lot of problems are stated as analytical when they're management problems," Rossmiller says.

And games as teaching tools are only as effective as the assumptions behind them, says John Prados, a designer of hobby war games as well as an historian who has studied U.S. intelligence. For example, prescripted events in a game will tend to reflect the biases of the game's designers as they steer the player toward certain decisions.

The next step is to figure out a way to use gaming technology for training in working with other agencies -- an oft-noted weakness within the intelligence community. "Maybe it's pie in the sky, but can we link multiple computers, so that I can have eight or 10 people in the room playing the same game," Bennett says. "I can be the DIA guy, someone else in DIA can play the CIA guy, and somebody else can be an FBI or a DEA person. If we don't share information, we lose the game."
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Sony Buys Gracenote for $260 Million

Wed, 23 Apr 2008 18:00:00 GMT

Gracenote, the CD identification database that has since branched out into car applications, video identification, audio fingerprinting and lyrics has found a new owner in Sony, which announced intent to purchase the company for $260 million in May.

Gracenote supplies media identification services for a large cross-section of the music industry. Everything from software like iTunes and Winamp to hardware from Sony and competitors like Panasonic and Samsung uses it to identify CDs upon insertion. Apparently, Sony will operate its new Gracenote unit as a separate division, but it will be hard-pressed not to use Gracenote competitively, potentially ratcheting up rates for the service to give itself an advantage in the market place.

As PaidContent points out, this marks the disappearance of the last independent metadata company, since AMG was bought by Macrovision and Muze is owned by Enterprise Partners Venture Capital. (Macrovision told me that it intends to use AMG to license metadata alongside its content protection technologies.) Other than its plan to run Gracenote as a separate division, Gracenote says it will continue adding new elements to the service.
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Miami Reach

Tue, 22 Apr 2008 18:30:00 GMT

On a sunny Saturday in March, two men with French accents sipped cappuccinos outside Miami’s Orange Café & Art. Down the street, a German photo crew wrapped up a catalog shoot. Waiters folded napkins at a courtyard restaurant with white couches surrounding a large banyan tree.

You might call it South Beach Two. But not yet.

In the past several years, a handful of Miami developers have spent hundreds of millions of dollars in an effort to create the next hipster hotspots. Craig Robins and father-son team Tony and Joey Goldman, developers largely credited with the revitalization of South Beach in the late 1980s, are leading the transformation, focusing on the Design District and Wynwood, respectively.

A 10-minute drive north of downtown, these once-dangerous areas are easy to reach from Interstate 95. They’re not on the water. They’re not lushly planted. But each has an urban vibe that the developers believe can be cultivated into the quintessence of cool.

“South Beach was a transformation of what Miami was all about, a movement toward a more European, pedestrian-friendly, aesthetically oriented neighborhood,” Robins says. “After Lincoln Road, there was no place for the movement part of South Beach to grow. This is the logical extension.”

As they did in South Beach, the developers are buying buildings and restoring historic properties. An equally—perhaps even more—important part of the plan is a strategy that has been used elsewhere: offering free space to attract artists and art organizations. Both Robins and the Goldmans are collectors and patrons whose interest in the arts dovetails with their belief that creative types can lay the foundations of a vibrant new community.

The hitch: timing. The residential real estate bubble has burst in South Florida, with prices down about 20 percent since December 2006, according to the S&P Case-Shiller home-price index. The number of condo and single-family home sales fell by 40 percent last year, and owners are scrambling to rent condos they can’t unload. Local papers carry lawyers’ ads for buyers eager to break preconstruction contracts. Vacancy rates for warehouse and office space are rising too, says Chris Lafakis, an associate economist covering Florida at Moody’s Economy.com.

Robins began turning his attention to the Design District in 2000. He and his company, Dacra, have worked with architects to restore ’20s- and ’30s-era buildings, attract upscale stores such as Fendi and Ligne Roset, and provide free studio space to a dozen artists, the alternative nonprofit gallery Moore Space, and the Haitian Heritage Museum. Robins launched an international design fair called Design Miami in 2005 and recently announced plans to invest another $250 million in the district.

Adjoining the neighborhood to the south, Wynwood is a sprawling area of cement-block warehouses and former manufacturing plants with hand-stenciled signs reading SHOES, SNEAKERS, SANDALS. The desolate, bleak setting is hardly the place you’d expect to find spaces housing works by artists such as Richard Serra, Dan Flavin, Claes Oldenburg, and Andy Warhol—but you do. Starting in the late 1990s, several of the city’s biggest private collectors opened public galleries in the massive spaces here, including the Rubell family in 1996 and Martin Margulies in 1999.

In 2003, Tony Goldman and his son, Joey, began buying more than 20 properties in Wynwood and attracting restaurants, galleries, and retailers—part of their plan to turn the area into a 24-hour live-work neighborhood. They’re even more explicit about their belief that art adds bankable value to a neighborhood under development. In 2005, they donated to Miami’s Museum of Contemporary Art a 12,000-square-foot warehouse that they had completely renovated, creating a world-class turnkey exhibition space.

Still, for these neighborhoods to flourish, there must be shoppers in the stores, patrons of the arts, diners in the restaurants, and tenants in the buildings. Just east of Wynwood, a half-dozen cranes rise above the condos under construction on Biscayne Bay. The Goldmans and Robins are counting on future residents of those buildings to support the new district.

“The housing cycle will have a higher peak and a lower trough than in the early ’90s, when speculation wasn’t as prevalent,” says Lafakis. “In 2006, Miami had the highest percentage of subprime loans of anywhere in the nation. That exerts extra pressure on the way up in terms of home prices and exacerbates the trough on the way down.”

The developers say that they aren’t concerned. Goldman isn’t interested in selling buildings yet but buying them. “In a marketplace like this, there are always opportunities to buy,” he says. “Hopefully even our competitors can come in and buy.”

“If you have a neighborhood that has a unique and special character, the current economy will slow its growth. But that doesn’t mean the neighborhood will fail to prosper,” Robins says. “During the late ’80s and early ’90s, one of the worst economic times since the Depression in real estate, South Beach managed to appreciate at 20 percent a year. The Design District is one of the most exciting areas in Miami. It will keep going, only slower.”

On a recent Saturday afternoon in the Design District, only a handful of shoppers wandered among the galleries and showrooms, and nearly every third building had a FOR LEASE sign in the window. Later that night, however, scenesters and art lovers of all ages crowded into the galleries here and in Wynwood for the all-night art party known as Second Saturday. Diners waited an hour for a table at the courtyard hotspot Michael’s Genuine Food & Drink, and D.J.’s spun records on the crowded sidewalks. But if you build it, will they come to live—and not just to visit?

For now, Miami’s artists may be the biggest beneficiaries of the developers’ dreams. Wendy Wischer, a sculptor who shares a 4,000-square-foot studio provided by Robins, says the free space had a huge impact on her work.

“I was able to start working a lot bigger. It allowed me to work on multiple things at one time and bring in an assistant,” she says. “It’s easier to do studio visits because we’re more centrally located. Being able to get messy is very important. There were also opportunities that happened—such as studio tours as part of Art Basel. Before, my living room was my studio. Sometimes I’d lay stuff on my stove and couldn’t cook for a couple of weeks.”Related Links
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A Google in the Sun

Tue, 22 Apr 2008 16:00:00 GMT

Rising oil prices lift all alt-energy boats.

For proof, look no further than the fat $130 million investment scooped up by eSolar, a company whose basic solar power strategy -- using sunlight-reflecting mirrors to generate steam -- was all but abandoned in the 1980s, and has recently recently caught investors' attention again.

The money, from Google's philanthropic arm, Google.org, and venture capital firms Idealab and Oak Investment Partners, will go towards the construction of eSolar's first functioning solar power plant.

"ESolar's long term is to become a viable replacement for all fossil fuel," said Robert Rogan, a Cal Tech Ph.D. and eSolar's executive vice president for corporate development. "The reason Google invested in us is that they saw the potential of this technology to beat the cost of using coal."

The company's core technology is an implementation of concentrating solar power, which uses mirrors to turn liquid into steam that drives standard electricity-generating turbines. CSP, also sometimes called solar thermal, is considered a promising replacement for fossil fuel power plants, particularly the coal plants that generate more than half of U.S. electricity. It's been around for decades, last seeing popularity in the early 1980s, when oil hit an inflation-adjusted price of $82 per barrel. Higher oil prices make fossil fuel plants more costly, making it easier for alternative technologies to compete. (Oil is currently trading for more than $115 a barrel, its highest level ever.)

Google's green-energy plan goes by the formula-like name RE<C, which sets out the goal of the company's operation -- to find renewable energy sources that reliably generate electricity more cheaply than burning coal. In modern times, that's been impossible, with fossil fuel plants able to generate power for a few cents a kilowatt-hour while solar energy from photovoltaics has cost upwards of $0.25 per kwh.

But times are changing as coal and natural gas plants have gotten more expensive to build. That's happening for a variety of reasons: Banks are including the risks of climate change legislation in their pricing for power plant loans, the raw construction materials used in power plants have become more expensive, and natural gas and coal prices have gone up alongside the skyrocketing price of oil. Within this changing marketplace, wind power has been growing phenomenally fast, but is too intermittent to power the whole grid. As a result, many clean-energy advocates are turning to solar thermal power plants as the solution du jour.

"There's hope and optimism but a little bit of skepticism as well," said Ryan Wiser, a renewable energy analyst at Lawrence Berkeley Labs. "No one knows whether the technologies are really cost competitive with other energy alternatives."

That hasn't stopped Abu Dhabi's clean-tech fund, Masdar, from funding a $1.2 billion solar thermal company called Torresol. Another competitor in the market, Ausra, has received more than $40 million from blue-chip venture capitalists. Yet another player, Abengoa, recently signed a $4 billion deal with Arizona Public Utilities, and Brightsource recently landed a 900-megawatt deal with the California utility PG&E. Stirling Energy Systems, a company that has adapted the Stirling Engine, a 200-year-old invention, for concentrated solar power, even pulled in a $100 million investment.

For its part, eSolar has a gigawatt of electricity production capacity planned.

In the near term, these deals are being driven by southwestern states' laws, which have built solar requirements into their renewable energy dictums. Nevada, Arizona, New Mexico and Colorado all require between 15 and 20 percent of their power to come from solar sources.

In the medium term, any sort of system that puts a price on emitting carbon dioxide -- either a carbon tax or a cap-and-trade framework -- would help these companies because it would penalize fossil fuels and aid cleaner technologies.

Long-term, though, the vision of truly cost-competitive solar energy is what drives all the competitors in the space.

"Once cost parity is reached, we'll see a flowering of solar power," said Rogan. "It's a question of time and place and technology. Right now, that perfect storm is developing."

But with more than a dozen competitors crowding into concentrated solar power, picking a winner looks extremely difficult.

"You have this diversity of designs ... but until we have more plants that are actually built, it's going to be hard to know which design will come out on top," said Wiser.

ESolar claims that its method for tracking the sun uses superior algorithms to focus its mirrors. Further, the company argues that its modular manufacturing processes, which allows it to build relatively small power plants ranging from 33 to over 500 megawatts, gives it time-to-market and cost-efficiency advantages over its competitors.

"If everyone else is building Cray supercomputers, we're building blade servers," Rogan said, coining an info-tech analogy. "If you took all the subsidies away, we believe that we're half the price of other solar technology."

Ausra's CEO Bob Fishman, however, who was formerly a natural gas executive with big utility Calpine, disputed eSolar's "smaller is better" assertion.

"I've looked at it, and I can tell you right now, there's a direct correlation between size and cost. If they want to build 30 megawatt plants, they can have at it," Fishman said. "Why do you think people build big coal-powered power plants and not small ones?"

Both eSolar and Ausra are planning to have demonstration plants up and running later this year. Several other plants from competitors are planning to come online within the next five years. Soon, some of these companies' claims will be subject to rigorous scrutiny by analysts like Wiser. But for now, hard data is hard to come by.

"We've been tracking the CSP market to some extent," Wiser said. "But we haven't done any analytic studies like we have for photovoltaics."

That means that pesky problems, like transmitting the power from the world's deserts to cities where it's needed and finding ways to store the energy for nighttime usage, remain subject to competing claims.

But while the different solar power plant companies have different approaches, they all agree that deploying any renewable technology is better than building more coal plants.

"The world needs all of these solutions," said Rogan. "One power plant is not going to solve the emissions problems of the world."

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Web 2.0: Torture by Information Overload

Tue, 22 Apr 2008 15:30:00 GMT

Now that the first burst of enthusiasm for social networking has died, people are realizing that web 2.0 is actually a huge time sink.

Facebook, Twitter, Flickr and Plaxo may have helped foster community and communication, but they've also added immensely to the flow of often-interruptive messages that their users receive, leading to information overload and possibly a nasty internet addiction.

"We have people calling on a weekly if not daily basis," says Libby Smith, a corporate clinician for the Illinois Institute for Addiction Recovery, which helps treat internet addicts. "If somebody engages in the use of an application compulsively, we get calls about it. There isn't one application that's good or bad, but if people are unable or unwilling to stop using it, that's what we look at as a red flag for an intervention."

Counselors who treat "internet addicts" would likely have a heyday at the Web 2.0 Expo, which begins in San Francisco on Tuesday. Ostensibly, the conference is for web designers, marketers and web professionals, but it's definitely weighted toward businesses that claim to help users and publishers harness data, or the web, to improve efficiency and productivity. Some of the scheduled panels include discussions on how to innovate in a timely manner; ways to make e-mail useful; how to create an effective user interface; ways to optimize a site for search engines; and a session on how to build a flash application in three hours.

Indeed, web 2.0 companies are starting to realize the demands they're putting on their users. Unfortunately, many of the solutions aimed at mitigating information overload -- like Facebook's ability to import Flickr, Picasa, Yelp and del.icio.us feeds into its users' news feeds -- only wind up multiplying the amount of news flowing across the screen. Other solutions, like Plaxo's new desktop notifier, add their own pop-up windows to desktops already cluttered with dialog boxes, instant-messaging windows, updates from RSS feed readers, and e-mail notifications.

Web 2.0 Expo exhibitors will have a wide range of collaboration, communication and "data integration" tools on offer, for end-users as well as web developers. All are hoping to capitalize on social networkers' diminishing attention spans by providing ways of cramming more information into less time.

But how to avoid information overload at the conference itself? That could be challenging. There are nearly 250 speakers and co-presenters on the schedule; an estimated 9,000 people are expected to attend; and as many as 25 parties (that we've heard about) are planned for the 4-day event.

The panels are mostly short and sweet (between 45 to 50 minutes long), but the days are packed. There are at least 9 different sessions for every time slot, and possibly more, since there is also a free sister event, "Web 2Open," a parallel unconference which is happening simultaneously. (Attendees can hop over to Web 2Open to submit an idea for a possible panel, and people use their feet to vote on whether the idea is any good.)

In just one time slot (9:40 a.m. on Wednesday), attendees can listen to a discussion about offline applications, led by guys from Google and Adobe; a session on using "personal informatics" to your advantage (with a discussion led by Dopplr and Yahoo representatives); how to integrate web 2.0 into business; ways to choose domain names to maximize traffic; and how to create a coherent social media strategy. And those are just the most interesting sessions during that time slot.

"We looked at the next wave of applications and tried to find some of the underrepresented skills," says Brady Forrest, co-chair of the conference.

They might have left out the most important skill: Web conference survival.
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Error 404. You've Been Hacked.

Mon, 21 Apr 2008 17:30:00 GMT

Seeking to make money from mistyped website names, some of the United States' largest ISPs instead created a massive security hole that allowed hackers to use web addresses owned by eBay, PayPal, Google and Yahoo, and virtually any other large site.

The vulnerability was a dream scenario for phishers and cyber attackers looking for convincing platforms to distribute fake websites or malicious code.

The hole was quickly and quietly patched Friday after IOActive security researcher Dan Kaminsky reported the issue to Earthlink and its technology partner, a British ad company called Barefruit. Earthlink users, and some Comcast subscribers, were at risk.

Kaminsky warns that the underlying danger lingers on.

"The entire security of the internet is now dependent on some random ad server run by some British company," Kaminsky said.

At issue is a growing trend in which ISPs subvert the Domain Name System, or DNS, which translates website names into numeric addresses.

When users visit a website like Wired.com, the DNS system maps the domain name into an IP address such as 72.246.49.48. But if a particular site does not exist, the DNS server tells the browser that there's no such listing and a simple error message should be displayed.

But starting in August 2006, Earthlink instead intercepts that Non-Existent Domain (NXDOMAIN) response and sends the IP address of ad-partner Barefruit's server as the answer. When the browser visits that page, the user sees a list of suggestions for what site the user might have actually wanted, along with a search box and Yahoo ads.

The rub comes when a user is asking for a nonexistent subdomain of a real website, such as http://webmale.google.com, where the subdomain webmale doesn't exist (unlike, say, mail in mail.google.com). In this case, the Earthlink/Barefruit ads appear in the browser, while the title bar suggests that it's the official Google site.

As a result, all those subdomains are only as secure as Barefruit's servers, which turned out to be not very secure at all. Barefruit neglected basic web programming techniques, making its servers vulnerable to a malicious JavaScript attack. That meant hackers could have crafted special links to unused subdomains of legitimate websites that, when visited, would serve any content the attacker wanted.

The hacker could, for example, send spam e-mails to Earthlink subscribers with a link to a webpage on money.paypal.com. Visiting that link would take the victim to the hacker's site, and it would look as though they were on a real PayPal page.

Kaminsky demonstrated the vulnerability by finding a way to insert a YouTube video from 80s pop star Rick Astley into Facebook and PayPal domains. But a black hat hacker could instead embed a password-stealing Trojan. The attack might also allow hackers to pretend to be a logged-in user, or to send e-mails and add friends to a Facebook account.

Earthlink isn't alone in substituting ad pages for error messages, according to Kaminsky, who has seen similar behavior from other major ISPs including Verizon, Time Warner, Comcast and Qwest. Earlier this month, Network Solutions, one of the net's largest domain name registrars, was caught creating link farms on nonexistent subdomains of websites owned by its own customers.

DNS expert Paul Vixie, who is the president of the nonprofit Internet Systems Consortium, says the problem Kaminisky found isn't with the core internet protocols, which he could fix, but instead is a "problem exacerbated by inappropriate monetization of certain DNS features."

Vixie compared this ISP behavior to Verisign's 2003 Site Finder project, which it unilaterally launched in September 2003 and then shut down a month later.

In that case, VeriSign, which controls the sales of .com and .net top-level domains through a contract with the U.S. government, began directing users who mistyped domains names to its own servers, where it presented paid search results.

The move outraged the technical community and eventually led to an ICANN commission report (.pdf) condemning the practice and an unsuccessful VeriSign lawsuit against ICANN.

"Sitefinder showed that [Non-Existent] domain re-mapping is bad for the community," Vixie said. "This would be an example of why it is bad."

While Barefruit fixed the immediate JavaScript hole, the underlying problem -- that large ISPs are ignoring a core internet practice to make money and pretending to be sites that don't exist -- means every site on the net remains vulnerable in ways they have no control over, according to Kaminsky.

Kaminsky said he'd talked this week to many internet companies who were pissed, though not at him.

"I can't secure the web as long as ISPs are injecting other content into web pages," he said.

The hole shows the risks of allowing ISPs to violate Net Neutrality principles that seek to keep the internet a series of dumb pipes, according to Kaminsky.

"There's no contractual obligation for ISPs not to change content and inject ads," Kaminsky notes.

For its part, Earthlink says the Barefruit ad pages are useful to users.

"We offer DNS error functionality for our customers through Barefruit to enhance our users' experience, and we work closely with Barefruit to provide a safe and convenient way for them to find the destination they're looking for online," Earthlink spokesman Chris Marshall said via e-mail. "We believe that the service provides a positive experience for our Internet users."

Barefruit echoes the sentiment.

"Barefruit endeavors to ensure online security while providing an improved internet user interface by replacing unhelpful and confusing error messages with alternatives relevant to what the user was seeking," Barefruit's Dave Roberts said via e-mail.

For Vixie, however, the issue is simple.

"I really feel if someone goes to a website that does not exist, they ought to see an error message," Vixie said.

Earthlink customers who do not wish to use the service can instead use different Earthlink DNS servers. Anyone can also use OpenDNS, a start-up that also provides ad pages on domains that don't resolve, but does so without pretending to be the other site.

The news of the massive security breach by compromising net neutrality for profit comes just two days after the Federal Communication Commission held a hand-wringing public forum at Stanford University over whether it should punish Comcast for its violation of standard internet practices. The broadband provider was caught sending fake packets to its users in order to reduce the bandwidth consumed by peer-to-peer applications.

Kaminsky is demoing the hole publicly on Saturday at the Toorcon security conference in Seattle.

Kaminsky, a well-respected security expert, is perhaps best known for cleverly proving that a spyware rootkit Sony included on music CDs infected computers in more than half a million computer networks in 2005.
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