February 1 — February 7, 2016 | bloomberg.

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became a battle of the billionaires p38
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 “IT WAS THE
SMARTEST
THING I’D EVER DONE.
NOW, IT’S THE

STUPIDEST
p38

1
PHOTOGRAPH BY ALEX HOERNER FOR BLOOMBERG BUSINESSWEEK

“Fashion doesn’t “How ironic—no, how perverse—

that the USA, which has been
come out of San so sanctimonious in its
Francisco. Google condemnation of Swiss banks,
has become the banking
has no sense of cool” secrecy jurisdiction du jour”
p55 p6
“Despite IEX’s attempts
to make trading nicer, it
is never going to be a
country-club sport”
p36
 Cover
Trail
February 1 — February 7, 2016
How the cover gets made

Domestic Cover
Opening Remarks Money from Swiss accounts finds an unlikely haven: The U.S. 6 ①
“The cover story is on a struggle
Bloomberg View Coal’s death shouldn’t be coal country’s, too • Fix Italy’s banks, pronto! 8 between a power company
and a solar company in Nevada,
owned by Warren Bufett and
Global Economics Elon Musk, respectively.”
Is Angela Merkel losing her clout? 10 “Wow, one of the richest investors
Vietnam’s new government may cage the up-and-coming Asian Tiger 12 in the world against the real-world
Iron Man. This is great.”
China’s growing service economy hits a snag 13
Russia risks becoming a second-rate state 14 “What are you thinking?”

Struggling Sharp looks for help from—surprise!—the Japanese government 15 “Very simple. First we comb through
hundreds and hundreds of photos of
Companies/Industries shirtless men on the Internet, looking
at glistening body after glistening
Foreign companies are keen to get into Iran, but it’s still not a breeze 17 body, until we find two physiques
that resemble Warren’s and Elon’s.”
Rural Americans weren’t too happy when Walmart rolled into town. Now it’s leaving them in the lurch 18
Combining Johnson Controls with Tyco, Alex Molinaroli gets out from under his cloud 19 ②
“Next, set up a photo shoot with
Swiss horologists are having a hard time 20
these two strapping men. Oil them
Briefs: iPhone fever fades; McMuin madness mounts 21 up real good, till they’re as slippery
as guppies. Then watch them
Politics/Policy wrestle—for hours and hours and

COVER AND COVER TRAIL: DOMESTIC EDITION: PHOTO ILLUSTRATION BY JUSTIN METZ FROM PHOTOGRAPH BY DAVID BRANDON GEETING FOR BLOOMBERG BUSINESSWEEK; BUFFETT: LACY O’TOOLE/
hours—until you get the right shot.”
Canvassers take the gloves of—and tap on their apps—for Iowa’s raucous caucus 22
“I’m a secretive LLC with a misleading name, and I approve this message” 24

CNBC/NBCU PHOTO BANK/GETTY IMAGES; MUSK: REBECCA COOK/REUTERS. INTERNATIONAL EDITION: PHOTO ILLUSTRATION BY JUSTIN METZ; RENO: MATT LICARI/GALLERYSTOCK
This Super Bowl will have it all: The hype, the halftime show, the fans. But not the army of homeless people 24
Charlie Rose talks to Donald Rumsfeld 26
2
Has California’s Supreme Court started a multistate feud? 27

Technology
E-sports teams and their owners are eager to join the big leagues 28
The trouble with Twitter #wheredidthelovego 30 ③
“Lastly, find two headshots of
Bespoke spam knows how to get around your e-mail filter 30 Warren and Elon, and Photoshop
Innovation: Swarming underwater robocops 31 them onto the models’ bodies.”

Markets/Finance
What’s not to like about cheap oil? Well … 33
A decade after the buyout boom, those megadeals look mega meh 34
The Bank of Japan goes wild for ETFs 35
Brad Katsuyama, the hero of Flash Boys, faces his old foes again 36
Bid/Ask: Lockheed Martin gets out of IT; Sony gets into chips 37

Features
International Cover
Power Struggle Nevada’s fight over solar rates is a proxy war between two heavyweights 38
①
Under His Thumb Chris Cox tinkers with Facebook’s mighty “like” button 44 “The story is about how Reno is one of
the biggest tax havens in the world.”
Dropped Call Some $22 billion later, SoftBank swears it won’t hang up on Sprint 50
“Two cover stories about Nevada? Are
we Bloomberg Westernweek?”
Etc.
Giphy is teaching the world how to speak GIF 55
Survey: Since when is working 60 hours a week normal? 58
Health: Skip the java and start your day with dandelion-root cofee 59
Design: Picture frames that do justice to kids and cats alike 60
The Critic: The latest plans for Penn Station are a failure—and a triumph 62
What I Wear to Work: Kate Dwyer, the licensing manager for Coke, likes labels (well, one label) a lot 63
How Did I Get Here? Girl Scouts CEO Anna Marie Chávez went from the Clinton administration to cookies 64
We’re blushing, @RonellSmith. Thank you.

We like to think Slack’s changing the way teams

communicate. But don’t take our word for it.
slack.com/love Work on purpose
 Index
People/Companies

ABC Duke Energy (DUK)

Dung, Nguyen Tan
40
12
Kering (KER:FP)
Kickstarter
20
56
Abe, Shinzo 15, 35 Dwyer, Kate 63 KKR (KKR) 34
Activision Blizzard (ATVI) 28 Eleven Madison Park 58 Koch, Charles 22
Adidas (ADS:GR)
Agari Data
Airbus (AIR:FP)
14
30
17
Ericsson (ERIC)
ESPN (DIS)
ESquared Hospitality
51
28
58
Koch, David
Konecranes (KCR1V:FH)
Kravis, Henry
22
37
34
06
A Reno
Alibaba (BABA) 13, 51 Facebook (FB) 46 Lambert, Jerome 20 haven
Altair Semiconductor 37 Fann, David 34 Lawrence Brothers
Amazon.com (AMZN) 30 Fiat Chrysler (FCAU) 17 Supermarkets 18
American Apparel 21 Fincher, David 46 Lawrence, Jay 18
American Express (AXP) 58 First Solar (FSLR) 40 Lee, Ed 24
American International FirstMerit (FMER) 37 Legere, John 51
Group (AIG) 21 Fitzmaurice Reilly, Mary Leibsohn, Adam 56
ANA 12 Ann 58 Leidos Holdings (LDOS) 37
Anhui Jianghuai Automobile 17 FLS Connect 22 Lew, Jacob 33
Apollo Global Management Ford Motor (F) 21 Lewis, Michael 36
(APO) 34 Fox, Rick 28 LG Display (LPL) 15
Apparao, Vidur 30 Foxconn Technology LG Electronics (066570:KS) 12
Apple (AAPL) 20, 21, 30 Group (2317:TT) 15 Lifan Industry 17
Arhancet, Steve 28 Frontier Partners 17 Line 46
AT&T (T) 51 Lockheed Martin (LMT) 37
Autodesk (ADSK) 58
GHI Lufthansa (LHA:GR)
Lyft
17
21
Gail, Peter 59
Gartner (IT)
Gauck, Joachim
46
10 MNOP
Gaudreault, Marc 20 Magid Advisors 28
Gavekal Dragonomics 13 Mango 14
Geely Automobile (175:HK) 17 Marchionne, Sergio 17
Gehry, Frank 46 Masan Group 12
General Electric (GE) 17 Mastrov, Mark 28
General Motors (GM) 14 McDonald’s (MCD) 14, 21
22
Jeb
Genova Burns
Genova, Angelo
58
58
McMillon, Doug
Media General (MEG)
18
37
Bush Giant Spoon 56 Medvedev, Dmitry 14
Gifage 56 Meredith (MDP) 37
Bank of America (BAC) 33 Gillette (PG) 27 Merkel, Angela 10
Barclays (BCS) 33 Gilli 63 Meskarian, Azadeh 17
4 BC Partners 34 Giphy 56 Miller, Andy 28
Becker, Jan 58 Girl Scouts of the USA 64 Mitsubishi Electric (6503:JP)15
Benson Strick, Melanie 58 Gohari, Parham 17 Molinaroli, Alex 19
Berkshire Hathaway (BRK/A) Goldman Sachs Group (GS) Montblanc (GOOG) 20
37, 40 33, 34 Moskovitz, Dustin 46 Rifsy 56 Thomas H. Lee Partners 34 Univision Holdings 34
Bernard, David 20 Google (GOOG) 30, 46, 56 Musk, Elon 40 Rihanna 37 TMF Associates 51 Verizon (VZ) 51
Bernhard, Wolfgang 17 Gou, Terry 15 Riot Games (700:HK) 28 TorreyCove Capital Partners 34 Victoria’s Secret (LB) 56
Betaworks 56 Greubel Forsey 20 Rive, Lyndon 40 Toshiba (6502:JP) 15 Vietnam Airlines 12
BG Group (BG/:LN) 37 Griin, Ken 36 Rokahr, Alice 6 Total (FP:FP) 17 Vodafone (VOD) 51
Blackstone Group (BX) 34 H. Moser & Cie 20 RootMetrics (IHS) 51 Toyota Motor (TM) 17 Walker, Scott 22
BMI Research 12 Haber, Jimmy 58 Rosneft (ROSN:RM) 14 TPG Capital 34 Walmart Stores (WMT) 18
Boeing (BA) 17 Halliburton (HAL) 21 Rothschild & Co. 6 Trident Trust 6 WeChat 46
Bombardier (BBD/B:CN) 17 Hamilton Lane Advisors 34 Rouhani, Hassan 17 Trong, Nguyen Phu 12 Wells Fargo (WFC) 33, 51
Bonnefont, Yves 17 HBO (TWX) 56 Royal Dutch Shell (RDS/A) 37 Trump, Donald 17 Whinston, Noah 28
Bridgetree
Brookshire Brothers
22
18
Herschel Supply
Hertz Global Holdings (HTZ)
63 19
Alex
Rozelle, Whalen
Rubio, Marco
28
22, 24
Tumblr (YHOO)
Turner (TWC)
56
28
White, Mary Jo
WisdomTree
36

Bufett, Warren 40 34 Molinaroli Rufalo, Mark 40 Twitch (AMZN) 28 Investments (WETF) 35

Bush, Jeb 22, 24 Hesse, Daniel 51 Rumsfeld, Donald 26 Twitter (TWTR) 56
Caesars Entertainment (CZR)
34
Hieu, Nguyen
Hilton Worldwide
12 Napolitano, Janet
Nasdaq (NDAQ)
64
36, 46
Saipem (SPM:IM)
Samsung
17 Tyco International (TYC) 19
XYZ
Calatrava, Santiago
CBS (CBS)
62
24
Holdings (HLT)
Hitachi (6501:JP)
34
15
Nash, Devin
NEC (6701:JP)
28
15
Electronics (005930:KS) 12, 15
Sandberg, Sheryl 46 UVW Xi Jinping
Yahoo! (YHOO)
13
51

RENO: ERIC MARKS; BUSH: RUTH FREMSON/BLOOMBERG; MOLINAROLI: JASON ALDEN/BLOOMBERG

Charney, Dov 21 Honeywell International (HON) Nexstar Broadcasting (NXST) Sanders, Bernie 22 Uber Technologies 21 YouTube (GOOG) 28
Chery Automobile 17 19 37 Sandoval, Brian 40 Ulyukayev, Alexei 14 Zada, Joseph 19
Christie, Chris 22 Humm, Daniel 58 NFL Network 24 Sanford C. Bernstein (AB) 15 Uniqlo (9983:JP) 63 Zoomlion Heavy
Chung, Alex 56 Huntington NGP VAN 22 Saw, John 51 United Guaranty 21 Industry (000157:CH) 37
Chávez, Anna Marie 64 Bancshares (HBAN) 37 Nikko Asset Management 35 Sberbank (SBER:RM) 14 United Technologies (UTX) 17 Zuckerberg, Mark 46
Cie Financiere HYT 20 Northrop Grumman (NOC) 19 Schäuble, Wolfgang 10
Richemont (CFR:VX) 20 Icahn, Carl 21 NTT DoCoMo (DCM) 51 Schmickl, Thomas 31
Cisa Trust 6 IEX Group 36 NV Energy (BRK/A) 40 Seehofer, Horst 10
Cisco Systems (CSCO) 30 IHS (IHS) 15, 17 Obama, Barack 22 Sephora (MC:FP) 46 How to Contact
Citadel
Citigroup (C)
36
33
Imgur
Intel (INTC)
56
56
Okasan (8609:JP)
O’Malley, Martin
35
22
Sharp (6753:JP)
Signia Venture Partners
15
28
Bloomberg Businessweek
Claure, Marcelo 51 Intelsat (I) 34 OPI (COTY) 63 Sikorsky Aircraft 37
Editorial 212 617-8120 Ad Sales 212 617-2900
Clinton, Bill 64 Iran Air 17 OTC Markets Group (OTCM) 36 Siluanov, Anton 14
Clinton, Hillary 22, 56 Iran Khodro 17 Oxford Economics 13 Silver Lake Management 34
Subscriptions 800 635-1200
CLSA 15 Parmigiani Fleurier 20 Skidmore, Owings, & Merrill 62 Address 731 Lexington Ave., New York, NY 10022
E-mail bwreader@bloomberg.net
CNN (TWX)
Coca-Cola (KO)
24
46, 63
JKL Paul, Ron
PayPal (PYPL)
22
30, 40
SoftBank (9984:JP)
SolarCity (SCTY) 40
51
Fax 212 617-9065 Subscription Service
Cooke, Jace 56 Japan Display (6740:JP) 15 Perriard, Vincent 20 Son, Masayoshi 51
PO Box 37528, Boone, IA 50037-0528
Coulson, R. Cromwell 36 Javelin Wealth Management Peugeot (UG:FP) 17 Sony (SNE) 15, 37
Cox, Chris 46 12 Pouyanné, Patrick 17 Sprint (S) 51
E-mail bwkcustserv@cdsfulfillment.com
Crull, Kevin 51 Jeferies Group (LUK) 33 Precision Castparts (PCP) 37 Standard & Poor’s (MHFI) 12 Reprints/Permissions 800 290-5460 x100 or
Cruz, Ted 17, 22 Jenner, Kendall 56 Putin, Vladimir 14 Subway 56 businessweekreprints@theygsgroup.com
Cuomo, Andrew 62 Jenner, Kylie 56 Success Connections 58
Letters to the Editor can be sent by e-mail, fax,
Joerres, Jefrey 19
RST Sunrun (RUN) 40

DEF Johnson Controls (JCI)

JPMorgan Chase (JPM)
19
33 RBC Capital Markets (RY) 33
Swatch Group (UHR:VX)
T-Mobile (TMUS)
20
51
or regular mail. They should include address,
phone number(s), and e-mail address if available.
Daimler (DAI:GR) 17 Kantar Media (WPPGY) 24 Redmayne, Eddie 20 TAG Heuer (MC:FP) 20
Davis, Ginny 58 Kaplan, Steve 28 Reid, Harry 40 Technicolor (TCLRY) 58
Connections with the subject of the letter should
DiCaprio, Leonardo 56 Kasich, John 22 Renesas Electronics (6723:JP) 15 Terex (TEX) 37 be disclosed, and we reserve the right to edit for
Dolce & Gabbana 37 Katsuyama, Brad 36 Renzi, Matteo 8 Tesla Motors (TSLA) 40 sense, style, and space.
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 Seven months ago, Rothschild & Co.
Opening paid an $11.5 million ine to the U.S.
Department of Justice and avoided
Remarks prosecution for helping Americans
dodge taxes using undeclared off-
shore accounts. It’s among the more
than 80 Swiss banks who’ve paid
$5 billion to the U.S. in penalties,
ines, interest, and restitution. Now,
however, Rothschild—one of the largest
investment banks in the world—is
moving money in the reverse direc-
tion, helping rich foreigners shelter
their wealth in the U.S. through a trust
company in Reno, Nev.
Last September, in a bid to drum
up business for the Reno office,
Andrew Penney, a managing director
By Jesse Drucker at Rothschild, put together a presen-
tation in San Francisco on how the
world’s wealthy elite could avoid taxes
as well as disclosures in their home
countries. In one section he gave the
hypothetical example of an Internet
investor named “Wang, a Hong Kong
resident,” originally from the People’s
Republic of China, concerned that his
account information could be shared
with Chinese authorities. According
to the presentation, putting Wang’s
assets into a Nevada limited liability
company, in turn owned by a Nevada
trust, would not only shield him from
the authorities in China but also gen-
erate no U.S. tax returns.
After years of lambasting other
countries for helping rich Americans
Moving money out of hide their money ofshore, some tax
the usual offshore tax experts and lawyers say the U.S. is
becoming the new Switzerland. Scott
havens and into Nevada Cripps, the managing director of
and South Dakota is Rothschild’s Nevada trust company,
a brisk new business says moving money out of traditional
offshore secrecy jurisdictions and
into Nevada is a brisk line of busi-
ness for Rothschild. “There’s a lot
of people that are going to do it,” he
says. “This added layer of privacy is
kicking them over the hurdle to” move
their assets into the U.S. For wealthy
foreign clients, he adds, “privacy is
huge, especially in countries where
there is corruption.”
Rothschild is perhaps the most
prominent bank chasing these kinds
of clients. But it has plenty of compe-
tition from others opening up shop
in states such as Nevada and South
Dakota that promote low taxes and
high levels of privacy through gen-
erous trust laws. Cisa Trust, based in
Geneva and specializing in serving
wealthy Latin Americans, is apply-
ing to open an operation in Pierre,
S.D. Trident Trust, one of the world’s
biggest providers of ofshore trusts
with sizable operations in the Cayman
Islands, has opened a trust company in
Sioux Falls, S.D. Says Trident President
Alice Rokahr: “I was surprised at how
many were coming across that were
formerly Swiss bank accounts, but they
want out of Switzerland.”
The low of overseas wealth into
the U.S. stems from a 2010 law, the
Foreign Account Tax Compliance
Act, or Fatca, which require banks
to ferret out foreign accounts held
by U.S. citizens and report them to
the Internal Revenue Service or face
steep penalties. Inspired by Fatca,
the Organisation for Economic
Co-operation and Development, a
government-funded international
policy group, drew up even stifer stan-
dards in 2014. Of the nations asked by
 the OECD to sign on, only a handful
have declined: Bahrain, Nauru,
Vanuatu—and the U.S.
The Obama administration is pro-
posing standards similar to the OECD’s
for foreign-held accounts in the U.S. Yet
most global tax experts expect those to
go nowhere. Similar proposals in the
past have stalled in the face of oppo-
sition from the Republican-controlled
Congress and the banking industry.
“I have a lot of respect for the Obama
administration, because without their
irst moves we would not have gotten
these reporting standards,” says Sven
Giegold, a member of the European
Parliament from Germany’s Green
Party. “On the other hand, now it’s time
for the U.S. to deliver what Europeans
are willing to deliver to the U.S.”
Rothschild’s Reno operation, Nevada
Trust, isn’t easy to ind. Its oices are
on the 12th loor of Porsche’s former
North American headquarters build-
ing, a few blocks from Harrah’s and the
Eldorado. (The U.S. attorney’s oice is
on the sixth loor.) The lobby directory
doesn’t list Rothschild. Instead, visitors
must go to the 10th loor, the oices of
McDonald Carano Wilson, a politically
connected law irm. A tax lobbyist there,
Robert Armstrong, is among the state’s
top trusts and estates attorneys—and
a manager of Rothschild Trust North
America, which was set up in 2013.
One Turkish family is using
Rothschild’s trust company to move
assets from the Bahamas into the U.S.,
says Cripps, the Nevada trust company
ILLUSTRATION BY 731
managing director, and a family from
Asia is moving assets from Bermuda.
An amiable California tax attorney who
of the West, Cripps says foreign clients
often have ofspring in the U.S., and
Rothschild makes sure it knows the
true owners of the entities used by its
clients. Clients must also show they’re
tax compliant in their home countries.
Rothschild’s Nevada trusts have “not
been set up with a view to exploit-
ing that the U.S. has not signed up to”
international reporting standards, says
spokeswoman Emma Rees. “We do not
ofer legal structures to clients unless
we are absolutely certain that their tax
afairs are in order; both clients them-
selves and independent tax lawyers
must actively conirm to us that this
is the case.”
Penney is a longtime attorney
for the bank. He worked his way up
from Rothschild’s trust operations on
the isle of Guernsey in the Channel
Islands. He’s now a managing direc-
tor for Rothschild Wealth Management
& Trust, which is based in London and
manages $23 billion for clients around
the globe. In a client newsletter from
2013, Penney explained that Nevada
trusts can be structured to show up as
foreign trusts to U.S. authorities—thus
avoiding U.S. taxes—while simultane-
ously looking like U.S. trusts to foreign
authorities. He gave the September pre-
sentation in San Francisco. An earlier
draft given to Bloomberg said the U.S.
tax laws and has little appetite to do so”
and “is efectively the biggest tax haven
in the world.” The irm said those state-
ments were deleted before he deliv-
ered his talk.
“The presentation was drafted in
response to a request by the organiz-
ers to be controversial and create a
lively debate amongst the experienced,
professional audience,” Rees says. “On
reviewing the initial draft, these lines
were not deemed to represent either
Rothschild’s or Mr. Penney’s view. They
were therefore removed.”
No one expects tax havens to disap-
pear anytime soon. Swiss banks still
hold about $1.9 trillion in assets not
reported by account holders in their
home countries, according to Gabriel
Zucman, an economics professor at the
University of California at Berkeley. At
the same time, rule changes govern-
ing formerly secret accounts in the
rest of the world are making the U.S.
an increasingly popular place to shield
global wealth from government reg-
ulators. “How ironic—no, how per-
verse—that the USA, which has been so
sanctimonious in its condemnation of
Swiss banks, has become the banking
secrecy jurisdiction du jour,” says Peter
Cotorceanu, of counsel at Anaford, a
Zurich law irm. “That ‘giant sucking
sound’ you hear? It is the sound of
used to run the trust services for Bank lacks “the resources to enforce foreign money rushing to the USA.” 
 Bloomberg
View
Let Coal Die But Save
Coal Country
There is a huge unemployment cost to the
decline and end of the industry
The decline of coal as a source of electric power is inevitable
8 and well under way. This is a good thing, because whether
measured by its efect on public health or its contribution to
global warming, coal is more harmful than any other widely
used source of electricity.
But there’s a human cost to this transition: unemployment
in coal country. Over the past ive years, as the industry has
shed 94 percent of its market value in the U.S., some 15,000
jobs have disappeared in West Virginia and Kentucky alone.
West Virginia’s Boone County and Kentucky’s Union County
have lost roughly 1 job for every 24 residents.
Although the pain has been cruelly concentrated, it should
be of national concern. That’s not because the government is
to blame; more than anything else, the low price of natural
gas has undermined the market value of coal-ired power. But
coal’s decline is accelerated by public policies designed to
reduce deaths from air pollution and to limit climate change.
And while the government is right to restrict coal’s emissions,
it should also help people deal with the consequences.
The regions that are sufering are ill-equipped to cope on
their own. West Virginia’s 2014 per-capita income was $36,644,
the lowest of any state save Mississippi. As of November, just
49.5 percent of its residents were working, the lowest share
in the country; Kentucky wasn’t much better, at 53.3 percent.
The suicide rates in both states are among the nation’s highest.
The Obama administration has asked Congress to support
a range of initiatives to help, including more job training. It
also wants to direct the surplus in the federal abandoned mine
lands fund, which is bankrolled by coal companies to clean
up old mines, toward projects that create local employment.
Providing wider broadband Internet service could help, too,
by giving people more opportunities to access new markets.
Congress has shamefully ignored the administration’s requests.
The administration also wants Congress to pay the pension
To read Mark
Buchanan on what
we don’t know about
growth and Faye Flam
on compassionate
rodents, go to
Bloombergview.com
and health-care obligations of coal mining companies that
have gone bankrupt. This is a more challenging proposition,
because it risks creating a precedent for beneiciaries of under-
funded pension plans in other industries. But if the assis-
tance can be arranged in a way that protects taxpayers from
future claims, Congress should pay for this, too. The best
way to support coal workers is to ensure they get the bene-
its they’ve already earned.
In opposing these changes, Republicans argue that the best
way for the government to help coal workers is to turn back reg-
ulations on air pollution and greenhouse-gas emissions. That
would sacriice the broader public good and still fail to save the
industry. The time when coal is king is past; what the commu-
nities it once sustained need now are alternatives.
Italy’s Banks Have
To Be Fixed—Quickly
The health of the fourth-largest economy in the
European Union is in jeopardy
In recent years, Europe has grown accustomed to inancial
panic. The latest cause for alarm is the troubled banks of Italy.
The sudden sellof of Italian bank shares shows that decisive
action on their nonperforming loans can’t wait any longer. Italy
and the European Union are discussing a plan. They need to
wrap up the talking and act.
There’s no longer any pretending that the issue is con-
ined to smaller lenders, such as the four that the government
rescued last November. Italy’s ratio of nonperforming loans,
at 17 percent, is more than four times the European average
(and Europe’s banks are in worse shape than those in the U.S.).
The answer is to create a “bad bank” to absorb these loans,
so the rest of the system can be restored to health and serve its
essential purpose of lending in support of economic growth.
The question is how to allocate the accumulated losses across
the system’s various stakeholders.
The EU has new rules that rightly require bank sharehold-
ers and creditors to carry much of this burden. It’s also insist-
ing that Italy curb its public borrowing, limiting the scope for
public subsidy. Italy’s prime minister, Matteo Renzi, has pushed
back against some of the European Commission’s demands.
A little more lexibility on both sides can bridge this gap.
The EU should remember that Renzi is trying, against strong
domestic opposition, to be the pro-market, iscally responsi-
ble reformer that Italy needs. In the larger task of reforming
Italy’s economy and governance, he’s the ally Europe wants.
ILLUSTRATION BY MARK PERNICE
Further delay would be dangerous. Italy has a vibrant busi-
ness community and excellent long-term prospects, but an
unrepaired inancial system puts them in jeopardy. The last
thing the rest of Europe needs is a worsening crisis in one of
its largest economies, just as the EU and its central bank are
struggling to revive demand and avoid the trap of delation. 
 YOUR FLEET MATTERS.

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 Global
Economics
February 1 — February 7, 2016
The Shrinking
Chancellor
⊲ Merkel’s under attack over refugees
⊲ “My patience is at an end,” says a onetime ally
The event should have been a breeze
for Angela Merkel. The German chan-
cellor was giving a speech on the
importance of funding science at a
new physics research center in the
eastern city of Halle—no problem for
a physicist-turned-politician. But a
few minutes into her address, Merkel
was confronted by a heckler demand-
ing a change in Germany’s stance on
refugees. Though the chancellor kept
10 her cool, thanking the heckler and
telling him, “I will stand by my respon-
sibility,” the incident highlights the
increasing hostility she faces over her
open-door policy on migrants.
After the arrival of 1.1 million refu-
gees in Germany last year, with thou-
sands more showing up every day,
Merkel’s leadership is being tested as
never before. Convinced that closing
borders would bring down Europe’s
system of passport-free travel, which
Merkel has called the centerpiece of
the region’s single market, she has
sought to cajole neighbors into taking
in more refugees and to persuade
Turkey to keep migrants from cross-
PHOTO ILLUSTRATION BY BRAULIO AMADO; MERKEL: UKAS MICHAEL/GETTY IMAGES
ing into the European Union. After
simmering throughout the summer
and fall, the controversy boiled over
in the irst week of 2016. Shortly after
revelers ushered in the New Year with
Champagne and ireworks, scores
of women across Germany reported
sexual assaults during the festivities.
In Cologne, groups of men gathered
at the foot of the city’s Gothic cathe-
dral and surrounded women, groping
and pickpocketing them. Police said
more than 1,000 men, mostly from
North Africa and the Middle East,
many of them asylum seekers, were
at the scene.
Members of
Merkel’s coali-
tion govern-
ment soon
stepped up
calls for
quotas on
refugees,
deporta-
tion of those
who commit
crimes,
and holding
facilities for
migrants in
border zones.
German President
Joachim Gauck
said the country
should consider ways
to limit the inlux. And
the sharpest criticism
has come from the closest
ally of Merkel’s Christian
Democratic Union, Bavaria’s
governing Christian Social Union.
To shore up support, Merkel
made an uprecedented visit to the
CSU’s annual retreat at the snowy
Alpine resort of Wildbad Kreuth.
After lederhosen-clad children pre-
sented the chancellor with a bouquet
of lowers, 100 delegates angrily told
her their communities were buck-
ling under the wave of migrants and
demanded a cap on arrivals. When
Merkel stood by her refusal to impose
a limit, CSU Chairman Horst Seehofer
threatened to ile a constitutional
complaint charging the federal gov-
ernment with failing to control the
borders and warned that 2016 could
end up topping last year’s record inlux
of migrants. “My patience is at an
 The fresh threat to As Russia contracts,
Vietnam’s economy 12 Putin stands pat 14

China looks to its Who will scoop up

service sector for Japan’s Sharp?
a lift 13 Probably Japan 15

end,” he told reporters. cap on immigration on Jan. 20.

The discord at home threat- The fallout has left Merkel more vul-
ens Merkel’s inluence in nerable than she’s ever been in her
the 28-member EU. As the decade-long chancellorship, with open
leader of Europe’s biggest speculation in Berlin and beyond over
economy, Merkel has how long she can hold on to her job.
dominated the EU’s Yet Merkel has no obvious succes-
response to the euro sor or challenger in the CDU, which
debt crisis with prides itself on loyalty and stability—
her insistence on and whose parliamentarians largely
budget disci- have Merkel’s stature to thank for their
pline and labor- seats. Two years ago she won a third
market reforms. term with her party’s biggest elec-
But given her tion victory since German reuniica-
growing isola- tion. And the man most often touted
tion on immi- as a potential successor, 73-year-old
gration, she Finance Minister Wolfgang Schäuble,
may ind it once the heir apparent to former
harder to Chancellor Helmut Kohl, has been
maintain notable in rising to her defense.
European Merkel holds another trump card:
unity over the economy. With record-low unem-
sanctions on ployment and steady growth, Germans
Russia and have money in their pockets and
to bolster are increasingly willing to spend it. 11
support The Finance Ministry announced a
for conces- 2015 budget surplus of €12.1 billion
sions to help ($13.1 billion), more than double the
keep Britain previous estimate, and said a bal-
in the EU. anced budget this year is still possible
Voters there despite costs tied to asylum-seekers.
are prepar- Furthermore, the unrest over her
ing for a refer- refugee stance has been limited to
endum on the her own bloc. Merkel governs in a
issue as soon coalition with the left-leaning Social
as this summer. Democratic Party, whose members
Merkel has already broadly support her on immigration,
given up on forging as does the opposition. The CSU’s
an agreement that challenge to Merkel “amounts to a
would obligate all EU breach of the coalition,” top Social
countries to accept ref- “I will stand by my Democrat lawmaker
ugees and will instead responsibility.” Thomas Oppermann
settle for voluntary action, —Chancellor
Angela Merkel
said on Jan. 26.
according to a person familiar Three state elec-
with her strategy. The chancellor tions on March 13 could
has said that she’ll reassess the EU’s provide an indica-
approach to migrants after a summit tion of the peril Merkel
on resettlement in mid-February, but faces. While her CDU
the sentiment across Europe appears stands a good chance
to be shifting away from her. To the of winning all three—
north, Denmark and Sweden are and ousting rivals in
tightening control of their borders. two of them—a large turnout for
To the east, formerly communist EU the anti-immigrant Alternative for
member states have refused to take Germany party could make the wins
in any more asylum seekers. And to look like losses. Merkel has shown no
the south, Austria, once a stalwart sign of backing down. In the Black
supporter of Merkel, announced a Forest city of Freiburg on Jan. 13, she
 Global Economics
noted that countries closer to Syria
have found a way to accommodate
many more refugees than the Germans
have. “If a continent like Europe, with
500 million people, is not capable of
taking in 1 million Syrians, perhaps
temporarily,” she told a crowd of stu-
dents and local grandees, “that is not in
line with our values.”
—Patrick Donahue and Arne Delfs
The bottom line As German Chancellor Merkel
gets more isolated at home on the refugee issue,
her influence in Europe wanes.
Economic Policy
The Old Guard Retakes
Control in Vietnam
⊲ Reform-minded Prime Minister
Dung is on his way out
⊲ “I don’t think they’ve really solved
the boom-and-bust cycle”
12 During his decade in power in
Communist-ruled Vietnam, Prime
Minister Nguyen Tan Dung hasn’t
been afraid to take controversial
stands. He’s advocated the sale of
state-owned companies and steered
the country into the Trans-Paciic
Partnership, even though member-
ship in the 12-nation trade pact will
require Vietnam to take painful steps
to further open its economy. Dung,
who’s barred from seeking a third
term when his current one expires
later this year, had hoped to retain
a measure of authority by becom-
ing head of the Communist Party.
Delegates to the party congress in
Hanoi had other ideas. On Jan. 26 they
forced him into retirement.
Capitalism, in Fits and Starts
Change in Vietnam’s gross domestic product
Global financial
crisis hurts demand
Asian
financial
crisis
First wave of
excitement about
Vietnam becoming
the next Asian Tiger
1990
Dung’s defeat was a victory for Party
General Secretary Nguyen Phu Trong,
who leads an old guard schooled in
the ways of a command economy. If
this faction puts the brakes on liberal-
ization, it could jeopardize Vietnam’s
momentum. “They’re not going to
reverse reforms, but they are not going
to speed them up either,” says Zachary
Abuza, a professor at the National War
College in Washington. “They will be
more cautious about the pace.”
Vietnam’s economy grew 6.7 percent
last year, and will maintain that pace
in 2016, according to analysts surveyed
by Bloomberg. Foreign direct invest-
ment reached a record $14.5 billion
in 2015, thanks to companies such
as Samsung and LG that have made
Vietnam a hub for manufacturing
smartphones and TVs. Electronics now
account for almost 30 percent of total
shipments abroad, up from 18 percent
in 2012. In December, Standard &
Poor’s said Vietnam “could be the next
Tiger economy.”
This isn’t the irst time Vietnam
has been heralded as the new Asian
dynamo. The country’s journey to a
socialist-oriented market economy,
begun in 1986, has been bumpy.
Inlation peaked at an annualized
23 percent in August 2011; last year
alone, the government devalued the
currency, the dong, three times. The
nation is also prone to credit-fueled
bubbles. Nonperforming loans hit a
high of 17 percent of total bank lending
in 2012 and remain a drag on growth.
Given that history, there are reasons
for concern that policymakers won’t
be able to keep the economy from
overheating again. Plunging oil prices
have spurred domestic consumption,
but, because Vietnam’s crude exports
generate about 10 percent of govern-
ment revenue, the drop is doing little
Foreign investment
grows as costs
rise in China
for exports
Credit growth plunges
after domestic
banking crisis 2014
to bring down the budget deicit. The
Vietnam Institute for Economic and
Policy Research, a part of the national
university, estimates the shortfall has
reached 7 percent of gross domestic
product. “I don’t think they’ve really
solved the boom-and-bust cycle,” says
Andrew Wood, head of Asia country
risk for BMI Research in Singapore.
There’s still cause for optimism.
Some manufacturers are shifting pro-
duction from China to Vietnam to take
advantage of the country’s ample work-
force and lower wages. The World Bank
projects Vietnam’s working-age pop-
ulation will expand 6.5 percent from
2015 to 2030, while China’s will decline
3 percent over the same period.
Vietnam’s share of all U.S. foot-
wear imports by dollar increased to
13.9 percent in 2014, from 10 percent
in 2012, according to the International
Trade Commission. That came largely
at China’s expense.
The country’s more than 90 million
consumers, many of them young—
60 percent of the population is
under 35—are another draw for foreign
companies. In December, Thai brewer
Singha announced it was spending
$1.1 billion to buy stakes in two subsid-
iaries of Vietnam’s largest listed con-
sumer company, Masan Group. ANA,
owner of Japan’s All Nippon Airways,
in January said it will pay $108 million
for 8.8 percent of Vietnam Airlines.
The tempo of dealmaking could pick
up if Dung’s successor carries on with
reforms. In December the government
identiied 18 industries that are open
to foreign investment, including con-
struction, manufacturing, property,
and transport. The ive-year devel-
opment plan approved at the latest
party congress calls for strengthen-
ing the private sector by guarantee- AP PHOTO (3); GETTY IMAGES (1); IMAGINECHINA (1); REUTERS (1); DATA: WORLD BANK
ing businesses equal access to credit,
land, and other resources enjoyed
by state-owned enterprises. State-
run companies tap 60 percent of the
country’s bank loans while contrib-
10% uting just a third of GDP, according to
government data. Nguyen Hieu, chief
executive oicer of a Hanoi construc-
tion company, who says he tried in
7% vain last year to persuade banks to
lend him $800,000 for a project, says
he’s cautiously optimistic: “It’s good
they recognize the importance of the
4%
private sector, but implementation is
key.” Justin Kendrick, chief investment
 Global Economics

oicer of Javelin Wealth Management on education, insurance, restaurants, Where China Gets Its Growth
in Singapore, cautions business travel, and the other trappings of Gross domestic product in yuan
leaders and investors to be patient. middle-class life. President Xi Jinping
“Vietnam,” he says, “never achieves stressed in a Jan. 18 meeting with min- 70t

things at the pace people want.”

—Bruce Einhorn, with John Boudreau
and Nguyen Dieu Tu Uyen
The bottom line Vietnam’s market opening may
slow with the ascendancy of a more conservative
faction of the Communist Party.
isters and provincial oicials the role
of services, innovation, and house-
hold consumption as the new eco-
50.5%of the economy Agriculture
last year
nomic drivers.
35t
China has a long way to go before
it resembles the U.S. economy, which Construction and
manufacturing
derives almost 80 percent of GDP from
services. A large part of 2015’s gain
from services came from the inancial Services
sector. It grew 15.9 percent as China’s 0

Growth stock markets soared in the irst half 1985 2015*

of the year. “There was an enormous
China Trumpets Its boom in trading volume, which had a
*PRELIMINARY READING;
DATA: NATIONAL BUREAU OF STATISTICS OF CHINA

Service Economy huge impact on the growth of the ser- care, and telecommunications, areas
vices sector,” says Christopher Balding, dominated by government-connected
associate professor at Peking University companies, hinder growth in services.
⊲ It accounts for half of GDP.
HSBC Business School in Shenzhen. So much
“So m of it is still state-owned,”
The pay isn’t great
“But it is very unlikely it ll be says Andrew Polk, senior economist
⊲ “The more you work, the more you repeatable in 2016.” at the Conference Board China Center
can make. But it’s … exhausting” Transportation and l istics, for E Economics and Business. “The
which were boosted last year ernment needs to unleash the
On a cold January afternoon shortly by fast-growing e-comme erce, rvice sector.”
before Chinese New Year, a young are likely to sufer this ye ear China’s State Council has made it
worker is zigzagging on his three- as manufacturing contin- eassier for new companies to register
wheeled motorcycle through Beijing ues to contract, says An ew simp y g the a roval process 13
traic. He’s rushing to deliver pack- Batson, Beijing-based C ina a and ending min um capital
ages to consumers who have bought research director at con ul- requirements. olicymakers
everything from socks to candelabra tant Gavekal Dragonomics. have encouraged investment
on Alibaba’s Tmall shopping website. About 60 percent off total in touri , health care,
He says he can make as much as services, including al sports, aand educa-
6,000 yuan ($909) a month, if he works estate, “are closely tion in part
p through
12-hour-plus days, seven days a week. related to the indus- tax eaks. In the
“The more you work, the more you can trial sector,” he says. 11 months
make. But it’s truly exhausting,” he says. ervicess
“That means services of 22015, China
Beijing is crawling with growth is going g to be sig- rregistered
motorcycle-mounted deliverymen, niicantly slowe er this year
y 3
3.9 million
one sign of the rapid growth of China’s than it was last year. GDP
G n
new com-
service industries. Services grew will also signiiccantly sslow anies, up
8.3 percent last year and for the irst down.” He’s predict- 19 pe
percent, with
time generated more than half of gross ing GDP growth h could m
more than four-ifths
domestic product, or 50.5 percent. fall below 6 perrcent by in
n services, accord-
Manufacturing rose only 6 percent. yearend, from ing too the State Adminis-
“If it hadn’t been for the service 6.9 percent for tratioon for Industry
sector, China’s economy would be 2015. and Comme erce.
in a much worse state today,” says Regulatory China’ss service
China serv sector now
Louis Kuijs, head of Asia economics at barrie to em
e mploys more than 300 million
Oxford Economics in Hong Kong. He comp ition in people, the largest share of the coun-
p
notes that all kinds of services have inance
i e, health
h tryy’s 775 million workers. The fastest
expanded quickly in recent years. grrowth has been in low-end jobs in
g
Service businesses are largely clean, retail, restaurants, hotels, and real
unlike the factories China has long e
estate. Over the last ive years, edu-
relied on. And services generate more catiion and government jobs, most
jobs per yuan of output, an impor- of which
w are illed by college gradu-
tant beneit as the country shifts to ates,, have fallen from a little less than
a slower growth rate. The industry half ofo total service employment to a
expands in tandem with higher house- thir or so. Finance’s share has also
hold incomes as families spend more fall , says Albert Park, professor of
 Global Economics
economics at Hong Kong University
of Science and Technology. “The
higher-skilled sectors—telecoms,
information technology, comput-
ers, inance, and business services—
are still not a large share of the total
service industry,” he says. “And while
some are growing, they aren’t growing
very quickly.” —Dexter Roberts
The bottom line China’s service industry grew
faster than the economy in 2015, but stock market
turmoil will likely hurt financial services.
Recession
Russia’s Great Shift
Downward
14
⊲ Putin has shown little interest in
changing the economic model
⊲ “It’s not about oil or sanctions; it’s
about structural weakness”
For Russia’s battered economy, 2016
already looks miserable. The ruble has
slumped to record lows as oil prices
have fallen 11 percent since Jan. 1, to
around $30 a barrel. The government,
which gets nearly half its revenue from
oil and gas, is scrambling to plug a
1.5 trillion-ruble ($19.2 billion) hole in
its budget. The International Monetary
Fund forecasts the economy will shrink
1 percent this year, after contracting
3.7 percent in 2015. The situation has
created “an atmosphere of extreme
nervousness,” Economy Minister Alexei
Ulyukayev told President Vladimir Putin
in a meeting on Jan. 26, according to a
transcript released by the Kremlin.
As grim as the numbers are, they may
understate the increasingly dismal pros-
pects for a country that only a few years
ago was enjoying its greatest prosper-
ity. Economists and business leaders,
including some with strong Kremlin
ties, are warning that Russia faces
long-term stagnation and declining
competitiveness. “We ind ourselves
among the countries that are losing, the
downshifting countries,” Herman Gref,
head of state-controlled Sberbank,
the country’s largest inancial institu-
tion, said at a conference in Moscow
on Jan. 15.
The situation resembles “a stair-
case leading down,” says Evgeny
Gontmakher, a board member at
Moscow’s Institute of Contemporary
Development, whose chairman is
Prime Minister Dmitry Medvedev.
Gontmakher predicts Russia will prob-
ably eke out near-zero growth through
2017 and that the government will
reassure citizens the economy will
resume climbing after the March 2018
presidential elections. Instead, he
says, the economy “will go downward
after 2018.”
Russia has weathered crises before,
including a 2008 oil price plunge and
a 1998 sovereign debt default. In those
cases, robust growth returned within
a year or two. This recession’s difer-
ent, says Vladislav Inozemtsev, a profes-
sor at the National Research University
Higher School of Economics in Moscow.
“It’s not about oil or sanctions; it’s
about structural weakness,” he says.
There already were signs of malaise in
2012, when oil topped $100 and Western
sanctions over Russia’s annexation of
Crimea were two years of.
The trigger for the downturn,
Inozemtsev says, was Putin’s return
to the presidency in May 2012. He
raised taxes on business and real
estate to inance military spending
and expanded the reach of ineicient
state-controlled companies such as
oil giant Rosneft. “Businesspeople
became disillusioned,” curbing
investment in factories and equip-
ment, Inozemtsev says. Productivity
slackened, corruption thrived, and
foreign investment slowed as inves-
tors fretted about the state taking over
their assets, says Timothy Ash, an
emerging-markets strategist at Nomura
International in London.
When Putin irst became president,
in 2000, he said he would reduce the
government’s reliance on oil. Instead
the government grew even more
dependent on oil revenue, and con-
sumer spending became the main
driver of the economy.
No more. Household incomes
have declined for the past two years,
and some 22 million Russians live in
poverty, up 50 percent since 2013. Retail
sales fell 10 percent last year, and auto
sales plunged 36 percent. General
Motors, which once counted Russia
among its fastest-growing markets, shut
most operations there last year, and
retailers including Germany’s Adidas
and Spain’s Mango have closed stores.
McDonald’s, which has 543 Russian
restaurants, said on Jan. 25 that it still
plans to open 60 outlets this year but
is adjusting its menus as more custom-
ers switch from Big Macs to cheaper
chicken wings and pork burgers.
Ominously, industrial production
and ixed investment deteriorated in
December, even
U.S. dollars per after Putin declared
ruble on Dec. 17 that the
0.040 worst of the crisis
was over. Oil prices
don’t seem likely to
0.025 rebound soon.
Reform advo-
cates say there’s
0.010 still time to reverse
1/2011 12/2015 the decline by
investing more
in technology and loosening the gov-
ernment’s grip on the private sector.
Even if Russia’s citizens are hurting,
there’s no immediate risk of social
unrest, former Finance Minister Alexei
Kudrin, a Putin adviser, told Bloomberg
News at the World Economic Forum in
Davos on Jan. 20. “We have two years in
reserve when social sentiments will be
stable,” Kudrin said.
The government can’t aford major
investments, though. It has already
dipped heavily into foreign reserves,
and Finance Minister Anton Siluanov
said on Jan. 13 that spending on most
programs would likely be slashed
10 percent to close budget deicits.
Things are no better in the private
sector. Sanctions have frozen most
Russian companies out of major inan-
cial markets, and the weak ruble makes
SASHA MORDOVETS/GETTY IMAGES; DATA: BLOOMBERG
it diicult for businesses to import
equipment to boost eiciency.
Putin, whose approval rating remains
above 80 percent, has shown little
interest in shaking up the country’s
economic model. “We have grounds
for cautious optimism” in 2016, he
told Economy Minister Ulyukayev on
Jan. 26, according to oicial remarks.
The state-run companies that domi-
nate the economy are headed by loyal
 ¥2t 49 6
INCJ
The state-backed
investment fund is
a powerful force in
Japan’s restructuring Approximate investment capability
of the fund
Putin friends, while other members
of his inner circle have beneited from
big-tic et projects such as the Sochi
Olymp cs that failed to produce lasting
econo ic beneits. Far-reaching
reforms, economist Gontmakher
says, “are ontrary to the institutional
interests of he current government.”
—Carol Mat ack, with Anna Andrianova
The bottom line Economists predict long-term
decline for Russia’s economy; the IMF forecasts it
will shrink 1 percent this year.
Governance
Japan Inc. vs.
The Highest Bidder
⊲ A state-financed vehicle is likely
to win control of Sharp
⊲ “This is a test case for Abe, and
he and his government will fail”
Japanese Prime Minister Shinzo Abe
came into oice on a pledge of resus-
citating the economy with market
reforms and stimulus programs. Now
his government’s commitment to share- corporate zombies goes back to early in
holder rights faces scrutiny in the case
of troubled electronics giant Sharp.
Although the Osaka-based company
is a household name because of its TVs,
it’s long operated in the red. For the
year ending in March, analysts estimate
a loss of 82 billion yen ($694 million).
Sharp is in talks with two possi- “Japan isn’t
ble saviors: Taiwan’s Foxconn
Technology Group and a
government-backed fund called competing nations. created in 2009 with 2 trillion
Innovation Network Corp.
of Japan (INCJ). Foxconn is
ofering $5.1 billion; INCJ plans
to bid $2.6 billion.
It sounds like a win for
Foxconn. But in Japan, loun-
dering companies have long relied
on the state. Sharp’s management is
leaning toward the lower ofer, accord-
ing to two people familiar with the
talks. Shareholders haven’t griped
conomics
Venture and restructuring deals the Private companies that have at least
fund has been involved in since 2009 500 million yen invested in the fund
publicly, and Sharp’s banks seem operations of Mitsubishi
to be onboard. The fund is Electric, Hitachi, and NEC.
Critics see Sharp as proof that scheduled to be Four years ago, INCJ created
dissolved in 2024
Abe doesn’t have the stomach Japan Display from the trou-
for tough reforms. After vowing bled screenmaking units of
to liberalize labor markets and deregu- Toshiba, Sony, and Hitachi with a
late parts of industry, he has delivered 200 billion-yen infusion.
few substantive changes. The economy Letting Sharp go to a foreign inves-
has contracted three times since he tor would threaten Japan Display
took oice. “This is a test case for Abe, and perhaps the rest of the domes-
and he and his government will fail,” tic screenmaking industry for mobile
says Michael Cucek, a political science devices. Sharp’s IGZO technology,
professor at Temple University’s Japan which ofers better screen resolu-
campus. Foxconn Chair an Terry Gou tion, touch sensitivity, and battery life
has met with S rp’s major lenders as than rival products, could be used by
well as government oicials to press Foxconn in its China factories.
his case, according to a person familiar Combining Sharp and Japan
with the talks. Display could create a panel maker
Bailout supporters say the Sharp capable of taking on market leader
rescue by INCJ is a strategic move to Samsung Display. The South Korean
preserve jobs and domestic indus- company shipped 24 percent of small
tries, from smartphone screens to and midsize screens in the irst nine
refrigerators, and not a return to months of 2015, says market researcher
Japan’s bad old days of industrial plan- IHS. Japan Display was second with
ning. “Japan isn’t prepared to sell the 15 percent, followed by LG Display
technological crown jewels to com- and Sharp with 13 percent and
peting nations,” says Nicholas Smith, a 9 percent, respectively. “Japan Display
strategist at brokerage irm CLSA. “It’s probably doesn’t want all that excess
hardly diferent from the rest of the capacity from Sharp, but it’s better
world in that.” than the technology going to Foxconn,”
Japan’s reputation for propping up says Alberto Moel, a tech analyst at
Sanford C. Bernstein. 
the lost decades that followed the col- A bailout may send a discouraging
lapse of the asset bubble in the 1990s. message to local entrepreneurs and
The country’s bad debt exceeded foreign investors. Startups will likely
its annual output; delation became see the deal as one more example of
chronic. The Industrial Revitalization the government protecting established
Corp. of Japan—INCJ’s predecessor— companies at taxpayer expense. “It’s
went beyond rescues of important com- not good for governance reforms,” says
panies to restructuring whole Nicholas Benes, representative director
prepared to sell industries, from construc- of the Board Director Training Institute
the technological tion to tourism. INCJ was of Japan, which trains directors to be
crown jewels to
more aware of shareholder rights.
It’s hardly diferent yen, majority government “And it’s not a good example for the
from the rest of ownership, and a mandate Japanese government to be setting for
the world in that.”
—Nicholas to promote the next genera- foreign investment.” —Pavel Alpeyev,
Smith, CLSA tion of technologies and com- Takashi Amano, and Tom Redmond
panies. Instead, its biggest
The bottom line A takeover fight for TV maker
investments have been in the Sharp shows the Japanese government is still
struggling chip and display businesses ready and willing to intervene.
of major electronics makers.
INCJ put money into Renesas
Edited by Christopher Power, David Rocks,
Electronics, which was formed in 2010 Dimitra Kessenides, and Cristina Lindblad
from the hard-pressed semiconductor Bloomberg.com
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 Companies/
Industries
⊲ As Europe
p and
d Asiia huntt for deals,
l most U.S. companies
⊲ “Without paying sufficient attention, one risks getting seriously in trouble”
On Jan. 24 and 25, executives from
Airbus, Lufthansa, and Bombardier
PHOTO ILLUSTRATION BY NEJC PRAH; PHOTO: SIMON DAWSON/BLOOMBERG
shared tea and pastries with represen-
tatives of the Iranian aviation industry
at the Parsian Azadi Hotel, a 26-story
tower at the base of the snow-capped
mountains that loom over north-
ern Tehran. A week earlier, French
and Iranian pharmaceutical chiefs
spent an evening at another hotel
downtown nibbling on fruit and cup-
cakes while discussing health care.
And on Jan. 25 well-heeled Iranians
were treated to delights such as mac-
aroons and chocolate trules at the
grand opening of a dealership for
automaker Peugeot’s DS luxury line
on upscale Andarzgoo Street. “Now
that the sanctions have been lifted, we
are very happy to be the irst brand
to enter the Iranian market,” Yves
Bonnefont, DS Brand’s chief executive
oicer, said at the event.
Since Jan. 16, when sanctions against
Iran because of its nuclear program
were eased, Tehran has started to
feel more like a business destination.
The concourses of Imam Khomeini
International Airport increasingly
echo with the sounds of French,
English, and German, and hotels
are full of money managers and
When Walmart leaves Why Swiss
town, where do you watchmakers are all
buy milk? 18 wound up 20
Johnson Controls’
Teflon CEO 19
Briefs: Apple’s iPhone
slowdown; McDonald’s
big breakfast 21
17
a e sidelined
ar
investment bankers looking to proit
from a country with a $406 billion
economy and a young, well-educated
population of 77 million people. On
Jan. 25, Iranian President Hassan
Rouhani landed in Rome to kick of a
European tour, where he was sched-
uled to meet with French and Italian
leaders and corporate chieftains
such as Fiat Chrysler CEO Sergio
Marchionne and Total CEO Patrick
Pouyanne. During the four-day trip,
Rouhani reached business deals worth
at least $22 billion with companies
ranging from Italian oil and gas con-
tractor Saipem to France’s Airbus.
 Companies/Industries
Iran Goes
Shopping
Value of a contract with Saipem, Number of planes Iran Air Value of expected contracts
an Italian oil-services company, plans to buy from Airbus to with Italy’s Danieli & C. Oicine
to develop pipelines update its aging fleet Meccaniche to build steel mills
Largely absent from the festivi- the spare parts they need.”
ties: Americans. While Europeans and Beyond aerospace, most of the
Asians seek deals, most U.S. compa- action is from European companies.
nies will have to watch from the side- Peugeot—which got about 13 percent
lines. The nuclear accord doesn’t of its sales from Iran before pulling
repair a relationship ruptured by the out in 2012—is in talks with auto-
1979 seizure of the U.S. Embassy in maker Iran Khodro and others
Tehran, in which dozens of Americans about a car manufacturing venture.
were held hostage for 444 days. The And Germany’s Daimler on Jan. 18
U.S. has left in place a host of restric- announced a joint venture to build
tions on commercial dealings with Iran Mercedes-Benz trucks in Iran and
because of its ballistic missile program a second one to distribute smaller
and its support for some groups the trucks from its Japan-based Fuso
U.S. links to terrorism. Some foreign brand. “There is a huge demand
subsidiaries of U.S. companies will be for commercial vehicles,” Wolfgang
allowed to work in Iran, but executives Bernhard, the head of Daimler’s com-
back at headquarters will have to keep mercial vehicle unit, said in a state-
their American operations walled of ment. “We will quickly resume our
from Iranian entities still sanctioned business activities in the market.”
under U.S. law, according to Azadeh As European automakers jump back
18 Meskarian, an attorney at Zaiwalla, a in, they’ll ind a landscape changed by
law irm in London that advises clients new competitors from China, which
on sanctions. “There’s a lot of hype weren’t afected by the sanctions.
relating to Iran,” she says. “But without Led by Chery Automobile, Lifan
paying suicient attention, one risks Industry, and Anhui Jianghuai
getting seriously in trouble.” Automobile, the Chinese are on track
An exception to the continuing U.S. to boost their share of the Iranian
sanctions are Boeing and jet engine market from about 1 percent in 2011
makers General Electric and United to about 9 percent this year, accord-
Technologies, which can now make ing to researcher IHS Automotive. At
deals. Although Boeing didn’t make its glass-walled Tehran dealership,
it to the conference at the Azadi Geely Automobile ofers its Emgrand
Hotel, the civilian aviation industry X7 SUV for about a third less than a
will be allowed to help Iran quickly similar ofering from Toyota. And
revitalize its aging leet, accord- cars such as the MVM 110, a made-
ing to Bloomberg Intelligence. The in-Iran version of Chery’s QQ hatch-
average age of Iran Air’s 45 planes is back, have become a common sight
27 years—antiques by industry stan- on the streets. The Chinese “have
dards—reports Planespotters.net. taken advantage of their investments
Airbus got a jump on Boeing just as in local production,” says IHS analyst
sanctions were lifted, with an agree- Stephanie Vigier. “They sufer from
ment to sell Iran 114 new and used an image of low quality, but their low
planes that will start being delivered prices make their oferings attractive.”
as early as July, according to Abbas Even the Europeans, though, may
Akhoundi, the minister of The Chinese “have be cautious in their approach to
roads and urban develop- taken advantage of Iran given that sanctions could
ment. “There’s this pent-up their investments in be reimposed if the country
local production.
demand that needs to be They sufer from an violates the nuclear agreement.
illed,” says Bloomberg image of low quality, And there are plenty of political
Intelligence analyst Caitlin but their low prices calculations to consider. Some
make their
Webber. “Iran’s got a poor oferings attractive.” U.S. lawmakers are pressing for
safety record due to the age —Stephanie Vigier, fresh sanctions as punishment
of its leet. They can’t get IHS for recent missile tests, and
Number of new nuclear power
plants Iran plans to build with
help from China and Russia
Republican presidential aspirants
Donald Trump and Texas Senator Ted
Cruz have vowed to rip up the nuclear
accord if elected. Says Parham Gohari,
co-founder of Frontier Partners,
which advises multinationals on doing
business in Iran: “Anybody going into
Iran needs to have a short-term exit
strategy in mind.” —Golnar Motevalli,
Ladane Nasseri, and Elisabeth
Behrmann
The bottom line As sanctions against Iran ease,
European and Asian companies are pouring in.
Their American rivals face more restrictions.
Retailing
No Cheers When
Walmart Packs Up
⊲ It’s closing more than 100 small
stores, leaving towns in the lurch
⊲ “We had a pharmacy and a
perfectly satisfactory grocery”
The Town ’n Country grocery in
Oriental, N.C., a local ixture for
44 years, closed its doors in October,
unable to compete with a Walmart
Express. Three months later—and
less than two years after the Walmart
arrived—the retail giant is pulling out,
leaving Oriental with no grocery store
and no pharmacy.
Mom-and-pop stores have steadily
disappeared from many small com-
munities across America over the past
three decades as Walmart Stores
methodically expanded. Now many of
the Walmarts are disappearing, too, as
part of the giant chain’s plan to shutter
269 outlets worldwide, leaving some
towns with no grocery stores at all.
“I was devastated when I found out,”
says Barb Venturi, mayor pro tem for
Oriental, a retirement and summer
vacation town along the intercoastal
waterway with a population of about
900. Before the big retailer’s arrival,

“we had a pharmacy and a perfectly
satisfactory grocery store; maybe
Walmart sold apples for a nickel less,”
she says. Now, “if you take into account
what no longer having a grocery store
does to property values here, it is a
signiicant impact for us.”
Walmart said on Jan. 15 it will close
all 102 of its small Express stores,
many in rural or isolated towns, to
focus on its supercenters and midsize
Neighborhood Markets. As recently
as 2014 the company touted the solid
performance of its smaller stores
and announced plans to open an
additional 90. Now the residents of
Oriental are looking at a 50-minute
round-trip drive to the nearest
grocery and pharmacy.
Walmart says it’s sensitive to the dis-
locations its decisions are causing. “In
towns impacted by store closures, we
have had hundreds of conversations
with elected oicials and community
leaders to discuss relevant issues, and
we are working with communities on
how we can be helpful,” says company
spokesman Brian Nick.
The chain has been under increas-
ing pressure as sales in the U.S. have
failed to keep up with rising labor
costs. It’s also been spending more on
Web operations. In October it forecast
that proit in 2016 would fall as much
as 12 percent. The outlook helped fuel
FROM TOP: MELINDA PENKAVEA/TOWNDOCK; KATHRYN SCOTT OSLER/GETTY IMAGES
The Town ’n Country ⊲ Now more than 100
market in Oriental, N.C., smaller Walmarts are
closed in October amid closing, including this
competition from a one in Littleton, Colo.
Walmart Express. That leaves small
towns like Oriental
without a grocery.
a 29 percent drop in its share price in
the past 12 months. “It is more impor-
tant now than ever to review our port-
folio and close the stores and clubs
that should be closed,” Chief Executive
Oicer Doug McMillon said in a state-
ment on the company’s website.
That’s why Oriental’s plight isn’t
unique. In Godley, Texas, with a pop-
ulation of roughly 1,000, Walmart
opened a small store just a year ago.
Within months, the only other grocery
store in town—a Brookshire Brothers,
part of an employee-owned regional
chain—shut its doors. With Walmart
gone, the closest full-service grocery
store is about a 20-minute drive away.
Some closed businesses may return
to towns where Walmart is shutting
down. In Merkel, Texas, the Lawrence
Brothers Supermarkets store, which
closed two months ago, plans to
reopen now that Walmart is leaving,
says Jay Lawrence, head of the regional
chain in Texas and New Mexico.
Residents of Oriental, where some
city oicials originally tried to block
Walmart from opening, are hoping
for a similar outcome. But for now,
the damage has been done, they say.
Renee Ireland Smith, who ran Town ’n
Country, says sales immediately fell
by 30 percent after Walmart opened
in May 2014. Whenever her store cut
prices, Walmart would reduce its
Companies/Industries
prices even more. Smith’s mother, who
owned the store, invested $100,000
of her savings into the doomed efort
to rescue the store. By October 2015,
the family decided to cut its losses and
close the business. “They ruined our
lives,” says Smith of Walmart. “They
came in here with their experiment
and ruined us.” —Shannon Pettypiece
The bottom line Walmart will close 102 of its small
Express stores. That may please investors but
leave some rural towns without grocers.
Management
A CEO With a Knack for
Beating the Odds
⊲ Johnson Controls’ Alex Molinaroli
crafts a merger to rock the cynics
⊲ “It’s a surprise he’s running JCI,
let alone the combined company”
First came the extramarital afair with
a consultant. Then the Ponzi scheme. 19
Mere association with such contro-
versies often can be terminal for a
chief executive oicer of a big public
company. But they haven’t ended
the career of Alex Molinaroli, CEO of
Johnson Controls ( JCI). He’s been
able to retain both his job and a free
hand to radically remake his company.
His latest move: a $28.8 billion merger
with Tyco International.
The marriage of two venerable cor-
porate names caps a remarkable—
and remarkably unusual—run by
Molinaroli, a 33-year JCI veteran. The
56-year-old has twice been investi-
gated by his board of directors and
once was found in violation of the com-
pany’s ethics policy. Yet, even though
the company’s stock price has lagged
the Standard & Poor’s 500-stock index
by about 30 percent during his tenure,
Molinaroli received a big raise last year
and now will run a combined enterprise
set to become the 14th-largest industrial
company in the U.S. by market value.
“In an era when investors and
the public expect earnings perfor-
mance to be accompanied by ethical
conduct, it’s a surprise he’s running
JCI, let alone the combined company,”
says Erik Gordon, a business law
professor at the University of
 Companies/Industries
Michigan’s Ross School of Business.
Molinaroli’s personal missteps fell
short of legal wrongdoing but none-
theless prompted scrutiny by JCI’s
directors. In 2014, 11 months after he
ascended to the top job, the board cut
his bonus by about 20 percent because
he failed to disclose an afair with the
principal of a consulting irm that
worked with the company. Although
an external investigation determined
that corporate assets weren’t misused,
the relationship was deemed to violate
Johnson Controls’ ethics policy. It also
led to divorce proceedings against him. Johnson Controls.
Molinaroli declined interview requests.
The CEO again found himself
touched by controversy in 2015, when
it came to light that he was the victim
of Ponzi scheme artist Joseph Zada and the 19-company peer group JCI uses to
provided Zada with inancial support
after the fraudster was charged.
Victims of Zada’s investment scam
included retired hockey star Sergei
Fedorov and a gaggle of Florida ire-
ighters and doctors.
After Zada’s conviction in September,
a federal prosecutor disclosed that
20 Molinaroli had purchased the swin-
dler’s home in Grosse Pointe Shores,
Mich., allowed him to con-
tinue to live there rent-free,
covered Zada’s legal bills, and
ofered to provide millions
of dollars in restitution for
victims, according to a court
transcript. In an October
interview with the Milwaukee
Journal Sentinel, Molinaroli
said he didn’t know why
Molinaroli
he allowed Zada to stay in the
mansion, which he said he’d purchased
as an investment. “I think we all make
mistakes in our life,” he told the paper.
He denied ofering restitution.
The JCI board hired outside counsel
to examine the unusual relation-
ship and found the “association was
personal in nature, did not involve
misuse of corporate assets or a viola-
tion of company policies, and did not
appear to involve a violation of law,”
said Jefrey Joerres, who became lead
board director on Jan. 1, in an e-mailed
statement. Johnson Controls took the
matter “extremely seriously,” Joerres
said, adding that Molinaroli enjoys the
board’s support.
Indeed, the directors awarded him
an 18 percent raise in 2015. Of his
$19.4 million pay package, a quarter
was in bonuses and a third in stock.
His base salary rose 13 percent,
to $1.58 million. In its proxy state-
ment, the company said it increased
Molinaroli’s compensation “in
recognition of his performance and
contributions, and to better align with
the median level.”
Fraser Engerman, a company
spokesman, declined to comment on
Molinaroli’s personal issues. As for his
performance, Engerman says the deals
Molinaroli has made show that he’s
a “change agent” who’s transformed
The company last year also increased
spending on Molinaroli’s personal secu-
rity tenfold, to $151,019, from $14,662 in
2014. That’s the biggest increase within
benchmark its inancials and set com-
pensation, other than defense-oriented
Northrop Grumman and Honeywell
International, according to data com-
piled by Bloomberg. Molinaroli “travels
a lot, and we want to make sure his
security is consistent with his personal
needs and with the threat assessments
that the security team does on a regular
basis,” Engerman says.
Amid the controversies,
Molinaroli has dramatically
overhauled the company,
which began life in 1885 with
an electric-thermostat patent
and became one of the largest
makers of automotive seating
in the world. The company
has shed many automo-
tive assets under Molinaroli,
who’s using JCI’s more proit-
able energy-eiciency and energy-stor-
age businesses to recast it as a building
technology company. A spinof of
the remaining automotive business is
scheduled for late 2016.
After the merger with Tyco is
completed, Molinaroli will run the
combined company for 18 months
as CEO and serve as executive chair-
man for a year after that. In the latest
in a series of controversial so-called
tax inversions, the company will
also take up Tyco’s tax domicile in
Ireland, where the corporate tax rate
is 12.5 percent, compared with the U.S.
rate of 35 percent.
It’s all a proitable outcome for
Molinaroli, whose 425,320 shares in
JCI can be exchanged for shares in the
new company or cashed out. That’s
worth $14.8 million—not counting
his unvested equity awards worth at
least $10 million and a pension valued
at $13.6 million, which he can start
collecting once he retires. —David
Welch and Jennifer Surane
The bottom line Johnson Controls CEO Molinaroli
has been investigated twice by his board and once
found in violation of the company’s ethics policy.
Luxury
Swiss Watches
Take a Licking
⊲ The industry is lowering prices
and looking to new markets
⊲ “The rich, instead of buying two,
they will buy one”
Last year wasn’t great for Switzerland’s
luxury watchmakers, and 2016 isn’t
looking any better. At an invitation-only
Geneva trade show in January attended
by 24 of the world’s most expensive
watch brands, the consensus was that
Hong Kong’s luxury slump, a rocky
Chinese economy, and the November
terrorist attacks in Paris—as well as com-
petition from the Apple Watch—will
hurt sales this year.
“We expect 2016 to be a very, very
diicult year,” Vincent Perriard, chief
executive oicer of luxury watchmaker
HYT, said at the trade show, oicially
called the Salon International de la
Haute Horlogerie. “One of our points of
sale in Paris sold no watches at all, from
any brand, from
Value of Swiss the day of the ter-
watch exports rorist attack until
24b now. Zero sales.”
Swiss francs A dearth of
Chinese tour-
17b ists after the
Nov. 13 massacre
topped of a bad
10b year. Swiss watch
2000 2015 exports declined
3.3 percent, to
21.5 billion Swiss francs ($21.1 billion), in
2015, the irst annual drop since 2009,
according to the Federation of the Swiss
Watch Industry.
The industry was jolted in early 2015
when the Swiss National Bank said it
would no longer maintain its cap on the

Swiss franc. The currency rose against
the euro, boosting production costs for
watchmakers. Vanishing stock market
wealth changed habits, too. “The rich,
instead of buying two, they will buy
one,” says Marc Gaudreault, CEO of
Parmigiani Fleurier, whose watches
sell for an average 30,000 francs.
A slowdown in Russia has led Ulysse
Nardin, the 170-year-old watchmaker
bought by luxury goods group Kering in
2014, to cut jobs. Third-quarter sales for
Cie Financiere Richemont, maker of
Cartier watches, fell 4 percent from the
previous year. The company plans to
decrease investments in manufacturing.
Falling demand has forced makers
such as Greubel Forsey, with watches
that average about 480,000 francs, to
seek out new clients and travel more to
meet them, says Chief Operating Oicer
David Bernard of his salespeople.
“Now you need to go, explain, show
that you’re there.” The brand has intro-
uced a less expensive timepiece
starting at 150,000 francs.
Family-owned H. Moser & Cie,
founded in 1828, is looking to the
U.S., the No. 2 market for Swiss
watch exports after Hong Kong.
Cities such as Chicago, Houston,
and Miami ofer potential, driven
mostly by tourism and greater
CLOCKWISE FROM LEFT: JASON ALDEN/BLOOMBERG; COURTESY GREUBEL FORSEY; ILLUSTRATION BY 731; JOHANNES KROEMER/GETTY IMAGES
concentrations of wealth, say many
representatives at the Geneva show.
Trying to lure younger buyers,
Omega, owned by Swatch Group,
signed Eddie Redmayne as a brand
ambassador last year, after his Oscar
win. Moser, hoping to grab some of the
attention lavished on the Apple Watch,
created a mechanical replica called the
Swiss Alp Watch that has none of the
tech applications. The ploy drew many
visitors to Moser’s booth to compare
their Apple Watches with the copy.
“The Apple Watch, smartwatches,
the Google watches—99 percent are
under $500,” Montblanc CEO Jerome
Lambert says. “In that price zone, the
relevance for ine watchmaking is zero.”
Still, TAG Heuer has introduced the
Connected Watch, a $1,500 smartwatch.
—Corinne Gretler
The bottom line High-end Swiss luxury watches
saw sales drop 3.3 percent in 2015, the first annual
decline since 2009.
Edited by James E. Ellis and
Dimitra Kessenides
Bloomberg.com
Companies/Industries
Briefs By Kyle Stock
Overripe iPhones
○o○ Apple said it expects its first quarterly sales
decline in 13 years this winter as iPhone demand
flattens. Orders for iPhones, which account for
2 out of 3 revenue dollars at Apple, climbed just Ford Motor said it
would stop selling in
0.4 percent in the quarter ended on Dec. 26, vs. Japan and Indonesia by
yearend. The American
a year earlier. The tech giant said demand was automaker is struggling
against a rash of
hurt by the relatively strong dollar and economic Japanese brands and
the weak yen.
softness in China. It’s considering price increas-
es in certain markets. ○5○ The McMuffins are working.
McDonald’s posted its best quarterly growth in almost four
Number of Halliburton years, after persuading its
workers laid of during
the fourth quarter as franchisees to serve breakfast
oil fields went fallow.
items all day. Sales at restau-
Since late 2014, the oil
well-services company
has cut one-quarter of
its workforce, equal to
4,000 rants open more than a year
21
almost 22,000 positions. rose 5 percent in the quarter.
○Q○ American International
Group said it would return $25 billion to shareholders over
the next two years under an ambitious plan to divest assets
and boost returns. The company plans to sell one-fifth of its
mortgage insurer United Guaranty. Activist investor Carl Icahn
said AIG should split up, a move he’s lobbied for since Octo-
ber. ○¡○ The Supreme Court upheld a federal rule requiring
utilities to pay big energy customers that reduce electricity
use during peak power demand. The ruling was a win CEO
for environmentalists, businesses, schools, Wisdom
and factories. Shares of large utilities slipped
on news of the decision. ○q○ Ride-hailing
service Lyft agreed to pay $12.3 million to “Wh gives me great
optimism are the things
settle a proposed class-action suit brought I possess that can’t be
stolen by a predatory
by its drivers. Lyft also agreed to notify hedge fund—my
ideas, values, drive,
drivers if they are to be idled, though it won’t authenticity, integrity,
and my passion.”
be required to classify them as employees. —American Apparel
founder Dov Charney
Similar actions filed against Lyft rival Uber after losing a bid to
buy the company out
have been granted class-action status. of bankruptcy
 Politics/ Both parties
open proceedings
on Feb. 1 at 7 p.m.

Policy Central time

February 1 — February 7, 2016

GetReady to Cau
⊲ With the time for glad-handing over, candidates rely on technology to get voters to the polls
⊲ “We want to make the experience for volunteers the best thing possible”
Across Iowa, thousands of campaign
volunteers are knocking on doors
with a simple goal: getting people to
the Feb. 1 caucuses, the irst vote of
the 2016 presidential primary season.
Traditionally, canvassers would go
out armed with clipboards holding
address lists and scripts for wooing
potential caucusgoers. Today, the vol-
unteers leave campaign oices with
“walk apps” on their phones. These
22 display the names and addresses of
people each campaign believes can be
motivated to caucus. They also ofer
live maps to help canvassers ind their
way in unfamiliar neighborhoods,
entry forms where they can upload the
e-mail addresses and phone numbers
of new supporters back to headquar-
ters, and remote access to fresh lists.
Although their apps look similar,
the two parties have taken diferent
approaches to developing get-out-
the-vote technology. The Democratic
side is dominated by a single private
company, NGP VAN, which is backed
by the national party and used by
all three Democratic candidates:
Hillary Clinton, Uncommitted
voters “won”
Martin O’Malley, and the Democratic
Bernie Sanders. The caucuses in
Republican app market 1972 and 1976
is as fragmented as the GOP’s 12-person
presidential ield. “The competition on
our side has yielded a number of good
applications,” says Mark Stephenson,
who was Scott Walker’s chief data
oicer until the Wisconsin governor
dropped out of the presidential race.
Walker’s campaign signed up
with a technology company called
Bridgetree, whose Advantage Mobile
app is also used by Chris Christie’s
campaign. Stephenson spent years
working for FLS Connect. In 2010
helped develop its pioneering Geo
Connect app, now used by Marco
Rubio’s campaign. (Rubio’s deputy
campaign manager, Rich Beeson, pre-
viously worked at FLS.) The Republican
National Committee recommends both
Geo Connect and Advantage, which
can be integrated with the party’s
GOP Data Center platform, formerly
known as the Voter Vault, to gain lists
of potential supporters.
Yet Jeb Bush, Ted Cruz, and John
Kasich have chosen to Campaigns are
rely on i360 Walk, an instructing supporters
app ofered by i360, a not to leave until
this is done so they
have a say in electing
convention delegates

Republicans
Republicans
and Democrats
will each gather at
① ② ③ ④
Candidate A straw poll is taken. State party oicials After the straw poll,

1,681
representatives The results are sent to declare a winner: caucusgoers vote on
give speeches. the Republican Party the candidate the party platform and
of Iowa using an app. with the plurality of other party business.
votes in Iowa.
Iowa precincts.

Democrats
The modern caucus
dates to 1972, when ① ② ③ ④
Iowa Democrats Candidate Caucusgoers Supporters of Some candidates
moved their gathering representatives gather in groups candidates who don’t make their corner of the
to January, before give speeches. according to their meet a minimum room more inviting by
all other state candidate preference. threshold (usually ofering refreshments.
nominating contests Uncommitted voters 15 percent) can join
get a corner, too. another group or leave.
 Nonprofits spend Charlie Rose talks to
on political causes Donald Rumsfeld 26
“It’s not bribery. It’s and don’t tell 24
all about hospitality.”
—Clinton volunteer “Super Bowl City” Is California starting
Susan Cohen displaces the homeless a war between
in San Francisco 24 the states? 27

director of the pro-Kasich super PAC “the VAN” introduced it to a generation

New Day for America; like the Ohio gov- of organizers. (Its mobile app is known

ucus ernor’s campaign, it uses i360 software.

data company controlled by Freedom
Partners, the political group backed by
billionaires David and Charles Koch and
their network of conservative donors.
The Koch investment in voter contact
technology is part of an explicit efort
to supplant one of the party’s core
functions—tracking Republicans—and
i360 is available only to candidates who
are seen as committed to advancing the
Kochs’ priorities, at a bargain price that
suggests i360 Walk is something of a
loss leader. Like other apps, i360 Walk
is paired with an interface for making
phone calls, i360 Call, using voice-over-
IP systems, which makes it cheaper and
LLUSTRATIONS BY 731
The split among Republican cam-
paigns has helped insulate candidates
against data breaches like the bug
in the NGP VAN system that allowed
Sanders stafers to see Clinton’s voter
iles last year. Republicans looked on
gleefully at the embarrassment the
episode caused Democrats, who have
for a decade considered themselves
superior in every aspect of digital
electioneering. The Voter Activation
Network (VAN) was designed in
Iowa in 2002 to help Democratic
candidates gain access to common
data through a desktop interface.
Among other features, it allowed can-
vassing materials to be loaded directly
onto PalmPilots. Within two years,
11 Democratic state parties had signed
up, along with the political action
group America Coming Together.
In 2007 the Democratic National
Committee decided to make VAN avail-
able to candidates nationwide, although it was still unusual to see
some state parties already had contracts Clinton’s Iowa canvassers top three oicials
with competing software vendors. The
as the MiniVAN.) Obama’s subsequent
installation of top campaign aides at
the DNC sealed its primacy within the
party. In 2010, VAN merged with the
fundraising platform NGP Software to
create a behemoth that touched almost
every aspect of campaign data. Rival
campaigns are supposed to be able to
tap a common database while their
proprietary voter proiles stay walled
of from one another.
The DNC’s response after the Sanders
data breach proved that the DNC con-
siders VAN too big to fail. Rather than
publicly holding NGP VAN responsible
for the coding error that made the
breach possible, the DNC punished the
Sanders campaign for taking advantage
of it by briely suspending its access to
the database. Sanders ired the aides
who were responsible and apologized
to Clinton during a debate.
Clinton and Sanders are both back on 23
the VAN. Nevertheless, in late January,
The state party’s
tracking voter conversa- automatically

easier for callers to follow up on can- decision by Barack Obama’s campaign tions with anything more become delegates
vassing visits. “Rather than the hard to run its expansive ground game of sophisticated than a ballpoint pen. That
lines, we install our call centers with what was afectionately In 2012, Ron Paul wasn’t because of a post-breach
iPad minis,” says Dave Luketic, political known in ield oices as won 21 percent in the loss of conidence in the system,
straw poll, but 22 of
Iowa’s 28 delegates
supported him

Iowa’s convention
delegates make up

30
of the total
⑤
At the end of the
evening, caucusgoers
⑥
In April, county
d legates attend
⑦
A state convention is
held in May to elect
⑧
At the national
convention, delegates
⑨
If no majority is reached
on the first ballot,
2,472
who will pick the
elect delegates to congressional district another 15 delegates to vote proportionally Iowa’s delegates are nominee at the
county conventions conventions to elect the national convention. according to the then free to vote for Republican National
held in March. 12 national delegates. caucus-night straw poll. whomever they want. Convention in July.

Iowa’s convention
delegates make up

52
of the total Eight elected or
party oicials
⑤
Delegates to county
conventions are
⑥
The size of each
⑦
County delegates
⑧
A state convention
⑨
At the national 4,764 automatically
become
preference group vote for delegates to is held in June to convention, delegates who will pick the delegates
awarded proportionally, is counted. The congressional district elect an additional 15 are free to vote for nominee at the
based on how many candidate with the conventions, where national delegates whomever they want. Democratic National
caucusgoers are plurality of statewide 29 national delegates who must declare Convention in July.
standing in their corner. delegates wins. are chosen. candidate loyalties.
 Politics/Policy
says Michael Halle, Clinton’s caucus
director. Many of the campaign’s vol-
unteers, like caucusgoers in general,
are older than the stafers who train
them—and remain more comfortable
with analog technology. “We want to
make the experience for volunteers
the best thing possible, and so if that’s
using paper or that’s using the MiniVAN
app, people have been able to do both,”
Halle says. “The tool that they’re using
is less important than the way they
were trained, what they’re saying, and
the quality of that relationship they
have with other people around them.”
—Sasha Issenberg
The bottom line Volunteers fanning out across
Iowa to make last-minute pitches to potential
caucusgoers are relying on apps to guide them.
Election 2016
Extra-Double-Secret
Campaign Financing
24
⊲ Nonprofits are on track to spend
more than ever on the 2016 race
⊲ “It’s much harder for the public
to see what’s going on”
Presidential campaigns face a Jan. 31
deadline for disclosing their donors
to the Federal Election Commission.
So do super PACs, the independent
political groups that are allowed to
raise unlimited amounts of money
from donors to support speciic candi-
dates. The ilings, the irst since June,
will reveal the identities of people who
have spent millions trying to inluence
the outcome of the 2016 election.
But millions more are being spent by
organizations that are never required
to disclose their donors at all: non-
proit issue-advocacy groups. According months after the end of its iscal year in
to Kantar Media’s Campaign Media
Analysis Group data, such groups have
spent more than $213.6 million on polit-
ical ads in the current election cycle,
$10.5 million of it for ads focused on
presidential candidates. That puts
the groups on track to exceed the
$309 million nonproits spent on
ads and other political communi-
cations in 2012, according to the
Center for Responsive Politics.
Under current rules, nonproit
advocacy groups can spend up to
50 percent of their budget on political
causes without ever having to reveal
any details about the interests of their
funders. Since the Supreme Court’s
2010 Citizens United decision, which
lifted restrictions on political spending
for individuals and corporations, non-
proits have been allowed to campaign
for and against speciic candidates.
“The campaigns are more complex, as
are the money networks,” says Center
for Responsive Politics Executive
Director Sheila Krumholz. “It’s much
harder for the public to see what’s
going on behind the scenes.”
The biggest spender in the pres-
idential race among so-called dark
money groups—those that don’t dis-
close their donors—is the Conservative
Solutions Project, a nonproit formed
in 2014 to support Republican candi-
date Marco Rubio. (The Florida senator
also has an allied super PAC called
Conservative Solutions.) The nonproit
has spent about $8.1 million on ads
featuring excerpts of Rubio’s speeches.
The group has spent $2.9 million
on national cable, with the remain-
der divided among local stations that
reach viewers in Iowa ($1.3 million),
New Hampshire ($1.5 million), and
South Carolina ($2.4 million). “They’re
deinitely gaming the system,” says
Paul S. Ryan, executive director of
the Campaign Legal Center, a watch-
dog group that’s asked the Justice
Department to investigate the group’s
spending, arguing it constitutes a tan-
gible beneit for Rubio. The DOJ would
neither conirm nor deny whether it’s
investigating. Spokesman Jef Sadosky
says the group is simply focused on
“advocating for a conservative agenda.”
How much money Conservative
Solutions Project has raised won’t
become public until after the election.
Its annual tax returns are due four
May. Filers can get an automatic four-
month extension. That means informa-
tion about its fundraising and spending
during the presidential primary season
won’t become public until 2017.
Rubio isn’t the only candidate
“They’re definitely with nonproit backing.
gaming the system.” Jeb Bush has a group
—Campaign called Right to Rise
Legal Center
Executive Director Policy Solutions along-
Paul S. Ryan side his super PAC, called
Right to Rise. The super
PAC pays for ads, and the nonproit
runs a website promoting Bush’s
positions on national security, educa-
tion reform, and biomedical innova-
tion. Other nonproit groups that have
gone after presidential candidates
don’t have visible links to active cam-
paigns. The Foundation for a Secure
and Prosperous America, a nonproit
founded in 2007 to support Republican
John McCain’s 2008 presidential run,
spent $290,000 in April 2015 running
ads in Iowa, New Hampshire, and
South Carolina attacking Rand Paul for
supporting nuclear negotiations with
Iran. As recently as December 2014,
according to its most recent iling with
the IRS, the group had no income and
was about $4,500 in the red.
Donors have also used limited lia-
bility corporations to shield their
political activism. An LLC called
Opportunity News Media spent
$14 million running ads from July
through September in Ohio and
Colorado that ended with this tag line:
“There are still people who believe
opportunity lives in America, and we
call ourselves Republicans.”
“There may have been one large
donor who thought this was a
great idea, or maybe it’s part of a
larger strategy,” says Travis Ridout,
co-director of the Wesleyan Media
Project, which studies political adver-
tising. “I’d be curious to know who’s
funding that.” —Bill Allison
The bottom line Nonprofits and LLCs are
spending millions on political causes, but unlike
super PACs, they can keep their donors secret.
TOP: DAVID PAUL MORRIS/BLOOMBERG; BOTTOM: COURTESY SUPER BOWL 50 HOST COMMITTEE.
DATA: STEAMER AND ENCAMPMENT-RELATED REQUESTS TO SAN FRANCISCO PUBLIC WORKS
Tourism
San Francisco Plays
Hide the Homeless
⊲ The city keeps a problem away
from Super Bowl cameras
⊲ “If you don’t have money, then you
have to go and hide somewhere”
When visitors descend on San
Francisco to revel in Super Bowl 50
festivities, they’ll be able to see a per-
formance by Alicia Keys, a ireworks
display, and works by local artists. What
they won’t see, the organizers hope,

Citywide
cleanup
complaints
3,000
1,500
0 fan village,
7/2011 12/2015
are many of the people who typically
sleep outside along the Embarcadero
at the foot of Market Street, where the
city has set aside space for Super Bowl
City, a free, family-friendly fan village.
Opening on Jan. 30, it will feature
stages where entertainers will appear,
a Bud Light bar, and a waterfront
wine-tasting lounge.
The weeklong event across from the
city’s Ferry Building will be among the
main images of San Francisco broad-
cast around the country by CBS,
CNN, and the NFL Network, which
will have anchors live at the site.
(The Super Bowl itself takes place on
Feb. 7 at Levi’s Stadium in Santa Clara,
about 40 miles south.) Starting on
Jan. 30, access to the fan site will be
controlled through four airport-style
security checkpoints.
San Francisco has dispatched social
workers to encourage regulars in the
area to visit shelters and take advantage
of other services. “We will be working
more than usual, and there will be more
street teams going out to assist people
who don’t have a place to stay so that
they can be safely cared for,” David
Perry, the Super Bowl host commit-
tee’s head of public engagement, said
at a community meeting on Jan. 14.
The Embarcadero
The site of
the future
Super Bowl
on Jan. 21
25
“San Francisco is also committed to
making sure that the experie ce for
the Super Bowl is safe, secure, nd
sanitary.” The committee is donating
$13 million to antipoverty charities.
Homelessness in San Francisco is a
persistent problem that’s worsened
as the technology industry’s growth
has drawn well-paid workers, inlat-
ing housing costs. With the eighth-
highest rate of homelessness in the U.S.,
the city, once a haven for free spirits,
has seen an explosion in complaints
about encampments and requests to
San Francisco Public Works to clean up
feces, urine, and shopping carts. “When
a lot of cameras are going to be pointed
on the city, they want to have an
image of the city that does not include making sure that we’re delivering
poverty,” says Jennifer Friedenbach, services throughout the city, not just
executive director for the Coalition on because of a special event,” she says.
Homelessness in San Francisco. Christine Falvey, a spokeswoman
The city is spending $5 million on for Mayor Ed Lee, says the efort to
police overtime, transportation, and direct people to shelters, where the
other costs associated with hosting city has added 1,100 beds, is because of
the Super Bowl festival. Jane Kim, a the weather, not the Super Bowl. “It’s
member of the Board of Supervisors, associated with cold, wet winter,” she
who opposes spending city funds for a says. “It is dangerous and unhealthy
corporate event, says she was told by to live on our streets.” Rachael Kagan,
the mayor’s oice that the area around a spokeswoman for the city’s health
the fan village was being targeted for department, says her team has gone
homeless outreach. “We should be out of its way to explain the changes
 Charlie Rose talks to …
Donald Rumsfeld How concerned are you about
how Iraq has turned out?
Oh, my goodness. You know, repression
works. A brutal dictator can impose his
will and kill people and imprison people,
The former U.S. defense secretary discusses the rules of engagement and once that’s gone, free people are
free to do good things, and they’re
with terrorists and the game that inspired him to develop an app also free to do perfectly horrible things.
Disorder in Libya, in Syria, in Iraq, in
many countries
Are you surprised Iran’s president has been in that part of the
You’re now an app developer: Churchill Solitaire. very vocal about the danger of Islamic State? world is a serious
How did that come to pass? Well, I’ve been asked the question “What problem. We’re
happens if the sanctions are taken of?” And facing a long
I was U.S. ambassador to NATO in Brussels in 1973 and ’74. I said that Iran will continue—and probably struggle against
And there was a very senior Belgian diplomat there named have more resources—to support terrorism. radical Islamists.
André de Staercke. While he’d been in exile in London [during They’re the principal supporter of terrorist And it’s going to
organizations. They’ve used their proxy in be years.
World War II], Churchill taught him this game of solitaire with Syria for it. Sure, anyone with any sense
two decks. When we were at NATO together, he taught me is concerned about terrorism, particularly
the game. I’ve played it ever since. My wife and I play every homegrown terrorism. And the fact that he’s
worried about some of that is fine. But they’re
day or two in the morning, after breakfast. And it would be supporting, actively, terrorist organizations.
ungracious of me to even comment on who’s ahead. It’s so
complicated. Instead of seven piles, you’ve got 10. You’ve got
to be thinking three, four, five plays ahead, and it’s delightful.

26
Of the presidential
candidates, which one best
reflects Donald Rumsfeld?
I don’t even know half of them.
I’ve watched every one of the
debates, for both parties. My
“A terrorist can attack any place, conclusion is that we don’t
need four more years of the last
at any time, using any technique. eight years, that a change in
administrations would be a good

And it’s physically impossible thing for the country. I want

to see someone in there who
can provide this country and
to defend every place” the world with leadership. If we
create a vacuum in the world—
and I believe we have—the
result of that is the vacuum gets
filled, and it gets filled by people
who don’t have our values.

What’s the best way to counter Islamic

State? What would be the Rumsfeld plan?
The first thing you do is recognize that this
isn’t going to be won with bullets. The basic And where’s that money coming from? How do you want America to
principle of economics is if you want more Not governments. From people, largely.
Second, you’ve got to squeeze of their
remember Donald Rumsfeld?
of something, you reward it. If you want
less, you penalize it. And what has to be recruiting. One of the ways to do that is I don’t get into that. I think of the
done is the U.S. is going to have to provide to find out where the people are flowing people who spend their time
leadership in the non-Muslim world and the from. But the second way to do it is
to make sure it becomes increasingly
worrying about their legacy. …
Muslim world to get a coalition of people
who are willing to find ways to squeeze of clear that it’s painful to be recruited— They should worry about doing
the money that’s going to them. that they’re not going to win. A terrorist the right thing for their country.
can attack any place, at any time, using
any technique. And it’s physically impossible
All you can do is get up in the
to defend every place at every moment of the morning and do your best.
day or night. Therefore, you have to find ways
to dissuade them.

Watch Charlie Rose on Bloomberg TV Weeknights at 6 p.m. and 9 p.m. ET


the festival will bring. “The homeless
outreach team staf informed homeless
people in that area that the event will
be coming there, that there will be con-
struction, road closures, and crowds,”
she says. “It will be very diferent than
usual for the next few weeks, and the
team made sure that the people who
live there are aware of that.”
One homeless man standing near a
bocce court that’s part of the village
says he likes to come to the water-
front site for some sun but was already
planning to go elsewhere once the
event begins. “It’s for the people with
money,” he says, declining to give his
name. “If you don’t have money, then
you have to go and hide somewhere,
or the police will take you away.”
—Alison Vekshin, with Jeran Wittenstein
The bottom line San Francisco is asking homeless
residents along the Embarcadero to leave a
Super Bowl festival site.
States’ Rights
California Decides to
Go It Alone on Taxes
⊲ A court decision could undermine
interstate agreements
⊲ “It was never a compact in the
traditional sense of ‘compact’”
Things that Americans routinely do
across state borders are made pos-
sible by interstate contracts known
as compacts: driving your car
in another state; adopting a child from
another state; working as a nurse
in another state without having to get
a new license; buying insurance from
a company based in another state.
The compacts let states get things
done without the federal government.
They cover state boundaries, educa-
tion, lood control, health, transpor-
tation, water apportionment, and
treatment of prisoners, among other
issues. There are almost 200 of these
PETER KRAMER/NBC/GETTY IMAGES
agreements, some more than a century
old. “Interstate compacts are the most
powerful, durable, and adaptive tools
for ensuring cooperative action among
the states,” the nonproit Council of
State Governments says on its website.
Suddenly, though, the legal standing
Digits
$1,460
Amount shielded from seizure under a Danish law passed on Jan. 26
allowing the state to confiscate refugees’ assets to pay for benefits
of the compacts is under a cloud. On
Dec. 31 the California Supreme Court
issued a ruling weakening one of the
most important interstate compacts,
a 49-year-old agreement known as
the Multistate Tax Compact (MTC).
The ruling, some experts say, might
embolden plaintifs who no longer
want to abide by the terms of other
compacts to challenge those, too.
“It creates uncertainty,” says Rick
Masters, a lawyer in Louisville, who is
special counsel to the National Center
for Interstate Compacts, a unit of the
Council of State Governments.
The original MTC said member states
should tax corporate income on the
basis of three equally weighted factors:
how many employees a company
has in the state, how much property
it owns in the state, and the value
of in-state sales. But over the years,
more than half the states, including
California, drifted away from those
terms with impunity. Instead, they
adopted tax formulas that beneit
in-state companies at the expense of
out-of-state ones.
In 2005, Gillette, the razor maker
owned by Procter & Gamble, sued
California tax authorities, arguing that
it should be taxed according to the
original MTC tax formula, which was
better for it as a non-California-based
company. Unfortunately for Gillette,
which is in Boston, the Multistate Tax
Commission didn’t stand up for its
own compact. Instead, the commis-
sion’s lawyers agreed with California
in a friend-of-the-court brief, arguing
that the compact’s taxation formula
was nonbinding and didn’t supersede
state law. “It was never a compact in
the traditional sense of ‘compact,’”
says Elliott Dubin, the commission’s
Politics/Policy
10,000 Danish
kroner, as of
Jan. 27
director of policy research. (The
commission tweaked its formula in
2014 to relect states’ practices.)
The impact of the California
ruling remains unclear. Challenges
against other compacts haven’t yet
emerged since the Dec. 31 decision.
The Multistate Tax Compact has been
known to be squishy for years. Other
compacts are considerably stronger.
The Interstate Insurance Product
Regulation Compact, for instance, is
clearly written as a binding legal con-
tract, so the California Supreme Court’s
27
decision is irrelevant to it, argues Karen
Schutter, executive director of the
Washington-based commission that
oversees the insurance accord.
On Jan. 25, Gillette’s lead lawyer,
Amy Silverstein, said through an aide
that the company is planning to ask
the U.S. Supreme Court to review the
California ruling. For now, the only
compacts that everyone agrees are safe
from challenge are the ones to which
Congress has explicitly given consent—
for example, those covering nuclear
waste disposal, oil and gas, and water
rights. Congressionally approved com-
pacts have the force of federal law,
which trumps state law. One solution,
then, to the problem of weak inter-
state agreements like MTC would seem
to be for states to ask Congress to put
its stamp of approval on all interstate
compacts. Falling back on Washington
might injure their pride, but it would
keep legal uncertainty from gumming
up the works. —Peter Coy
The bottom line A California decision to weaken
an interstate tax agreement may put similar
compacts between states at risk.
Edited by Allison Hofman
Bloomberg.com
 February 1 — February 7, 2016

Gaming’s Growing

28

The LCS world final in Berlin on Oct. 31

⊲ For e-sports, outside funding comes with some tough questions

⊲ “You need to be able to spend money to catch up”
FROM LEFT: COURTESY RIOT GAMES; YOUTUBE

The two teams of ive baby-faced
young men look tense in their hoodies
and T-shirts. When the battle begins,
they go on the attack—with staves,
swords, and giant spiders. In West
Los Angeles, it’s opening week for
the North American branch of the
League of Legends Championship
Series (LCS), the world’s best known
league for competitive video gaming.
As competitive gaming grows more
popular, LCS is setting the pace. More
than 330 million people watched some
part of the league’s four-week world
championships last fall through chan-
nels like YouTube and gaming-video
site Twitch. Thirty-six million saw the
$1 million championship match, held on
Halloween at the Mercedes-Benz Arena
in Berlin. Bigger audiences and prizes
are drawing a wave of outside invest-
ment, setting up a showdown between
the league’s past and its future.
The Jan. 17 match in L.A. is one of
the irst for the Immortals, an all-star
squad formed in October with rich
backers. They’re up against Team

Pains
Impulse, a struggling group that tried
and failed to sell its LCS spot in the of-
season. The match ends in record time.
The future cleans the past’s clock.
Competitive gaming is in its Cambrian
explosion phase. The landscape is
awash with game publishers, tourna-
ment organizers, teams, and stream-
ing platforms that attract millions of
viewers, but most have no uniied strat-
egy or business model to speak of. The
match in L.A. ofers a glimpse of what
the future could look like for a pro
e-sports league, albeit one in which the
playing ield has tilted.
Riot Games, which publishes the
popular arena-battle game League of
Legends, runs LCS competitions with
relatively strict control over the ixed
number of slots for its pro tourna-
ments. This separates Riot, a subsid-
iary of Chinese Internet conglomerate
Tencent, from most of the early com-
petitive gaming leagues. It also creates
a market for the entry slots, which LCS
allows to be bought and sold.
Since the fall, the money coming
from outsiders, including veterans of
the U.S. pro sports industry, has begun
to professionalize the league in ways big
and small. The changes have rankled
team owners who don’t have access to
that kind of cash, but the new money is
also forcing tough conversations about
how to run a pro
league in which many
players are teens.
“The guys who are
buying teams want
there to be an NFL-
style ecosystem,” says
Michael Vorhaus,
president of Magid Advisors, a consul-
tant that’s worked with e-sports busi-
nesses. The investors are looking for
a tenfold rise in their teams’ value
someday, he says, “and no one thinks
that someday is next year.”
Three deep-pocketed groups of
investors bought teams in LCS’s
10-franchise North American league
in the months before the new season’s
kickof on Jan. 16. Among the notable
are Memphis Grizzlies co-owner Steve
Kaplan; former NBA star Rick Fox; and
Andy Miller and Mark Mastrov, who
have stakes in the Sacramento Kings.
Kaplan was the irst, as part of a con-
sortium that includes a small army of
tech executives. In October the group
bought the LCS slot of struggling fran-
chise Team 8 and put 21-year-old pro
gamer Noah Whinston in charge.
Whinston, a Northwestern dropout,
hired staf to devise training and nutri-
tion regimens to make sure his teenage
Twitter’s How artisanal spam
weapons of mass sneaks into your
defenestration 30 in-box 30
Innovation: Swarming
robots that keep an
eye on waterways 31
squad wouldn’t damage their relexes
by subsisting on Red Bull and junk food.
Then, in a matter of weeks, he illed
the roster with stars from Europe and
veteran local free agents. “You need to
be able to spend money to catch up”
with North American favorites Cloud9
and Team SoloMid, Whinston says.
Two more investor groups bought
LCS teams in December: Miller
and Mastrov helped fund NRG,
and Fox put money into Echo Fox.
(Representatives for the other new
squads either didn’t respond to
interview requests or declined to
comment.) The inlux of money for
a few teams has made it tougher for
some of the other owners, mostly
young ex-players, to compete.
By some accounts, player sala-
ries have as much as quadrupled in
a single year and in some cases are
now in the low six igures. “Teams are
almost being forced to take on outside
investment on unfavorable terms,” 29
says Stephen Ellis,
a 24-year-old
League of Legends
former pro
gamer who advises
several e-sports
startups.
The worries of
poorer owners played
out in a recent online debate about
whether teams should publish player
salaries to prove they aren’t exploit-
ing anyone. In the NFL and NBA, sal-
aries are public and heavily regulated
through systems of salary caps and
revenue sharing. Nothing like this is
in place in e-sports leagues. Whalen
Rozelle, Riot’s director of e-sports, says
the company isn’t inclined to intervene
at this point. “We can’t just decide on
a whim that it works in basketball, let’s
apply it one-to-one” he says.
On Christmas Day, newly formed
squad Ember published a list of
annual salaries ranging from $70,000
to $92,000, not counting free housing
and health care, for the equivalent of a
minor league team. Team Elemental,
Ember’s parent organization, has raised
$2 million from investors at Silicon
Valley irm Signia Venture Partners.
Whinston immediately supported dis-
closure, though he hasn’t published
 Technology
Quarterly
Peak share earnings show
price, growth slowing
$73.31
 oicer and head
Head of
product
Stock steps down
price
241 million
monthly users,
 down, replaced
IPO at a 30 percent
Head of
yearly gain
$26
engineering
steps down
11/7/2013
End of stock
lockup period
for employees
salaries. Other owners argued that
transparency disadvantages teams
without venture funding. “This eco-
system broadcasts one message:
Money wins,” Devin Nash, chief execu-
tive oicer of LCS team Counter Logic
Gaming, wrote in an online essay.
He predicts that in two years it’ll be
“impossible to have an e-sports team
30 unless you’re a behemoth.”
In this case, the term “behemoth”
is relative. The typical LCS team sells
for about $1 million, say people with
knowledge of the deals—what the New
England Patriots’ Tom Brady would call
two weeks’ pay. LCS streams online but
hasn’t signed any long-term deals for
exclusive broadcast rights, the primary
means by which pro sports leagues
make money. Riot has only so much
incentive to do that, because e-sports
isn’t its core business. Game publish-
ers have traditionally seen competi-
tive gaming as a marketing expense that
pays of through added sales.
The audience for competitive
gaming is getting big enough to change
that equation. Twitch’s audience has
doubled, to more than 100 million
monthly viewers, in the year and a
half since Amazon.com bought it for
$1 billion. On Jan. 14, ESPN unveiled
a newsgathering operation to cover
e-sports. LCS’s head start on profes-
sionalization won’t last long. Turner
says it plans an e-sports league, and
on Jan. 4, Call of Duty publisher
Activision Blizzard bought Major
League Gaming, an online network
for e-sports events, for $46 million.
Selling broadcast rights would be a
major sign of maturation for e-sports
Twitter’s
Slow Burn
288 million
monthly users,
a 20 percent
yearly gain
Head of
Chief operating product
steps down
of media step  Chief
down
 oicer steps down
 CEO

CFO steps
Director
CEO Dick Costolo
of product
by Goldman
management
banker who
steps down
handled the IPO
Quarterly results
show revenue
growing, but user
growth disappoints.
Twitter blames iOS 8
leagues, says Dennis Fong, a former pro
player who runs Raptr, a social network
for gamers. New LCS owners and their
investors are surely going to push Riot
to secure more fees and set up revenue
sharing, says Bryce Blum, a lawyer who
represents e-sports teams.
The arrival of mainstream investors
should make the industry seem safer
to big advertisers, says Steve Arhancet,
co-owner of the LCS squad Team
Liquid, adding that he’s unconcerned
by the prospect of new money chang-
ing the league. “There’s a massive
opportunity right now,” he says. If
more money starts lowing, Arhancet
says, smaller teams like his can deal
with the inequality. —Joshua Brustein
The bottom line LCS is the early leader among
pro video game leagues but needs to act quickly to
build a sustainable business model for owners.
Hacking
E-Mail Spam
Goes Artisanal
⊲ Scammers are using small-batch
attacks to evade filters
⊲ “This shows they are getting
more concerned about quality”
Unlike the early days of the Internet,
most e-mail in-boxes are no longer
clogged with poorly worded come-ons
for Viagra or Nigerian banking scams.
Modern e-mail ilters block more than
99.99 percent of the 400 billion spam
Earnings show
revenue rising,
but interim CEO
and co-founder
Jack Dorsey
Executives and says user growth
insiders stop
will take time
selling company Twitter says it’ll
stock cut as many as
336 jobs, 8 percent
of its workforce
communications
Dorsey Heads of
becomes product,

engineering,
  media, HR,
and Vine step

steps down; he’d down
Vice president
sold more than 
for product
$35 million in
personal shares and director
of product
management Latest earnings $17
show missed 1/26/2016
step down
revenue and
user estimates
BY SARAH FRIER; DATA COMPILED BY BLOOMBERG
messages sent around the globe daily.
But crude eforts to swipe people’s
data are still big business—86 percent
of the world’s e-mail traic, worth
$200 million a year—and the scammers
who use them are getting smarter,
according to a report prepared for
Bloomberg Businessweek by researcher
Agari Data in San Mateo, Calif.
Instead of blasting fake e-mails to
millions of people at a time, hackers
are increasingly targeting groups of a
couple hundred or thousand, the Agari
report says. By sending the spam in rel-
atively tiny batches and using e-mail
accounts hosted through small compa-
nies not typically listed among known
cyberthreats, the senders have been
able to evade detection by ilters and
get their messages to people’s in-boxes.
Industry researchers call it “snowshoe
spam,” because it’s relatively small com-
pared with the Zamboni-size conven-
tional spam blast.
“Spammers are getting much more
focused, much more targeted,” says
Vidur Apparao, Agari’s chief technol-
ogy oicer. “This shows they are getting
more concerned about quality.”
One of the more successful attacks
Agari examined was a series of
5,000 e-mails sent to Apple custom-
ers in France last October. The e-mails,
purporting to be from Apple, con-
tained links to a fake iTunes login
page. The Agari report says most
found their way to the intended recip-
ients’ in-boxes using accounts hosted
by an obscure Belgian cloud company.
Attacks frequently involve small
hosting providers that don’t have the
same kinds of checks Amazon.com or
 Technology
“If you use a swarm
of cheaper robots
Google have in place to detect scam- instead of one
mers, Apparao says.
Agari says it took e-mail ilters
eight hours to start catching on to the
Innovation costly device, you
can spread the risk”

French iTunes scam. By spamming

standards, that’s a success, though
Agari couldn’t determine how many
of the 5,000 people fell for it and gave
Subcultron
up their passwords. Form and function Innovator Thomas Schmickl
A separate attack, also in October, Subcultron is a swarm of at least 120 self- Age 46
involved 169 e-mails targeting Italian directing, underwater robots being developed Zoology professor and founder of the
users of PayPal with a similar set of by scientists in six countries to monitor Artificial Life Laboratory at the University
Venice’s polluted waterways and transmit
phony links and logins. Links are a environmental data to government oicials.
of Graz in Austria
more efective spammer tool than
attached iles because they take longer
for e-mail ilters to assess as threats.
Many ilters, including most used by 1. Energy The robots
use lithium ion
smaller e-mail providers, don’t even Design The robots, shaped batteries and solar
bother to deal with links. like fish, mussels, and lily cells for power. (Yes,
Snowshoe attacks are causing pads to mimic the species’ enough sunlight gets
hydrodynamics, carry through.)
serious problems for spam ilters, says sensors to monitor water
Craig Williams, a senior manager at conditions like temperature
Talos, a cybersecurity research divi- and chemical composition.
Recon Some of
sion of Cisco Systems. He says the the robots carry
amount of snowshoe spam has more cameras. Others
have electrodes that
than doubled in the past two years and aPad allow them to “see”
accounts for more than 15 percent of by measuring objects
the world’s junk messages. crossing the electric
fields they generate.
As artisanal spam becomes a bigger 31
problem, the $84 billion cybersecurity
industry is advocating that e-mail
operators adopt new protections.
aFish
Among the more radical ideas: creat-
ing a global registry for banks, retail-
ers, and other companies that send
mass mailings. The companies would
register the servers they use to send
their own junkier e-mails, such as
those advertising clothing sales or Control Using
reinancing rates; the e-mail systems wireless signals,
human monitors can
would then block any other addresses take over from the
purporting to send such messages. swarm’s AI software 2.
Getting all the interested parties on if something
goes wrong.
board for a global registry has been Direction The robots split
a challenge, especially outside the up to patrol areas of interest,
such as a damaged water
U.S. For now, Agari recommends the main or ship, beyond what
usual defenses: Closely scrutinize the individual robots could cover.
e-mail addresses that purport to be Funding The The swarm communicates via
European the Internet-capable lily pads.
from a company you know, and when Commission
in doubt, don’t click any links. “It’s a has granted the
numbers game,” Williams says. Even project €4 million aMussel
($4.4 million).
if the scammers boost their spam
returns by only 1 percent, “1 percent
of a billion e-mails is a pretty good Next Steps
number.” —Jordan Robertson “The ability to take lots of data and understand the patterns with a mobile
underwater system is really unprecedented,” says John Long, a professor who
COURTESY SUBCULTRON (3)

The bottom line So-called snowshoe spam now

accounts for more than 15 percent of the 400 billion
junk e-mails sent around the world each day.
Edited by Jef Muskus
Bloomberg.com
heads the robotics research lab at Vassar College. Schmickl showed what he
calls “very rough” prototypes at a Venice expo in the fall and expects to test
new models in April. Eventually, he says, he plans to build robot swarms that can
monitor the oceans or even faraway moons that have water. —Nick Leiber
 Markets/
Big buyouts, meager A fresh fight over
returns 34 speed trading 36

Finance The Bank of Japan

wades deeper into
stocks 35
Briefs: Lockheed’s
vanishing IT; Rihanna’s
royal look 37

February 1 — February 7, 2016

“For anyone consuming oil, lower

Is oil prices are a tax cut,” said U.S.

Secretary of the Treasury Jacob Lew at
the World Economic Forum in Davos
on Jan. 21. “It puts more money in peo-
ple’s pockets. It actually has a positive
efect.” Lew was trying to be reas-
suring, with good reason. The day

1. 6 3
before, crude prices had dropped to
a 12-year low of $26.55 a barrel, down
from $107 as recently as mid-2014.
The ripple efects in the stock market
briely wiped as much as 565 points of
the Dow Jones industrial average. (Oil
rallied back to $32 as of Jan. 27.)

Like
Lew’s contention that dramatically
cheaper oil is something to cheer
about makes a lot of intuitive sense.
China, the world’s largest oil importer,
has capitalized on lower prices by
stockpiling reserves; for all the coun-
try’s problems as its growth slows,
energy costs aren’t among them. In
the U.S., consumer conidence is on
the rise. The beneits of the price cut 33
“handily outweigh the negatives,” says
Jacob Oubina, senior U.S. economist
for RBC Capital Markets. “It’s just a
matter of when consumers and busi-
nesses adjust to this.”

Or
The meme that cheap oil acts
like a tax cut goes back decades. As
early as 1983, lawmakers asked the
Congressional Budget Oice to gin
up estimates of the beneicial impact
of falling prices. Revisiting the topic
a few years later the CBO ofered an
instructive caveat: “It may be best not
to refer to a ‘tax cut equivalent’ of an
oil price change.” Among the reasons
the analogy didn’t work: The drop in
revenue for domestic energy compa-
nies can trigger economic contraction
not seen with a tax cut. And, surpris-
ingly, the total economic beneit actu-
ally shrinks the further prices fall.
Increased U.S. energy indepen-
dence has made the math even trick-

?
ier. With domestic output near a
43-year high and fuel imports down
to 24 percent of consumption, a
glut of crude isn’t a problem just for
OPEC and Texas anymore. Third-
ILLUSTRATIONS BY 731

⊲ Cheap oil is no blessing for companies that bet on high prices quarter revenue for U.S. indepen-
dents, the little companies that drove
⊲ “This crash is a huge transfer of wealth” the shale boom, was $26 billion less
than the year before, according

Big Buyouts
of the
2000s
How 19 large
acquisitions led by
4 0%
top buyout firms have
performed
Gain on investment
SunGard
Size of buyout $11.1b
(3/2005)
IN ORDER OF ANNOUNCEMENT. GAIN FIGURES ARE ROUNDED. RETURNS FOR ACTIVE DEALS ARE BASED ON VALUE THROUGH DEC. 31 FOR PUBLIC COMPANIES AND SEPT. 30 FOR PRIVATE COMPANIES
to data compiled by Bloomberg.
Last year’s spending is on track to be
more than $60 billion lower than 2014,
and oil at $30 a barrel has prompted
a fresh round of cutting. Goldman
Sachs, which hailed lower prices as a
$125 billion tax cut in December 2014,
put it this way in a November report
retreating from its bullish prediction:
“Shale states shrank the stimulus”
that usually comes when consumers
pay less at the pump.
Instead of tax cut, some analysts
are turning to another simile: Falling
oil prices could be like falling real
estate values. “This was a Wall Street
bet, and the bet was that the price of
oil, a theoretically inite commodity,
34 wouldn’t go below a certain level,” says
Martin Bienenstock, co-head of bank-
ruptcy and restructuring at law irm
Proskauer Rose. “The bet turned out
wrong. Just like the bet that housing
prices would never fall.”
During the boom years, some shale
producers spent $2 drilling for every
$1 earned selling oil and gas, accord-
ing to data compiled by Bloomberg,
and they plugged the shortfall with
debt. Wall Street extended low-
interest credit lines to junk-rated bor-
rowers, which put up their oil and gas
properties as collateral. Producers
tapped their bank lines to buy prop-
erties and drill wells. When compa-
nies needed to pay of their loans,
their bankers helped them sell equity
and debt. Investors, hungry for higher
returns after years of low interest
rates, snapped it all up.
From 2004 through 2014, the high-
yield bond market doubled in size
while the amount of bond debt owed
by junk-rated energy producers
expanded elevenfold, to $112.5 billion,
according to Barclays. Bond buyers
were so eager that provisions meant to
protect them eroded.
It worked beautifully until oil prices
collapsed. Revenue has plummeted,
leaving producers short of cash to pay
The buyout shops have
fully cashed out of six
of the companies
1 6 0% 1 70 % 180%
12 0%
Hertz Kinder Morgan
$15.3b TDC 0
$22.4b
3
$15.3
Nielsen
$11.3b
their debts. Banks have cut drillers’
credit lines as the value of their collat-
eral has fallen. Oil and gas bonds have
pushed debt market distress to levels
not seen since the 2009 recession,
according to Standard & Poor’s, and
bond buyers are selling their holdings
at steep discounts to salvage some part
of their investment.
Those who got out could be the
lucky ones. Last year 42 U.S. oil pro-
ducers went broke owing $17 billion,
according to the law irm Haynes &
Boone, a trend that’s likely to accel-
erate at today’s prices. Many holders
of those companies’ bonds will get
nothing. Banks aren’t immune. Wells
Fargo, Bank of America, Citigroup,
and JPMorgan Chase said this
month that they’ve set aside at least
$2.5 billion to cover potential losses
on souring energy loans. If low prices
persist, the price tag will get bigger.
The worry is that the pain spreads
from inance to the broader economy.
“Consumers may be doing great until
producers can’t service their debt,”
says Michael Feroli, chief U.S. econ-
omist at JPMorgan. “And that creates
problems for everyone, producers and
consumers alike.” He points out that
the commodity bust of the 1980s con-
tributed to the inability of emerging-
market countries to pay their debts,
with worldwide consequences.
Oil-rich countries that spent the
boom years collecting bonds, equi-
ties, department stores, and soccer
teams are in selling mode. As they
dump assets, exacerbating the market
rout, “it feels pretty messy,” wrote
David Zervos, chief market strategist
for Jeferies Group, in a Jan. 18 report.
Saudi Arabia, the world’s largest
oil producer, has seen its foreign
exchange reserves fall by more than
$100 billion since mid-2015, accord-
ing to the Saudi Arabian Monetary
Agency, a bigger drop than during the
inancial crisis.
“But outside the energy market, this
41 0 % Prolific KKR was in on
both top gainer HCA
and big loser TXU
170%
HCA
$33b % Equity
60 50
Oice
Properties
NXP
10% $38.7b
Biom
$10.5b $11.6
0%
Univision Freescale Clear
$13.7b $17.6b Ch nnel
$24b
is nothing like 2008,” Zervos added.
“This crash is a huge transfer of wealth
away from the levered global energy
asset holder to the unlevered average
consumer.” Similarly, RBC’s Oubina
calls comparisons to the subprime bust
“insanity.” The inancial system, he
says, “is ironclad compared to 2007.”
There’s one more thing low oil prices
might be like: a lashing red warning
light. China’s downshift to annual
growth of 6.8 percent, from 10 percent
ive years ago, is a big factor pulling oil
prices down. It points to an increased
risk of delation and slow growth
throughout the global economy. In
other words, persistently low oil prices
could really be just a symptom, says
JPMorgan’s Feroli. “This may be the
result of a bad economy,” he says. “Not
a cure for a bad economy.” —Asjylyn
Loder and Matthew Philips
The bottom line While cheap oil has benefits for
consumers, defaults by producers and pain in oil-
rich countries could stall the world economy.
Private Equity
A Meh Decade for
Megadeals
⊲ The big buyouts of the mid-2000s
turned out to be mostly middling
⊲ “The entire industry has become
more disciplined”
Henry Kravis, a K in KKR, dubbed it
private equity’s golden age. From 2005
to 2007, buyout irms paid fat prices to
acquire about 20 supersize companies,
from hotel chain Hilton Worldwide
Holdings to rental car giant Hertz
Global Holdings.
A decade later, the results of that
debt-fueled spree can be tabulated —
and they hardly shine. The megadeals
yielded mostly mediocre returns,

Alliance Boots, another
KKR buyout, merged
with Walgreens
% Alliance Boots
et
b
-70% -100%
First Data
Harrah’s
$30.7b TXU
$48b
according to separate data compila-
tions by Bloomberg and asset manager
Hamilton Lane Advisors.
“The big deals were done more out
of ego than economic sense,” says
David Fann, chief executive oicer of
TorreyCove Capital Partners, which
advises pension plans that invest in
buyouts. “People paid steep prices and
put on too much debt.”
Private equity irms
TPG had its name on pool money from inves-
three poor-performing
deals tors, including pen-
sions and endowments,
and use debt to help inance buyouts
and magnify potential returns. They
typically charge investors an annual
management fee of 1 percent to
2 percent of investors’ funds and keep
20 percent of proit.
Buyout shops generally aim to at
least double investors’ money within
three to ive years. According to
data culled from U.S. Securities and
Exchange Commission ilings and the
irms, 19 large deals each valued at
$10 billion or more produced a median
proit of about 45 percent above invest-
ment cost—well short of the target.
The results also pale when com-
pared with the 70 percent median gain
yielded by all private equity transac-
tions during that period, according to
Hamilton Lane. That group included
thousands of smaller deals.
On an annualized basis, the largest
deals generated a median return of
about 4 percent, says the study by
Hamilton Lane, which looked at 25 big
transactions. The Standard & Poor’s
500-stock index returned 7.3 percent
per year from the start of 2006
through the end of 2015.
The biggest transaction of the
lot, the purchase of utility TXU for
a record $48 billion, was a lop. The
company, renamed Energy Future
ILLUSTRATION BY 731
Holdings, iled for bankruptcy in
2014. As a result, the acquisition, led
by KKR, TPG Capital, and Goldman
Sachs Group, vaporized $8.3 billion
Blackstone had no
losers and scored a
huge win with Hilton
250 %
170%
$22.2b 30
Hilton Going big
$26b didn’t pay
%
% of
10 Alltel (7/2007)
$27.5b
- 80%
$29.8b Intelsat
$16.6b
of equity. Other notable
losers: the $30.7 billion
takeover of casino opera-
tor Harrah’s—now Caesars
Entertainment—by Apollo
Global Management and
TPG, and the $16.6 billion
buyout of satellite services
company Intelsat by BC Partners
and Silver Lake Management.
Have the Masters of the Universe
learned a lesson? “This crop of deals
dragged down private equity returns,”
says Joe Baratta, the global head of
private equity at Blackstone Group,
one of the leading dealmakers. As
a result, he adds, “the entire indus-
try has become more disciplined.”
TPG has sworn of buyouts as large as
$30 billion, people with knowledge
of the irm’s thinking say. No irm has
led a transaction of $10 billion or more
since the inancial crisis.
Several factors contributed to medi-
ocre returns. During the boom, low
borrowing costs led private equity
irms to buy companies for as much as
twice the usual valuations, based on
multiples of a target’s sales and cash
low. They reasoned that buying big,
established companies would bring
protection. The inancial crisis that
began in 2007 dashed that idea, imper-
iling companies big and small.
Almost all the targets were public
companies, which are harder to buy
at bargain prices. “The fundamen-
tal law with large public-to-private
deals is you pay the full market rate,”
says Scott Sperling, the co-president of
Thomas H. Lee Partners, which paid
an above-average 16 times cash low for
Univision Holdings. “That decreases
the odds you can sell the company
later for a higher multiple.” (Sperling
declined to discuss the performance of
his irm’s speciic deals.)
Another problem, Blackstone’s
Baratta says, was that many targets
were already well-run, leaving less
room for operational improvement—a
Markets/Finance
% %
47 70
Median gain on Median gain on
megadeals all buyouts
“The big deals were
done more out of
ego than economic
key element of the private
sense.”
—David Fann, equity playbook. The compa-
chief executive nies also were too big to sell to
oicer,
another company or private
TorreyCove Capital
Partners equity group for cash. To cash
in, buyout irms often had to
arrange public stock ofer-
ings, which takes time, eroding
annualized returns.
It’s harder now to inance such giant
transactions, in part because in 2013
the Federal Reserve put curbs on loans
tied to buyouts.
How long buyout titans will heed
the lessons of the era is an open ques-
tion, says Josh Lerner, a Harvard
Business School professor who
researches the private equity indus-
try. “Memories often last a decade,” 35
he says. “Getting them to last two
decades may be overoptimistic.”
—David Carey and Devin Banerjee
The bottom line Most of the big buyout deals from
a decade ago made money, but not the kinds of
returns investors were looking for.
Stimulus
The BOJ Dreams of
A New Investment
⊲ Japan’s central bank wants to
buy an ETF that doesn’t yet exist
⊲ “It’s the same as if the BOJ were
buying individual stocks”
Exchange-traded funds, the index-
based portfolios that can be traded
like stocks, grew to almost $3 trillion
in global assets by the end of 2015.
Individuals and big institutions alike
use them to cut investment costs
and diversify quickly. In Japan they
assume another role: as a tool for
the Bank of Japan to manage the
nation’s economy.
The central bank is already

Markets/Finance
One Very Big Footprint
Japanese ETF Assets
Owned by BOJ
12/2010 12/2015
DATA COMPILED BY BLOOMBERG;
BANK OF JAPAN; INVESTMENT TRUSTS ASSOCIATION
waist-deep in the market, and
it’s about to wade even deeper. The
BOJ holds half the ETF shares in the
country. In December it announced it
would invest $2.6 billion more, taking
its annual purchases to $28 billion.
This money would go into ETFs that
track Japanese companies “proac-
tively making investment in physical
and human capital,” the bank said.
The hitch is that no such funds
yet exist. “I think the message from
the BOJ is for us to go out and make
them,” says Koei Imai, who oversees
ETF investments at Nikko Asset
Management in Tokyo. “Using capital
spending as a factor in deciding what
36 goes in an ETF is quite unusual.”
Other central banks venture into
markets to buy bonds—the U.S. Federal
Reserve and the Bank of England have
both done so. Buying stocks via ETFs
is a novelty. The BOJ started doing it in
2010 as a catalyst to promote more risk-
taking in the economy.
ETFs seemed a suitable way for the
BOJ to purchase shares without choos-
ing one company over another. The
bank invested mainly in funds that
track major indexes such as the Topix
and the Nikkei 225.
Recently, however, policymakers
have begun using stock purchases
to inluence corporate behavior.
A government-backed stock index
begun in 2014 showcases companies
the Tokyo bourse sees as the nation’s
best. Companies are selected by
return on equity and proitabil-
ity, two areas where Japan Inc. has
traditionally fallen short. Japan’s
government pension fund, the world’s
largest manager of retirement savings,
and the BOJ are among the state inves-
tors that have directed large sums to
this index.
Investing in a capital expenditure
ETF would make the BOJ’s nudge a
little harder. Corporate cash-hoarding
and stagnant wages, a response to
15 years of falling prices, are seen as
¥16t thwarting the bank’s attempts to spur
growth. Companies that spend cash
to put their proits to work will be
¥8t rewarded by the BOJ purchasing their
shares via the ETF.
A side efect of the ETF push could
¥0 be to bring change in Japan’s inan-
cial industry, says Jesper Koll, head of
the new Tokyo oice of WisdomTree
Investments, an ETF manager.
Most ETFs in Japan track well-
known indexes. So-called smart beta
strategies—baskets of stocks selected
for factors such as dividends or prof-
itability—haven’t taken of as they
have in the U.S. The BOJ’s move is a
wake-up call, says Koll.
Stimulus from the BOJ is a key
element of Prime Minister Shinzo Abe’s
policy program, dubbed Abenomics.
Although the central bank has stemmed
delation, it is nowhere near its target of
2 percent inlation. ( ing prices would
be a sign Japan is returning to healthy
growth.) With oil prices roiling the
market, many investors expect more
BOJ asset purchases ahead.
But some worry that the bank’s
role in ETFs takes things too far,
especially if the funds favor certain
companies. Says Yoshihiro Ito, chief
strategist of Okasan Online Securities
in Tokyo: “It’s the same as if the BOJ
were buying individual stocks rather
than pushing up the overall market.”
—Yuji Nakamura and Yuko Takeo
The bottom line Japan needs corporations to
stop hoarding cash. The BOJ thinks an ETF that
favors growth-oriented companies could help.
High-Speed Trading
A Flash Boys Foe Is
Slowed Down in D.C.
⊲ The hero of Michael Lewis’s book
wants to start a stock exchange
⊲ “They should have to play by the
same big-league rules”
Brad Katsuyama was lionized in
Michael Lewis’s best-selling 2014 book,
Flash Boys, for coming up with a way
to protect ordinary stock investors
from predatory high-frequency—that
is, lash—traders. His trading venue,
Griin
Investors’ Exchange,
briely pauses all orders
to take away the edge p s-
sessed by traders with sup -
fast computer networks.
Now his irm, IEX Group,
trying to become a full-ledged d
public stock exchange. Such a
designation would carry a stamp
approval from the U.S. Securities a
Exchange Commission and boost the
number of trades IEX handles. (It
accounts for about 1.7 percent of daily
volume for U.S. stocks.) Standing in
the way: some of the same high-speed
traders who were cast as the heavies
in Lewis’s book.
Leading the charge is the hedge fund
Citadel, whose billionaire founder Ken
Griin was furious about Lewis’s por-
trayal of the irm, according to two
people who have spoken with him.
Aligning themselves with such IEX
competitors
p as the New York Stock
Exchange and Nasdaq, Citadel
executives have trekked to
Cappitol Hill to lobby
Katsuyama
conngressional staf,
and wriitten letters critical
of IEX to
t the SEC, which
has delayed its decision.
“Desspite IEX’s
attemp pts to make trading
nicer, it
i is never going to
ountry-club sport,”
be a co
says R. Cromwell
C Coulson,
chief execcutive oicer of
OTC Marketss Group, who has
watched the ba attle with keen
interest. “Citadel p ays hard to win.”
pla
IEX operates as a dark pool, a kind
of private stock market that relies on
brokers and traders to send it busi-
ness. It employs a speed bump that
shields investors’ orders from what
it calls predatory traders. The infor-
mation passes through IEX’s “magic
FROM LEFT: ADAM JEFFERY/GETTY IMAGES; HEIDI GUTMAN/GETTY IMAGES
shoebox,” which contains 38 miles of
coiled iber-optic cable that pauses
transmissions by millionths of a
second. The slight delay prevents
speed traders from racing ahead and
marking up prices when they see a big
buyer in the market, or reducing them
when they detect a seller, IEX says.
IEX’s opponents argue that delayed
orders mean stale prices, putting it
in conlict with a 2005 regulation that
says investors should get the best
available price.
“If they want to be an exchange and
 Markets/Finance

play in the big leagues, they should

have to play by the same big-league
rules as everyone else,” says John
Nagel, Citadel’s senior deputy general
Bid/Ask By Kyle Stock

counsel. He declined to comment on

his irm’s meetings with congressional
staf and SEC oicials.
Chicago-based Citadel, which also
operates a market-making business,
has invested heavily in high-frequency
trading and is a massive presence in
the U.S. stock market. It often accounts
for more than 14 percent of daily trans-
actions. The irm regularly comments
on SEC issues.
Griin views IEX as an existential
threat to modern markets, say the
people who have spoken to him. (They
asked not to be named because the dis-
cussions were private.) He believes
faster markets make trading easier and
cheaper for all investors. He also didn’t
like that Flash Boys portrayed Citadel
as secretive. (A company spokesman
says the book contained inaccuracies

$5b
about Citadel. Lewis says there were
some small errors, but none had “the
slightest efect on the broader story.”)
The irm says it’s worried that if one 37
exchange is allowed to slow trading, Lockheed Martin offloads its information technology business.
others would add speed bumps, The cash and stock deal with Leidos Holdings lets Lockheed pocket
leading to multiple venues with obso-
lete price quotes. The change might
$1.8 billion tax-free as it sheds a unit facing increasing competition from
even provide opportunities for gaming Silicon Valley. The defense contractor, which borrowed to finance its
the system, argues Citadel. $9 billion purchase of Sikorsky Aircraft late last year, says it will use
Katsuyama and John Ramsay, a the money to repay debt, pay dividends, and possibly buy back stock.
former SEC oicial who is IEX’s chief
market policy oicer, have also lobbied
House and Senate staf. In meetings, Royal Dutch Shell shareholders approve a purchase. Shell
Katsuyama used a notepad to sketch pitched the acquisition of natural gas company BG Group as a
way to weather the slump in oil markets.
pictures that simpliied aspects of
his irm’s market, down to the coiled

$32.4b
Berkshire Hathaway is set to close on Precision Castparts.
cables, say people who attended. The The all-cash deal is the conglomerate’s largest takeover.
irm’s executives dismissed Citadel as a Precision primarily makes fasteners and turbines for airplanes.

beneiciary of the status quo.

$3.4b
Huntington Bancshares buys FirstMerit. With assets of almost
“This ight isn’t about a speed bump,” $100 billion, the combined companies will have much more clout
Katsuyama wrote in an e-mail to poten- in the Midwest and Pennsylvania.
tial allies. “This is a ight about money—
who makes it and from whom.” The Terex attracts an unsolicited suitor. The construction crane
maker, which has agreed to merge with Finland’s Konecranes,
decision is being closely watched, as says China’s Zoomlion Heavy Industry made an all-cash ofer.
it raises questions that the SEC under
BID/ASK ILLUSTRATIONS BY OSCAR BOLTON GREEN

Chair Mary Jo White has been slow to Sony rakes in a chipmaker. The company is buying Israel-
answer, about setting rules for markets based Altair Semiconductor for technology to power the next
generation of smart appliances.
in which machines move very, very fast.
—Robert Schmidt and Dave Michaels

$60m
Meredith accepts a breakup fee. The owner of broadcast
stations and magazines will drop its attempt to merge with
The bottom line Citadel, a big player in high- Media General, which Nexstar Broadcasting will acquire.
frequency trading, wants to stop IEX from
becoming a public stock exchange.

$8.9k
Royal ear goggles. A pair of Dolce & Gabbana bejeweled
headphones shaped like a crown quickly sold out when Rihanna
Edited by Pat Regnier tweeted a photo of herself wearing a pair.
Bloomberg.com
S
S N 39

Photograph by
Alex Hoerner
 OUTSIDE the Public Utilities Commission office, which is
on the second floor of a modern, three-story building about 7 miles
from the Strip in Las Vegas, a chorus of women are shouting to the
tune of a Beastie Boys classic:

“WE’RE GONNA
FIGHT... GO

It’s Jan. 13, a crisp desert morning with high, wispy clouds. Cars zoom by
on a nearby freeway. Across the street, construction workers are leveling
ground in front of a subdivision. Local TV news crews close in on the women
as several hundred other protest- rewrote the rules for net-metering customers. In December it
ers wave signs that read, “Don’t hog scored a major win: Nevada’s Public Utilities Commission (PUC)
imposed rules that not only make it more expensive to go solar,
40
the sun” and “Save our solar jobs.” but also make it uneconomical for those who’ve already signed

Another poster takes a jab directly at up. Similar regulatory skirmishes are playing out in dozens of
other states, but no other has gone as far as Nevada to under-
the local power company: “Don’t be mine homeowners who’ve already installed solar arrays.
All this has enraged independent, free-market, and environ-
shady NV Energy.” mentally conscious Nevadans. All day on Jan. 13 people enter
Many of the protesters are employees or customers of the hearing room to give the sole commissioner an earful.
SolarCity. Started a decade ago by Tesla Motors Chief Executive (Two more commissioners are piped in via video from Carson
Oicer Elon Musk and two of his cousins, Lyndon and Peter City, where the hearing is happening simultaneously.) The
Rive, SolarCity has brought renewable energy to the masses bureaucrats sit blankly behind their desks as employees from
in more than a dozen states, generating about $350 million SolarCity and a competitor, Sunrun, explain that they’d been
in annual revenue. The company designs, installs, and leases let go because the commission’s recent ruling killed their com-
rooftop solar systems at prices that allow homeowners to save panies’ business in the state. Some of the roughly 18,000 cus-
on their monthly power bills—and ight climate change along tomers who have already put solar panels on their roofs say the
the way. For a 20-year commitment, SolarCity will set cus- oicials have rigged the game against the players. One home-
tomers up with panels for no money down. After starting in owner threatens a $1 billion class-action lawsuit. Another com-
California and expanding to Arizona and Oregon, SolarCity pares NV Energy to King George III.
began selling in Nevada in 2014 and quickly became the state’s “Are you getting kickbacks?” demands one woman, who
leading installer of rooftop panels. asks the commission for records proving it made its ruling in
SolarCity’s success is partly because the government pro- the public’s interest.
vides subsidies and enables an arrangement called net meter- “Answer her,” shouts a man in the crowd.
ing, which allows homeowners with panels to sell back to the “Resign!” yells another.
grid any solar energy they don’t use. This helps ofset their cost At one point, Mark Rufalo shows up. The actor has lown
of power when the sun’s not shining. Like more than 40 other in for the rally and makes his way into the commission oice
U.S. states, Nevada forces utilities to buy the excess energy at lanked by two SolarCity employees. A half-dozen camera crews
rates set by regulators—usually the same rate utilities charge follow him to the mic, and he receives a standing ovation after
(hence, the net in net metering). In Nevada, it’s worked well. So he calls the commission the “anti-Robin Hood” for taking from
well, in fact, that NV Energy, the state’s largest utility, is ight- the people and giving to a monopoly. “The utility has the whole
ing it with everything it’s got. pie,” Rufalo adds. The citizens, he says, “just want a tiny, little
First, NV Energy deployed its lobbyists to limit the total slice.” A local TV reporter, realizing she just got the Hulk on
amount of energy homeowners and small businesses were ilm for her segment, pumps her ist.
allowed to generate to 3 percent of peak capacity for all util- None of it sways the commissioners, and at around 4:30 p.m.
ities. Then it expertly argued its case before regulators, who they make a show of cross-examining each other before
 voting unanimously to deny requests to delay the new rules.
It’s another victory for NV Energy and its owner, Berkshire
Hathaway, the investment company controlled by Warren
Bufett. He didn’t respond to requests for comment.
“The outcome was horrendous” in Nevada, says SolarCity
CEO Lyndon Rive. Homeowners no longer have any inancial
incentive to put panels on their roofs, and those who already
did may end up paying an additional
$11,000 over the next two decades, he
says. “We will ight this. We will ight
it legally, and I’m highly conident we
will win.”
Not that long ago, things were far more
cordial between SolarCity and Nevada
officials. “They sold themselves as
being solar-friendly,” Rive says. “It was,
‘Hey, we are for solar. We want to make
solar work.’ ” It probably didn’t hurt
that SolarCity also had created scores
of jobs wherever it went and that it was
a no-brainer to tap the sun’s potential
in a state that’s largely desert.
In 2004, Rive, his wife, and Musk
were in an RV on their way to Burning
Man. Rive was casting about for a business idea that could
“have an impact on humanity,” and Musk suggested that his
cousin look into solar power. “He didn’t say how or what, but
just get into the industry,” Rive told the San Jose Mercury News
in December. When Rive got back from the festival, he told
his brother about the conversation. They founded SolarCity
on July 4, 2006. The company’s mission: to help people leave
fossil fuels behind. Musk, who had made a fortune on PayPal
and was dreaming up rocket ships and electric cars, put up
some capital and became chairman. Musk didn’t reply to an
e-mail seeking comment.
SolarCity grew into one of the country’s largest solar oper-
ators in the years that followed. In the markets it entered,
it hired hundreds of people to sell, maintain, and install its
systems. But Rive didn’t go into Nevada. To make its contracts
work, SolarCity needed the right policies in place. For years
the state provided rebates for homeowners who wanted to go
solar through a lottery system. The randomness turned poten-
tial customers of, he says.
Nevada’s legislature had been gradually changing incen-
tives for solar customers for years and, in 2013, it did away
with the lottery for rebates, so anyone could get one. The state
also set a new cap on installations—3 percent of the utility’s
peak demand. Such provisions usually appease utilities and
give regulators a chance to study what it means to have more
small solar systems on the grid.
SolarCity had begun a national search to igure out where to
STEVE MARCUS/LAS VEGAS SUN
open a call center in late 2012 and considered Nevada. Governor
Brian Sandoval’s oice ofered a sweetener, Rive says. Nevada
had set up something called the Catalyst Fund to encourage
companies to locate operations in the state. In the economic
development trade, “it’s called ‘love money,’ ” says Ross Miller,
a former secretary of state, who served on the board that doled
out the funds. SolarCity’s grant was announced in March 2013.
The company would get paid as much as $400,000 annually
for three years if it met certain hiring targets. “You had me at
Elon Musk,” Miller told Vegas Inc., a business news outlet, at
the time.
In August of that year, SolarCity had an opening ceremony
for its Vegas oice, which was to serve as its main call center
and handle sales and administrative functions nationally.
Sandoval called the opening a “watershed moment” for the
state and joined with Democratic U.S. Senator Harry Reid in
cutting a green ribbon with a giant pair of scissors. “Nevada is
going to be your home for a long time,” Reid said. “And we’re
going to do everything we can to make it one that’s a happy,
happy home.”
With the new net-metering and rebate policies in place,
SolarCity began taking applications on May 1, 2014. Charlie
Catania called that same day. Catania, who resembles Regis
Philbin, came to Vegas in the 1970s and spent most of his career
at Caesars Palace working in the baccarat pit. “I wanted to
be a good steward of the environment,” but going solar was
always too expensive, he says. By signing with SolarCity, he
anticipated saving money over time, because his energy rates
would be locked in for 20 years. That would help him mini-
mize the impact of any increases NV Energy might make. “I’m
71,” he says. “If I live to 91, when my lease is up, hallelujah.”
Thousands more followed Catania, signing contracts with
SolarCity, Sunrun, and other providers. They were retirees,
computer programmers, bartenders, young, old, Democrat,
Republican, Libertarian. Most were in southern Nevada. By and
large, the homeowners who went solar cared about the envi-
ronment. But the thought of saving a few bucks—and sticking
it to NV Energy—didn’t bother some of them, either.
To meet the demand, Rive opened more operations centers
in the state, where its crews of installers would grab panels and
other supplies before going out on a job. The company had
created something called the Chairman’s Cup—after Musk—to
honor the most productive warehouse nationally. In 2015 its
two locations in the Las Vegas area dominated the competi-
tion, winning almost every month.
The growth was good. But another problem was
 looming: Rive and his staf thought their industry
was about to reach the 3 percent cap.
Whoa. Hold on.
Bufett got into utilities in 1999. While many investors ch
latest Silicon Valley IPO, he bought a nice electric company in Des
HOLD ON.
Moines. Building power plants and maintaining the grid ofered
almost endless opportunities to reinvest cash, which he had a lot
of. And, as a monopoly providing an essential service, the local
power company wasn’t going away anytime soon. Owning utili-
ties isn’t “a way to get rich,” he later said. “It’s a way to stay rich.”
talk about the
By 2013 the energy unit at Berkshire had expanded to include
power companies serving parts of Oregon, Washington, Idaho,
Wyoming, and Utah. It had also invested billions of dollars in
wind farms in Iowa and giant solar arrays in California and an e-mail that Sunrun obtained through a
Arizona. Two months after SolarCity got its love money from public records request. “Net metering is not
Nevada, Bufett ofered $5.6 billion to buy NV Energy. Soon after about customer choice and competition,” it said. Rooftop solar
Berkshire completed the purchase, NV Energy accounted for customers, it went on, were already getting a subsidy, and it
about a ifth of the company’s energy revenue. would only increase if the cap were lifted to 10 percent, as
Because power companies operate in a highly regulated the solar industry wanted. All customers would have to pay
industry, they stay close to elected oicials. NV Energy’s ties higher rates if that were allowed, according to the document.
in Nevada were particularly strong. Two of its lobbyists—Pete Instead, the utility argued it would be more cost-efective to
Ernaut and Greg Ferraro—have been friends with Sandoval for generate power from large-scale solar arrays.
decades. Sandoval told the Reno Gazette-Journal that the lob- A month later, Rive went to see the governor. Sandoval
byists had irst suggested he run for governor in 2010. Both began the meeting by handing over a printout of his Wikipedia
ended up serving as advisers to his successful campaign and page, Rive recalls. Someone had just inserted information about
have continued to lobby him in oice. NV Energy’s lobbying on net metering in the governor’s biog-
The governor has tried to avoid favoritism—and, at times, raphy and wrote—erroneously—that he could lift the cap to
has promoted policies that helped the solar industry and prevent solar companies from cutting jobs.
vetoed legislation that the utility wanted. Even Robert List, “He was really upset, like fuming out of the ears,” Rive says.
SolarCity’s lobbyist in the state, says Sandoval is “a man of “He goes, ‘This is what you guys are doing. This is all you.’ …
total integrity.” Still, it’s diicult for the governor to get away And I’m like, ‘Whoa. Hold on. Hold on. I’m here to talk about
from the perception that “he’s being inluenced by them,” the solar future of the state. This is not us.’ ”
42 says Jon Ralston, the host of a political afairs show on Las “The governor did not express frustration,” Mari St. Martin,
Vegas’s PBS station. a spokeswoman for Sandoval, says of the meeting. But he “did
As the 2015 legislative session opened in Carson City last bring up the questionable, petty tactics of some members of
February, the rooftop solar industry was focused on lifting the rooftop solar industry, which included misleading online
the 3 percent cap. Bufett’s utility was set against it. “We had postings about the governor’s authority on the issue.”
numerous conversations with the NV Energy lobbyists, and they The debate dragged into May. SolarCity and the other
were swarming all over the building constantly,” List recalls. installers needed a resolution. Only the state legislature could
“Nobody could seem to ind a middle ground.” lift the cap, and the session was scheduled to end on June 1.
On March 9, Ernaut sent a brieing document on net After that, lawmakers wouldn’t convene for a regular session
metering to two of Sandoval’s senior advisers, according to again until 2017. NV Energy, SolarCity, and other solar com-
panies agreed to legislation that
20% eliminated the cap. But it also
Power to the People—Only Not Too Much required the utilities commis-
Forty-four U.S. states allow some form of net metering—a policy that requires utilities to buy surplus sion to study net-metering rates
electricity from solar customers. More than half of those have a cap on installations. Such caps
are often measured as a percentage of peak electricity demand. As states approach their limits, and eliminate any unreasonable
policymakers have to consider whether to raise them. shifting of costs to other custom-
15% ers. It set a Dec. 31 deadline for
oicials to review and approve
new rates that the utility would
submit. “We literally had a gun
against our head to support it,”
10% Rive says.
Net-metering Nevada removed
cap its 3 percent cap NV Energy made its case to
in June. the utilities commission in late
July, kicking off a five-month
Installed solar
production process that culminated with the
5% December decision. Staf spent
hundreds of hours requesting
data and reviewing information.
There were four days of hearings.
Nowhere in all this, Rive says,
0% was there any hint of changing
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DATA IS AS OF AUG. 1, 2015. FREQUENCY OF NET METERING DATA REPORTING VARIES BY STATE. DATA: EQ RESEARCH gone solar.
 Ultimately, the commission decided that
Lyndon and
Peter Rive everyone who put panels on their roofs
should be treated the same. It also found
that small commercial and residential net-
metering customers were getting more
than $16 million in subsidies a year from
other people. To ix that, the commission-
ers agreed on New Year’s Eve to two rate
increases and one
decrease. A residen-
tial solar customer
in southern Nevada,
for instance, would
of the state. see her monthly
service charge gradu-
ally step up in annual
THIS increments from $12.75
. The
aid for
ectric-
IS NOT e pro-
would
e by
US
eriod.
ate on
. about 30 percent of its power from wind turbines.
hanges
uthern
at (the
lly named) 1234 Happy Dr. in Las Vegas, for instance,
end up paying $94.64 for her January bill vs. $84.66
the old rates. NV Energy’s sample bills also account
for only the irst year of changes the commission approved.
SolarCity’s pricing undercut NV Energy by just a little bit in
Nevada before the new rates, Rive says. So he knew immedi-
ately that he could no longer do business in the state.
A day after the ruling, Rive announced that SolarCity would
cease sales in Nevada. Later, he said the company would have
to dismiss 550 workers in the state. Sunrun and other solar
companies followed suit. SolarCity still employs more than a
thousand people in Las Vegas at its call center, but they mostly
serve other states.
Throughout the process, says Kevin Geraghty, NV Energy’s
vice president for energy supply, he’d been frustrated by
how the solar industry has tried “to inluence what is a tech-
nical, inancial analysis with emotion.” If you go solar, he
adds, “you have to pay your fair share” for the grid. He says
rooftop solar customers will continue to enjoy “substantial”
savings on their utility bills. A homeowner’s payback on a
rooftop system ultimately depends on the trajectory for NV
Energy’s rates, he says. Recently, the utility has managed to
cut them several times.
Geraghty blames SolarCity for confusing customers. “That’s
what they did in Nevada,” he says. “They’ve done it every-
where they’ve been.” The commission came out with a ruling
that the solar companies didn’t like because “they didn’t chal-
lenge the facts and igures,” Geraghty says. “They rolled out
the same tired, generic, rooftop solar arguments. And in the
face of facts and information, they failed.”
“NVE is wrong—their data was lawed, and everyone except
DAVID PAUL MORRIS/BLOOMBERG
the commission recognized this,” Rive ires back.
The power struggle in Nevada is hardly unique. Solar is
booming in the U.S., in part because of a stunning drop in
the price of panels. Adjusting for inlation, it cost $96 per watt
for a solar module in the mid-1970s. Process improvements
and a huge boost in production have brought that igure down
99 percent, to 68¢ per watt today, according to data from
Bloomberg New Energy Finance. Leasing from companies
such as SolarCity has only sped up adoption. And a multi-
year extension of the 30 percent federal solar tax credit in
December has also helped.
In just a decade, solar has gone from an enviro’s dream
to a serious lobby that will be ighting these kinds of battles
nationwide for years. More than half of U.S. states were
studying or changing their net-metering policies in the third
quarter of 2015, according to the North Carolina Clean Energy
Technology Center. Just about everywhere solar companies
go, the industry has stirred up popular support, often with
help from celebrities. On Jan. 24 a pro-solar group arranged
for musicians Michael Franti, Bob Weir, and Sammy Hagar to
play a free, acoustic concert in San Francisco.
Power companies may not be winning any popularity con-
tests, but they’re developing their own renewable energy to
keep up with changing attitudes and to meet state mandates.
In North Carolina, Duke Energy is spending $900 million on
solar. Bufett’s company had committed $15 billion across all
its operations through 2014 to all types of renewable energy.
Last year it pledged to double that as part of an Obama
Administration climate pledge. Much of this money has gone
to its Iowa utility, MidAmerican Energy, which can generate
Bufett’s company has also bought renewable energy
through long-term contracts. Last year, NV Energy signed
up to purchase power from a giant First Solar installation
outside Las Vegas for $38.70 per megawatt-hour. Analysts said
at the time that it was one of the cheapest rates on record.
Commissioners cited projects like that for why it made no
sense to continue encouraging net metering in Nevada. If the 43
goal is to put more solar on the grid, it’d be far cheaper for
NV Energy to procure it.
This, of course, is of little consolation for the Nevadans
who’ve already blanketed their roofs with solar panels. The
public outcry seems to have registered with NV Energy. On
Jan. 25 it said it would ask the commission to allow existing
net-metering customers to stick with the old system for two
decades in some instances. “A fair, stable, and predictable
cost environment is important to all our customers,” Paul
Caudill, the utility’s president, said in a statement. The com-
mission will soon rehear that portion of the case.
Even if the utility’s proposal is accepted, it may not go
far enough for the solar industry. The December decision
could be challenged in court—or taken straight to voters.
SolarCity and other groups are trying to get the issue on the
November ballot.
Caught in limbo are people such as Dale Collier. The day
after the commission hearing, he showed of a 56-panel system
on his home in the Las Vegas suburb of Henderson. It cost
him about $48,000 to install in 2011. SolarCity hadn’t yet set
up shop in Nevada, so he paid for it by reinancing his house.
The system took his NV Energy bill down to about $80 a month
from the $330 it used to average, he says. One year, he got a
$1,355 check from NV Energy because his solar power was
helping the utility meet its renewable energy requirements.
“It was the smartest thing I’d ever done,” he says. “Now, it’s
the stupidest thing I’ve ever done.”
Collier had planned to retire from his job lying small cargo
planes. But he doesn’t want to stop working until he has a
better handle on his monthly bills from Bufett’s utility. “If it
goes totally haywire, I’m going to look at batteries,” he says.
“I’d love to just go of the grid totally, and tell them to f--- of.” 
—With Mark Chediak and Chris Martin
44
45
 he most drastic change WhatsApp, the Oculus Rift
THE
to Facebook in years was virtual-reality headset, a
born a year ago during planned fleet of 737-size,
OBVIOUS
an of-site at the Four Seasons Silicon carbon-fiber, Internet-
Valley, a 10-minute drive from headquar- beaming drones—Cox runs ALTER-
ters. Chris Cox, the social network’s chief “the big blue app.” That’s
product oicer, led the discussion, asking Facebook’s term for the NATIVE, A
each of the six executives around the con- social network that we all
ference room to list the top three proj- compulsively check a few DISLIKE
ects they were most eager to tackle in dozen times a day. He’s also
2015. When it was Cox’s turn, he dropped the keeper of the compa- BUTTON,
a bomb: They needed to do something ny’s cultural lame, the guy
about the “like” button. who gives a rousing welcome HAD BEEN
The like button is the engine of speech to new recruits every
Facebook and its most recognized symbol. Monday morning at 9 a.m. REJECTED
A giant version of it adorns the entrance It’s a safe bet that all 12,000
to the company’s campus in Menlo Park, Facebook employees know ON THE
Calif. Facebook’s 1.6 billion users click on it more than 6 billion his name.
times a day—more frequently than people conduct searches He’s probably the closest GROUNDS
on Google—which afects billions of advertising dollars each thing Internet users have
quarter. Brands, publishers, and individuals constantly, and to an editor-in-chief of THAT IT
strategically, share the things they think will get the most likes. their digital life. Cox’s team
It’s the driver of social activity. A married couple posts perfectly manages the News Feed, that WOULD
posed selies, proving they’re in love; a news organization ofers endless scroll of Facebook
up what’s fun and entertaining, hoping the likes will spread its updates. Invisible formulas
content. All those likes tell Facebook what’s popular and should govern what stories users
SOW TOO
be shown most often on the News Feed. But the button is also see as they scroll, weighing
a blunt, clumsy tool. Someone announces her divorce on the baby pictures against polit-
MUCH
site, and friends grit their teeth and “like” it. There’s a dev- ical outrage. “Chris is the
astating earthquake in Nepal, and invariably a few overeager voice for the user,” says Bret
NEGATIVITY
clickers give it the ol’ thumbs-up. Taylor, Facebook’s former chief technology oicer. “He’s the
46 Changing the button is like Coca-Cola messing with its secret guy in the room with Zuckerberg explaining how people might
recipe. Cox had tried to battle the like button a few times before, react to a change.”
but no idea was good enough to qualify for public testing. Cox’s ascension has been gradual and, for the past
“This was a feature that was right in the heart of the way New few years, clearly visible to Facebook watchers. Many
you use Facebook, so it needed to be executed really well animated irst met him during the 2012 initial public ofering
in order to not detract and clutter up the experience,” he buttons roadshow, when the company distributed a video
says. “All of the other attempts had failed.” The obvious of executives talking about its mission. Along with
alternative, a “dislike” button, had been rejected on the Chairman and Chief Executive Oicer Zuckerberg
grounds that it would sow too much negativity. and Chief Operating Oicer Sheryl Sandberg, the
Cox told the Four Seasons gathering that the time ilm included Cox, who gazed earnestly into the
was inally right for a change, now that Facebook had camera at close range while employing some seri-
successfully transitioned a majority of its business to ously overheated rhetoric: “We are now changing
smartphones. His top deputy, Adam Mosseri, took a deep within a generation the fabric of how humanity com-
breath. “Yes, I’m with you,” he said solemnly. municates with itself.”
Later that week, Cox brought up the project He’s frequently seen at Zuckerberg’s side. Here
with his boss and longtime friend. Mark are Zuckerberg and Cox running a three-legged race for a
Zuckerberg’s response showed just how much company game day, with Cox wearing a banana suit; embrac-
leeway Cox has to take risks with Facebook’s ing after Facebook started trading on the Nasdaq (Zuckerberg
most important service. “He said something like, hugged Sandberg irst and Cox second); riding a loat together
‘Yes, do it.’ He was fully supportive,” Cox says. during San Francisco’s gay pride parade.
“Good luck,” he remembers Zuckerberg telling Zuckerberg says Cox is one of his closest
him. “That’s a hard one.” friends and “one of the people who makes
The solution would eventually be named Reactions. It Facebook a really special place.” He mentions
will arrive soon. And it will expand the range of Facebook- Cox’s IQ and EQ—emotional intelligence—and how
compatible human emotions from one to six. “it’s really rare to ind people who are very good
at both.” He’s also cool in a way that Zuckerberg,
Cox isn’t a founder, doesn’t serve on the boards of other in particular, isn’t. Cox, who moonlights as a key-
companies, and hasn’t written any best-selling books. board player in a reggae band, dresses fashion-
He’s not a billionaire, just a centi-millionaire. He joined ably, usually leaving a button open on the top of his
Facebook in 2005, too late to be depicted in The Social neatly tailored work shirts. He’s also irk-
Network, David Fincher’s movie about the company’s somely handsome and displays the casual
Like
early days. While Zuckerberg manages an expanding cheer of someone who knows it.
portfolio of side businesses and projects—Instagram, Look a little deeper, though, and Cox’s

record isn’t quite as
tidy. He’s been in charge of some
of Facebook’s biggest duds: a nicely
designed news-reading app for smart-
phones called Paper, which no one
used, and a major revamp of the News Feed
that was scrapped because it didn’t work well on
small screens. If you look at the things poised to
deliver big growth opportunities at Facebook—
Instagram and WhatsApp being the biggest—
they’re mostly acquisitions, not reinventions
Sad of the big blue app.
In Silicon Valley fashion, Cox prefers
to recast past mistakes as healthy experiments and valu-
able learning experiences. “I think any good company is
trying things, is forcing itself to try things, and you need
to be able to put things out there and try and learn,” he
says. “People only get in trouble if they’re not honest
about failure.”
Cox irst heard of job opportunities at Facebook
while pursuing a master’s degree in computer-
human interaction at Stanford. A roommate
already worked there and badgered Cox to inter-
view, primarily because there was a $5,000 recruit-
ing bonus. Cox was skeptical. Wasn’t Facebook just
a gloriied dating site?
The headquarters back then were on University
Avenue, Palo Alto’s main drag. When he got there, co-
founder Dustin Moskovitz described Facebook as a
crowdsourced directory of everyone. He drew circles
on a whiteboard, then lines connecting them to repre-
sent “friending” on the site. By looking at each other’s
proiles, friends could bypass the irst awkward ive
minutes of every conversation—those rote questions
like “where are you from?”—and move on to deeper
connections. Cox was riveted.
He dropped out of Stanford (naturally) and joined
the company when it had about 30 employees. His
irst job was developing the News Feed, the feature
that made Facebook a global addiction. At the time,
though, he and Zuckerberg badly misjudged user reac- Love
PREVIOUS PAGE: PHOTOGRAPH ILLUSTRATION BY 731; THIS PAGE: ILLUSTRATIONS BY 731
website Quora. “And he did so without becoming a cynical,
uncaring shell of a man.”
Cox says the HR job gave him a way of looking at things
through other people’s eyes. It also led him to ponder Facebook’s
mission in the world, which is when he started reading the
works of communications theorist Marshall McLuhan. Each
wave of media technology, McLuhan wrote, is initially greeted
with anger and mistrust.
That was comforting to Cox, because it explained some of
the hostility that Facebook was encountering. “We were in
this period back then where people really didn’t understand
Facebook and didn’t believe it could become anything,” he
says. “McLuhan helped tell that story in a broader context.”
Cox returned to engineering in 2008, but he’s still the compa-
ny’s cultural ambassador. He weaves McLuhan’s lesson into his
Monday morning speeches to the new recruits. The talks usually
start with a question: “What is Facebook?” He lets the
room hang in silence until someone is brave enough
to say, “It’s a social network.” Wrong. Facebook is a
medium, Cox says, referring to McLuhan’s famous
dictum, “The medium is the message.” In other words,
how Facebook presents content and the way in which
it allows users to read, watch, comment on, and like
that content inluences how all 1.6 billion members
see the world around them.
Cox spends most of his days in the new Frank Gehry-
designed Building 20 on the Menlo Park campus. The
structure is a huge, 430,000-square-foot rectangle. A
grassy park is on the roof, with a hot dog stand on one
side and a smoothie shop on the other. Inside
the cavernous space, full of rustic art and chalk- 47
board walls, Facebook employees tie silver bal-
loons to their movable standing desks to mark
their “Faceversary,” celebrating how long they’ve
worked there. Cox had his 10th Faceversary last fall.
On a Wednesday in November, he enters a con-
ference room for the second of ive
meetings and confesses that he’s
breaking the rules: Executives are dis-
couraged from scheduling meetings on
Wednesdays, which is supposed to be a
day engineers and designers can work
without interruption. Nevertheless, Cox
and his team need to talk about tai-
loring the Facebook smartphone app
for India. On a screen at the front of

tion: People hated it. They felt as if their private inter- the room, there’s a bar chart of Indian
actions were suddenly being exposed. “It wasn’t our best users on Android phones, broken down by the
product rollout,” Cox concedes. He learned that people tend to estimated speed of the cellular network they
be suspicious of well-capitalized Silicon Valley startups preach- use most often—2G, 3G, and so forth.
ing lofty values such as “openness” and “sharing.” “Can you just hang on that stat for a sec?”
In late 2007, after Facebook hired its 100th employee, Cox asks, peering at the chart with his elbows
Zuckerberg decided he needed to put someone he trusted in on his knees. “4G is a whopping 0.2 percent.”
charge of personnel. This became Cox’s strangest career move: “It’s just one guy hanging out there,” says
Zuckerberg asked him to become the company’s irst human a product manager, Chris Struhar.
resources chief. Zuckerberg now says he thought it was “an The team can’t aford to wait for India to
opportunity to take a diferent approach than other companies speed up its mobile networks—frustrated users
and to bring a technical spirit to deining all these diferent will simply stop using Facebook. (Or worse.
aspects” of the company’s culture. The company recently faced street
Cox scheduled one-on-one meetings with every employee and protests in the country for its plan to
became a sort of in-house therapist. “He had to endure the slings ofer Free Basics, a stripped-down,
and arrows of people’s complaints from all over the company,” free Internet service that includes Wow
Yishan Wong, an early employee, wrote on the community Facebook and not much else.) Struhar
 proposes to use less data in the app, in part
by recycling older stories that don’t have
to be freshly downloaded. Cox agrees. “My
intuition, which we could prove wrong,
is people just want more stuf,” he says.
He imagines himself as the user, looking
for any hit of digital nicotine that will stave
of boredom at, say, a bus stop. “That’s dei-
nitely what I want. I just want more stories.”
Cox then reviews a couple of other ideas, like
a spinning icon on photos that will let users
know the app is loading, potentially decreas-
ing what the company calls “rage quits.”
Near the end of the meeting, he wonders aloud
how to get other Facebook employees to start think-
ing about the particular challenge of building
features that will work on yesterday’s mobile net-
works, still in use around the world. Someone pro-
poses switching everyone at the company to a 2G
connection once a week. Cox loves the idea. “This
is our tool for empathy,” he says. “Happy Wednesday,
you’re in Delhi!” Two weeks later, the company imple-
ments 2G Tuesdays.
“Empathy” is a word Cox throws around a lot, and
which his colleagues often use about him. Facebook
blundered in the past when it didn’t take the time
to talk to and understand its users. In the old days,
product teams tested features in New Zealand, which has
the advantage of having an isolated, English-speaking
population but is hardly an accurate representation of
the world. Under Cox, Facebook’s product team is tackling haven’t seen in years. Alternatives to
48 more sensitive subjects, such as designing a way for accounts like will let Facebook users be a little
to become memorials after someone’s death, or helping users more thoughtful, or at least seem to be,
navigate the aftermath of a breakup by selectively blocking without having to try very hard.
pictures of the ex. His goal, which he admits Facebook hasn’t
reached, is to make the News Feed so personalized
that the top 10 stories a user sees are the same they’d
pick if they saw every possibility and ranked it them-
selves. A side efect of making things easier for users:
happy advertisers. Under Cox, Facebook found a way
to make advertising work on its smartphone app,
and came up with video ads that play automatically.
Since Cox was elevated to chief product oicer
in 2014, his team has consulted with an outside
panel of about 1,000 Facebook users who rate
every story in their feed and ofer feedback. There
are also a handful of product test stations scat-
tered around Facebook’s oices that look a little
like interrogation rooms—tiny spaces with brightly
lit desks. A camera is attached to a test subject’s
smartphone to ilm their actions while Facebook
employees watch through a one-way mirror.
Sessions can go on for hours. Sometimes they’re
live-streamed to a larger audience of employees.
Cox applied this testing regimen to the revamp-
ing of the like button. He wasn’t part of the team
that originally developed the button from 2007 to
2009, but colleagues have war stories about how
hard they had to work to get Zuckerberg on board. According
to longtime executive Andrew Bosworth, there were so
many questions about the button—should likes be public
or private? would they decrease the number of comments
on stories?—many thought the feature was doomed. Even
its champions had no idea of the impact it would have on
the company’s fortunes. It was simply
SUPERFICIAL. IF USERS CLICK LIKE ON A POST ABOUT THE
meant to make interactions easier—just
click like on someone’s post about their
new job, instead of being the 15th person
to say congratulations.
Eventually the button became a
THEY FEEL AS IF THEY’VE DONE SOMETHING TO HELP
crucial part of how Facebook’s tech-
IT’S A WAY OF CREATING A CONNECTION, EVEN IF IT’S
nology decides what to show users. If
you like beauty tips a friend shares from
some Kardashian or other, the software
calculates that you should also see ads
and articles from People magazine and
Sephora. “The value it has gener-
ated for Facebook is priceless,” says
Brian Blau, an analyst at Gartner.
It’s a way of creating a connec-
tion, even if it’s supericial. If users
click like on a post about the Red
Cross’s disaster relief eforts, they
RED CROSS’S DISASTER RELIEF EFFORTS,
feel as if they’ve done some-
thing to help. (In January,
Sandberg went so far as to
suggest that likes could help
defeat Islamic State: By posting
positive messages on the terror
group’s Facebook pages, users
could somehow drown out the
Yay ed hate.) Liking someone’s photo
t
Rejec is an awkwardness-free way
to make contact with someone you
Facebook researchers started the
project by compiling the most fre-
quent responses people had to
posts: “haha,” “LOL,” and “omg
so funny” all went in the laugh-
ter category, for instance. Emojis
with eyes that transformed into
hearts, GIF animations with
hearts beating out of chests, and
“luv u” went in the love category.
Then they boiled those categories
into six common responses, which
Facebook calls Reactions: angry, sad,
wow, haha, yay, and love.
The team consulted with outside
sociologists about the range of
human emotion, just to be safe.
Cox knows from experience that
he doesn’t have all the answers:
When the company redesigned
the News Feed in 2013, it looked
great on the iMacs in Facebook’s
headquarters but made
the product harder to use
everywhere else. “There
are a million potholes to
trip over,” Cox said.
Facebook Reactions
won’t get rid of like—it will
be an extension. Within
Angry
 the company, there was some debate on how to
add the options without making every post look
crowded with things to click. The simpler Facebook
is to use, the more people will use it. Zuckerberg
had a solution: Just display the usual thumbs-up
button under each post, but if someone on her
smartphone presses down on it a little longer,
the other options will reveal themselves. Cox’s
team went with that and added animation to clarify
their meaning, making the yellow emojis bounce
and change expression. The angry one turns red,
looking downward in rage, for example. Once
people click their responses, the posts in News
Feed show a tally of how many wows, hahas, and
loves each generated.
This update may seem trivial. All it’s doing is increas-
ing the number of clickable responses. People already
comment on posts with emojis or, in some cases, actual
words. But the feature will probably make Facebook
even more addictive. And it will certainly give Cox’s
team a lot more information to throw into the News
Feed algorithm, thereby making the content more rel-
evant to users—and, of course, to advertisers.
In October the team got close enough to a inal
design that Zuckerberg felt comfortable mentioning
the project in a public interview, giving no details
except that there wouldn’t be a dislike button. Cox
worried it was too soon to talk about the emotions
Facebook picked. (Yay was ultimately rejected because
“it was not universally understood,” says a Facebook
spokesperson.) Cox says he spent the next morning
ILLUSTRATIONS BY 731
Team Cox: Julie Zhou, Adam Mosseri, Cox, Fidji Simo, and Will Cathcart
parsing through responses to the announcement,
reading what users thought the social network needed
and preparing to start over if necessary.
A few weeks later, the team began testing Reactions in
Spain and Ireland, then Chile, the Philippines, Portugal,
and Colombia. In early January, Cox lew to Tokyo to sell
Reactions to Japan. “You can love something, you can be
sad about something, you can laugh out loud at something,”
he said to a crowd of reporters at Facebook’s oices in the
Roppongi district. “We know on phones people don’t like
to use keyboards, and we also know that the like button
does not always let you say what you want.”
He explained Facebook’s goal: a universal vocabulary
that lets people express emotion as they scroll through
their feed. In a sense, Reactions is an adaptation of
digital culture in Asia, where messaging apps such as
Line and WeChat have already established a complex
language of emojis and even more elaborate “stickers.”
Cox says Reactions’ biggest test so far was during the
November terrorist attacks in Paris. Users in the test
countries had options other than like, and used them.
“It just felt diferent to use Facebook that day,” he says.
Facebook won’t give a specific date for when
Reactions will be introduced in the U.S. and around
the world, just that it’ll be “in the next few weeks.”
Cox says the data he has looks good and that users
will take to Reactions, though he takes pains not
to sound in any way triumphant. “We roll things
Haha out very carefully,” he says. “And that comes from
a lot of lessons learned.”  —With Brad Stone and
Hiroyuki Nakagawa
49
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At Sprint headquarters in Overland Park, Kan.
 M
arcelo Claure is a 6-foot-6-inch
Bolivian who came to the U.S.
20 years ago and co-founded
a company that sold mobile phones.
Brightstar was based in Miami, where
he partied with Jennifer Lopez and
tried to establish a professional soccer
franchise with David Beckham. As
Brightstar expanded around the world,
Claure befriended a top executive at
SoftBank, the giant Japanese telecom
and Internet company.
The executive thought Claure
should get to know SoftBank’s
founder and chief executive
officer, Masayoshi Son. Like
Claure, Son is an entrepreneur.
He built a purveyor of PC soft-
n al
ware into a $75 billion empire
that invested early in Yahoo!
and Alibaba. A meeting was
arranged. Upon arriving in
Tokyo one day in late 2012,
Claure was told that Son
was quite busy, so the
meeting would be short.
“I thought, ‘My God, I
lew all the way from
Miami for a 15-minute
meeting?’ ” he recalls.
Claure, now 45, sat
down with Son, who’s 13 years
older and a
foot shorter.
The morning
session stretched into the afternoon
as Son grilled Claure about resell-
ing iPhones, a business that didn’t
then exist in Japan. Son asked how
long it would take Claure to start
reselling trade-ins for
SoftBank. Maybe a
few months, Claure
said. “How about
two weeks?” Son
asked. They signed a
contract that day.
Claure returned to
Tokyo monthly to brief Son, and
they grew close. Son liked Claure’s
grit, calling him a “street ighter.”
Claure appreciated Son’s decisive
nature. “I’ve heard a lot of Japanese
executives say, ‘The way you think is
very similar to the way Masa thinks,’ ”
Claure says, using Son’s nickname.
In 2013, SoftBank took control of
Sprint in a $21.6 billion acquisition.
Sprint was already in trouble, but Son
announced his intention to merge the
company with T-Mobile to challenge
Verizon and AT&T. One of the irst things
he did was put Claure on Sprint’s board.
When the plan to merge with T-Mobile
ran into regulatory objections and
failed, Son bought Claure’s company
and named his protégé Sprint’s CEO.
In the 17 months since, Claure (pro-
nounced CLAW-ray) and Son have had
hundreds of phone chats, exchanged
thousands of texts and e-mails, and sat
through dozens of midnight meetings.
They’ve slashed prices—Sprint ofered
iPhones for $1 a month last year—and
replaced much of the old executive team.
In late January, people familiar with the
situation said the company would elimi-
nate 2,500 jobs, bringing total cuts under
SoftBank to more than 4,000.
It hasn’t helped much. The stocks
of SoftBank and Sprint plummeted
to multi year lows in mid-January,
though both recovered some with
Sprint’s report of third-quarter sub-
scriber gains and lower-than-expected
losses. SoftBank has plowed more than
$22 billion into Sprint, and yet all of
Sprint is now valued at $11.8 billion.
Sprint’s $2.2 billion in cash is about the
same as its 2016 debt obligations.
A decade ago, Sprint had a $69 billion
market value and a chance to dominate
the U.S. wireless business. It’s now No. 4
in essentially a four-player business. It
hasn’t posted an annual proit since 2006.
“You’ve watched a once-great insti-
tution deteriorate to the point that it
is now a badly, badly compromised
asset,” says Craig Mofett, an analyst at
MofettNathanson. “They’ve been living
from hand to mouth for years, con-
stantly making short-term decisions in
order to live to ight another day.”
Amid the turmoil, Claure and Son are
presiding over the monstrously diicult
chore of upgrading—yet again—Sprint’s
U.S. wireless network. Within two
years, they vow, the system will handle
the growing demand for data-intensive
content—people watching movies and
playing video games on smartphones and
tablets—better than any other.
The wireless industry is a $355 billion
zero-sum game. With just about anybody
who wants a phone already owning
one, carriers can grow only by luring
subscribers from rivals with cut-rate
service plans and ever-speedier down-
loads. AT&T, Verizon, and T-Mobile are
all spending billions to supercharge their
networks and color in the blank spots
on their coverage maps.
Sprint’s distinguishing asset is a
peculiar band of spectrum—those radio
waves that carry calls, texts, e-mail,
and video. Competitors have shunned
Sprint’s 2.5 gigahertz spectrum as costly
and impractical. Son and Claure say
it’s the key to what will be the greatest
business turnaround ever—if Sprint can
last that long.
Sprint is a descendant of Brown
Telephone, founded in 1899 by Cleyson
Brown. A mostly forgotten industrialist,
he had stakes in lumber, oil, sheet metal,
and other businesses including hotels
and the Piggly Wiggly chain of grocery
stores. He thought he’d be a farmer
but, after losing an arm in a grist mill,
turned to white-collar work, building a
conglomerate in Abilene, Kan.
A century later, Sprint, in Overland
Park, Kan., emerged from the free-for-
all ignited by telecom deregulation as a
prime contender in the exploding U.S.
wireless market. In 2005 the company
paid $35 billion for Nextel, known for
push-to-talk devices favored by truck
fleets and construction firms. Their
networks were based on incompatible
technologies. That meant Sprint had
to support separate networks and sell
diferent types of phones that worked
with each.
After Dan Hesse took over as CEO in
late 2007, he shut down Nextel’s network
and used what he could of its remains
to rebuild Sprint’s. Disruptions during
construction resulted in blocked and 51
dropped calls. Millions of customers
led. By 2012, Sprint had piled up losses
of $37 billion related to the Nextel deal.
Son
Son came to the rescue. The SoftBank
founder had built a fortune on invest-
ments in Yahoo! and other Internet busi-
nesses in the 1990s, lost most of it in
the dot-com bust, then rebuilt it with
early stakes in Alibaba and other com-
panies. He bought Vodafone’s troubled
Tokyo-based subsidiary and remade it
into a feisty rival to NTT DoCoMo, the
biggest carrier in Japan. The Bloomberg
Billionaires index estimates Son’s net
worth at $8.4 billion.
Son has capacious ideas about what
technology can accomplish. He’s laid
out a 30-year plan for SoftBank; the
company’s website says technol-
ogy should be used “to reduce
 loneliness and ease the sadness of
people as much as possible.”
In October 2012, two months before
Son irst met Claure, SoftBank said it
would buy a controlling stake in Sprint.
After the deal closed, Son started pur-
suing a merger with T-Mobile—the
self-described “uncarrier” with the
pink-shirted, smack-talking CEO, John
Legere—which was competing with
AT&T and Verizon by cutting prices and
eliminating service contracts.
Federal antitrust and telecom regu-
lators publicly said they’d oppose the
T-Mobile deal. Son and his lobbyists
stormed through Washington, arguing
the merger inally would ofer Americans
wireless service as good as that in Japan.
When it became clear the proposal was
dead, Claure says, “it was a blow to
Masa. He considered selling Sprint.” But
buyers were scarce. In August 2014, Son
replaced Hesse with Claure.
Claure was born in Guatemala but grew
up in Bolivia. He says one of his irst
businesses was stealing dresses from
his mother’s closet and selling them on
the street. He didn’t tell Mom, and she
didn’t notice the missing apparel. “I stra-
tegically chose noncore assets,” he says.
52 His parents sent him to the U.S. for
college. He earned a bachelor’s degree
in economics and inance at Bentley
University in Waltham, Mass. One day
after graduation, he visited a cell phone
retailer to buy a phone. He got to talking
with the store owner and wound up
buying a stake in the business. He assem-
bled a sales force that hawked phones
from car trunks across the Northeast.
Claure sold his stake and in 1997
co-founded Brightstar, which helped
phone makers, wireless carriers, and
retailers buy and sell phones. By 2013
in g Out of Juice
the company had annual revenue
of $10 billion and operated in unn
more than 50 countries, includ- R Total
average
monthly subscriber
ing Japan. That year, SoftBank bought
57 percent of Brightstar for $1.3 billion;
it acquired the rest before Claure took
over at Sprint.
Claure moved his family from Miami
to suburban Kansas City. His irst oice
sat in the middle of Sprint’s 240-acre
campus, with its stately brick-and-stone
buildings that rise from grassy quads.
“You walked into this mahogany castle,”
he says. “I used to joke that my oice
was almost bigger than my house.”
Sprint’s workforce was beaten down.
“They were great people with the
right intentions, but they forgot what
winning was all about,” Claure says.
“They stopped going to sales meetings
because they were losing 10,000 custom-
ers a day.” He immediately cut prices,
marking the occasion with a beer-and-
barbecue party where he told employ-
ees, as so many new CEOs do, that
Sprint was “going to do things difer-
ent” and “get back in the game.”
From Tokyo, Son ran hourslong daily
meetings with network engineers while
Claure focused on costs, pricing, and
inancing. Some executives chafed at
taking orders from what they saw as
a two-man executive committee. Son
didn’t help by openly dismissing ideas
as “stupid,” say several former exec-
utives. He also expressed frustration
with network construction slowing for
zoning approvals. Son declined to be
interviewed for this story.
“People have a hard time accepting
that Masa is blunt, and sometimes he
hurts people’s feelings,” Claure says.
Claure has told underlings he wanted
to do things “the SoftBank way.” He
explains: “If something is not right in
our company, just ix it immediately,
and there’s no need to analyze and make
100 presentations.”
Over the next several months, he
rolled out a “cut your bill in half ” cam-
paign to entice customers from AT&T
and Verizon. Sprint started renting,
rather than selling, phones, making it
easier for customers to switch to new
models, potentially locking in more
long-term subscribers. And he probed
for ways to cut costs, even down to
getting rid of some of the wastebaskets
at headquarters.
The mahogany castle now stands
empty. Claure works in another build-
ing on a loor of low-slung cubicles and
g revenue er
$65
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12/2009 12/2015
conference rooms named for U.S. cities.
His desk faces a huge wall screen dis-
playing Sprint’s customer gains and
losses, updated every two hours.
The numbers in black (good) and red
(bad) are vetted each day at a meeting
attended by all top executives and run
by Claure. “If you aren’t hitting your
marks, you’re expected to come in with
a plan to ix it,” says Kevin Crull, pres-
ident of Sprint’s 15-state central area.
“There’s patience for your plan as long
as it’s measured in hours and days, not
weeks and months.”
Sprint has stabilized its subscriber
base. In the quarter ended on Dec. 31,
churn—a monthly measure of custom-
ers canceling service—was 1.6 percent,
down from 2.3 percent a year ago. Sprint
gained 501,000 monthly phone and tablet
customers in the quarter, the highest
number of net additions in four years.
But, as Claure says, “Price will only get
you so far. You can’t do a turnaround
without a great product”—the network.
Shortly after arriving, Claure began
daily meetings about Sprint’s worst-
performing cell sites—what the network
team called the Top 10 S--- List. With
about 20 executives around a table
or dialing in, Claure brought up each
site responsible for large numbers of
dropped calls and asked how it would
be ixed within 24 hours.
If a site was still on the list the next
day, Claure would ask again: Should an
antenna be tilted up or down or side-
ways, so it points toward more custom-
ers? Does Sprint need to add antennas, or
use antennas with more bandwidth? “It
was painful,” says John Saw, Sprint’s chief
technology oicer. “But it was good
for getting the network ixed.”
Total monthly subscribers
110m
zon
Veri
80m
AT&T
50m
Sprint
T-Mobile 20m
12/2009 12/2015
DATA: COMPILED BY BLOOMBERG
 Sprint’s network geeks are now
consumed with the deployment of radio
frequencies seldom used before in the
U.S. “The 2.5 gigahertz spectrum is the
crown jewel of Sprint,” says Saw, who
also spends a good deal of time on the
phone with Son.
Wireless providers transmit signals
via three broad categories of frequen-
cies: low-band, such as the 700 mega-
hertz favored by Verizon; midband
spectrum, such as the AWS-3 variety
that garnered $45 billion in a federal
auction last year; and high-band spec-
trum, such as Sprint’s 2.5GHz.
To understand the diferences,
e e
th h th
picture the U.S. wireless system
as a honeycomb of interlock-
ing hexagons. Within each
hexagon stands a cell tower.
“By
The bigger the hexagon,
the farther the tower
ork w
can transmit signals,
which is optimal for
voice calls and build-
ing an attractive national
coverage map. Those large hexagons
w
rely on low- and midband spectrum.
High-band spectrum has smaller
t
hexagons—it doesn’t cover as much ter-
e
ritory. But those high-band airwaves
create fat pipelines that facilitate the
speedier low of enormous amounts
of data, the stuf of movies, TV shows,
and games. Sprint controls more 2.5GHz
spectrum than any carrier.
Son used the same sort of airwaves to
build a robust network in Japan. Other
carriers don’t have much, if any, 2.5GHz
spectrum, partly because it presents
costly challenges. Its shorter reach can
require more cell sites at added cost.
PHOTOGRAPHS BY JULIAN BERMAN FOR BLOOMBERG BUSINESSWEEK (2); SON: TOMOHIRO OHSUMI/BLOOMBERG
It doesn’t penetrate walls and ceilings
well. It’s akin to Wi-Fi, which operates
at 2.4GHz and works less efectively as a
user moves farther from the signal source.
To address these issues, Sprint
engineers have been going city to
city, building to building, to “densify”
the 2.5GHz network. The company is
putting tens of thousands of transmit-
ters about the size of a pizza box on
rooftops and utility poles and inside
buildings to ferry signals along. For
many installations, it must negotiate
leases one by one with municipalities
and property owners.
The buildout amounts to a huge
bet that Sprint will emerge as the pre-
ferred provider for customers who
gorge on data in 4G and forthcoming
5G systems—think urban millennials.
Ericsson predicts mobile-data usage will
grow more than tenfold by 2021, with
Claure
nd
of
20
it e to attract and keep subscribers.
17, we w
m
acity
ost am
”
f cap
ount o
ill h a n
ave
video streaming accounting for almost
70 percent of traic. Claure says con-
sumers will gravitate to networks with
greater data capacity ofering the fastest
downloads. “By the end of 2017,” he says,
“we will have a network with the most
amount of capacity.”
A June study by independent
research company RootMetrics said
Sprint’s network has improved in several
markets in reliability, speed, and other
measures. There are plenty of skep-
tics. Tim Farrar, an analyst at research
irm TMF Associates, says Sprint is still
playing catch-up with today’s most
advanced 4G networks, and its densii-
cation plan could cost too much. Some
worry the rebuild will repeat past mis-
takes, such as service disruptions that
alienate customers. Meantime, Verizon,
AT&T, and T-Mobile are seeking to fatten
their data pipelines. Unlike Sprint, they
don’t have to worry about where the
money’s coming from.
One afternoon in November, Claure
sits in a glass-walled conference room
in Overland Park, rocking in his chair as
30 deputies debate how to respond to
a T-Mobile promotional ofer of limited
free video. He turns to his marketing
chief, who joined Sprint in May, then
to a network expert who’s been with the
company three months, then to his chief
inancial oicer, another short-timer.
Looking impatient, he inally says, “We
will talk about this every day until we
igure it out.”
A week later, Sprint extends its half-
off-your-bill offer to customers who
switch from T-Mobile. Sprint stock falls
9.3 percent that day. By Dec. 31, shares
had dropped 15 percent for the year,
to $3.62.
The market reaction highlights the
diiculty of Sprint’s path. Until the
network is done, Sprint doesn’t
have much in addition to discounts
More than $7 billion in debt obli-
gations come due in the next
three years. SoftBank, which
owns 83 percent of Sprint, can’t
invest much more without trip-
ping a contractual mandate to
buy the entire company.
Sprint recently received a
$1.2 billion cash lifeline from a
new phone-leasing company owned
by SoftBank and some equity part-
ners. That will reduce Sprint’s annual
53
$10 billion-plus cash outlay for phones,
partly because the lease company
charges lower interest than the high-
yield debt Sprint typically uses. More
such deals are in the works, Claure says.
“If you remove the balance-sheet
concerns, the rest of the story is good,”
says Wells Fargo analyst Jennifer
Fritzsche. Mofett says Sprint could be
playing for time, hoping a new admin-
istration in Washington will look more
kindly on a T-Mobile merger. Claure says
he’s running Sprint to be a standalone
company, but “that doesn’t mean we’re
not open to doing deals.”
Even if Sprint survives the cash
crunch and completes the network,
it’s not clear when it will be able to
start raising prices and making proits.
It might have to ind a way to shed its
reputation as a cheap alternative per-
petually in turnaround.
Son recently bought a $5.5 million
house near the Kansas headquarters
so he can visit Sprint more easily. The
house, which has a pool, is next door
to where Claure lives with his wife and
ive children, without a pool. “I love
that Masa comes one day of the month,”
Claure says, “but I now have a pool
365 days a year.”  —With Pavel Alpeyev
 BUY YOUR TICKETS NOW ○ BUY YOUR TICKETS NOW ○ BUY YOUR TICKETS NOW ○ BUY YOUR TICKETS NOW ○ BUY Y

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M FOR INFO AND TICKETS

April 11, 2016
Yerba Buena Center
San Francisco

CO
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CHECK: BLOOMBERGBUSINESSWEE K D E S

Featuring: tr ld Ja a ria e
a i e m e M udic
e e w r f Co s Gi desk)
Janin s St utte (Fie
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H org
(Bio
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s)
(Co
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#BWD E SI GN2016
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Th He e n
He om n i l
e ind M len K
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(H
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 DESK-WORTHY
FRAMES THE NEW MATCHA THE 60-HOUR COCA-COLA
WORKWEEK CHIC

D NG

Etc. Technology
O
ne afternoon in December, Giphy’s two dozen
staf members gathered around a long picnic
table in their Lower East Side Manhattan
oice for a year-in-review meeting. The mul-
ticolored Christmas lights and six packs of
Shiner Bock in the spacious, ninth-loor room
made for a festive vibe—as did the 3D poster
of a cat dangling from a wine bottle. Alex
Chung, the 40-year-old co-founder and chief
executive oicer, stood next to
a whiteboard, scrawling numbers charting the
company’s growth. “We’re the biggest Internet
startup people are seeing right now,” he said. “We,
like, did it.”
Giphy—that’s a hard “G”—really, like, did do
it. It’s become the go-to library for GIFs, the
seconds-long, looping video clips that people
text when words are too hard to conjure or quick
shots of a shivering Leonardo DiCaprio in The Revenant just
better convey how cold you are; the startup
reached 95 million unique visitors per
month in 2015, quadruple what it did in
2014. And Giphy has become an adviser to
movie studios and TV producers who want
your texts to include their content, which
they are turning over to editors to splice
into a million little pieces. Advertisers and political campaigns
are asking for advice, too, on using the technology to sell prod-
56 ucts and candidates. Giphy closed the year with a deal that lets
users create Star Wars-themed GIFs, and it’s inalizing plans to
live-GIF the Oscars and the Super Bowl.
The company’s rise has helped make
the format a culturally relevant (some
might say vital) communication tool—a
mostly wordless way to emote via text,
Snapchat, Gchat, or e-mail. Search the
database, and you can express sadness
with a wistful Homer Simpson; an
“OH. HELL. NO!” with a wide-eyed Jennifer Lawrence; and if
you’ve completely lost your mind, there’s always the demonic
cat shooting laser beams out of its eyeballs at lying cucum-
bers. “It’s communication with a wink,” says Marc Simons,
co-founder of New York and Los Angeles advertising agency
Giant Spoon.
The ability to ind all of this in one place is partially the
result, of course, of alcohol. Over drinks in the winter of 2012,
Chung and a friend, Giphy co-founder Jace Cooke, 34, extolled
the power of GIFs in a postliterate society, when technology
“YOU NEVER GET TO DO
SOMETHING FIRST ON THE INTERNET.
EVERYTHING HAS BEEN DONE”
Selections from
Giphy’s top 20 most popular
GIFs of 2015
will advance so far that reading and
writing won’t be necessary. Chung
spent the next few days seeing if
there was a tool to create and share
the clips, but it didn’t exist. “That’s
when I got excited,” he says. “You
never get to do something irst on
the Internet. Everything has been done.”
At the time, Chung was taking a sabbatical. He’d founded
several startups, including a social
network called Fridge that Google
acquired, and had developed software
for MTV and hardware for Intel. After
years of jumping from gig to gig, he
needed some rest; that meant training
in Brazilian jiujitsu, in which he holds
a second-degree black belt. When he
wasn’t kicking ass, he was writing code,
creating software that could comb Tumblr, Imgur, and other
websites and organize the videos under searchable keywords
such as “cat” or “puppy.”
Once he had a working prototype, Chung sent a link to
a few friends—who sent it to a few
friends, who sent it to a few friends.
Within hours, Giphy had more than
30,000 page views, and tech sites
such as Gizmodo and Mashable
were writing about it. (All press
is good press: Gizmodo’s headline
was “The First GIF Search Engine Is
Hilariously Bad.”) “People were yelling at me because
the site was so slow, but it was just a silly hack,”
Chung says. “We thought it was something that was
going to make us Internet-famous for a day. But by
5 p.m., we had multiple ofers for investments.”
The ridiculousness of building a business on loops
of a Teenage Mutant Ninja Turtle inhaling pizza
wasn’t lost on Chung. But now he had a not-so-silly
$1 million from Betaworks, which had also invested in name
brands such as Kickstarter.
One of the irst people Chung called to join Giphy was Adam
Leibsohn, an Amherst College philosophy major and tennis
star. Leibsohn, 34, was working at an ad agency when he met
Chung through a mutual friend; now he’s Giphy’s chief operating
oicer. Over a Jameson and a Guinness, he echoes Chung’s orig-
inal brainstorm, attempting to explain the company’s mission
by invoking Ludwig Wittgenstein, the Austrian-British philos-
opher who died in 1951, well before GIFs were invented. (GIFs
PREVIOUS PAGE: FIRE: ALAMY
 Etc.

have been around since the ’80s and gained popularity more why the money’s pouring in. Big brands, such as Subway and
than a decade ago as a way to personalize a MySpace page. The the NBA, are seeking advice; Victoria’s Secret had Giphy reps
format fell out of favor along with the doomed social network, on hand to live-GIF its most recent runway show, getting back-
but breezy, image-driven sites such as BuzzFeed have given stage clips of Kendall Jenner taking a selie and lingerie-clad
them a second life.) Wittgenstein believed that written language models dancing; and HBO tapped Giphy to help with a Game
leaves too much open to interpretation. GIFs are more eicient, of Thrones contest. (Giphy has discussed becoming a studio for
Leibsohn says, because they ill in interpretive companies that want GIFs for product pitches.)
gaps. He leans back on his bar stool, like a gradu- Even staf members from Hillary Clinton’s cam-
ate student satisied with his explanation, and it paign stopped by the oice not long ago for point-
isn’t clear to what extent he’s joking. “I’m com- ers on what makes a compelling clip—soon after,
pletely serious!” he says. Hillary for America
Giphy creates clips in-house, but it also shared GIFs of the
relies on its algorithm to bring them into its candidate doing
database. Editors are con-
stantly combing through Leibsohn (left)
them, making sure there and Chung in the
Giphy oice
are no glitches or porn
and that the collection is
up to date. (Keeping sex
and nudity of the site is a
tough job, they say.) “There a blasé shoulder dust at a
isn’t a 1980s reboot series, Benghazi hearing.
or a new album that drops, Giphy hasn’t cor-
or a Kylie Jenner moment nered the GIF market. San
that happens that some- Francisco startup Riffsy,
body at Giphy doesn’t which simplifies adding
see,” Leibsohn says. Some GIFs to texts, has attracted
employees say they can’t millions of users. Giffage
go a few minutes without introduced a GIF “key- 57
watching video that makes board,” and even Google
them think, That would has taken stabs at building
make a great GIF. “My atten- a search tool. But Chung
tion span has been demol- isn’t worried. “You need
ished,” says Tyler Menzel, to be a part of pop culture,
Giphy’s editorial director, and when we look at San
who determines what goes Francisco, most of those
on the home page. startups just don’t get it,”
Right now he says. “That’s why fashion
the business doesn’t come out of San
is focused Francisco. Google has no
on grow th, sense of cool.”
not revenue. Giphy certainly strives
Leibsohn and to hone its
C h u n g s ay main point
they could of diferenti-
generate cash by allowing ation. Every
advertisers to target people July the staf
PHOTOGRAPH BY DAVID BRANDON GEETING FOR BLOOMBERG BUSINESSWEEK

based on what images goes to Los

they’re hunting for, the most common business model for Angeles for the month, renting a house with
Internet companies from Google to Snapchat to Twitter, but a pool for the team to live and work in—but
the two worry it would turn of ickle users. mostly live. Not shockingly,
“There’s a lot of ways for this isn’t Giphy’s most pro-
How do you pronounce “GIF”?
us to make a lot of money, The majority favors a hard “G”
ductive stretch. During the
but instead of spinning sound, as in “good,” but a vocal year-in-review meeting,
our wheels doing it, we’re minority, including the inven- Chung showed a growth
tor, insists the “G” is soft, as in Jif
trying to get really big,” peanut butter. The Oxford English
chart tracking back to 2013.
Leibsohn says. They’ve Dictionary says either is ine. He pointed to areas each year
got the runway to give it a where expansion latlined.
go: Giphy has raised $24 million, and another “This is July,” he said. Or to GIF-ify what he
sizable investment round is in progress. was getting at: Popsicle with sunglasses, Will Ferrell cannon-
You don’t have to be an Austrian-British philosopher to get ball, dancing backward-hat guy. 
 Etc. Survey

WHEEL OF FORTUNE
How many hours do you work each week? By Arianne Cohen

“Close to 60. I’ve always believed that “Forty to 70—it all “Every waking
a good lawyer is available and a great depends on meetings hour. I’m always
and how much I need to
lawyer is always available. Happily, prepare. I make time for
in touch, making

PHOTOGRAPH BY ANDREW B. MYERS FOR BLOOMBERG BUSINESSWEEK

I don’t need much sleep, and I still ind hikes, SoulCycling, and decisions or asking
time for a personal trainer, guitar lessons, personal travel, because questions. I look
and playtime with my grandson.” it’s all important.” at smartphones
Jan Becker as my liberation,
Angelo Genova
Senior partner, co-founder, and chairman,
Senior vice president for human
resources, Autodesk, New York
allowing me to
Genova Burns, Newark, N.J.
get away from my
desk and still
work efectively.”
“Around 70. I’m up “Like many single moms, I strive for the 40-hour week.
by 6 a.m. to exercise On Fridays, I work from home so I can drive my 10-year- Jimmy Haber
and arrive at the old daughter to school. I really treasure those drives.” Managing partner, ESquared
Hospitality, New York
restaurant around 11 a.m.
for meetings and tastings. Mary Ann Fitzmaurice Reilly
Senior vice president, American Express, New York
58 By 5:30 p.m., service
is under way, then it’s
nonstop hustle for
the rest of the night.”
“Around 30. I worked 80-
Daniel Humm plus hours a week in corporate
Chef and co-owner, Eleven Madison
Park and the NoMad, New York America for a long time,
and now I want to have time
to enjoy life.”
“About 65. I start
Melanie Benson Strick
early to connect with President and founder, Success Connections, Los Angeles
people in Europe,
then work a normal day
to be home for my
daughter’s dinner, bath, and
bedtime. In the evenings,
I have conversations with
people in Asia.”

Ginny Davis
Chief information officer,
Technicolor, Los Angeles

Teddy is
an 8-month-old
professional
hamster model
and actor
who works about
25 hours a week
 Heal Etc.

AFreshCup
ofCoffee
You’re not still
drinking matcha, are you?
By Kayleen Schaefer

Dandelion cofee isn’t actually cofee: That’s

the irst thing to know about it. Although the
roasted powder blend mixed with hot water or
milk looks like what you’d get at Starbucks, it’s
made from dandelion root, barley, rye, chicory,
and beets. Dandelion cofee is the “it” drink,
so if you were just about to hop on the matcha
bandwagon—so 2015—don’t bother.
The idea of mashing up these roots with
other ingredients and drinking them exploded,
naturally, in Los Angeles. (It’s caught on
across the country, at restaurants and cafes
such as Chicago Raw and the Market Street 59
Apothecary Café and Wine Bar in Austin.)
Corrina Becker, owner of the organic cafe
Amara Kitchen in L.A., serves dandelion
cofee made with Dandy Blend’s prepackaged
mix (one of several available); you can get it in
a homemade cashew milk latte or mocha, too.
“When I tried dandelion cofee plain, I was
like, ‘Eh, it needs a little help,’ ” she says. Erin
Johnson, a server at Kitchen Mouse, a vegetar-
ian restaurant also in L.A. that serves the cofee
straight and in lattes, says, “Since we opened a
year and a half ago, it’s gotten more and more
popular. People like that it tastes similar to
cofee and has that richness but doesn’t have
the stimulant of cafeine.”
That’s true, but exercise caution. The
vitamin B in dandelion root can help you
feel more alert. New York wellness coach
Robyn Youkilis says it’s similar enough to
espresso that “you might forget it’s not
cofee.” In fact, Dandy Blend’s creator,
botanist Peter Gail, says customers
have suggested he put a warning on
the package about drinking it before
bed. Youkilis says dandelion root has
other beneits: It’s rich in essential min-
erals such as zinc, potassium, and iron,
and it helps soothe stomach ailments.
ILLUSTRATIONS BY JACI KESSLER LUBLINER

We
“On a visit to L.A.,” says
Tried
Bloomberg Businessweek
It! reporter Caroline Winter,
“a friend served me her latest
smoothie creation: almond
milk, a frozen banana, a scoop
of unsweetened cocoa, and
a scoop of Dandy Blend. It
tasted subtly sweet, with a
refreshing, slightly bitter kick.”
A LITTLE L.A. IN YOUR DAY
For a coconut latte, mix
8 ounces of iltered hot water
with 1 tablespoon organic
coconut oil and 1 tbsp. Dandy
Blend. The company instructs:
“Let the oil melt and use a
small hand blender to incorpo-
rate the oil into the drink.”
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60
PHOTOGRAPH BY WILLIAM MEBANE FOR BLOOMBERG BUSINESSWEEK; PROP STYLIST: DAVE BRYANT

In the
Right Frame
Because no one deserves a life surrounded by glitter and inspirational quotes
By Monica Khemsurov
 Etc.

ACRYLIC AND METAL FRAME

$29; westelm.com
MAGNETIC FRAME A chunk of acrylic
BY CANETTI rests on top of a brass base—
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For the minimalist mom to keep your photo in line.
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The only artistic detail
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PICTURE FRAME An old-school solution in copper,
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there’s almost no reason
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 Etc.
Sure,
why not?
NOT A TOTAL TRAIN WRECK
Critics slammed plans for New York’s Penn Station—but sometimes building
for posterity shouldn’t be the most pressing concern. By Belinda Lanks
he first week in January, New
T
York Governor Andrew Cuomo
unveiled a $3 billion plan for a
new Penn Station—the ifth such
62 proposal in the past 25 years.
“Let’s be as bold and ambitious
as our forefathers,” Cuomo said
in his announcement. The ren-
derings were anything but an homage
to past visions of grandeur. Although a
1999 scheme featured a hall with a two-
loor concourse, two levels of additional
tracks, and a spectacular steel-and-glass
canopy, this one, with low-slung skylights,
resembled the atrium at the Short Hills
mall. The plans had more detractors than
drunk Rangers fans taking the A train
home after a game upstairs at Madison
Square Garden. “Penn Station’s 5th
Redesign Fails to Charm Some Critics,”
read a New York Times headline. That was
about the kindest sentiment expressed.
It would be a gross understatement
to say the current Penn Station also fails
to charm. It sees 600,000 subway, com-
muter, and intercity customers a day,
three times what it was built to serve.
A dirty, dark, crowded underground
warren, it’s a shadow of the original grand
neoclassical structure designed by McKim,
Mead & White in 1910 and torn down in
1963 when not enough people thought it
was worth saving: We were all going to
be getting around like the Jetsons soon
enough. (Oops.) There was almost-instant
regret: The demolition fueled the forma-
tion of the NYC Landmark Preservation
The Crit c
I don’t
hate it
Meh
Commission, which saved Grand Central
Terminal from the same fate.
Cuomo’s plan is, to use an architec-
tural term, “meh.” It’s no better than all
right. That’s not necessarily a bad thing—
maybe this one will get built. (Helping
those prospects, there’s more space than
in past blueprints for retail, which devel-
opers would have rights to.) What it lacks
in aesthetics, it might make up for by, you
know, actually existing, a trade-of most
New Yorkers—and anyone going through
Penn Station on Amtrak—
would accept. “Meh”
design happens. Why did
we expect city government
SINCE WHEN IS
to have great taste all of a GOVERNMENT
sudden? How often does
that happen?
A GOOD ARBITER
Yes, in theor y, we OF TASTE?
should be able to define
good architecture as both
ambitious and buildable, but it seems
you have to choose one in New York
City. Just look downtown to the trans-
portation hub rising at the World Trade
Center site. Its centerpiece—a striking,
bone-white oculus by Spanish starchitect
Santiago Calatrava—has been plagued by
setbacks, including construction delays
and a water leak. Twelve years after the
Port Authority presented the design, it
still isn’t inished, and its budget has bal-
looned from $2.2 billion to $3.7 billion—
twice the inflation-adjusted cost of
erecting Grand Central.
This doesn’t mean cities shouldn’t try
Guess
so
Mm hm
to build for eternity. But conjuring vast
amounts of money and political will for
ambitious municipal projects takes time
and patience, and one could argue that
25 years is a long enough wait. Denver
waited only—only!—10 years for the gor-
geous redesign of its Union Station depot
by Skidmore, Owings, & Merrill, the archi-
tects behind the new Penn Station layout.
California is eight years along in the likely
20-year process of building a high-speed
rail line between San Francisco and
Los Angeles. But what’s
eight years? Talk to us when
you’ve been through multi-
ple commanders-in-chief.
It’s one thing for leaders
to see what can be done
and another to see what
has to be done—and do it.
Cuomo’s father, former
New York Governor Mario
Cuomo, is the one who said you cam-
paign in poetry and govern in prose. The
latest Penn Station renderings are decid-
edly prosaic, but we don’t care about
poetry when we’re stuck on an Acela
arriving from Washington and train traic
is preventing us from making a meeting
in Midtown. Which is why, last fall,
Cuomo and GOP presidential candidate
and New Jersey Governor Chris Christie
revived discussions about the Gateway
ILLUSTRATION BY 731
project, an essential rail tunnel under
the Hudson River that would relieve con-
gestion. There’s nothing sexy about it—
and good thing. 
 What I Wear to Work Etc.
What’s your job?
I manage anything
bearing the Coca-Cola
trademark that’s not the

KATE
beverage. We do a lot of
collaborations with fashion
designers but also with ASHISH
retailers like Uniqlo and
Herschel Supply.

DWYER
Does it involve travel?
Thirty to 40 percent
of the time. Our largest
licensing program is
in Latin America.

46, worldwide
COS licensing group director,
Coca-Cola, Atlanta
How do you decide what
products to license?
We do things that drive Your bag is Coke, too.
connections with our core
consumers, especially teens We did a collaboration
and young adults. We tap into with an Italian fashion
their passion points: fashion, company, Gilli. It’s in
sports, and technology.
tone-on-tone leather,
very subtle, so I can have
some branding on me
THEORY but be more discreet.

63

Are you always in

Coca-Cola garb? HERMES
I like to be part of the
brand, since it’s what ROLEX
we live and breathe. TIFFANY

Is red polish your

signature?
COCA-COLA RED GILLI No. We launched
Coca-Cola Red by
BY OPI OPI, and we were at
the event.

CLUB MONACO
PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK

Do you have
to dress cheerily
in the office?
I don’t feel like
How many Coke
I have to. I
clothing items do think I like to.
you own?
Probably 50. Some of
it I buy, and I also get
oice samples.
CHRISTIAN LOUBOUTIN

Interview by Arianne Cohen

 Etc. How Did et Here?

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ANNA MARIE CHÁVEZ Chief executive officer, Girl Scouts of the USA
Fourth-grade
class photo, 1978

Education
“It was a huge
“I was very cultural shift from
involved in extra-
curriculars:
Shadow Mountain
High School, Phoenix,
the Sonoran Desert
foreign language class of 1986 to Connecticut.”
club, National Yale, class of 1990
Honor Society,
volunteering.” James E. Rogers College
of Law, University
of Arizona, Tucson,
class of 1994

Work
Experience

1995–96 With Bill Clinton,

Attorney adviser,
64 Federal Highway
“I worked on Administration (FHA)
Adarand v. Peña,
about how the 1996
government hires Attorney adviser to the
president’s oice
minority businesses,
On the Supreme
which went to the 1996–98
Court steps, 1998
Legal counsel, FHA
Supreme Court.”
1998–2000
Chief of staf for
“I’d seen children fall deputy administrator,
Small Business
through our safety networks Administration
and was happy working 2000–03
with the 21,000 scouts and Senior policy adviser
to the U.S. Secretary of
leaders in Texas.” Transportation
2003–09
Director of
intergovernmental afairs,
deputy chief of staf,
Arizona Governor Janet
Napolitano
2009–11
CEO, Girl Scouts of
1996
“Clearly, there were a lot of issues
in the Clinton administration,
but I was busy negotiating trade
relations with China.”
“She was a
Republican, but
I’m bipartisan.
I helped vulnerable
populations in
domestic violence
shelters and refugee
and homeless
programs.”
With Napolitano, 2009
“We’re creating the irst
technology platform for Girl
rl
Scouts globally. Digital Cookie
has been tremendous—
ence as well as your own.”

Southwest Texas
you’re going to see Girl Scouts
2011–Present
CEO, Girl Scouts
in a diferent way.”
of the USA
Courtesy subject (6). Alamy (2)

Life Lessons
With Girl Scouts at the White House, 2015
i st
ex

rs’
1. “Collect a lot of advice.” 2. “Advocate on behalf of the issues you’re passionate about.” 3. “Live your life as a bold adventure, and you’ll improve othe
HOW FAR WILL YOU TAKE IT

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