Whopper to go

Will Burger King be gobbled up by private equity?

Sep 2nd 2010 | NEW YORK

SHARES in Burger King (BK) soared on September 1st on reports that the fast-food
company was talking to several private-equity firms interested in buying it. How
much beef was behind these stories was unclear. But lately the company famous
for the slogan Have It Your Way has certainly not been having it its own
way. There may be arguments about whether BK or McDonalds serves the best
fries, but there is no doubt which is more popular with stockmarket investors:
the maker of the Big Mac has supersized its lead in the past two years.

BK9 1

Recession has favoured McDonalds over BK, whose share price has fallen by half
since the economy was flame-grilled in the summer of 2008. Shares in McDonalds
have risen, reaching an all-time high in August. Same-store sales at BK have
fallen for five successive quarters.

2008
8

Why has McDonalds been eating BKs lunch? Among other things, BK has always
had a higher proportion of sales to young men, who have been hit especially hard
by the recession. McDonalds, by contrast, has for several years wooed women
and older people with relatively healthy salads and drinkable coffee. BK has
struggled to follow suit. At the same time, it has had to contend with angry
shareholders, as the rising cost of beef and other ingredients has clobbered its
profits. BK may also have cannibalised its existing sales by offering value
meals that were a bit too irresistible.

1
BK is used to changes in ownership. It went from being part of Pillsbury, a food
company, to Grand Metropolitan, a British conglomerate, then to Diageo, a drinks
giant. In 2002 it was sold to a group of private-equity investors: TPG, Bain
Capital and Goldman Sachs. They did a fair job, improving sales with better
marketing. They also helped turn around the most troubled of the franchisees who
operate most BK restaurants. In 2006 BK floated its shares again. Its bosses may
hope that going private once more will protect them from short-term stockmarket
pressures while they ponder how to beat McDonalds.

2002
TPG
2006

If BK does go private, it may be part of a trend in the private-equity industry

now that some of the bigger firms have rediscovered their appetite for deals
of gobbling up the companies they had taken public during the bubble years but
which are now trading cheaply. TPG, Bain Capital and Goldman Sachs still own a
sizeable stake in BK, despite listing it on the New York Stock Exchange in 2006.
However, it seems that other private-equity firms are interested in buying it.
If that happens, no doubt BK servers will appreciate the irony: the act of
passing a company from one private-equity firm to another is known in the
business as flipping.

TPG 2006

shiyi18 2010-11-12 13:16

2 0 0 0

Down the slipway

Quantitative easing is unloved and unappreciatedbut it is working

Nov 4th 2010 | Washington, dc

EVEN before the Federal Reserve unveiled its second round of quantitative easing
2
(QE) on November 3rd, critics had already denounced it as ineffectual or an
invitation to inflation. It cannot be both and it may not be either.
11 3

The announcement of QE2 was hardly breathtaking. The Fed said it will buy
$600 billion of Treasuries between now and next June, at about $75 billion a
month, although it also said it could adjust the amount and timing if need be.
That was about what markets expected but far less than the $1.75 trillion of
debt it bought between early 2009 and early 2010 in its first round of QE. Yet
QE2 seems already to have exceeded the low expectations it has aroused. Since
Ben Bernanke, chairman of the Fed, hinted at it at Jackson Hole on August 27th,
markets have all done exactly what they should (see chart).
6 6 000
750
2009 2010 1.75
? 8 27
Jackson Hole

Under QE the Fed buys long-term bonds with newly created money. This lowers
long-term yields and chases investors into riskier, alternative investments. The
real yield on ten-year, inflation-indexed Treasury bonds has fallen from 1.05%
to 0.5%, a result of relatively flat nominal yields and a rise in expected
inflation. The yield on their five-year cousins is negative (see Buttonwood).
Share prices are up by 14% in the same period. Lower yields make the dollar less
appealing: it has duly fallen by 5% against the Japanese yen, by 9% against the
euro and by 5% on a trade-weighted basis. You can declare QE to be a success
already, says one hedge-fund economist. Whether this translates into real
activity remains a question-mark. But the question of whether the mechanism
would work has been answered.

10
1.05% 0.5%
Bottonwood 14%
5% 9% 5%

With a bit of a lag, these easier financial conditions are supposed to boost
growth through three channels. First, lower real yields spur borrowing and
investment. This channel is bunged up: many households cannot borrow because
their homes have fallen in value and because banks are less willing to lend. But
3
the remaining two channels remain open. Higher share prices have raised
household wealth by some $1.4 trillion, which will spur some spending. And the
lower dollar should help trade. American factory purchasing managers reported a
sharp jump in export orders in October and a drop in imports.

1.4 10

Macroeconomic Advisers, a consulting firm, reckons that the Fed will eventually
buy $1.5 trillion of debt under QE2, and that this will raise growth next year
to 3.6% from 3.3% without QE. Thats not exactly overwhelming: the firm thinks
the Fed would have to buy $5.25 trillion of bonds to achieve the equivalent of a
4% federal-funds rate, which is what the economy needs. The Fed will not do
that for fear of unknown consequences, among them the response of Congresss
newly empowered Republicans. In a Bloomberg poll, 60% of self-identified tea-
party supporters favoured overhauling or abolishing the Fed.
Macroeconomic Advisers 1.5
3.3% 3.6%
-4%
5.25

Bloomberg60%

Could QE work too well and drive inflation expectations to dangerous levels?
The odds arent zero, says Don Kohn, a former Fed vice-chairman, but
theyre small. Theres more risk that expectations could rise once credit
loosens up and spending accelerates. That, however, would be a signal that the
Fed has succeeded; it can then tighten policy.
?
Don Kohn

Other countries complain that QE is merely bringing them overvalued currencies

and bubbly asset markets by pushing investors to seek higher returns elsewhere.
But that may be unavoidable given their divergent growth paths. Both India and
Australia raised interest rates this week despite rising currencies.

4
A damaging round of beggar-thy-neighbour currency interventions cannot be ruled
out. But the Bank of Japan, after intervening directly to weaken the yen in
September, has struck upon a more benign response. It had been scheduled to
release details of its own QE at a regular policy meeting in mid-November but
moved the date forward to this week. Analysts suspect this was to counteract
upward pressure on the yen because of the Feds move. If central banks all
print money in unison, and dont mop up excess liquidity, then the result could
be a worldwide monetary fillip. QEs benefits should not be over-egged. Nor
should they be dismissed.

9 11

Opening stand

Luck may play a big role in launching successful careers

Nov 18th 2010

IN CRICKET batsmen often need a slice of luck to build a decent innings. Might
that be true of cricketers careers in general, and even of other jobs? In an
IMF working paper Shekhar Aiyar and Rodney Ramcharan suggest that it is lucky
for international cricketers to play their debut Test (international) match at
home.

IMF Shekhar Aiyar Rodney Ramcharan

Test

Playing at home means familiar pitches and climatic conditions, and a more
supportive crowd (just ask the English cricketers whose series against Australia
starts in Brisbane on November 25th). Sifting through the data on 790 cricketers
who made their Test debuts between 1950 and 1985, the authors find that playing
at home rather than away raises the average number of runs scored in their first
series by 33% and reduces the runs that a bowler concedes by 18%.
11 25
1950
1985 790
33% 18%

5
This would not be luck, of course, if team selectors deliberately give home
debuts to better players. But first starts are often the result of random events
such as the injury or poor performance of existing team members. By using age as
a proxy for ability (assuming that younger players who force their way into
international sides tend to be more talented), the authors find that the
distribution of cricketers ages is almost identical for home and away debuts.

A strong debut seems to lead to a shinier career. Every additional ten runs
scored in a debut series adds an extra five runs to a players career average.
The effects of initial success are similar for bowlers. One possibility is that
a good start builds confidence and experience that boosts future performance. A
bad start, in contrast, is not easily forgiven: selectors appear to discard
potentially high-ability players who had the misfortune to debut abroad.
10
5

A good start may have a persistent, positive impact in other fields, too.
Thats especially likely if employers take things at face value and fail to
discount the impact of other factors that might enable good performancea boom
in financial markets for a trader, lets imagine.

A rock, not a hard place

Boom time for miners in a resource-hungry region

Nov 11th 2010 | Hong Kong

IT CAN sometimes feel as if bankers in Asia are shifting their focus backwards
along the economic food chain. First they moved from manufacturing to property.
Now its the turn of rocks.

6
In Hong Kong alone seven mining and natural-resources firms have gone public
this year, raising HK$36 billion ($4.6 billion) in the process. Another 13
listed in 2009, raising HK$58 billion, up from not very much the year before. A
further 10-15 firms are due to list over the next year and the sums raised will
almost certainly be bigger than before, thanks to Asias appetite for raw
materials and inexorably rising commodities prices.
7 360
2009 13 580 2008
10~15

One of the more meteoric ascents has been that of Sino Prosper State Gold
Resources Holdings, a Hong Kong-listed company which a year ago was barely more
than a shell company. It had an agreement to buy what was thought to be a small
mine in Inner Mongolia, along with five undeveloped tracts of land in a remote
area of Heilongjiang, in Chinas north-eastern tip. The firm was valued on the
Hong Kong stock exchange at HK$400m. Since then the price of gold has spiked,
and the mine has been bought and turned out to be not so very small after all.
Sino Prospers valuation is currently HK$3.5 billion and it has become a beacon
for other minerals firms.

4
35

Hong Kongs Canadian Chamber of Commerce this week held an invitation-only

conference on mining. It was packed with Canadian companies in search of capital
either through a direct listing (difficult, given profitability requirements at
the Hong Kong stock exchange) or a partial investment by a cash-laden, resource-
hungry Chinese firm. Investors seemed less concerned by the risks of digging up
minerals, more by potential political obstacles in the wake of the Canadian
governments intervention to block BHP Billitons hostile takeover of Potash
Corporation.
Canadian Chamber of Commerce

BHP Billiton Potash

Enthusiasm for minerals firms is not found just in Hong Kong. There are
7
stirrings in less likely places, too. The Mongolian stock exchange, located in a
lovely old cinema in Ulan Bator, has been transformed into a meeting place for
international bankers. Locally listed miners are booming. A tie-up between the
Mongolian bourse and the London Stock Exchange is expected to be announced by
the end of the month.

London Stock Exchange

Only two large mines are currently being developedgold and copper in Oyu
Tolgoi, coal in Tavan Tolgoibut there are numerous smaller mines throughout
the country and 15 major deposits that are the source of serious discussions
between global mining giants and the government, says Ganhuyag Chuluun Hutagt of
TenGer, a bank holding company. Financiers are on the hunt for investment
opportunities in other businesses, too. Mr Hutagt calls Mongolia a wolf economy,
hungry and eager. Just like the bankers.
Oyu Tolgoi Tavan Tolgoi
TenGer Ganhuyag Chuluun Hutagt
15
Hutagt

America's budget deficit

Speak softly and carry a big chainsaw

Sorting out Americas fiscal mess is relatively simple. Whats needed is

political courage

Nov 18th 2010

LAST week Asia, this week Europe: no wonder Barack Obama has been to so many
foreign summits since his party took a pounding in the mid-term elections. With
the prospect of gridlock at home, a president naturally turns abroad. Yet Mr
Obama badly needs to show that he can still lead on domestic policy. He should
start by cajoling Congress into an agreement to tackle Americas ominous fiscal
arithmetic.

Conventional wisdom says such an agreement is impossible: the problem is too

big, the politics too difficult. But it is wrong to suppose that the deficit is
unfixable, as two proposals for fixing it have shown this month (see article).
And even the politics may not be totally intractable.

A trillion-dollar trove

The scale of Americas fiscal problem depends on how far ahead you look.
Todays deficit, running at 9% of GDP, is huge. Federal debt held by the public
has shot up to 62% of GDP, the highest it has been in over 50 years. But that is
largely thanks to the economys woes. If growth recovers, the hole left by
years of serial tax-cutting and overspending can be plugged: you need to find
spending cuts or tax increases equal only to 2% of GDP to stabilise federal debt
by 2015. But look farther ahead and a much bigger gap appears, as an ageing
population needs ever more pensions and health care. Such entitlements will
double the federal debt by 2027; and the number keeps on rising after then. The
figures for state and local debt are scary too.
GDP
9% GDP 62% 50

2015 GDP2%

2027

The solution should start with an agreement between Mr Obama and Congress on a
target for a manageable level of publicly held federal debt: say, 60% of GDP by
2020. They should also agree on the broad balance between lower spending and
higher taxes to achieve this. This newspaper believes that the lions share of
the adjustment should come on the spending side. Entitlements are at the root of
the problem and need to be trimmed, and research has shown that although
spending cuts weigh on growth in the short run, they hurt less than higher
taxes. And in the long run later retirement and other reforms will expand the
labour force and thus potential output, whereas higher taxes dull incentives to
work and invest.

2020 GDP 60%

9


Yet even to believers in small government, like this newspaper, there are good
reasons for letting taxes take at least some of the strain. Politically, this
will surely be the price of any bipartisan agreement. Economically, there is
sensible room for manoeuvre without damaging growth. American taxes are
relatively low after the reductions of recent years. In an ideal world the tax
burden would be gradually shifted from income to consumption (including a carbon
tax). But that is politically hardand there is a much easier target for
reform.

Americas tax system is riddled with exemptions, deductions and credits that
feed an industry of advisers but sap economic energy. Simply scrapping these
distortionsin other words, broadening the base of taxation without any new
taxescould bring in some $1 trillion a year. Even though some of this would
have to go in lowering marginal rates, it is a little like finding money behind
the sofa cushions. The tax system would be simpler, fairer and more efficient.
All this means that America can sensibly aim for a balance between spending cuts
and higher taxes similar to the benchmark set by Britains coalition
government. A ratio of 75:25 is about right.

75:25

There is legitimate concern that, done hastily, austerity could derail a weak
recovery. But this strengthens the case for a credible deficit-reduction plan.
By reassuring markets that America will control its debt, the government will
have more scope to boost the economy in the short term if need befor instance
by temporarily extending the Bush tax cuts.

10
Mr Obama and the Republicans are brimming with ideas for freezing discretionary
spending, which covers most government operations from defence to national
parks. They have found common cause in attacking earmarks, the pet projects
that lawmakers insert into bills. But discretionary outlays, including defence,
are less than 40% of the total budget. Entitlements, in particular Social
Security (pensions) and Medicare and Medicaid (health care for the elderly and
the poor), represent the bulk of spending and even more of spending growth.

40%

On pensions, the solution is clear if unpopular: people will need to work

longer. America should index the retirement age to longevity and make the
benefit formula for upper-income workers less generous. The ceiling on the
related payroll tax should be increased to cover 90% of earnings, from 86% now.

86% 90%

Health-care spending is a much tougher issue, because it is being fed by both

the ageing of the population and rising per-person demand for services. Richer
beneficiaries should pay more of their share of Medicare, while the generosity
of the system should be kept in check by the independent panel set up under Mr
Obamas health reform to monitor services and payments. The simplest way for
the federal government to restrain Medicaid would be to end the current system
of matching state spending and replace this with block grants, which would give
the states an incentive to focus on cost-control.

Chainsaw you can believe in

Devising a plan that reduces the deficit, and eventually the debt, to a
manageable size is relatively easy. Getting politicians to agree to it is a
different thing. The bitter divide between the parties means that politicians
pay a high price for consorting with the enemy. So Democrats cling to
entitlements, and Republicans live in fear of losing their next party nomination
11
to a tea-party activist if they bend on taxes. Even the presidents own
bipartisan commission cant agree on what to do.

But true leaders turn the hard into the possible. Two things should prompt Mr
Obama. First, the politics of fiscal truth may be less awful than he imagines.
Ronald Reagan and Bill Clinton both won second terms after trimming entitlements
or raising taxes. Polls in other countries suggest that nowadays tough love can
sell. Second, in the long term economics will tell: unless it changes course,
America is heading for a bust. If Mr Obama lacks the guts even to start tackling
the problem, then ever more Americans, this paper and even those foreign
summiteers will get ever more frustrated with him.

Divided we fall

Britain and France need each other to continue as great(ish) powers

Nov 4th 2010

2010 11 4

1:

2009
583
639

17.8
25
12

2
1

6
11

17
20

7
6

300
360

233
246

4
4

: SSDASA/MOD

THEY may not always see eye to eye, but when it comes to defence, the interests
of France and Britain converge. The two countries are respectively the third and
fourth biggest military spenders in the world. Both see themselves as global
players, ready and willing to project expeditionary force. But fiscal austerity
has threatened the ability of both to live up to those grandiose ambitions. Only
by working much more closely together, they have concluded, can two medium-sized
European countries hope to stay in the great-power game. Hence the 50-year
defence and security co-operation treaty signed this week in London by David
Cameron and Nicolas Sarkozy.

13


50

The main items in the pact are a combined joint expeditionary force and an
agreement to operate aircraft-carrier strike groups using aircraft and escort
vessels contributed by both countries. But much of the treaty deals with less
glamorous equipment and capabilities. Training and maintenance for the new A400M
transport aircraft that the two nations are buying will be pooled. Britain is
keen to share its new A300-based aerial tankers, if a financial deal to do so
can be reached.

A400M
A300

The two countries will jointly develop nuclear-submarine technologies, satellite

communications and maritime-mine countermeasures. The big defence industries of
both will be encouraged to co-operate on the next generation of surveillance
drones and assorted new missiles, with the aim of forging a single prime
European contractor for complex weapons.

Most dramatically, a separate treaty has been signed on nuclear co-operation.

This is remarkable, given the different approaches that France and Britain have
taken towards their nuclear deterrents (Britain depends heavily on American kit,
while Frances force de frappe is a supreme symbol of national sovereignty).
With the blessing of the United States, Britains Aldermaston research
establishment will concentrate on developing technology, while its French
counterpart at Valduc will carry out simulated warhead testing.

Valduc

Predictably, there was much harrumphing in Britains jingoistic popular press.

A few retired politicians were dragged out to reminisce about slights suffered
14
at the hands of the perfidious Frogs. The reaction in France was more muted,
perhaps because the agreement carefully avoids any of the visionary language
about European architectures that excites French imaginations, but which many
British Conservatives, such as the defence secretary, Liam Fox, viscerally
loathe.

?Liam
Fox

In fact, most of the objections raised seem either ignorant or anachronistic.

Even before France rejoined NATOs integrated military structure last year,
British and French forces had frequently worked and fought together under the
command of one or other country. With the exception of the Iraq controversy, the
two have rarely found themselves on opposite sides during recent international
crises. For example, Britains defence secretary during the Falklands war, John
Nott, revealed in his memoirs that France had been Britains staunchest ally,
providing information that helped to render the Exocet anti-ship missiles used
by Argentina ineffective, and supplying Mirage and Super-Etendard fighters for
British Harrier pilots to pit themselves against in training.

?John Nott

Difficulties could arise, however, over shared use of the two countries
aircraft carriers, if national priorities and policies do not coincide during
future conflicts. One solution would be for Britain not to sell the second
carrier it is currently building, which at present seems its likely fate, but to
operate it on a timeshare basis with the French. That way it could be made
available without caveats to whichever country needed it when its main ship was
in refit (a three-year job required every seven years or so). Just dont call
it Trafalgar.

15
The liquefaction of hardware

The rise of the virtual computer

Nov 18th 2010

IMAGINE a personal computer that has two souls. One moment it is your work
machine, complete with a set of corporate applications and tight security
settings. Then it becomes an entertainment centre, allowing you to watch any
video and download any program.

Thanks to a process called virtualisation, such computers are now being

created. Ever more processing power and clever software are allowing devices of
all kinds to separate from their hardware vessels and move to new homes. If this
process continues as some expect, it will change computing radically. And more
than one IT company will have to rethink how it does business.

IT

Virtualisation dates back to the age of mainframe computers. To make better use
of them they were sometimes split into smaller virtual machines, each of
which could run its own operating system and application. But the approach took
off only in recent years, when VMWare, a software firm, applied it to servers,
the powerful computers that populate todays corporate data centres. VMWare and
its main rivals, Citrix and Microsoft, have since developed all kinds of
software tools to manage virtual machinesmoving them between data centres, for
example.

VMWare
VMWare Citrix Microsoft

16
The success of server virtualisation has inspired IT firms and their customers
to do the same thing with other types of hardware, such as devices to store
data. Software now pools their capacity and allocates virtual disks as
needed. Going further, Dropbox, an online storage service, saves identical files
only once. Even large files can take only seconds to upload if they already
exist somewhere on one of these firms disks.
IT

Dropbox

The virtualisation of PCs is now under way. Many company computers can already
work with applications that run on a central server. But start-ups are pushing
the concept further. Desktone offers virtual desktops as an online service.
NComputing, a maker of computer terminals, virtualises PCs so they can be shared
by up to 30 users. It has already sold more than 2.5m devices, mostly to
developing countries and schools. And technology from MokaFive can send an
entire virtual machinecomplete with operating systems, applications and data
over the network and install it on any PC. Eventually people may no longer need
to carry laptops at all. Virtual computers, including data and applications,
will follow them everywhere.

Desktone
NComputing 30
250 MokaFive

In the long run, smartphones and other mobile devices may also become shells to
be filled as needed. Open Kernel Labs, a start-up in which Citrix has a stake,
already lets smartphones run applications, multimedia and radio functions on a
single processor, cutting manufacturing costs. Software from Citrix turns the
iPad, Apples tablet computer, into a terminal for applications that run in a
corporate data centre.
Citrix
Open Kernel Labs
Citrix iPad

How quickly will virtualisation advance? Gartner, a market-research firm,

predicts that the overall market for virtualisation software will grow from $2.7
billion this year to $6.3 billion in 2014. There is certainly no lack of demand.
Virtualisation lowers costs by enabling firms to make better use of their
17
servers and buy fewer new ones. The technology also allows PCs to be maintained
remotely, which is much cheaper. But improved reliability and security are even
more of an attraction. Users of MokaFive, for instance, can relaunch their
virtual machine should a computer virus infect it. And it can be shut down if a
laptop is lost or stolen.
Gartner 27
2014 63

MokaFive

Yet the technology also has to overcome a few hurdles. The virtualisation of
servers is well understood, but for PCs and mobile devices the technique has yet
to mature. In the longer run institutional barriers will prove more of a
problem, argues Simon Crosby, Citrixs chief technology officer. Virtualising
IT systems, he says, is only the first step to automating their management. This
is seen as a threat to existing workers and makes many IT departments hesitant
to embrace the technology.

Citrix Simon Crosby

IT
IT

Still, analysts believe virtualisation will win out. Its impact will be felt
through the industry. The technology not only makes IT systems more flexible,
but allows firms to switch vendors more easilywhich will weigh on the
vendors profits. Big software firms such as Microsoft and Oracle may be hit
hardest. But many hardware-makers may suffer as well, since their wares will
become even more of a commodity than they are today.
IT IT

Microsoft Oracle

Whats up, BYOC? 1

Moreover, virtualisation makes it much easier to add new servers or storage

devices. Alternatively, firms can simply rent extra capacity from operators of
what are called computing clouds, such as Amazon Web Services. That outfit
has built a network of data centres in which virtual machines and disks can be
launched in seconds. As a result, IT systems will increasingly no longer be a
capital expense 2, but an operational cost 3, like electricity.

18
 Amazon Web Services
IT

Yet the most noticeable change for computer users will be that more employees
will be allowed to bring their own PC or smartphone to work, says Brian Madden
of TechTarget, a consultancy. Companies can install a secure virtual heart on
private machines, doing away with the need for a separate corporate device. A
bring your own computer or BYOC movement has already emerged in America.
Companies such as Citrix and Kraft Foods pay their employees a stipend, which
they can use to buy any PC they wanteven an Apple Mac.

TechTarget Brian Madden

BYOC
Citrix Kraft Foods
Mac

Such innovations may help to ease growing tensions between workers and IT
departments. New privacy regulations and rampant cybercrime are pushing firms to
tighten control of company PCs and smartphones. At the same time more and more
digital natives 4 enter the workforce. They have grown up with the
freewheeling internet and do not suffer boring black corporate laptops gladly.
Giving workers more freedom while helping firms keep control may prove to be the
biggest benefit of virtualisation.
IT

1Whats up, BYOC?

1972 Whats up, Doc?
/ /

2capital expense
Capital Spending/Capital Expenditures/Capital Expense

(capital expenditures)

19


3operational cost
(Operating costs)

1.

2.
3.
4.

4digital natives
80 PC 90 PC
30 ()
(Digital Immigrants)
1985
(Born Digital)(Live Connected)
(Digital Native)
A digital native is a person who was born after the general implementation of
digital technology, and as a result, has had a familiarity with digital
technologies such as computers, the Internet, mobile phones,and digital audio
players over their entire lives. A digital immigrant is an individual who was
born before the existence of digital technology and adopted it to some extent
later. Alternatively, this term can describe people born in the latter 1970s or
later, as the Digital Age began at that time; but in most cases the term focuses
on people who grew up with 21st Century technology. This term has been used in
several different contexts, such as education (Bennett, Maton & Kervin 2008) (in
association with the term New Millennium Learners (OECD 2008)).

More complicated than you think

A new, giant virus is confounding old certainties

Oct 28th 2010

BIODIVERSITY is not just a matter of tigers and whales, or butterflies and

trees, or even coral reefs and tuna. It is also about myriad creatures too small
20
to see that live in numbers too large to count in ways too numerous to imagine.
It is easy to forget, especially at meetings like the one to discuss the
Convention on Biological Diversity that has been taking place in Nagoya under
the auspices of the United Nations, that most of biology is in fact microscopic.
Indeed, the more microscopic biology gets, the more diverse it becomes.

Nagoya

In that context, the discovery by Curtis Suttle of the University of British

Columbia and his colleagues of a critter they propose to call Cafeteria
roenbergensis virus, or CroV, should not be surprising. But for those brought up
on a textbook definition of what a virus is, it is still a bit of a shock. For
CroV is not a very viruslike virus. It has 544 genes, compared with the dozen or
so that most viruses sport. And it may be able to make its own proteinsa task
that viruses usually delegate to the molecular machinery of the cells they
infect.
Curtis Suttle
Cafeteria roenbergensis CroV
CroV
544

CroV, as its full name suggests, is a parasite of Cafeteria roenbergensis, a

single-celled planktonic organism that was itself discovered only in 1988.
Despite the recentness of its discovery, C. roenbergensis is one of the
commonest creatures on the planet. It is also reckoned by some, given that it
hunts down and eats bacteria, to be the most abundant predator on Earth. It is
found in every ocean. The samples of C. roenbergensis from which Dr Suttle and
his team extracted their quarry were collected off the coast of Texas.
CroV Cafeteria roenbergensis
1988 Cafeteria
roenbergensis
Scuttle
CroV Cafeteria roenbergensis

To see a world in a grain of sand

That quarrys nature, reported this week in the Proceedings of the National
Academy of Sciences, is not a complete surprise. A larger virus, called
Mimivirus, which lives in freshwater amoebas, turned up in 2003 and a few other,
similar, viruses have been found since then. But CroV is by far the biggest to
come out of the sea.
21

Mimivirus 2003
CroV

Those who like their categories cut and dried may wonder whether viruses are
alive or not. Wise biologists do not struggle too much with such questions.
Viruses have genes, can reproduce and are subject to the evolutionary pressures
imposed by natural selection. That is enough for biology to claim them. As for
CroV, those 544 genes (composed of 730,000 base pairs, the DNA letters in which
the language of the genes is written) mean its genome is bigger than those of
several bacteriacreatures which everyone agrees are alive.

CroV 544 73
DNA

The problem with categorical thinking in biology is that evolution does not work
like that. It actually works by whatever works working. If an organism can
successfully subcontract part of the business of metabolism to another while
retaining the rest itself, rather than offloading the whole lot as most viruses
do, then there are no rules to stop it happening.

CroV seems to do just that. Besides the genes that relate to protein synthesis
it has others which encode DNA repair mechanisms and still others which are
involved with protein recycling and signalling within cells. This is not mere
hijacking. It is tantamount to a complete personality transplant for the
infected cell.
Crov DNA

About a third of CroVs genes are similar to Mimivirus genes, suggesting they
share a distant ancestor. On the other hand, two-thirds are not. A significant
chunk of them seem to have been copied from bacteria. But the majority are
unique, and previously unknown to science. A whole new chapter of life, in other
words, has been opened.
CroV Mimivirus

22
This discovery, thenand the earlier one of C. roenbergensis itselfspeak
volumes, albeit in a microscopic language, about biodiversity. Two centuries
after Carl Linnaeus invented the system now used to describe it, and a century
after Charles Darwin worked out what causes it, the ability of that diversity to
surprise is still staggering.
C. roenbergensis
?Carl
Linnaeus200 100

Science and Technology

1.

2. matter

Viruses have genes, can reproduce and are subject to the evolutionary
pressures imposed by natural selection. That is enough for biology to claim
themClaimfor biology to claim them

3. In that context, the discovery by Curtis Suttle

of the University of British Columbia and his colleagues of a critter they
propose to call Cafeteria roenbergensis virus, or CroV, should not be
surprising Curtis Suttle
Cafeteria roenbergensis CroV

Curtis Suttle
Cafeteria
roenbergensis CroV

4. It is found in every ocean

hunts down and eats
bacteria, to be the most abundant predator

5.
CroV Cafeteria roenbergensis
CroV, as its full name suggests, is a parasite of Cafeteria roenbergensis, a
23
single-celled planktonic organism that was itself discovered only in 1988
CroV Cafeteria roenbergensis
Cafeteria roenbergensis
CroV

6.
To see a world in a grain of sand

Horton hears a who

William Blake
A Grain of Sand

William Blake/.
To see a world in a grain of sand,
And a heaven in a wild flower,
Hold infinity in the palm of your hand,
And eternity in an hour.

Ral the pragmatist

Bold changes intended to preserve Cuban communism may herald the beginning of
its end

Nov 11th 2010

SHORTLY after he took charge of Cuba from his ailing brother, Fidel, in 2006,
Ral Castro declared that his countrys moribund communist economy needed to
change. But his failure to make anything more than marginal adjustments
disappointed hopes that he would follow Chinese and Vietnamese communist leaders
in combining capitalist economics and growing social freedom with continued
24
party control.
. 2006 .

Now, at last, Mr Castro is showing signs of boldness. Over the past few weeks he
has launched some potentially far-reaching changes. By April 1st 500,000 Cubans
will be laid off from their state jobs and encouraged to make their own living
in small businesses. Over the next two or three years, another 800,000 are
likely to join them. Eventually up to two Cubans in five will no longer work for
the state.

4 1 50
2-3 80

This week Mr Castro convened a much-postponed Congress of the Communist Party

for late April: its job will be to bless the new economic model (see article).
Meanwhile, the government has released more than 50 political prisoners. Two
decades after the fall of the Berlin Wall, is Cuban communism finally on the way
out?
4
50 20

Any answer must be hedged about with caveats. The economists advising Mr Castro
are barred from talking of reform. In its guidelines for the party congress,
the leadership declares that only socialism [ie, communism] is capable of
overcoming our difficulties and preserving the gains of the revolution and
that in the new economy planning will be paramount, not the market. No Cuban
official has matched Deng Xiaopings embrace of market socialism, let alone
his (perhaps apocryphal) injunction that to get rich is glorious. The
welcome release of prisoners seems merely to have been a move to deflect outside
criticism after the death of one of them in a hunger strike, rather than a first
step in dismantling the islands police state. Indeed the army is playing a
bigger role in the economy and in government.

25
Yet Rals reforms go much further than Fidels reluctant acceptance of
foreign investment and limited self-employment after the collapse of the Soviet
Union, partially reversed on the appearance of a new benefactor, Hugo Chvezs
Venezuela. For the first time since the 1960s Cubans will be able to employ
other Cubans (even though the constitution bans such exploitation). Many of
the rules under which these new businesses will operate are still being drawn
up. But it seems that Cubans will now be able to get loans and rent and buy
property. Other changes are likely to follow. Mr Castro talks of gradually
eliminating the free food rations that Cubans get, and moving towards targeted
social assistance (as elsewhere in Latin America). The corollary is that wages
will have to go upand increasingly they will be set in the market.

60

In all this Mr Castro is bowing to reality. He has been withering in his

criticism of the featherbedding that has bankrupted the state. He has also
refused to blame the American economic embargo for problems which he rightly
says are self-inflicted. His pragmatism has finally won out against his
brothers doctrinaire Utopianism.

Apart from the economy, the other big task facing Mr Castro, who is 79 (and
Fidel 84), is to start handing over power to a younger generation. That may come
after the party congress next year. In the meantime, his new boldness represents
an opportunity for those who hope that Cuba will eventually join the rest of
Latin America in accepting democracy and the market economy, for once the
markets green shoots appear they tend to flourish.
79 84

How to help kill communism

26
Outsiders should take their lead from the common position that Europe adopted in
1996, which allows it to help in the progressive and irreversible opening of
the Cuban economy while predicating closer friendship on moves towards
democracy. Offering training and creditas Brazil has doneto Cubas
incipient private sector would be a good move. Rewarding Cuba for releasing
prisoners who should never have been locked up in the first placeas Miguel
Moratinos, Spains recently sacked foreign minister, wantedwould not.
1996

Miguel
Moratinos,

Americas embargo remains as futile and counter-productive as ever. Although

Barack Obama has commendably reversed George W. Bushs restrictions on visits
and remittances by Cuban-Americans, Republican control of Congress will make it
even less likely that the embargo will be dismantled. Thats a great shame. The
embargo has allowed the Castros to pose as proud Cuban nationalists standing up
to a bullying hegemon and thus helped them cling to power. If change is at last
under way it is despite the embargo, not because of it.

Lebanon and the region

Can there be justice as well as stability?

As the UN prepares to announce indictments for a series of murders and

assassinations, the mood in Lebanon is getting edgy

Nov 11th 2010 | Cairo

IT IS the strangest of courtroom dramas. Distinguished judges and a prosecutor

sit in a sleepy suburb of the Dutch capital, The Hague. The case has plenty of
victims: 61 people, including Lebanons then prime minister, Rafik Hariri, were
murdered and 494 injured in a spree of bombings and assassinations that racked
Lebanon from 2004 to 2008. But though the UN-sponsored Special Tribunal for
27
Lebanon has yet to convene or to charge anyone for the crimes, the impending
trial threatens not only to reignite a firestorm in Lebanon, but also to spread
sectarian tensions across the Middle East and to vex relations even more between
the regions big adversaries, Iran and the United States. If Lebanon were to
blow up again, Israel and Syria could well step in once more, turning the
current Middle East peace process into a slide back towards war.

2004 2008
?Rafik Hariri 61 494

Few foresaw this when the UN Security Council ordered an investigation into the
car-bombing of February 2005 in Beirut, the Lebanese capital, when Mr Hariri, a
billionaire Sunni who was seeking his sixth turn at running the government, was
assassinated along with 22 others. That sparked a furious popular backlash,
prompting the exit of Syrian troops who had lingered, increasingly unwanted, to
enforce peace after Lebanons civil war of 1975-90. Then followed the electoral
triumph of Mr Hariris pro-Western coalition, known as the March 14th alliance,
after the date of a big anti-Syrian demonstration. Many Lebanese, as well as the
UNs first investigating team, assumed that Syria had arranged Mr Hariris
murder, and expected the cases swift resolution.

2005 2
22

1975 1990

3?14

It was not to be. Over the next three years sporadic bombings and shootings
targeted prominent backers of the March 14th alliance, Christian areas, and
Lebanese officers involved in the investigation. Even as the investigators
brief widened to include these later attacks, their credibility fell when it
emerged that key witnesses implicating Syria had apparently made up their
testimony.

3?14
28


Meanwhile, March 14ths pro-Syrian adversaries, led by Hizbullah, the Lebanese

Shia party-cum-militia which emerged strengthened from a war with Israel in July
2006, mounted a tenacious and effective campaign to challenge the pro-Western
faction. This culminated in an invasion of central Beirut in May 2008 by
Hizbullah gunmen that forced March 14th to accept a power-sharing deal.
Hizbullah and its allies thereby secured a veto over government decisions but at
the cost of deepening the bitter schism that now largely pits Lebanons Sunnis
and Shias, each with nearly one-third of the population, against each other, and
splits the third who are Christian into sparring factions backing one side or
another.

3?14
2006 7
2008 5
3?14

1/3 1/3

Since then, as the tribunals work has dragged on, many Lebanese have grown
weary of the whole process. Lately, this weariness has turned to alarm. The
court is expected to issue an indictment soon. Leaks strongly suggest it will
not accuse Syria but rather senior officers of Hizbullah itself. The
implications of such a charge are explosive. The party has long exalted its role
as a heroic protector of Lebanon, justifying its impressive arsenal on the
grounds, however implausible to outsiders, that its weapons are trained solely
on Israeli invaders and not fellow Lebanese.

Along with Hizbullahs devoted followers, many non-Shias readily accept such
arguments. But should Hizbullah be proven to have mounted a systematic campaign
of extermination against Sunni Muslim and Christian political opponents in
Lebanon, the partys reputation would be severely damaged, along with that of
its main backer, Iran, whose president, Mahmoud Ahmadinejad, made a recent
29
festively triumphant visit to Lebanon.

Mr Hariris son Saad, who now leads March 14th as Lebanons prime minister,
has quietly reassured Hizbullah that he would publicly insist that any of its
members implicated in the killings would be considered merely rogue actors.
Conveniently also, the man most widely believed to have orchestrated the
killings is dead. Imad Mughniyeh, well known since being implicated in bombings
and hostage-takings during Lebanons civil war, headed Hizbullahs special
operations forces, and was a key link to Irans Revolutionary Guard before his
unexplained assassination in Damascus in February 2008. Curiously, the killings
in Lebanon stopped abruptly at the same time.

3?14

?Imad Mughniyeh

2008 2

But Hizbullah, apparently confident in its strength, rejects any suggestion of

its involvement. Instead, its leaders have attacked the tribunal with growing
vigour, accusing it of being an American tool and of ignoring purported evidence
of Israels hand in the killings. In Beirut last month party loyalists posing
as a pack of angry veiled women scratched, punched and bit members of a team
from the UN investigation in southern Beirut. Hizbullah leaders followed this
staged provocation with denunciations of the UNs supposed affront to the
virtue of Lebanese womanhood, declaring that henceforth any co-operation with
the tribunal would be equated to collaboration with the Zionist enemy.

The partys allies have made a noisy issue of the initial false testimony cited
by investigators and long since discarded, in an effort to discredit the entire
30
judicial process. More ominously, voices sympathetic to Hizbullah whisper that
its militia, widely seen as far tougher than Lebanons ill-equipped conscript
army, is ready to take swift control of ports, borders and main cities. Such a
move might well provoke Israeli generals, whose itch to tame the Shia party is
as intense as it was when they launched their fierce but inconclusive war in
2006, after a spat between Hizbullah and an Israeli border patrol.

2006

In Lebanons polarised landscape Hizbullahs large core of loyalists is

unlikely to be shaken, even by firm evidence of the partys involvement in the
killing of Mr Hariri and others. Some of its allies, however, especially in the
Christian camp, may prove less immune to repulsion. For such a small country,
even one with such a violent past, 555 dead and wounded is a big number.
Lebanese nerves are jangling.

555

Pros clicking at war

An American firm wants to turn computer games into a global spectator sport

Oct 28th 2010

Arriving for a big e-sports match

THE first round is over and 32 of the worlds best professional computer-game
players are through to the next stage of the Global Starcraft 2 League being
played in Seoul, South Korea. Over the next two weeks the players, including the
reigning champion, Kim Won-ki (better known by his online moniker
31
FruitDealer), will marshal their armies, ponder their strategies and crush
their foes. The finalists will play in front of an audience of thousands (and
hundreds of thousands more online) for an $87,000 first prize and the respect
due the best Starcraft 2 player on the planet.

32
2 ID

8.7
2

This is e-sports, or professional computer-gaming, at its highest level. Just

like football or baseball, computer games can be played competitively and in
front of paying spectators. South Korea, where the original Starcraft game was
released in 1998, is the spiritual home of e-sports.

1998

South Korean fans watch games broadcast on cable television and the players are
celebrities. Teams flush with sponsorship money pay stars salaries on top of
their prize money. (One player, Lee Yoon-Yeol, aka Nada, is rumoured to earn
around $200,000 a year; a journeyman player might make $20,000). Now Activision
Blizzard, the California-based company that developed the Starcraft games, is
keen to spread the popularity of e-sports in the West.

Nada 20
2
-

Will it work? Professional computer-gaming in the West has been around for
several years, with outfits like the Electronic Sports League in Europe and
Major League Gaming in America. But it has never taken off to the extent that it
has in South Korea. Activision Blizzard thinks that will change as faster
broadband makes it easier to broadcast games over the internet. The company
designed Starcraft 2 with spectators in mind and has flown famous Korean players
to America to play an exhibition match. GomTV, the Korean firm that runs the
league, is providing English commentary on games and it has opened the
tournament to any non-Korean player that can manage to qualify.

ESLMLG
32
-
2
GomTV

Advertisers are attracted by the ability of e-sports to target an audience with

plenty of spending money; Sony Ericsson is sponsoring the tournament in Seoul.
The average American gamer is in his 30s and well-educated. With sponsorship
comes the money necessary to attract players to pursue computer gaming as a
career, says Sean Plott (better known as Day[9]), an American player-turned-
commentator. Intel recently sponsored a European tournament with a $15,000 prize
pool. Perhaps the biggest obstacle to exporting e-sports to the West is a
lingering belief that playing computer games is not a proper joban idea that
would no doubt sound familiar to pioneers of professional sports from tennis to
snooker.

-
30 Sean
Plott Day[9]

15000

Silver lining
Gold's poor relation is on a winning streak
Sep 30th 2010

AT THE first Olympic games of the modern era in 1896, winners were awarded
silver medals. Since then the metal has had to get used to second-class status.
But for some time now silver prices have been outpacing those of gold (see
chart), its flashier neighbour on the periodic table. On September 29th silver
exceeded $22 an ounce, a price not seen since 1980 when the Hunt brothers, a
pair of Texan oil barons, unwisely attempted to corner the market. Then silver
spiked as high as $50 an ounce before the strategy unravelled, sending the price
crashing and the Hunts back to the oil business.
1896

9 29 22 / 1980
Hunt brothers 50
/
33
The explanation for the steady rise of silver this time round is less dramatic.
But high prices have a better chance of enduring. For investors, silver and gold
have much of the same allure. The combination of a weak dollar, low interest
rates and economic uncertainty that has convinced some to buy gold and pushed
its price up to around $1,300 an ounce has also encouraged them to put their
money into other likely-looking stores of value. Silver not only offers
investors diversity but it is also supported by real industrial demand.

1300 /

Whereas around 25-30% of gold is bought by investors, only about a tenth of

global silver production goes the same way. Roughly half the worlds silver
goes to industrial users (the balance is accounted for by jewellery and other
silverware), although their identity has undergone a huge shift over the past
decade.
25~30% 10%

Old-fashioned film for cameras required mountains of silver. According to

Merrill Lynch, an investment bank, photographic demand for silver has fallen by
more than 60% in the past decade. Even in 2004, when the popularity of digital
cameras was already well established, the photographic industry consumed 5,600
tonnes of silver, a fifth of total production. That compares with just 9% in
2009.

2004 5 600
2009 9%

New uses for the metal plugged the gap left by film. Silver is widely used in
electronics, whether in buttons for TVs, in membrane switches in computer
keyboards or as a coating for CDs and DVDs. But the great hope for silver is the
solar-power industry. Photovoltaic cells, the technology used in 70% of solar
panels, contain silver. Although other technologies that do not use silver are
on the rise, heavy government subsidies are forecast to help keep the solar
industry growing.

CD DVD 70%

Demand for silver is likely to keep rising in developing countries in

34
particular: China, which used to export the metal, now imports it. The same
cannot be said for supply. As Michael Lewis of Deutsche Bank points out, three-
quarters of the worlds supply comes as a by-product from copper, lead and zinc
mines. So ramping up production is difficult. Total supplies of the metal in
2009, at 27,650 tonnes, were barely higher than in 2004. Athletes of the future
may not feel quite so bad about taking home a silver medal.

?Michael Lewis 75%

2009
27 650 2004

System 2010-10-11 23:00

5 0 0 0
sometimes naive

anchine

anchine
13 2010-12-17 2010-9-25 0 64 GBP
0 0 0 10 1 5 0 0
UID131094

, 1, 1
2010-9-25 0 1 5 2
2010-10-4 22:49 |
Athletes of the future may not feel quite so bad about taking home a silver
medal.

Ambac's fall
Ambac

And then there was one

35
The bond-insurance industry struggles for survival

Nov 4th 2010

AMERICAS municipal-bond market is worth around $2.8 trillion. But monoline

insurers, which insure municipal bonds issued by American cities and counties,
are barely breathing. On November 1st the industry edged closer to extinction
when one of the largest bond insurers, Ambac, announced that it would skip an
interest payment. The company could file for bankruptcy by the end of the month.

2.8
11 1 Ambac

It didnt need an oracle to predict Ambacs demise. Earlier this year a state
regulator siphoned off some of Ambacs most toxic assets and put them into
rehabilitation. Ambac has over $1.6 billion in debt, but only $76m in cash
and short-term securities. One of its most coveted assets is its $7 billion
net operating loss tax carry forward, which could translate into $2.5
billion in tax savings if it ever manages to turn a profit. Rob Haines of
CreditSights, a research firm, does not think it will: Ambac is a dying
company with a finite life.

Ambac Ambac
Ambac 16 7.6
70
25 CreditSights ?
Rob Haines Ambac Ambac

The prospects for other monoline insurers look equally bleak. The industry got
going in the 1970s and at first provided insurance only for municipal-bond
issuers, which rarely defaulted. Over the past decade, however, the industry has
branched out into structured products, such as risky mortgage-backed securities
and collateralised-debt obligations. Big mistake. When subprime mortgages
soured, bond insurers such as Ambac and MBIA, another embattled monoline, were
on the hook to pay up. Their credit ratings dropped, which meant issuers were
less willing to buy insurance from them.

20 70

Ambac MBIA
36


In 2005 bond insurers covered around 57% of new bond issuance, but now they
cover a mere 7% or so. Only one monoline remains active: Assured Guaranty, which
sat out most of the structured stampede. All its pre-crisis peers are either
being restructured, face litigation or are out of business. Even Warren Buffett,
who entered the bond-insurance market in 2008, has pulled back. Were like an
only child, says Dominic Frederico, the boss of Assured Guaranty. We dont
have anybody to play with but all the toys are ours. Still, life isnt all
fun and games. Standard & Poors, a ratings agency, last month stripped the
firm of its AAA rating.

2005 57% 7%
Assured Guaranty
2008 ?
Warren Buffett Assured Guaranty
?Dominic Frederico
AAA

Some still believe there is hope for the industry. The National League of
Cities, a non-profit organisation, thinks there should be a mutual insurance
company owned and operated by local governments. But monolines will have to
embrace a new model to succeed. Stanislas Rouyer of Moodys, another ratings
agency, says monolines need to emphasise that they provide not just insurance
but also monitoring and surveillance capabilities. This would enable them to
sell their wares directly to retail investors, who account for 36% of the buyer
base for municipal bonds.

National League of
Cities
Moodys?
Stanislas Rouyer
36%

There are other hurdles to jump first. The shaky finances of some municipalities
could put whats left of the industry to another huge test. Fragile issuers and
nervous investors ought to be a boon to insurers. But mass defaults by cities
and counties could be the final blow for Assured Guaranty and its zombie peers.

Assured Guaranty

37
Finance and Economics

Oracle v SAP
Oracle SAP

Maintaining fees

A lawsuit against SAP is about more than illegal downloads

SAP

Nov 4th 2010

SOMETIMES a tackle says much about a match and even the entire season. This is
the case with a trial that opened on November 1st, pitting the worlds two
biggest makers of corporate software, Oracle and SAP, against each other. The
dispute goes back to SAPs purchase in 2005 of TomorrowNow, which provided
maintenance services for some of Oracles software. Its aim was to poach
customers. But in 2007 Oracle sued SAP, alleging that TomorrowNow had made
illegal downloads from its website.
11 1
Oracle SAP 2005 SAP
TomorrowNow Oracle 2007
Oracle SAP TomorrowNow

SAP has since admitted that TomorrowNow had done wrong and closed it down. It
will not even contest allegations that it was aware of the copyright
infringement and has reportedly agreed to pay $120m in legal fees to Oracle.
This essentially leaves only two questions open: the damagesSAP thinks $40m is
enough; Oracle wants about $2 billionand whether Lo Apotheker, SAPs former
boss and now head of Hewlett-Packard (HP), will appear in court.
SAP TomorrowNow Oracle
SAP Oracle 1.2
Oracle SAP 4000
Oracle 20 Lo Apotheker SAP HP

As a result, it will be up to another trial to answer the underlying question:

what are the rules for third-party maintenance? In January Oracle sued another
maintenance firm, Rimini Street. It has since countersued, accusing Oracle of
anticompetitive behaviour.
SAP 1
Oracle Rimini Street Oracle
38


The issue is the same as with independent car-repair shops: what access to the
intellectual property of the original vendor should they have? If the court
favours Rimini Street and others, their business could take off. A growing
number of firms are thinking about defecting from Oracle and SAP, even though
they would no longer get regular updates. They are happy with their existing
applications and could cut their maintenance costs in half.

Rimini Street
Oracle SAP

If many customers jump ship, this would weigh heavily on the results of Oracle
and SAP. Maintenance fees, usually 22% of a programs price per year, have
become a bigger part of firms technology budgets and of software vendors
income. For both firms, maintenance generates twice as much revenue as software
salesand all of the profits.
Oracle SAP
22% Oracle SAP

Yet if the TomorrowNow trial has attracted so much attention, it is also because
of a new epic rivalry in the industry. It started when Oracle bought Sun
Microsystems last year, becoming a direct rival to HP. Things got worse in
September when Oracle hired HPs ex-boss, Mark Hurd, who had been pushed out
the previous month. The relationship became downright hostile when HP then
appointed Mr Apotheker as successor and installed as chairman, of all people,
Ray Lane, who left Oracle in 2000 after falling out with its flamboyant boss,
Larry Ellison.
TomorrowNow
Oracle Sun Microsystems HP
9 Oracle HP Mark Hurd
HP HP Apotheker Ray Lane
2000 Oracle Larry Ellison Oracle

Mr Ellison, who has shown restraint in recent years, has since rediscovered his
previous more belligerent form. He compared HPs board to idiots when they
forced Mr Hurd out. He spoke of madness after Mr Apothekers appointment.
Later he accused HPs new boss, who started his new job on the first day of the
trial, of having overseen an industrial-espionage scheme.
Ellison HP
Hurd HP Apotheker
39
 HP

All this has entertainment value. And it may impress Wall Street. But it is
unlikely to make firms buy more of Oracles products. Nor will it do anything
to counter the growing anger among customers of Oracle (and of SAP, for that
matter) over how much they pay in maintenance fees, with so little in return.
Oracle
Oracle SAP

Transparency International

Murk meter

The best-known corruption index may have run its course

Oct 28th 2010 | BERLIN

CORRUPTION takes many forms; in some countries it is blatant, in others it is

barely visible. So the idea that it can quantified on a simple scale is
appealing; it gives the impression that an elusive aspect of behaviour can be
pinned down.

No wonder, then, that the annual corruption perceptions index (CPI), which
orders countries according to the perceived degree of graft, is closely watched.
But when its compilersTransparency International (TI), an organisation based
in Berlinreleased their 16th annual ranking on October 26th, there was
criticism as well as curiosity.

(CPI)
10 26 16

To be sure, TI has done a lot for the anti-corruption cause. The group has had
an enormous impact, says Richard Boucher, a deputy secretary-general at the
OECD, a rich-country club. The CPI was the first index comparing corruption
globally.
40
?
(Richard Boucher)

But it has always been controversial. As might be expected, early complaints

came from poor places which felt they were being singled out by an organisation
that reflected the ethos of wealthy countries.

Now there are more subtle critiques, too. Some people take issue, for example,
with the methodology based on 13 surveys of experts and business people. Its
precise working varies from country to country, and it has changed over timeso
that year-on-year comparisons can be misleading.

13

The CPI highlights the general level of corruption, but offers little clue about
which aspects are most serious, or how to fight it. Frustration has grown with
the idea that a single number for a whole country is enough, says Nathaniel
Heller of Global Integrity, an anti-corruption outfit.

(Global Integrity) ?(Nathaniel

Heller)

The CPI has more than run its course, in the view of Claudio Weber Abramo,
director of Transparncia Brasil, a former chapter that left the TI umbrella in
2007.

(Transparncia Brasil)??(Claudio Weber Abramo)

2007

TI is aware of the indexs shortcomings. The CPI, it says, is an annual

snapshot with less of a focus on year-on-year trends. Yet the group stands
by its ranking. We are comfortable we have an important toolbut it is only
one tool, says Huguette Labelle, TIs chair.

41

?
(Huguette Labelle)

TI is far from a one-trick pony. It now focuses on boosting international

accords and helping enforce them. At the local level, it also does much more
than in the past. In some developing countries, legal advice centres help
victims of corruption. Still, the CPI looms large, and the organisation faces a
dilemma. The index gets a much-needed attention, but it overshadows other
activities and exposes it to criticism. If TI had the courage to ditch its
score-card, or at least publish it in a less misleading form, its other work
might fare better.

Broadband in America

Come sooner, future

Verizon has paid dearly to build a fast network. Now it needs customers
Verizon

Oct 28th 2010

VERIZON can get shirty about the word fibre. Americas second-biggest
telecoms operator successfully complained to the Better Business Bureau that
competitors had touted fibre-optic fast to consumers, even though their
broadband networks did not run fibre all the way to the home, as Verizon does.
This is not just a techies argument. By an order of magnitude, an all-fibre
network is the fastest way to move information from one place to another on the
internet and Verizon has the largest such network in America. The difficult bit
is making money from it.
Verizon
42


Verizon

The company is betting that highbandwidth web services will create a huge demand
for fast networksand profits. But that is in the future. In Japan and South
Korea, two other countries with fast networks, the government has subsidised the
laying of new fibre. In America, which has relied on private investment, Verizon
is having to shoulder more of the risk.

Verizon

The reason why the company was so keen to build a fast network goes back to how
America was wired originally. In the beginning there was copper wire, which
telephone companies ran to almost every house. Then, in the 1980s, cable-
television companies secured local monopolies to provide coaxial cable as well.

At first the two networks had a fair fight, delivering the internet at about the
same speed. No network, however, can run faster than the speed of its last
mile, from the neighbourhood node to the house. This is the most expensive
place to lay networks and the last mile of cable is faster than a copper wire.
So the telephone companies would, eventually, be unable to deliver the internet
as fast as their cable competitors.

Verizon, formed in 2000 out of several regional telephone companies, decided to

create a third network. Since 2004 it has strung optic fibre to 60% of the homes
where it already had copper wires, mainly in Texas, California and on the East
Coast. Verizon calls its new network FiOS. It cost about $23 billion to
build and, according to Sanford Bernstein, an investment firm, contributed to
the $32 billion debt of Verizons wireline division.
2000 Verizon2004
60%Verizon
FiOS 230 Sanford Bernstein
Verizon 320

43
To counter FiOS, the cable companies have run fibre to the neighbourhood node,
from where the connection continues to the home through their existing cable.
This technology now reaches more than 70% of homes (see chart) and, unlike
Verizon, the cable companies did not have to pay to replace the last mile.
FiOS
70% Verizon

Basic copper and cable internet access cannot run faster than about 5 megabits
per second, which is just about fast enough to watch something on YouTube or for
a video chat over Skype. But networks seldom run as fast as advertised. The
cable networks upgraded with fibre can run at speeds in the hundreds of megabits
per second, enough to handle most present-day applications and many in the
immediate future, like high-definition video. Yet Verizons network could leave
these in the dust. In tests in Massachusetts its fibre network has run as fast
as 10,000 megabits per second, and it could go faster.
5Mbits/s YouTube Skype

Verizon
10Gbits/s,

This puts Verizon in a tricky position. Its old copper network, still 40% of its
customer base, is not fast enough but FiOS is faster than most consumers need.
So the company is having to weather the transition to a time when faster
networks become more important. On October 22nd Verizon said that its overall
revenue, at $26.5 billion in the third quarter, was 2.9% down on the same period
a year ago. Its mobile-phone division performed strongly, with revenue rising by
6%, to $16.3 billion. But its wireline business remained under pressure: revenue
fell by 3.6% in the period and operating profit slumped by 90%.
Verizon 40% FiOS

10 22 Verizon 265 2.9%
6% 163
3.6% 90%

For now, Verizon has halted new investment in fibre while it tries to drum up
more customers for FiOS. And for the long term it is trying to create demand for
an even faster internet. Verizon has suggested that it be allowed to offer
companies super-fast, premium access to its network while continuing to provide
what it calls the open internet to its customers. Verizon sees its fast
network supplying programmes to 100-inch television screens and providing 3-D
online gaming. More speed-demanding video games are coming (see article). The
company has also been discussing linking medical devices in hospitals and
44
doctors surgeries. It is building connections to intelligent power grids,
which businesses and homes could use to reduce their energy bills. For Verizon,
the future cannot come fast enough.
Verizon FiOS
Verizon
Verizon 100
3D

Verizon
Born digital

National libraries start to preserve the web, but cannot save everything

Oct 21st 2010

The library of the future

IN THE digital realm, things seem always to happen the wrong way round. Whereas
Google has hurried to scan books into its digital catalogue, a group of national
libraries has begun saving what the online giant leaves behind. For although
search engines such as Google index the web, they do not archive it. Many
websites just disappear when their owner runs out of money or interest. Adam
Farquhar, in charge of digital projects for the British Library, points out that
the world has in some ways a better record of the beginning of the 20th century
than of the beginning of the 21st.

Adam Farquhar
20 21

In 1996 Brewster Kahle, a computer scientist and internet entrepreneur, founded

the Internet Archive, a non-profit organisation dedicated to preserving
websites. He also began gently harassing national libraries to worry about
preserving the web. They started to pay attention when several elections
produced interesting material that never touched paper.
1996 Brewster Kahle

In 2003 eleven national libraries and the Internet Archive launched a project to
preserve born-digital information: the kind that has never existed as
45
anything but digitally. Called the International Internet Preservation
Consortium (IIPC), it now includes 39 large institutional libraries. But the
task is impossible. One reason is the sheer amount of data on the web. The
groups have already collected several petabytes of data (a petabyte can hold
roughly 10 trillion copies of this article).
2003 11
39

petabytes 10

Another issue is ensuring that the data is stored in a format that makes it
available in centuries to come. Ancient manuscripts are still readable. But much
digital media from the past is readable only on a handful of fragile and antique
machines, if at all. The IIPC has set a single format, making it more likely
that future historians will be able to find a machine to read the data. But a
single solution cannot capture all content. Web publishers increasingly serve up
content-rich pages based on complex data sets. Audio and video programmes based
on proprietary formats such as Windows Media Player are another challenge. What
happens if Microsoft is bankrupt and forgotten in 2210?

windows media player)

2210

The biggest problem, for now, is money. The British Library estimates that it
costs half as much to store a digital document as it does a physical one. But
there are a lot more digital ones. Americas Library of Congress enjoys a
specific mandate, and budget, to save the web. The British Library is still
seeking one.

So national libraries have decided to split the task. Each has taken
responsibility for the digital works in its national top-level domain (web-
address suffixes such as .uk or .fr). In countries with larger domains,
such as Britain and America, curators cannot hope to save everything. They are
concentrating on material of national interest, such as elections, news sites
and citizen journalism or innovative uses of the web.

.uk.fr

46


The daily death of countless websites has brought a new sense of urgencyand
forced libraries to adapt culturally as well. Past practice was to tag every new
document as it arrived. Now precision must be sacrificed to scale and speed. The
task started before standards, goals or budgets are set. And they may yet
change. Just like many websites, libraries will be stuck in what is known as
permanent beta.

1.

webnational libraries
things seem
always to happen the wrong way round

Virtual outsourcing

Mobile work

A way to earn money by texting

Oct 28th 2010 | new york

Mobile worker

THE idea came to Nathan Eagle, a research scientist with the Massachusetts
47
Institute of Technology, when he was doing a teaching stint in rural Kenya. He
realised that, as three-quarters of the 4.6 billion mobile-phone users worldwide
live in developing countries, a useful piece of technology is now being placed
in the hands of a large number of people who might be keen to use their devices
to make some money. To help them do so, he came up with a service called
txteagle which distributes small jobs via text messaging in return for small
payments.
Nathan Eagle
46
Eagle
txteagle

Only 18% of people in the developing world have access to the internet, but more
than 50% owned a mobile-phone handset at the end of 2009 (a number which has
more than doubled since 2005), according to the International Telecommunication
Union. One study shows that adding ten mobile phones per 100 people in a typical
developing country boosts growth in GDP per person by 0.8 percentage points.
2009 18%
2005
GDP 0.8

Mr Eagle hopes txteagle will do its bit by mobile crowdsourcingbreaking

down jobs into small tasks and sending them to lots of individuals. These jobs
often involve local knowledge and range from things like checking what street
signs say in rural Sudan for a satellite-navigation service to translating words
into a Kenyan dialect for companies trying to spread their marketing. A woman
living in rural Brazil or India may have limited access to work, adds Mr Eagle,
but she can still use her mobile phone to collect local price and product data
or even complete market-research surveys. Payments are transferred to a
users phone by a mobile money service, such as the M-PESA system run by
Safaricom in Africa, or by providing additional calling credit.
Eagle txteagle

Eagle

Safaricom M-PESA

Working with over 220 mobile operators, txteagle is able to reach 2 billion
subscribers in 80 countries. It already has the largest contract-labour force in
Kenya and new ways of using it are being found all the time. Recently a large
media firm asked Mr Eagle for help in monitoring its television commercials
across Africa. The company was concerned that, although it had paid for
48
broadcasting rights, its ads could be replaced with others by local television
companies. So txteagle pays locals to watch and then text notes about which ads
are shown. I would never think of that myself, says Mr Eagle. Which is why
he is not sure just how big all these small text jobs could become.
txteagle 220 80 20
Eagle

txteagle
Eagle
The Big Mac index
An indigestible problem
Why China needs more expensive burgers
Oct 14th 2010 | Hong kong

A WEAK currency, despite its appeal to exporters and politicians, is no free

lunch. But it can provide a cheap one. In China, for example, a McDonalds Big
Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of
$2.18 at market exchange rates. In America, in contrast, the same burger
averages $3.71.

14.5
2.18 3.71

That makes Chinas yuan one of the most undervalued currencies in the Big Mac
index, our gratifyingly simple guide to currency misalignments, updated this
week (see chart). The index is based on the idea of purchasing-power parity,
which says that a currencys price should reflect the amount of goods and
services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan
should be worth $0.26 on the foreign-exchange market. In fact, it costs just
$0.15, suggesting that it is undervalued by about 40%.

14.5 3.71 1
0.26 1 0.15 40%

The tensions caused by such misalignments prompted Brazils finance minister,

Guido Mantega, to complain last month that his country was a potential casualty
of a currency war. Perhaps it was something he ate. In Brazil a Big Mac
costs the equivalent of $5.26, implying that the real is now overvalued by 42%.
The index also suggests that the euro is overvalued by about 29%. And the Swiss,
who avoid most wars, are in the thick of this one. Their franc is the most
expensive currency on our list. The Japanese are so far the only rich country to
49
intervene directly in the markets to weaken their currency. But according to
burgernomics, the yen is only 5% overvalued, not much of a casus belli.
Guido Mantega

5.26 42%
29%

5%

If a currency war is in the offing, Americas congressmen seem increasingly

determined to arm themselves. A bill passed by the House of Representatives last
month would treat undervalued currencies as an illegal export subsidy and allow
American firms to request countervailing tariffs. The size of those tariffs
would reflect the scale of the undervaluation.

How does the bill propose to calculate this misalignment? It relies not on Big
Macs, but on the less digestible methods favoured by the IMF. The fund uses
three related approaches. First, it calculates the real exchange rate that would
steadily bring a countrys current-account balance (equivalent to the trade
balance plus a few other things) into line with a norm based on the
countrys growth, income per person, demography and budget balance.
IMF
IMF

The funds second approach ignores current-account balances and instead

calculates a direct statistical relationship between the real exchange rate and
things like a countrys terms of trade (the price of its exports compared with
its imports), its productivity and its foreign assets and liabilities. The
strength of Brazils currency, for example, may partly reflect the high price
of exports such as soyabeans.

Third, the fund also calculates the exchange rate that would stabilise the
countrys foreign assets and liabilities at a reasonable level. If, for
example, a country runs sizeable trade surpluses, resulting in a rapid build-up
of foreign assets, it probably has an undervalued exchange rate.

50


The IMF has typically assessed its members policies one at a time. But the
funds managing director, Dominique Strauss-Kahn, now proposes to assess its
biggest members all at once to make sure their macroeconomic strategies do not
work at cross-purposes. He is keen to identify the ways in which a countrys
policies, including its exchange-rate policies, spill over to its
neighbours.
IMF ?-
Dominique Strauss-Kahn

Those spillovers depend on the size of the economy as much as the scale of any
misalignments. But the biggest economies are also the hardest to bully. The
funds last annual report on the Chinese economy, in July, included the
governments rebuttal of every criticism the fund offered. In a decorous
compromise the report concluded that the yuan was substantially undervalued
but refrained from quantifying the size of the problem.

IMF 7 IMF
IMF

Big revaluations of the kind required to satisfy the fund or equalise the price
of burgers are unlikely. A recent study of the Big Mac index by Kenneth
Clements, Yihui Lan and Shi Pei Seah of the University of Western Australia
showed that misalignments are remarkably persistent. As a result, the raw index
did a poor job of predicting exchange rates: undervalued currencies remain too
cheap and overvalued currencies remain too pricey.
IMF
?Kenneth ClementsYihui Lan Shi Pei Seah

But since this bias is systematic, it can be identified and removed. Once that
is done, the three economists show that a reconstituted index is good at
predicting real exchange rates over horizons of a year or more. Since The
Economist costs just $6.99 (a little less than two burgers) on the news-stand,
the index provides decent value for money for would-be currency speculators, the
authors conclude. The Big Mac index may itself be undervalued.

6.99
51
Microsoft's mobile operating system

Windows or curtains 1

The software giant is desperate to make a splash in the smart-phone business

Oct 7th 2010 | San Francisco

AT A company meeting last year, Steve Ballmer, Microsofts pugnacious boss,

spied an employee taking a photo on an Apple iPhone. He promptly grabbed the
offending device and pretended to stamp on it. Microsoft would love to crush
competitors in the smart-phone market, but it has repeatedly failed to come up
with compelling offerings of its own. Now the software firm is gearing up for
another assault on a business that is crucial to its future.
?
iPhone

On October 11th Microsoft is due to unveil phones from manufacturers such as HTC
and Samsung that incorporate its new operating system, Windows Phone 7 (WP7). An
accompanying media blitz will seek to position it as an attractive alternative
to Apples iPhone, Googles Android and Symbian, which powers many Nokia
phones (see chart). The stakes are high for Microsoft and for Mr Ballmer, whose
stewardship of the firm is the subject of intense debate. Microsofts share
price has fallen by almost 20% since the beginning of this year, while the S&P
500 stockmarket index has risen by 4%.
10 11 WP7 HTC
iPhone
Android

20% 500 4%

Microsoft hopes not only to profit from selling licences for its software but
also to push its other services via the phones. Bing, the firms internet
search engine, Xbox Live, its gaming platform, and Zune, its music and video
player, are baked into the new operating system. Microsoft is also betting that
WP7 will help it preserve its once vice-like grip on the workplace. That hold is
slipping as firms let employees toting iPhones and Android-based devices use
them for work.
52

Bing Xbox Live Zune
WP7
iPhone Android

The new phones boast a slick touch-screen interface and several novel features,
including one that makes it easier than on most smart-phones to post news and
photos to social networks on the move. Microsoft has also laid down minimum
standards to which phonemakers must adhere for things such as built-in cameras.
Some earlier Windows phones suffered from poor hardware. There isnt a thing
about our approach to this business that we havent changed, says Greg
Sullivan, a Microsoft executive.

Windows

The firm is also expected to spend enormous sums promoting its new system.
According to some estimates, it has earmarked $400m-500m to boost WP7, an amount
that is likely to be matched by phonemakers and telecoms companies that will
offer the new devices. By comparison, Motorola, Verizon and Google spent $100m
on the launch of the Android-powered Droid smart-phone at the end of 2009,
reckons Deutsche Bank. Microsoft is also taking to the courts. Last week it sued
Motorola, arguing that the firms phones violated some of its patents.
4 5 WP7

2009 Android Droid

1

Such legal quarrels are unlikely to halt the rise of Android. Googles
operating system is now the most popular one among recent buyers of smart-phones
in America, although Apple will become a stronger competitor if it releases a
Verizon iPhone, as has been rumoured. Microsoft is way behind the competition
and the chances of it catching up are fairly low, says Brent Thill of UBS, an
investment bank. He points out that it will take time to persuade developers to
create a rich range of software applications for Microsofts operating system.
IDC, another research company, reckons that by 2014 Microsoft will still trail
both Apple and Android, as well as Research in Motion (RIM), the maker of the
BlackBerry.
Android Version iPhone

53
UBS?
IDC
2014 Android
RIM

Hence persistent speculation in Silicon Valley that the software behemoth, which
has a $37 billion cash pile, might be tempted to bid for RIM, whose phones are
popular with corporate road-warriors. If Mr Ballmer is still around to negotiate
such a deal, it might be the best chance he has of putting Microsofts stamp on
the smart-phone world.
370 RIM RIM

1windows or curtains
windows
curtains windows

Charlemagne

Economic sanctions? Yes, please

Brussels wants to delve deep into the running of national economies. It should
beware of digging too far

Sep 30th 2010

2010.09.30

THEY came to Brussels this week in their tens of thousands, from Finland to
Greece, to say no to austerity. Their message was simple: the poor and the
workers are being made to pay for the sins of the bankers and the speculators.
To judge from some banners, they may have a new category of enemy: Eurocrats.

---

Jos Manuel Barroso, president of the European Commission, keeps saying that the
days of stimulus spending are over; now is the time for budget cuts. To ensure
that members of the European Union maintain fiscal discipline, he proposed on
September 29th stern new measures to give the commission power to scrutinise
their budgets and impose hundreds of millions of euros worth of penalties on
54
the profligate. Even those that pig-headedly refuse to reform their economies
could be punished.

9 29

For Mr Barroso this economic governance is the only way to ensure the
survival of the euro. But outside the commission, demonstrators see things
differently. To John Monks, general secretary of the European Trade Union
Confederation, the EU is turning into a punishment squad. Left-wing members
of the European Parliament are in a quandary. They want more Europe, but in
this case more Europe means more austerity.

John Monks

This years Greek crisis exposed the inadequacies of the euro, a single
currency without a joint economic or fiscal policy. Trouble in even a peripheral
country like Greece, whose GDP is less than a tenth of Germanys, posed dangers
to all. Loose agreements have not proved strong enough to stop reckless
behaviour. Sanctions exist, in theory, in the stability and growth pact, which
requires euro-area countries to keep deficits below 3% of GDP and government
debt below 60% of GDP, but they have never been imposed. Governments have been
reluctant to criticise each other in public, let alone to mete out fines.

GDP
1
GDP 3% GDP 60%

The commissions suggested solution is to appoint itself as fire warden,

firefighter and prosecutor. European leaders agreed earlier this month to submit
their budgets to Brussels for scrutiny six months earlier than they used to.
Countries will be monitored not just for excessive deficits and debts, but also
for imbalances and falling competitiveness. Penalties for the recalcitrant will
include warnings and deposits of up to 0.2% of GDP into, first, interest-bearing
accounts, and then into non-interest bearing ones. In the end, these funds could
be forfeited entirely.

GDP 0.2%
55


The idea is to impose sanctions early in the process rather than at the end,
when they would only exacerbate a countrys fiscal problems. It is also to
focus as much on debt levels as on annual fiscal deficits.To reduce ministers
temptation to protect each other, the commission suggests reverse voting:
instead of a majority being required to impose sanctions, the penalties would be
approved unless a majority votes them down.

All this would apply at first only to the euro zone, for which the legal powers
are clearer. But later there could be a parallel system, based on withholding
future EU payments, for those outside the euro. This would have to wait for next
years round of budget negotiations. Britain will keep its opt-out, but several
non-euro members want shackles. As a senior EU source says, its strange to
hear countries saying: We want sanctions!

As Eurocrats tell it, most countries accept the thrust of these ideas. Germany
has, for now, dropped its demand that heavily indebted countries should lose
voting rights. Only a few quibble. France dislikes semi-automatic sanctions.
Italy is against the focus on debt. Spain does not want sanctions for
uncompetitiveness. Yet some scepticism is still in order. Even if EU leaders
give their nod at a summit next month, months of detailed negotiations lie
ahead. All 16 members of the euro zone now breach the 3% deficit threshold, and
12 also violate the 60% debt limit. They are not about to engage in mutual
flagellation. The new rules will not be retrospective, and many sanctions will
not bite until 2013. There is an escape clause to avoid penalties if Europe
faces a general shock such as the financial crisis.

16 3%GDP 12
60%GDP 2013

Powers like these might have done something about Greece. But would they have
56
saved Spain or Ireland? Both had healthy public finances before the crash, and
yet are now among the most troubled countries. Eurocrats argue that monitoring
of imbalances and scrutiny by a new EU financial regulator could have spotted
their problems sooner. Perhaps. But imbalances are easier to identify after a
bust than during a boom. As one Eurocrat mockingly puts it, We are now like
communist central planners. We know everything.

Whipped or skinned?

None of this is the economic integration that federalists dreamed of. It is more
like a deal to police minimum standards than a joint economic policy. It is born
of fear of the markets, not a love of Europe. Being whipped by Brussels is less
scary than being flayed by bond traders. Hard discipline may be needed to
preserve the euro, and to mollify German voters who do not want to bankroll
irresponsible neighbours. But there are also dangers.

The plans would give Brussels unprecedented power to intervene. Depoliticizing

sanctions to make them credible risks delegitimizing them. The commission would
be less of an impartial referee and more of an active player in domestic
politics. Gauging competitiveness is a murky business, with no obvious
benchmarks. In any case, balancing spending and taxes, deciding the level of
wages and reforming labour markets ought to be tasks for elected leaders, not
appointed bureaucrats. Will Mr Barroso and Olli Rehn, the commissioner for
economic and monetary affairs, really tell the likes of Christine Lagarde,
Wolfgang Sch?uble, Giulio Tremonti and George Osborne what to do, and fine them
if they refuse? The next time protesters hit Brussels, they may not just march
past the commission, but right into it

Olli Rehn Christine

Lagarde, Wolfgang Sch?uble, Giulio Tremonti George Osborne 2
57


--------------------------------------------------------------------------------
-------------------------------------------------------

1
stability and growth pact
The Stability and Growth Pact (SGP) is an agreement among the 16 members of the
European Union (EU) that take part in the Eurozone, to facilitate and maintain
the stability of the Economic and Monetary Union.
The actual criteria that member states must respect:

an annual budget deficit no higher than 3% of GDP (this includes the sum of all
public budgets, including municipalities, regions, etc)
a national debt lower than 60% of GDP or approaching that value.

Print on the iPad

iPad

A smashing success

The iPad is transforming media firms, and frustrating them

iPad

THE advertisement for Newsdays iPad application starts blithely enough. A man
in a shirt and tie sits in the kitchen, reading the New York newspaper on his
tablet computer. He turns the device on its side and watches the live feed from
a traffic camera. Then a fly lands on the table. The man quickly raises the iPad
and smashes it down, shattering the glass. The ad implies that the iPad is
superior to old-fashioned print in all sorts of ways, just not every way. It is
a jokebut also a good summary of how newspaper and magazine outfits have come
to feel about Apples product in the eight months since it was unveiled.

iPad

iPad -- iPad

58


Even before the device had a name, media executives knew what they wanted from
the iPad. Like the Kindle, Amazons e-reader, it could be used to sell digital
issues of newspapers and magazines. Like the web, it could be used to deliver
targeted advertising. It would look better than both. Newspaper and magazine
firms were determined to steer its evolution. Terry McDonell, who oversees
Sports Illustrated, helped create a futuristic-seeming video of a hypothetical
issue filled with whizzy graphics and interactive ads.

iPad Kindle

Terry McDonell

It is a mark of the quality of Apples device as well as the efforts at Sports

Illustrated that the magazines actual app does not differ much from the video.
Others have created beautiful applications that are drawing consumers. Wired, a
technology magazine owned by Cond Nast, claimed to sell 24,000 downloads within
24 hours, at $5 each. Newspaper and magazine apps are popular with advertisers,
who pay up to 10 cents per readerseveral times what newspapers tend to charge
for web adsfor the privilege of appearing on a sexy new device.

iPad
iPad Cond Nast
24 24000 5 iPad
10

The iPads effect on media firms extends well beyond its screen. The device
contains a web browser as well as an app store, bringing together the world of
paid content and the open web, where print content tends to be free. It is as
though a news-stand carried two versions of every magazineone costly, the
other inferior but free. Media firms that were already coming to believe that
the web is a mediocre advertising platform have drawn a stark conclusion: they
should pull back from the free web.

iPad iPad iPad

Time magazine has begun to hold back some stories from its website, on the
59
ground that it is now providing a decent digital alternative. Time Inc is moving
towards all-access pricing, in which content is available on all platforms to
people who pay for it. This is in line with the TV Everywhere plan developed
by Jeff Bewkes, Time Warners chief executive. Others are likely to follow.
James Moroney, publisher of the Dallas Morning News, says the release of a paid
iPad application later this year is likely to coincide with the erection of a
paywall on the Dallas.com website. It is illogical to charge for one but not the
other, he says.

CEO Jeff Bewkes

James Moroney iPad
paywall)

Yet obstacles lie in the path of media firms that want to move in this
direction. The first is that many print publications do not have enough
information about their customers to enable them to sell across platforms. Ken
Doctor, a media analyst at Outsell, points out that American newspapers tend to
sort their readers by address rather than by name. The second obstacle is Apple.
The firm has made it difficult to sell subscriptions on the iPad, and is
reluctant to disclose much data on buyers. This is a particular problem for
magazine firms, which use customer data to push other products and to sell
advertising.

Outsell Ken Doctor

iPad

Apples device is proving both transformative and deeply frustrating. Media

firms are praying that another device, perhaps using Googles Android operating
system, becomes popular and gives them leverage over Apple. Much as they love
the iPad, they would gladly smash a few if the thing could be replaced by
another, equally compelling, tablet computer.

Google Android iPad,

Finance

60
Taming the banks

The publics urge for revenge may not have been sated, but the new Basel rules
make sense

Sep 16th 2010

2010 9 16

TWO years ago the collapse of Lehman Brothers heralded a frightening period for
the world economy. As one bank after another toppled, or came close to doing so,
regulators worried that cashpoint machines would fail to operate and that
companies would be unable to meet their payrolls. A second Great Depression
seemed to beckon.

Extraordinary efforts were made to bail out the banks, including state
guarantees, partial nationalisations, near-zero interest rates and massive
fiscal deficits. The public seethed at the banks profligacy. Surely finance
would be reformed, as it was in the 1930s when America created a new regulator,
the Securities and Exchange Commission, and separated casino-like investment
banking from retail banking?

30

Two years on, the landscape of finance has altered somewhat. Take hedge funds:
the crisis wiped out around a quarter of their assets and forced many mediocre
ones out of business. Many private clients left in disgust when they found that
these self-proclaimed superstars could lose money; the client base is
increasingly dominated by institutions, which should insist on more transparency
and better risk management. In private equity, the poor performance of the 2006-
07 vintage of deals is making it harder for firms to raise money; one manager,
Candover, is giving up the ghost.

61
 1/4

2006 2007
Candover

But it is the banks that matter most; and, in banking, it is remarkable how
little has changed. Many banks are still too big to fail and the casino side
of their activities remains mixed up with the mundane business of deposit-
taking. Bankers are once more earning huge bonuses. How could this be?

Breaking up the banks might have satisfied taxpayers desire for revenge, but
it is not clear what problems it would have solved. Anglo Irish Bank and
Northern Rock collapsed not because they were too big, nor because they were
playing the markets: they were classic narrow banks which failed in the
traditional fashionborrowing short to lend long against property that turned
out to be overvalued. The problems of the Spanish cajas show that a financial
system with lots of small banks is not necessarily safer.

Still, the crisis made it painfully clear that the worlds banking system
needed new international rules to impose lending discipline and guard against
any temptation to migrate to the weakest regulatory regime. A new set, known as
Basel 3, has been proposed. They will not satisfy radicals, but they will
probably do the job.

The purpose of the new rules is to ensure that banks have more capital when they
face the next crisis, and are thus better able to cope with bad debts. The core
Tier 1 ratio will rise to 7%, slightly less than expected but still a lot better
than before the crisis (at the end of 2007, Royal Bank of Scotland had a ratio
of just 3.5%).

62

7%
2007 3.5%

The timing is more questionable. The new requirements are being phased in
slowly, under pressure from those countries, such as Germany, which escaped the
worst of the crisis. The final deadline is not till 2019. Regulators reckon the
rules are fairly tough but critics think this deadline is excessively generous.
The fact that bank shares rose in response to the Basel announcement will add to
cynics suspicions that the banks have been given too much time.

2019

For the moment, the system does not look dangerously undercapitalised. Most
large, internationally active banks in America, Britain and Switzerland already
meet the new requirements. As for other banks that dont, imposing higher
capital ratios on them immediately might only discourage them from lending money
to businesses, at a time when credit is already scarce.

More, please

The rules are sensible, so far as they go, but more needs to be done. In
particular, it is vital that regulators deal with the outliers, banks that
lose more than average in a crisis. The best way to do that is to create a layer
of debt that regulators can write off, or convert into equity, if necessary.
National regulators should also firm up the rules on counter-cyclical capital,
requiring banks to strengthen their balance-sheets during booms, rather than
busts; this would help prevent a credit spree like that in 2005-06, and provide
the banks with a cushion during a downturn. Extra rules may be needed for firms
in the too big to fail category. And some banks need to reduce further their
reliance on short-term borrowing.

63
 2005 2006

These reforms will not turn the masters of the universe into model citizens
overnight. Bankers circumvented the last lot of Basel rules, and regulators will
have to watch out for attempts to do the same this time around. But higher
capital requirements should eventually reduce the riskiness of banks, cut into
their profit margins and constrain bonuses. The punishment may not seem
commensurate to the crisis they caused; but reducing risk is more important than
getting revenge.

Oil prices
Crude awakening
A stable commodity may be about to get more volatile
Oct 7th 2010

THE 50th birthday of OPEC in September was accompanied by few celebrations

although philatelists salivating at the prospect of the commemorative stamps
issued by the 12 countries in the oil cartel may have held private parties.
Members, always mindful that not everyone is happy with their sway over oil
markets, may yet permit themselves some backslapping at a gala dinner at OPECs
next meeting on October 14th. An organisation dedicated to the stabilisation
of oil markets and a steady income to producers has done a decent job of
late.
9 50 12

10 14

Benchmark West Texas Intermediate (WTI) crude has mainly traded at between $70
and $80 per barrel since mid-2009. Earlier that year OPEC had cut production by
12% to support prices, which had collapsed after the credit crisis from a peak
of $147 a barrel in 2008 to just $33. This June OPEC, which supplies over two-
fifths of the worlds oil, declared that it was comfortable with $70-80 a
barrel. At this price consumers do not complain too much. And OPECs revenues
64
this year should hit $625 billion, according to the Centre for Global Energy
Studies, a consultancy, after slumping in 2009. That will be roughly the same as
in 2007, when members pumped 1m barrels per day (bpd) more crude.
2009 West Texas IntermediateWTI
70~80 2008 147
2009 33 12% 6
40% 70~80
Center for Global Energy
Studies 2009 6250
2007 2007 100

But oil could be heading beyond OPECs comfort zone. According to Goldman
Sachs, world demand in the first eight months of the year was 2.7m bpd higher
than in the same period in 2009. On October 6th WTI rose above $83 a barrel, a
five-month high, and retreated only slightly after reports of a surprising
increase in American stockpiles. In the short term the price could get another
boost from rising stockmarkets. Before the crisis oil prices tended to move in
the opposite direction to equities (higher prices mean higher costs for energy-
consuming firms). But since March last year, says Adam Sieminski of Deutsche
Bank, oil prices and the S&P 500 share index have been positively correlated
(see chart). Mr Sieminski also notes the historical effect of American mid-term
elections on share prices. If the optimism that customarily grips investors is
repeated around this Novembers poll it could put another $8 on the oil price.
8
270 10 6 83 5

? Adam
Sieminski 3 500

11 8

In 2011 the fundamentals of supply and demand are likely to exert more upward
pressure on prices. Francisco Blanch of Bank of America Merrill Lynch reckons
that global demand is set to expand by 1.4m bpd as growth in developing
countries offsets a decline in demand from sluggish rich countries. As a result
he expects prices to hit $100 next year and to average $85 a barrel over the
course of 2011.
2011 ?
Francisco Blanch
140 100
85
65
Looking still further out, the booming economies of China, India and other
developing countries are set to need much more fuel in years to come. The rich
world should eventually rediscover its thirst, too. Non-OPEC supplies, which
have grown in recent years, may start to decline in 2012. New wells will fail to
plug the gap left as older fields dry up, despite the investment that 2008s
higher prices encouraged. OPEC is likely to respond by calling on its spare
capacitybelonging mainly to its biggest member, Saudi Arabia. OPEC is tight-
lipped about how much it has on tap. Some estimates put it at about 5m-6m bpd,
though others think the amount that could readily hit the market is much lower.

2012
2008

500~600

Such calculations determine estimates of when demand will begin to outpace

supply, a circumstance that, just as in 2008, is likely to cause precipitous
price spikes. Jeffrey Currie of Goldman Sachs reckons that demand could be
bumping up against capacity in 18 months. Other analysts with greater doubts
about global growth and more optimism about OPECs capacity give it four years
or more. Given the havoc of 2008 neither OPEC nor oil buyers are likely to greet
the moment with a party, let alone a run of special stamps.

2008
?Jeffrey Currie 18

4 2008

66