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FEBRUARY 21, 2005
Edited by Ira Sager Talk Show "I'm a bad No. 2. I need to be a No. 1 so I will never be a No. 2 again." -- Mel Karmazin, former president of Viacom and CEO of Sirius Satellite Radio, on what he learned working over four years with Viacom CEO Sumner Redstone SECURITY Look Who's Training Iraqi Cops At her confirmation hearing on Jan. 17, Secretary of State Condoleezza Rice said the task of training Iraq's security forces -- army, police, and national guard -- falls to many partners: the U.S. military, NATO, Iraq, Jordan, and more. But Rice and other officials have yet to mention the significant role being played by private contractors. More than 700 contractors -- from companies such as Science Applications International, DynCorp (CSC ), and United States Investigations Services -- are training more than half the Iraqi Police Service, BusinessWeek has learned. Policemen will account for half of Iraq's 275,000 total security personnel. It's unclear how much of the $5 billion allocated for security private companies have received, but USIS' contract with the Justice Dept., for one, is worth over $200 million. By Spencer E. Ante   THE DEAL MILL A Lemon For Lenovo? Lenovo might have a rougher time with its $1.25 billion acquisition of IBM's (IBM ) PC unit than was at first apparent. In addition to a just-ordered U.S. government review of security issues raised by the deal, there are new signs of weakness in IBM's PC business. BusinessWeek has learned that General Electric (GE ) late last year dropped IBM as one of its two PC suppliers to go exclusively with Dell (DELL ) for desktop and notebook computers. According to sources, GE made the switch because of Dell's lower prices. The companies declined to comment. While there's no evidence of mass customer defections, since the deal was announced on Dec. 7, IBM PC sales have lost momentum -- with revenues for the Personal Systems Division, which includes the PC unit, up just 2% in the fourth quarter. Meanwhile, worldwide market share for its ThinkPad notebooks fell to 8.2% from 10% in the second half of 2004, says market researcher IDC. Then there's IBM's pesky warranty problem. The failure of a component in desktop PCs sold in 2003 pushed up warranty costs for the first two quarters of last year to 7% of PC revenues -- well above the industry's typical 5%, and more than twice Dell's level. The problem cost IBM 6.1% of PC revenues in 2003. To cover future liabilities, IBM will pay the Chinese company up to $100 million, according to a Lenovo filing with the Hong Kong Stock Exchange. IBM declined to disclose warranty costs for the rest of 2004. The news doesn't get better. A yet-to-be-released customer survey by Technology Business Research shows that while customer loyalty to the ThinkPad line is strong, desktop PCs fell from 4.0 to 3.6, on a scale of 1 to 5, between the second and fourth quarters. "The Lenovo deal may be hurting them," says TBR analyst Julie Perron. IBM and Lenovo say they're working with the government and expect to close the deal. IBM says that in a survey of 4,000 customers, more than 90% favor the deal. It says the warranty problems are over and plans to air ThinkPad TV ads in late February to bolster the brand. By Steve Hamm, with Andrew Park and Ben Elgin THE DEAL MILL 
GLAZINGS Is Goldman Caught In A Donut Hole? Is Goldman Sachs fishing near the bottom? On Feb. 7 the investment bank reported in an SEC filing that as of Dec. 31, it owns a 5.8% stake in Krispy Kreme Doughnuts (KKD ). Goldman may be betting on a rebound for the troubled donut maker. But Krispy Kreme's shares have tumbled nearly 40% in the new year, turning a $45 million stake into about $28.5 million. Indeed, things have gone from bad to worse for Krispy Kreme. The stock is currently worth a quarter of its value in 2003. And amid an SEC investigation into recent franchise buybacks, the company announced it will restate earnings for the last three quarters of 2004 and lay off 25% of its workforce. Krispy Kreme did not return calls, and Goldman declined to comment. Perhaps Goldman, now the second-largest Krispy Kreme shareholder, sees potential in Stephen Cooper, who led Enron out of bankruptcy in 2004 and replaced company veteran Scott Livengood as CEO last month. Cooper has to live up to a lot of potential before Goldman's stake is back in the black. By Erin Chambers SOFTWARE HARDBALL Sour Notes Few of Microsoft's (MSFT ) battles are more pitched than the struggle to rule digital music. So far, it's getting pummeled by Apple Computer (AAPL ) and its popular iPod. No wonder Microsoft execs get a bit peeved when they see those telltale white cords hanging from ears on the Redmond (Wash.) campus. The iPod is popular enough at Microsoft that one worker sent an e-mail to colleagues notifying them about new shipments to a nearby Apple store. That drew a sharp riposte from Dave Fester, general manager of the Windows Media division: "I sure hope Microsoft employees are not buying iPods," he wrote. "We have great alternatives." Evidently not good enough. By Jay Greene TAKING A PASS Hockey Fans Have Gone Into Hiding With the National Hockey League locked out, the American Hockey League, the top minor league, figured to get a lift. That hasn't happened -- at least, not in the U.S. As of Jan. 31, the AHL posted a puny 2.8% gain in ticket sales over last season. Crowds have shrunk for 13 of 28 teams. But three of its four teams in Canada are up. The Road Runners, having relocated from Toronto to Edmonton, have seen ticket sales rise a league-best 85%, to an average of 8,492, and the Manitoba Moose sell 96% of seats. It's the national game, after all. By Mark Hyman FACE TIME Lester Wunderman: Go Ahead, Hang Up On This Man  Don't get Lester Wunderman started on the topic of junk mail. Wunderman, the 84-year-old father of direct marketing and founder of the global communications giant that bears his name, winces at the term. "We get picked on," says the man behind such innovations as the Gevalia Kaffe coffee-of-the-month and Columbia House monthly music marketers.Despite spam blockers, a National Do Not Call Registry, and other measures to stop unwanted intrusions, one-to-one marketing is growing faster than other forms of ads. Why? The Web and other technologies have made it easier to measure such strategies and hone targets. "Now you're advertising to people you know something about," he says. Wunderman doesn't mind people blocking e-mails or ignoring telemarketing calls during supper. With one-to-one marketing, he argues, people are more peeved when they get the wrong pitch. But the right one, he says, is more likely to pay off. By Diane Brady BROADCAST NEWS Spike TV's Feminine Side? Albie Hecht's sudden resignation on Jan. 31 as president of cable network Spike TV was blamed on creative differences. Apparently, those creative differences caused female viewers to, well, spike. And that's a problem for a network that has built its brand -- and advertising base -- around programming for men. When the men's cable channel launched in August, 2003, 68% of viewers were guys, giving Spike one of TV's largest percentages of male watchers. By the end of 2004 male viewers had fallen to 58%, and women had jumped to 42%. The network blames reruns of crime show CSI: Crime Scene Investigation, which brought in predominantly female viewers when it first aired on CBS. CSI started airing nightly on Spike last September and contributed to a 10% ratings boost among men. But the gain in female viewers is reason for concern at the network, says Andy Donchin, who directs national broadcast for media buyer Carat USA. "We're buying [the advertising] off of male guarantees," he says. Spike, owned by MTV Networks (VIA ), remains one of the few cable channels other than ESPN able to capture the elusive, and coveted, young male audience. To maintain its ratings bump without attracting the wrong crowd, media experts say, Spike needs a hit original show. That puts the pressure on Hecht's replacement, Doug Herzog, who developed cartoon hit South Park for Comedy Central, to deliver another winner. "In a perfect world, that hit will have an 80/20 male/female balance," says Herzog. Here's hoping it doesn't strike a chord with women. By Jessi Hempel MEDIA MOVES 
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