Bits & Pieces

Kleiner’s Laws

2010-09-03T15:10:00.003+07:00

I found this piece on an interesting blog

http://smartrepreneur.wordpress.com/2010/04/04/kleiner’s-laws/

Regarding Eugene Kleiner, one of the traitorous 8, the founder of Fairchild Semiconductor, an investor in Intel and one of the main founders of KPCB, a top VC firm. Basically this dude is the grand daddy of Silicon Valley.

He says some stuff that's worth contemplating for entrepreneurs.

Kleiner’s Laws

* Make sure the dog wants to eat the dog food. No matter how ground-breaking a new technology, how large a potential market, make certain customers actually want it.
* Build one business at a time. Most business plans are overly ambitious. Concentrate on being successful in one endeavor first.
* The time to take the tarts is when they’re being passed. If an environment is right for funding, go for it. Eugene, more than anyone, knew that venture capital goes in cycles.
* The problem with most companies is they don’t know what business they’re in.
* Even turkeys can fly in a high wind. In times of strong economies, even bad companies can look good.
* It’s easier to get a piece of an existing market than to create a new one.
* It’s difficult to see the picture when you’re inside the frame.
* After learning some of the tricks of the trade, some people think they know the trade. This reflected some of Eugene’s own humility; he recognized that many venture capitalists thought they were experts when they had just a bit of knowledge.
* Venture capitalists will stop at nothing to copy success.
* Invest in people, not just products. Eugene always respected founding entrepreneurs. He wanted to build companies with them not just with their ideas.

And, two others – frequently quoted:

* “There is a time when panic is the appropriate response.”
* “What tips me off that a business will be successful is that they have a narrow focus of what they want to do, and they plan a sufficient amount of effort and money to do it. Focus is essential.”

Bored of this Blogger blog

2010-08-28T19:50:00.002+07:00

Howdy folks .. Getting bored of this layout, I feel left behind not jumping on the Wordpress bandwagon. So expect a face lift real soon.

Outliers by Malcom Gladwell

2010-08-28T19:45:00.001+07:00

Outliers is a fantastic read. If Gladwell started out this book with the intention of changing one's perspective on how success is achieved, he has without a doubt succeeded.

He breaks down success with the 10,000 hour rule and the legacy of culture, all of which make perfect sense. If you have not realized yet, Gladwell has the uncanny ability to point out things that we overlook. He does it flawlessly here with stories of successful software billionaires, lawyers and doctors.

An interesting bit in this book is as personal as it gets, Gladwell's breakdown of his mother as an outlier. A set of perfectly timed events centuries ago that result in her ending up in Canada.

The word Interesting does not do justice to this book. I highly recommend it.

Activate Simpati 3G dan GPRS for internet access with 3G modem

2010-01-23T10:49:00.002+07:00

To activate 3G or GPRS for your Telkomsel Simpati sim card so you can use it on a 3G modem, do the following:

2 step process

SMS
'GPRS 62101118253*****' send to 6616 without quotes. The 16 digit number is written on your SIM Card. Registration takes 48 hours, but took 5 mins for me. Telkomsel will send you a confirmation sms.

SMS
'3G' TO 3636

Cost Rp. 5/kb, not cheap or as my medan friends would say 'Mahal Kali.'

Settings for modem:
apn telkomsel
username: wap
password: wap123
access number: *99#

Bring it on..

2010-01-22T11:54:00.002+07:00

Greetings 2010, earlier this year people smsd and emailed wonderful greetings. They said this year would be better than the last. After 2009, anything would have been better. So far it feels the same. The psychics now say its going to be just as bad as last year. Haha, what do they know right..

I say bring it on, we're ready for anything... except for another natural disaster.

The Good Enough Revolution: When Cheap and Simple Is Just Fine

2009-12-19T00:19:00.001+07:00

By Robert Capps

08.24.09

Photo: Kenji Aoki

WHEN GOOD ENUF IS GREAT

Entire markets have been transformed by products that trade power or fidelity for low price, flexibility, and convenience.
— Erin Biba

Phone
Net-based calls can be laggy, and they sometimes drop out in mid conversation. But they can also be free—even international calls—and it's easy to turn conversations into shareable MP3s. Skype now accounts for 8 percent of international calling minutes, and the service added nearly 38 million users in the second quarter of 2009, a 42 percent increase over the same period last year.

Books
Amazon's Kindle can't display complex graphics, and paper still has much higher resolution. But the device does store hundreds of titles in a slim package, ensuring that you always have access to whichever Philip K. Dick tale you're in the mood for. The Kindle is expected to generate $310 million in revenue by the end of 2009. Barron's estimates that annual sales could reach $2 billion by 2012.

Televison
Its content may not be hi-def, and you're stuck watching it on a computer screen, but Hulu lets you catch recent television shows and popular movies whenever and wherever you want. For free. No wonder it has 40 million unique viewers—up from just 7 million a year ago.

In 2001, Jonathan Kaplan and Ariel Braunstein noticed a quirk in the camera market. All the growth was in expensive digital cameras, but the best-selling units by far were still cheap, disposable film models. That year, a whopping 181 million disposables were sold in the US, compared with around 7 million digital cameras. Spotting an opportunity, Kaplan and Braunstein formed a company called Pure Digital Technologies and set out to see if they could mix the rich chocolate of digital imaging with the mass-market peanut butter of throwaway point-and-shoots. They called their brainchild the Single Use Digital Camera and cobranded it with retailers, mostly pharmacies like CVS.

The concept looked promising, but it turned out to be fatally flawed. The problem, says Simon Fleming-Wood, a member of Pure Digital's founding management team, was that the business model relied on people returning the $20 cameras to stores in order to get prints and a CD. The retailers were supposed to send the used boxes back to Pure Digital, which would refurbish them, reducing the number of new units it had to manufacture. But customers didn't return the cameras fast enough. Some were content to view their pictures on the tiny 1.4-inch LCD and held on to the device, thinking they'd take it in later to get prints. Others figured out how to hack the camera so it would download to a PC, eliminating the need to return the thing altogether.

Brisk sales combined with a lack of speedy returns destroyed the company's thin margins, and the camera failed. But the experience taught Kaplan and Braunstein a lesson: Customers would sacrifice lots of quality for a cheap, convenient device. To keep the price down, Pure Digital had made significant trade-offs. It used inexpensive lenses and other components and limited the number of image-processing chips. The pictures were OK but not great. Yet Pure Digital sold 3 million cameras anyway.

Kaplan and Braunstein also learned something important about camera retailing in general. The market had long been split into two main segments: point-and-shoots (including disposables) and single-lens reflex cameras, which use interchangeable lenses and other high-end accessories. Not surprisingly, the vast majority of cameras sold then—as now—were the handy point-and-shoots; SLRs tended to attract only serious hobbyists and professionals.

Oddly, though, there was no point-and-shoot analogue in video cameras—and that's where the pair saw their next opportunity. Home videocams were almost without exception expensive, complicated devices loaded with features like image stabilization, night-vision mode, and onboard color correction. And even with tools like Apple's iMovie, it was a hassle to get footage off the cameras and onto a computer for editing and sharing. In terms of complexity and price, the camcorder market resembled the SLR market, but with no low-end alternative. Kaplan and Braunstein suspected that there might be a place for a much cheaper, simpler video camera. So they decided to make one.

After some trial and error, Pure Digital released what it called the Flip Ultra in 2007. The stripped-down camcorder—like the Single Use Digital Camera—had lots of downsides. It captured relatively low-quality 640 x 480 footage at a time when Sony, Panasonic, and Canon were launching camcorders capable of recording in 1080 hi-def. It had a minuscule viewing screen, no color-adjustment features, and only the most rudimentary controls. It didn't even have an optical zoom. But it was small (slightly bigger than a pack of smokes), inexpensive ($150, compared with $800 for a midpriced Sony), and so simple to operate—from recording to uploading—that pretty much anyone could figure it out in roughly 6.7 seconds.

Within a few months, Pure Digital could barely keep up with orders. Customers found that the Flip was the perfect way to get homebrew videos onto the suddenly flourishing YouTube, and the camera became a megahit, selling more than 1 million units in its first year. Today—just two years later—the Flip Ultra and its subsequent revisions are the best-selling video cameras in the US, commanding 17 percent of the camcorder market. Sony and Canon are now scrambling to catch up.

The Flip's success stunned the industry, but it shouldn't have. It's just the latest triumph of what might be called Good Enough tech. Cheap, fast, simple tools are suddenly everywhere. We get our breaking news from blogs, we make spotty long-distance calls on Skype, we watch video on small computer screens rather than TVs, and more and more of us are carrying around dinky, low-power netbook computers that are just good enough to meet our surfing and emailing needs. The low end has never been riding higher.

Photo: Kenji Aoki, Lego sculpture: Nathan Sawaya

Computers
On paper, netbooks might seem like crappy toys. They have almost no storage, processing power, or graphics capability. What they do have, though, is accessibility: Cheap, small, and light, they let you connect to the Internet from almost anywhere. Netbook shipments were up sevenfold in the first quarter of 2009.

Trade Shows
It sounds lame, and it is: virtual trade shows inhabited by eager sales avatars and their potential clients. No, it's not the same as meeting face-to-face, but with the economy flatlining, digital confabs are a working alternative. Analysts expect 5,000 virtual events next year, an increase of 500 percent for the industry.

Advertising
They're not high-concept, and they don't feature celebrities (or even pictures). But text-based ads are highly targeted, incredibly cheap to produce, and make up 90 percent of Google's net revenue (and 45 percent of all Internet ad sales in the US).

-D Modeling Software
Rendering software like AutoCAD is notoriously hard to use. Google's SketchUp is dead simple. The result: It has been embraced by architects, engineers, educators, and artists. The full version costs $500—a pittance compared to AutoCAD's $4,000 price tag. SketchUp has become so popular, in fact, that Autodesk has responded with its own lo-res app: Project Dragonfly.

Illustrations: Quickhoney

So what happened? Well, in short, technology happened. The world has sped up, become more connected and a whole lot busier. As a result, what consumers want from the products and services they buy is fundamentally changing. We now favor flexibility over high fidelity, convenience over features, quick and dirty over slow and polished. Having it here and now is more important than having it perfect. These changes run so deep and wide, they're actually altering what we mean when we describe a product as "high-quality."

And it's happening everywhere. As more sectors connect to the digital world, from medicine to the military, they too are seeing the rise of Good Enough tools like the Flip. Suddenly what seemed perfect is anything but, and products that appear mediocre at first glance are often the perfect fit.

The good news is that this trend is ideally suited to the times. As the worst recession in 75 years rolls on, it's the light and nimble products that are having all the impact—exactly the type of thing that lean startups and small-scale enterprises are best at. And from impact can come big sales. "When the economy went south before Christmas last year, we worried that sales would be affected," says Pure Digital's Fleming-Wood. "But we sold a ton of cameras. In fact, we exceeded the goals we had set before the economy soured." And this year? Sales, he says, are up 200 percent. (Another payoff: In May, networking giant Cisco acquired Pure Digital for $590 million.)

To some, it looks like the crapification of everything. But it's really an improvement. And businesses need to get used to it, because the Good Enough revolution has only just begun.

Speaking at an Online publishers conference in London last October, New York University new-media studies professor Clay Shirky had a mantra to offer the assembled producers and editors: "Don't believe the myth of quality." When it comes to the future of media on the Web, Shirky sternly warned, resist the reflex to focus on high production values. "We're getting to the point where the Internet can support high-quality content, and it's as if what we've had so far has all been nice—a kind of placeholder—but now the professionals are coming," Shirky said. "That's not true." To reinforce his point, he pointed to the MP3. The music industry initially laughed off the format, he explained, because compared with the CD it sounded terrible. What record labels and retailers failed to recognize was that although MP3 provided relatively low audio quality, it had a number of offsetting positive qualities.

Shirky's point is crucial. By reducing the size of audio files, MP3s allowed us to get music into our computers—and, more important, onto the Internet—at a manageable size. This in turn let us listen to, manage, and manipulate tracks on our PCs, carry thousands of songs in our pockets, purchase songs from our living rooms, and share tracks with friends and even strangers. And as it turned out, those benefits actually mattered a lot more to music lovers than the single measure of quality we had previously applied to recorded music—fidelity. It wasn't long before record labels were wringing their hands over declining CD sales.

"There comes a point at which improving upon the thing that was important in the past is a bad move," Shirky said in a recent interview. "It's actually feeding competitive advantage to outsiders by not recognizing the value of other qualit ies." In other words, companies that focus on traditional measures of quality—fidelity, resolution, features—can become myopic and fail to address other, now essential attributes like convenience and shareability. And that means someone else can come along and drink their milk shake.

To a degree, the MP3 follows the classic pattern of a disruptive technology, as outlined by Clayton Christensen in his 1997 book The Innovator's Dilemma. Disruptive technologies, Christensen explains, often enter at the bottom of the market, where they are ignored by established players. These technologies then grow in power and sophistication to the point where they eclipse the old systems.

That is certainly part of what happens with Good Enough tech: MP3s entered at the bottom of the market, were ignored, and then turned the music business upside down. But oddly, audio quality never really readjusted upward. Sure, software engineers have cooked up new encoding algorithms that produce fuller sound without drastically increasing file sizes. And with recent increases in bandwidth and the advent of giant hard drives, it's now even possible to maintain, share, and carry vast libraries of uncompressed files. But better-sounding options have hardly gained any ground on the lo-fi MP3. The big advance—the one that had all the impact—was the move to easier-to-manage bits. Compared with that, improved sound quality just doesn't move the needle.

Photo: Kenji Aoki, Lego sculpture: Nathan Sawaya

Of course, there are those who appreciate the richer sound of uncompressed files, CDs, or even vinyl records (regarded by some audiophiles as the highest-fi format available). But most of us don't give it a second thought. In fact, there's evidence that consumers are simply adapting to the MP3's thin sound. Jonathan Berger, a professor of music at Stanford University, recently completed a six-year study of his students. Every year he asked new arrivals in his class to listen to the same musical excerpts played in a variety of digital formats—from standard MP3s to high-fidelity uncompressed files—and rate their preferences. Every year, he reports, more and more students preferred the sound of MP3s, particularly for rock music. They've grown accustomed to what Berger calls the percussive sizzle—aka distortion—found in compressed music. To them, that's what music is supposed to sound like.

What has happened with the MP3 format and other Good Enough technologies is that the qualities we value have simply changed. And the change is so profound that the old measures have almost lost their meaning. Call it the MP3 effect.

We've seen it again and again. Consider, for example, the rise of cloud computing. For years, software was something you bought and installed on your hard drive. A lot of it was made by Microsoft, which solidified its dominance by releasing ever more powerful, feature-laden updates. But with the advent of services like Gmail and Zoho Writer, many users are now turning to the Web for basic tasks like word processing, spreadsheets, and email. These cloud apps have inherent limits: They run through a browser window and can't directly access your local hard drive or processor. They lack features. Their performance depends on the strength of your Internet connection. Nevertheless, tens of millions of people use Gmail, while Zoho Writer boasts 1.8 million users and is growing at a rate of 100,000 subscribers a month. Microsoft, of course, is now jumping into the cloud as fast as it can. Redmond says that Office 2010 will be largely cloud-based. Not to be outdone, Google recently announced a mostly cloud-based operating system that will work in tandem with the company's Chrome browser.

Web tools are succeeding because they're Good Enough. They do most of what we need from a word processor or a spreadsheet or an email program or even an OS. But, like the MP3, they also offer other advantages. You can access them from any computer. If your hard drive crashes, you don't lose your work. And they are incredibly cheap—free in the case of simple tools or just a few dollars a month per user in the case of business apps.

Compare these qualities with those of the MP3 and the Flip, and a clear pattern emerges. The attributes that now matter most all fall under the rubric of accessibility. Thanks to the speed and connectivity of the digital age, we've stopped fussing over pixel counts, sample rates, and feature lists. Instead, we're now focused on three things: ease of use, continuous availability, and low price. Is it simple to get what we want out of the technology? Is it available everywhere, all the time—or as close to that ideal as possible? And is it so cheap that we don't have to think about price? Products that benefit from the MP3 effect capitalize on one or more of these qualities. And they'll happily sacrifice power and features to do so.

By traditional military standards, the MQ-1 Predator isn't much of a plane. Its top speed is a mere 135 miles per hour. It has an altitude ceiling of 25,000 feet. It carries only two 100-pound Hellfire missiles. It has a propeller. By comparison, an A-10 can travel 420 mph, cruise at 45,000 feet, and carry up to 16,000 pounds of bombs—not to mention a 30-mm gatling gun. An F-16 can reach a blistering 1,500 mph (Mach 2), climb to more than 50,000 feet, and back up its 20-mm multibarrel canon with six missiles.

All three of these aircraft are used for surveillance and close air support. But more and more, the military is relying on the unmanned Predator. In the past two years, it has logged more than 250,000 flight hours, nearly all of them in combat. It has been deployed to the Balkans, Pakistan, Afghanistan, and Iraq.

Photo: Kenji Aoki, Lego sculpture: Michael Psiaski

Why, if manned planes are so superior, is the Predator saturating the combat market? Because military aircraft are experiencing their own version of the MP3 effect.

Over the past few decades, the armed services—like many industries—have been radically changed by the Internet and other modern communications technologies. Now that the military can digitize and share information quickly, engagements are conducted differently: Greater emphasis is being put on "situational awareness," the ability of remote commanders to know what's happening on a battlefield at all times. This in turn has altered what the military looks for in a plane, much the same way small digital files changed what music fans value in a recording.

There is at least one measure by which the Predator has piloted aircraft handily beat: the ability to maintain a constant presence in the air. That's because the drones are relatively cheap to build, can fly for more than 20 hours straight, and don't require pilots who need sleep, food, and bathroom breaks (and who might die if the plane is shot down). In Afghanistan and Iraq, a Predator is available pretty much anytime the military needs one. Accessibility, in other words, has become a dominant aircraft value—prized as much as, and sometimes more than, speed, altitude, and armament.

"Sustaining the sorts of operations we conduct with the Predator used to be virtually impossible," says Eric Mathewson, director of the Air Force Unmanned Aircraft Systems Task Force. "The idea of putting an aircraft over an area of interest 24 hours a day, 365 days a year, was simply unsustainable."

Piloted aircraft are still valuable, he's quick to add, but because the Predator can linger, it has enabled a new type of strategy—remotely guided surgical strikes with fewer troops and armaments. It's a lesson that surprised the Air Force and other services, Mathewson says, but one that has been learned definitively. "We're now looking at aircraft capabilities for the future that are even more persistent," he says. "We're exploring airships again, which could stay airborne for up to five years."

The impact of the Predator illustrates the potential of the MP3 effect to transform almost any market. In fact, Good Enough tech is already gaining a foothold in two other huge industries: the legal profession and health care.

Richard Granat is a pioneer in a field called elawyering. It shouldn't be confused with Web sites that merely offer legal documents for downloading, Granat explains. Elawyering involves actual lawyers, and clients who use these services get help sorting through legal issues.

Granat, who runs his own law firm and cochairs the American Bar Association's task force on elawyering, has designed and marketed a number of Web tools that walk people through common legal procedures. He created a child-support calculator, for example, which assists couples going through relatively amicable divorces. There's also a tool to help people decide whether they need Chapter 7 or Chapter 13 bankruptcy. These widgets then generate legal forms, which may be reviewed by a licensed attorney who can make suggestions or offer advice over the phone.

It turns out to be a remarkably efficient way of offering what Granat calls legal transaction services—tasks that are document intensive. For everything from wills to adoptions to shareholder agreements, elawyering has numerous advantages. It's cheaper, for example; a no-fault divorce, Granat says, might run a fifth of what seeing an attorney would cost. It's also faster—customers can access the tools anytime and never have to interrupt their day to meet with someone in a distant office. Simply put, elawyering makes certain legal services more accessible.

There are trade-offs, of course. "The relationship has less richness than what you'd get from sitting in a lawyer's office," Granat says. "And if you have an issue that's more complex, then you still need to see a lawyer face-to-face." In other words, it's a lower-fidelity experience.

But for most simple legal interactions, elawyering is, well, Good Enough. It gets the job done, even if it doesn't let you ask every question or address every contingency. And not surprisingly, it's on the rise. "Elawyering will be mainstream in three years," Granat says. "I predict that in five years, if you're a small firm and don't offer this kind of Web service, you're not going to make it."

Photo: Kenji Aoki, Lego sculpture: Nathan Sawaya

In the case of health care, the Good Enough mindset can be seen in a new initiative by Kaiser Permanente. The largest not-for-profit medical organization in the country, Kaiser has long relied on a simple strategy of building complete, self-sustaining hospitals—employing 50 doctors or more—in each region it serves. "It's an efficient model," says Michele Flanagin, Kaiser's vice president of delivery systems strategy. "It offers one-stop shopping: pharmacy and radiology and everything you want from health care in one building." But that approach forces patients who don't live near a hospital to drive a long way for even the most routine doctor's appointment.

As it happens, though, Kaiser has become one of the most technologically advanced health care providers in the country, digitizing everything from patient records and doctors' notes to lab data and prescriptions and putting it all online. The system is networked, so patients can email their doctor, check lab results, and make appointments from their PC or mobile Web device. Getting a referral doesn't mean carrying medical records from one doctor to another, as it does at many hospitals.

In 2007, Flanagin and her colleagues wondered what would happen if, instead of building a hospital in a new area, Kaiser just leased space in a strip mall, set up a high tech office, and hired two doctors to staff it. Thanks to the digitization of records, patients could go to this "microclinic" for most of their needs and seamlessly transition to a hospital farther away when necessary. So Flanagin and her team began a series of trials to see what such an office could do. They cut everything they could out of the clinics: no pharmacy, no radiology. They even explored cutting the receptionist in favor of an ATM-like kiosk where patients would check in with their Kaiser card.

What they found is that the system performed very well. Two doctors working out of a microclinic could meet 80 percent of a typical patient's needs. With a hi-def video conferencing add-on, members could even link to a nearby hospital for a quick consult with a specialist. Patients would still need to travel to a full-size facility for major trauma, surgery, or access to expensive diagnostic equipment, but those are situations that arise infrequently.

If that 80 percent number rings a bell, it's because of the famous Pareto principle, also known as the 80/20 rule. And it happens to be a recurring theme in Good Enough products. You can think of it this way: 20 percent of the effort, features, or investment often delivers 80 percent of the value to consumers. That means you can drastically simplify a product or service in order to make it more accessible and still keep 80 percent of what users want—making it Good Enough—which is exactly what Kaiser did.

Flanagin believes these clinics will enable Kaiser to add thousands of new members. And they'll do it for less. The per-member cost at a microclinic is roughly half that of a full Kaiser hospital. The first microclinic is set to open in Hawaii early next year. Medical care is now poised for its own manifestation of the MP3 effect.

The phenomenon certainly won't stop with hospitals, lawyers, and military campaigns. As more and more industries move their business online, they too will find success in Good Enough tools that focus on maximizing accessibility. It's a reflection of our new value system. We've changed. To benefit from the MP3 effect, companies will have to change as well.

No one understands this better than the folks at Pure Digital Technologies. Two years ago, the Flip Ultra nailed all three of those accessibility traits: It was significantly less expensive than other digital video cameras—so much so, it almost seemed an impulse buy in comparison. It was much easier to use, not only for shooting video but also for uploading clips to the Internet. And its pocketable size and Web-sharing abilities made video available anytime, anywhere. The Flip hit the Good Enough trifecta.

When asked why he thinks the Flip has succeeded where more powerful videocams—and even new Flip knockoffs from the likes of Sony—have failed, Pure Digital's Fleming-Wood has an interesting answer: "I think it's because we have a better product." What's odd is that executives at Sony and Canon would likely say the same thing—after all, their models have far more features and often produce sharper images. But Fleming-Wood is using a different definition of "better." He now defines quality entirely in terms of ease of use—how easy it is to shoot and share the video. "The one thing everyone wants to do with their footage is show it to someone else," he says.

Even so, it's easy to imagine that feature creep will one day seep into the Flip. After all, the company recently released models that record in HD, so why not image stabilization or a bigger LCD—or hey, how about a touchscreen! "We will always prioritize accessibility over features," Fleming-Wood insists. The increase in pixel count, he says, is simply the result of Moore's law advances in chip speed and storage capacity, not a signal that Pure Digital is changing its focus. Once HD components became available that would not drastically raise the price of the camera or make it harder to use, "it made no sense not to go HD," Fleming-Wood says. He points out that Pure Digital has yet to include other features like an optical zoom or image stabilization, adding that he knows people love the Flip because of how simple it makes recording and sharing video. "We will never sacrifice that."

When he thinks about how the Flip line will improve in the future, Fleming-Wood envisions adding features that will make the video even easier to share. "Well, we could add Wi-Fi or cell connectivity, so if you were filming your kid's soccer game, you could be uploading the footage to the Web in real time so Grandma could watch from home," he says with a daydreamer's enthusiasm. To do something that ambitious, of course, might require sacrificing some of that HD image quality. No problem, as long as it's Good Enough.

Senior editor Robert Capps (rcapps@wired.com) wrote about Judd Apatow in issue 15.06.

http://www.wired.com/gadgets/miscellaneous/magazine/17-09/ff_goodenough?currentPage=5

Apple’s Game Changer, Downloading No

2009-12-07T15:34:00.001+07:00

By JENNA WORTHAM
IAN LYNCH SMITH, a shaggy-haired ball of energy in his late 30s, beams as he ticks off some of the games that Freeverse, his little Brooklyn software company, has landed on the iPhone App Store’s coveted (and ever-changing) list of best-selling downloads: Moto Chaser, Flick Fishing, Flick Bowling and Skee-ball.

Skee-ball, Mr. Smith says, took about two months to develop and deploy and then raked in $181,000 for Freeverse in one month. The company’s latest bid for App Store fame? A game featuring a Jane Austen character in a lacy dress who karate-chops her way through hordes of advancing zombies.

“There’s never been anything like this experience for mobile software,” Mr. Smith says of the App Store boom. “This is the future of digital distribution for everything: software, games, entertainment, all kinds of content.”

As the App Store evolves from a kitschy catalog of novelty applications into what analysts and aficionados describe as a platform that is rapidly transforming mobile computing and telephony, it is changing the goals and testing the patience of developers, bolstering sales of the Apple motherships the applications ride upon — the iPhone and iPod Touch — and causing Apple’s competitors to overhaul their product lines and business models. It even threatens to open chinks in Apple’s own corporate armor.

Thanks in large part to the iPhone, introduced in 2007, and the App Store, which opened its doors last year, smartphones have become the Swiss Army knives of the digital age.

They provide a staggering arsenal of functions and tools at the swipe of a finger: e-mail and text messaging, video and photography, maps and turn-by-turn navigation, media and books, music and games, mobile shopping, and even wireless keys that remotely unlock cars.

“Apple changed the view of what you can do with that small phone in your back pocket,” says Katy Huberty, a Morgan Stanley analyst. “Applications make the smartphone trend a revolutionary trend — one we haven’t seen in consumer technology for many years.”

Ms. Huberty likens the advent of the App Store and the iPhone to AOL’s pioneering role in driving broad-based consumer adoption of the Internet in the 1990s. She also draws comparisons to ways in which laptops have upended industry assumptions about consumer preferences and desktop computing. But, she notes, something even more profound may now be afoot.

“The iPhone is something different. It’s changing our behavior,” she says. “The game that Apple is playing is to become the Microsoft of the smartphone market.”

The popularity of Apple’s app model has reached a fever pitch. Tens of thousands of independent developers are clamoring to write programs for it, and the App Store’s virtual shelves are stocked with more than 100,000 applications. Apple recently said that consumers had downloaded more than two billion applications from its store.

Major players like Research in Motion (maker of the BlackBerry), Palm (maker of the Pre), Google (maker of the Android mobile operating system) and Microsoft (maker of Windows Mobile) are taking note and scrambling to replicate the App Store frenzy.

App fever has even prompted cities like New York and San Francisco to open reservoirs of city data to the public to spur software developers to create hyperlocal applications for computers and phones.

One need not look further than the lobby of Apple’s headquarters in Cupertino, Calif., to see that the iPhone and applications that run on it are centerpieces of the company’s mobile strategy. Planted squarely in the lobby of the main office, at 1 Infinite Loop, is an impressive, 24-foot-wide array built out of 20 LED screens populated with 20,000 tiny, brightly colored icons.

As Philip W. Schiller, head of worldwide product marketing at Apple, describes how the wall works — each time an application is purchased, the corresponding icon on the electronic billboard jiggles, causing its neighbors to ripple in unison — he, too, becomes animated.

Normally reserved and on message, Mr. Schiller waves his hands back and forth and allows his voice to ascend into giddy registers as he speaks about the potential unleashed by the App Store.

“I absolutely think this is the future of great software development and distribution,” Mr. Schiller says. “The idea that anyone, all the way from an individual to a large company, can create software that is innovative and be carried around in a customer’s pocket is just exploding. It’s a breakthrough, and that is the future, and every software developer sees it.”

APPLE cloaks most of its inner workings in a shroud of secrecy — a tactic that has helped preserve the company’s mystique and generate intense interest in its product rollouts.

But the App Store relies on vast cadres of outside developers to populate its virtual shelves with products, leaving Apple in the unfamiliar and at times uncomfortable position of having to collaborate with folks who haven’t drunk the company’s corporate Kool-Aid.

This has led Apple to be deeply supportive of developers once shunned by big telecommunications companies, while also frustrating many of them more recently with what developers see as the company’s inscrutable and arbitrary process for accepting programs into the App Store.

Apple frames the issue differently.

“I think, by and large, we do a very good job there,” Mr. Schiller said. “Sometimes we make a judgment call both ways, that people give us feedback on, either rejecting something that perhaps on second consideration shouldn’t be, or accepting something that on second consideration shouldn’t be.”

For Apple, the review process is a necessary evil. The company places high value on what it describes as “customer trust,” or the idea that users have faith that an application distributed on the iPhone won’t crash the platform, steal personal information or contain illegal content.

Mr. Schiller says the majority of applications sail through the review with no difficulty, and those that do require greater scrutiny are largely those that are slowed down by bugs or glitches in the coding.

“We care deeply about the feedback, both good and bad,” he says. “While there are some complaints, they are just a small fraction of what happens in the process.”

Apple says it receives more than 10,000 application submissions each week. Most become available in the App Store within two weeks (creating yet another problem: the difficulty consumers have in efficiently and effectively trolling through 100,000 apps to find hidden gems they hadn’t known about).

Still, the App Store is markedly better than the alternative, says Peter Farago, a marketing executive at Flurry, a mobile analytics company in San Francisco. Gone are the days when mobile developers had to negotiate with major telecommunications companies if they had any hopes of publishing their applications on a mobile phone.

“It took six to nine months to build a relationship with a carrier, maybe a quarter-million to get the infrastructure built, and the company took 50 percent or more from each dollar,” Mr. Farago says, a process that limited access to mobile platforms. “Apple has helped create a much healthier middle class of developers and expanded the pie for everyone.”

Apple pockets 30 percent of the revenue earned by any App Store program, with developers keeping the balance. Although barriers to entry for software developers have dropped considerably, Mr. Farago acknowledges that “friction points have changed.”

Developers now cite instances in which applications have been held in approval limbo, neither accepted nor rejected for months. And as bigger companies begin churning out programs, the smaller, garage-size outfits worry that they will be squeezed out.

FreedomVoice Systems, a company in San Diego, couldn’t wait to roll out a mobile version of its telephone software for the iPhone. The company submitted an application to the App Store last year and excitedly waited. And waited. And kept waiting.

“We’re facing 396 days with no contact from Apple,” says Eric Thomas, chief executive of FreedomVoice. “The app has been ‘pending’ in the App Store for a year.”

Mr. Thomas says he understands that it is Apple’s decision whether to accept his app. “But the idea they wouldn’t tell us it was a no — or even why — so we could try to do something about it,” he said, “is a very strange and unneighborly approach.”

Freeverse, which Mr. Smith founded in 1994, also creates games and desktop programs for computers. But like legions of other software developers, the company shifted its focus to the iPhone as the popularity of the device skyrocketed. But that doesn’t mean it’s been an easy road to riches.

“For our size and seriousness, we are still treated like a college freshman who is doing this as a side project,” Mr. Smith says. “The trade-off being that there is a much lower barrier to entry for developers. Anyone can have a shot.”

No one knows that better than Cerulean Studios, a software firm in Brookfield, Conn. After e-mail generated only automated responses from Apple for three months, Cerulean got a call in November from an Apple employee.

“He didn’t say much, just that our app would be going live in the App Store that afternoon,” recalls Scott Werndorfer, a co-founder of Cerulean. “We knew what we were getting into with Apple. They want everything to be pixel perfect, and you have to play ball by their rules.”

Some Apple developers are willing to go to greater lengths — underground — to avoid dealing with Apple’s policies and to get their software out quickly and on their own terms. To do that, they create programs for “jailbroken” iPhones and iPod Touches. Such devices are modified to allow anyone to upload a program onto them, which Apple says is illegal.

“Developers are just tired of the review process and navigating opaque hurdles,” says Mario Ciabarra, who operates Rock Your Phone, an online storefront containing a small catalog of applications for jailbroken iPhones. “They’ve been defecting to the jailbroken community or other platforms, such as Android. That demand has created the marketplace for our products and attracted developers.”

Mr. Ciabarra says about 1.5 million iPhones have visited his storefront, an impressive figure though still a small fraction of the 50 million iPhones and iPod Touches that Apple says it has sold.

As the App Store has matured, so has the need to come up with more sophisticated ways to profit from it. Simply having a great application is not enough. Bart Decrem, chief executive of Tapulous, a start-up company that publishes musical rhythm games, recalls the early days when it was enough to develop a shiny application that used the iPhone.

The company’s first game, Tap Tap Revenge, was available in the App Store when it opened in 2008. It quickly climbed the store’s charts, and Apple eventually ranked it as the most popular free iPhone game that year.

These days, Mr. Decrem says, that kind of instant and relatively easy success is much rarer because more companies are competing in the App Store. They include giant game publishers like Electronic Arts, which recently released a version of its popular video game Rock Band for the iPhone.

“It’s still the Wild West, but the stakes are higher,” Mr. Decrem says.

Tapulous has begun working with record labels and musicians to introduce paid special editions of Tap Tap Revenge featuring big-name artists. “Simply selling applications is ultimately not a scalable model,” he says.

IT’S unclear how concerned Apple is about some of the tensions swirling around the App Store. The company’s App Store policies have faced criticism — and even prompted a Federal Communications Commission investigation of Apple’s decision to reject an iPhone application developed by Google, which is still under way. Critics say they wonder whether the company can be trusted to maintain a fair marketplace, especially when developers release products that could compete with Apple’s current or future line of products.

Apple runs the App Store under the aegis of its iTunes unit (the operation that, wedded to the iPod, transformed music downloading in a way that analysts say the App Store, wedded to the iPhone, is now transforming mobile computing).

“A rocket ship is even too small of an analogy,” says Eddy Cue, Apple’s vice president for iTunes, of the App Store’s popularity. “We’ve been able to leverage a lot of our iTunes technology for the App Store. But it’s completely different. We’re reviewing all of those apps. We really don’t have to review each and every song.”

Apple executives are quick to point out the importance of ensuring that third-party applications run smoothly and provide a high-quality experience for users.

“Our goal is very simple: We want to have the best platform for applications that there has ever been on any product,” notes Mr. Schiller, the marketing executive. “We know we’re not perfect, but we know we’re better than anything else that has been and we want to keep improving it.”

Apple says it has increased the number of product reviewers working on the App Store and has tried to improve and streamline the way it communicates with developers.

The App Store’s success — as much a surprise to Apple as it has been to competitors — has given rise to a new digital ecosystem. Today, hundreds of software aspirants, from individuals tinkering in their bedrooms late at night to established companies looking for lucrative new revenue streams, are jumping into the App Store fray.

And smartphone manufacturers across the board are trying to make their platforms more attractive and lucrative to bring in the kind of creativity and enthusiasm that Apple has.

It’s easy to see why: Although Apple doesn’t release specific financial figures for the App Store, analysts estimate that it generates as much as a billion dollars a year in revenue for Apple and its developers.

At a recent conference in San Francisco organized by Research in Motion for BlackBerry developers, the company said it would make several changes to its mobile operating system to increase the kinds of applications developers can create for its devices, including allowing advertising and e-commerce within applications. Jim Balsillie, a co-chief executive of Research in Motion, says he isn’t focusing on the sheer number of apps available on a BlackBerry (3,000) but on their utility.

“Is it about 20,000 apps or 200,000 apps or is it about changing those 20,000 apps and their deep integration and how they interrelate to one another?” asks Mr. Balsillie. “We’re much more interested in changing the applications and changing the user experience and really unlocking the promise and the money and revenue opportunity for the ecosystem.”

Regardless, says Mr. Balsillie, apps and smartphones have created a new playing field.

“It’s inevitable that all cellphones will be smartphones,” he says. “There will be more services and new ways to monetize and more consumption. Growth is a given; it’s just a question of who is going to innovate in the right way to drive that value proposition to capture that growth.”

ALTHOUGH Palm is still rolling out the e-commerce portion of its own app store, called the App Catalog, the company hopes to draw developers to write for Palm devices like the Pre because Palm’s operating system, called webOS, is based largely on the same programming languages used to create Web sites — meaning developers are already familiar with the tools they will need to create mobile apps.

So far, however, Palm offers 500 applications, a relatively slim selection compared with the iPhone, and many analysts believe that this has made the device less attractive to consumers. Palm, like Research in Motion, says it doesn’t need an avalanche of applications to compete.

“Two years ago, the iPhone blew away expectations for what mobile devices are capable of. And mobile devices and applications are the future of the computing industry,” says Ben Galbraith, co-director of Palm’s developer relations team. “But the market is becoming saturated with a large volume of applications. When you’re number 50,000 out of 200,000, how do you survive?”

Palm says it is offering a breezier review process to developers — including allowing them the option of submitting their programs as candidates for Palm’s App Catalog or immediately publishing their applications in a third-party, online storefront — which may help it avoid some of the conflicts plaguing Apple’s relationship with developers.

Meanwhile, Microsoft, which analysts have criticized for its sluggish approach to the smartphone market, also says it is emphasizing quality for the application store it introduced in October, Windows Marketplace for Mobile.

“Our strategy is to look holistically at how we can provide the best all-around user experience,” says Victoria Grady, director of mobile strategy at Microsoft. The Marketplace now has more than 800 apps.

Many developers and analysts think Google’s mobile operating system, most recently placed in the Motorola Droid, may evolve into the fiercest competitor to the iPhone. Unlike Apple, Google has eschewed a review process, allowing any developer to publish an application to the Android Marketplace, its version of the App Store, instantly. About 14,000 applications are available for Android-powered smartphones.

“We’re doing everything we can to open the device to both developers and consumers,” says Eric Chu, group manager of the Android platform at Google. “That is a critical part of what we think makes Android unique: applications are no longer limited to a single device.”

Mr. Chu said the growing number of Android-powered phones available on multiple wireless carriers increases the financial opportunity for developers. “Last year at this time, we only had one device,” he says. “The volume is going up at a tremendous pace, and the developer ecosystem is seeing that.”

Besides being a business opportunity for all of these companies, apps offerings may also be a matter of survival in a make-or-break market. Apple has another strong advantage: the iPhone offers developers a uniform, standard platform.

“When we create an application for the iPhone, you know it’s going to run exactly as you tested it on every single model,” says David Lieb, co-founder of Bump Technologies, which creates software that lets users share contact information by tapping two phones together. “The same isn’t true for the rest of the smartphones, which have varying screen sizes, processor speeds and form factors.”

HOWEVER the competitive landscape shapes up, the App Store phenomenon shows no signs of slowing. IDC, a technology research firm, predicts that the number of iPhone apps will triple next year, fueled by the growing popularity of smartphones and other mobile devices. Along the way, analysts say, the App Store will continue to upend the architecture of the smartphone business and threaten competitors that don’t have vibrant and extensive offerings.

The way the industry once operated, “Each handset company would come up with its latest iterations and maybe have the hottest device of the season or not,” says Ms. Huberty, the Morgan Stanley analyst. “Enter apps into the equation, and that changes. It goes from being a product cycle game to a platform game.”

“People will look back on the iPhone as a turning point in the industry,” says Craig Moffett, a telecom analyst with Sanford C. Bernstein. “The iPhone will be remembered as the first true handheld computer.”

Call of Duty: Modern Warfare 2 smashes industry records

2009-11-28T11:35:00.000+07:00

November 27, 2009 | Tom Slater

The latest in a parade of hits, Activision’s Call of Duty: Modern Warfare 2 has sold an estimated $550 million in the first five days of its release, bringing the entire The Call of Duty series $3 billion in sales between its six titles.

Modern Warfare 2 officially smashed opening-day sales records with 4.7 million copies sold in its first day in the U.S. and U.K. alone. To put that in perspective, James Bond has been a franchise for 47 years and grossed just over $5 billion.

Activision isn’t the only company growing fat on Modern Warfare’s success. GameStop, an online gaming retailer, sold 2.5 million copies of MW2 within three days of its release. Not coincidentally, GameStop’s Q3 sales rose to $1.82 billion, up from $1.7 billion in Q2. Activision ended the day’s trading up 0.09 percent, closing at $11.57.

“If you consider the number of hours our audiences are engaged in playing Call of Duty games, it is likely to be one of the most viewed of all entertainment experiences in modern history,” says Robert Kotick, CEO of Activision.

MW2 includes over 40 types of weapon and presents the player with the option of participating in a civilian massacre — a controversial move that VentureBeat reporter Dean Takahashi examined in his review of the game. This scene has inspired some outcry: There were early reports that it was banned in Russia. In fact, the game was released there, but without the massacre scene. To help offset some of the outrage over the massacre concept, Activision has donated $1 million to veteran’s groups in the U.S.

MW2’s launch beat every previous-best first and five-day launch in the entertainment industry: box office, book releases and video games launches alike have been humbled by its sales. Previously, the five-day sales of Grand Theft Auto IV held the record at 6 million units and $500 million dollars. MW2 has been so successful, in fact, that a special edition of the game is being offered with full functioning night vision goggles. So far, no handgun edition has been announced.

Inside Google's Advertising Empire

2009-11-24T15:14:00.000+07:00

Google's announced plans to buy display-ad company Teracent. Here's a look at how the purchase fits into Google's advertising empire and your online life.

JR Raphael, PC World
Monday, November 23, 2009 03:00 PM PST

Google's gobbling up another advertising company, the search giant has announced. Google will acquire Teracent, a Silicon Valley startup specializing in "intelligent display advertising." Yep -- that means more online ads customized specifically for your visit.
Teracent, of course, is far from Google's first foray into the online advertising world; as most people who use the Web can't help but know, Google-served ads are practically everywhere these days. Here's an overall look at Google's ad-related acquisitions and how they play into your online life.

Teracent: Google's Display-Advertising Acquisition

Reading the way Google describes Teracent, it's not hard to understand how it'll fit into the company's advertising ecosystem.

"Teracent's technology can pick and choose from literally thousands of creative elements of a display ad in real-time -- tweaking images, products, messages or colors," Google's official blog posting explains. "These elements can be optimized depending on factors like geographic location, language, the content of the website, the time of day or the past performance of different ads."

Teracent's technology is expected to become available to advertisers using Google's Content Network and DoubleClick program. Yahoo, incidentally, announced an advertising partnership with Teracent earlier this year. There's no word yet how the Google acquisition could affect that relationship (though "badly" might be a logical guess).

Google's Past Ad Acquisitions

The Teracent acquisition comes just two weeks after Google announced it was buying mobile advertising provider AdMob -- a deal worth a whopping $750 million in stock. AdMob focuses primarily on display ads and mobile application ads. Translation: Get ready to see a whole lot of Google-powered advertising on your mobile phone.

Prior to AdMob, Google's ad-related acquisitions had revolved around the Web and even the airwaves. (Some say the G-gang is also aiming for in-brain advertising, though I'm pretty sure those rumors are unfounded.) So what are some of the other noteworthy purchases, and how have they affected you? Time for the quick tour:

• DoubleClick: Bought for $3.1 billion in 2007, DoubleClick delivered a massive network of advertisers into Google's already-strong advertising system. You can thank DoubleClick for all the Google-run display and rich-media ads around the Net -- prior to DC's entry, those had been a relatively small part of Google's advertising empire.

• AdScape: In-game advertising firm AdScape entered the Google domain in March of 2007, drawing speculation of massive Google-led virtual worlds on the way. To its credit, Google did launch Lively last summer. It took only a matter of months, however, for the service -- which, by some accounts, had turned largely into a virtual teenage groping ground -- to get shut down.

What's AdScape doing now? Good question. It's somewhere in Google's advertising empire, just presumably in a quiet corner. One day, though, the big G's targeted advertising may pop up in a game near you.

• dMarc Broadcasting: Even further down on the list of not-quite-so-successful ad attempts is dMarc Broadcasting, bought by Google in January of 2006. The company was meant to help Google get into radio advertising, and it did -- for a short while.

Earlier this year, the Google radio ad idea died, effectively sending dMarc to the gDump and Google ads off of America's airwaves.

• Applied Semantics: Ah, the one that started it all. Google grabbed Applied Semantics in 2003, marking the beginning of the AdSense program and Google's status as a serious advertising player. You know all those little text ads that pop up on Google searches and on countless other Web sites? You can thank Applied Semantics for getting that ball rolling and providing the foundation for the various Google ads we see today.

Google Acquisitions: The Next Steps

So who's next on Google's acquisition wish list? Possibly Microsoft or Digg, if you buy into these satirical suggestions (I wouldn't advise it).

In reality, though, the one safe prediction to make is that we'll see plenty more Google purchases soon, and odds are, it won't be long before one of them brings another new twist to the company's massive ad network. If you want anything more specific, well, you can try Googling it -- but I somehow doubt you'll find the answer.

JR Raphael is co-founder of geek-humor site eSarcasm. You can keep up with him on Twitter: @jr_raphael.

Colum McCann wins major US fiction prize

2009-11-20T14:35:00.001+07:00

Thursday, 19 November 2009

Colum McCann's September 11 novel Let the Great World Spin picked up the 2009 National Book Award for Fiction, one of the most significant literary awards in the US next to the Pulitzer Prize. Winners were announced November 18 during a ceremony in New York City.

National Book Awards are given in the categories of fiction, non-fiction, poetry, and young people's literature. Other 2009 awards went to T.J. Stiles's The First Tycoon: The Epic Life of Cornelius Vanderbuilt for nonfiction; Keith Waldrop's Transcendental Studies: A Trilogy for poetry; and Phillip Hoose's Claudette Colvin: Twice Toward Justice for young people's literature. Hoose was joined onstage by the early civil rights heroine who inspired his novel.

The Best of the National Book Awards, a special prize celebrating the awards' 60th anniversary, was based on public online voting after finalists were selected. Flannery O'Connor's The Complete Stories won; finalists included books by John Cheever, Ralph Ellison, William Faulkner, Thomas Pynchon and Eudora Welty.

Dave Eggers won the 2009 Literarian Award, recognizing "outstanding literary service to the American literary community." His 2006 work What is the What: The Autobiography of Valentino Achak Deng, won France's Medicis literary prize in November; his other novels include A Heartbreaking Work of Staggering Genius (2000), which was a finalist for the Pulitzer Prize. An author, editor, journalist, publisher, screenwriter, Eggers is co-founder of 826 Valencia, a nonprofit writing and tutoring center for youth, and of McSweeney's, an independent publishing house.

Author and activist Gore Vidal accepted a lifetime achievement award honoring Distinguished Contribution to American Letters.

The National Book Awards have recognized excellence in American literature since 1950. The winners, who are selected by a jury, each receive a $10,000 cash prize and a bronze sculpture; finalists each receive $1,000, a medal, and a citation from the panel jury.

http://www.nationalbook.org/index.html

IN THE SHADOW OF THE GOLDEN BOY

2009-11-16T15:51:00.001+07:00

When Oscar De La Hoya hung up his gloves for good this past February, it prompted the immediate question to fight fans - "Who will be the next Oscar?" The answer may be not as obvious as it seems.
November 2, 2009 - by Dave Larzelere

For nearly a decade, Oscar De La Hoya ruled the fight game as its marquee pay-per-view attraction. Every time he fought, it was an event guaranteed to generate huge amounts of cash and crossover interest. After Mike Tyson exited the stage, De La Hoya was the only fighter left standing who could regularly put boxing on the front of America's sports pages.

When Oscar announced in February that he was hanging up the gloves, the news provoked considerable angst among dedicated sweet scientists. They envisioned a period of waning interest and malaise similar to what the NBA suffered in the post-Jordan years.

Eight months after De La Hoya's farewell, the battle lines of the post-Oscar era have begun to take shape. Two fighters stand poised to inherit the 'crown, both with such compelling (and contrasting) claims on the throne that they may as well represent the houses of Lancaster and York. But as Manny Pacquiao and Floyd Mayweather jostle to become the sport's new reigning king, there's reason to suspect that the next generation of boxing will not be dominated by a single, over-arching superstar, but rather by a talented group of worthy contenders all vying for top-dog status.

To hear Floyd Mayweather tell it, however, those contenders are all pretenders. "I'm the cash cow," he says regularly. "All roads lead to me."

Mayweather certainly made a strong case for that claim in his fight with Juan Manuel Marquez in September. In a virtuosic performance, he showed not a trace of ring rust after a near two-year absence from boxing, pitching a virtual shutout on the scorecards against a man deemed among the top two or three pound-for-pound fighters in the world.

At the box office, the event was a blockbuster success, doing a million pay-per-view buys and confounding the predictions of many boxing insiders who thought it would struggle with sales due to the pronounced size difference between the welterweight Mayweather and the lightweight Marquez.

"Floyd proved himself as the A-side of an event-type fight," says HBO boxing analyst, Max Kellerman. "He proved that he is now an event-maker like Oscar was."
The fight was a mismatch, as it turned out, but fans tuned in anyway. For Floyd Mayweather, the star of the show, that success was almost as satisfying as his victory in the ring. "Floyd proved himself as the A-side of an event-type fight," says HBO boxing analyst, Max Kellerman. "He proved that he is now an event-maker like Oscar was."

Mayweather, however, is not the only man to anchor a major boxing event in 2009. In May, Manny Pacquiao generated rave reviews and media buzz when he knocked out Ricky Hatton in front of a packed house at the MGM Grand in Las Vegas. The fight did 850,000 pay-per-view buys, announcing to everyone that the Filipino sensation known as Pac Man had officially crossed over to mainstream stardom in the U.S.

Most expect Pacquaio's November 14th bout with Miguel Cotto to equal or exceed the Hatton numbers, and though Cotto is acknowledged as perhaps the toughest opponent of his career, Pacquiao remains a heavy favorite to win the fight. If Pacquaio does get past Cotto, and the event matches the PPV success of Mayweather/Marquez, it sets up a natural super-fight for 2010 in which the winner could immediately inherit De La Hoya's place atop the sport. A Pacquiao-Mayweather fight could be the best thing to happen to boxing in a long time, even better than the attention-grabbing mega-fights of the De La Hoya era.

"Sports are at their strongest," says Kellerman, "when their No. 1 box office attraction is also their best participant. Michael Jordan, Tiger Woods, Muhammad Ali. The problem with De La Hoya was that during the period where he was the number one box office attraction, he was never the best guy. What's interesting about a potential Pacquiao vs. Mayweather situation is that the winner of that fight would certainly be viewed as the best fighter in the sport and the biggest box office attraction."

Of course, doubts linger about either Pacquiao or Mayweather possessing enough star power to carry boxing in the fashion of De La Hoya. With Mayweather, there's the issue of his fighting identity as a consummately skilled boxer whose bouts are often less than exhilarating to watch. Then there is the simple question of casting. Floyd has played the villain for years now, and though "bad guys" often have been huge stars in boxing, Mayweather may find it hard to reach a De La Hoya-level of universal appeal while working the Darth Vader angle.

For his part, Pacquiao has the good guy role down pat. He's humble, eminently likable, and thrill-a-minute in the ring. His electrifying style has won him a devoted cult of fans among professional athletes—Kevin Garnett, Derek Jeter, and Kobe Bryant among them.

But is he a true Golden Boy? Will the American sports audience ever completely give itself over to a small Filipino fighter who speaks very little English? And will Pacquiao stick around long enough to see it happen? Pacquiao's trainer, Freddie Roach, has said that his charge will fight only once more after Cotto, and he's even gone so far as to suggest that Cotto might be his last bout.

There are, of course, many more fighters on the scene today who could become breakout stars—Cotto, Andre Berto, Chad Dawson, Paul Williams. There's a former pound-for-pound king, Shane Mosley, still at the top of his game and holding a major belt at 147 pounds, and a young welterweight in Mexico, Saul Alvarez, is already being anointed the heir to Julio Cesar Chavez.

De La Hoya's retirement ended a chain of dominant superstars in boxing that can be traced back to the 1960's, from Oscar to Tyson to Sugar Ray Leonard to Muhammad Ali. But the baton was not passed seamlessly among that quartet. In the pre-Tyson period from about 1982 to 1986, when Ali had retired and Ray Leonard fought only twice, the sport was dominated not by one gigantic superstar, but a handful of big names, names like Larry Holmes, Marvin Hagler, Tommy Hearns, Roberto Duran and Ray Mancini.

This is a period remembered by boxing fans as a golden era for the sport. Today, the fight game has the same potential for a group of thrilling and talented fighters, many occupying the same general weight penumbra, to fill the De La Hoya vacuum with a cutthroat struggle for supremacy in which boxing fans are the definitive winners. It's good to keep this in mind as we sit and wonder whether Pacquiao or Mayweather will be the next monarch of boxing's unruly kingdom. Maybe it will be neither, and maybe, the kingdom will be all the better for it.

SIMPLY PHENOMENAL - PACQUIAO DOMINATES COTTO

2009-11-16T15:42:00.004+07:00

In the lead-up to their fight, many wondered whether Manny Pacquiao could handle the power of a hard-punching welterweight like Miguel Cotto. Tonight Pacquiao answered with a resounding yes, taking Cotto's best shots and breaking down the Puerto Rican with speed and precision to take his welterweight crown.

November 14, 2009 - by Dave Larzelere | Photos by Will Hart & Ed Mulholland

With utter fighting mastery, Manny Pacquiao defeated Miguel Cotto with a TKO in the 12th round at the MGM Grand in Las Vegas tonight, taking Cotto's WBO welterweight belt in a sensational performance that left no question that Pacquiao is not only one of the best pound-for-pound fighters of his generation, but one of the best of all time.

It's a record seventh world title for Pacquiao in seven different weight classes, proving himself perhaps a more complete and explosive fighting machine as a welterweight than he was when he won his first world title eleven years ago as a 112-pound flyweight. For Cotto, meanwhile, though it was only the second loss of his great career, it was a nevertheless a devastating evening, as he found himself on the receiving end of a thorough beating that had him retreating so dramatically at the end of the bout that boos were heard throughout the sold-out arena.

It was a much different story early in the fight, however, when a confident Cotto went on the attack. In the first four rounds, it appeared the showdown was going to follow the script set out for it by many boxing pundits as a memorable war between Cotto's considerable power and Pacquiao's electrifying speed. Cotto's well-timed jab seemed to neutralize Pacquiao'shandspeed in the first frame, and using his own underrated speed, he was able to land heavier shots onPacquiao than the Filipino sensation has absorbed in recent memory.

In fact, tonight's major story may be just how well Pacquiao took those shots. Going into the fight, the public knew how fast Pacquiao was, and also knew that he had knockdown power in both hands. But one thing the world learned tonight about Manny Pacquiao was that he can walk through gigantic punches from a bruising welterweight on the order of Cotto, a man long known for breaking down his opponents with the ferocity of his attack.

Despite Cotto's landing head-snapping jabs and hooks, the speed differential started to show in Pacquiao's favor in the second round, and in the third, he drew first blood with a sneaky-fast right hand that sent Cotto stumbling and then bracing himself with a glove on the canvas - the first knockdown of the fight. The second, a much more convincing knockdown, came in the very next round, as Pacquiao, having languished on the ropes for much of the round, exploded with a roundhouse left that caught Cotto lunging and sent him sprawling to the canvas, clearly injured.

It's arguable that Cotto never quite recovered from that knockdown. He fought a cagey fifth round and may have tipped the frame in his favor, but after that it was all Pacquiao in a frightening onslaught. By the seventh, Cotto had begun to circle the ring relentlessly to stay out Pacquiao wheelhouse, and by the ninth, swollen and bloodied, he was merely in survival mode, desperately trying to end the fight on his feet.

It was not to be, as referee Kenny Bayless stepped in to stop the carnage at 55 seconds of the final round. Now a seven-time champion, all that seems left for Pacquiao to accomplish in boxing is to solidify his claim on being the world's top pound-for-pound fighter by facing the other current aspirant to the pound-for-pound throne, Floyd Mayweather. After tonight's performance, and after Mayweather's commanding victory over Juan Manuel Marquez in September, the way is cleared for a Pacquiao/Mayweather extravaganza that, if it happens, is set to become the biggest, most anticipated, and most hotly debated boxing match of the young millennium.

Inside the App Economy

2009-11-12T16:24:00.000+07:00

Beyond the goofy games is a world of useful programs that's making fortunes and changing the rules of business

By Douglas MacMillan, Peter Burrows and Spencer E. Ante

It's easy to shrug off the kooky world of apps. The bite-size software programs people load onto their mobile phones or tap into on the Web seem mostly to be silly games and pointless novelties. But look past the beer-drinking apps and flatulence programs and you'll see something significant taking shape: a bustling app economy that's creating new fortunes for entrepreneurs and changing the way business gets done.

It's happening with dizzying speed. Just two years ago, almost none of this existed. Apple's (AAPL) App Store, the most popular destination for mobile-phone programs, was launched last summer. Now there are more than a dozen rival stores, and at least 100,000 apps have been created. Some startups that staked their claim in the app economy have become large, lucrative businesses in just a few months. Two-year-old Zynga, which makes popular game apps, is already profitable, with more than $100 million in revenues. By comparison, Google (GOOG) didn't start making money until its third year—and still had less revenue.

There are serious business tools among the thousands of new apps. Salesforce.com's (CRM) programs let executives manage customer relationships from an iPhone or BlackBerry. Oracle (ORCL) apps let managers check inventory or get a snapshot of a business unit's performance. The computing that people used to do at their desks increasingly can be done on devices they can carry anywhere.

Early Days
Apps will help determine technology's next big winners. The success of Apple's iPhone is due in large part to the fact that the company can offer customers more software choices than any rival. Research In Motion (RIMM), maker of the business-oriented BlackBerry, has scrambled to catch up and has made progress. But established giants such as Nokia (NOK) and Microsoft (MSFT) are struggling to get traction, raising questions about their prospects.

These are such early days, no one knows exactly how big the app economy is. Companies make money from selling apps, from ads within apps, and from selling digital goods used in apps. Add it up and analysts figure it's at least a $1 billion market today, headed for $4 billion by 2012. Not bad for a brand-new business.

True, much of the money these days comes from goofy games. One popular app is I Am T-Pain, named after the performer, born Faheem Najm. Fans can download software to their iPhone and mimic his robot-like voice. But it's time to heed the opportunities in this fast-evolving world. The $2.99 T-Pain app has put its creator, a year-old startup called Smule, on track to pull in $3 million this year. "Apps have moved into the mainstream. The world's changed," says Jeff Smith, Smule's chief executive.

ZYNGA'S ZING

Revenues are soaring on the success of 'Social Game' Apps like FarmVille

Early this year, Mark Pincus, founder of the tech startup Zynga, huddled with staffers in his company's San Francisco offices to brainstorm new product ideas. Zynga develops game apps that can be played on social networks such as Facebook or mobile phones like the iPhone, and Pincus needed a follow-up to a popular poker app. One employee suggested a farming game, where players could grow digital crops and sell them to make virtual money. Pincus liked the idea and gave it the green light. Four months after its launch, FarmVille is one of the most popular apps in the world, with 60 million people playing it in the last month. "It just exploded," says Pincus.

Such is the nature of business in the burgeoning app economy. Success—and a flood of money—can arrive practically overnight. Zynga doesn't charge users to play FarmVille, but it does sell digital crops, cattle, and farmland. Corn seed, for instance, goes for the equivalent of 10 cents; cows run 20 cents each. All those digital goods add up. Zynga pulls in its nine-figure annual revenues from FarmVille and 20 other games.

The company may be just getting started. U.S. revenues from so-called social games have surged over the past two years to $720 million, and analysts project they will grow to $2 billion by 2012. "We are seeing very strong success with these companies," says Atul Bagga, an analyst with investment bank ThinkEquity. "They are basically letting customers choose [how much money] they want to [spend] in a particular game or application."

Zynga has the vibe of a young Google (GOOG). Just like the search giant in its early days, the company has a masseuse on staff and chefs who serve up two meals a day to keep employees from wasting time going out for food. It has weekly keg parties, like the ones Google's founders once hosted. And Pincus has tried to maintain a light atmosphere, even as the company has grown to 468 employees. The winner of a monthly poker tournament gets treated to a one-day Lamborghini rental. Pincus calls the atmosphere "ghetto Google."

Seeds of Success
The company's offices are in the industrial Potrero Hill neighborhood of San Francisco. On a recent October day the 43-year-old Pincus, clad in jeans and an untucked oxford shirt, drew three intersecting circles on a whiteboard. He says the next great opportunity on the Web lies at the intersection of three trends—apps, Web services, and small online payments from consumers. Pincus sees apps not as products but as ongoing services that users tap into from Facebook or the iPhone and pay for in small increments. "Our story has been about finding games people could play forever and giving them a reason to do it," he says.

The strategy is in full swing in the FarmVille studio at Zynga, where a 30-person crew manages the company's biggest hit to date. The game is an odd success for the digital world: Users get a virtual plot of land to farm as they see fit. As they grow crops and earn currency, they can use the money to buy more seeds, animals, and tools like tractors. Since all players are logged in to Facebook, they can work with friends or co-workers, or they can compete against them for farmer bragging rights. There are roughly 20 times more people playing FarmVille these days than there are actual farms in the U.S.

For a hit like FarmVille, the work is never done. A wall-size chart in the FarmVille studio lists the various virtual items up for consideration in the next round of improvements to the game, culled from staff ideas and requests from users. The ability to get feedback and act on it quickly is a break from past models, says Mark Skaggs, who runs the FarmVille group. At large companies such as Electronic Arts (ERTS), where Skaggs used to work, "You might design a feature and not know until two years later whether it was good or people liked it," he says. "Here, you can design a feature in a day and put it in the game the next day."

As Zynga's games have grown, they've become giant test labs for new ideas. "Every single click is being recorded," says Vish Makhijani, Zynga's chief operating officer. That means Zynga can quickly find out the impact of small adjustments—such as changing the size of a cabbage patch in FarmVille or the cost of a new gun in the game Mafia Wars—on retaining users and increasing revenue. One recent success: digital sweet potato seeds that cost $5 a packet. The seeds, which of course cost nothing to duplicate, pulled in more than $400,000 in three days.

The rich opportunity has fueled aggressive competition. Zynga's primary rivals are London's Playfish and Mountain View (Calif.)-based Playdom. Playfish is known for a game called Pet Society, which lets people adopt online creatures and then dress them up in designer clothes, while Playdom's hit game is Mobsters, in which people try to gain skills, alliances, and wealth. All three companies are private and don't disclose financial information.

The game makers compete for users across all sorts of technology platforms. The big targets are Facebook, with more than 300 million members, and Apple's App Store, with more than 50 million iPhone and iPod touch users.

Lately, Playdom and Zynga have also been dueling in court. A lawsuit filed by Zynga in September alleges that several former employees recruited by Playdom supplied the competitor with the Zynga Playbook, a proprietary document the complaint describes as "the recipe book that contains Zynga's 'secret sauce,'" referring to its game-making techniques.

The rapid growth and sharp rivalries have drawn comparisons to the early days of Web pioneers such as Amazon.com (AMZN) and eBay (EBAY). One significant difference is that the apps business has virtually no barriers to entry, meaning it is hard for any company to maintain a lead. Today there are thousands of small developers who crank out apps that don't make a dime.

The perk-heavy culture at Zynga is certainly reminiscent of the dot-com days. Inside its office for human resources, 160 small paper bulldogs are tacked on the wall, one for every new hire in the past quarter. There's a cooking staff of 17, and most game studios have their own kitchen. Several rooms are equipped with Xboxes and board games, and are designated "meeting-free areas."

New Staffers and a Couch
With employees grouped into a series of discrete loft offices, Zynga's operation looks more like 11 small startups glued together than one large one. It's a reflection of how the company is run: Studio heads set goals and are given freedom to achieve them any way they can. Those who succeed are rewarded with cash and stock bonuses and are granted extra resources such as new hires. When a new game called Café World recently set a company record for growth, signing up 16 million users in its first two weeks, its head, Roy Sehgal, was rewarded with a bevy of new employees and the leather couch he had been requesting for his office for weeks.

Pincus calls this style of management "true meritocracy" and says it's modeled partly after the approach at Amazon. It applies to regular staffers as much as managers. In his first three months in the poker group, Harsimran "Sim" Singh moved up the company ladder three times for helping to bring growth back into the company's longest-running game, Texas Hold'em. A year after landing at Zynga with no direct reports, the 25-year-old runs the entire poker unit, a team of 45.

The Amazon influence affects how Pincus conducts his board meetings. Each time he meets with his directors, he begins by recounting whatever issue kept him awake the night before. It's a tip he learned from Amazon CEO Jeff Bezos, an acquaintance and role model who shares a director with Zynga.

One matter getting airtime at board meetings of late: When should the company consider going public? Zynga doesn't need cash. It raised $39 million in venture capital in 2008 and hasn't touched the money since. But a publicly traded stock would give Pincus the currency to make deals or dole out employee options. Still, Pincus wants to protect the culture he has created. "We all make so many compromises in order to build our businesses that we wake up one day and we've created a company that we don't want to work at," he says. "I wanted to create a long-term home."

THE MAN BEHIND APPLE'S APPS

How Eddy Cue and his team keep the App Store ahead of the competition

If you had to choose one person who makes the world of apps go around, Eddy Cue might well be it. Apple (AAPL)'s vice-president for Internet services is the architect and overseer of Apple's App Store. Millions of iPhone owners have downloaded the 85,000 apps available from the App Store. That's light years ahead of rival offerings from Google (GOOG), Microsoft (MSFT), or Research In Motion (RIMM).

Cue and his team seem on track to ensure that those mobile Internet wannabes don't close the gap anytime soon. While no rival has even 15,000 apps, his team keeps tweaking Apple's offerings to make them more attractive to consumers and useful to developers. On Oct. 14, for example, Apple told developers that for the first time they could give away apps on a trial basis and then ask consumers to pay later. "Apple has done a ridiculously good job, and now they're taking it to the next level," says Jeff Holden, chief executive of Pelago, which makes apps for the iPhone and other devices.

Cue, 45, joined Apple as a lowly staffer in the IT department in time to witness the company's darkest days during the mid-1990s. He not only survived a major housecleaning after Steve Jobs returned to the company as chief executive in 1997 but emerged as one of the CEO's most trusted lieutenants. When Apple found itself playing catch-up in digital music early this decade, Jobs put Cue in charge of creating the iTunes Music Store. While far less ambitious efforts floundered, Apple's site was doling out millions of songs within weeks, with nary a hitch.

Hollywood Connection
Over time, Cue's role expanded from running the iTunes store to cutting deals to fill it. While Jobs often finalizes agreements, Cue does most of the heavy negotiations with record labels and Hollywood studios. "Eddy doesn't have attitude. That's part of his success," says one former Apple insider. "In an industry with lots of big egos, he can hold his own without saying, 'I'm the inventor of iTunes, bow before me.' One favorite approach is for Cue to "play good cop to Steve's bad cop," says the ex-employee. Apple declined to comment for this story.

Cue stands out within Apple's hard-core culture for his friendly, let's-get-a-beer manner. A rabid Duke University basketball fan, he's described by insiders as an "East Coast guy's guy." But he's one of a tight-knit group that makes sure that Apple devices, software, and services work smoothly together. Many app developers don't know the role he plays or even his name.

No doubt Cue has his hands full with the fast-growing App Store. When Apple rushed plans for the store into place in 2008, it was overwhelmed by the customer interest. The company had to invent the business on the fly, including how to approve and promote applications. Now Apple's back-end infrastructure may be as indispensable a competitive advantage as the iPhone's design. Developers have flocked to Apple because they see how the App Store can make huge successes of programs like Shazam and Tap Tap Revenge.

Apple's success has led to controversy. Some developers gripe about delays in getting into the App Store, and the Federal Communications Commission is investigating Apple's refusal to approve an application from Google. Analysts say Apple needs to develop better ways for customers to find just the right app among the thousands of options—and thereby make the business more profitable for more developers.

Still, most developers give Apple and Cue high marks. They not only established the App Store but also are building on its success. "Apple is really listening to the marketplace," says Shervin Pishevar, CEO of app developer Social Gaming Network.

ENTER YAHOO

The company is out to become the go-to place for applications

Yahoo! (YHOO) has big plans for apps. While Apple may have started the app phenomenon by letting developers create programs for the iPhone, Yahoo wants to be the company that brings apps to the wider world.

In the company's most ambitious app effort to date, Yahoo is redesigning its home page to include applications from outside developers. As the changes roll out through November, the apps will be listed along the left-hand side of the Yahoo.com page, used by more than 300 million people each month. Visitors can customize their own home pages, selecting the apps they want. Then they can check the day's headlines from USA Today or bid for an item on eBay (EBAY) without leaving the Yahoo site.

Yahoo will make money from advertising embedded within the apps. It's also considering launching its own app store, similar to Apple's, in which case it could charge for applications and split revenues with developers.

This is only one of the app frontiers Yahoo is exploring. The company has developed software for televisions that lets people launch applications such as Twitter and Facebook on the TV screen while watching their favorite shows. Another new technology allows people to tap into apps directly as they use Yahoo! Mail. Wherever people are, Yahoo wants to "summon up a gallery of all the possible things you could do," says Prabhakar Raghavan, head of Yahoo's research division. "Here are 50 million things you could do—book a ticket, upload a picture. Everything's an app."

Yahoo's home page strategy is getting some traction. Dozens of software developers have signed up and landed their programs in the "App Gallery," a menu from which users can pick and choose their favorite free programs. Carrie Cronkey, the director of business development at personal finance site Mint.com, says people are more likely to join Mint if they're referred by Yahoo because it implies a level of security. "The fact that [your app] is on Yahoo makes you more credible," she says.

For Yahoo, the real payoff from sprinkling apps into TVs and its home page comes in the form of data. By tracking which apps people use and how they interact with them, the company is building on its ability to serve targeted ads. That may help the company compete for ad revenues against rivals such as Google (GOOG). "Apps can play a big role in understanding user behavior," says Raghavan.

GOLD RUSH?

Money is flowing into apps as smartphones reshape the tech world

When Bart Decrem went looking for office space in the spring of 2008 for his startup, Tapulous, Jeff Clavier opened his door. Clavier, the founder of venture capital firm SoftTech VC, saw enormous potential in the Tapulous software that would run on Apple's iPhone. So he let Decrem use some space in the firm's Palo Alto (Calif.) digs and made an investment in his company.

Eighteen months later, Clavier's support of Tapulous looks like it may be one of his best investments ever. The company's Tap Tap Revenge app, in which players tap on-screen balls in sync to the beats of a song, has become a breakout hit. The game and its multiple spin-offs have been downloaded more than 15 million times. Tapulous, which makes money from game sales, advertising in the game, and the sale of in-game avatars, has been profitable since this summer, a speedy accomplishment for a tech startup.

The investment has convinced Clavier there is loads of potential for venture capital investments in mobile applications. At last count, consumers had downloaded 2 billion programs from Apple's App Store, and that's just one place among several where people get apps. Clavier believes app startups could become billion-dollar outfits that rival traditional game and software companies. "The revenues of these companies will become substantial," he says. "There will be publishers that become large brand names."

"We See Huge Markets"
The torrid growth has attracted money from other high-profile investors. Last March, Kleiner, Perkins, Caufield & Byers, one of the Valley's marquee venture capitalists, launched a $100 million investment fund specifically to back startups creating software applications for the iPhone. Last October, Research In Motion (RIMM) unveiled a $150 million venture fund, with investments from Thomson Reuters (TRI) and RBC Venture Partners, to develop apps and services for its BlackBerry and other phones. And this October, U.S. mobile operator Verizon Wireless (VZ) announced an initiative to invest up to $1.3 billion in wireless applications and related technologies. "We see huge markets and game-changing opportunities," says Kevin Talbot, co-managing partner of the BlackBerry Partners Fund.

Of course, investors don't need a dedicated fund to participate. Firms such as Union Square Ventures, O'Reilly AlphaTech Ventures, and XG Ventures are devoting an increasing amount of time and money to financing wireless apps. "Most of the deals we see are in the mobile arena," says Andrea Zurek, co-founder of XG Ventures, a new VC firm of former Google (GOOG) executives.

The money flowing into apps is inspired by the belief that smartphones and other portable devices are transforming the tech world. The growth of mobile computing is sparking a renaissance in software development. Gaming apps are the most popular programs right now, but mobile shopping, content, social media, communications, and productivity tools are attracting increasing amounts of capital. "We don't think this is slowing down anytime soon," says Matt Murphy, the partner at Kleiner Perkins running the fund dedicated to Apple-related investments. (View an interview with Murphy here).

Douglas MacMillan is a staff writer for BusinessWeek in New York. Burrows is a senior writer for BusinessWeek, based in Silicon Valley. Ante is an associate editor for BusinessWeek.

Zynga CEO: Playfish Helps EA 'Catch Up'

2009-11-12T16:22:00.001+07:00

Posted by: Douglas MacMillan on November 10

Mark Pincus has become the poster boy for the booming business of social online games. His company, Zynga, brings in more than $100 million in annual revenues, and owns the most popular Facebook app of the year, FarmVille. Zynga is even considered by analysts and observers to be a candidate to go public next year.

So what does Pincus make of video game stalwart Electronic Arts recently scooping up Playfish, one of Zynga’s top rivals, in a deal that’s worth up to $400 million? He says EA paid a justifiably high price to enter the social gaming space. “The founders got a really good cashout, and EA got to catch up to a business that they had kind of missed the start of,” Pincus says.

Zynga may benefit indirectly from the marriage, since EA marketing savvy could bring more attention to the social gaming space, he says.

Pincus isn’t worried about Playfish’s newfound access to more capital making it a stronger competitor. But he admits that EA’s popular game brands including The Sims and Madden have a lot of potential in the social gaming space. “There’s a good chance for them to try to leverage EA’s major brands and take Sims and other [games] into the market,” he says. This could be a “risk” for Zynga and others that don’t have a stable of recognizable game franchises to draw on, Pincus says.

EA never talked to Zynga about the possibility of an acquisition, according to Pincus. "They apparently didn’t want to buy us," he says. "They might have realized that we weren’t interested in being acquired." Or, EA might have assumed the price tag would have been too high to bother. If Playfish was worth $400 million with 60 million active users, analysts estimate Zynga, with 186 million users, may already be worth over $1 billion.

Pincus shrugs off speculation that Zynga is coming due for an IPO. "Why would we sell it or why would we take it public if neither of those options accelerated our business plan?" he asks. Even though a public offering would give Zynga cash to make deals of its own, Pincus thinks the constant scrutiny of Wall Street would threaten the company's innovative, entrepreneurial structure. That echoes the sentiment he conveyed last month, when I interviewed him for a BusinessWeek cover story on The App Economy.

Recently, Zynga has been brought to task for promotional offers made inside its games, offers which account for less than 20% of revenues. As the blog TechCrunch reported Oct. 31, many of these offers reward users for signing up for unwanted contracts and subscriptions. Since then, Pincus has pledged to put each offer in Zynga games under more scrutiny, and remove those that appear to be "misleading," he says. "We have to try to police them."

Policing is hardly what the company was doing before. Pincus claims he personally never knew about the more seedy offers in FarmVille and other games, since he spends most of his time building products, not revenues. "We have one person who deals with offer networks and it’s not even a full time job," he admits. Still, the entrepreneur adds that his ignorance of the matter is "not an excuse."

He’s certainly paying attention now. And with EA’s marketing muscle behind Playfish, he’ll need to keep closer tabs on the competition too.

Apple Bathes in Profit

2009-11-12T16:12:00.001+07:00

Market share is probably the easiest and most often used point of comparison between competing products. It makes sense: If something has a large share of the market, it’s probably doing well. But that doesn’t always mean that it’s doing better than something with less market share, especially from a business perspective.

I bring this up because today brought some very interesting numbers from the research firm, Strategy Analytics. According to them, Apple has surpassed Nokia as the most profitable phone maker in the world. I’ll throw some numbers at you in a second to show why this is really incredible, but the key takeaway is that this is why, at the end of the day, Apple wins.

While the press and rivals obsess over market share, Apple quietly comes in and makes an insane amount of money. It’s the same in the computer industry. Small market share, huge amount of money. The most important thing for all of these are companies is the bottom line. Apple wins that battle.

According to the report, Apple made $1.6 billion in operating profit off of the iPhone in Q3. Nokia, meanwhile, made $1.1 billion. Let’s put this in perspective. Recent numbers suggest Nokia controls roughly 35% of the worldwide handset market. Apple? About 2.5%.

Not 25%. Two point five percent.

Since the launch of the iPhone in 2007, just about everyone has been clamoring for more variety in Apple’s offering. People wanted iPhone minis, they wanted CDMA iPhones, etc. But Apple stuck to its guns and has basically sold one phone, which it could manufacture efficiently, when rivals like Nokia are busy peddling dozens. Sure, there are a few variations on the iPhone (included memory, and now the 3G/3GS), but basically, it’s one phone that is pulling in hundreds of millions of dollars of more profit than the market leader.

To people who follow Apple closely, this should be absolutely no surprise. It’s the same thingit does in the computer industry. Despite having a much smaller market share than its rivals, it makes more money than most of them. The key, of course, is that Apple maintains its high profit margins, while the competitors shuffle to battle each other for market share.

That’s not to say that Apple doesn’t care about market share for either its computers or the iPhone, it undoubtedly does. But it’s a secondary goal to running a successful business. A business which is now absolutely thriving in an awful worldwide economic environment.

If Apple wanted to boost its computer market share, it could do so in a heartbeat simply by slashing into its margins and chopping hundreds of dollars off its machines. That’s why those “I’m A PC” shopping commercials this summer were humorous. They’re attacking Apple for not competing in segments (low cost PCs) that it has absolutely no desire to compete in. Would those commercials be effective if Apple chose to sell a $500 MacBook? No, becauseLauren probably would have bought it (remember, her first stop was the Apple store).

Most consumers obviously shouldn’t like the idea that a company is purposely charging more for its product to keep its margins high. But Apple has a winning proposition for that because it builds machines of such high quality that to many users itseems like they should cost more than they actually do. Or as Apple COO Tim Cook put it in a earnings call over the summer, “Our goal is not to build the most computers. It’s to build the best.” When you do that, apparently you can keep your margins high and in turn, make insane profits.

The iPhone is a bit different because Apple has a partner that it has convinced to pay it an insane amount of money for each device sold and then subsidize the cost of it for consumers. Remember that when the iPhone first came out it was $600. That’s the price Apple clearly felt comfortable setting for it to maintain what it thought was a good margin.

That price, of course, was ridiculous (though, admittedly, myself and plenty of others paid it). A few months later, Apple realized this too, and slashed a couple hundred dollars off the price, thus slashing it margins. But then they figured out a better way. Previously, they had been getting a cut of every monthly AT&T iPhone contract. But with the iPhone 3G, Apple decided to give all that money to AT&T in exchange for one upfront payment, and the promise that AT&T would subsidize the cost of the phone down to $199 (and $299). Jackpot.

So basically, Apple is now making a huge margin on every iPhone sold, while AT&T more or less picks up the tab. (Don’t feel too bad for them, they still make plenty on those monthly contracts.) Now you see why Apple doesn’t mind that exclusive agreement even while us consumers bitch to no end? There are 1.6 billion reasons why they like that deal (okay, probably some smaller percentage of that, but still).

And because Apple makes all of this money, they have money to pour into making that next great product. A product that will likely be high quality — and sell with a high margin. Hopefully some of that $34 billion in cash (with no debt) is being poured into finalizing the tablet as we speak.

This influx of profit also allows Apple to take the plunge into new markets, like it did with the iPhone. Earlier today, blogger John Gruber recalled what former Palm CEO Ed Colligan said when he heard that computers makers like Apple could enter the phone market:

“We’ve learned and struggled for a few years here figuring out how to make a decent phone,” he said. “PC guys are not going to just figure this out. They’re not going to just walk in.”

Not only did they walk in, they walked in, changed the landscape, and have what now appears to be the best business model industry-wide.

Just as with the computer industry, while all its rivals were busy jockeying for market share, Apple secured the high ground and figured out the best way to bathe in profits.

Starbucks: Howard Schultz vs. Howard Schultz

2009-11-06T23:44:00.001+07:00

Starbucks' iconoclastic founder has gone through a reeducation in the rigors of running a more typical company. That doesn't mean he has to like it

By Susan Berfield

You can get a sense of what's important to someone by the stories he tells. At Starbucks (SBUX), a company diminished in ways both tangible and ineffable, Howard Schultz is telling a story about milk. Starbucks uses a lot of the stuff. As part of Schultz's efforts to improve the quality of the millions of lattes and cappuccinos Starbucks serves, he forbade what had become the common practice of resteaming milk. That meant the baristas were pouring millions of dollars of leftover milk down the drain. As store managers for the first time began thinking about how to operate more efficiently, an idea emerged. It was simple, obvious, and made everyone wonder why no one had thought of it before: They could put etched lines in the steaming pitchers so that the baristas would know exactly how much milk to use for each size drink. Before, they just guessed. "The celebration of that line in the halls of Starbucks has become a metaphor," says Schultz. "How many other lines can we find? We've found a lot because no one was ever looking. The people who have found those lines have become part of the folklore."

Can you think of many other executives who would turn something so prosaic into folklore? Or who would have left something so basic to chance? But we're talking about Howard Schultz, and about Starbucks, which for most of its existence was fast-growing and free-flowing, a place where the experience was everything. A place where the boss led by instinct, where authenticity was what counted. Schultz liked to say that Starbucks had taken the road less traveled.

That vision, perhaps inevitably, has collided with the exigencies of the real world. The $4 latte has become an unaffordable luxury, and Starbucks is competing with McDonald's (MCD) and Dunkin' Donuts, two chains more interested in selling lots of coffee than in being a part of people's lives. Even so, Schultz, for a time, seemed strangely unconcerned that the ground was shifting. When he reclaimed the responsibilities of chief executive in January 2008, he announced that Starbucks had lost its way: It had become the kind of soulless corporation he detested. He promised to take the company back to its roots, to make Starbucks loved again.

The Great Recession has since forced Schultz to do something even more drastic. He has had to acknowledge, however grudgingly, that the company needed to change almost everything about how it operates. Starbucks had to become more ordinary. The first orders of business: Cut costs by at least $500 million, shutter 800 stores in the U.S., lay off more than 4,000 employees. And also: Conduct more customer research, offer discounts, advertise. All very common, unremarkable ways of doing business. All new and uncomfortable to Schultz. "He was always so tantalized by out-of-the-box thinking," says John Moore, a former Starbucks marketing executive. "But sometimes it's the box that needs to be fixed."

Spend enough time with Schultz, and one thing becomes clear. Despite the recent reversals and reckonings, he still wants it all. Starbucks must be powerful and benevolent, respected and passionate, ubiquitous and imaginative. There is no point telling him that no big corporation, certainly not one with some 16,000 stores in 50 countries, has ever found such a balance. He simply doesn't buy it. Yet he concedes the strain of trying to stay true to his shareholders and his original vision. "I've had to change my own mentality and thinking," he says. "It's always a fragile balance between creativity and discipline, but it's much more acute than it was in the past." As he leads Starbucks into its next era, Schultz's biggest struggle may be with himself.

THE SOUL OF THE COFFEE HOUSE

Howard Schultz, who is 56, has lived and breathed Starbucks for more than two decades. He is a salesman, a marketer, a merchant, and he always thought he could tell Starbucks' story best. Even during the eight years when he wasn't actively running Starbucks, everyone—from the executive team to the baristas—felt his presence. When he reassumed the position of CEO 19 months ago, the staff at the Seattle headquarters knew they were in for something. "We were all shell-shocked that first week," says Troy Alstead, the chief financial officer. Schultz had never really left, but somehow he was very much back. "We need his passion and drive and challenging nature," says Alstead.

Schultz has always relied on instinct. And his instincts have been pretty good. From the beginning, when he bought Starbucks' six stores from its quirky founders in 1987, he knew what the company could be. He wanted to sell an experience, and so he created a gathering place with its own language and culture. He knew the baristas would be everything to the company, so he treated them well, offering stock options and health insurance even to part-time employees (and everyone was called a partner). He talked about the soul of the coffee house, doing good in the world, controlling your own destiny. He tried plenty of things that failed, and he made many compromises that he would later regret. But he always measured success on his own terms.

Let other companies base their strategies on customer surveys. That wasn't the Schultz way. "We did it, but he hated it," says Howard Behar, who as a senior executive at Starbucks for more than a decade had a close but contentious relationship with Schultz. Another former executive recalls what happened to anyone with the temerity to suggest doing more research. "Everybody would cringe and say: 'You're new, aren't you?' Howard would say: 'We're not P&G.' " If Schultz wanted to learn something about his customers, he would visit a store. Schultz says he still visits 25 locations a week.

There were a bunch of other things he didn't believe in—things most executives do without questioning. For most of his tenure, Schultz hasn't cared much about costs. He didn't think he had to because Starbucks was opening thousands of stores a year, and speed was always more important than efficiency. Advertising? That was what other companies did. After all, millions of people were walking around holding Starbucks cups. "Our advertising money went to the best real estate on the corners," says Arthur Rubinfeld, who was in charge of Starbucks store development in the 1990s and recently returned after a six-year absence to lead the work on new-store designs.

For a long time the Cult of Schultz worked brilliantly, and no one complained. Certainly not the shareholders who watched the stock's value increase by nearly 5,800% from the initial public offering in 1992 to its peak in 2006. By 2007, Starbucks was a $10 billion company serving 50 million customers a week. For 15 years, sales in stores that had been open for more than a year surged at least 5%. "No one in the history of retail had ever done that before," says Schultz. Even now, as Starbucks seems more and more like every other retailer, Schultz doesn't seem quite like any other chief executive. He's still an iconoclast.

Eventually, though, came the reversal—then the reappraisal. "We got swept up," Schultz says. "We stopped asking: How can we do better? We had a sense of entitlement. And I'm here to tell you that's over." All companies find themselves retrenching at some point. But it's hard to overstate just how much Schultz has been forced to retreat from the practices of the past. "We've gone through a huge change," says Alstead, who has worked for Starbucks since 1992. "And somewhere in the mix [were] stages of grief."

A new breed of manager has emerged at Starbucks, people whose skills would have been far less valued back in the day. Consider Peter D. Gibbons, Schultz's handpicked supply-chain guru. Gibbons didn't have a problem telling Schultz & Co. that Starbucks was really bad at even the most basic operations. Such as delivering supplies to the stores. "Now we're excited about the supply chain," says Alstead. Cliff Burrows, who oversees the U.S. stores, has been told to simplify operations (and save money). Translation: Among other things, getting baristas to use a standard six-step process to brew coffee rather than do whatever they feel like. Schultz even hired a chief information officer in the person of Stephen Gillett, who previously worked at Yahoo! (YHOO) His job is to make sure real-time data flows to headquarters, where it can be sliced and diced into meaningful analysis. Lastly, there is Michelle Gass. She helped make the Frappuccino a hit in the mid-1990s and has been given a budget—Schultz won't say how much—to, that's right, advertise.

You can just hear the business traditionalists applauding: Finally, Howard has gotten religion. Certainly, most of what he's doing makes sense. Starbucks arguably would have been in better shape today if it had more data. "When the numbers went south, we couldn't even make an educated guess about why," says a former executive. "We had no way to get details about sales, no way to capture customer opinion, no good way to get information from the baristas."

Burrows's efficiency drive in the stores, which includes teaching baristas to set up the pastry case in 25 or so minutes rather than 45, has saved Starbucks $60 million in the past three months. And Gillett's store sales data helped Schultz see an important difference between the morning (when coffee is a necessity) and the afternoon (when it is an indulgence). "We never had that level of segmentation before," Schultz says. "It's a new tool in terms of being able to move the business in different ways." The numbers prompted Starbucks to offer any grande cold drink for $2 after 2 p.m. to customers who had already made a purchase that day: The company calls it the treat receipt.

Gass, named the chief of marketing and new product development last year, convinced Schultz that advertising is essential in the current climate. "The consumer is shifting to more conscientious consumption," she says, "and for us that's really good, that's what we always set out to be—the company that does the right thing, that buys its coffee responsibly, that takes care of its partners. The objective is to remind people why they fell in love with Starbucks to begin with."

STILL CONFLICTED

In 19 months, Schultz has turned Starbucks upside down and, in doing so, set in motion a possible recovery. Already there are signs that the company is doing better. During the last quarter same-store sales declined, but less sharply.

The man, however, still seems conflicted. Maybe it's understandable. Getting baristas to use a standard process to make coffee seems a lot like McDonald's counter staff cranking out Egg McMuffins. And listen to Schultz on customer research. "I despise research," he says. "I think it's a crutch. But people much smarter than me pushed me in this direction, and I've gone along." Hardly the words of a convert. Now, when he walks around Starbucks' Seattle headquarters, Schultz sees life-size cardboard cutouts representing four customer archetypes.

Yes, Schultz approved Starbucks' first all-out advertising campaign. You may have seen the ads in the newspaper: They are meant to look like they are printed on a burlap coffee bag and tell you in no uncertain terms what the company stands for. Schultz seems to appreciate them, in a perfunctory way. Just before the campaign launched in May, Starbucks posted a video on YouTube (GOOG) of Schultz discussing the ads with baristas in a Seattle store. For a man routinely described as charismatic and inspiring, he seems surprisingly uncomfortable. See for yourself: It's still up.

Schultz's autobiography, written more than a decade ago, is called Pour Your Heart Into It. He comes across, then and now, as a classic entrepreneur: optimistic, relentless, mercurial, and eager to prove people wrong. And when he says, "I love being the underdog," as he did several times in our conversations, he's not talking about then, he's talking about now. Except now he is the chairman, CEO, and president of a company that made more than $300 million in profit last year, that is the most followed company on Facebook, and one of the most recognized brands in the world. Would anybody really call him, or Starbucks, the underdog?

Schultz's curious assertion seems to suggest that the role he inhabits now, as a conventional executive making predictable decisions, may be a little harder for him to play than he lets on. There are other signs. He recalled for me a story he had just told a group of Starbucks marketing executives. Schultz went to visit Molly Moon's, a new ice cream shop in Seattle that everyone was talking about. It was a summer Sunday, and about 100 people were in line. When Schultz finally got in, he looked around carefully. He figured the owners hadn't spent more than $50,000 on the place; the signs were poor, the furniture secondhand. But there was energy and passion, and the ice cream was fantastic. "You want to be there," he says. "To me that store reinforces all the things I believe in. It's not marketing, research, consultants, it's just the experience."

A month later, during a conversation in late July, he returns to the same idea. Word was out that Starbucks was opening a concept store in Seattle, and Schultz was as excited as I had seen him. Earlier in the year he'd asked a select group of employees a question: If you were going to open a store to compete with Starbucks, how would you do it? Then Schultz gave them a small budget, told them they were on their own, and left. In early June they emerged to present a design they called 15th Ave. Coffee & Tea. On the door it would say: "Inspired by Starbucks." (Schultz insisted the store have a different name because it offers beer and wine.) It would sell Starbucks coffee, but the company logo and graphics would be gone. So would the automated espresso machines that some Starbucks stores still use and Schultz has always hated. The food would be baked locally. There would be coffee and tea tastings in the mornings. In the evenings, music and poetry readings. "We all said we'd invest in that company," recalls Schultz. "I said: 'Go open it.' "

He visited the store for the first time just days before it opened on July 24. "I was blown away by the creativity," he says. "I asked the lead designer: 'Where did you get this coffee scale?' She got it from the flea market. When is the last time somebody went to the flea market to get something for a Starbucks store? It reminds me of the early days, when we were fighting for survival, for respect. To me this hearkens back to when we were at our best." He says there are plans to open two other concept stores in Seattle. Beyond that, he can't say. "But my hope is that we can expand it," he adds. It's as if Schultz can't help himself: Starbucks is growing up, and he needs to start over again with something small.

BUSINESS EXCHANGE: READ, SAVE, AND ADD CONTENT ON BW'S NEW WEB 2.0 TOPIC NETWORK

Instant Caffeine Fix

In February, Starbucks introduced a product that sent a jolt through its customers, investors—and critics: instant coffee. VIA Ready Brew is intended to be drunk on the go, hot or cold, and is sold in single-serve packages. Starbucks is testing it in Seattle, Chicago, and London, and will launch it nationally in the U.S. this fall. "People talk about Starbucks having reached saturation in the U.S. and abroad," Schultz told the Financial Times. "But when we look at the size of the prize, this is the most significant opportunity that we can look at in terms of growth."

To read "Starbucks Hopes for an Instant Success With Via," go to http://bx.businessweek.com/starbucks/reference

Berfield is an associate editor at BusinessWeek .

Karim Rashid, Designer & Author of 'KarimSpace' (INTERVIEW)

2009-11-06T23:39:00.000+07:00

Karim Rashid is a renowned designer who has also written a book called ‘Karim Space,’ a popular and personal guide to living.

Karim Rashid has been the recipient of multiple awards, the latest from Veuve Clicquot Globalight called the Popai Gold Medal for Technics and Innovation. Along with Veuve Clicquot, Karim has also worked for Swarovski, LaCie and Samsung, among many others.

10 Questions With Karim Rashid

1. How did you get involved in design and what motivates you to continue?

My career really started in 1993 (when I was 33) when I moved to New York City. In my early 20s I spent two years in Italy doing post-graduate classes and working in Milano in a design office. That experience made me realize that I wanted to design poetic artistic yet functional everyday objects for everyday life.

But on my return to Canada from 1985 to 1991, I worked in a design office in Toronto for six years doing really ‘hardcore’ industrial design projects like machinery, medical equipment, power tools, laser measuring devices, snow shovels, train interiors, and mailboxes for Canada Post. I was disillusioned about the profession and felt that Italy was about the only country that understood the necessity of beauty in industrial design.

The North American companies were disrespectful of design. Design was not embraced as it is today. I went into being a full-time academic and stopped designing for two years because I was so fed up with industrial design. I was full-time in Toronto at OCAD, then the Rhode Island School of Design (RISD).

I was going to quit the profession in 1992 when I was fired from RISD. I was told I was teaching ‘philosophy and theory,’ not design. Then I found myself in New York City penniless and started drawing objects romanticizing about the beautiful world I always wanted to shape.

When I started my office, after approaching about 100 companies from La-Z-Boy to Gillette, I only got one client. I designed a collection of tabletop objects for Nambe in Santa Fe that became very successful. They sold about $3,000,000 a year and entered permanent museum collections.

This relationship gave me the confidence that I could really contribute some meaningful and successful objects into the world. I designed the OH chair and Garbo Waste can for Umbra (1995). They continue to sell millions and proved to me that Americans want design but at an affordable price.

I then went on to design cosmetic packaging for Issey Miyake, the Prada skincare line, cosmetics for YSL and Shiseido, products for Sony in 1998, and Giorgio Armani shops in 1999.

The first restaurant I designed was for Morimoto, the Iron Chef, in 2001 (Philadelphia) which fortunately won many awards. Being a successful restaurant interior designer afforded me many more interior projects including the Semiramis hotel in Athens. It was my first hotel, and I designed every aspect from the architecture to the flatware, from the menus in the restaurant to the staff’s uniforms. Since then I have designed thousands of objects and about 50 interiors.

This moment as I answer your questions I am working in 30 countries on about 50 projects and I feel like I am just starting. There is about 100 million dollars of my work sold yearly by about 200 companies globally. I think that I design objects that people love and want—not objects that are about design for design’s sake or insular design that is unfriendly and not coherent with people’s behaviors and sensibilities.

2. How significant are the topics of cool hunting and trend spotting in the world of writing or design?

I think what Trend Hunter does is necessary to expose the world to the ‘new’—to inspiring design and movements. Trend hunting is a preoccupation and need for many, but for me as a designer, I am working more in a first order, I am designing and shaping the future, not working off existing trends or styles.

My focus has never been about what’s cool or trendy. I do not look for trends and I never derive my work from trends. Design is about shaping new movements, finding new directions, new solutions, and new aesthetics, so design eventually shapes or results in trends. Design has been the cultural shaper of our world from the start. We have designed products, systems, cities, industrialization; we designed everything in the entire built environment.

3. How do you define a trend?

Trends for me are something that come and go, or are momentary, which is part of our ever-evolving, in flux world. But as a designer, if something is ‘trendy’ it means for me, it is over, it is style at that point, and no longer a movement or direction.

But frankly, I think we have blurred the meaning of trend, style, and design. Style is steeped in appropriating the past; design is about shaping the future. Trend is the populous embracement of the present.

4. How do you define cool?

Cool is smart, beautiful, poetic, original, individual, useful, sexy, enlightening, inspiring, contemporary, colorful, energetic, fulgent, powerful, and intellectual yet accessible.

5. Do you need a culture of innovation to create something that is cool?

Yes—I always believed that design and innovation should be inseparable. Style is separable from innovation, hence design has content, and style is fleeting and forever subjective.

Let me give you an example. I designed some shoes for a Brazilian company called Melissa. They asked me to design a high heel shoe. My first thought was to create a comfortable high heel shoe since I can’t believe that in the last 100 years we have continued to design uncomfortable high heel shoes. As far as I am concerned, there is no excuse.

So I used a tri-injection process to create a shoe made of three different inseparable polymers. One polymer is the unseen inside heel that almost moves and cushions (inspired by Nike Air concept). The sole polymer is extremely robust, and the overall shoe last is soft and very flexible polymer on the foot. Many women tell me it is the most comfortable high heel shoe they have worn. I also injected a scent in each shoe of vanilla, strawberry, etc.

The shoes are washable and remain looking perfect for years. This is an example of innovation and the result is an interesting unusual yet high performing object of design. I may sound like a braggart here but let me say that although this project is a successful example, for every success I have designed 10 failures!

6. What is the best way to create an infectious idea, product or service?

I write about this subject in my book “DESIGN YOUR SELF.” I would say question your life. Bring ideas, possibilities, opportunities, or even just alternatives to one’s life. With awareness we can then start to ‘resolve’ our problems which, at the end of the day, inspire individual control and self-confidence about taking charge of your life and your destiny.

My real desire is to see people live in a the modus of our time, to participate in contemporary world, and to release themselves from nostalgia, antiquated traditions, old rituals, meaningless kitsch, and that we should be conscious and sensorially attune with this world in this moment that we are alive.

7. What is the key to innovation?

Design’s agenda since the Industrial Revolution was to create accessible altruistic objects for a larger audience, so design’s agenda was to shape a betterment of society. And innovation affords this betterment. We live better today than we have ever lived historically, regardless of all the world’s problems.

I try to always have some level, even a nuance, of originality or innovation in my work, whether it is a new material, a new human behavior, new form, new production method, new market, new message (be it wit, humor, emotion, meaning, social or political agenda), new experiences, or completely new concepts.

Innovation is not about trends, it is not about problem solving, it is not about just form or just function—it is about progress. Innovation is the manifestation of brilliant new ideas that create progress and evolve humankind. To innovate is to be highly perceptive of the moment in which we live.

8. What are the most important trends you see in the design industry?

Trends are not important. I want to rid the world of nostalgia (NO-STALGIA!) so we can enjoy, celebrate and experience the contemporary world without perpetual biases and subjective tastes. I want to live only in contemporaneity.

It is comfortable for people to live with recognized vernaculars, with the security of known signs and languages. The past is easy to copy; the past, though, is pointless. We live, breathe, and engage today’s world.

A mobile phone is not a copy of the last, nor is a car or a fashion; therefore, all entities of our life should have this same agenda of high performance, new aesthetics, greater comfort, softer, more sophisticated and eloquent designs. You are alive today, so you should surround yourself with physical goods that are a reflection of our milieu.

The future trend will be immateriality. I think that the future is that we will own nothing (but have even more heightened, more digital experiences). This is really nature—a new digital nature. Now we lease cars, we lease houses, lease computers, and soon we will learn to lease everything, experience it for a short while, and go on to the next.

We will create a hyper consumptive, forever dynamic, ever-vast changing human condition, where everything will be cyclic, sustainable, biodegradable, and seamless. The digital age will be more human, more communicative, more active, more inspiring, and more experiential than ever. So if I design a physical object, it must at least try and speak and communicate this technological world in which we live.

9. Professionally, what do you want to be doing or studying in 10 years?

There is so much to do. I want to design an electric car, smart clothing, smart objects, houses, robots, buildings, restaurants and hotels, a hospital, a school, and I could go on and on. I want to keep designing products, cosmetics, furniture, lighting, interiors, producing art, and shaping the future.

I also have a desirous need to design objects for the physically challenged and the aging population. It is quite shocking how so few companies are addressing this ever-growing market. By 2012 there will be over 60 million Americans over the age of 60.

10. What are your most important hobbies?

Outside of design I always loved music, collecting music. So for the last 30 years I have deejayed around the world. So I do not really have a hobby. I always say that you should make your hobby your job.

Design is my lifelong hobby. Design is something that can be so emotional, so experiential, so romantic, so poetic, and so human and yet constantly moves us forward. We must evolve, we must innovate, and we must change. I want to change the physical world.

30 Healthy Cholesterol Tips

2009-11-06T23:03:00.000+07:00

1. Find more ways to walk. Can you walk to the store for milk? Park farther away? Take the stairs? If you can move more, DO! Physical activity is vital to heart health.

2. Eat six or more small meals a day. A large study of British adults found that people who ate six or more times a day had lower cholesterol than those who ate twice a day, even though the "grazers" got more calories and fat!

3. Fix all your sandwiches on whole grain bread. Eating more complex carbs, like whole grain bread and brown rice, can increase HDL levels slightly and significantly lower triglycerides, another type of blood fat that contributes to heart disease.

4. Say cheese! Women who ate a serving a day (about the size of four dice) had higher HDL (good cholesterol) and lower LDL (bad) than those who ate less, according to a study at Wake Forest University School of Medicine in Winston-Salem, North Carolina.

5. No laughing matter. A recent study showed that diabetes patients who watched funny sitcoms for 30 minutes, along with their standard meds, reduced their heart risk substantially: They had about a 26 percent increase in HDL ("good" cholesterol), compared with a bump of just 3 percent among patients in the control group.

6. Brew it better. If you're worried about cholesterol, stick to paper-filtered and instant coffees. Unfiltered coffees, which are typically made with a French press, contain more of a cholesterol-raising substance called cafestol.

7. Make the move to nonfat milk. If you drink whole milk, switch to 2 percent. If you already drink 2 percent, move to 1 percent. If you drink 1 percent, you're ready for nonfat.

8. Start with soup. Studies show that folks who begin their meals with soup end up eating fewer calories by the end of the day without feeling hungrier. Give it a try with a broth-based soup.

9. Bag some barley. Thanks to its impressive stash of soluble fiber, which slows the digestion of food and the rise of blood sugar, barley is much friendlier to blood sugar than rice for most people. And it lowers cholesterol to boot.

10. Start three days this week with oatmeal, a proven cholesterol-reducer. Use the old-fashioned or quick-cooking kind, not instant.

11. Sip a cup of black tea every four hours. Government scientists found that three weeks of drinking five cups a day of black tea reduced cholesterol levels in people with mildly high levels.

12. Berry good news. Adults who ate about a cup of berries a day lowered their blood pressure and raised their HDL (good) cholesterol after eight weeks, according to a new study from Finland.

13. Pay attention to fiber. Studies find that eating 10 to 30 grams of soluble fiber a day -- much more than the average American eats -- reduces LDL about 10 percent. Aim to up your intake slowly though, otherwise you may experience some bloating and flatulence.

14. The use of medication doesn't have to be permanent. If you improve your diet and increase your activity level, you may reduce your cholesterol enough to get off the medication and stay off it!

15. Add half a tablespoon of cinnamon to your coffee before starting the pot. A Pakistani study found that 6 grams cinnamon a day (about 1/2 tablespoon) reduced LDL cholesterol in people with type 2 diabetes by nearly 30 percent.

16. Try turmeric. Small studies have found that curcumin, a component of turmeric, cuts cholesterol. Heat a little oil in a sauté pan, and toss in a tablespoon of turmeric, a dash of salt, and a generous pinch of black pepper (pepper can increase your uptake of curcumin by up to 2,000 percent). Stir for a minute, then add veggies and lean protein for a healthy, sunny dish.

17. Pop edamame as a snack. Just half a cup contains nearly 4 grams fiber, not to mention the soy isoflavones in these soybeans. Consumption of both has been linked to lower cholesterol.

18. Fall in love with olive oil. A study found that people who consumed about 2 tablespoons of virgin olive oil daily for just one week had lower LDL and higher levels of antioxidants in their blood.

19. Put your pizza on a diet. Order a veggie pie with extra vegetables. Or, if you must have meat on your pizza, make it chicken or ham, not pepperoni. Or try clams, shrimp, or anchovies!

20. Practice deep breathing four times a week for two to four minutes. Use this technique when you're faced with a stressful situation to mitigate your body's reactions.

21. Take as prescribed. If you need cholesterol medication, statins are generally prescribed first, but your doctor may also suggest bile acid sequestrants, fibrates or prescription niacin, all of which will help.

22. Make healthy eating easy. If time's an issue, buy "semiprepared" foods. Some examples: boneless, skinless chicken breast; broccoli and cauliflower florets; and bagged salad.

23. Bag the butter. Dip breads in olive oil instead, or try a sterol-based spread. In the kitchen, try replacing butter with olive or canola oil.

24. Make meals picture-perfect. On days when you don't have salad, add a piece of fruit to your lunch. Or better yet, have fruit at lunch and salad with dinner.

25. Get creative with vegetables. Throw frozen veggies (no need to defrost!) into soups.

26. Step to it. Try to get at least 2,000 steps a day just through everyday activities, like vacuuming and gardening. Make it easy and check out a sports store for a pedometer.

27. Bored with your walks? Invite a friend to break up the tedium or try a new route -- both can make for a more enjoyable experience, and time will go much faster.

28. Lower stress levels with an enjoyable hobby. Can't think of one? Jot down your favorite childhood pastimes, then find one you can transfer to your adult life. For instance, if you loved to draw, find a drawing class nearby and sign yourself up!

29. Sprinkle wheat germ or flaxseed (both rich in omega-3 fatty acids) over salads, yogurt, and cereal.

30. Set the alarm on your computer to go off once an hour. This is your signal to get up and take a short, five-minute walk.

Samsung Upbeat about Memory Chip Recovery

2009-10-28T23:58:00.000+07:00

Posted by: Moon Ihlwan on October 28

A year ago, the global semiconductor industry was fraught with overcapacity. The situation was particularly bad for memory chips. But suddenly the tech industry is facing supply constraintsfor DRAM (dynamic random access memory) chips used in computers to hold data while processors run programs and NAND flash chips used in mobile gizmos to store music, photos and data.

That’s good news for the tech sector looking for signs of recovery after a yearlong slump. And no other company will benefit more from a semiconductor supply shortage than Samsung Electronics, the world’s largest maker of memory chips. The Korean company’s chip business chief, Kwon Oh Hyun, said Oct. 28 he expected the supply of both DRAM and NAND chips to fall slightly short of demand next year, making chip prices stay firm. Samsung aims to increase its chip revenues to $25.5 billion in 2012 from an estimated $16.6 billion this year, he said.

The optimistic outlook stems from confidence that Samsung has widened its gap with rivals during the downturn. Samsung kept investing in upgrading production technologies and equipment while Japanese, American and Taiwanese rivals cut back in spending. Industry analysts say Only Samsung and Hynix Semiconductor, another Korean company, can now produce DRAM chips by printing circuit lines on wafer disks with 50 nanometer technology – a tool increasing productivity by 30% from the previous-generation technology. Samsung is poised to report a sharp rise in profits this year, thanks partly to a turnaround in its chip business.

http://blogs.businessweek.com/mt/mt-tb.cgi/15930.1310913874

The Coolest Small Company in America

2009-10-22T00:09:00.000+07:00

Why are high-powered M.B.A.'s getting off the fast track to work for a $13-million food company in Ann Arbor?

By Bo Burlingham | Jan 1, 2003

It's 4:20 on a Wednesday afternoon, and Ari Weinzweig is talking to a group of new employees about the 4 Steps to Selling Great Food. "Anybody know what the first one is?" he asks, holding up a plump, brown, and fragrant loaf of bread from Zingerman's Bakehouse.

" 'Know it,' " says a young woman with curly blond hair.

"That's right," says Weinzweig. "Great." And he proceeds to lead the group on a sensory excursion into the properties of slow-rising artisanal bread.

The CEO of Zingerman's Community of Businesses (ZCoB), Weinzweig looks like a Jewish hippie version of Ichabod Crane -- tall and gangly, with olive skin, curly black hair, and a fringe of a beard. He wears a ring in one ear and a stud in the other and dresses in black jeans, sandals, white socks, and a T-shirt with the sleeves rolled up. The Chicago native studied Russian history at the University of Michigan and describes himself as a lapsed anarchist.

In 1982, Weinzweig founded Zingerman's Delicatessen with Paul Saginaw, who is still his partner. Over the next 10 years, the deli became world famous -- and then hit a wall. Faced with the choice of changing the company or letting it stagnate, the partners came up with an ingenious strategy that has allowed them to retain the best aspects of small-business life while enjoying the benefits and challenges of growth. The result is ZCoB, consisting of seven small businesses in and around Ann Arbor, Mich., with two more in the active-planning stage. Together the businesses do a profitable $13 million a year in sales.

One of the businesses is Zingerman's Training Inc., or ZingTrain. Right now it's playing host to the orientation of the new employees, but ZingTrain also offers training and consulting for non-ZCoB companies, which send their people to learn the Zingerman's way of doing business. Earlier in the week bank managers, bakery owners, and restaurateurs from around the Midwest were in Ann Arbor for the "Managing with Zing" seminar. Other sessions have attracted a wide range of organizations -- grocery-store chains, hospitals, garden shops, not-for-profit groups, chocolatiers, custom manufacturers, even a mortuary -- from across the country.

It was at one such seminar that Todd Wickstrom first experienced Zingerman's. At the time, Wickstrom owned two franchised bakeries in Chicago that he wanted to improve, and he thought the session might give him new ideas. It did. On his return to Chicago, he sent Weinzweig an E-mail message: "The seminar made me realize you can live your ideals in the food business. The bad news is, I can't do it here." Weinzweig invited him to become a managing partner of the deli, and Wickstrom jumped at the opportunity. He sold his bakeries and moved his family to Ann Arbor. "I would have come in as a dishwasher to be in this environment," he says.

The environment is, indeed, ZCoB's most striking feature, combining a strong sense of community, a deep belief in people, a fascination with management and business, and a passion for great food and great service. It's an entrepreneurial environment in which good ideas become real businesses, and employees with good ideas have an opportunity to become owners. More to the point, it's an environment that many can't resist. "Working here has never felt like a job to me," says Wickstrom. "I'm constantly learning about managing, about food, and about myself."

Wickstrom isn't the only former entrepreneur to be seduced by ZCoB. "It was just a great opportunity. Everything was right about it," says Dave Carson, who built and sold two successful technology companies before becoming cofounder and managing partner of Zingerman's Creamery.

BRAIN FOOD, SOUL FOOD: Zingerman's has a passionate, challenging culture and corned beef on rye to die for.

Other, equally accomplished recruits fled successful careers in corporate America for jobs at Zingerman's that pay, at most, in the high five figures. Maggie Bayless, a ZingTrain managing partner, holds an M.B.A. from the University of Michigan and did stints at General Motors and Soho Natural Soda. Stas' Kazmierski, ZingTrain's other managing partner, was a high-powered consultant with clients such as Boeing, Marriott, and Prudential Insurance. Amy Emberling majored in social theory at Harvard, studied cooking at the Hotel Ritz in Paris, earned an M.B.A. from Columbia University, and now makes bread and pastries at Zingerman's Bakehouse. And Ron Maurer held high-level positions at such companies as Lexis-Nexis and Living.com before signing on as ZCoB's vice-president of administration and chief financial officer at half the salary he could get elsewhere. "I figured if Zingerman's was even close to its billing, I'd be happy here," he says. "In fact, it's better than its billing."

Eleven years ago there was no room for such people at Zingerman's. The deli had a reputation for being warm-hearted, fun-loving, and food-obsessed, but it had nothing to offer experienced professionals looking for new business challenges and no need for their services. Then, in 1992, Weinzweig and Saginaw began developing an innovative growth model that redefines the choices founders have when they've achieved their initial goals and begin thinking about what to do next.

Standing alongside each other, Ari Weinzweig and Paul Saginaw bring to mind Don Quixote and Sancho Panza -- or perhaps the Cisco Kid and Pancho. Where Weinzweig is long and lean, Saginaw is short and sturdy, with a barely visible five o'clock shadow covering the top of his shorn head. They met in the late 1970s while working at an Ann Arbor restaurant called Maude's and immediately hit it off. What united them was the dream of a perfect corned-beef sandwich on rye. "We both grew up in cities with great delis, and Ann Arbor didn't have one," says Saginaw, who comes from Detroit.

Twenty-one years ago the two started a deli meant to carry the finest artisanal food products and serve the best sandwiches known to humankind. "We wanted sandwiches so big you needed two hands to hold them and the dressing would roll down your forearms," says Saginaw. "We wanted people to say about other sandwiches, 'This is a great sandwich, but it's not a Zingerman's.'"

Within a decade, they'd accomplished that and more. Articles extolling the deli's food appeared in the New York Times, Bon Appetit, Eating Well, and other publications. "In Zingerman's," novelist Jim Harrison raved in Esquire, "I get the mighty reassurance that the world can't be totally bad if there's this much good food to eat, the same flowing emotions I get at Fauchon in Paris, Harrod's food department in London, Balducci's or Dean and DeLuca in New York, only at Zingerman's there is a goodwill lacking in the others."

Still, when all was said and done, in 1992 Zingerman's was just a deli doing $5 million a year out of a cramped red-brick building in Ann Arbor's historic district. One manager was starting a bakery to supply the deli with bread and pastries; otherwise there were no plans for growth or even significant change. Zingerman's was, in short, a typical, mature, stable small business, exhibiting all the symptoms of companies that have plateaued. Behind the shelves crammed with exotic spices, oils, and vinegars, bureaucracy had begun to creep in. There was an active rumor mill. Opportunities to advance had dried up, and competitors were beginning to encroach on Zingerman's market.

Weinzweig and Saginaw had a choice. They could keep Zingerman's a small, local operation and run the risk that it would languish or atrophy. Or they could take it to the next level. But if they grew Zingerman's aggressively, they might sacrifice the very attributes that had made the deli extraordinary since its beginning -- close contact with a community, intimacy with customers, team spirit among employees, and exceptional quality of food and service.

Weinzweig can pinpoint the exact moment when the growth issue first reared its head. It was a sultry summer day in 1992, and the lunchtime rush was in full swing. In addition to the usual headaches involved in feeding the hungry multitudes, a cooler had broken down. Weinzweig was racing around, trying to deal with the problems, when Saginaw came hurrying in. "Ari, we got to talk," he said.

"OK, Paul, but not now," Weinzweig said. "I've got too much going on here."

"No, it's important," Saginaw insisted. "We've got to talk right now. Let's go outside."

Weinzweig reluctantly followed Saginaw out the side door and sat down beside him on a bench. "OK, what is it?" he asked.

"Ari," Saginaw said, "where are we going to be in 10 years?"

"I couldn't believe it," Weinzweig recalls today. "I sat there thinking, 'I don't have time for this. The cooler is broken, the kitchen staff is stretched thin, and he hauls me out to talk about 10 years from now?' But I had to admit, it was a real good question."

It was also the start of a two-year debate that tested the limits of their partnership. Saginaw felt strongly that the company had grown smug and complacent, leaving it vulnerable to competitors who could copy Zingerman's merchandising and chip away at its customer base. The partners had recently settled a lawsuit against one such copycat, and the experience had convinced Saginaw that legal protections were a poor substitute for innovation. The business needed to be shaken up. It needed to build higher barriers to competitors by expanding, improving, and trying different things. In short, it needed a new vision for growth, and Saginaw thought that all options should be on the table, including the possibility of opening Zingerman's clones in other cities. That was, after all, the most logical way to grow a retail food business. A lot of people had already suggested it and offered to get involved. "We might be stupid not to do it," he told Weinzweig.

THE EARLS OF SANDWICH: Ari Weinzweig and Paul Saginaw transformed a small, local deli into one of the most attractive companies to work for in America.

There was just one problem: Weinzweig was dead set against it. "I didn't want to spend my time flying to Kansas City to see some mediocre Zingerman's," he explains. "For me, it was important to be part of something great and unique. You lose the uniqueness when you try to replicate the original. I said to Paul, 'I can't say you're wrong from a business standpoint. If that's what you want, maybe you should do it, but it's not something I want to be associated with. I'll leave.'"

"You have to understand," says Saginaw, "Ari is a guy who studies the history of orange marmalade. He has an emotional attachment to the product. He was afraid the coleslaw would be bad, and his name would be on the door. I said, 'Your name isn't on the door, and I don't care about the coleslaw. We can throw it out. But if you care so much about it, fine. We'll find another way.'"

That other way, however, proved frustratingly elusive. Saginaw and Weinzweig had no interest in pursuing acquisitions or moving to another location, and they knew of no alternative growth strategies for small companies like theirs. So they did a lot of reading, thinking, and talking -- meeting regularly to discuss their ideas at a picnic table next to the deli. They wrote vision statements and then rewrote them, soliciting input from people inside and outside the business. By 1994 the outlines of a grand design had emerged. The Zingerman's Community of Businesses was ready to be born.

Weinzweig and Saginaw envisioned a company comprising 12 to 15 separate businesses by 2009. Like Zingerman's Delicatessen and Zingerman's Bakehouse (which was already up and running), the new businesses would be small and located in the Ann Arbor area. Each would bear the Zingerman's name but would have its own specialty and identity. Each would have at least one managing partner who would work in the business and be an owner. Internal entrepreneurship would be encouraged and supported, but partnership would be open to outsiders as well. And whereas not every new company would be a food business, all would be designed to enhance the quality of food and service offered to Zingerman's customers and to improve the financial performance of ZCoB and its components. Initial funding would come from Weinzweig, Saginaw, and the new partners themselves, with the goal of reaching breakeven on a cash-flow basis as soon as possible.

"The key was having partners who were real owners," says Weinzweig. "We wanted the passion. We wanted people who had visions of their own. Otherwise, whatever we did would be mediocre, and the whole idea was to elevate the quality of each element of the company."

In the summer of 1994, Weinzweig and Saginaw presented their vision in a document titled "Zingerman's 2009: A Food Odyssey." It took the form of a long conversational letter from Weinzweig to the company's managers and employees. He wrote a similar letter to customers, whom he and Saginaw considered important members of the Zingerman's community.

Although the partners had prepared the groundwork carefully, their plans drew mixed reviews. Customers didn't understand why it was necessary to change a business they considered nearly perfect. Lawyers and accountants told the founders they were crazy to let the new partners have real stock and to run the new companies as separate businesses. But the most negative response came from Zingerman's managers, who voted with their feet. In the 18 months after the rollout, more than 80% left. "People had gotten comfortable," says Weinzweig. "We told them that we were going to have a significant culture change. It would be a lot like going back to a start-up. We'd have to work 90 hours a week again, and no one would be going home at 4 on Friday anymore. A lot of people didn't want to do that."

It was a tumultuous period, Emberling recalls. From her position as pastry manager at the bakery, she viewed the transformation of Zingerman's into ZCoB with misgivings. First came the establishment of the Zingerman's Service Network, or ZingNet, a central administrative unit that would provide marketing, finance, and human-resources services to the businesses. At about the same time, a CFO was hired who began asking for new financial reports from the bakery staff. Emberling feared that the company was becoming bureaucratic and impersonal. She also worried about the exodus of veteran managers, not to mention the various management experiments, some of which struck her as nutty.

"They started a deli council, with the staff voting on everything," she recalls. "I thought that was insane. How could 17-year-olds make decisions for the company? They knew nothing about the business."

Accustomed to operating autonomously, Emberling and her coworkers worried that the bakery might be expected to follow the deli's lead and play by its rules. "As a manufacturer, we were very into process, rigor, accuracy," she says. "The deli had a different style. We didn't see the value of being in the ZCoB with them. We just wanted the deli to buy our bread and pastries and leave us alone."

In 1996, Emberling left the company when her husband took a job in Denmark. In 2000, Frank Carollo, managing partner of the bakery, asked her to be his co-managing partner, and she returned to Ann Arbor with her family. "By the time I came back, it was a different company," she says. "They'd managed to implement ZCoB very well. There was a partners group that met regularly. And they'd done an incredible job of building a common culture. I don't know if they realized what they were doing when they did it, but they definitely got it right."

In her new role, Emberling not only makes bread and pastries but, as an owner, has major responsibility for the present and future success of the business. "I love it here," says Emberling. "I don't make as much money as the investment bankers I went to school with, but I make enough, and I'm never bored. We face the same questions that big companies face, without the stock-market worries, and there are so many interesting people to talk to. It's very stimulating and challenging."

There's a concept taught in ZingTrain's seminars concerning the mastery of a skill. When you know absolutely nothing about a skill, you are unconsciously incompetent -- that is, you don't know what you don't know. As you learn more, you become consciously incompetent: you know what you don't know. With training and practice you can become consciously competent, while total mastery makes you unconsciously competent, meaning that you use the skill so effortlessly that you're not even aware you're doing it.

Here's the kicker: in order to teach a skill, you have to go backward, from being unconsciously competent to being consciously competent. Until you can teach it, moreover, you don't really know what you know. That concept helps to explain the process Zingerman's went through that earned it a reputation for management equal to its reputation for food.

The catalyst was ZingTrain, which was launched in 1994. Over the years Zingerman's had received numerous consulting requests, mostly from other specialty-food retailers interested in emulating the deli's culinary acclaim and customer service. Maggie Bayless, ZingTrain's cofounder and original managing partner, wanted to offer training instead. "Rather than figure out what someone was doing wrong and trying to fix it, we'd show people what worked for us," she says. At the same time, ZingTrain would provide training for ZCoB managers and staff.

First, however, ZingTrain had to come up with the language to explain what Zingerman's did. That meant distilling various practices into easily understandable, and teachable, concepts and principles. "We already had the 3 Steps to Great Service," says Weinzweig, referring to a maxim applied at Zingerman's since its early days. "We just kept building from there." One by one, the handy rules of thumb emerged: the 5 Steps to Handling Customer Complaints, the 4 Steps to Order Accuracy, the 3 Steps to Great Finance, the 4 Steps to Productive Resolution of Differences, and on and on. Each rule was more a set of talking points than a rigid formula -- a way to get people to focus on a subject and remember it afterward. Some rules simply codified practices Zingerman's had been using for years. Others expressed management ideas that Weinzweig believed in but had never fully implemented. Still others were developed in response to issues that arose as the company evolved.

At some point you have to roll your eyes at the sheer number of rules. "Ari talks about the 18 Steps to Calming Amy Down," says Emberling. ("I guess I forgot to tell her the 8 Points of Talking to Journalists," says Weinzweig.) Yet each rule does contain a nugget of management wisdom. To give good service, after all, you really do have to "1. Figure out what the customer wants. 2. Get it for them -- accurately, politely, enthusiastically. 3. Go the extra mile." What's more, it's important for employees to know that.

"I sat there thinking, 'I don't have time for this. The cooler is broken, the staff is stretched thin, and Paul hauls me out to talk about 10 years from now?' But I had to admit, it was a real good question."

--Ari Weinzweig

Soon Weinzweig and his colleagues began applying the same thinking to more challenging and sophisticated aspects of management, such as leadership, training, and organizational development. A voracious reader of business books and a prolific writer, Weinzweig turned out long papers on Zingerman's application of concepts like stewardship and entrepreneurial management. He then worked with the ZingTrain partners to break down those concepts into a series of steps, points, and definitions, thereby turning ideas into management tools for both ZCoB's employees and ZingTrain's customers. "What we look for is elegant simplicity," he says.

Through that process, ZingTrain got a steady supply of material for its seminars, which began to fill up fairly regularly. ZingTrain's curriculum, in turn, had a huge effect on ZCoB itself. Employees who took the courses were challenged to wrestle with management philosophy in all its complexity. As people were baking bread, selling cheese, or making gelato, they were also studying business, not to mention the history and sociology of food, another part of the curriculum. As a result, the company became a kind of school -- the University of Zingerman's, people called it.

The result was a culture both intellectually stimulating and unifying. "All those three-step things really do work," says Emberling, "but they also gave us a language to talk to each other. Everyone in the different businesses had the same vocabulary, which helped create the culture in the community as a whole."

Other factors also contributed to a common culture. The deli, for example, had long used distinctive lettering and cartoons on its signs and printed material. Following the formation of ZCoB, those design elements were standardized across the businesses to ensure they all had the same look and feel. "The more common themes you have throughout, the more effectively you can build the community," says Weinzweig. "We want to leave a lot of flexibility while providing enough structure for people to be successful. That way, the ZCoB doesn't become a collection of businesses that have nothing in common but ownership."

Much has changed at Zingerman's in 10 years. The company has been adding businesses at the rate of about one every 18 months, and the pace shows no signs of slackening. Altogether the businesses employ 334 people, up from about 125 in 1994, when the company consisted of just the deli and the bakery. With the new businesses have come new partners, new language, and new opportunities for employees, as well as energy, passion, and excitement that was missing a decade ago. That was, of course, what Weinzweig and Saginaw had in mind. A little more than halfway to 2009 it appears likely that the company will meet the goals laid out in its 1994 vision statement.

Yet for all the changes, what is most striking is how much Zingerman's has remained the same. It's still a local, independently owned business with extraordinarily close ties to Ann Arbor and its environs. Last year, on the 20th anniversary of the company's founding, 13 local not-for-profit organizations put up a giant plaque next to the Zingerman's Delicatessen saying, "Thank you for feeding, sheltering, educating, uplifting, and inspiring an entire community." One organization, Food Gatherers, was actually started by Zingerman's in 1988. "We don't like to advertise our work with nonprofits," says Saginaw, "but it's fair to say this would be a different community if we didn't do what we do."

Meanwhile, food critics keep raving about Zingerman's, and the raves are often for products and services coming from the new companies -- bread from the bakery, cream cheese from the creamery, and just about everything from the mail-order house. Both Zingerman's Bakehouse and Zingerman's Mail Order have received industry recognition.

Inside the company, questions about the future remain, but they seem to be manageable. "We've realized the value of living with ambiguity," says Emberling. "When something comes up, it's not always clear what the right answer is. You just have to go with the process and have faith. Mutual trust and respect play a big role. You have to operate in a world of integrity. There's a lot of integrity in this company at all levels -- from the financial statements to the croissants."

That integrity and resilience will surely be tested in the years to come. Although Zingerman's has always been profitable on an operating basis, its margins have been squeezed recently by, among other things, a change of management at the deli and the expense of launching the new businesses. "There's no reason we can't earn 10% profit before tax," says Ron Maurer, "but it won't be easy. The question is, How far can we go without damaging the culture?" Right now the company has a goal of donating at least 10% of its operating profit to charitable causes, which is laudable, but it can't help affecting financial performance.

Then there's the problem of generating the cash that will be needed to buy back the stock of departing partners. All the partners say that they're not going anytime soon, but the day will come. As for the founders, "currently, our exit strategy is to die," says Saginaw.

The company could, of course, be sold. Weinzweig notes that the Zingerman's brand could be very valuable if, say, a major grocery-store chain wanted to set up its own specialty-foods department or subsidiary. But he isn't interested in going that route. "People keep badgering me about an exit strategy," he says. "But I don't want to get out. We've been in business for 20 years, and I look forward to coming to work even more now than I did in the beginning. I'm having more fun, and I'm more at peace with the realities of life. So why should I leave?"

He pauses and flashes a lapsed-anarchist smile. "Success means you're going to have better problems," he says. "I'm very happy with the problems I have now."

Bo Burlingham is Inc's editor-at-large. He is also the author, with Jack Stack, of The Great Game of Business and A Stake in the Outcome.

History in the Baking

1982 Zingerman's Delicatessen offers "flavorful, traditionally made foods...in an entertaining, educational, and service-oriented setting"

1992 Zingerman's Bakehouse produces baked breads and pastries for the deli and other customers

1994 Zingerman's Training Inc. shares Zingerman's expertise in training, service, merchandising, specialty foods, and staff management with the public and ZCoB members

1996 Zingerman's Mail Order sends foods across the country and around the world

1998 Zingerman's Catering provides food for small parties and large events

1999 www.Zingermans.com allows customers to buy Zingerman's products on-line

2001 Zingerman's Creamery produces handcrafted fresh cheeses, gelato, and other dairy products for the deli and other customers

2004 Zingerman's Roadhouse features a menu of American regional cooking

TBA Mexican Restaurant (name and opening date not set)

Please E-mail your comments to editors@inc.com.

The Heart of a Company

2009-10-21T23:26:00.000+07:00

The birth of a seriously ill child set Kenny Kramm on a course from ordinary guy to extraordinary entrepreneur.

By Leigh Buchanan | Jun 1, 2003

Of all the motivations for launching a business, love and fear may be the most powerful.

Kenny Kramm, a slight, gentle-spoken man of almost preternatural calm, is the founder and CEO of $5.7 million FlavorX Inc., a fast-growing company based in Bethesda, Md. But not so long ago, the only thing Kramm wanted to start was a family. By 1992 he was married to his college sweetheart, with a three-year-old daughter and a second child on the way. After a stint on the creative side of advertising had left him feeling dissatisfied and vaguely unclean, Kramm had sought refuge in the family business, a cozy, old-fashioned pharmacy that he expected one day to inherit. There he labored comfortably alongside his parents, working the counter and passing the time of day with the store's mostly elderly clientele, much as he had done growing up.

At age 29, Kramm had never so much as toyed with the idea of starting a company. What's more, he possessed a trait incompatible with entrepreneurship: He was perfectly content with his life the way it was. "It wasn't the kind of life you would read about in Inc.," says Kramm. "But it was good."

Back then, the only thing troubling Kramm was his unborn child. Though she was now healthy, his first child, Sarah, had been born two months early, blue and not breathing. During her second pregnancy his wife, Shelley, developed toxemia; the couple awaited the new baby's birth with trepidation. On February 6, 1992, Hadley Kramm was born at 28 weeks, weighing 3 pounds, 10 ounces. Still, "she was fine," says Kramm. "She had an Apgar score of 10. We were so relieved. We thought it would be okay."

But when she was 10 days old, Hadley -- still in the hospital because of her weight -- stopped eating. Her skin mottled. The Kramms haunted the hospital corridors by day, spending fretful evenings at home with Sarah. They alternately summoned hope and dismissed it as a dangerous luxury. Then "we got the call," says Kramm.

Obeying the summons, the Kramms rushed to the hospital. There "the resident led us into the NICU carrying a flashlight because it was the middle of the night," recalls Kramm. "He shined it on Hadley, and her eyes were rolled back in her head." The resident insisted it wasn't a seizure, and so did other residents who attended Kramm's daughter during that long President's Day weekend. "They said it was just 'seizurelike activity,' and it went on for three days. Three days," says Kramm. Finally, on Tuesday, a physician confirmed that yes, Hadley was experiencing seizures and needed immediate treatment. She should have had it days earlier.

Kramm believes his daughter's seizures may have resulted from a massive brain hemorrhage caused when she was given asthma medicine by mistake. (The hospital denied responsibility, the Kramms say. They also say they were too exhausted and demoralized to sue.) Whatever the culprit, the damage was extensive and irreparable. Hadley's life would thereafter be defined by a long list of debilitating ailments, the most serious of which were continual seizures, a blood-clotting disorder, and cerebral palsy. She would need help with some of the most basic functions for the rest of her life: She might never live on her own. "When you have a baby you have boundless hopes for them," says Kramm. "All we could do was ask, what is the best we can hope for? Will she be able to walk? Will she talk?"

For many families the introduction of a child so disabled is not a single shattering event but rather the beginning of a lifetime of fraying relationships, periodic despair, and shuttered possibilities. It could have gone that way for the Kramms. Instead, Kenny Kramm mustered the energy -- even at his life's emotional ebb -- to begin a venture that far exceeded his earlier ambitions. Driven to take back some control of his family's future, he launched a company that is both inspired by and intended to financially secure his daughter Hadley.

FlavorX Inc., which flavors liquid medicines for children, is a family business because it leverages the diverse talents of Hadley's extended clan. But it is also a family business because it helped save a family.

As a pharmacy technician, Kramm knew young children hated swallowing medicine, but it had never seemed like an earth-shaking problem. Hadley made it one. Home from the hospital, his infant daughter balked at the four daily doses of phenobarbital she needed to prevent grand mal seizures that deprived her brain of oxygen. "She would clamp her mouth shut and you couldn't get it open," says Kramm. "If you did get it open, she'd hold the medicine in her mouth for half an hour until she'd start crying and it would come out all over her. That was worse because we didn't know how much she'd gotten, and we were afraid of giving her more in case she got too much." The Kramms erred on the side of undermedication, and as a result Hadley's seizures continued, sending her to the emergency room over and over again. "After two or three months we decided we couldn't function like that," says Kramm.

Then one day in May, Kramm's father, Harold, suggested sweetening Hadley's phenobarbital with flavorings used by candy manufacturers. When the pharmacy shut its doors on those warm evenings in late spring, father and son would repair to a small counter in the back of the store and stand there for hours, mixing the medicine with varying amounts of whatever flavors they could get their hands on. They experimented with cherry, wintergreen, grape, peppermint, and cinnamon: Kramm would taste each by taking a bit on his fingertip and touching it to his tongue, then rinsing his mouth with water.

The combinations that Kramm deemed most successful he carried home to Hadley in diminutive dosing cups. "She rejected at least 10 before she finally accepted banana," he says. "When she swallowed it, that was the first time in months that I felt I had some control back in my life."

Center Pharmacy, which is in Spring Valley in Washington, D.C., shares a building with several pediatricians' offices and an annex of Children's Hospital. Word of the Kramms' success with phenobarbital spread, and soon their neighbors began sending down patients with all kinds of prescriptions to be filled and flavored: everyday children's antibiotics, as well as medicines for more serious conditions, like phenytoin for seizures and digoxin for heart arrhythmia. As more and more customers requested the flavorings, Kramm, who had been a business major, saw an opportunity to increase sales with a distinctive offering. And the notion of helping children was therapeutic, since he could do so little for the one child that mattered to him most.

Kramm recognized immediately that variety was key to the new offering's appeal. So he used some of the store's young customers as a focus group to test flavor combinations. Does sour apple clash with Zarontin? Wouldn't mixing chocolate and Biaxin only make matters worse? He continued to taste-test every concoction himself and began compiling a formulary of optimum drug and flavor recipes. In each case, the amount of flavoring had to be carefully controlled so it wouldn't dilute or destabilize the medicine. (The flavorings -- all commercial products -- were already approved by the FDA.)

Center Pharmacy, which started life in a nursing home, had always catered to elderly customers. But after Kramm placed an ad touting the flavoring service in the Washington Post, parents and their finicky offspring swarmed the pocket-sized pharmacy from as far as 25 miles away. The Kramms began stocking toys and other child-related products. Within a few years, the clientele changed from 90% geriatric to 90% pediatric. Meanwhile, the pharmacy's sales overall jumped from $600,000 to $3 million.

"When you have a baby, you have boundless hopes for them. All we could do was ask, will she talk?"

But that growth only partly salved the anxiety that Kramm felt as he watched his personal expenses mount. At the pharmacy, he was making $70,000 a year. What with medications (Hadley routinely took at least four, including ones for seizures and blood clots), operations (she needed surgery every two years because her muscles became so rigid that her feet turned in), various therapists, special equipment, and modifications to their home, the family was spending as much as $100,000 a year on Hadley alone.

Kramm and his wife worried obsessively about what would happen to their daughter after they died. "I couldn't bear the thought of her unable to support and defend herself, at the mercy of people that did not love her," says Kramm. "We needed enough money to make sure she would be taken care of for the rest of her life."

Though Center Pharmacy was solid, Kramm also fretted about its future. Huge chains such as CVS, Rite Aid, and Kroger were swallowing up or driving out smaller stores, while third-party reimbursements were spiraling downward, taking a further toll on independents. "We'd seen some of our friends go out of business," says Kramm. "I wanted a backup plan in case something happened to the pharmacy."

FlavorX is a family business because it leverages the diverse talents of Hadley's extended clan.

So in 1995 Kramm took $15,000 from his personal savings and a little more than $200,000 that his father gave him from the pharmacy's profits, and launched FlavorX as an independent company. It would sell its "systems" -- consisting of the formulary and refillable sets of flavorings -- to other pharmacies. "It was a risky thing to do because we had such large expenses at the time," says Kramm. "But those expenses were only going to get larger. We had to make it work."

Center Pharmacy is a curious seedbed for an innovative, fast-growth company. The 36-year-old neighborhood business is comfortably old-fashioned, competing on personal service rather than price. Staff and customers are on a first-name basis, home deliveries are common, and the Kramms themselves will drive to other pharmacies to pick up something for a customer if they're out of stock. They even give out their home phone numbers. "I can remember many instances," says Kramm, "when my dad would get called out in the middle of the night because a hospice patient needed a pain medication or somebody had some other emergency."

From a very young age Kramm helped out in the store, sliding fliers into envelopes, pasting price stickers on bottles of laxatives, whatever needed doing. Over the years he had absorbed his father's philosophy that having a family business is less about passing on than about pitching in. Consequently, there was no question in the entrepreneur's mind that his father would do more than just bankroll the new company. Kenny Kramm possessed business and marketing skills. But Harold Kramm understood the technical details of compounding -- the practice of customizing medicines to meet individual needs. A pharmacist himself, he knew the target market as well as anyone.

The only problem: Harold Kramm was as comfortably old-fashioned as his business. Impressed by what the flavoring service had done for Center's bottom line, he saw no need for the service -- or Kenny -- to ever outgrow the store. His son argued that it was time. They'd put in three years of development on the product and had 50 pages of flavor and medicine combinations in their formulary. (That number has now risen to more than 500 pages.) They could make life better for millions of children instead of the few hundred who patronized the store.

And, if it worked, they'd be helping Hadley. "All my decisions, at that time and since, were influenced by Hadley's situation," says Kenny Kramm. Slow growth was not an option: He wanted financial security and he wanted it soon. "I felt I had to accomplish my goals as quickly as possible," he explains. "That made me much more aggressive than may have been natural to me."

The issue came to a head in the summer of 1995. The National Association of Retail Druggists was meeting in Las Vegas, and Kenny Kramm saw the conference as the perfect opportunity to test the concept's acceptance. Harold, by contrast, saw it as "a waste of time and money," says his son. But, in a rare instance, Kenny's entrepreneurial instincts overrode his filial ones. "I told him he could either join me or I would go alone," Kenny recalls. At the conference, FlavorX's no-frills booth attracted long lines, and the embryonic company signed up its first 20 accounts. Harold was convinced, and "I guess for the first time I really was too," says Kenny.

But the real battle -- or what passes for a battle in such a polite, soft-spoken clan -- erupted when Kenny Kramm suggested FlavorX sell its system to chain stores. In Harold's eyes, it was a deal with the devil. "My father is not a fan of the chains," says Kenny. "When we started, all he wanted to do was help his granddaughter, but in the first two years something like 5,000 independent pharmacies went under. As one of the survivors, he wanted to do something for the other survivors."

Bowing to his father's wishes, for three years Kenny Kramm sold exclusively to independent pharmacies, touting his product as a sling to wield against Goliath. "We actually turned down the chains -- it was stupid, stupid, really stupid," he says. "I didn't want to upset my father and I didn't want to be screamed at by our independent customers for selling out. But the independents were going out of business, and I didn't want the company to die because I made a bad decision."

So in 1999 Kramm, whose confidence had been growing along with his company's sales, decided to target the behemoths with or without his father's blessing. To make it easier on his father he began with a local chain -- Giant, now owned by Royal Ahold -- dragging Harold along to meetings with their new customer. "My father had watched Giant grow, which made it easier to get used to the idea," says Kramm. "And when he saw that we sold 150 sets in one hour, it started to make sense to him."

Standing beside his son, Harold Kramm -- still dapper at 73 -- shrugs gently. "At least the independents had a few years to get it established," he says.

The son's strategy is paying off: FlavorX has grown at a five-year rate of 786%, landing on the Inc. 500 list in 2002; it's been profitable every year but one. "Kenny has made this thing into something so much bigger than I had ever imagined it could be," says Harold Kramm. "He is a very talented boy."

FlavorX moved out of the Center Pharmacy building in 1998, but it didn't go very far: The company's headquarters are just five miles away from the family business. The two places are even closer in spirit, displaying on their walls some of the same snapshots, mottoes, and posters, including one proclaiming 14-year-old Sarah's anointment as Miss Teen USA for Maryland. Kramm's office is a gallery of portrait-sized family photos and homemade artworks. ("Hadley does a lot of handprints," says the CEO.) On his desk rests a memo pad emblazoned with childish drawings of one girl in a wheelchair and another clutching a shopping bag. "From the Dad of Sarah and Hadley" reads the legend across the top.

Today the dad of Sarah and Hadley is conferring with the uncle of Sarah and Hadley -- a.k.a. Woody Neiss, the company's chief financial officer and Shelley Kramm's youngest brother. Neiss, who four years ago left a well-paying job at PeopleSoft to enlist in the family mission, has just returned from a three-day trip to Australia, where he accepted the Thomas Alva Edison Award for Innovation from the Young Entrepreneurs Organization. The trophy -- a century-old phonograph, one of the originals peddled by Edison's company -- is fragile and bulky and clocks in at 60 pounds. Neiss carted it home on the plane himself so he could present it to FlavorX's 40 employees at the Monday-morning staff meeting. "I couldn't wait," he says gleefully.

"All of my decisions, at that time and since, were influenced by Hadley's situation. That made me much more aggressive."

What makes the FlaxorX model innovative is not the idea of flavoring medicine -- a practice that has been applied, unsystematically, by other pharmacists in the past -- but the idea of choice. Children are able to select from a menu of 42 flavors. The options include such appealing flavorings as strawberry cream, root beer, and chocolate silk pie; pharmacists pipette in the recommended amount. "Choosing their own flavors makes the process fun, and once the child has made the choice, he's invested in it and is much more likely to take the whole prescription," says Kramm. "He'll take it even if tastes crappy because he doesn't want to admit to his mother he was wrong."

Stores pay on average $800 to $1,000 each to join the program, which gets them the 556-page formulary, in-store marketing materials, and a rack of small glass vials filled with plummy-purple grape and pearly peaches 'n' cream. Refills cost about $10 a bottle. "We're like Gillette," says Neiss. "We make our money off the reorders."

The company has been expanding its line: In 1999 it introduced flavorings for veterinary medications (Kramm tastes all those too), and it's developing pour-on flavors for special-diet dog and cat food. In the human realm FlavorX recently launched PediaPop -- a lickable, flavored electrolyte replenisher for kids with diarrhea. Far more ambitiously, Kramm and Neiss are talking with a small drug company about creating a branded line of over-the-counter medicines that would apply the Baskin Robbins methodology to off-patent medicines. "We would label it FlavorX acetaminophen, for example, and with each bottle there would be different flavor packets you could buy," says Neiss, an animated guy who is caf to Kramm's decaf. "You could just pick a packet off the rack and add it yourself."

"It would be silly to sell when we're at this high-growth stage. Right now the grand scheme is to go public in two to four years."

FlavorX runs lean, generally developing new products with deeper-pocketed pharmaceutical companies. The company also outsources manufacturing and deploys a young, chiefly part-time sales force to talk up the brand among doctors, who in turn urge pharmacies to buy the systems.

Only one area is impervious to economies: testing, on which the company has spent more than $1 million. Beyond ensuring safety, testing is an important barrier to entry that protects Kramm's company from competitors who might want to copy its model. "Each flavor has to be tested with each medication, and there are more than 400 medications, so it's a huge hurdle for any start-up," says Kramm.

The company's brand equity and proprietary formulas, as well as the scientific validation meant to intimidate would-be competitors, make FlavorX an attractive acquisition target. "I get calls once a month or so from someone asking if we're interested in selling," says Neiss. "But we're building so much value in the company that it would be silly to sell when we're at this high-growth stage. Right now, the grand scheme is to go public. Hopefully in two to four years. Hopefully."

Once a boutique service in a single store, FlavorX is now offered in about 10,000 chain pharmacies, 1,500 independents, and 300 hospitals. The progress of the company's human inspiration has been less sure. At age 11, Hadley Kramm can say barely 30 words, uses a walker or wheelchair, requires support to sit up, and still wears diapers. "Hopefully, by the time she's 12 she'll be potty trained," says Kramm. He pauses. "I never thought I'd be saying that. 'By the time my child is 12 she'll be potty trained.'"

Hadley's disabilities have had little effect on her Audrey Hepburn looks: elfin, silky-browed, with the tender vulnerability of beauty easily bruised. At the Kramm home on a March afternoon, she is dressed in a diaphanous red top, pink-trimmed sneakers, and blue jeans that barely crease as she totters stiff-legged across the playroom floor, her thin hands clutching the back of a chair. "Say your name, Hadley," Kramm coaxes his daughter. Gamely, Hadley pushes out the h, but the rest of the word collapses into a plaintive sound too tenuous to be called a sigh.

The playroom, like other parts of the Kramm home, is a riot of toys and books -- they are heaped in boxes, piled on shelves, cascading from baskets that hang from the ceiling. "We want to keep Hadley stimulated, and you have to buy a lot of toys to find one she'll respond to," says Kramm. "And we're always buying things for Sarah to make up for ... the lack.... " He pauses. "I know we probably shouldn't do that," he says finally. (For the record, Sarah shows no sign of having suffered from a lack of anything. Upstairs she is on the phone, rattling on euphorically about the modeling agency with which she has just signed.)

Toys are the least of the family's expenses. The Kramms just moved into a larger home so Hadley could have a room on the first floor. ("She's getting too big to carry up the stairs," says Kramm.) They have many modifications planned: a ramp to the front door, a bathroom equipped with a transfer station so Hadley can get out of her wheelchair and into the shower, lower counters, rails along some walls, wider doorways. The 11-year-old is outgrowing her two $4,000 wheelchairs and will soon need another. And her parents have ordered a special adaptive bicycle to help develop her legs, which, until recently, she had never used.

Then there are the specialists. The Kramms employ a full-time au pair and a roster of therapists -- occupational, physical, speech. Hadley has also had multiple operations, including several to treat her hypertonia, which causes her muscles to grow rigid. "It looks like she's smiling about something," explains Kramm, referring to a grin that seems unwilling to stop at Hadley's ears. "But really, the muscles are all tightened in her face. She can't stop."

But just because the smile isn't real doesn't mean Hadley's not happy. Kramm thinks she is, and he means to keep her that way. How much money will that ultimately take? "I have no idea," he says. "Millions. It would probably take millions for me to feel comfortable that she will be taken care of."

Even as Kramm waits for the security he craves, FlavorX performs an important psychic function for all the members of its founding family. "This company has been my salvation," says Kramm. "It's let us all respond to the situation in ways that draw on our strengths and that aren't about wallowing in depression or giving up. It's put something positive into our lives."

Leigh Buchanan is a senior editor at Inc.

Hadley's Other Legacy

Like her husband, Shelley Kramm went through a dark time after Hadley's diagnosis, suffering from panic attacks and depression. But unlike her husband with his budding enterprise, she had no source of distraction, no mental sanctuary where she could still be in control. "I saw what Kenny was doing and I supported him all the way, but I also wanted something for myself," she says. "Only I didn't know what."

The answer came on a spring day in 1995 during a visit to a local playground. "Sarah ran to this pumpkin coach and started climbing on it," Shelley Kramm recalls. "I looked around and realized there wasn't a single thing in the whole park that Hadley could play on, or where Sarah and Hadley could interact. So Hadley and I went and sat down on the side and watched Sarah. And I looked at Hadley and she was crying. She understood."

That was the beginning of Hadley's Park Inc., a nonprofit that designs and builds playgrounds equally accessible to children with and without disabilities. Shelley Kramm, a former interior designer with no experience running an organization or raising money outside the parameters of a bake sale, persuaded Montgomery County, Md., to donate an acre of land and raised $1 million from individuals, corporations, grants, and the government. To get ideas for the park she talked to physicians, therapists, and parents of disabled children, and enlisted Sarah's Brownie troop in a yearlong study of disabilities.

The first Hadley's Park went up in 1996, in the family's hometown of Potomac. It has ramps leading up to a pirate ship, and a transfer station to help children move from their wheelchairs into a castle or a frontier village. The swings have backs to support riders with no upper body strength; many signs are in Braille, and the soft, springy ground is surfaced with recycled tires. "I don't want people to have to deal with wood chips and barriers and beams," says Shelley Kramm. "This is supposed to be common ground."

Today there are five Hadley's Parks in the Washington area and 15 more in development around the country. And while the venture does nothing to bolster the Kramms' finances, it has done as much as FlavorX to heal the family's spirit, to keep it whole. "So many people in situations like this, their marriage has taken a blow," says Shelley Kramm. "I think all those hours Kenny and I stayed up late talking about our projects, talking about what we were going to do, that was the make or break point for us."

"And we didn't break," says her husband. "So now we're making something."

Please E-mail your comments to editors@inc.com.

Building a Marketing Juggernaut

2009-10-21T22:25:00.000+07:00

How did Aquascape's Greg Wittstock--the "Pond Nazi" to his rivals--get so successful so quickly? One key reason: He created an army of loyal customers by teaching them how to make money.

By Bo Burlingham | Nov 1, 2003

Clyde Wilson, who owns a 14-year-old landscaping business in Bracey, Va., didn't know much about Aquascape Designs Inc. until last January, when his wife insisted he attend a two-day seminar in a nearby city. Her reason was straightforward: She was scared. Their company had lost so much money in 2002 that they'd had to borrow $65,000 to get through the winter. They clearly needed to do something different, and Aquascape, which designs and sells pond-building supplies, was promoting its seminar as a chance for landscapers to learn how to succeed in the pond business. Whether or not pond-building proved to be their salvation, Mrs. Wilson hoped her husband would pick up some profitable ideas.

It was on the second day of the seminar that Wilson had his revelation. It came in the form of a simple formula he could use to figure out how long it would take his business to reach the breakeven point in any given year (see "Are You on Track to Break Even?" page 67). As soon as he got home, Wilson and his wife plugged in their numbers and discovered that they would need 540 days to break even in 2003. "Omigod," Wilson thought, "we're going out of business." But the formula also gave him hope--by making him more aware of his gross margins. Clearly, his prices were too low. A $300 lawn-cutting contract, for example, should have been $400; a $50 contract for delivering mulch should have been $150. So he raised his rates, and most customers paid them without complaint. In July, Wilson's wife sent him back to school, this time to attend Aquascape's third annual Pond College in St. Charles, Ill. By then, he'd improved his overall gross margin from 6% to 35% and was on track to break even by August 10. At the Pond College, he lost no time in seeking out Greg Wittstock, Aquascape's 33-year-old founder, owner, and CEO. Wilson just wanted to thank the man. "If I hadn't gone to that seminar," Wilson told Wittstock, "I wouldn't be here today. I'd be out looking for a job."

Chances are you're not familiar with the pond industry. You may not even know it exists. But exist it does, with sales of $1.4 billion a year and growing, and its driving force is the company Wittstock started in 1990 when he was still an undergraduate at Ohio State University. Today, Aquascape has 130 employees, 35,000 customers, and $44 million in annual sales. It has been on the Inc. 500 list three times, and its ponds have been installed all over the United States and Canada, as well as in parts of Europe and South America. Most important, it has built an army of loyal customers--mainly independent landscape contractors and pond-supply distributors--who gather every July at a resort near the company's headquarters in Batavia, Ill., to learn, network, and celebrate the joy of ponds. This year's event was a weeklong extravaganza called Pond-erosa--not to be confused with Pondapalooza, the industry trade show that took place two weeks later in Atlanta--and included both the Pond College and the 11th annual Parade of Ponds.

Ponds are, in fact, more than a business to the Aquascape crowd. They are a passion and a calling, and no one is more passionate about them than Wittstock, who is also known as the Pond Guy--a name he has trademarked--and who is an intense, athletic, notoriously volatile, utterly ingenuous former fullback on his state champion high school football team. "My philosophy is that everyone wants a pond," he says. "A lot of people just don't know it yet."

That's a situation he intends to rectify. One of his current projects involves placing pond kiosks in malls around the country. He displayed a prototype at this year's Pond College. "How 'bout that sucker, huh?" he asked the assembled throng, looking and sounding more like an overgrown Bart Simpson than the CEO of a company that has revolutionized its industry. "Do you think we can take ponds mainstream with this? We're going to educate the masses, man! That's what's so awesomely cool about malls!"

By and large, Wittstock's employees share his enthusiasm, and he is venerated by his customers. But, as devoted as his followers are, Wittstock is an object of fear and loathing in the rest of the industry, where people refer to him as the Pond Nazi, call his company "the Dark Side," and regard the Aquascape empire as a cult-like phenomenon. "He's very egotistical, extremely aggressive, and incredibly intolerant of any views that deviate from his own," says one of his industry adversaries. "He looks at business as war. In his own company, he's a tyrant, yet he has this loyal following. That's the cult aspect." Wittstock is even shunned by his father, Gary, who used to be his partner and is now his competitor.

Some of the hostility is related to Aquascape's controversial pond-building methodology, which aims to create a natural eco-system that can keep water clear without the use of chemicals or ultraviolet light. When Wittstock began marketing the system aggressively in the mid-1990s, he raised hackles in the industry because his approach broke many of the rules of conventional pond-building. Wittstock responded by suggesting that promoters of other pond-building techniques were, at best, morons who didn't know what they were doing or, at worst, charlatans who were ripping off their customers. That didn't go over well in the small, collegial world of ponds, where people hold deep convictions about, for example, whether a Japanese koi fish prefers a gravel or cement bottom.

Fear is also a factor--especially now that Aquascape has moved beyond its original niche of contractor-built ponds and begun targeting the do-it-yourselfers who constitute more than 85% of the market. On the surface, the two market segments are very different, at least from a pricing standpoint. Contractor-built ponds start at about $3,500 for a small backyard job and can run to more than $500,000 for a two-acre commercial project with stepped waterfalls cascading into pools. Do-it-yourself pond kits, on the other hand, sell for as little as $200. But no one is underestimating Wittstock's ability to do for the latter market what he's done for the former. "Aquascape has turned itself into a marketing juggernaut," says Steve Stroupe, an industry consultant and independent sales rep, as well as one of the few people in the pond world who has maintained personal and business relations with the various factions. "Greg is creating such a hypercompetitive environment that only the strongest will survive."

The intriguing part is how he's done it. Virtually all of Aquascape's marketing involves teaching other people--and other companies--how to make money in the pond businesss. Indeed, the entire organization is set up to provide customers with whatever information, education, products, marketing materials, and technical support they need to have successful businesses of their own. Granted, Wittstock's motives are hardly altruistic--like any supplier, Aquascape stands to be a prime beneficiary of its customers' success--but the company goes to extraordinary lengths to ensure that the contractors, garden centers, and wholesalers it does business with earn a profit on ponds.

"You want to know what this is?" Wittstock asked his audience at the Pond College. "We're a franchise business without the franchise fee." More to the point, Aquascape is a franchise business without a franchise agreement. Contractors are under no legal obligation to use the Aquascape pond-building materials on which the company makes its money. While Aquascape does charge for its seminars, magazines, books, videos, and marketing materials, they are not a major profit source. But what's to stop a contractor from taking advantage of the training programs and then buying less expensive pond supplies from one of Aquascape's competitors? The answer is, nothing--or at least nothing in the form of a binding contract. Some pond-builders do, in fact, go to the seminars, buy the books and videos, use the marketing materials, and purchase the big-ticket items elsewhere. Those people are a distinct minority, however, and their defections have had no discernible impact on Aquascape's meteoric growth.

Clearly, Wittstock has figured out something about marketing in the information age, and you don't have to be in the pond business to wonder what it is.

"If you want to keep motivated employees around," Wittstock tells his seminar audience, "there's no better way than to teach them the Financials.

On a slow winter day in Raleigh, N.C., about 20 landscape contractors have gathered in a hotel conference room for a two-day course in pond-building. This particular session focuses on the importance of doing breakeven analysis and sharing the information with employees. Leading the seminar is Ed Beaulieu (pronounced buh-LOO), a zoologist turned pond-builder who is Aquascape's vice president of construction. A lean and laid-back fellow with a shaved head, a mustache, and a goatee, he takes the group through the process of calculating breakeven and explains the energizing effect that knowledge of the numbers has had on the members of his work crew.

Greg Wittstock sits quietly in the back row, listening, watching. He used to run these sessions himself, although they were different back then, focusing more on pond construction and less on the business. He did the first tour in 1996, hitting 19 cities around the country. The next year, he upped the total to 43 cities and, the year after, to 57. He was on the road for three straight months in 1998, secretly loving it while complaining mightily to his fiancée, Carla, who wanted him to stop. Once they were married, Wittstock turned the tours over to other people in the company. But he still shows up occasionally, and you can see him wrestling with the urge to jump back in.

Now, in Raleigh, he gets out of his chair and starts walking around. When he sits down again, he's in the first row. As Beaulieu finishes his presentation, Wittstock decides to challenge the audience. "I want to know how you're going to apply all this," he says. "How many of you are going to go back and share this with the people who work for you?" Three or four hands go up. Beaulieu points out that opening the books doesn't mean you have to talk about individual salaries with employees. "Yes, you can," Wittstock cuts in. "You can ask them, 'How much do you want to make?' $40,000 a year? No problem. We just have to do another $300,000 in sales....And maybe they'll start telling you ideas: 'Here's how we can cut 2% of expenses.'" His face is lit up. He stabs the air with his finger. "And guess what? Kaboom! They're thinking like owners!"

All eyes are riveted to him. His body is tense. He holds out his hand, palm up, fingers raised and taut, as if he's literally grabbing the attention of the people in the room. "Think about the questions you have on this...because we've done it, man! I've seen the power that it's had with our employees!"

Wittstock sits back down, and Beaulieu begins to talk about how he uses the breakeven formula with his crew. "Tell them about hiring," Wittstock says. Beaulieu explains how he and his crew use the formula to decide whether to hire additional people. "And then they vote!" says Wittstock. "The employees vote!" They can make the decision, Beaulieu says, because they know how many more ponds they'll have to build to cover the cost of an extra person.

"And what happened before?" Wittstock asks, rising from his chair again. "Every employee said, 'We're overworked. Hire somebody else.' Does hiring someone else affect their salary? It sure does, because there's only so much to go around. But did they think that way? So now, with this, do you get better buy-in? Are they complaining less? Is that valuable to you? Are motivated employees tough to find? If you want to keep motivated employees around, there's no better way than to teach them the financials. Because all of sudden you're not a crook! Everybody's part of the same team!"

Wittstock was not always so passionate about the numbers. He started out as a contractor, after all, and--like most contractors--he let someone else handle the finances. Then, in 2000, he attended a seminar given by Charles Vander Kooi, a Colorado-based consultant to the landscape industry, who spoke about the mistakes people make in estimating their costs and the trouble they can get into as a result. He gave the example of a snowplowing company charging $50 for a job that actually cost the business $60 by the time the overhead expenses were factored in.

Vander Kooi's talk struck a chord with Wittstock. He kicked the idea around with other people in the company, and eventually they came up with their own approach to breakeven analysis, one simple enough to be easily grasped by the pond-building crew. Among other things, the system allowed the employees to figure out how many ponds they needed to build each week to hit their breakeven point by a given date. After breakeven a portion of every sales dollar goes to net profit, and Wittstock agreed to split that portion between the company and the crew members, meaning that each employee stood to benefit financially by reaching breakeven as soon as possible.

Overnight, the psychology of the crew was transformed. Employees began taking better care of the equipment, and they made sure they had everything they needed when they showed up at a job site. Meanwhile, morale soared. Brian Helfrich, a foreman, admits that he'd been thinking about leaving Aquascape to start his own pond-building business until he got the financial message. "This is the one thing that completely changed the way I look at Aquascape and every other company," he says.

Yet, as effective as the breakeven formula was, Wittstock and Beaulieu did not think about including it in the seminar curriculum until last year, after Aquascape's largest customer got into trouble paying its bills. Beaulieu had tried to help the customer straighten out its finances and quickly realized that it was barely breaking even on the sale of ponds, despite having an overall gross margin of more than 40%. Evidently the owner, though a good salesman, had no idea how to make sure his company earned a profit.

That discovery was a wake-up call for Wittstock, Beaulieu, and the other people involved in customer training and education. If their best customer--a company they'd held up as a role model--didn't know how to make money, what about the rest of their market? They decided to expand the seminar from one day to two and to include basic business training, but the trainers' first attempt at teaching the financials was a bust, mainly because they tried to do too much. Afterward, they agreed that they had to simplify the financial information and focus on the breakeven formula. The simplified program, introduced at the next seminar, was an instant success. Asked to name his favorite part of the program, one contractor wrote on a comment card: "Financials. The breakeven concept. Wow! My eyes are open." And his least favorite? "Financials. Thinking about the amount of lost time and money."

Wittstock likes to explain Aquascape's success by saying, "We're pond guys, not engineers." The comment is a not-so-subtle swipe at his father, an engineer, but it contains more than a kernel of truth. To Wittstock, the products are secondary, a means to an end. The pond's the thing, and Aquascape's hallmark has been its ability to simplify every aspect of the business--from financial management to construction. The simpler Wittstock can make the process, the easier it will be for people to follow the instructions, meaning more ponds will get built.

Wittstock had already done a lot of simplifying by the time he rolled out his pond-building system in the mid-1990s. With his approach, he claimed, a contractor could build in one day a pond that others took three weeks to install. At the heart of his system--which hasn't changed much since then--is what he calls the 20/20 rule. Any pond of any size, he says, can be constructed with the same 20 components assembled in the same 20 steps. The components include everything from the stones around the waterfall to the glue for attaching the flexible plastic pipe to the filter. The steps run from "Mark pond area" to "Get paid." It's all there, and always the same. To be sure, the size of the components will vary from pond to pond; different ponds will have different designs, based on the geography of the space and the desires of the pond owner; and complex ponds will take more time to build than simple ones. But the process doesn't change, Wittstock says, nor do the types of products needed.

The 20/20 rule was one of the most radical of Aquascape's innovations. Critics charged that Wittstock was cheapening the art of pond-building, turning it into an assembly-line, cookie-cutter process, and sacrificing quality for profits. He strenuously denied that his system compromised quality. On the contrary, he said, ponds built professionally, according to Aquascape's principles, using high-quality materials, were superior to others--more natural-looking, more aesthetically pleasing, more durable, easier to maintain, better for the environment.

He didn't disagree, however, that his approach was more profitable, or that it was assembly-line. In effect, he'd done for ponds what Ray Kroc had done for hamburgers and Henry Ford for cars. But Wittstock insisted that, by systematizing pond construction, Aquascape allowed the pond-builder both to make more money and to be more creative. The artistry had to do with the pond's design and the quality of its execution, not with the steps involved in carrying it out.

For water-gardening veterans, it was a lot to swallow, especially coming from a brash 25-year-old, but Wittstock knew ponds. He'd been making them since he was 12. The first one had been a hole in the ground behind his family's home in Wheaton, Ill., west of Chicago. That pond was soon replaced by a more elaborate concrete one that he built with his father. As the years went by, the two of them continued to work on the pond, redoing it every summer, experimenting with filtration, pumps, and construction techniques until finally, in 1990, they got it just about right.

That summer, Wittstock also began thinking about branching out. He had recently finished his sophomore year at Ohio State and had a summer job at a subsidiary of Union Carbide, where his father was an engineer. One afternoon, he says, he was driving home, ruminating about how miserable he was in his job and wondering what else he might do, when a thought popped into his head: What about starting a pond-building business? Everyone who saw the Wittstocks' pond wanted one--the mailman, the UPS guy, the neighbors. He told his parents about his plan. "He said, 'No one builds ponds like me. All I need is a wheelbarrow, a shovel, and a strong back,'" says his mother, Lauri. "And he had a name, too. He wanted to call it Aquascape Designs." For Christmas, his parents gave him the wheelbarrow and the shovel.

Wittstock went into business the following summer, marketing his services by placing classified ads in newspapers and leaving business cards at rock yards. He also wrote a letter to the gardening editor of theChicago Tribune. The response came a year later, in the summer of '92, when one of the newspaper's freelance writers called. By then, he'd built 17 ponds and had a small backlog of orders, but he was eager for publicity. The article appeared on the front page of the Tribune's Tempo section on Sunday, August 2--and Wittstock's telephone started ringing. All told, the article wound up generating orders for 81 ponds. Suddenly he was booked for the rest of the season and into the following year.

Wittstock could no longer handle the business alone. He was building ponds by day and making sales calls, lining up pond parts, and doing other chores by night. As it happened, his father, Gary Wittstock, was available to help. He'd left Union Carbide by then and started his own engineering consulting business, which wasn't doing well. In September, he began working at Aquascape.

Exactly who did what is a matter of dispute nowadays. It appears that Gary worked primarily on sales, administration, and engineering, while Greg focused on pond-building. He began looking for ways to reduce the construction time--by having all the parts on-site at the start of a job, for example, or by laying the pipe before digging the pond, so that the dirt from the hole had to be shoveled only once, not twice. Out of such efficiencies came the 20/20 rule and the one-day pond-building methodology. He also hired his first foreman to work with his crew and build ponds without him.

But it wasn't until the fall of '93, he says, that he began to see the real potential of the business. His mother--an English teacher turned corporate training consultant--urged him to speak to a former colleague of hers, who was working for Arthur Andersen in Columbus, Ohio, where Greg was still finishing up his college degree. The two began talking about Aquascape's strengths and quickly zeroed in on Wittstock's homegrown, hands-on knowledge of pond-building. The consultant encouraged him to expand his horizons, to think about reaching the masses. Franchising was an obvious option. Wittstock tried to set up a franchised unit in Columbus, but after six months of negotiating, the deal fell through. Disappointed and frustrated, he decided to forget about franchising and focus on the booming business in Chicago.

"The back-order policy at Aquascape is simple: There will be no back orders. If one occurs, the flag in front of the building is lowered to half-staff."

But he didn't stop thinking about the masses, and one day in 1994, he says, the answer came to him. So what if he couldn't sell his knowledge by franchising? Why not just give it away? Through newsletters and catalogs, he'd teach landscapers what he knew and sell them the products they needed to do it on their own.

From that epiphany, an entirely new Aquascape evolved, but it took a couple of years. Complicating the transition was the increasingly rancorous relationship between Wittstock and his father, who had become his 50-50 partner in April 1993. At the time, it had seemed reasonable to divide the equity between them. The two had been making ponds together for more than 10 years. In the past, moreover, they had gotten along well. "I never had a fight with my dad growing up," says Greg. "Here, we couldn't talk without fighting."

On one level, it was a clash of personalities. They were polar opposites. "Gary is very detail-oriented," says Lauri Wittstock. "Greg is an entrepreneur." Of course, every business needs a combination of those traits, and the people who have them don't necessarily wind up driving each other crazy, but--as time went along--Gary and Greg were increasingly at each other's throats. "He's an engineer, and he was always over-engineering everything," says Greg. "My deal is KISS--Keep it simple, stupid....Ed [Beaulieu] and I were running construction back then. We'd design a filter with one pad, and my dad would put in two, even though it made the pond harder to maintain and had no benefits. It was like that all the time."

"We built the business together in my opinion," says Gary. "He was the hard-working installer, and I was the engineer that engineered the system. The fighting was because of control. Greg wanted to run everything."

Inevitably, the conflicts had repercussions outside the company. "I was traveling a lot, and when I came back, each of them would tell me his side of the latest fight," says Lauri, who generally sided with her son. "They both advanced the business. Gary brought maturity, and Greg brought creativity. But the business was always Greg's. We were just parents supporting a kid in his hobby, which Gary would never admit."

The situation came to a head in 1996. By then, Lauri and Gary were getting divorced, largely because of the battle for control of the company. "I just couldn't see my husband doing this to my son," says Lauri. "We really had a picture-perfect family, and it all came apart." Gary, for his part, was so upset about the divorce that he withdrew from the day-to-day operations of the company. Eventually, however, he decided he wanted to come back, much to the chagrin of Greg, who moved to end their partnership. Greg says that he offered his father seven different buyout formulas, including one whereby Gary would get 3% of Aquascape's sales for 15 years. In 2002, that would have amounted to almost $940,000--more than 22% of the company's net pretax profit. According to Greg, Gary dismissed the offer, saying, "3% of nothing is nothing, and if you're running this business, it will be nothing."

Gary says he does not recall getting such an offer or making such a comment, but he concedes that Greg proposed giving him "a large sum of money payable over many, many years" on condition that he stay away from the business. Gary rejected the offer. "I didn't want to leave," he says. "I was very content working with Greg."

"I just wanted my own career back," Greg says, "and I was willing to give away the farm to get it. It had nothing to do with money, obviously, or I wouldn't have offered him that deal. In the end, we had to go to arbitration. I bought him out for $184,000. He left and started his own business. He was my first competitor."

Gary's company, founded in April 1997, was called Pond Supplies of America and was based in Yorkville, Ill., about 20 miles from Aquascape's headquarters in Batavia. While PSA did reasonably well, Aquascape took off like a rocket. In 1995, Gary's last year in the office, it had done $800,000 in sales. The next year, sales more than doubled, to $1.8 million. In 1997, they doubled again, to $4 million, and they kept right on climbing from there. By 2002, sales had reached $31 million, an increase of 16% over the year before. That was respectable enough, but it paled alongside the surge in net pretax income to $4.2 million (13.3% of sales) from $1.6 million (5.9% of sales) in 2001--a leap of 163%. This year, Aquascape will do between $43 million and $45 million in sales, thanks partly to an acquisition.

That growth has come in the face of ever-increasing competition. PSA's sales are now $6.8 million, according to Gary, and 11 other direct competitors have entered the picture, all offering products similar to Aquascape's but at lower prices. Then there are the many companies that offer different pond-building approaches altogether, mainly for the do-it-yourself market.

Some of Aquascape's remarkable growth can be explained by traditional marketing techniques--and Greg Wittstock's willingness to invest in them. The catalog is a good example. Aquascape now sends out 3.2 million catalogs a year in nine different mailings. None of its competitors do more than two. Still, the catalogs don't explain the most tantalizing part of Aquascape's success, namely, the willingness of old customers to pay a premium for sticking with the company. To understand that, you have to look at other factors--one of which is Aquascape's in-house pond-building division, headed by Ed Beaulieu. Up until 1995, it was virtually the whole company, but as Wittstock transformed Aquascape from a pond-builder into a designer and marketer of pond-building equipment, the role of the construction team changed. It became Aquascape's research-and-development unit, coming up with new products, testing them in the field, experimenting with different types of jobs, and developing the marketing and management techniques that other contractors could use to build their own businesses and motivate their employees.

In principle, the construction division--which builds ponds only in the Chicago area--competes with other local contractors, but it also refers work to those that become Aquascape customers, and it regularly takes on lower-margin jobs to acquire experience and learn lessons that it can then pass on to other landscapers around the country. Moreover, by operating successfully in a competitive market, the team gives Aquascape a tremendous marketing advantage: Customers know its products have been field-tested by one of the best pond contractors around. "That gives me a lot of confidence," says John Russell, the CEO of Russell Water Gardens in Redmond, Wash. "I know that whatever I buy from Aquascape is going to work." Meanwhile, Aquascape is in the unusual position of having an R&D division that earns a profit.

Another factor is Aquascape's back-order policy. It's very simple: There will be no back orders on any product the company carries. If a back order occurs, the flag in front of the building is lowered to half-staff. This is an expensive policy. It means the warehouse is perpetually overstocked. "I'm willing to err on that side," says Wittstock. "It's about how ponds sell. When a landscaper gets a job, he needs the equipment right away, or he'll have guys sitting around for days. That's also why we double-check parts going out of our warehouse. If one $2 plumbing fitting is missing, you can't hook up a pump. Someone has to go to Home Depot. A one-day job becomes a two-day job, and you cut your profitability in half. Instead of making $2,500 per day, you're making $1,250 per day."

The back-order policy gives Aquascape another huge marketing advantage. "Other companies just can't match their service," says Tom Smith, owner of Garden State Koi, based in Warwick, N.Y., who gave up lucrative but competing product lines to become an Aquascape distributor. "Their fill rate [for orders] is something like 99.5%. Can you imagine getting that kind of fill rate in this industry? If I order from anybody else, I'm lucky to get 50%."

"It's a big part of their success," says Steve Stroupe, the independent sales rep. "Any competing vendor who doesn't understand the power of their no-back-order policy is going to get bloodied."

The same could be said of Aquascape's phenomenal rate of innovation. In the first six months of this year, the company introduced, among other things, a "pondless" waterfall, a new line of pumps, a kit to help contractors empty ponds for cleanouts, a bulk fish-food dispenser, a customer rewards program, seven new videos, and two new books, including The Pond Guy on Marketing, in which Wittstock reveals his marketing secrets. "Aquascape innovates so fast that other guys can't keep up," says Tom Smith, the distributor. "I sent in a memo at the beginning of March about a contractor who wasn't comfortable putting a one- or two-ton boulder on a pond liner. He worried about making a hole. I said, 'What about coming up with a rock pad for people like him?' [Four months later] I asked Ed Beaulieu, 'What's happening with the rock pad?' He said, 'We're testing it on Monday. It will be ready in a couple of weeks.' What other company can move so fast?"

With each innovation comes information about new ideas and products and techniques for Aquascape's customers. But to get the information, people have to stay in the loop. That means taking advantage of Aquascape's educational offerings, yet another factor. The centerpiece is the traveling training program, which swings into high gear every year about this time. Backing it up is an entire publishing and video division, which generates a flood of training and marketing materials.

And beyond education, there's one final factor that has to do with the ponds themselves. "You know," says Smith, "ponds aren't just a business--they're a lifestyle. After 9/11, I must have gotten six, eight calls from people who wanted to thank me for the relief their ponds gave them from the flood of bad news. We get that all the time. You build a pond for $10,000, and people hug you. You turn on the water, and they cry."

Every professional pond-builder can tell stories about customers who develop deep, emotional attachments to their ponds. "People give names to their fish," says Tonja Andreattia, of Andreattia Waterscapes in Medford, Oreg. "The women tell me, 'My husband would never go out in the yard before, and now I can't stop him.' Everybody is so appreciative. They say the pond changed their lives." Contractors, too, have a passion for ponds that borders on religious fervor, and it rubs off on Aquascape. "I earn a good living with ponds," says Kenny Floyd, who overcame various alcohol and drug addictions before starting Aquatic Construction in Metairie, La. "More important, I get up every morning and do what I would do anyway for free. I can tell you, Greg Wittstock re-creates lives. He did mine."

He's been called a hypocrite, but Wittstock says he bought Water Creations to solve a strategic problem: an inability to penetrate the do-it-yourself market.

Back in Batavia, Aquascape's headquarters is getting a little crowded these days. There's still room for the indoor pond filled with koi that eat out of your hand, not to mention the 15 aquariums and terrariums housing all manner of fish and reptiles, from freshwater stingrays to a bearded dragon lizard named Rex. There's still room as well for the fitness center, the indoor basketball-soccer-tennis court, and the two pool tables. Workspace, however, has become tight as the number of employees has exploded from 71 to 130 people, thanks to Aquascape's purchase of a major competitor, Water Creations, in January.

That acquisition raised eyebrows throughout the industry. For years, after all, Aquascape people had been heaping scorn on Water Creations and its products. There was the additional irony that Aquascape--so often accused of being cultlike--had bought a company founded by members of a real religious cult, the Plymouth Brethren, a fundamentalist Christian sect that traces its origins to 19th-century England. Steve Stroupe, for one, couldn't resist poking fun at the merger, putting out a bogus press release with the headline "Cult Leaders Bury the Hatchet" and writing a satirical analysis of the deal entitled "The Church and the Bordello."

Wittstock told people that he'd bought Water Creations, now called Nursery Pro, because it solved his company's major strategic problem, namely, its inability to penetrate the huge market of do-it-yourselfers who find Aquascape ponds to be out of their price range. He pledged that he would eliminate the most objectionable features of the Water Creations products and use them to get people started in ponds. The goal, however, would be to move retail customers up to professional ponds over time. How? By education, of course.

Eventually most of his followers came around, although there are still some doubters. Kenny Floyd, the Louisiana contractor, remains uncomfortable with the acquisition. "I felt it was hypocritical," he says. "Water Creations sold a lot of gadgetry that we thought wasn't good. I have confidence that Greg can improve the products, but it's a big change. I'm really going on my faith in Greg."

Greg is also going on his faith in Greg, which has never been in short supply. He believes that the industry is poised to explode, and that Aquascape/Nursery Pro is now positioned to take advantage of the explosion. He points to a study by a market research firm showing that ponds and water gardens are the fastest-growing segment of the $46 billion lawn and garden industry. Then there's the survey from USA Today indicating that more homeowners (16%) would choose to enhance their homes with a water feature than would go for any other home improvement except decks (also 16%). With Nursery Pro, Wittstock now has access to the entire market. "Before I could only reach the people who could afford the big ponds," he says. "Now I can get to anybody, and I can bring them up." The average pond owner, he notes, buys three ponds in a lifetime.

Within a couple of years, Wittstock expects to outgrow his present, 103,000-square-foot facility, but he has a plan to deal with that, too. It's called Aqua Land, and it will be a 5.7-acre, wedge-shaped, ecofriendly building with grass on the roof. That's where he plans to put the soccer field for the guys in the warehouse. In addition, there will be a swimming pool, at least one koi pond, a daycare center, a state-of-the-art fitness center, a spa, a tennis court, and two racquetball courts. The building is supposed to be finished by December 2005. It will cost at least $15 million.

Aqua Land is the Pond Guy's dream come true--or at least one of his dreams. There's still that little piece of unfinished business with his father. The two haven't had much contact since 1997. In that time, Gary has remarried, and Greg and his wife have had two children, whom their grandfather barely knows. Greg insists that he'd like to make up. "I'm not good with this feeling," he says. He's not sure that making up will be possible, however, as long as he and his father are competitors.

Gary, meanwhile, says he'd like nothing better than to be the doting grandparent of Greg's sons. Then again, he has no inclination to leave the pond business. On the contrary, he recently started another company to manufacture pond equipment. As for PSA, he insists it's in good shape. "We've got some great new products," he says. And profitability? "Well, that's something we have to work on."

Of course, one way to work on it might be to send some people to Aquascape's breakeven seminar. It doesn't appear, however, that Gary will be doing that anytime soon. He and his son aren't talking. I

Sidebar: Are You on Track to Break Even?

The principles behind Aquascape's approach to breakeven analysis are almost as old as accounting itself. What's new is the way Aquascape has used its formula as a tool for education, communication, and marketing. The secret lies in the formula's simplicity. To calculate your breakeven point for a given period of time, you need to have just two numbers, your overhead expenses and your gross margin.

Start with your total sales for the period. Then calculate your cost of goods sold (COGS)--or, in service businesses, your cost of sales--by adding up all of your direct costs, that is, the costs directly involved in obtaining or producing what you've sold. You get your gross profit by subtracting COGS from sales. Express that number as a percentage of sales, and you've got your gross margin.

You calculate your overhead by adding up all of the other expenses, the indirect or fixed ones (rent, utilities, insurance, administrative salaries and benefits, and the like).

Here's an example using projected numbers from Aquascape's construction division in 2003:

Annual Sales	$750,000	100%
Total Cost of Goods Sold (COGS)	$453,459	60%
Gross Profit	$296,541
Gross Margin		40%
Total Fixed Costs (Overhead)	$247,115	33%
Net Income From Operations	$49,246	7%
(before taxes)

By definition, breakeven is the point at which total revenue equals total costs. Put another way, your gross profit will equal your overhead at the breakeven point: Breakeven Gross Profit = Overhead

But remember, gross margin is gross profit divided by sales. That means gross profit equals sales multiplied by gross margin. Therefore, at the breakeven point: Breakeven Sales x Gross Margin = Overhead

To figure out the amount of sales you need to break even, divide your overhead for a given period of time by the gross margin. Breakeven Sales = Overhead / Gross Margin

That's the basic breakeven formula, and there are a lot of things you can do with it. Let's say you want to buy a truck that will cost you monthly finance charges of $500, plus $250 per month for fuel and insurance (let's assume those are the only new expenses). In a year, you'll make payments of $6,000, and you'll have fuel and insurance costs of $3,000, for a total of $9,000 a year in new overhead expenses. How much do you need in additional sales to cover those expenses? You divide $9,000 by your gross margin, say, 40%, and you find that you'll break even on the investment with a sales increase of $22,500 per year.

You can then ask yourself, "Will this truck allow me to get the $22,500 more in annual sales that I would need to justify spending the money to buy it?" It's often easier to answer the question if you take the analysis a step further. Say your average sale is $6,000--about the price of a pond. In that case, you'll need the equivalent of 3.75 ponds ($22,500 / $6,000 = 3.75) in additional sales to break even. So you can ask, "Will this truck make it possible for me to build 3.75 more ponds this year?"

You can also use the formula to figure out how long it will take you to break even in a given period. Suppose your annual overhead is $240,000, and your gross margin is 40%. You'll break even when you hit $600,000 in sales ($240,000 / 0.4 = $600,000). Now suppose that, on average, you do $20,000 a week in sales. At that rate, you'll hit $600,000 in 30 weeks. When you get there, you will have covered all of your overhead expenses for the year. In the remaining 22 weeks of the year, you'll earn an operating profit of 40¢ on every $1 of sales.

But what if you could increase your weekly sales to $25,000? Your breakeven point would go down to 24 weeks from 30 weeks, and you'd be earning 40¢ on the dollar six weeks longer. Or what if you could increase your gross margin to 44%? Then you'd need only $545,455 (rather than $600,000) in sales to break even.

Bo Burlingham (bo.burlingham@inc.com) is an Inc. editor-at-large.

The Ultimate Investment Club for Entrepreneurs

2009-10-21T00:22:00.002+07:00

At CMS, a highly successful but little-known financial services firm, entrepreneurs help each other find the best places to invest.

By Jon Gertner | Dec 1, 2003

Mark Solomon is telling a story.

It is a night several years ago, he is saying, and he is driving for hours through an unrelenting rainstorm to visit a prospective client for CMS, the Philadelphia financial services company that he founded in the late 1960s. In the car with Solomon are his deputies: Paul Silberberg, CMS's president, and Bill Landman, CMS's chief investment officer. For a firm that represents the likes of Bernie Marcus, the founder of Home Depot, this prospective client, a man worth hundreds of millions of dollars, would be a nice fit. He would also be an amazingly nice catch.

And yet, there is a problem. The CMS team, soaked from the short walk from the car to this entrepreneur's house, makes a lengthy presentation in the living room. "We look for three things in a client," says Silberberg. "One is a very successful entrepreneur who has built the business. Number two is geographic location--our clients are all within a three-hour plane ride of Philly because we would like to get back for dinner after visiting them, even if it's a late dinner. Third, and probably the most important, is shared values. We look for people whom we like, who are honest, and who are philanthropic. We look for people who really care about more than just creating wealth for themselves and their families, who are trying to use that wealth to help repair the world in some way. And we don't care how--inner city work, save the whales, hug the trees, we just don't care."

This entrepreneur, however, was not the saving, hugging, or repairing kind. As Solomon recalls, he said, "'I've read all your material, and it seems you're extremely philanthropic. You need to know I'm not.' And he was proud of this."

Solomon decided to give it his best shot. "I was going to take a chance on converting him," he says, and he began to regale this man with personal stories about the joys and virtues of philanthropy. Then he launched into a brief tutorial on the Rule of 72. "He didn't know what it was, so I said, if you take the rate of interest you earn and divide it into 72, it tells you how long it takes for you to double your money." Assuming this entrepreneur could earn a steady rate of 6%, Solomon offered some quick back-of-the-envelope calculations, showing that the man would probably be highly placed in the Forbes 400 by the time he was 70. "Do you know how big the hole has to be to bury you and that amount of money?" Solomon asked. "What in God's name are you going to do with it? This guy just looked at me like I was talking in Chinese."

Solomon decided to stand up and announce that he just didn't see how this was going to work for either CMS or the entrepreneur. The CMS execs filed out, piled back in the car, and drove for four hours in the rain, doing their best to keep the car from hydroplaning on the Xooded roads home to Philadelphia.

Even to most entrepreneurs, CMS is a largely unfamiliar name, a firm few know about and even fewer have joined. CMS doesn't exactly seek anonymity, but its obscurity results from the firm's aversion to the media (this is its first real profile) as well as its focus on only the most select (and successful) entrepreneurs. Technically speaking, CMS views itself as an "alternative investment boutique" or "an entrepreneurs' buyers cooperative." Its offices in Philadelphia, where all 100 employees work, comprise two rambling floors of a low-rise brick building on an aggressively unpretentious block. The firm currently has several hundred active clients to whom it offers advice on life insurance, estate planning, and asset allocation. More important, CMS invites those same clients to invest in various funds, generally ranging in size from $30 million to $150 million, that the firm creates at a rate of about four or five per year. Since its inception, the firm and its clients have invested more than $3 billion in real estate and private equity. Every client who invests is an entrepreneur--no corporate executives, entertainers, or idle rich. Every client has been referred by existing clients or someone within CMS's vast network of contacts. And every client has been screened in the same manner as the wealthy-but-ungenerous man Solomon and company visited that night in the driving rain.

Let me explain who our clients are," says Mark Solomon, the founder of CMS. "They tend to be older people who have had a value-realizing event. And the return of their money is more important to them than the return on their money."

All of which suggests some obvious questions: Why doesn't CMS--itself an entrepreneurial, profit-maximizing concern--just sign up every wealthy investor it can find? And why does it focus so much on the criterion of philanthropy? And above all, what can an everyday entrepreneur, someone on the ground floor of building a business, learn from these people in the penthouse? As it turns out, quite a lot. But first, consider the question of why this peculiar firm limits its membership to entrepreneurs. CMS is fundamentally a network of men and women who help themselves, and each other, by helping the firm. In other words, CMS makes money for its clients, and for itself, because it uses its clients' expertise to scout out good investments. When weighing a potential investment, for instance, CMS's in-house analysts may crunch the numbers on a prospective buy and then ask one or two of its entrepreneur/clients with expertise in that area to get on a plane, look things over, and report back. As Bill Landman, the CMS investment chief, puts it: "There's virtually no business we consider buying where we can't call up two or three clients so they can offer insights about the opportunity."

Of course, the firm's clients are not only very wealthy but very busy. Don't they mind getting pulled into such time-consuming investing projects? "Not at all," says Bernie Marcus, the retired founder of Home Depot. "So many of the financial people today sit in front of their computers and they only know the numbers. But here, these partners at CMS go to people who have been in the kind of businesses they're considering. You can't buy that kind of information. And all these clients share freely with them because they know that. These guys are smart enough to listen to the people who have become successful. This is how they perpetuate their success."

These are not venture capitalists looking to seed start-ups. CMS invests in more mature companies that are up and running and looking to grow, and the firm always looks for a measure of control in the businesses it pursues.

Two recent deals typify the process. Three years ago, CMS teamed up with KRG Capital, a Denver private-equity firm, in purchasing two Pennsylvania-based companies: TransCore Holdings and UTI Medical Devices. TransCore is a leading provider of automated toll-collection systems like the ones used by EZPass. "It's a fascinating business, a great management team," Landman concluded after a period of due diligence. What really charmed him, however, was TransCore's strategic position in a field that promised terrific growth--as well as the belief that the fledgling company would benefit from his firm's involvement. CMS quickly matched TransCore with a new accounting firm and a new law firm that could handle the intricate state and government contracts the company depends upon. "We went on the company board," Landman says. "We're very involved with the company day to day."

Landman is similarly optimistic about UTI, which engineers, manufactures, and assembles precision medical equipment. He explains that KRG was in the process of buying and integrating several small medical-device companies when some CMS clients told him about UTI. Seeing a nice fit, he brought the idea to KRG. Landman believes that the resulting deal (the new integrated device firm that has kept the UTI name) has enormous potential, and as usual CMS and its clients have been tapped for expertise, advice, and guidance. This has meant visiting UTI's production facilities at various locations around the country and helping the company reconfigure its executive ranks. Landman, for instance, has helped recruit and interview CEO and CFO candidates.

One of the first investments that I made with them went bad," says Donald Crawford, a broadcast entrepreneur who owns a chain of 28 radio stations. "And on their own initiative they made good on any losses we sustained."

The origins of CMS go back to the mid-1960s, when Mark Solomon was selling sophisticated high-end life insurance policies to doctors and entrepreneurs in the Philadelphia area. Solomon discovered that he didn't like doing business with doctors, but that he loved doing business with entrepreneurs. By the time he formed CMS (originally Capital Management Systems) in the late 1960s and brought Paul Silberberg onboard a few years later, the firm had honed its expertise in peddling insurance and financial- and estate-planning advice. "The entrepreneur part of CMS, like most things in life, was an accident," Solomon says. "Over time you gravitate toward where you feel most comfortable." As Silberberg explains, it might be easier and less time-consuming to represent nonentrepreneurs--people who don't ask so many questions about potential investments. But it would be more difficult on the back end, especially since CMS's funds are illiquid and often put investors' money out of reach for as long as 10 years. "In private investments you need time to work things out," says Silberberg, "and less sophisticated clients don't give you time. We have yet to buy a business that hasn't run into a problem. It's just a question of how big and when. And our clients give us time to fix those things."

Or at least they do now. In the early 1980s, when CMS first started investing alongside its clients in real estate and individual businesses, the learning curve was steep. While some early residential real estate deals turned out well, a commercial office building endeavor blew up. Then came a disastrous investment in a Chuck E. Cheese pizza franchise in which CMS lost its clients' money along with its own. A wipeout. The loss undercut CMS's most fundamental covenant with its clients--that it would never endanger principal. In some ways, however, the debacle proved a turning point for the firm. The partners decided that CMS would immediately come clean to clients about just how bad things had gone and transfer to those same clients the firm's own shares in a profitable buyout fund.

If building trust is the first step to building a profitable business, CMS made a mint by screwing up and then owning up. None of the clients were happy, of course; some still grumble about Chuck E. Cheese even now, almost 20 years later. Yet CMS has a client base of realists who understand that things can go wrong. "One of the first investments that I made with them went bad," recalls client Donald Crawford, a broadcast entrepreneur who owns a chain of 28 radio stations around the country. "They had the mantra of protecting clients' capital at all costs. And on their own initiative they made good on any losses we sustained. It just showed me that these were men of their word and it was a safe bet being with them for the long haul."

It is a widely held truism that entrepreneurs tend to be far better at creating personal wealth than managing it. Solomon and Silberberg don't go so far as to say that entrepreneurs are bad investors, but CMS has long understood that people busy building a business have such enormous time constraints--and such a single-minded focus on their work--that they're prone to stumble. "We knew from the beginning that there was a real need for diversification and that our clients weren't doing it," says Silberberg. "They didn't know how to do it. They were just like we were--they had the attention span of a gnat. We also knew they weren't going to do the homework. They were making huge bets that were ridiculous. We saw that we had the opportunity to create a real service. We were at least going to make more studious bets. And we were going to take some of those eggs and put them in other baskets." The good thing, adds Silberberg, is that his clients have always understood their limitations. "The difference between the entrepreneur and the doctor is that the doctor doesn't know anything about investments but thinks he does," he says. "The entrepreneur doesn't know anything about investments and recognizes it. Doctors are wonderful people. They're just not good business people."

The years have taught Silberberg several lessons that he likes to share with his clients: "Number one would be that people are everything," he says. "Both the beginning and the more sophisticated entrepreneur get carried away with the sex appeal of the transaction--they have to look at the people behind it." His second point is that many investors look at how much money they can make--and gloss over the risks: "We look closely at how much we can lose." His third key lesson goes to the heart of the entrepreneur's dilemma: If you want to create wealth, Silberberg says, most do it by concentration, just as his clients have done as they built their businesses. At some point, though, there's too much risk in that strategy, and that's when it becomes imperative to protect wealth by diversifying. This is not, Silberberg emphasizes, simply a matter of splitting money between stocks and bonds. "The beginning entrepreneur cannot get access to some of the really good asset classes," he says, referring to the kind of exclusive private equity deals his firm favors. But Silberberg says every entrepreneur can diversify by vintage, by geography (especially with real estate), and by choosing between different operating partners.

It has taken Silberberg and company more than a decade to smooth out their approach to investing and create a successful system; in the meantime, the firm has found it useful to move away from piecemeal investments in small businesses like fast-food franchises. CMS now makes all investments from pooled funds, to which clients contribute, so as to socialize the returns. As Solomon puts it: "We're able to take the grand-slam home runs and doubles and strikeouts and come up with a good average." While CMS's focus on up-and-running companies and real estate minimized the damage from the bursting of the technology bubble, the firm has nevertheless struggled to find big winners over the past few years. For one thing, as the stock and bond markets have grown tougher, the number of investors pouring into the marketplace for alternative investments in private equity and real estate has grown, leading to increased competition and higher prices. At the moment, CMS has scaled back the size of its funds to correspond with what it sees as a scaled-back opportunity to buy good companies--and good real estate projects--at good prices.

"What we're trying to do is generate a 500-basis-point advantage over the public markets," says Silberberg. CMS has easily beaten this goal over the past two decades, racking up a 20% return in its multifamily housing funds (while public multifamily REITs earned on average about 11%) and a 20% return in private equity (while the S&P 500 returned about 15%). Irvin Naylor, a Pennsylvania entrepreneur who made his fortune from a box company and who now owns several East Coast ski resorts, has about 10% of his net worth invested with CMS. "My rate of return, cumulatively for 20 years, is 24.5% annually," he says. But Silberberg says he always tells new clients that "yesterday is yesterday." He adds that if people like Warren Buffett and Jeremy Siegel are correct in predicting more modest returns of, say, 7% over the next few years, then CMS would be shooting for a 12% return in private equity. Says Silberberg: "That would make us and our clients very happy."

The person entrusted with this task at CMS is Bill Landman, the chief investment officer. In the 1970s and early 1980s, before he came to the firm, Landman worked as a sports agent, and his demeanor--casual, friendly, confident, yet completely opaque--hints at a bearing that must have served him well in contract negotiations. During the spring and summer season he worked with baseball stars such as Tony Pe - a, Ken Griffey, and Tim Raines; during the off-season he spent time cutting real estate deals. His interest in private equity deals came later. "I'm the ultimate generalist," Landman says. At CMS, however, where equity investments run the gamut from buyout funds to CD packagers to tube-sock manufacturers, and where the real estate investments range from garden apartments in Birmingham to rental complexes in Seattle, that's not a bad thing. Versatility, and knowing a little about a lot, is a plus--especially since the firm has a big Rolodex of people who know a lot about a little.

Here's how it works: In a roundtable investment meeting with a dozen managers of the firm's real estate funds, Landman's associates give updates on their property investments around the country. Landman fires back general questions about hurricane damage, job loss, market saturation, and competition. But when the topic turns to potential investments in various markets in the South, he insists some members of the group contact their clients with special expertise in the region. "Let's get them on this as quickly as possible," he says. Later, in a meeting convened to discuss a huge equity fund investment in assisted-living facilities and geriatric daycare, Landman asks various deputies to contact specific clients so the firm can get a better sense of what CMS might be able to add to the daycare business. A thumbs-up from these clients, or a strategy for making the facilities spit back a better return, would mean the difference between going forward or tabling the project.

Such an approach drives home the point that CMS's value proposition is not merely something the firm offers its clients; it's something its clients offer one another. As Bernie Marcus points out, CMS's trump card is its clientele. The firm knows that its clients are as smart, and usually smarter, than anyone in the CMS office.

Still, if CMS's decision to limit clients to entrepreneurs essentially translates into a mercenary decision to add value to the firm, CMS's second peculiarity--the decision to make philanthropy a driving force--is arguably more complicated. One explanation goes like this: CMS's two top executives, Silberberg and Solomon, long involved with philanthropic activities themselves, have an authentic desire to sow their ideas with employees (who are urged to volunteer with community projects), fellow partners (who are forced to dedicate to charity 10% of their gross income share), and like-minded, deep-pocketed entrepreneurs (who are invited to attend conventions on charitable giving). While true, all this merely helps explain why CMS does good, not why CMS has done well.

As Silberberg notes, philanthropy has served CMS as an "indicator" of a client the firm would like to work with. And while it may be counterintuitive, there seems little question that CMS's success is due in part to its decision to limit clients and give money away. In Philadelphia, a relatively conservative business community where family connections can be more useful in reaching the upper echelons than raw talent, the firm's emphasis on exclusivity and philanthropy have set it apart. Thus CMS partners sometimes make reference to entrepreneurs who end up on their "LTS list" instead of their client list. "LTS," says Silberberg, "means life's too short."

Bernie Tenenbaum, a private-equity investor who used to run the entrepreneurial studies program at the Wharton School of Business and knows CMS well, explains that by doing good deeds, the firm built value for its clients: "They were able to break into a club, servicing a very narrow niche, by demonstrating both charitable leadership and personal commitment," he explains. Tenenbaum likewise remarks that philanthropy has had great utility for both CMS and the client base it serves. The first-order impact of a successful entrepreneur is wealth creation, he says; the second is philanthropy--the desire to have an impact on society. "I think what the CMS guys have done is tap into that desire for their clients to make a difference," he explains, "to create a legacy that outlasts themselves." Many of the CMS clients contacted for this story agree. Harold Toppel, for instance, who founded and later sold the Pueblo International chain of super stores, tapped the firm's philanthropic expertise when he and his wife decided to set up an after-school mentoring program. They didn't know how to go about it until CMS sent an adviser to Toppel's home in Florida. "Without CMS's help," Toppel says, "we wouldn't be where we are with that program."

Through the years, some observers have questioned Silberberg and Solomon's philanthropic motives but have been at a loss to show they fall short of practicing what they preach. Indeed, whether their motivations are heartfelt or strategic--or both--the CMS partners have demonstrated a steadfast involvement with community and religious charities. Says one client: "I believe they're sincere, I believe they're genuine. But if they're not, who cares? They're doing great things. And if they're not sincere, they sure have been doing this a long, long time. They're acting like a charitable company every single day."

Seated at a circular oak table in a conference room at CMS, Mark Solomon is telling another story. Five years ago, he is explaining, an old friend called to say, "Mark, I've got a client who is a real estate developer and needs a new source of equity. You've got to meet with him." So Solomon asked his friend what the developer did and heard something distinctly unappealing in response. The friend said, "He buys underperforming hotels."

To Solomon, this was exactly the kind of risky investment CMS avoids. "I said, 'Let me explain who our clients are,'" Solomon recalls. "They tend to be older people who have had a value-realizing event, and the return of their money is more important to them than the return on the money. So I don't think buying underperforming hotels is going to resonate with our client base."

Solomon's friend told him to shut up and try listening for a change. So Solomon listened to a few details of the hotel business Jim Procaccianti was running out of Rhode Island. Then Solomon, his interest piqued, went to meet Procaccianti--or Proc, as everyone at CMS now calls him. It seemed to Solomon, and to some CMS clients, that the way the Procaccianti Group functioned--buying a foundering hotel and using its own integrated construction, design, and management divisions to relaunch it--had potential. And so CMS went ahead and dedicated a small portion of a multifamily housing fund to a hotel that Procaccianti wanted to buy. CMS rules dictate that the firm must put its own money in a fund along with its clients' money; they also dictate that any joint venture partner (Procaccianti in this case) must invest his or her own money as well. So in this hotel test project, they'd all succeed or fail together--CMS, its clients, and Procaccianti.

As it turned out, there was nothing but upside. CMS backed the Procaccianti Group in the $6 million purchase of a Ramada Inn in East Hartford, Conn. The hotel was doing $3.5 million annually in gross income and was earning $138,000 in net operating income--"basically, no income at all," says Solomon. The development team put $6 million into revamping the place--new skin, new elevators, new management, new everything. At the end of the first year, the gross stayed the same but the net went up to $750,000. The management team then changed the hotel from a Ramada to a Sheraton, and in the second year, the gross rose to $7.1 million and the net to $2.2 million. At that point, says Solomon, "we could see that this strategy worked, and we did six more hotels with different funds."

More recently, Procaccianti came up with an opportunity to buy a large number of hotels and turn them around, and CMS took two clients on a fact-finding mission. "The fact-finding team was very encouraging," says Solomon, "so we went back out [to our clients] and raised $125 million." So far, CMS has committed about $43 million of the new fund.

CMS, says Bernie Marcus, has always known that while successful entrepreneurs are not like everyone else, they are very much like each other. Solomon, Silberberg, and Landman, says Marcus, "are entrepreneurs themselves, so they understand us. They understand what entrepreneurs want and need. These are all self-made men, and all self-made men go through certain kinds of struggles. The CMS group is kind of like a family of entrepreneurs."

It's no accident that when scrutinizing CMS for the entrepreneurial lessons its clients can teach, it turns out that the firm itself is just as instructive. Bernie Tenenbaum, the former entrepreneurial studies exec, explains that the CMS partners had the imagination early on to see that they could lead in a marketplace of entrepreneurs when no one saw the opportunity. "They were in effect looking for themselves in the mirror," says Tenenbaum. "They said, 'We can't be the only ones.' Then they had the persistence to keep at it. Woody Allen says that 80% of success in life is just showing up. Well, they stayed focused on their niche, and they didn't deviate. It's a classic lesson for other entrepreneurs. They said: 'Who am I and what am I good at doing?' And once they knew, they stuck to it."

This is Jon Gertner's first piece for Inc.

Its not easy being Green

2009-10-20T23:59:00.001+07:00

It's Not Easy Being Green

Jeffrey Hollender and Alan Newman disagreed about strategy, fought bitterly -- and created two successful companies. They'd set out to change the world, but what they really changed was each other.

By Jess McCuan | Nov 1, 2004

Jeffrey Hollender was clearly enjoying himself. It was a misty evening in January, and he was the guest of honor at a tony Manhattan party, thrown to mark the release of his new book, What Matters Most. The setting was the "sky terrace" of the Galleria, an exclusive residential tower on the city's Upper East Side. Dashing and handsome in a dark jacket and tie, Hollender moved through the crowd with characteristic ease, stopping every so often to marvel at the glittering views of the Midtown skyline. In What Matters Most, Hollender, 49, tells how he and his company, Seventh Generation, a manufacturer of environmentally friendly household products based in Burlington, Vt., fell in with the likes of Anita Roddick of the Body Shop, Ben Cohen of Ben & Jerry's, and other civic-minded businesspeople -- entrepreneurs determined to prove that a progressive, values-based company can make a difference. Early reviews were glowing. "Reading this book may help you look at how your company affects the world," noted a Harvard Business School report. An official reviewer for Amazon.com called Seventh Generation a "poster child for corporate conscience." After the party, Hollender began a nationwide speaking tour, with stops at the Haas School at Berkeley and Northwestern's Kellogg School of Management.

But not everyone was impressed. In fact, Alan Newman, the man who had founded Seventh Generation in 1988, was somewhere near irate. A few weeks before the book party, Newman, now CEO of Magic Hat Brewing Co., a craft beer maker in Burlington, sat at the desk in his cluttered office, bearded and barefoot as usual, and composed an e-mail to Hollender:

"I've been aware that you've been referring to yourself as the founder of Seventh Generation for some time now. Frankly, [I] have been ignoring it. That part of my life is long over and I am happily onto the next phase. But it is a problem for me when reporters show up to discuss Seventh Generation, which happened recently, and they are surprised that: (a) I clearly was the founder, and (b) you were not around or involved until well after the name change to Seventh Generation, the positioning, the product direction, and (multiple versions of) the first catalog had been produced and mailed." He went on: "While we may always have a different point of view about what happened at the end of our relationship, the founding of the company is a matter of record and not subject to 'personal perspectives.' I only hope you do not take this opportunity to present yourself as being the founder of Seventh Generation....It just isn't so and can only lead to embarrassment for both of us."

Hollender responded immediately, changing passages in his book and editing Seventh Generation's marketing and press materials. But that did little to ease tensions that had been simmering for years. Newman had been one of the original wave of radical Vermont entrepreneurs (see "What Is It About Vermont?" page 116), a dreamer who went into business less to make money than to change the world. Seventh Generation was his baby, and he had infused it with all his hippy sensibilities. Hollender, a New York City businessman who had founded two previous ventures, joined Seventh Generation later, bringing new levels of marketing and financial sophistication -- as well as ambition -- to the company. Together, Newman and Hollender, with their lofty goals and unusual business culture, enjoyed a white-hot growth streak -- until those same values collided head-on with the brutal realities of running a business. The partnership unraveled amid circumstances that remain murky and contentious even today, and the company appeared to be doomed as well, teetering on the brink of bankruptcy. But somehow, Seventh Generation managed not only to survive but to thrive, as have the two entrepreneurs -- although the beliefs of both men, and their philosophies about entrepreneurship in general and socially responsible businesses in particular, have changed in ways neither would have thought possible.

Alan Newman, 57, is something of a local celebrity around Burlington. He has a Santa Claus-like beard and often wears vintage leather motorcycle gear. When it's warm out, he rips around town on a bad-ass Kawasaki, his beard flapping in the wind. When he sits at an outdoor table in downtown Burlington at lunchtime, a stream of passersby call out his name, stop by and squeeze his arm, or shout hello from their Volvos.

Though not a native Vermonter, Newman might make an excellent state mascot. After living on a commune in Oregon, he and his wife, Judy, moved to Burlington in 1970, joining so many other back-to-the-landers looking to flee their harried urban existences. He became an entrepreneur because he had nothing better to do. An environmental activist with no business training and a resume that was little more than a string of odd jobs, he was drawn to the idea of running a business with a strong social mission. In 1983, he helped launch a retailer called Gardener's Supply with his friend Will Raap, who still runs the place today. The driving idea was that gardening and sustainable agricultural and environmental practices improve communities and can save the planet. Running a business was a blast, Newman found, and three years later, he launched a new venture -- Niche Marketing, which advertised and distributed products for progressive companies and nonprofit groups, such as a militant left-wing T-shirt maker and a manufacturer of water-saving showerheads.

One of Niche Marketing's clients was a Washington, D.C., nonprofit, Renew America, that developed and sold household devices that conserved energy. In the summer of 1988, Renew America tried to sell Newman its catalog business. He wouldn't buy it. After failing to find a buyer elsewhere, though, the nonprofit simply handed it to him. Newman didn't like the name, and during a brainstorming session, one of his employees, a Native American woman, came up with a new one -- Seventh Generation, a reference to an Iroquois saying that, "In our every deliberation we must consider the impact on the next seven generations." Later that year, the first Seventh Generation catalog appeared. Its tagline: "Products for a Healthy Planet."

At about the same time, Jeffrey Hollender was having an epiphany of his own. Hollender had been raised on Park Avenue in New York City, but his goals were much the same as Newman's. Eager to do something that would have an impact, he had dropped out of Hampshire College after a year and a half and in 1977 moved to Toronto, where he founded a nonprofit called the Skills Exchange of Toronto, which offered courses such as "Introduction to Meditation" and "Marxist Thought." His father, a successful advertising executive, was appalled and grew even more concerned when his son was arrested in Canada for failing to file proper work permits. Hollender moved back to New York City and started a for-profit version of the business, the New York Network for Learning. This time, Hollender was determined to make money. His father was an investor and an adviser, and the courses included "How to Meet Men" and "How to Lose your Brooklyn Accent." One offering, "How to Marry Money," landed Hollender on The Phil Donahue Show -- accompanied by one of his lecturers, Joanna Steichen, who had married photographer Edward Steichen when he was 50 years her senior. The Donahue audience took great pleasure in heckling the pair, accusing both of being unscrupulous money-grubbers. Wiping off his stage makeup after the show, Hollender wondered: "Is this what I have become?"

He was 28 and his lofty goals were starting to seem distant. At the same time, the buzz about his classes was fading, and the company needed to shift direction if it was going to survive. Working with an executive from the Waldenbooks chain, Hollender decided to offer taped, rather than live, lessons. The timing turned out to be perfect. Books on tape had grown increasingly popular, and Hollender soon found himself sitting on a lucrative library of material. In 1985, Warner Communications bought Network for Learning for more than $2 million.

Vermont was teeming with entrepreneurs who believed they had a better way to run a business. "We smoked way too much pot, stayed up too late at night, and talked about how to change the world," Newman says. "We were full of ourselves. It was so much fun."

Hollender became head of Warner's new audio book division. He was the corporation's youngest division president, often hobnobbing with high-profile executives in private dining rooms across Manhattan. But Hollender grew bored. Finding the lavish lifestyle less than fulfilling, he quit to devote himself to what he hoped would be a redeeming project -- a book called How to Make the World a Better Place. Research for the book led him to Vermont, a state teeming with entrepreneurs like Alan Newman, who believed that they had a better way to run a business -- with emphasis on environmentally friendly materials, fair dealings with suppliers, and generous benefits for their own workers. They were also spending long hours debating how to get the message out to the rest of the world. "We smoked way too much pot," says Newman, "stayed up too late at night, and talked about how to change the world. We were full of ourselves. It was so much fun."

Newman and Hollender met when Hollender traveled to Vermont as part of his research. At the time, Newman was growing increasingly serious about Seventh Generation. Sales from the first catalog had met expectations, and he sensed that the company had a real shot at success. But the company needed money. As it happens, raising money is one of Hollender's great talents. Neither man remembers connecting during their initial meetings, but their business interests clearly coincided. In early 1989, Hollender helped Newman write a business plan. He shopped the new plan to investors -- most of them friends who had invested in his previous venture -- and raised $850,000. Under the deal, Hollender and Newman would each own 23% of company stock. There were about 40 other shareholders, none of whom would own more than 3%. Hollender, who took the title of CEO and chairman, continued to live in New York City and commuted to Vermont a few days a week. He was mainly in charge of financing and product development. As president, Newman oversaw marketing and day-to-day operations.

With the new money, the company moved to new space in nearby Colchester. Newman quickly transformed it into a cheerful hippy den. There was a Ping-Pong table in the warehouse, free Ben & Jerry's, and chalkboards in the bathrooms where people could write things about the company they didn't feel comfortable saying out loud. The main conference room, where Newman held staff meetings, had no table or chairs. Only pillows. No matter how busy the company was, he conducted weekly "check-ins" at which every employee was invited to report on new projects or problems or just about anything. Some stuck to business, others discussed conflicts with co-workers or troubles at home. The idea, Newman says, was to create a culture of absolute honesty in which employees would not be hampered by fear of admitting mistakes or suffering disapproval. The way Newman saw it, such fears dominated most workplaces, which led people to hide or cover up errors. He even launched a policy known as "Five Dollars for the Best Mistake" -- rewarding people for admitting and taking responsibility for their missteps.

Hollender, for his part, kept a small office in midtown Manhattan with an assistant and a staff of about five. He stayed in close contact with Newman on the phone, speaking to him several times a day. The office culture in Vermont, he says, was "very different than the one I might have created." But he adapted -- sitting in Newman's beanbag chairs without complaint, though he conducted his own meetings in a smaller conference room outfitted with a table and chairs. Once in a while, he drew the line -- "Alan wanted to have a nap room," he says -- but he put in long hours and tried to remain open and honest with employees. That got harder as the company began to grow and evolve. "I didn't have everything under control," he acknowledges, "and it would have been misleading to create that appearance. When things were uncertain, I let people know that they were."

But things seemed to be coming together. A March 1989 profile of the company in The New York Times painted Newman as the prophet of a new environmental movement. The article quoted him predicting that the watchwords of the new decade would be recyclable, renewable, and biodegradable. The story was a publicity windfall. By early 1990, monthly orders had jumped from fewer than 600 to more than 7,000. Earth Day 1990 was fast approaching, and Newman and Hollender could feel the momentum building. They expanded their product line like crazy, adding everything from beeswax crayons to biodegradable panty-liners to chemical-free carpet deodorizers ("with flea-chasing herbs!"). They hired some 80 new employees and drafted plans to mail three million catalogs.

Reporters began calling regularly. Most stories focused on Seventh Generation as an environmental pioneer, but reporters were also struck by the unusual pair that ran the company. The Associated Press called Hollender and Newman the "odd couple." People magazine noted that "Hollender favors pin-striped business suits" while "Newman's business attire consists of Patagonia shorts and Day-Glo green sunglasses." And yet, as managers the pair seemed deeply complementary. Newman inspired loyalty through sheer charisma, while Hollender was the indefatigable worker who led by example. "I was the emotion and Jeff was the intellect," Newman says. The partnership was working.

At the end of 1989, sales of catalog products were nearly $1 million; by the end of 1990, they topped $7 million. Hollender raised an additional $5 million and outlined sales projections for 1991 of $20 million, an increase of some 300%. Things were moving fast, and there was little time to talk. At one point, Newman and Hollender got word just before they were scheduled to depart for a conference in Los Angeles that the event had been canceled. They went anyway, figuring they'd have the roundtrip plane ride to catch up and strategize.

If the two had managed to slow down for a moment, they might have noticed that a major shift was under way in the marketplace. The economy had slowed and was on the verge of a deep recession. Iraq's invasion of Kuwait, and the subsequent Gulf War, further dampened things. Just as suddenly as their switchboards had lit up, the phones at the Seventh Generation office went silent. "It was like people put down their telephones and turned on CNN," says Newman. "The world had changed, but Seventh Generation hadn't."

As 1991 wore on, it became clear that hitting $20 million was a pipe dream; even remaining flat at $7 million would be a challenge. "It was like falling through the air and not knowing where the ground is," Hollender recalls. "It was the most stress I can imagine." Indeed, he had raised all the capital, and now it was his wealthy friends who had the most to lose.

In late 1991, the company dismissed about 50 employees, some of whom had been with Newman since his Niche Marketing days. A few months later, even more workers were laid off. Newman took the second round of layoffs particularly hard and wasn't sure how to proceed. "We hit a wall and had to reinvent ourselves," he says. "I was burnt out." What he needed was time to think things through. At the beginning of 1992, he told Hollender that he would be taking a six-month sabbatical.

Hollender was livid. He had resisted his own impulses to flee and felt Newman was abandoning him. "I thought, 'If you're leaving now, don't bother coming back.'"

Hollender was livid. He had resisted his own impulses to flee and felt Newman was abandoning him. "I was so angry and hurt," he says. "I thought, 'If you're leaving now, don't plan on coming back.'" Further complicating matters, the two men had begun to harbor deep differences about the company's direction. Despite the slumping sales, Newman remained confident in the catalog business. Hollender, on the other hand, believed that Seventh Generation's true potential was in becoming a full-scale consumer brand. His plan was to narrow the company's range of products, mass-produce popular items like recycled toilet paper, and retail the goods under the Seventh Generation label.

Such differences were left unresolved when Newman departed. His goal was to get away from the business, clear his head, and think. He hung out with his daughter, Zoe. He learned to play bass guitar. When he was good enough, he started playing with a rock band composed mostly of Seventh Generation employees. He heard from friends around town about Seventh Generation, but for the most part, he didn't call in. "Jeffrey was decidedly cold," he says. "I thought I would give him some space."

Hollender was doing some soul-searching of his own. He had been shaken by the experience of firing more than fifty people -- many of whom he had hired in the previous twelve months. "It was a very painful period," recalls Arthur Gray, a Seventh Generation investor and one of Hollender's closest advisers. "I don't think he lost his belief in the company, but he was sorely tested." Amid the strain, Hollender was in no mood to let Newman waltz back into the company. In the early summer months of 1992, after Newman wrote Hollender a letter outlining his ideas about repositioning Seventh Generation, Hollender wrote back informing him that he no longer had a job with the company. The letter stunned Newman. "I felt he had stolen my child," he says. "I knew he was unhappy with my leaving, but I thought we were in total agreement [on my coming back]." Gray, then chairman of Seventh Generation's board, says he shed no tears over Newman's departure. "Alan Newman was never interested in making money," Gray says. "He was one of those people who believes it doesn't matter. I saw Alan as an impediment."

As personal as it was, the struggle between Hollender and Newman reflected one that has long split the wider community of so-called green business owners. The issue is a basic one: What does it mean to run a socially responsible business? To Newman's thinking, Seventh Generation had more in common with activist groups like Greenpeace than it did with traditional corporations. He had no problem with rapid growth, but he envisioned Seventh Generation's catalog, as he had that of Niche Marketing, as a distribution channel for small, independent companies whose products might not otherwise reach consumers. Hollender advocated a different approach. The way he saw it, a company stood a better chance of influencing the world by developing leverage in the mainstream marketplace, building strong brands that can compete with the big players.

They were hardly the first business owners to grapple with such issues. The green business world is still reeling over the 2000 decision by Ben Cohen and Jerry Greenfield to sell their ice cream company to the Dutch conglomerate Unilever. The sale drew new lines in the battle, says Judy Wicks, owner of Philadelphia's White Dog Cafe and a former girlfriend of Ben Cohen, who went so far as to organize a group to try to buy Ben & Jerry's. Because their duty is to serve shareholders, not stakeholders, Wicks says, large public companies have a hard time being socially responsible. Socially responsible entrepreneurship, she says -- and many in Vermont agree -- is not about growing large or building brands. "What happened to Ben & Jerry's was a wake-up call," she says. "Twenty years ago, the socially responsible business movement was focused more on business practices -- not on ownership and size. But even the most socially responsible companies can end up adding to the concentration of wealth and power."

Obviously, many entrepreneurs disagree. "If you sincerely want the world to be a better place, and you believe business is a way to get there, then it's pure academic nonsense to set some arbitrary size limit above which you cannot be a responsible company," says Gary Hirshberg, who founded the organic yogurt maker Stonyfield Farm in Londonderry, N.H., in 1983. In 2001, Hirshberg stirred up his own brouhaha among do-gooders by selling a stake to the French dairy and bottled water giant Group Danone. Earlier this year, Danone upped its ownership to more than 80%. The way Hirshberg sees it, partnering with a Goliath like Danone means he can do good on a grand scale. "Things happen a whole lot faster when a company like Danone flexes its muscles," he says.

By the winter of 1992, Newman had his own answer to the conundrum. He had pleaded with Seventh Generation's board to be allowed to rejoin the company. Not only was his request rejected, he was also denied a spot on the board. He considered legal action but decided against it. "It's not my style," he says. And so, having lost control of Seventh Generation, Newman vowed never to start a business again.

Less than a year later, walking down Church Street in downtown Burlington, he ran into Bob Johnson, his old friend and former warehouse manager. Johnson had quit Seventh Generation and was now in the beer business, working as a brewer for an East Coast beer maker. But what he really wanted to do, he told Newman, was launch his own brewery. "Well, why don't we?" responded Newman. A few months later, their first test brews were ready and the partners rented a small space in downtown Burlington. Their new venture, the two men decided, would be different from Seventh Generation. Johnson had never gotten over the frustration he felt when warehouse employees were having check-ins or playing Ping-Pong instead of getting the orders out. Newman, for his part, was re-thinking everything. Did social responsibility require absolute honesty and regular check-ins, he wondered. Or was it possible to manage in a more traditional manner -- and still do the right thing? In any case, he was willing to try again. Money was tight, and they were funding the project mainly on credit cards. But then something fortuitous happened. Newman got a phone call from Hollender's attorney.

Seventh Generation had changed since Newman's departure. "Alan's leaving was a very difficult transition for the company," Hollender says. "I felt like we had endless healing processes." Employees loyal to Newman viewed Hollender with suspicion -- leading Hollender to hire a New Age consultant to come in and take a "spiritual inventory" of the place. The guru, who went by the name of Malachi, led a series of sessions called "withholds" in which small groups of employees vented their deepest feelings and frustrations to one another.

But that healing process was the least of Hollender's problems. Seventh Generation was on the ropes, and Hollender, frankly, had run out of people to ask for money. His options, as he saw them, were to seek venture capital or take the company public. Neither option seemed particularly consistent with social responsibility. On the other hand, you can't do much good from bankruptcy court. So in 1993, on the advice of the board, he decided to take Seventh Generation public.

To do that, he needed Newman's stock. Newman's first reaction? "Over my dead body." But then he started thinking -- the brewery did need cash. Eventually, a childhood friend of Hollender's, a New York City investment banker, bought Newman's stake for about $200,000, which went right into the new venture. The cash was serendipitous, to say the least, and Newman later named the brewery for his ability to pull things together at the last minute -- like a rabbit from a magic hat.

The deal allowed Hollender to proceed with attempting to sell his struggling company to Wall Street. It was a pitch unlike anything the Street had seen. He printed his prelude to going public on 100% recycled paper. Plus, the statement was, as The New York Times termed it, "unusually candid." It conceded that the company's losses from the years 1991 and 1992 totaled $3.4 million, that its debt was so severe that 30% of its catalog orders still stood unfilled, and that, though it had recently decided to make a line of branded products, it had no money for shelf space and no intention of paying for it. "Without guarantees from retailers that such projects would be welcome," the Times reported, "a real question exists whether Seventh Generation can pull it all off."

Nonetheless, on November 8, 1993, Seventh Generation offered 1.2 million shares of stock to the public, at $5 a share, and 1.2 million warrants, at 10 cents a piece. The company managed to raise $7 million. Getting the money and seeing Seventh Generation's name in the papers again were energizing, but it didn't take long for doubts to set in. As 1994 wore on, Hollender realized that the ongoing costs of being a public company were enormous. The time and expense of dealing with accountants, attorneys, and investors was a massive headache. And Hollender's heart sunk when the company's stock price plummeted.

What's more, Seventh Generation still lacked the money it needed to make a real push into retail. So Hollender made his gutsiest move ever: He decided that Seventh Generation would sell its struggling catalog business, even though it accounted for 80% of revenue. He found a buyer in Gaiam, a healthy-lifestyle products company in Broomfield, Colo. Most of the staff either quit or went to work for Gaiam, leaving Hollender to rebuild Seventh Generation essentially from scratch. He poured the proceeds into developing products like bleach- and dye-free dish and laundry soaps, recycled toilet paper, and other paper products made from recycled materials and began building relationships with chains like Whole Foods and Wild Oats, as well as mainstream supermarket retailers like Kroger. Before long, the company was making progress -- though you wouldn't have known it from its stock price, which was stuck at about 70 cents. So in 1999, again on the advice of the board and with the help of wealthy New York friends, Hollender bought back his struggling company for $1.30 a share.

Turning to Gray and a new crew of consultants for advice on yet another repositioning, Hollender decided that his products needed to appeal not only to a sense of moral and ethical duty but also to health consciousness. The idea appealed to him on a personal level, too. His son, Alexander, then 9, suffered from severe allergies and asthma, and one of the things that helped the Hollenders keep him healthy was the use of Seventh Generation's mild, chemical-free products. The consultants eventually helped him reposition Seventh Generation under a new tagline: "Healthier for You and the Planet."

Today, Seventh Generation is based in a gleaming office building in downtown Burlington. The Ping-Pong table, beanbag chairs, and pillows have been replaced with more traditional office furniture. Hollender himself lives outside Burlington in a 6,000-square-foot mansion overlooking Lake Champlain. Two years ago, the house, constructed from untreated woods and equipped with water-saving laundry equipment and compact lighting, was the subject of a story in the Burlington Free Press under the headline "Greenhouse" -- which raised the hackles of many hard-core Vermonters, including more than a few former Seventh Generation employees. "There is no way that five people living in 6,000 square feet, miles from work, schools, and shopping, can be 'environmentally friendly' or sustainable for humanity in the long run," one reader wrote.

Hollender makes no apologies -- for his home or for the direction in which he's taken Seventh Generation. He continues to believe that the best way to make an impact is to head straight for the American mainstream and is not shy about battling giants like Procter & Gamble on their own turf, pushing hard for market penetration in mainstream supermarkets in health-conscious cities such as Denver, Austin, and Seattle. Though Seventh Generation's prices are generally about a dollar more than mainstream brands, the products have attracted customers willing to pay a premium.

Nor has Hollender abandoned the company's original values. Seventh Generation continues to demand brutal honesty. Hollender still conducts check-ins with his 30 employees regularly, and every employee participates in a painstakingly frank 360-degree review process. Bonuses are awarded not only on the basis of having achieved key business objectives but for exhibiting certain "trust behaviors" -- such as "listening actively without interruption." The company also turned heads, in late 2003, when it published its first Corporate Social Responsibility Report. The document details not only growth in markets like Denver, where Seventh Generation's chlorine-free baby diapers outsell all other brands, but also points out the ways in which the company has fallen short of its ideals. The fragrances in the green apple dish liquid and mint toilet bowl cleaner, for example, are still synthetic, the report says, though the company is looking for natural replacements. With such moves, Hollender hopes to establish Seventh Generation as a role model for corporate social responsibility. "Businesses no longer have a choice whether to behave in a moral fashion or not," he says. "The world will soon expect it from them."

Newman's Magic Hat, on the other hand, continues to build its customer base one New England community at a time. The brewery is a 50-employee operation whose best-selling beer, an apricot-tinged pale ale called No. 9, has helped attract fans in 12 eastern states. But its main focus remains on its hometown, Burlington. About 15 people work in a South Burlington warehouse Newman calls the "Artifactory." A retail store is festooned with vintage televisions, Mardi Gras beads, and other artifacts. Brews have names like Fat Angel, Blind Faith, and Thumbsucker. All employees have fanciful titles. The director of sales is the Ambassador of Ales and Odd Notions; the PR rep is the Minister of Fermentation Elation Relations. The company's official name is Magic Hat Brewing Co. and Performing Arts Center, and it shows: Each year, Magic Hat sponsors several arts and music festivals in Burlington, as well as about 20 other concerts, mainly at New England venues. The biggest event of the year is the Magic Hat Mardi Gras weekend in late February -- in which Newman leads thousands of drunken revelers, parading through Burlington's snow-covered streets wearing a goofy, fruit-covered "magic hat."

Ask Newman if he's held a check-in lately, and the answer is not what you'd expect. "I'm fed up with the touchy-feely employee-empowerment crap," he sn

orts.

Newman runs the show from a cluttered corner office. He almost never wears shoes and often takes naps on a purple velvet couch under his collection of psychedelic posters. Magic Hat has many of the trappings of a "socially responsible" company, sponsoring arts events, donating to a local rape crisis center, and generally being a good neighbor. But in other, important ways, Newman's feelings about the "social responsibility" label have changed. The phrase, he believes, gets tossed around so often now that it's nearly meaningless. Does it mean offering health benefits to employees? Donating to charity? Newman's answer to the question has been to avoid the label altogether. He chooses his do-gooder battles carefully, promoting causes like rape prevention, AIDS awareness, and safe sex -- issues often linked to alcohol use. His management style has also shifted. Ask Newman if he's held a check-in lately, and the answer is not what you'd expect. "I'm fed up with the touchy-feely employee-empowering crap," he snorts. He never lost his fun-loving free spirit, but decisions at Magic Hat tend to come from the top. "There's much less participation, and much less illusion of participation," says Newman. "There's no need to be disrespectful or mean, but we have a job to do, a budget to live to. That's the driving mission of the organization."

As for Hollender and Seventh Generation, Newman says his "voodoo pin phase" is over. That's for the best, he says, because "Vermont is small, and Burlington's even smaller." In fact, in the late 1990s, Newman and his former partner were forced to be cordial with each other when they discovered that Hollender's son and Newman's daughter were attending the same private elementary school and were becoming friends.

But Newman still can't bring himself to buy Seventh Generation's recycled toilet paper -- once his favorite catalog item -- when he sees it at a Burlington grocery store. "When I left, I made a conscious decision to stop using all that stuff," he says. "It was a painful reminder, and I didn't need it. Now, I pass it in the grocery store and think, 'Hmmm, they've got quite a lot of shelf space.' But that's as much thought as I give it."

Sidebar: What is it about Vermont?

Ben and Jerry may be the most famous of Vermont's entrepreneurs, but they're not the only ones. In a state where there are 600,000 citizens and few jobs with big corporations, starting or working in a small company is not so much a choice as a necessity. And that's the way most Vermonters like it. "You get enough quirky, creative people up here doing their own thing, and it's inspiring," says Elisabeth Robert, CEO of Burlington-based Vermont Teddy Bear. "There are always a bunch of good ideas floating around."

The idea that running a company could be a vehicle for social change has been part of Vermont's business culture at least since the 1940s, when a New Yorker named Lyman Wood moved to Burlington and founded Garden Way, a mail-order gardening supply business. Wood's goal was to "live the garden way of life" and his approach was "not for profit only." But Garden Way was a big success, and Wood later served as a mentor to younger do-gooder entrepreneurs, including John Sortino, founder of Vermont Teddy Bear, and Will Raap of Gardener's Supply. By the 1970s, the state got involved, doling out loans to would-be business owners, and socially oriented private venture groups, such as Northern Vermont Lending Partners and the Vermont Food Venture Center, soon followed suit. In 1990, Ben Cohen helped found Vermont Businesses for Social Responsibility, the largest state group of its kind, with more than 450 members.

Since then, Vermont has become as much a brand as an address. Businesses like Green Mountain Coffee Roasters, based in Waterbury, and Orvis, an outdoor gear retailer in Manchester, make direct reference to the state's landscape in their marketing materials. That makes sense to Bernie Sanders, a longtime mayor of Burlington and now the state's independent representative in Congress. "Would you rather have a product that was New Jersey pure or Vermont pure?" he asks. Sanders, a hard-core progressive who consistently votes in favor of pro-worker, pro-abortion rights, and pro-environmental legislation, says he's also pro-entrepreneur. In the '80s, when he was mayor of Burlington, he helped oversee the conversion of old warehouses into small-business incubators. Now he's happy to see the progressive meet the practical in the socially responsible business movement. "Bright entrepreneurs recognize that there's a lot of political and cultural excitement in Vermont," he says. "It attracts a different type of imagination."

Jess McCuan is a staff writer.

Lucky Junki

2009-10-20T23:35:00.000+07:00

He has 20 thriving companies, a fourth-degree black belt, and a plan -- always a plan. Which is why this former Japanese gang leader is a teriyaki-sauce-making global-logistics magnate. Only Junki Yoshida; only in America.

By John Brant | Oct 1, 2004

It's not a question of if Junki Yoshida will seize control of the room, but when, and in what guise and key. Will he play the manic, English-mangling, teriyaki-sauce-hawking clown or the ambassador-smooth tycoon responsible for keeping Nike factories around the world supplied with shoe boxes and air soles? Flaunt himself as a Franklinesque self-made American entrepreneur or betray the ghost of a lonely Japanese teenager? Display the traits of his merchant mother or of his artist father? Provoke laughter or command homage?

The room in play is the test kitchen of Sur la Table, an upscale cookware store in the Pearl District of Portland, Oreg. Yoshida sits quietly in a corner, cradling his cell phone in one hand and running the other over his weary eyes.

The past few weeks have been hectic even by Yoshida's frenetic standards. During a whirlwind 10 days in Japan, China, and Korea, he visited factories that produce his lines of outdoor clothing and sporting goods, and called on shipping companies and airlines upon which his logistics and supply-chain management firms depend. Returning to the U.S., Yoshida touched down briefly at his home near Portland, then flew to Minneapolis, where he received an award from a national community college foundation. He then journeyed to Las Vegas to celebrate his wife's birthday, and to Coeur d'Alene, Idaho, to deliver a speech to a food-packing association. Finally he returned to Portland, where he presided over the opening of a restaurant he purchased across the road from his home in suburban Troutdale.

Now he sits at Sur la Table, a block away from the art gallery and wine bar he owns with his wife and daughter, waiting to tape segments of his TV spot, "Cooking with Junki," which airs twice a week on a local station. The spot pushes Japanese cuisine in general and, in particular, the Mr. Yoshida's line of sauces that forms the public face and emotional base of Junki Yoshida's 20-company international conglomerate.

"I tired," he growls, his voice barely above a whisper.

The other people in the room -- Yoshida's assistants, the cameraman and producer, and the local TV weatherman who co-hosts the spot -- prick up their ears, waiting to be entertained, enlightened, issued orders, or, as is most often the case with the 54-year-old Yoshida, a combination of all three.

"I tiiiiired!" Yoshida repeats, the growl growing both louder and more playful. He yawns fiercely and rolls his shoulders like a boxer preparing to answer the bell; the cell phone dangles from his fingers. Finally he slaps his knees, squares his shoulders, and rises. By the time he reaches the side of his co-host, Dave Salesky, Yoshida is all glint and holler.

"Hey, in Vegas, I win that horserace, that Kentucky Fried Derby!" he tells Salesky, a tall, fair-haired man whose folksy, small-market charm serves as a perfect foil for Yoshida's intensity. "I put down 100 dollar on that Pennsylvania horse and win 800 dollar! I a rich man!"

Hoo-hah, Junki, you're a card! Kentucky Fried Derby! Eight hundred bucks! Now you can give everyone a raise!

Now Yoshida is rolling. He slips into costume -- this week it's an apron, a white chef's jacket, and an Asian peasant's conical straw hat -- and plows into a rehearsal of the first segment, which will feature the preparation of a teriyaki-style sandwich wrap. Salesky, meanwhile, explains that Yoshida's presence is ubiquitous around Portland, where he serves in roles ranging from port commissioner to benefactor for the city's largest children's hospital.

"I've been working regularly with Junki for a year and a half, and I'm still seeing different sides to him," Salesky says. "When I first met him, all I knew about was Mr. Yoshida's sauce, and that goofy billboard with his picture on it out at the Portland airport. I'd heard something about the work he did for Doernbecher hospital, but nothing about the trade missions with the governor, or the Nike shoe boxes."

The lights go up and the taping begins. Although he rarely cooks anymore outside of these public appearances, Yoshida's kitchen chops are genuine: He grew up helping his mother run a succession of small restaurants and teashops in Kyoto, and 30 years ago brewed the original Mr. Yoshida's sauce on the stove in the basement of his karate studio in Beaverton, Oreg. Now, he deftly layers filling into delicate tissues of rice paper, while at the same time riffing on horseracing, gas prices, and Salesky's mother's visit from Idaho. He mugs relentlessly for the camera, at one point sporting a bowtie pasta on his lip like a mustache.

"Tomato pesto! Garlic! Rice wine!" Yoshida roars as he adds each ingredient.

His foghorn voice blasts forth from the kitchen, stopping shoppers in their tracks out in the store. Which, of course, is the point: Yoshida trained his voice, developed his schtick, and built his empire by grinding out thousands of supermarket demos around the nation. No matter how vast the warehouse store or tiny the grocery, no matter how sophisticated or benighted the customers, Mr. Yoshida always took over the room. He always sold his sauce.

"Kentucky Fried Derby!" he trumpets, as the steak strips sizzle, the cameras roll, and outside on the sidewalk pedestrians gape through the window in wonder. "I take first and second! I a lucky man! Lucky Junki!"

Six-day-old Kristina Yoshida had turned a sickly yellow during the night and by dawn she was too limp and weak to cry. Her mother, Linda, had a fever as well, and she was scared. She desperately wished that Junki were home with her in Seattle, but Kristina's father was hundreds of miles away, in Salem, Oreg., teaching members of the Oregon State Police self-defense techniques. It was Junki's big break, his first chance to rise above the station of a struggling young karate instructor.

Kristina wouldn't nurse. She barely moved. Linda called Junki, who immediately rushed to the Portland airport for a flight to Seattle. He arrived home and took mother and daughter to Children's Hospital, where the doctors rushed the infant into intensive care. The diagnosis was grim: Kristina had a runaway case of jaundice, a condition especially dangerous in babies of Asian descent. Her liver and kidneys were shutting down.

Junki's comatose baby daughter lay nearly buried beneath the tangle of tubes and monitors. The doctors would not look him in the eye. He sat vigil through the night. In the silent watches, to the pulse of the heart monitor, during breaks from his divine plea-bargaining -- God, take me, not her -- shards of his past came hurtling at him.

He remembered his bleak boyhood in Kyoto, in the section of the city below the central train station, far removed from the world-famous temples and cherry trees. His father was an accomplished but dreamy photographer and his mother a driven, embittered woman who launched a series of struggling enterprises to feed her seven children. Junki, the youngest child, turned to the gang-controlled streets for companionship.

Junki proved himself a consummate brawler, slashing and battling with a ferocity notable even by lower Kyoto's brutal standards. First he ran with a gang, then he ran his own. He picked up both a collection of knife scars and a nickname derived from the American tough-guy films he loved: One-Eyed-Jack Junki.

He had lost his right eye in an accident when he was three years old. A Buddhist priest had told him, "Junki-san, God has taken your eye and replaced it with his own. You will have a special insight into people."

But the only thing special about Yoshida's life seemed to be its difficulty. At 18 he failed the exam for entrance into the university system, the kiss of death for a young person in Japan. A life on the streets awaited Yoshida, a violent and likely brief career shaking down construction workers for the Yakuza, the Japanese version of Cosa Nostra. He decided instead to borrow money from his mother for a plane ticket to America, the land of second chances. He touched down in Seattle on a January day in 1968. The first thing he did was cash in his return ticket. He had resolved not to return home until he had achieved success.

For a long time it seemed he would never see Japan again. He spoke no English and possessed no work permit. That first rain-swept winter he lived in a junker car and used a public restroom in west Seattle as his bathroom. As an illegal alien, he worked gut-busting, low-paying jobs in restaurant kitchens and on landscaping crews.

But things started to improve. He acquired some rudimentary English and a student visa. He enrolled at Highline Community College, where he discovered that American students were as hungry for things Japanese -- from tempura to films to Zen -- as he'd once been for things American. Junki began to teach karate at Highline. His fire and charisma -- along with his fourth-degree black-belt mastery of the Ryobukai school of the martial art -- drew students in swarms. He met a fellow Highline student named Linda McPherren at a party and immediately announced that he was going to marry her. Two weeks later, the couple was engaged. Junki and Linda married in 1973, and the next year became parents. Lucky Junki.

Dear God, take me instead.

Grace and good medicine prevailed. Kristina was out of danger, breathing normally, her liver again filtering her blood. As life flooded back into their daughter, Linda and Junki went limp with relief. A day or two passed before Junki considered the fact that the family had no health insurance.

After five days in the hospital, Kristina was well enough to go home. The nurses and doctors were all grins, Junki and Linda were glowing. But a worm of despair was already turning in Junki's brain: My God, how do I begin to pay for all this?

One of the hospital staff handed him an envelope. Junki hesitated before opening it. The bill would certainly be astronomical. Then he gave a gallows laugh -- what did it matter how many zeros there were when he was virtually penniless? But as he read the bill his laughter died. The amount payable was $250.

"If that's too much," the hospital staffer said, "we can work something out."

Junki was too overwhelmed to speak. But he silently vowed, with all the resolve that had brought him off the streets of Kyoto to the New Jerusalem of America, that one day, in some way, he would repay this kindness.

The Yoshidas returned to their lives. Junki continued to teach karate. The family moved to Oregon, where Junki opened a dojo in suburban Portland that soon became a center for martial artists throughout the Pacific Northwest. When practicing karate, Junki was formal, dignified, and imposing -- all Japanese. In other aspects of his life, however, he was exuberant, fun loving, able to make friends with anybody -- the representative American. The dojo thrived, but another daughter had come along (the Yoshidas would eventually have three daughters), and the family still lived on a shoestring.

In fact, at Christmas, Yoshida didn't have enough money to buy gifts for his karate students. So he and Linda brewed batches of a cooking sauce, adapting one of his mother's recipes to American tastes. They doubled the sugar and added more mirin, the rice wine that lent the sauce, or teri, its distinctive flavor and glazing properties. Outside of a few specialty stores, such sauces were then unknown in the U.S. The Yoshidas gave eight-ounce bottles as gifts in December. By February, students were asking for more. Junki admonished them that Christmas came only once a year.

"No, no," the students replied. "We don't expect another gift. We'll pay you."

Today, Mr. Yoshida's Original Gourmet Sauce and Marinade is bottled and packed in an industrial park just under the flight path of arriving jets at Portland International Airport. You walk down a hallway from Junki Yoshida's office, put on a hygienic haircover, open a door, and step directly onto the plant floor. The effect is rather startling. It's as if you've stumbled into a James Bond movie, where a vast SMERSH laboratory secretly hums on the other side of a seemingly ordinary living-room wall. Serpentine belts snake from floor to ceiling of the football-field-size factory, emitting a moderate din as they bear the distinctive, half-gallon plastic jugs of ink-colored sauce in various states of preparedness.

He shows no trace now of the samurai cowboy screaming into the TV camera. Yoshida is every inch the businessman -- solemn, crisp, and formidable.

Yoshida moves through the plant with a capo's strut, pausing here to greet a longtime employee, there to question a manager about water spilling over the lip of a monstrous vat. He shows no trace of the samurai cowboy screaming into the TV camera. Yoshida is every inch the businessman -- solemn, crisp, and formidable in an expensive gray suit, his face an impassive mask.

He climbs a set of stairs to a catwalk overlooking the floor, surveying this slice of his kingdom with a satisfaction tinged by wistfulness: He has only a sketchy understanding of the factory's engineering and operations, he acknowledges. And the sauce itself, while bearing Yoshida's name and likeness, is no longer entirely his; five years ago, he sold North American trademark, distribution, and marketing rights to the H.J. Heinz Co., for which he essentially serves as a contract manufacturer. This arrangement falls under the aegis of Yoshida Foods International, another one of the companies that make up the privately held Yoshida Group, which last year took in more than $180 million in sales.

"Economy of scale," he says, with a stoical toss of his hand. "Pretty soon, there only be four grocery outlets left in this country -- Wal-Mart, Safeway, Kroger, Costco. To play with those big boys, you better be big yourself."

The capital-intensive roar and high-corporate filigree seem a world apart from a 20-gallon pot of sauce simmering on the stove in the basement of a karate dojo. And the austere and sober businessman touring his factory seems a different person from the berserker wearing a pasta mustache at Sur la Table. And yet the distance between the mom-and-pop project and Heinz, or even between the two sides of Yoshida's personality, isn't nearly as great as the one yawning between food manufacturing and the spectral, virtual 21st-century enterprise -- global logistics and supply chain management -- that now constitutes Yoshida's core business.

"Family, relationships," he says, hanging up his haircover and passing back through the looking glass toward his office. "No matter what business you in, no matter how big how small, that's all that count -- family, relationships."

By the late 1980s, after years of furious work and two near bankruptcies, Junki Yoshida's sauces were established as a regional favorite in the Pacific Northwest. He sold through the local supermarket chains, which were then still the backbone of the American grocery industry. Although he still practiced karate, he was a businessman now, with a wide circle of contacts, many of them in positions of power. When the fledgling Costco came courting, these friends urged Yoshida to spurn the advances.

Costco challenged the system by buying directly from producers and manufacturers, cutting out the jobbers and slashing the markups by which the supermarkets prospered. With its membership fee, warehouse stores, limited selection, and oversize packaging, Costco once seemed like a bizarre fad that would soon pass. If Yoshida did business with this upstart, he was warned, he would be blacklisted by the grocery establishment.

It was one of those watershed moments, when an entrepreneur must crunch the numbers, search his soul, and finally close his eyes and make a calamitous or evolutionary leap. Yoshida rejected the advice and gambled on Costco.

Selling through Costco meant reconfiguring his packaging, coding, and pricing, a huge undertaking for what was still essentially a mom-and-pop operation. But the basic nature of the business remained unchanged -- selling the sauce. At the time, the Costco chain consisted of only two stores, in Seattle and Portland. Each weekend for months, Junki and Linda would shuttle between the stores, hammering out the demos. To say that Yoshida was an effective salesman is like saying that Bob Dylan is a good songwriter.

"Junki reinvented the whole concept of demos," says Costco founder and CEO Jim Sinegal. "Before -- and for the most part since -- demos consisted of little old ladies handing out free samples, and the customer gobbling up the freebie and then looking for a place to get rid of the plastic fork. Well, Junki just blew that out of the water. He put on a show. He created traffic jams in the aisles. Most important, he wouldn't let a customer get away without a flat of sauce in her shopping cart."

"To my mind, marketing and sales are connected, two sides of same coin," Yoshida says. "I never understand why they separate. I think that a big problem with corporate world today. In my company, marketing people always sell."

At Costco, Linda cooked and served while Junki worked the crowd, doing his gonzo samurai routine, dancing, singing, yelling out "Hey, mama-san" to shoppers, donning cowboy hats, throwing lassoes, brandishing butcher knives, on one occasion even chasing a stubborn shopper out into the parking lot and escorting her back into the store to buy his sauce.

The shows were a hit, the sauce flew out of the stores, and Sinegal and Yoshida forged a lasting bond. Costco grew exponentially, and Yoshida hooked on for the ride. When Costco staged a grand opening of a store anywhere in America, the Yoshidas served as headliners. And when an outlet opened in England in 1993, Linda and Junki took their act to Europe.

Yoshida eventually reached another crossroads. The next step for his rapidly growing business was to sell through the mega-supermarket chains at a national level. But that required a capital investment -- chiefly in the form of fees for placement on supermarket shelves -- beyond the scope of his company. Yoshida had to either go public or sell the distribution and marketing rights to his sauce. He chose the latter, selling to Heinz in 2000. At around the same time, Yoshida's other business interests were starting to bear fruit.

He'd begun to diversify in the late 1980s, with an investment in geoducks. A geoduck is a type of large clam that lives in profusion in the mud flats of Puget Sound. It is popular in Japan, where it forms the base for many sushi recipes. Yoshida bought a geoduck harvesting and distributing company and started supplying customers in his native country. Business clicked along until fate intervened -- twice. First, a series of geoduck shipments arrived in Japan spoiled. Yoshida, whose b?te noir is disappointing a customer, was furious at the air freight company. The second episode was far more serious: A company diver died in an accident while harvesting geoducks under the sound.

"I always believe in karma," Yoshida says. "When that poor diver die, I understand that the karma no good for geoducks, and I get out. That another lesson I learn from my mother: When a business don't work, after you try like hell to make a success but it don't happen, then you just got to know to walk away."

The geoduck karma wasn't all bad, however. Studying the debacle of the spoiled shipment, Yoshida surmised that other companies shipping perishable goods to Asia must have had similar experiences. With remarkable acuity, the former gangbanger and current saucemeister recognized that the real opportunity lay not in geoducks, but in the supply lines delivering them to market. So Yoshida got into the global freight-forwarding business.

The former gangbanger and current saucemeister recognized that the real opportunity lay elsewhere. Yoshida got into global freight forwarding.

Except for Junki's office and the bottling plant, all of the Yoshida Group enterprises, including OIA Global Logistics, operate out of a bright, low-slung postindustrial cube farm in Gresham, east of Portland. Nothing tangible is produced here, which is a point of pride with Matt Guthrie, the group's president.

"We're information- rather than asset-based," says Guthrie, a tall, relaxed man with a fashionably sparse beard who could serve as a model for Portland's open-collar business culture. "For example, OIA is basically an airline without the airplanes. We do freight forwarding, import brokerage, warehousing, purchasing and delivery, inventory, and risk management. The Pacific Rim and Asia are our main beat: We have branch offices from Bangladesh to Beijing."

OIA's blue-chip customer is its Portland-area neighbor Nike. The progression from delivering clams to trafficking shoe components was actually fairly direct. In its early years, OIA carved a niche in facilitating the transport of perishable goods between the U.S. and Asia. At around the same time, Nike was rolling out its air soles, which were manufactured in Oregon, then delivered to assembly plants throughout Asia. OIA's Asian and air freight expertise made the company a natural choice for Nike.

Air soles, of course, revolutionized the shoe industry. Just as Mr. Yoshida's sauce hooked onto Costco's rise, so did OIA climb aboard the Nike rocket. While continuing to deliver air soles from Oregon to Asia, Yoshida's company now also manages the flow of shoe boxes through Nike factories worldwide. OIA now produces annual revenue of $130 million. Lucky Junki, perhaps; prescient, hustling, and adaptable Junki, definitely.

Whenever Yoshida starts a new venture, from Prison Blues, his inmate-produced line of denim clothes, to Straight Line Sports, which makes water ski gear, he follows the same pattern. During start-up, he immerses himself in the project. Once the enterprise is smoothly functioning, he disengages from day-to-day operations, turning it over to carefully chosen specialists in the field.

Just now, that pattern is playing out with Hagar's, Yoshida's new restaurant in Troutdale. He envisions the spot as both a neighborhood hangout and a place for families to stop after a day at the nearby Columbia Gorge. It might also serve as Yoshida's unofficial headquarters after he semiretires in a year or two to devote more time to philanthropy and civic affairs. Chief among these interests is Portland's Doernbecher Children's Hospital. Yoshida has never forgotten the vow he made years ago in Seattle, after his own daughter's life was saved.

"Once I retire, start doing charity full time, all my business buddies stop calling me real quick," he explains, deadpan. "But if I got a restaurant, I say, 'Come on in and have a free drink.' Everybody like a free drink. Everybody still my friend."

He knows he'll lose money on the restaurant, and it is far from one of his frontline enterprises, yet at this point no detail is too small to escape Yoshida's attention. Today, for instance, the primary item on his agenda is deciding what kind of chicken-wing appetizers Hagar's will serve. Such a task would seem a natural for the blaring, wild-man Junki, but instead he's playing it straight.

He has flourished by straddling actual and metaphorical borderlines, building a fortune on marrying East and West.

Yoshida sits on a sofa in his office, perched midway between the big executive's desk occupying one end of the room and the formal Japanese tea table and service that takes up the other. He has flourished by straddling such actual and metaphorical borderlines, building a fortune on marrying East and West, on managing to be both the quintessential Japanese and American, tycoon and clown.

Two staffers enter the office, each bearing a tray laden with chicken wings, one prepared with mild sauce, the other with spicy sauce. Reading their boss's mood, the staffers silently place the trays in front of Yoshida, then step back a safe distance.

Mr. Yoshida grabs a plastic fork -- the kind you get at a supermarket demo -- and spears a wing off the mild tray. He chews thoughtfully but says nothing. Then he samples one of the spicy wings. His grin lights up the room. i

John Brant is a writer in Portland, Oreg. He is working on a book about the 1982 Boston Marathon.

Closing the Deal

2009-10-20T23:10:00.000+07:00

Three big-time investors have rolled into Miami to listen to 33-year-old whiz kid Marcelo Claure try to sell them a chunk of his company--and, my God, he's late!

By Christopher McDougall | Mar 1, 2004

These guys are money--$5 billion at least, probably $10 billion. They don't look like money; they look like duffers playing euchre on the 19th hole, the way they're kicking back in khakis and golf shirts, one of them scratching his sockless ankle. They don't look like much, today, because they're not expecting much: They've turned this Thursday into their own casual Friday because they're going to be stuck all day in a Miami industrial park, listening to a boy genius yap about how he's going to conquer the world. With their money, of course.

Not all day, actually--there is a later flight back to New York, but these three venture capitalists are catching the first one out at 3 p.m. That's all the time they need, they figure, to hear everything worth hearing from Marcelo Claure, a 33-year-old Bolivian who was hustling cell phones out of a car trunk 10 years ago, and his Brightstar Corp., which frankly doesn't sound a whole lot different than his car-trunk operation, except by scale. The VC trio wouldn't have even bothered getting on the plane this morning if it weren't for two things:

1) Marcelo Claure raked in a billion dollars last year.

2) They have no idea how.

The Brightstar basics aren't hard to understand. Marcelo buys cell phones from Motorola and sells them to wireless carriers across Latin America. Couldn't be simpler. Except--how come no one else can do it, while Brightstar has seen near triple-digit growth every year? Marcelo could barely get manufacturers' credit in 1997; still, his annual revenue hit $14 million that year, and $73 million the next, and $355 million the next. Though 2000 was the year that telecommunications took a nosedive, Brightstar was banking $631 million. Today, Brightstar has 700 employees working out of 21 facilities in 16 countries, selling or reselling cell phones to 160 wireless network operators and an assortment of 15,000 other agents and retailers. Its 2003 revenue will come in north of $1.2 billion.

And now, even though the telecom industry is still smoldering from the wreckage, Marcelo is looking to raise $50 million so he can hustle yet more phones. He's got world domination plans for Asia, Europe, and Africa and deep veins of untapped consumers right here in the United States--even though rival distributors have well-established beachheads on all those fronts. Marcelo is sure he can beat them; he's sure he's got a system that will let him move cell phones faster and cheaper than anyone else in the world.

He's also sure he can convince this VC trio, no matter how skeptical they are. Marcelo is a showman, a charmer, a bit of a braggadocio, and accustomed to winning over doubters. He'd better--the stakes are high, and he won't have many chances. Marcelo will only be making his pitch to a small number of specially chosen potential investors (including a very well-known big fish, one of the world's richest men) because he's determined to keep maximum control of Brightstar and only wants investors who will give him cash, frankly, and leave him alone. If he fails in this round, time will be short for another: If Brightstar doesn't grow, it could suffer the same fate that it once dealt to its competition.

The VCs are impatient; one is already checking his watch. Until they know a lot more about this Brightstar, they don't even want anyone to know they're in this room. It's 8:59...no, make that 9 a.m. on the button. Marcelo wants their money, and he has exactly five hours to get it.

Set?

Go.

Five hours...

Hold up--he's late. The future of his company is waiting in his conference room, but Marcelo is stopping for a sweet, Cuban coffee from the sweet, Cuban coffee woman pushing a cart down the hall. It's hard to blame him: The Coffee Lady is so well known, one Brightstar client even cites her when asked to rate the company's performance. "I'm telling you, she makes the best coffee in Miami," he says. She's also powerful subliminal advertising. "This old woman with her espresso pot sets the perfect tone," he says. "It tells people, 'We respect Latin American tradition here. We take time to do things right.'"

Four hours, 50 minutes...

Okay, here he comes, smiling and sort of sleepy-looking. At times, Marcelo looks like Friends star David Schwimmer, even down to the gelled black hair, the sly-goofy grin, the awkward big-guy mannerisms. This morning, he's wearing a dark-blue suit and cloud-blue shirt, like he's got nightclub plans after punch-out time. He just might: Paulino Do Regos Barros Jr., the head of Latin American operations for BellSouth, confides that the divorced Marcelo likes to "party" an extra night when he's in Mexico City, hitting the clubs after business calls. But Regos Barros also stresses that "he's the hardest-working guy around--he'll work 16, 18 hours, then hop a flight to Brazil at a moment's notice if a customer needs something."

Apart from the VC trio, Marcelo is the only tieless guy in the room: His Citigroup financial advisers along the left flank of the U-shaped table are buttoned-down, their ties neatly Windsored, his CFO and COO beside him are just as tightly tailored. Even the VC trio on the right, in their golf getups, look more intense. Marcelo has the most riding on the meeting but seems the most relaxed, probably because he's playing to strength: Ever since he bought his first strip-mall cell phone store with no money down, Marcelo has been talking people into sales with cash he doesn't have. Marcelo is a consummate talker, a master at getting people to see the world his way.

Marcelo isn't even ruffled when one of the VC trio interrupts his opening banter with a question so blunt, so let's-cut-the-BS, it sounds like an invitation to fight.

"So how do you make your money?" VC 1 asks. "I don't really get it."

Marcelo shoots a glance at his COO, Denise Gibson, formerly head of Motorola's cell phone ops and logistics. Marcelo and Denise exchange barely perceptible grins; they remember when Motorola COO Mike Zafirovski fired the same beanball at Marcelo's head back in 2000. Zafirovski had just come to Motorola from GE, where 24 years under "Neutron" Jack Welch had taught him to piss on politeness and ax the middlemen. Jack Welch liked to open partnership meetings with the most aggressive, insulting question he could think of. If the guy came firing back with facts, great. If he tried fluffernutting around with PowerPoint pictures, look out. Zafirovski had learned that rocking a guy back on his heels was the best first step toward finding out if he's for real, and what he wanted to know was this: If Motorola makes the cell phones and Verizon sells them, why is there a Marcelo Claure in the middle draining millions of dollars out of the deal? Why doesn't Motorola just ship phones on its own and add that 5% markup to its own bottom line instead of Brightstar's?

VC 1 must have had Straight From the Gut on his night table.

"You mean, why do we even exist?" Marcelo answers, his Spanish-tinged enunciation lending an almost theatrical air of melodrama to the question. Despite his childhood in American schools in Latin America and North Africa and his bachelor's degree in business from Bentley College, Marcelo's accent is still as rich as his caf? con leche.

"Right," VC 1 says. VC 2 and VC 3 are nodding along. "That's my question."

Marcelo sits back from the laptop and instead of launching his presentation, he roughs out the same answer he gave Zafirovski.

"When we started the company in 1997, it was just me and three crazy guys. We did a beautiful business plan and went to the banks. They said, 'Fellows, come see us in six months if you're still in business.' We tried the manufacturers for credit, but they weren't interested. So we had to improvise."

They came up with a just-this-side-of-shady scheme: "Motorola used to sell phones cheaper to Bell Canada than in the U.S., so we convinced Bell Canada to buy extra phones and sell them to us," Marcelo tells the VCs. The Brightstar boys poured all their cash into buying U.S. phones in Canada, then reselling them to retailers in the U.S. "Bell Canada got benefits from Motorola for increased purchases," he explains, "and we would sell the phones in the U.S. for less than Motorola. It took us one week to figure it out. We were making millions of sales in weeks." As he gets to the end of the story, Marcelo is almost cracking up too much to continue. "We managed to make Motorola miserable," he laughs.

These days, Motorola and Brightstar are on the best of terms. Motorola eventually learned an important lesson: Let Brightstar do what it's best at so Motorola can concentrate on its strength, which is making phones.

Back then, flush with their new bankroll, Marcelo sent his buddy, Dave Peterson, on a scouting expedition to Indonesia, Hong Kong, and the Philippines. "We didn't know anyone in Asia, so we figured, let's find out what's going on there," Marcelo recalls. What was going on, Dave soon discovered, is that bootstrapping cell phone traders who've never been to Asia before can have a pretty miserable time. "I called Dave the next day, and he said, 'I love you, but I'm not staying in a room full of cockroaches,'" Marcelo laughs. Nevertheless, Dave toughed onward with his recon project, and the partners were soon making a fat profit from reselling cheaper, Asian-assembled phones.

Four hours, 30 minutes...

While Marcelo pauses for a sip of coffee, everyone mulls the impression this little tale must have made on Mike Zafirovski. How'd we get into business? By ripping you off! Who's getting rocked on his heels now? Marcelo continues: Even though Motorola was taking the hit, it was Ericsson that learned the lesson first. In 1998, it made Brightstar its main distributor in Latin America. Ericsson, of course, had little to lose by partnering with these rookies: It held only a sliver of the Latin market and previous distributors hadn't budged those numbers upward.

"The problem was, Ericsson had the ugliest and most expensive product on the market," Marcelo explains. "So when we got the account, we went to customers and said, 'How can we make Ericsson more attractive?' 'Make the phones prettier,' they said. 'We have no say over that,' we responded. 'Make them cheaper.' 'We can't control the price, either.'"

Brightstar had no input, let alone control, over price point, design, or even marketing strategy. All it controlled was shipping--so it made the shipping irresistible.

"What if we make Ericsson the easiest brand to do business with?" they said. "You'll have no minimum order, no projection requirement, you can pay in longer than 30 days, and we'll deliver direct."

That raised some eyebrows. Few manufacturers wanted to deal with the hassles of figuring out customs requirements and import duties for dozens of Latin American countries, so they usually just shipped the phones as far as Florida or Texas and left it up to the network carriers--the Sprints, and Verizons, and BellSouths--to bring them in-country. Brightstar was making a tempting offer: Our phones may be ugly, but they're awfully handy. "After a while," Marcelo says, "the carriers got dependent on us. They knew that if they needed a phone tomorrow, they could get one from Brightstar." Within one year, Brightstar had doubled Ericsson's market share in Latin America.

Four hours...

Now Motorola had to take Brightstar seriously. At the time, Motorola was having enough trouble clawing at Nokia, which owned 60% of the Latin American market, without Ericsson suddenly getting into the hunt. When Ericsson's contract with Brightstar expired in 2000, Motorola zoomed in and made Brightstar its master distributor in Latin America. The payoff came fast: By 2003, Motorola's share of the Latin American market had more than doubled, from 16% to 33%. Nokia's, during the same period, plummeted from 60% to 33%. Within three years, Motorola had shot from distant also-ran into a dead tie with the dominant player on the continent.

Brightstar's role in Motorola's tremendous surge was unmistakable. It was the biggest and most sustained growth Motorola had seen anywhere in the world--in Asia and Europe, in fact, Motorola was either losing ground or negligibly gaining. Latin America had become such a triumph for Motorola that, in an unprecedented move, it invited Brightstar to become one of its major distributors in the U.S. as well. Within 10 months, Motorola was already seeing a 24% increase in the number of phones it was shipping throughout the United States.

"The secret was," Marcelo says, "that I changed the rules of distribution."

Marcelo was smart enough to outthink the risk.

Three hours, 45 minutes...

"Well," VC 2 says politely, "we don't really do much with distribution companies."

He's got good reason: Based on market principles in general, and what they know so far of Brightstar in particular, middleman investments smell like risky business. Distribution is notoriously hazardous because the companies rarely own a product, or intellectual property, or even assets; all they have is a system, which any competitor can copy and use to lowball away customers. Worst of all, they're symbiotic creatures linked to other financial organisms, so their existence depends on the performance of the manufacturers they buy from and the customers they sell to. These are factors they can't control, so if either runs into trouble, the first bit of fat they'll look to cut is the middle--the distributor.

"Those aren't really the projects we get involved in," VC 2 apologizes.

"Good!" Marcelo responds. "Distribution is something we do--it's not who we are."

VC 2 looks doubtful; everyone in the room knows that Brightstar exists precisely because the two worst-case scenarios that can cripple a distribution company had wiped out its competition. This is the critical moment: Marcelo has to blast away the VC trio's doubt and convince them that Brightstar isn't just better, but fundamentally different from any distribution model they've ever seen. In this instant, he has to make his point about "changing the rules of distribution." His next words will determine whether the VC guys will be listening for the next few hours or just killing time till the plane takes off. Everyone in the room feels it. Even the bankers, who've been checking BlackBerries and jotting notes, are now watching him.

So Marcelo takes off. "You guys must be getting bored with me," he says. "How about you listen to the really smart people, and I'll catch up with you after lunch?" He then yields the floor to Denise Gibson and his CFO, Oscar Fumagali. "They know the company as well as I do," he shrugs, patting Oscar on the back as he heads out the door. Suddenly, amazingly, he's gone.

That kind of quietly confident move, says Rick Darnaby, the former CEO of Somera Communications Inc., is vintage Marcelo. "He doesn't have to show you he's the smartest guy in the room by talking," says Darnaby, who signed Brightstar last July to move Somera's network infrastructure equipment in Latin America. "He shows you by the kind of people he hires and his belief in them. That's the sign of a true leader, and it's one of the things I immediately liked about Marcelo--he's wise beyond his years when it comes to managerial skills."

And so, with Marcelo pulling himself out of the game in the crucial inning, his two lieutenants open the back of the clock and show what makes Brightstar tick.

Three hours...

In 1997, the two biggest names in U.S. and Latin American cell phone distribution were CellStar and Brightpoint. Right from the gates, Marcelo and his partners weren't shy about bleeding away both companies' business in Latin America: First, they took part of each name to form "Brightstar"; then they took their customers. The relationship was filial at first; CellStar adopted Brightstar as sort of its industry gopher, using the tiny company whenever it needed a few phones on short demand. In return, it sold small batches of phones to Brightstar on credit. "We put them in business," says Osvaldo Pi, CellStar's former CFO. "We were a $1 billion company, and we gave them their first credit line." After all, what was the danger? Marcelo and his guys only had small regional offices in Miami, Brazil, and Bolivia, while CellStar was dotted throughout the world.

"But over the past three years, Marcelo has taken away all of CellStar's business in Latin America," says Pi, who left the company in 2000 and now watches Brightstar's progress with interest. "What he has done in such a short amount of time is amazing." Brightstar seized the advantage in 2000, when CellStar and Brightpoint were hit by two simultaneous storm fronts: Up north, the telecom industry had begun its slide, while down south, key Latin American countries were spinning into turmoil.

Venezuela's economy was in free fall. Argentina was close to default on external loans. Peru's recovery had bottomed out, and President Fujimori was facing ouster. No one knew what was going on in Mexico, where the government was in disarray after outsider Vicente Fox won the presidential election. Bolivia was in the midst of its worst money crisis in decades. "Everyone got scared to death," says Pi. "The telecom industry was already in a tailspin, so no one wanted to take on the added risk of doing business in areas where they couldn't be sure they'd get paid."

"That left the door wide open for Marcelo," he concludes. "When there's turmoil, big companies either hunker down or cut and run." CellStar and Brightpoint, he adds, didn't really have much choice when they chose the haul-ass option; they were public companies with shareholders to answer to, so neither chief exec wanted to stammer to the board about why he'd shipped that quarter's profits into a war zone. "Marcelo was free to take the risks that perhaps others should have," Pi says. "But keep in mind, Marcelo was also smart enough to outthink the risk and make his money while reducing his exposure."

Just to make sure, Motorola commissioned a McKinsey team to dig into Brightstar's operation and see if it was really worth the cost. Motorola won't officially release the results of that study, calling it proprietary information, but Motorola's then VP of Latin American services gives a tantalizing hint at the contents. "You can draw your conclusions from this--after the study, Motorola not only renewed Brightstar's contract but also improved the terms and expanded the reach," says Rafael de Guzman, now CEO of the Latin American branch of the Foote, Cone & Belding ad agency.

"Marcelo seized the market, because the crisis forced the manufacturers to fall back on their area of excellence," De Guzman explains. Nokia, Samsung, Motorola--they were all furiously trying to figure out how to stick a digital camera inside a cell phone and how big the keypads should be. "This was a crash-and-burn situation for the entire industry, so do you think Motorola really cared about [cell phone] stock levels in Honduras? It had a million other things to worry about. If a company comes along that can handle supply, letting them take a cut is a small price to pay."

Two hours, 20 minutes...

Outside the conference room, Marcelo tells a more down-and-dirty version of the story that the VC guys are hearing inside.

"CellStar, Brightpoint, they really sucked," he begins. "When we were first getting started, they were these two huge companies, completely unreachable, untouchable. But when I started buying phones from them, I saw they were so disorganized. We made a fortune buying from CellStar Miami [which supplied Latin America] and selling to CellStar Dallas [which supplied the U.S.]. CellStar Dallas would call and say, 'Do you have any Motorola Startac 2000s?' I'd say, 'Hold on,' then call CellStar Miami, make the order, and tell Dallas I'd send them right over."

He shakes his head. "God, I wonder what they're going to think when they find out what we were doing to them?" he says. "They were really bad. The director of operations [for CellStar] had a conference room bigger than my entire office building. Why does he need that?"

"My biggest fear is that someday, someone will do to me what I did to CellStar. I don't think it will happen--I came up too hard, and it's made me as good a street fighter as you'll find."

Marcelo grew up in Bolivia, the poorest country in one of the world's poorest regions. Luckily, his grandfather earned enough as an accountant for a supermarket chain to send Marcelo's father to study in the U.S., where he became a geologist. After Marcelo and his brother and sister were born, the family moved every few years across the Americas and North Africa, following their father's United Nations Development jobs. At each port of call, Marcelo's parents scrounged to make sure they could enroll him in an elite American school. "I always complained that my friends always had a lot more money than we did," Marcelo recalls. "My dad said, 'The only thing I can give you is good education, so I spend everything on that.'" (It's an investment that paid off for Marcelo's dad: Today Marcelo employs both his father and his sister at Brightstar.)

As he bounced from school to school, the perpetual new kid developed into a serious goof-off. "I was a horrible high school student, always getting kicked out," Marcelo admits. Still, his mother, Marta Claure, insists she knew he'd do well; Marcelo had been a profit-wise hustler since kindergarten. "As a six-year-old, he was selling canicas [marbles] in the schoolyard by the case," says Marta Claure, "and whenever I went to the market, he'd be outside selling cans of condensed milk from a crate."

By the time he arrived at Bentley College, Marcelo had steadied enough to do well but still had nothing to pursue after graduation. He found the answer over a couple of Scotches. "I was flying home to visit my family, and I met this guy on the plane who was about to take over the Bolivian national soccer team," Marcelo recalls. "Maybe because we were having a few drinks, he offered me a job as his right-hand man."

Guido Loayza, Marcelo's new boss, was a dreamer and fierce innovator. He was determined to get tiny Bolivia, which had finished at the bottom of the Latin league standings for decades, into its first World Cup.

Within a year, Guido would get his wish, and Marcelo would get the lesson of a lifetime in leadership, strategic planning, radical institutional restructuring, and basic motivation. Everything Marcelo learned during that march to the World Cup he would later deploy with Brightstar. They relocated the team to Spain to reboot its thinking from a culture of losers to a culture of winners. The players had been promised lots of money in the past and stiffed, so the new management offered less money but always paid on time. Finally, they scheduled as many games as possible against the toughest teams in the world, so the Bolivian players could learn by seeing the best in action.

It worked. In the qualifying rounds, Bolivia ignited national hysteria when it shut out international powerhouse Brazil, 2-0, then defeated Venezuela 7-0. In its World Cup debut, Bolivia nearly pulled off the upset of the year but ended up losing to Germany, 1-0. Back home, Guido and Marcelo were heroes. Guido went on to become a senator, then chairman of the Bolivian FCC.

The first appliance a consumer buys is a phone.

Marcelo could have followed him into government but felt it was time to strike out on his own. He went back to Boston; needing cash, he answered an ad in the Boston Herald and sold his frequent-flier miles for $2,000. A week later, he had to fly back to Bolivia, so he called the number and tried to buy some back. The same miles, he was told, were now worth $8,000.

A 400% markup in seven days! That was the business for him, and it yielded two more crucial lessons.

The first was skepticism: When Marcelo and his best friend, Alan Mota, got into the gray-market miles business and it grew very big, very fast, the airlines came after them. "They told us it was illegal, but we found a way to do it legally," says Marcelo. "It taught me that you don't have to do what people tell you, no matter how powerful they are. A lot of times, we live by the limits that are given to us, and it stunts our potential."

The second was service: Because his mile-buyers would often call only once, on impulse, Marcelo vowed to be available 24-7. It's a lesson he never forgot: Today, Brightstar is still known for "overwhelming the client with service," as BellSouth's Paulino Do Regos Barros Jr. puts it.

To handle their constant calls, the air-mile buccaneers went shopping for cell phones. Every store they visited around Boston had terrible service. The owner of one place complained to his two new customers about how much he hated the business. On the spot, Marcelo made him a deal: If the shop owner sold him the business for no money down, Marcelo would pay him in full in six months. He kept his promise: By the end of those six months, Marcelo and Alan had the largest cell phone franchise in Massachusetts, with stores in strip malls across the state.

They did it by applying the same impulse-friendly technique that had worked so well for air miles: Marcelo would have salespeople stationed in cars all across the state, just sitting in convenience stores with phones in their trunks. As soon as a potential customer called for information, Marcelo would dispatch his nearest rep. "You could buy a cell phone from us faster than you could get a pizza," he says. "My goal was to remove every possible barrier between an impulse and a purchase."

Two hours...

Never one to miss a meal, Marcelo slides back into the room shortly after the food arrives. Perhaps in deference to his guests, lunch is surprisingly all-American; instead of grilled Cuban sandwiches or rice and beans from Marcelo's favorite Latin diner, one of the tables is laid out with cold cuts, pickles, and side salads. While Marcelo loads his plate with a thick turkey sandwich and coleslaw, the VC guys are bringing up disaster scenarios.

"What about the ongoing risks in Latin America?" VC 2 asks. With Venezuela suddenly freezing its currency, and Colombia embroiled in drug wars and kidnapping epidemics, and Zapatistas still roaming free and angry in southern Mexico, how secure could any U.S. business be, especially one that depends on shipping lots of merchandise across desolate terrain?

"That's our strength," CFO Oscar Fumagali responds. "We get the best people on the ground, and we protect ourselves by knowing more than anyone else about how to secure and move our product." Brightstar has become highly skilled at scheming up ways to get paid in the midst of chaos; because no one can afford to have cell phone operations shut down, Brightstar has perfected methods for getting their collectibles transferred around currency freezes.

It's because the area is so tricky that Marcelo got into Latin America in the first place. When he and his three "crazy" buddies decided to get out of vendor sales and into global distribution, they had just enough money to make one serious stab. Dave Peterson, who is now vice president of sales at Brightstar's Chicago office, mortgaged his house for $250,000, and Marcelo borrowed his father's life savings.

They set up a small office in Miami because they'd decided that Latin America had three perfect components for budding entrepreneurs: confusion, demand, and disfunction.

The confusion came from dispersement: Latin America is made up of dozens of countries with a dizzying mix of currencies, government regulations, import tariffs, and trade restrictions. If Brightstar could make themselves into Latin American Talmudists and find ways to safely go where other companies wouldn't, that information would have concrete market value, because phone manufacturers would gladly pay to outsource that nightmare.

The demand aspect was obvious: The region's populations were growing rapidly, and typically the first major appliance any consumer buys, even before a car, is a phone.

Which leads to the disfunction: Because only 17% of the Latin American population had access to telephone landlines, the market was wide open for affordable satellite service.

90 minutes....

"Okay, so what's to stop your customers from just going to the manufacturers directly?" VC 2 asks. "Yes, let's talk about this for a moment," VC 1 presses. "What would happen if you got Telefonica Moviles all set up, got their logistics and forecasting all tidy, and they said, 'Thanks, guys, we'll take it from here,' and went to the manufacturers themselves?"

Once again, VC 2 seems to be on to something; earlier, in private, Marcelo had talked about the backstabbing he'd suffered during Brightstar's early days. "There are a lot of honorable people, but there are a lot of scumbags who would kill to save 25 cents." He shrugged. "We got cut out of a lot of deals, $10 million to $12 million deals, but we just moved on to the next."

But those days are long over. "We deal with this every day," Marcelo begins, and as he answers, the full impact of Brightstar's accomplishment is finally revealed.

During the 2000 telecom crisis, Brightstar didn't just content itself with seizing the business the bigger companies had abandoned. Marcelo knew that telecom chaos and Latin American instability wouldn't last for long, so he had to move fast to fortify his position before the competition came storming back in during the recovery.

And that was Marcelo's brainstorm. He worked up the supply chain in both directions, appropriating as much of the inventory process as he could from both manufacturers and network operators. Ordinarily, there's no reason for a distributor to penetrate beyond the loading dock door, but what gave Marcelo his opening was the fast turnover in technology. He could just drop new phones off at stores in, say, Honduras, but how would they get rid of the old ones to open up shelf space? No problem; Brightstar would buy them back (at a markdown, of course) and ship them to one of their other country-clients where last month's fashion was late to arrive.

"There are a lot of scumbags who would kill to save 25 cents."

And what if the retailers made a mistake in forecasting and ordered too many phones or too few? What if sales slumped for a day--where could they get secure storage for just a day or two? The network carriers didn't want to deal with those problems--they were too busy trying to convert their systems to GSM and making decisions on subscription plans. It was easier to let Brightstar tell them how many phones they needed, and at what price, and let it handle warehousing, inventory control, forecasting, customs, and shipment.

For instance, when the biggest network in the Dominican Republic, Codetel, asked for logistics help, Brightstar dispatched two of Marcelo's inventory aces to do an assessment. The Brightstar guys ended up staying eight months. "It was so chaotic, we couldn't even find the workers, let alone the product," says Alejandro Miranda, one of Brightstar's setup managers. "We'd chain the doors shut from the inside and make everyone stay there till we were through. We'd have food sent in, but no one left until we had each day's orders in shape."

60 minutes...

Funny, how the room has seesawed: At the beginning of the meeting, the VC guys were hunched forward at their table, squinting and almost scowling in concentration as they took notes and fired questions, while the Brightstar team sat back and answered. Now, the VC guys are lounging back, arms thrown across the back of one another's chairs, while the Brightstar execs are leaning forward and rattling off info excitedly. Body language tells it all--the VC trio is relaxed and really getting a kick out of this show, while the Brightstar team senses that they're close to winning them over.

"Let's talk about Telefonica Moviles," Marcelo is saying. "They spent untold millions, they wanted to do their own logistics. Then, they're calling us in emergency mode, saying, 'Hey, guys, come in and take over this whole nightmare.'" Today, Brightstar is the purchasing agent for Telefonica Moviles, buying phones from all manufacturers on its behalf and delivering them directly to the point of sale.

"Are they ever going to want to go directly to the manufacturer?" Marcelo asks. "Difficult--they'd have to redeploy the warehouses, redeploy people, get insurance, security..."

When Brightstar asks carriers how much it's costing them to carry inventory, Marcelo says, they almost always reply, "Two to 3%." By the time Brightstar's analysts get done ripping through their costs allocations, looking at such hidden debits as duty fees, obsolescence, lost interest from holding inventory instead of cash for 90 days, advertising costs to fire-sale unwanted stocks, the most efficient carriers find that inventory is costing them 10% to 12% of the purchase price of the phone, and the worst realize they're losing a whopping 30% or more.

"So the best think they're at 2% or 3%, and you convince them they're really above 10%?" VC 2 muses.

"Then we charge them a percentage of the savings," Marcelo continues. "For example, one carrier network is very good, so we might charge them 8% for the exact same service we're doing for another company at 18%. Exact same services. The only difference is, that company's cost of managing was in the 30s and 40s, so when we offer them 18%, it sounds good to them."

"So you've got value-based pricing?" VC 1 says admiringly. "Can't beat that."

"What do CellStar and Brightpoint charge?" VC 3 pipes up. Everyone looks over, surprised to hear him ask his first question all day; up until then, he'd been watching and scribbling notes on his legal pad. Just the sound of his voice suggested that another barrier had been broken down; whatever roles the VC guys had decided to play before coming into the meeting room, they had now dropped.

"They're out of Latin America," Oscar Fumagali says.

30 minutes...

There's barely time for show-and-tell, which is Marcelo's way of addressing the unasked second part of the distribution question: What if the manufacturers decided to cut you loose and ship on their own?

The answer is back in the Brightstar Batcave, a giant, nicely lit and smoothly laid-out assembly plant on the ground level of its headquarters. As Brightstar logistics chief Tony Faraco explains, "Each carrier wants phones configured its own way, and there are different technologies for each carrier. Fifty percent of the phones we get from suppliers aren't ready for the carrier, so down here, we plug in the software, snap on faceplates, change PINs for chargers." Faraco's teams will handle 500,000 phones down here every month; even more will be handled at Brightstar's plant in Mexico.

"More and more, Motorola is sending us generic phones and letting us do the customization," Marcelo says. "If it ever gets rid of us, it would have thousands of little tasks like this on its hands." And while Motorola was spending money to handle its own customization, Brightstar would be making a call to Nokia, or one of the smaller players in the market like Erikson, Samsung, or LG, who'd most likely be happy to help themselves and hurt Motorola with the same contract.

And essentially, that's why Brightstar wants the VC trio's money. With $50 million, Brightstar can bankroll its own expansion into Asia, Europe, and Brazil, build its own assembly plants and shipping operations without having to rely on financial assistance from any of the phone manufacturers.

Since the fat new bankroll will make Brightstar much less dependent on manufacturers' credit, it will also make the company more attractive when Marcelo launches Part II of his plan: Sometime in the near future, he plans to defy the terrible reputation of telecom stocks and take Brightstar public.

Guess who just sold the world's toughest, wealthiest sell?

10 minutes...

The killer question comes just as the VC trio is glancing at their watches and pulling together their notes. VC 1 fires it: "Aren't you guys setting yourselves up to fail if you extend outside your comfort zone? Why do you think you can do the same thing in Asia and Europe?"

Because in the end, what they'll be financing will be Marcelo Claure's bid to rule the world--as far as cell phone distribution is concerned, at least. They like the fact that Marcelo has never expanded so fast that he couldn't return 2% to his bottom line every single year--even during the worst crisis the telecom industry has seen--but at the same time, they know that businesses that run on as low margins as Brightstar does can be an all-or-nothing proposition.

"It only takes a few things to go wrong for it to be in serious trouble," says one Latin American specialist who is familiar with the intricacies of Brightstar's finances. "On the other hand, if a few things go right, it makes many millions of dollars without its costs going up."

With only minutes left before the VCs must leave for the airport, Marcelo doesn't hurry as he tells them how he'll gamble their $50 million. He'd set out to become the biggest in Latin America by 2013, and he came in a decade under deadline. The key to his success wasn't from any special knowledge of the region--true, he speaks Spanish, but what did he know about Patagonia? It came from hiring the best people on the ground and teaching them his method. He'll simply do the same in every new country Brightstar targets.

Already, he's in the crowded U.S. market. Brightstar has made fast strides by targeting the lower-income demographic everyone else has ignored.

"We do what they don't want to do," Marcelo says. "Motorola doesn't want to sell to gas stations, convenience stores--it wants to sell millions to Verizon. There's a gigantic market out there in prepaid cell phone chips that no one has touched."

Those same markets exist in abundance in Eastern Europe, Africa, and Southeast Asia--all those cut-off corners of the world where there are more phone customers than there are phone lines.

One minute...

Oscar has to remind the VC guys that it's time for them to go. "With construction traffic around the airport, you never know...," he's warning. But VC 1 is lingering. He's been asking the thorniest questions all day, and now it seems there's one more thing on his mind. Marcelo is saying goodbye rather absent-mindedly; he'd gotten a message about a problem in Mexico, and he's eager to get on the phone upstairs and start kicking the appropriate asses. He knows that anything he could have down here has been done; any more selling at this point, he guesses, will be a mistake.

He discovers he's right when VC 1 takes him by the arm. "Whatever we decide, I have to tell you," VC 1 says, pumping Marcelo's hand in a gesture more of congratulations then departure, "you've created one hell of a company."

Epilogue:

Several weeks later, Marcelo and his girlfriend are clinking martini glasses in Manhattan. Marcelo is just back from a trip to Seattle, and guess what? Guess who just sold the toughest, wealthiest sell in the world? That's right, Marcelo announces triumphantly to anyone within earshot--he just convinced Bill Gates to privately invest $60 million for 15% of the company, which would give Brightstar a whopping $400 million valuation. If a genius like Gates believes in Brightstar, who else would dare to doubt it?

Actually, as it turns out, Marcelo is stretching a bit. It becomes clear two weeks later that while Gates is involved in the deal, he is a partner in a $61.75 million investment by four funds, including Grandview Capital Management, which Gates personally controls, Falcon Investment Advisors, Prudential Capital Group, and the Ramius Capital Group. In its official announcement on January 14, 2004, Brightstar is mum on valuation (and doesn't even mention Gates, only his investment company), but insiders say Marcelo's $400 million appraisal is also somewhat overblown.

So, Marcelo's days of winning over doubters aren't over. His new millions will allow him to punch into Asia and Europe, but before ruling the world, he still needs to wallop Wall Street.

This coming summer, Marcelo plans to take Brightstar public, launching Brightstar's first stock offering in a market that's terrified of telecom companies. Stock traders still have "Worldcom" and "Enron" ringing in their ears, and Marcelo wants them to trust him. But that's okay; he's not worried. They haven't heard what he has to say yet.

Sidebar: Globe-trotting

Marcelo Claure began by leveraging his knowledge of select Latin American markets. But as his expertise as a value-added distributor grew, Brightstar spread to the rest of the hemisphere. Up next: an aggressive plan to enter Asia and Europe.

Chris McDougall's profile of an entrepreneur's 10-year struggle to commercialize a Russian miracle fabric in the United States appeared in the September 2003 issue of Inc. He is the winner of a Clarion award for his feature on the seamy underside of the voting machine industry. McDougall's book, Girl Trouble, about Mexican pop star Gloria Trevi's involvement in an infamous sex scandal, derives from an article he wrote for The New York Times Magazine. It will be published by HarperCollins in June.

Indonesian Smartphones Battle: BlackBerry Beats iPhone

2009-10-20T17:00:00.001+07:00

Ever since 1992, when IBM released the first smartphone, the Simon, technology firms including Apple and Research In Motion have been engaged in a do-or-die struggle to create the most complete, technologically advanced handset.

Although there is no consensus on the precise meaning of the term smartphone, it is usually refers to mobile phones that offer PC-like capabilities, such as Internet connectivity, e-book reader functions and large data storage capacity.

Apple’s iPhone, with its advanced portable multimedia player functionality, is seen as fun and among the most advanced phones in the market. To date, there are more than 21 million iPhone users worldwide, according to Apple figures released at the end of the second quarter.

In comparison, RIM says that it had 28.5 million BlackBerry users signed up at the end of June.

Growing from a smaller user base than the iPhone, BlackBerry, with its trademark Messenger system that allows users to chat and interact, has profited from skyrocketing mobile Web usage over the past two years, according to InMobi, a global mobile ad network based in Palo Alto, Calfornia, which measures mobile web usage by ad requests.

Because both the iPhone and BlackBerry are web-enabled devices, InMobi’s surveys provide an insight into consumer preferences.

In Indonesia, even though BlackBerrys are primarily considered business devices, their Messenger system has played a part in attracting customers.

The country is experiencing rapid expansion in mobile web usage and currently has a total of nine million mobile web users, 53 percent of whom are between the ages of 18 and 27.

InMobi predicts that the number of users will grow by up to 30 percent yearly and that all will have Internet access via their handsets by 2015.

BlackBerry has been winning the battle against the iPhone here since the start of the year, maybe due to the propensity of Indonesians to chat. InMobi found that in the first nine months, BlackBerry’s local mobile web usage had grown by 4,704 percent, compared with iPhone’s 631 percent.

But according to Abhay Singhal, InMobi’s head of sales, the popularity of the iPhone in Indonesia is set to take off over the coming years.

“Given that Indonesians are now accustomed to using smartphones, an iPhone boom is just a matter of time and pricing,” Abhay said.

But until then, it appears that BlackBerry will continue to rule. There are roughly about 470,000 to 500,000 BlackBerry users in Indonesia, according to figures from the country’s cellular providers.

Meanwhile, PT Telekomunikasi Selular (Telkomsel), iPhone’s sole local service provider, says that the device has between 80,000 and 95,000 users.

Teguh Prasetya, cellular provider PT Indosat’s head of brand marketing, said that BlackBerry benefited from greater market coverage.

“With its wide range of products, BlackBerry covers more segments of the market compared with the iPhone, which has only released three models,” he said.

“The iPhone started with entertainment as the concept, not communication. It’s basically an iPod that can also be used as a phone. BlackBerry, on the other hand, is more suitable for the Indonesian market, due to it being better than the iPhone for social networking. This shows that Indonesians prefer communication to entertainment.”

Suryo Hadianto, Telkomsel’s corporate communications manager, said each brand had its own strengths.

“I always refer to BlackBerry as the community gadget, and iPhone as the multimedia gadget, meaning that each brand is the leader in its own category. Some people I know even carry both phones so they can complement one another,” he says.

Such is the case with Sutra, a 32-year-old mother of three.

“I have both an iPhone 3G and a BlackBerry Javelin, and I bought each phone for different reasons,” she said.

With smuggled mobile phones flooding the market, “Eric”, who owns a cellular store in the Roxy Mas International Trade Center in West Jakarta, said that iPhone sales had been mediocre, regardless of whether the phones are legal or smuggled.

“For every iPhone I sell, I can sell up to 11 or 12 BlackBerrys, including both legal and illegal products,” he said.

“I’ve been hearing a lot of complaints about how iPhone is just too advanced and difficult to get to grips with. People say it’s also too expensive compared to the more compact BlackBerrys.”