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NOVEMBER 20, 2006
Edited by Deborah Stead Talk Show "Actually, I thought we were going to do fine....Shows what I know." -- President George W. Bush, on the Democrats' strong showing in the Nov. 7 CEO PAY Verizon: Ivan's Focus On Fiber As more subscribers ditch their traditional phone lines and get courted by cable companies, Verizon Communications (VZ ) is spending almost $25 billion to extend fiber-optic service to millions of homes. Shareholders have been feeling the cost of the project, which enables Verizon to offer consumers a TV, Internet, and phone package. Rollout costs this year diluted earnings by 11%, about 30 cents per share, according to a recent company briefing. But does Verizon's CEO have the same skin in the game? The board has decided to make Ivan Seidenberg's long-term incentive pay less tied to Verizon's stock performance and more tied to the fiber rollout's success. The company won't elaborate on what constitutes success, stressing instead that the arrangement allows Seidenberg to focus on the long term and not on short-term hits to Verizon's stock price. "There is some pain in the near term," concedes spokesman Eric Rabe, referring to the project's cost. "But the alternative of not investing in the rollout is not in shareholders' interests." Critics aren't so sure about that. Telecom analyst Zhiping Zhao of CreditSights characterizes the fiber-op rollout as an exercise in losing money just to grab subscribers. "You're burning cash," she says, noting that Verizon is offering service comparable with standard cable TV for $39.95 a month, about $10 less than what cable and satellite rivals charge. Her take on management's prediction that the network will show operating profits by 2009: "It's fiction." To be sure, Seidenberg's short-term bonus is still tied to quarterly financial targets. Still, his fiber-op incentive "is not in the best interest of shareholders," Zhao argues. "It's a decision decoupled from economics--like, We're going to reward the CEO regardless.'" By Roben Farzad   VERBATIM The Art Of Understatement From a recent deposition of former Enron CFO Andrew Fastow, taken as part of a civil case against banks filed by Enron shareholders who allege that the banks participated in fraudulent deals with Enron to help hide the company's debt. (In re Enron Corporation Securities Litigation; U.S. District Court, Southern District of Texas) Q: Is your attitude towards shareholders different now than it was while you were CFO? A: I would say yes. Q: How has it changed? A: Well, I think by doing what I'm doing now, I'm trying to help shareholders, and many of the things I did while I was at Enron ultimately did not help shareholders. PHONE WARS Say Hello To The Folks Back Home Immigration may be a political headache in Spain, but it's a boon for British cell-phone operator Vodafone VOD which is signing up immigrants by the, uh, boatload. Vodafone's Spanish subsidiary says it has snared a half-million new subscribers in the past month after launching its Mi País (My Country) ad campaign, offering the equivalent of 23 cents-a-minute calls to 50 countries. Spain has one of Europe's fastest-growing immigrant populations, with more than 600,000 foreigners arriving annually, mainly from Africa, Latin America, and Eastern Europe. About a year ago, the country granted amnesty to nearly 700,000 illegals. Most of the immigrants are poor. But Vodafone says that 90% have cell phones and that they tend to run up higher bills than locals: They make more international calls and often don't have home phones. Because many immigrants lack bank accounts and credit cards, Vodafone also sells prepaid Mi País calling cards in tobacco shops and large newspaper stands. And it has set up customer service hotlines in 11 languages, from Arabic to Romanian. It even offers reduced fees on foreign countries' national holidays. Vodafone claims that 40% of Spain's immigrants subscribe to its service. The campaign is part of a push to raise its 31% share of Spain's mobile market to challenge local operator Telefónica, which has 46%. By Carol Matlack and Joan Tarzian SOCIAL STUDIES Now There's Proof. TV Is Bad In his 2000 book, Bowling Alone, sociologist Robert Putnam argues that excessive TV watching frays social ties. Benjamin Olken, a Harvard economics researcher, says he may have proved Putnam's case against TV, using data from the Indonesian island of Java. Because TV reception varies within Java's rural eastern and central provinces, people watch more TV in some villages than in others. The result: less civic-mindedness in the good-reception areas. Olken found that the availability of one extra channel was linked to a 7% decline in the number of a village's social groups and an 11% decline in the number of school, neighborhood, or savings circle meetings the average adult attended. The shriveling social capital didn't seem to worsen village governance, though. A road project was managed just as well in the villages with good TV reception as in the bad-reception communities, Olken says, perhaps because a drop in social trust "encourages citizens to monitor government more." By Peter Coy HANGING AROUND The Ghost In The Catalog Richard Thalheimer, founder of The Sharper Image, has appeared in issue after issue of the retailer's catalogs. The Holiday 2006 catalog is no exception--despite the fact that Thalheimer stepped down as chairman and CEO more than a month ago. The issue, which arrived in homes in mid-October, features two letters from Thalheimer in which he talks up various products with his characteristic enthusiasm. Beneath his smiling headshot, he is identified as company founder. Thalheimer's Sept. 26 ouster from the San Francisco-based retailer--he remains a company director--followed years of stagnant sales and a board makeover led by the investment firm Knightspoint Partners. Might the new management, led by Chairman and interim CEO Jerry Levin, be using Thalheimer as a familiar public face while the company gets its bearings? The company says no. Thalheimer "will not be featured in future issues of the catalog" and will be phased off the Web site, says spokesperson Michael Gross, adding that the holiday catalog "was already being printed" when Thalheimer stepped down. Scheduling issues may also explain why the catalog cover features the company's signature Ionic Breeze air purifier despite analyst critiques that Ionic Breeze products have dragged down sales. Levin and his team are developing "new marketing and product strategies," says Gross. By Elizabeth Woyke Creative Destruction A handful of enterprising community banks are bypassing tote bag and key chain giveaways for some productively destructive marketing: free document-shredding services. As customers and noncustomers alike line up to feed their old financial records into a shredding truck, they get information on the bank's new financial products and services. Mercantile Potomac Bank in Gaithersburg, Md., which began holding quarterly Community Shred days in mid-2005, routinely gets up to 1,500 participants at its sessions, according to industry publication American Banker, followed by an immediate increase in Web site hits and call-center inquiries. By Lindsey Gerdes RUMBLINGS An Executive Upgrade At Dell? Michael Dell is on a search for new talent--trying to upgrade a management team critics say has become complacent. Dell, who owns 10% of the computer maker and is its chairman, is looking for a new exec to run his fast-growing services business. Some insiders wonder if his personal involvement in the search means he's preparing for the departure of embattled ceo Kevin Rollins. Dell calls such talk "nonsense." But the search comes as the "direct from Dell" model is struggling. Dell (DELL ) has missed financial targets in four of the past five quarters and is expected to announce a third-quarter income drop on flat sales on Nov. 16. Sources say the company wants to hasten its move beyond low-end pc-repair and into the lucrative business of helping manage companies' computer operations. So far, they say, Dell has contacted Robert Zapfel and Elizabeth Smith, of IBM's (IBM ) services business, and Steve Smith, formerly of Hewlett-Packard (HPQ ). All declined to comment. Dell has also been looking for a new marketing chief, and, say some industry sources, it would do well to hunt for a new head of the consumer business as well. Michael Dell wouldn't comment on future hiring, adding that all top brass report to him and to Rollins, "and that's not going to change." By Louise Lee and Peter Burrows Document Watch Besieged by probes into its practices, Halliburton subsidiary kbr has included 26 pages of "risk factors" in the amended ipo registration it filed with the sec on Oct. 31, a document that returns 179 hits for the term "investigation." And that's for starters. Not listed as a risk, of course, is a Democratic Congress. Nor is a broad audit begun in September by the Defense Dept.'s Inspector General to examine allegations by Senator Byron Dorgan (D-N.D.) and others that nonpotable water kbr provided to troops in Iraq was contaminated. Halliburton disputes Dorgan's findings that the water, used for bathing, made soldiers ill. By Dawn Kopecki QUESTION OF THE WEEK Ad Infinitum Product placement, viral marketing, bloggers paid to hype brands, ads even in elevators. Is advertising today creative--or creepy? How far should Mad Ave. go? "That line of demarcation was was obliterated years ago, when they started naming ballparks after brands. And if people don't read all blogs with a discerning eye, they deserve any deception that's heaped upon them." -- Joe Garden, features and business affairs editor, The Onion "From the moment you get up in the morning, you're basically assaulted. About 3,000 marketing messages a day seep into the average North American brain. That level of advertising is stressing us out." -- Kalle Lasn, co-founder, Ad Busters magazine "The amount of product placement is amazing in any reality show. The younger generation recognizes that if they want free content--and that's the way they are because they've been raised on the Internet--it's a trade off they're willing to accept." -- Ted Murphy, CEO PayPerPost.com
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