During this time the practise of Policy by Press Release rose to prominence as ill-founded concepts like the “Bomber Gap“, “Missile Gap“, and “Submarine Gap” were leveraged to justify a massive expansion in military spending.  U.S. Doctrine from the end of the Vietnam era to the collapse of the Soviet Union in 1991 was to essentially outspend the Soviets while engaging them in proxy guerilla wars in weak communist ally states and financing developing countries through the World Bank.  It is thought by many (mostly Pro-Reagan) historians that it was indeed the US Military-Industrial Complex that won the Cold War and bankrupted the Soviet Union by simply outspending them.

Nowadays, we live under the spectre of far more benign [perceived] enemies.  Most of us in the technology industry fear Microsoft’s Goliath and align with Google’s David more meaningfully than any political discourse, though we only rarely cower under our desks in fear of a Vodka-soaked phone call between Steve Ballmer and Eric Schmidt (which I am positive has happened).

Google only stumbled its way into Microsoft’s crosshairs nine years ago, whereas Microsoft’s founder Bill Gates has long sought to get in on the action on the Internet and the Web in particular.  The two are presently in a pitched battle on a number of fronts, including Search (Microsoft recently launched Bing), Mobile (Google’s Android is a pattern-cut copy of MSFT’s Windows Mobile strategy), The Browser (Chrome versus the dreaded IE), Email (Google is making inroads into institutional and corporate email services), and Productivity Applications (Microsoft Office as an app and a hosted service versus a number of nascent Google Apps).

Most recently, Google responded to the Bing launch by going after MSFT’s supposed crown jewels with an announcement about Chrome OS.  Microsoft then parried with its own vapourware announcement about Web Office.  Engaging Microsoft on another front on an increasingly expansive battlefield might seem like the smart thing to do, but as Kevin wrote, Spite is not a business strategy. This is akin to pissing in your neighbour’s yard just because he took a whiz in yours.

The Soviets, like our more modern evil empire whose Kremlin sleeps in the dales just outside Seattle, were more cagey than we might have thought in those days.  They didn’t match the US and NATO move-for-move in force expansion, and rather than counter Reagan’s famous SDI initiative with a Star Wars system of its own, they simply rejiggered their ICBMs to penetrate airspace using different methods and geared fighters up to be able to shoot down satellites from within the mundane confines of our atmosphere.

No … the Soviets didn’t join in the arms race — instead they were quite content to watch their enemy blow its own brains out, expanding US debt in leaps and bounds (US debt doubled under Reagan in a single year, mostly on the back of military spending) while their own programs pursued less lofty goals, financing battlefield weaponry and troops on the ground in Afghanistan and elsewhere.

We didn’t know it at the time, thanks to a lot of propaganda from our own leaders, but the Commies were actually the underdog.  And like any underdog, the Soviets capitalized on American fear and loathing to nurture an inflated perception of its own militarism and level of armament, hoping that the US would collapse under its own weight trying to keep up — and it nearly worked.  Some would argue that it has — and that our current and previous economic hiccups, heaped atop rampant social problems in the US, are the reckoning for decades of rampant Cold War spending — and may not be remedied anytime soon.

Google is apparently trying to match Microsoft on every front in the technology industry — but it too is an underdog.  It’s attempting to do so with far fewer employees (Google has 20K employees – Microsoft has 90K), far fewer financial resources, and no apparent profit model associated with many of these businesses.  Microsoft has also had the benefit of nearly 30 years — all supported by revenue growth in the rising tide of the PC revolution — to expand its business aspirations from its core business of supplying Operating Systems.  Furthermore I would argue that the core of Microsoft is no longer Windows, and has instead long been its much more expensive product offering, Office.

If Google is attempting to parlay its underdog status into some sort of puffer fish role, in forcing Microsoft to compete on many more fronts than search, then the insincerity of these efforts is pretty transparent to most of us.  And it will fail.  I use MS Word and Apple’s Pages, but would not even consider using Google Docs.  As a web app, it delivers a far poorer user experience at the point of my absolute maximum requirement for efficiency and dexterity.  Google’s Chrome browser isn’t much better than Firefox, and as I’ve pointed out frequently, Android is a duplicate of Microsoft’s own floundering efforts in the mobile space with little improvement.

Microsoft is likely snickering (I know I am) as it watches Google’s many flailing attempts to strike it in different arenas.  Particularly so in Operating Systems.  Slapping a GUI onto Linux, particularly when said GUI developer is Google — a company apparently bereft of UX designers — is a cynical, me-too play that will alienate the Linux Community and pale in comparison to OSX.

According to Yahoo Finance! on MSFT and GOOG, Microsoft has 3x the revenue and 20% more cash reserves than Google.  That’s an amiable war chest and revenue stream that means it’s unlikely that Google can cause Microsoft to spend itself into oblivion.  Google, on the other hand, is moving in too many areas and executing poorly in most of them.

If Google truly wants to hurt Microsoft it needs to double-down on a sincere effort to unseat Microsoft Office and Exchange and thereby dominate the ways in which we communicate at work.   Otherwise, much as the Soviet Union really collapsed due to radical downward shifts in the price of oil and lack of access to credit, Google may suffer from a decline in CPC advertising and all of the air will spew out from its puffer fish act.

In May Day parades, the Soviets would invite Western leaders to the review stand, as bombers and missile launchers would run circles past the parade ground.  These Westerners would return to their peers wide-eyed with parables of impressive arrays of weaponry and massively inflated estimates of actual force sizes.  Unlike during the real Cold War, Google’s foe is not self-invested in grandiose estimates of its enemy’s fortitude and the rest of us are quite aware that in many cases, such as the ill-fated Orkut and other flailing products, Google’s emperor has no clothes.

And unlike our former evil empire’s round-faced leader, Ballmer is under no pressure for Perestroika.

Which one are you?  The ancient parable of the fox and the hedgehog has come into increasing view in popular culture lately.  And while its origins are somewhat ambiguous, the allegory has been applied to entrepreneurs, scientists, philosophers, playwrights, business leaders, economists, and even US presidents.

One of the fables goes something like this (sorry, no link to a source … I am paraphrasing a story from my childhood):

A fox and a hedgehog were strolling through a country path.  Periodically, they were threatened by hungry wolves.  The fox — being blessed with smarts, speed and agility — would lead packs of wolves on a wild chase through the fields, up and down trees, and over hill and dale.  Eventually the fox would return to the path, breathless but having lost the wolves, and continue walking.  The hedgehog, being endowed with a coat of spikes, simply hunkered down on its haunches when menaced by the wolves and fended them off without moving.  When they gave up, he would return to his stroll unperturbed.

According to the great liberal (before that was a dirty word) historian and thinker Isaiah Berlin who in 1953 wrote the Essay “The Hedgehog and the Fox“, interpreting the works of Tolstoy, Foxes are complex thinkers who account for a variety of circumstances and experiences while hedgehogs have the keen ability to focus and drive along a single path.  As examples, Berlin flags such thinkers as Plato, Lucretius, Dante, Pascal, Hegel, Dostoevsky, Nietzsche, Ibsen, and Proust as Hedgehogs and slots Herodotus, Aristotle, Erasmus, Shakespeare, Montaigne, Moliere, Goethe, Pushkin, Balzac, Joyce, Anderson as Foxes.

More recently, Jim Collins (author of “Good to Great“) took this concept into the business world in his book and it is one of the central unifying themes of his work.  In his book and other writings Collins comes down pretty hard on Foxes:

Those who built the good-to-great companies were, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what we came to call a Hedgehog Concept for their companies. Those who led the comparison companies tended to be foxes, never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent.

This is understandable.  Collins, a former Stanford University Business Professor, comes from a hedgehog factory.  He has made a career of spooling hedgehogs into mainstream companies at the mid-management level and consulting with large, heavily-matrixed companies on business strategy and leadership.  In many respects he lives in a world constructed by and for hedgehogs — so it makes sense that he could see the “Great” companies he writes about in his books (all typically fortune 500 players) as hedgehogs.  On a long enough timeline we are ALL wrong, but it is worth pointing out that a number of Collins’ “Great” companies have suffered badly from (and others have caused) the current economic downturn, eg. Circuit City.

As Nicholas Kristof describes the dichotomy in the NY Times:

Hedgehogs tend to have a focused worldview, an ideological leaning, strong convictions; foxes are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance. And it turns out that while foxes don’t give great sound-bites, they are far more likely to get things right.

John Kerry is clearly a Fox: A self-doubting; complicated; unable to present absolute, sound byte-friendly answers to complex questions.  George W. Bush, however, presents himself as a hedgehog: simple, direct, ideological, and absolutely assured of his correctness.  In 2004, America signed up for its second term of 4 years of hedgehog leadership to substantial effect.

In our industry, hedgehogs have the benefit of focus and the ability to keep their heads down and companies out of trouble during tough times.  They succeed through the avoidance of substantial risk and through the ability to see things through.  When they fail, it’s because their conservatism holds them back, and markets move past them; or because they can’t release their death grip on that singular idea and move on to the next thing.

The Fox has the benefit of broad vision and the ability to perceive the complex interaction of seemingly dissonant ideas, and they succeed because they are able to travel outside of marked pathways with their ideas and make substantial gains.  When they fail it’s because their reach exceeds their grasp, because they are too far ahead of the market, or because they have difficulty maintaining focus to see things through.

The one problem that Mr. Collins cannot cop to is that while Hedgehogs are mass-produceable through training and discipline (this is what MBA factories do), Foxes are not so easy to come by:  their behaviour is learned but it is most likely interdisciplinary and tangential.  As a modern example, one could strongly argue that Steve Jobs, Reid Hoffman, and many successful tech entrepreneurs are foxes.

On the other hand Bill Gates, who at one time was the richest man in the world:  pure hedgehog.  Rupert Murdoch?  Count the spikes.  There are many successful hedgehogs in the mainstream business world and far fewer Foxes.  The structure of businesses, after all, are generally designed around hedgehogs. In general larger corporate structures aren’t great at absorbing foxes.  It’s why Jobs quit Apple, before going back as CEO under a mandate that embraced his wide-ranging aspirations.  It’s probably why entrepreneurs such as Evan Williams, who blew out of Google as soon as he could after selling blogger.com to them, generally can’t wait to get out of the mother ship after a their lock-up periods are done.  A friend and the CEO of a company acquired by Microsoft always referred to Redmond as “they” and never “we” even while he took down an amazing salary serving as a VP for two years.

Innovation is a concept which we modernists tie into every description of a person’s thinking process.  Wikipedia says there are a few different types of innovation:  “It may refer to incremental, radical, and revolutionary changes in thinking, products, processes, or organizations.”  Perhaps the razor cuts this way:  Perhaps hedgehogs deliver incremental changes while foxes deliver radical, revolutionary changes.

As a fox, I know that many of my successes have come when paired with hedgehogs.  A hedgehog can pluck a singular concept from the maelstrom of energy emanating from the fox and run with it along a narrow path.  Steve Jobs had Wozniak on the engineering side, and just as significantly Mike Markkula on the financing and business affairs side.  The latter two are quintessential hedgehogs.

While it’s valuable to know whether you’re a fox or whether you’re a hedgehog, it is not particularly constructive to assign a static value judgment to one versus the other.  At varying points in the arc of a business, a prevalence of influence from either a fox or a hedgehog can make or break a company.  Witness the foxes that artificially inflated hyper-economies at Enron (Jeff Skilling) and AIG (Joseph Cassano) to great personal benefit but ultimately destroyed hundreds of billions of dollars in wealth.  And meet the Hedgehogs, Gil Amelio and John Sculley, who sapped the growth of Apple, diluted its brand value, and very nearly bankrupted the company.

So figure out what you’re good at, chase the visions you believe in, and if you’re fortunate enough to work in an environment that embraces and supports your particular attributes, you’ll ultimately be successful.

I contend that there is something fundamentally wrong with a society where Jack Welch (a smart and fair guy, by any measure, and an exceptionally good leader) makes $123 million per year in total compensation and tens of millions of people in America live in abject poverty. How can we continue trying to build a functional society until we start to connect these two examples?

I was particularly struck when I saw Kenneth Lay, nearly a year ago, leaving a parkade in his brand new G-Class Mercedes. I thought: “that prick has devastated the retirement incomes of hundreds of thousands, maybe millions, of people, forced others into financial ruin, and here he is rolling around in a $100,000.00 truck wearing immaculately-tailored suits.” What’s more despicable is that he, and people like him, are not even conscious that this is wrong, or of why we should be offended.

But speaking from an economic perspective, a nation is built on the backs of the middle class. It was the participation of the Middle Class, which for the first time began to invest directly in securities as their major investment plan, that made the economic boom of the late 90s happen, and it is the Middle Class that provides the tax basis that sustains a nation. Many of the top US-Headquartered multinationals either don’t pay ANY income tax or receive subsidies from the government. And many of their CEOs are able to shelter most of their income and keep one step ahead of the IRS.

Pats on the back to the NY Times for taking this stand. It is NOT an Envy Politic. It IS Class Warfare. It is the sustainability of the world economic system that is at stake, for we are in danger of sliding towards a sort of global Corporate Feudalism that will ultimately be our ruin.

As America is effectively taking over the world, their society shows a test case for Bush Sr.’s “New World Order”, which we will all someday be living under.

I urge you to read this in full..

-Ian.

——– http://www.nytimes.com/2002/10/20/magazine/20INEQUALITY.html

October 20, 2002 For Richer By PAUL KRUGMAN

I. The Disappearing Middle When I was a teenager growing up on Long Island, one of my favorite excursions was a trip to see the great Gilded Age mansions of the North Shore. Those mansions weren’t just pieces of architectural history. They were monuments to a bygone social era, one in which the rich could afford the armies of servants needed to maintain a house the size of a European palace. By the time I saw them, of course, that era was long past. Almost none of the Long Island mansions were still private residences. Those that hadn’t been turned into museums were occupied by nursing homes or private schools.

For the America I grew up in — the America of the 1950’s and 1960’s — was a middle-class society, both in reality and in feel. The vast income and wealth inequalities of the Gilded Age had disappeared. Yes, of course, there was the poverty of the underclass — but the conventional wisdom of the time viewed that as a social rather than an economic problem. Yes, of course, some wealthy businessmen and heirs to large fortunes lived far better than the average American. But they weren’t rich the way the robber barons who built the mansions had been rich, and there weren’t that many of them. The days when plutocrats were a force to be reckoned with in American society, economically or politically, seemed long past.

Daily experience confirmed the sense of a fairly equal society. The economic disparities you were conscious of were quite muted. Highly educated professionals — middle managers, college teachers, even lawyers — often claimed that they earned less than unionized blue-collar workers. Those considered very well off lived in split-levels, had a housecleaner come in once a week and took summer vacations in Europe. But they sent their kids to public schools and drove themselves to work, just like everyone else.

But that was long ago. The middle-class America of my youth was another country.

We are now living in a new Gilded Age, as extravagant as the original. Mansions have made a comeback. Back in 1999 this magazine profiled Thierry Despont, the ”eminence of excess,” an architect who specializes in designing houses for the superrich. His creations typically range from 20,000 to 60,000 square feet; houses at the upper end of his range are not much smaller than the White House. Needless to say, the armies of servants are back, too. So are the yachts. Still, even J.P. Morgan didn’t have a Gulfstream.

As the story about Despont suggests, it’s not fair to say that the fact of widening inequality in America has gone unreported. Yet glimpses of the lifestyles of the rich and tasteless don’t necessarily add up in people’s minds to a clear picture of the tectonic shifts that have taken place in the distribution of income and wealth in this country. My sense is that few people are aware of just how much the gap between the very rich and the rest has widened over a relatively short period of time. In fact, even bringing up the subject exposes you to charges of ”class warfare,” the ”politics of envy” and so on. And very few people indeed are willing to talk about the profound effects — economic, social and political — of that widening gap.

Yet you can’t understand what’s happening in America today without understanding the extent, causes and consequences of the vast increase in inequality that has taken place over the last three decades, and in particular the astonishing concentration of income and wealth in just a few hands. To make sense of the current wave of corporate scandal, you need to understand how the man in the gray flannel suit has been replaced by the imperial C.E.O. The concentration of income at the top is a key reason that the United States, for all its economic achievements, has more poverty and lower life expectancy than any other major advanced nation. Above all, the growing concentration of wealth has reshaped our political system: it is at the root both of a general shift to the right and of an extreme polarization of our politics.

But before we get to all that, let’s take a look at who gets what.

II. The New Gilded Age The Securities and Exchange Commission hath no fury like a woman scorned. The messy divorce proceedings of Jack Welch, the legendary former C.E.O. of General Electric, have had one unintended benefit: they have given us a peek at the perks of the corporate elite, which are normally hidden from public view. For it turns out that when Welch retired, he was granted for life the use of a Manhattan apartment (including food, wine and laundry), access to corporate jets and a variety of other in-kind benefits, worth at least $2 million a year. The perks were revealing: they illustrated the extent to which corporate leaders now expect to be treated like ancien regime royalty. In monetary terms, however, the perks must have meant little to Welch. In 2000, his last full year running G.E., Welch was paid $123 million, mainly in stock and stock options.

Is it news that C.E.O.’s of large American corporations make a lot of money? Actually, it is. They were always well paid compared with the average worker, but there is simply no comparison between what executives got a generation ago and what they are paid today.

Over the past 30 years most people have seen only modest salary increases: the average annual salary in America, expressed in 1998 dollars (that is, adjusted for inflation), rose from $32,522 in 1970 to $35,864 in 1999. That’s about a 10 percent increase over 29 years — progress, but not much. Over the same period, however, according to Fortune magazine, the average real annual compensation of the top 100 C.E.O.’s went from $1.3 million — 39 times the pay of an average worker — to $37.5 million, more than 1,000 times the pay of ordinary workers.

The explosion in C.E.O. pay over the past 30 years is an amazing story in its own right, and an important one. But it is only the most spectacular indicator of a broader story, the reconcentration of income and wealth in the U.S. The rich have always been different from you and me, but they are far more different now than they were not long ago — indeed, they are as different now as they were when F. Scott Fitzgerald made his famous remark.

That’s a controversial statement, though it shouldn’t be. For at least the past 15 years it has been hard to deny the evidence for growing inequality in the United States. Census data clearly show a rising share of income going to the top 20 percent of families, and within that top 20 percent to the top 5 percent, with a declining share going to families in the middle. Nonetheless, denial of that evidence is a sizable, well-financed industry. Conservative think tanks have produced scores of studies that try to discredit the data, the methodology and, not least, the motives of those who report the obvious. Studies that appear to refute claims of increasing inequality receive prominent endorsements on editorial pages and are eagerly cited by right-leaning government officials. Four years ago Alan Greenspan (why did anyone ever think that he was nonpartisan?) gave a keynote speech at the Federal Reserve’s annual Jackson Hole conference that amounted to an attempt to deny that there has been any real increase in inequality in America.

The concerted effort to deny that inequality is increasing is itself a symptom of the growing influence of our emerging plutocracy (more on this later). So is the fierce defense of the backup position, that inequality doesn’t matter — or maybe even that, to use Martha Stewart’s signature phrase, it’s a good thing. Meanwhile, politically motivated smoke screens aside, the reality of increasing inequality is not in doubt. In fact, the census data understate the case, because for technical reasons those data tend to undercount very high incomes — for example, it’s unlikely that they reflect the explosion in C.E.O. compensation. And other evidence makes it clear not only that inequality is increasing but that the action gets bigger the closer you get to the top. That is, it’s not simply that the top 20 percent of families have had bigger percentage gains than families near the middle: the top 5 percent have done better than the next 15, the top 1 percent better than the next 4, and so on up to Bill Gates.

Studies that try to do a better job of tracking high incomes have found startling results. For example, a recent study by the nonpartisan Congressional Budget Office used income tax data and other sources to improve on the census estimates. The C.B.O. study found that between 1979 and 1997, the after-tax incomes of the top 1 percent of families rose 157 percent, compared with only a 10 percent gain for families near the middle of the income distribution. Even more startling results come from a new study by Thomas Piketty, at the French research institute Cepremap, and Emmanuel Saez, who is now at the University of California at Berkeley. Using income tax data, Piketty and Saez have produced estimates of the incomes of the well-to-do, the rich and the very rich back to 1913.

The first point you learn from these new estimates is that the middle-class America of my youth is best thought of not as the normal state of our society, but as an interregnum between Gilded Ages. America before 1930 was a society in which a small number of very rich people controlled a large share of the nation’s wealth. We became a middle-class society only after the concentration of income at the top dropped sharply during the New Deal, and especially during World War II. The economic historians Claudia Goldin and Robert Margo have dubbed the narrowing of income gaps during those years the Great Compression. Incomes then stayed fairly equally distributed until the 1970’s: the rapid rise in incomes during the first postwar generation was very evenly spread across the population.

Since the 1970’s, however, income gaps have been rapidly widening. Piketty and Saez confirm what I suspected: by most measures we are, in fact, back to the days of ”The Great Gatsby.” After 30 years in which the income shares of the top 10 percent of taxpayers, the top 1 percent and so on were far below their levels in the 1920’s, all are very nearly back where they were.

And the big winners are the very, very rich. One ploy often used to play down growing inequality is to rely on rather coarse statistical breakdowns — dividing the population into five ”quintiles,” each containing 20 percent of families, or at most 10 ”deciles.” Indeed, Greenspan’s speech at Jackson Hole relied mainly on decile data. From there it’s a short step to denying that we’re really talking about the rich at all. For example, a conservative commentator might concede, grudgingly, that there has been some increase in the share of national income going to the top 10 percent of taxpayers, but then point out that anyone with an income over $81,000 is in that top 10 percent. So we’re just talking about shifts within the middle class, right?

Wrong: the top 10 percent contains a lot of people whom we would still consider middle class, but they weren’t the big winners. Most of the gains in the share of the top 10 percent of taxpayers over the past 30 years were actually gains to the top 1 percent, rather than the next 9 percent. In 1998 the top 1 percent started at $230,000. In turn, 60 percent of the gains of that top 1 percent went to the top 0.1 percent, those with incomes of more than $790,000. And almost half of those gains went to a mere 13,000 taxpayers, the top 0.01 percent, who had an income of at least $3.6 million and an average income of $17 million.

A stickler for detail might point out that the Piketty-Saez estimates end in 1998 and that the C.B.O. numbers end a year earlier. Have the trends shown in the data reversed? Almost surely not. In fact, all indications are that the explosion of incomes at the top continued through 2000. Since then the plunge in stock prices must have put some crimp in high incomes — but census data show inequality continuing to increase in 2001, mainly because of the severe effects of the recession on the working poor and near poor. When the recession ends, we can be sure that we will find ourselves a society in which income inequality is even higher than it was in the late 90’s.

So claims that we’ve entered a second Gilded Age aren’t exaggerated. In America’s middle-class era, the mansion-building, yacht-owning classes had pretty much disappeared. According to Piketty and Saez, in 1970 the top 0.01 percent of taxpayers had 0.7 percent of total income — that is, they earned ”only” 70 times as much as the average, not enough to buy or maintain a mega-residence. But in 1998 the top 0.01 percent received more than 3 percent of all income. That meant that the 13,000 richest families in America had almost as much income as the 20 million poorest households; those 13,000 families had incomes 300 times that of average families.

And let me repeat: this transformation has happened very quickly, and it is still going on. You might think that 1987, the year Tom Wolfe published his novel ”The Bonfire of the Vanities” and Oliver Stone released his movie ”Wall Street,” marked the high tide of America’s new money culture. But in 1987 the top 0.01 percent earned only about 40 percent of what they do today, and top executives less than a fifth as much. The America of ”Wall Street” and ”The Bonfire of the Vanities” was positively egalitarian compared with the country we live in today.

III. Undoing the New Deal In the middle of the 1980’s, as economists became aware that something important was happening to the distribution of income in America, they formulated three main hypotheses about its causes.

The ”globalization” hypothesis tied America’s changing income distribution to the growth of world trade, and especially the growing imports of manufactured goods from the third world. Its basic message was that blue-collar workers — the sort of people who in my youth often made as much money as college-educated middle managers — were losing ground in the face of competition from low-wage workers in Asia. A result was stagnation or decline in the wages of ordinary people, with a growing share of national income going to the highly educated.

A second hypothesis, ”skill-biased technological change,” situated the cause of growing inequality not in foreign trade but in domestic innovation. The torrid pace of progress in information technology, so the story went, had increased the demand for the highly skilled and educated. And so the income distribution increasingly favored brains rather than brawn.

Finally, the ”superstar” hypothesis — named by the Chicago economist Sherwin Rosen — offered a variant on the technological story. It argued that modern technologies of communication often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less. The classic example — which gives the theory its name — is the entertainment business. As Rosen pointed out, in bygone days there were hundreds of comedians making a modest living at live shows in the borscht belt and other places. Now they are mostly gone; what is left is a handful of superstar TV comedians.

The debates among these hypotheses — particularly the debate between those who attributed growing inequality to globalization and those who attributed it to technology — were many and bitter. I was a participant in those debates myself. But I won’t dwell on them, because in the last few years there has been a growing sense among economists that none of these hypotheses work.

I don’t mean to say that there was nothing to these stories. Yet as more evidence has accumulated, each of the hypotheses has seemed increasingly inadequate. Globalization can explain part of the relative decline in blue-collar wages, but it can’t explain the 2,500 percent rise in C.E.O. incomes. Technology may explain why the salary premium associated with a college education has risen, but it’s hard to match up with the huge increase in inequality among the college-educated, with little progress for many but gigantic gains at the top. The superstar theory works for Jay Leno, but not for the thousands of people who have become awesomely rich without going on TV.

The Great Compression — the substantial reduction in inequality during the New Deal and the Second World War — also seems hard to understand in terms of the usual theories. During World War II Franklin Roosevelt used government control over wages to compress wage gaps. But if the middle-class society that emerged from the war was an artificial creation, why did it persist for another 30 years?

Some — by no means all — economists trying to understand growing inequality have begun to take seriously a hypothesis that would have been considered irredeemably fuzzy-minded not long ago. This view stresses the role of social norms in setting limits to inequality. According to this view, the New Deal had a more profound impact on American society than even its most ardent admirers have suggested: it imposed norms of relative equality in pay that persisted for more than 30 years, creating the broadly middle-class society we came to take for granted. But those norms began to unravel in the 1970’s and have done so at an accelerating pace.

Exhibit A for this view is the story of executive compensation. In the 1960’s, America’s great corporations behaved more like socialist republics than like cutthroat capitalist enterprises, and top executives behaved more like public-spirited bureaucrats than like captains of industry. I’m not exaggerating. Consider the description of executive behavior offered by John Kenneth Galbraith in his 1967 book, ”The New Industrial State”: ”Management does not go out ruthlessly to reward itself — a sound management is expected to exercise restraint.” Managerial self-dealing was a thing of the past: ”With the power of decision goes opportunity for making money. . . . Were everyone to seek to do so . . . the corporation would be a chaos of competitive avarice. But these are not the sort of thing that a good company man does; a remarkably effective code bans such behavior. Group decision-making insures, moreover, that almost everyone’s actions and even thoughts are known to others. This acts to enforce the code and, more than incidentally, a high standard of personal honesty as well.”

Thirty-five years on, a cover article in Fortune is titled ”You Bought. They Sold.” ”All over corporate America,” reads the blurb, ”top execs were cashing in stocks even as their companies were tanking. Who was left holding the bag? You.” As I said, we’ve become a different country.

Let’s leave actual malfeasance on one side for a moment, and ask how the relatively modest salaries of top executives 30 years ago became the gigantic pay packages of today. There are two main stories, both of which emphasize changing norms rather than pure economics. The more optimistic story draws an analogy between the explosion of C.E.O. pay and the explosion of baseball salaries with the introduction of free agency. According to this story, highly paid C.E.O.’s really are worth it, because having the right man in that job makes a huge difference. The more pessimistic view — which I find more plausible — is that competition for talent is a minor factor. Yes, a great executive can make a big difference — but those huge pay packages have been going as often as not to executives whose performance is mediocre at best. The key reason executives are paid so much now is that they appoint the members of the corporate board that determines their compensation and control many of the perks that board members count on. So it’s not the invisible hand of the market that leads to those monumental executive incomes; it’s the invisible handshake in the boardroom.

But then why weren’t executives paid lavishly 30 years ago? Again, it’s a matter of corporate culture. For a generation after World War II, fear of outrage kept executive salaries in check. Now the outrage is gone. That is, the explosion of executive pay represents a social change rather than the purely economic forces of supply and demand. We should think of it not as a market trend like the rising value of waterfront property, but as something more like the sexual revolution of the 1960’s — a relaxation of old strictures, a new permissiveness, but in this case the permissiveness is financial rather than sexual. Sure enough, John Kenneth Galbraith described the honest executive of 1967 as being one who ”eschews the lovely, available and even naked woman by whom he is intimately surrounded.” By the end of the 1990’s, the executive motto might as well have been ”If it feels good, do it.”

How did this change in corporate culture happen? Economists and management theorists are only beginning to explore that question, but it’s easy to suggest a few factors. One was the changing structure of financial markets. In his new book, ”Searching for a Corporate Savior,” Rakesh Khurana of Harvard Business School suggests that during the 1980’s and 1990’s, ”managerial capitalism” — the world of the man in the gray flannel suit — was replaced by ”investor capitalism.” Institutional investors weren’t willing to let a C.E.O. choose his own successor from inside the corporation; they wanted heroic leaders, often outsiders, and were willing to pay immense sums to get them. The subtitle of Khurana’s book, by the way, is ”The Irrational Quest for Charismatic C.E.O.’s.”

But fashionable management theorists didn’t think it was irrational. Since the 1980’s there has been ever more emphasis on the importance of ”leadership” — meaning personal, charismatic leadership. When Lee Iacocca of Chrysler became a business celebrity in the early 1980’s, he was practically alone: Khurana reports that in 1980 only one issue of Business Week featured a C.E.O. on its cover. By 1999 the number was up to 19. And once it was considered normal, even necessary, for a C.E.O. to be famous, it also became easier to make him rich.

Economists also did their bit to legitimize previously unthinkable levels of executive pay. During the 1980’s and 1990’s a torrent of academic papers — popularized in business magazines and incorporated into consultants’ recommendations — argued that Gordon Gekko was right: greed is good; greed works. In order to get the best performance out of executives, these papers argued, it was necessary to align their interests with those of stockholders. And the way to do that was with large grants of stock or stock options.

It’s hard to escape the suspicion that these new intellectual justifications for soaring executive pay were as much effect as cause. I’m not suggesting that management theorists and economists were personally corrupt. It would have been a subtle, unconscious process: the ideas that were taken up by business schools, that led to nice speaking and consulting fees, tended to be the ones that ratified an existing trend, and thereby gave it legitimacy.

What economists like Piketty and Saez are now suggesting is that the story of executive compensation is representative of a broader story. Much more than economists and free-market advocates like to imagine, wages — particularly at the top — are determined by social norms. What happened during the 1930’s and 1940’s was that new norms of equality were established, largely through the political process. What happened in the 1980’s and 1990’s was that those norms unraveled, replaced by an ethos of ”anything goes.” And a result was an explosion of income at the top of the scale.

IV. The Price of Inequality It was one of those revealing moments. Responding to an e-mail message from a Canadian viewer, Robert Novak of ”Crossfire” delivered a little speech: ”Marg, like most Canadians, you’re ill informed and wrong. The U.S. has the longest standard of living — longest life expectancy of any country in the world, including Canada. That’s the truth.”

But it was Novak who had his facts wrong. Canadians can expect to live about two years longer than Americans. In fact, life expectancy in the U.S. is well below that in Canada, Japan and every major nation in Western Europe. On average, we can expect lives a bit shorter than those of Greeks, a bit longer than those of Portuguese. Male life expectancy is lower in the U.S. than it is in Costa Rica.

Still, you can understand why Novak assumed that we were No. 1. After all, we really are the richest major nation, with real G.D.P. per capita about 20 percent higher than Canada’s. And it has been an article of faith in this country that a rising tide lifts all boats. Doesn’t our high and rising national wealth translate into a high standard of living — including good medical care — for all Americans?

Well, no. Although America has higher per capita income than other advanced countries, it turns out that that’s mainly because our rich are much richer. And here’s a radical thought: if the rich get more, that leaves less for everyone else.

That statement — which is simply a matter of arithmetic — is guaranteed to bring accusations of ”class warfare.” If the accuser gets more specific, he’ll probably offer two reasons that it’s foolish to make a fuss over the high incomes of a few people at the top of the income distribution. First, he’ll tell you that what the elite get may look like a lot of money, but it’s still a small share of the total — that is, when all is said and done the rich aren’t getting that big a piece of the pie. Second, he’ll tell you that trying to do anything to reduce incomes at the top will hurt, not help, people further down the distribution, because attempts to redistribute income damage incentives.

These arguments for lack of concern are plausible. And they were entirely correct, once upon a time — namely, back when we had a middle-class society. But there’s a lot less truth to them now.

First, the share of the rich in total income is no longer trivial. These days 1 percent of families receive about 16 percent of total pretax income, and have about 14 percent of after-tax income. That share has roughly doubled over the past 30 years, and is now about as large as the share of the bottom 40 percent of the population. That’s a big shift of income to the top; as a matter of pure arithmetic, it must mean that the incomes of less well off families grew considerably more slowly than average income. And they did. Adjusting for inflation, average family income — total income divided by the number of families — grew 28 percent from 1979 to 1997. But median family income — the income of a family in the middle of the distribution, a better indicator of how typical American families are doing — grew only 10 percent. And the incomes of the bottom fifth of families actually fell slightly.

Let me belabor this point for a bit. We pride ourselves, with considerable justification, on our record of economic growth. But over the last few decades it’s remarkable how little of that growth has trickled down to ordinary families. Median family income has risen only about 0.5 percent per year — and as far as we can tell from somewhat unreliable data, just about all of that increase was due to wives working longer hours, with little or no gain in real wages. Furthermore, numbers about income don’t reflect the growing riskiness of life for ordinary workers. In the days when General Motors was known in-house as Generous Motors, many workers felt that they had considerable job security — the company wouldn’t fire them except in extremis. Many had contracts that guaranteed health insurance, even if they were laid off; they had pension benefits that did not depend on the stock market. Now mass firings from long-established companies are commonplace; losing your job means losing your insurance; and as millions of people have been learning, a 401(k) plan is no guarantee of a comfortable retirement.

Still, many people will say that while the U.S. economic system may generate a lot of inequality, it also generates much higher incomes than any alternative, so that everyone is better off. That was the moral Business Week tried to convey in its recent special issue with ”25 Ideas for a Changing World.” One of those ideas was ”the rich get richer, and that’s O.K.” High incomes at the top, the conventional wisdom declares, are the result of a free-market system that provides huge incentives for performance. And the system delivers that performance, which means that wealth at the top doesn’t come at the expense of the rest of us.

A skeptic might point out that the explosion in executive compensation seems at best loosely related to actual performance. Jack Welch was one of the 10 highest-paid executives in the United States in 2000, and you could argue that he earned it. But did Dennis Kozlowski of Tyco, or Gerald Levin of Time Warner, who were also in the top 10? A skeptic might also point out that even during the economic boom of the late 1990’s, U.S. productivity growth was no better than it was during the great postwar expansion, which corresponds to the era when America was truly middle class and C.E.O.’s were modestly paid technocrats.

But can we produce any direct evidence about the effects of inequality? We can’t rerun our own history and ask what would have happened if the social norms of middle-class America had continued to limit incomes at the top, and if government policy had leaned against rising inequality instead of reinforcing it, which is what actually happened. But we can compare ourselves with other advanced countries. And the results are somewhat surprising.

Many Americans assume that because we are the richest country in the world, with real G.D.P. per capita higher than that of other major advanced countries, Americans must be better off across the board — that it’s not just our rich who are richer than their counterparts abroad, but that the typical American family is much better off than the typical family elsewhere, and that even our poor are well off by foreign standards.

But it’s not true. Let me use the example of Sweden, that great conservative bete noire.

A few months ago the conservative cyberpundit Glenn Reynolds made a splash when he pointed out that Sweden’s G.D.P. per capita is roughly comparable with that of Mississippi — see, those foolish believers in the welfare state have impoverished themselves! Presumably he assumed that this means that the typical Swede is as poor as the typical resident of Mississippi, and therefore much worse off than the typical American.

But life expectancy in Sweden is about three years higher than that of the U.S. Infant mortality is half the U.S. level, and less than a third the rate in Mississippi. Functional illiteracy is much less common than in the U.S.

How is this possible? One answer is that G.D.P. per capita is in some ways a misleading measure. Swedes take longer vacations than Americans, so they work fewer hours per year. That’s a choice, not a failure of economic performance. Real G.D.P. per hour worked is 16 percent lower than in the United States, which makes Swedish productivity about the same as Canada’s.

But the main point is that though Sweden may have lower average income than the United States, that’s mainly because our rich are so much richer. The median Swedish family has a standard of living roughly comparable with that of the median U.S. family: wages are if anything higher in Sweden, and a higher tax burden is offset by public provision of health care and generally better public services. And as you move further down the income distribution, Swedish living standards are way ahead of those in the U.S. Swedish families with children that are at the 10th percentile — poorer than 90 percent of the population — have incomes 60 percent higher than their U.S. counterparts. And very few people in Sweden experience the deep poverty that is all too common in the United States. One measure: in 1994 only 6 percent of Swedes lived on less than $11 per day, compared with 14 percent in the U.S.

The moral of this comparison is that even if you think that America’s high levels of inequality are the price of our high level of national income, it’s not at all clear that this price is worth paying. The reason conservatives engage in bouts of Sweden-bashing is that they want to convince us that there is no tradeoff between economic efficiency and equity — that if you try to take from the rich and give to the poor, you actually make everyone worse off. But the comparison between the U.S. and other advanced countries doesn’t support this conclusion at all. Yes, we are the richest major nation. But because so much of our national income is concentrated in relatively few hands, large numbers of Americans are worse off economically than their counterparts in other advanced countries.

And we might even offer a challenge from the other side: inequality in the United States has arguably reached levels where it is counterproductive. That is, you can make a case that our society would be richer if its richest members didn’t get quite so much.

I could make this argument on historical grounds. The most impressive economic growth in U.S. history coincided with the middle-class interregnum, the post-World War II generation, when incomes were most evenly distributed. But let’s focus on a specific case, the extraordinary pay packages of today’s top executives. Are these good for the economy?

Until recently it was almost unchallenged conventional wisdom that, whatever else you might say, the new imperial C.E.O.’s had delivered results that dwarfed the expense of their compensation. But now that the stock bubble has burst, it has become increasingly clear that there was a price to those big pay packages, after all. In fact, the price paid by shareholders and society at large may have been many times larger than the amount actually paid to the executives.

It’s easy to get boggled by the details of corporate scandal — insider loans, stock options, special-purpose entities, mark-to-market, round-tripping. But there’s a simple reason that the details are so complicated. All of these schemes were designed to benefit corporate insiders — to inflate the pay of the C.E.O. and his inner circle. That is, they were all about the ”chaos of competitive avarice” that, according to John Kenneth Galbraith, had been ruled out in the corporation of the 1960’s. But while all restraint has vanished within the American corporation, the outside world — including stockholders — is still prudish, and open looting by executives is still not acceptable. So the looting has to be camouflaged, taking place through complicated schemes that can be rationalized to outsiders as clever corporate strategies.

Economists who study crime tell us that crime is inefficient — that is, the costs of crime to the economy are much larger than the amount stolen. Crime, and the fear of crime, divert resources away from productive uses: criminals spend their time stealing rather than producing, and potential victims spend time and money trying to protect their property. Also, the things people do to avoid becoming victims — like avoiding dangerous districts — have a cost even if they succeed in averting an actual crime.

The same holds true of corporate malfeasance, whether or not it actually involves breaking the law. Executives who devote their time to creating innovative ways to divert shareholder money into their own pockets probably aren’t running the real business very well (think Enron, WorldCom, Tyco, Global Crossing, Adelphia . . . ). Investments chosen because they create the illusion of profitability while insiders cash in their stock options are a waste of scarce resources. And if the supply of funds from lenders and shareholders dries up because of a lack of trust, the economy as a whole suffers. Just ask Indonesia.

The argument for a system in which some people get very rich has always been that the lure of wealth provides powerful incentives. But the question is, incentives to do what? As we learn more about what has actually been going on in corporate America, it’s becoming less and less clear whether those incentives have actually made executives work on behalf of the rest of us.

V. Inequality and Politics In September the Senate debated a proposed measure that would impose a one-time capital gains tax on Americans who renounce their citizenship in order to avoid paying U.S. taxes. Senator Phil Gramm was not pleased, declaring that the proposal was ”right out of Nazi Germany.” Pretty strong language, but no stronger than the metaphor Daniel Mitchell of the Heritage Foundation used, in an op-ed article in The Washington Times, to describe a bill designed to prevent corporations from rechartering abroad for tax purposes: Mitchell described this legislation as the ”Dred Scott tax bill,” referring to the infamous 1857 Supreme Court ruling that required free states to return escaped slaves.

Twenty years ago, would a prominent senator have likened those who want wealthy people to pay taxes to Nazis? Would a member of a think tank with close ties to the administration have drawn a parallel between corporate taxation and slavery? I don’t think so. The remarks by Gramm and Mitchell, while stronger than usual, were indicators of two huge changes in American politics. One is the growing polarization of our politics — our politicians are less and less inclined to offer even the appearance of moderation. The other is the growing tendency of policy and policy makers to cater to the interests of the wealthy. And I mean the wealthy, not the merely well-off: only someone with a net worth of at least several million dollars is likely to find it worthwhile to become a tax exile.

You don’t need a political scientist to tell you that modern American politics is bitterly polarized. But wasn’t it always thus? No, it wasn’t. From World War II until the 1970’s — the same era during which income inequality was historically low — political partisanship was much more muted than it is today. That’s not just a subjective assessment. My Princeton political science colleagues Nolan McCarty and Howard Rosenthal, together with Keith Poole at the University of Houston, have done a statistical analysis showing that the voting behavior of a congressman is much better predicted by his party affiliation today than it was 25 years ago. In fact, the division between the parties is sharper now than it has been since the 1920’s.

What are the parties divided about? The answer is simple: economics. McCarty, Rosenthal and Poole write that ”voting in Congress is highly ideological — one-dimensional left/right, liberal versus conservative.” It may sound simplistic to describe Democrats as the party that wants to tax the rich and help the poor, and Republicans as the party that wants to keep taxes and social spending as low as possible. And during the era of middle-class America that would indeed have been simplistic: politics wasn’t defined by economic issues. But that was a different country; as McCarty, Rosenthal and Poole put it, ”If income and wealth are distributed in a fairly equitable way, little is to be gained for politicians to organize politics around nonexistent conflicts.” Now the conflicts are real, and our politics is organized around them. In other words, the growing inequality of our incomes probably lies behind the growing divisiveness of our politics.

But the politics of rich and poor hasn’t played out the way you might think. Since the incomes of America’s wealthy have soared while ordinary families have seen at best small gains, you might have expected politicians to seek votes by proposing to soak the rich. In fact, however, the polarization of politics has occurred because the Republicans have moved to the right, not because the Democrats have moved to the left. And actual economic policy has moved steadily in favor of the wealthy. The major tax cuts of the past 25 years, the Reagan cuts in the 1980’s and the recent Bush cuts, were both heavily tilted toward the very well off. (Despite obfuscations, it remains true that more than half the Bush tax cut will eventually go to the top 1 percent of families.) The major tax increase over that period, the increase in payroll taxes in the 1980’s, fell most heavily on working-class families.

The most remarkable example of how politics has shifted in favor of the wealthy — an example that helps us understand why economic policy has reinforced, not countered, the movement toward greater inequality — is the drive to repeal the estate tax. The estate tax is, overwhelmingly, a tax on the wealthy. In 1999, only the top 2 percent of estates paid any tax at all, and half the estate tax was paid by only 3,300 estates, 0.16 percent of the total, with a minimum value of $5 million and an average value of $17 million. A quarter of the tax was paid by just 467 estates worth more than $20 million. Tales of family farms and businesses broken up to pay the estate tax are basically rural legends; hardly any real examples have been found, despite diligent searching.

You might have thought that a tax that falls on so few people yet yields a significant amount of revenue would be politically popular; you certainly wouldn’t expect widespread opposition. Moreover, there has long been an argument that the estate tax promotes democratic values, precisely because it limits the ability of the wealthy to form dynasties. So why has there been a powerful political drive to repeal the estate tax, and why was such a repeal a centerpiece of the Bush tax cut?

There is an economic argument for repealing the estate tax, but it’s hard to believe that many people take it seriously. More significant for members of Congress, surely, is the question of who would benefit from repeal: while those who will actually benefit from estate tax repeal are few in number, they have a lot of money and control even more (corporate C.E.O.’s can now count on leaving taxable estates behind). That is, they are the sort of people who command the attention of politicians in search of campaign funds.

But it’s not just about campaign contributions: much of the general public has been convinced that the estate tax is a bad thing. If you try talking about the tax to a group of moderately prosperous retirees, you get some interesting reactions. They refer to it as the ”death tax”; many of them believe that their estates will face punitive taxation, even though most of them will pay little or nothing; they are convinced that small businesses and family farms bear the brunt of the tax.

These misconceptions don’t arise by accident. They have, instead, been deliberately promoted. For example, a Heritage Foundation document titled ”Time to Repeal Federal Death Taxes: The Nightmare of the American Dream” emphasizes stories that rarely, if ever, happen in real life: ”Small-business owners, particularly minority owners, suffer anxious moments wondering whether the businesses they hope to hand down to their children will be destroyed by the death tax bill, . . . Women whose children are grown struggle to find ways to re-enter the work force without upsetting the family’s estate tax avoidance plan.” And who finances the Heritage Foundation? Why, foundations created by wealthy families, of course.

The point is that it is no accident that strongly conservative views, views that militate against taxes on the rich, have spread even as the rich get richer compared with the rest of us: in addition to directly buying influence, money can be used to shape public perceptions. The liberal group People for the American Way’s report on how conservative foundations have deployed vast sums to support think tanks, friendly media and other institutions that promote right-wing causes is titled ”Buying a Movement.”

Not to put too fine a point on it: as the rich get richer, they can buy a lot of things besides goods and services. Money buys political influence; used cleverly, it also buys intellectual influence. A result is that growing income disparities in the United States, far from leading to demands to soak the rich, have been accompanied by a growing movement to let them keep more of their earnings and to pass their wealth on to their children.

This obviously raises the possibility of a self-reinforcing process. As the gap between the rich and the rest of the population grows, economic policy increasingly caters to the interests of the elite, while public services for the population at large — above all, public education — are starved of resources. As policy increasingly favors the interests of the rich and neglects the interests of the general population, income disparities grow even wider.

VI. Plutocracy? In 1924, the mansions of Long Island’s North Shore were still in their full glory, as was the political power of the class that owned them. When Gov. Al Smith of New York proposed building a system of parks on Long Island, the mansion owners were bitterly opposed. One baron — Horace Havemeyer, the ”sultan of sugar” — warned that North Shore towns would be ”overrun with rabble from the city.” ”Rabble?” Smith said. ”That’s me you’re talking about.” In the end New Yorkers got their parks, but it was close: the interests of a few hundred wealthy families nearly prevailed over those of New York City’s middle class.

America in the 1920’s wasn’t a feudal society. But it was a nation in which vast privilege — often inherited privilege — stood in contrast to vast misery. It was also a nation in which the government, more often than not, served the interests of the privileged and ignored the aspirations of ordinary people.

Those days are past — or are they? Income inequality in America has now returned to the levels of the 1920’s. Inherited wealth doesn’t yet play a big part in our society, but given time — and the repeal of the estate tax — we will grow ourselves a hereditary elite just as set apart from the concerns of ordinary Americans as old Horace Havemeyer. And the new elite, like the old, will have enormous political power.

Kevin Phillips concludes his book ”Wealth and Democracy” with a grim warning: ”Either democracy must be renewed, with politics brought back to life, or wealth is likely to cement a new and less democratic regime — plutocracy by some other name.” It’s a pretty extreme line, but we live in extreme times. Even if the forms of democracy remain, they may become meaningless. It’s all too easy to see how we may become a country in which the big rewards are reserved for people with the right connections; in which ordinary people see little hope of advancement; in which political involvement seems pointless, because in the end the interests of the elite always get served.

Am I being too pessimistic? Even my liberal friends tell me not to worry, that our system has great resilience, that the center will hold. I hope they’re right, but they may be looking in the rearview mirror. Our optimism about America, our belief that in the end our nation always finds its way, comes from the past — a past in which we were a middle-class society. But that was another country.

Paul Krugman is a Times columnist and a professor at Princeton.

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Published Oct 7, 2002 NET07

Envisioned by cellular pioneer Craig McCaw, backed by Bill Gates — and financed in part by their bottomless wealth — the idea of delivering high-speed Internet via a constellation of satellites seemed almost a sure thing.

But after 12 years of management changes, network design revisions and, most recently, telecommunications industry turmoil, the vision of an Internet-in-the-sky has come crashing down to Earth.

Teledesic’s board has halted work by a contractor building two satellites, effectively putting the ambitious idea into deep hibernation.

“Obviously by suspending work on the contract, the board of Teledesic is saying, as we see it today, it’s not feasible to do this,” spokesman Todd Wolfenbarger said.

The recently announced decision means layoffs for 25 people. Another 10 or 12 employees will stay on, evaluating “possible alternative approaches,” a company press release said.

Teledesic, started in 1990, was envisioned as a network of space-based satellites that could deliver high-speed Internet to businesses and consumers anywhere in the world. The network would relay voice and data over a portion of the radio spectrum, with Teledesic hoping to offer full service by 2005.

It was the latest brainchild of one of Seattle’s favorite sons. McCaw almost single-handedly had spun together the new industry of cellular telecommunications. His company, McCaw Cellular, impressed telecom executives, Wall Street investors and customers alike and was bought by AT&T Wireless in 1994.

And Teledesic, although it never had more than 200 employees, certainly had its star power.

The company, based in Bellevue, Wash., had McCaw for a founder, Microsoft Chairman Gates as a backer, a $100 million commitment from Boeing Co. and $200 million from Saudi Prince Alwaleed Bin Talal. With some of the richest men in the world behind it, the company wasn’t hurting for money.

But despite the promise, the vision and the war chest, Teledesic had its issues.

Management changes

The company went through several management changes, including rotations through chief executives and co-chief executives.

“It’s hard to have consistency and hard to develop your road maps and service with different types of visions that are being replaced every so often,” said Sean Badding, vice president of the Carmel Group telecommunications research firm.

The designs and scope of the project changed as well through the years.

Ultimately, even men with very deep pockets have their limits.

“Really, for the people who have already invested money in this thing, it really doesn’t make sense,” Wolfenbarger said. “The risk is not outweighing what they think the reward is.”

Teledesic still owns rights to a portion of high-frequency spectrum.

But under agreements with the Federal Communications Commission, the company would have had to meet a series of deadlines with the ultimate goal of offering service by 2004, which it could not do under the current financial climate, Wolfenbarger said.

With no big customer lined up ready to commit, the board opted to put the project on ice.

“[McCaw] was supposedly a genius who could see the future and see around corners,” said O. Casey Corr, who wrote a biography of McCaw. “This proves that he’s mortal.”

Other companies, including McLean, Va.-based StarBand and Hughes, already offer Internet connections through a satellite network, though their service is far less ambitious than what Teledesic had planned.

StarBand recently filed for bankruptcy, joining other troubled satellite ventures, including Iridium. Backed by Motorola Corp., it built a satellite network offering voice and data service but, crippled by debt, ended up cutting off service two years ago. A new venture, Iridium Satellite, took over the bankrupt company’s assets.

Too much, too soon?

Teledesic, with its grander vision of high-speed connectivity, might have been ahead of its time, Badding said. “At this time, there are more questions than answers about the viability and the economics for these types of services.”

McCaw isn’t out of the satellite business altogether, either.

He still is a major investor in London-based ICO, which similarly hopes to offer satellite-based wireless communications in the future. At one point, McCaw sought to merge the company with Teledesic and issue new stock in the combined company. But he abandoned that effort early last year due to the sagging market.

Badding said he remains hopeful that McCaw one day will revive Teledesic.

“Teledesic still has tremendous amounts of potential in the future,” he said. “In the next seven to eight years, it clearly is going to be a different story.”

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Inside the Rolling Stones Inc. The Rolling Stones are an astounding moneymaking machine. Here’s how Mick Jagger & Co. have perfected the business model behind the most successful act in rock & roll today. FORTUNE Monday, September 30, 2002 By Andy Serwer

Mick Jagger is wearing a cool pink shirt, slim black trousers, and bright red socks. His hair is–well, there’s a lot of it. But don’t let the look fool you. Mick is all business. That’s business with a capital “B,” as in the stuff we write about all the time in the pages of FORTUNE.

I’m up in Jagger’s suite in Boston’s Four Seasons hotel just before the Stones kick off their worldwide Licks tour. Mick turns down the volume on a boom box, packs off two of his young kids with their nannies, and then holds forth on product pricing, economics, and business models. Jagger is eloquent and informed, but he has a disclaimer: “I don’t really count myself as a very sophisticated businessperson,” he says as he leans back on the couch. “I’m a creative artist. All I know from business I’ve picked up along the way. I never really studied business in school. I kind of wish I had, kind of, but how boring is that?” he says with a grin.

Like the protagonist in one of his most devilish songs, Mick has been around for many a long year. He had plenty of smarts to begin with, and now he has 40 years of music industry experience under his belt. Jagger may be getting a trifle old to rock & roll–he’ll turn 60 next July–but from a business perspective he’s at the top of his game. Which makes sense in a way. After all, that’s a typical age for a CEO of a large, multinational organization. (Okay, so most of the CEOs we follow don’t have to swivel-hip their way through “Midnight Rambler,” but you get the point.)

There are, of course, plenty of detractors who say the Rolling Stones should pack in their guitars and drumsticks. “Way old,” they sniff, “and way irrelevant.” I have two responses, one subjective and one objective. Subjectively, the Rolling Stones sound pretty damn good, even after all these years. And objectively, if they’re such has-beens, then how do you explain the band’s phenomenal commercial success over the past decade? No, they aren’t writing groundbreaking songs anymore–in fact they haven’t really recorded any new material of note in 20 years–but we sure are listening to their old stuff. A lot. And buying concert tickets. Millions and millions of them. And that’s the wrinkle here. Even though the Stones have been in what you might call a creatively fallow period, we want to hear them more than ever. Couple that with the fact that they have perfected their business model, and it’s easy to understand why they are such an astounding moneymaking machine.

The bottom line is this: “The only rock & roll band that matters,” or “the greatest rock & roll band in the world,” or whatever you want to call Mick, Keith Richards, Charlie Watts, and Ronnie Wood, they are far and away the most successful act in rock today. Since 1989 alone–the beginning of the modern age of the Rolling Stones (more on that later)–the band has generated more than $1.5 billion in gross revenues. That total includes sales of records, song rights, merchandising, sponsorship money, and touring (see charts: Hot Licks and Packing Them In). The Stones have made more money than U2, or Springsteen, or Michael Jackson, or Britney Spears, or the Who–or whoever.

Next: The Rolling Stones Inc. runs on a combustible mix of talent and labor…

Unlike some other groups, the Stones carry no Woodstock-esque, antibusiness baggage. The group has tendrils deep in American business, cutting sponsorship and rights deals with stalwarts like Anheuser-Busch, Microsoft, and Sprint. Remember the old Boston Consulting Group matrix of the four types of businesses? Well, if the Stones were a traditional company, they would be the cash cow.

As with most thriving enterprises, the Rolling Stones Inc. runs on a combustible mix of talent and intense labor–the product of four decades of trial and error. The band downplays the effectiveness of the organization: “I’m sure that if you looked at it and analyzed it, you could say, ‘Well, that’s fucked up,'” says Jagger. “That shouldn’t be like that. No, of course it isn’t run well. No show business organization is run well. There’s always too much money paid out.” Keith, for his part, just shakes his head: “It’s a mom-and-pop operation,” he laughs. “Mick is the mom, and I’m the pop, and then we have these offspring that need feeding.” Well, kind of.

The Stones, or at least some members of the band, can still come across as wiggy rock stars. (“You’re talking to the business right now,” Richards tells me, holding up his two hands ceremoniously. “These are the business.”) But in many respects the Rolling Stones are like any other large business. They are global, they pay taxes (grudgingly), and they litigate. The band has a P&L and budgets, and accountants, and lawyers, and bankers, and investments, and software, and hardware. “They know what they’re doing,” says Barry Diller, a Jagger confidant. “That’s what separates them from any other band.”

Spend time with their senior entourage and you quickly realize how the Stones got so market-wise. Sure, Mick attended the London School of Economics (“I mostly studied economic history”), but his greatest talent, besides strutting and singing, is his ability to surround himself and the rest of the band with a group of very able (they probably hate to be called this) executives.

The Rolling Stones are a private and secretive organization. Most of the team, like Joe Rascoff, the band’s business manager, and tour director Michael Cohl, stay out of the public eye. So, too, does Prince Rupert Zu Loewenstein, a London-based banker who carries an old Bavarian title and who’s been the band’s chief business advisor for some 30 years–“and I hope for another 30 too,” he says. (Keith calls Loewenstein “the mastermind of our setup.”) But just because the Stones’ financials aren’t public doesn’t mean there isn’t rigorous benchmarking. “Mick likes to run a pretty tight ship,” Keith says to me with a twinkle in his eye.

The business side of the Stones has several facets. As for any executive running a conglomerate, understanding and managing these diverse businesses are the key, says Jagger. “They all have income streams like any other company,” he says. “They have different business models; they have different delegated people that look after them. And they have to interlock. That’s my biggest problem.” And as we will see, his biggest opportunity.

The touring side of the business produces a torrent of revenue when the band is on the road, and then of course absolutely zilch when the tour is done. The record business also blows hot and cold–depending on if a new album is released or if old ones are promoted–though it’s not as erratic as touring. Music rights, on the other hand–money paid to a band when its songs are played on, say, the radio–are predictable enough that some artists (most famously David Bowie) have been able to securitize these rights and sell bonds backed by their revenue streams.

To harness these businesses, to make them “interlock,” the Stones and Prince Rupert have set up a unique business structure, which looks roughly like this: At the top, not unlike at a blue-chip law firm, is a partnership consisting of the four core members of the group: Jagger, Richards, Watts, and Wood. Do all four get equal shares of touring and new-record sales? No one in the Stones party will touch that one. “In the old days they all got equal splits,” says the Stones’ former manager, Allen Klein, “but I doubt it now.”

Connected to the Stones partnership and Prince Rupert is a group of companies that include Promotour, Promopub, Promotone, and Musidor, each dedicated to a particular aspect of the business. This family of companies is based in the Netherlands, which has tax advantages for foreign bands. When the group isn’t touring, these companies employ only a few dozen employees. At the high-water mark of a tour, on the night the band is playing, say, Giants Stadium, the Stones may employ more than 350. Backstage the enterprise resembles a flourishing startup, with dozens of fast-moving junior employees in black T-shirts running around to make sure the IPO, er, the show, gets off without a hitch. It looks crazy, but it works. Perhaps Keith sums it up best: “With our business, who really knows what’s what. You go and look at Lake Superior, and you say, ‘Look at all that water, and that’s just the top!’ ”

Next: Touring is the biggest moneymaking part of the Stones’ operation….

Today touring is professionalized, complete with immigration lawyers, traveling accountants, and real-time budgets. It is also the biggest moneymaking part of the Stones’ operation. Since the 1989 Steel Wheels tour, the Stones have grossed over $1 billion on the road. Though exact profit margins are hard to come by, it’s safe to say that tens of millions of that total flowed to each of the band members. It wasn’t always this way. “When we first started out, there wasn’t really any money in rock & roll,” says Jagger. “There wasn’t a touring industry; it didn’t even exist. Obviously there was somebody maybe who made money, but it certainly wasn’t the act. Basically, even if you were very successful, you got paid nothing.”

Jagger recalls that in the beginning, “you’d just jump from gig to gig. There’d be no sound or lights or anything.” Gradually, beginning with the Stones’ 1969 American tour–which ended with the debacle at Altamont–the touring business would become modernized, with traveling lights, sound, and stage. Jagger himself had a major hand in this, sometimes negotiating directly with promoters in various regions and countries. But it wasn’t until the 1989 Steel Wheels tour, when Canadian rock promoter Michael Cohl took over managing the band’s shows, that the Stones would begin to fully exploit the economic potential of this business.

Generally speaking, prior to Steel Wheels, the band would hire a tour director–the late Bill Graham of Fillmore West fame once filled this role–who would call local promoters in each city to set up shows. Individual deals would have to be cut with each promoter, who took, say, 10% to 15% of ticket sales after the cost of the show. The tour director would then have to collect $250,000 here, $400,000 there, from promoters all over.

Cohl, who started out as a self-described “drugged-out, late-teens strip-club owner from Ottawa,” had been one of those local promoters. After a run-in with the volatile Graham in 1988, Cohl came up with an idea that he thought would tantalize the Stones, who at the time weren’t on speaking terms with each other, never mind touring. “I knew the guys from Pink Floyd, who knew Prince Rupert, and I asked them if they would call Rupert for me,” he tells me as the sounds of the Stones rehearsing “Street Fighting Man” echo backstage. “Ten minutes later Rupert was on my phone saying, ‘Excuse me, young man’– he talks in this very nice, formal British accent–‘excuse me, I understand you have something to say to me.’ And I said $40 million for 40 shows. He said, ‘Very interesting.’ ”

The way Cohl’s plan worked is that he would book the entire tour himself, dealing with the venues directly and cutting out the local promoters. He would also produce new streams of revenue by selling skyboxes, bus tours, and TV deals, and by taking merchandising to a new level. He would bring in corporate sponsors like Volkswagen and Tommy Hilfiger. And most important, he would help stitch these operations together, through cross-promotion and the like, to maximize their earning power.

After months of negotiations and a desperate, failed bid by Graham to retain the Stones, the band accepted Cohl’s offer. Cohl even ended up signing on as the band’s tour director. There was one small problem: “I didn’t have $40 million,” recalls Cohl with a grin. “I had sold half of my company to Labatts [the Canadian beer company], and the truth of the matter is when I offered Rupert the $40 million, I didn’t have their permission to offer it either.” Ultimately Cohl was able to come up with the money, and he and the Stones put together the tour. (Another wrinkle: Steel Wheels had to be insured–Lloyd’s covered Stones tours–and before the insurer would issue a policy, the band had to take physicals. Keith passed, legend has it, to his own astonishment.)

“First and foremost, the show itself was the seminal, watershed point,” says Cohl. “When you look at what a stadium show was pre-Steel Wheels, it was a bit of a scrim, and a big, wide, flat piece of lumber, and that was it. The band turned a stadium into a theater. It all started with Mick. He simply said, ‘We have to fill the end space.’ It was complicated to the third power and expensive to the fifth. But it worked.”

It was also incredibly hairy. “I think Michael would admit that it was a huge learning curve for him doing Steel Wheels,” says Jagger. “Michael had never done it before really, so it was a bit of a gamble.” The tour began in August, and by October Cohl looked at the numbers and realized they were losing money. Gobs of it. The band and the organization had to cut costs quickly. “It was a deal where I said they could make a whole lot of money, and I would guarantee it ‘subject to,’ and the ‘subject to’s’ made us partners at the end of the day. So we all had to learn how to do it,” says Cohl. And they did.

Next: Ticket prices have been the subject of much grousing….

In the end, the Steel Wheels tour–tickets, merchandising, sponsorship money from Anheuser-Busch–made over $260 million worldwide, then a record for a rock tour. The venues, Cohl, the band, and Labatts all made out bigtime. Steel Wheels became the template, and Cohl has been doing Stones tours ever since, refining the operation each time around.

On the new, E*Trade-sponsored Licks tour, the band, which includes keyboard whiz Chuck Leavell and bassist Darryl Jones, is playing three types of venues: stadiums, arenas, and small clubs, each with a unique set of songs (the band has rehearsed more than 130 for this tour), staging, and lights. “It is an amazing challenge,” says Patrick Woodroffe, the lighting designer on the tour, who’s jumped in a cab with me after the Boston show, “but it’s great for the audiences and it keeps the band fresh.” The props and set are downplayed a bit. The giant, multimillion-dollar videoscreen, the staging, and the lights that change for every song don’t overwhelm but complement.

Because they are doing smaller venues, the Stones and Cohl know revenue from Licks won’t approach the monster Voodoo Lounge Tour in 1994-95, which brought in close to $370 million worldwide. Nor will it eclipse 1997-99’s Bridges to Babylon/No Security tour, which did over $390 million. But merchandising (Jagger’s and Charlie Watts’s domain) will be more sophisticated than ever. Jagger tells me that there will be some 50 products–such as underwear by Britain’s Agent Provocateur and new, expensive items like shirts, jackets, and, yes, dresses. And it will be “our most efficient tour ever,” promises Rascoff, though he refuses to divulge any of the band’s financials. “Doing fewer stadiums this time cuts costs because in previous tours we had to have three stages and three crews. This tour we have one stadium stage with one crew.” In other words, when sales in your core business aren’t maximized, you look to cut costs and boost tertiary revenues.

As usual, ticket prices ($50 to $350) have been the subject of much grousing in the press. But Jagger is happy to delve into the topic. “This is one element of the business thing that I try to really control as much as I can,” he says. “Pricing a concert ticket is very different from pricing a Lexus or toothpaste. It’s more like a sports event. And you are prepared to pay the market price. So if U2 or Madonna costs $100 (I’m making these up), you don’t want to be charging $200. I try to keep ticket prices within the market price range. It’s America. We’re not living in a socialist society where we’re all paid so low and no one can afford it.”

The ticket-pricing controversy burns Cohl up. Athletes like Derek Jeter and Marshall Faulk are free to make whatever they can, “but people complain that Mick and Keith can’t. I think that is the biggest load of crap. We are only charging $50 a night for club shows, which we lose money on. I read on eBay one of the tickets to Roseland Ballroom [in New York] went for $10,000. That makes us schmucks! When we charge $300 for some seats, somebody’s out there selling them for $500. If we were to charge $500, somebody would sell them for more. Come on, what are they complaining about?” It’s true that ticket prices to Stones shows have outpaced inflation (along with health care and college tuition), but you kind of get the feeling that the same people who are complaining about high ticket prices also rue the fact that Blind Boy Fuller died poor.

The Stones are famously tax-averse. I broach the subject with Keith in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out–it is, in other words, a perfect venue for such a discussion. “The whole business thing is predicated a lot on the tax laws,” says Keith, Marlboro in one hand, vodka and juice in the other. “It’s why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we’d be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don’t want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out.” No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

Of course, it wasn’t just the taxman’s pinch that forced the Rolling Stones to focus on the bottom line. They also got screwed by record labels. “In the early days you got paid absolutely nothing,” recalls Jagger. “The only people who earned money were the Beatles because they sold so many records.”

By the mid-’60s the Stones had reportedly sold ten million singles, including “Satisfaction,” and five million albums, but the band was still living hand to mouth. “I’ll never forget the deals I did in the ’60s, which were just terrible,” says Jagger. “You say, ‘Oh, I’m a creative person, I won’t worry about this.’ But that just doesn’t work. Because everyone would just steal every penny you’ve got.”

In 1965 the band began to work with Allen Klein, a New York manager, who would help it negotiate a new contract. Klein, now 70, recalls his big day with the band some 37 years later: “I told the guys, ‘I want you to come down with me to Decca. Wear dark sunglasses and look angry but don’t say anything. Leave the talking to me.'” By intimidating the British record execs, Klein helped land the Stones their first million-dollar payday. Klein (whose company, ABKCO, still owns rights to the Stones’ songs from the earliest days through 1971) and the band would have a falling-out and part ways in the early 1970s. With vintage photographs of the Stones covering his office walls, Klein leafs through the old contracts in his office and shakes his head: “The others didn’t look at them that much, but I remember Mick would read every single page.”

Interestingly, the Stones have never had a blockbuster album, like Fleetwood Mac’s Rumours or Michael Jackson’s Thriller. But what they have done is make 42 albums. And they’ve sold tens of millions of those records and CDs, and singles and EPs too. Since 1989 alone, for instance, the band has sold more than 38 million albums at roughly $12 each, for gross proceeds of over $460 million.

The new Stones albums haven’t been as hot as the oldies, obviously, but the band has high hopes for the Forty Licks album, due out this fall. The album has 36 of the band’s biggest hits, plus four new songs. Also, Allen Klein’s ABKCO has just re-released 22 of the band’s earlier albums on SACD hybrid, a new CD format (compatible with traditional CD players), including all of the band’s great records from the 1960s. In a way, the Stones’ older music is like Coke Classic. The band tries to introduce new varieties, some of which do okay, but it’s the original stuff we still love the best.

Next: So what keeps the Stones going?…

Serwer: Your income must vary all over the place, year by year, because the tours give you this huge bump and then there’s nothing.

Richards: But there’s always an awful lot of PRS coming in.

Serwer: What the hell is that?

Richards: Performing rights. Every time it’s played on the radio. I go to sleep and make money–let’s put it that way.

Now this is the Microsoft part of the Stones’ business empire. Profitable. Steady. And stretching out to the horizon. “Music publishing is more profitable to the artist than recording. It’s just tradition,” says Jagger. “There’s no rhyme or reason. The people who wrote songs were probably better businesspeople than the people who sang them were. You go back to George Gershwin and his contemporaries–they probably negotiated better deals, and they became the norm of the business. So if you wrote a song, you got half of it, and the other half went to your publisher. That’s the model for writing.”

And Jagger/Richards have written more than 200 songs. The pair has had a few monster hits like “Honky Tonk Woman,” but more significantly they have dozens of songs that are played on FM radio, which is still a vibrant category. And it’s not just the radio. Every time “Shattered” or “Jumping Jack Flash” is played anywhere around the globe when commerce is involved–at an ice-skating rink, on a jukebox, or at a club–the Jagger/Richards cash register goes ka-ching.

Again, Jagger is intimately involved in this business. Perhaps the most famous product rollout of all time used a Stones song–Windows 95 and “Start Me Up.” Microsoft reportedly paid $4 million for those rights. (“Yeah, we met Bill Gates,” says Jagger. “And [Paul] Allen is always around.”) Not to be outdone, Apple used “She’s a Rainbow” to launch the colored iMacs. But, says Jagger, “we don’t really do a lot of commercials. I mean, I’m not against them per se, but we don’t do them that much. We do a lot of film licensing. We get lots of requests, and I usually say yes. It’s a great business. You have a sort of price that you like to keep to, unless it’s a low-budget film and it’s a really interesting film–then you can make a deal maybe.” Though the cost of buying rights to use a Stones song in a film varies, on average it runs a filmmaker in the low six figures.

Over the past decade Fortune estimates that the songwriting team of Jagger/Richards has garnered $56 million from songs being played on radio and in public venues, as well as being used in advertising and movies. A significant chunk of change. “The thing that we all had to learn is what to do when the passion starts to generate money,” says Richards. “You don’t start to play your guitar thinking you’re going to be running an organization that will maybe generate millions.”

The tours, the records, the rights: They’ve all made the Stones the wealthiest rock & roll band on the planet. None more so than Jagger and Richards, who unlike the others enjoy the full fruits of all that licensing. Their portfolios are mostly in the hands of the trusty and tight-lipped Prince Rupert. Though Jagger follows the financial news in the Wall Street Journal and Financial Times, he isn’t doing much with stocks these days. “I used to play the market, but I’m not that interested at the moment because I don’t think it’s a very interesting time,” he says.

Keith is more philosophical: “I watch the [Dow] go up and down and wonder. It’s like watching the horses really. How much is that an indication of anything? Oh, the Dow’s up…. And you go, okay, who’s running in the 3:30 at Belmont? I have a small portfolio. I find things I love, like houses–bricks and mortar. Nothing wrong with a bit of land. I’ve invested in my friends’ projects. And there’s Rupert. He is a great financial mind for the market. He plays that like I play guitar. He does things like a little oilwell. And currency–you know, Swiss francs in the morning, switch to marks in the afternoon, move to the yen, and by the end of the day, how many dollars? That’s his financial genius, his wisdom. Little pieces of paper. As long as there’s a smile on Rupert’s face, I’m cool.”

So what keeps the Stones going? Money, yes. But the band could make big bucks simply by doing commercials instead of touring. Going on the road is about ego gratification. “This whole thing runs on passion,” says Richards. “Even though we don’t talk about it much ourselves, it’s almost a sort of quest or mission.”

The Stones and their estates will continue licensing songs and selling records for years. But sooner rather than later, the touring will cease. Jagger’s stage antics are remarkable when you consider his age. But how much longer? Charlie Watts, the oldest Stone, is already 61. The band hasn’t said this is the last tour, though it could be–and of course that kind of speculation is great for ticket sales, particularly in second-tier cities, where this really could be the Stones’ last show.

“How long can we go on?” asks Keith. “Forever. We’ll let you know when we keel over.” And when that day comes, it will mean not only the end of the world’s greatest rock band but also a winding-down of one of the most successful enterprises this crazy business has ever known.

———–

By Russ Mitchell

This article was originally published on SmartMoney Select on 8/22/02. NOT EVEN A PROMISING pedigree was enough to spare Agere Systems (NYSE:AGR.A – News) the indignities of the telecom meltdown.

Last week, the Lucent Technologies (NYSE:LU – News) spinoff unveiled plans to dump its optoelectronics business, close almost all of its manufacturing plants and lay off 4,000 — a third of its work force. The decision, though drastic, was all but unavoidable in light of the state of the industry and the health of the broader economy. What’s curious, though, has been the stock market’s reaction to it all.

Agere’s shares have been hovering between $1.50 and $1.70, off a 52-week high of $6.30. The price blipped up on the announcement, but only a tad. In other words, the market seems to be saying the news is practically neutral; that huge layoffs, plant shutdowns and a dramatic shift in strategy will leave the company worth about what it was worth before the announcement.

Clearly, that’s absurd. More likely, investors want to believe in Agere, but they don’t trust it yet. And who can blame them? Until early 2001, Agere was the microelectronics group at Lucent. Lucent spun it off because Lucent’s finances were in deep crud, just as AT&T (NYSE:T – News) spun off Lucent in 1996 because AT&T was in trouble.

Agere, for its part, came away with a potentially strong chip business and great technology — its roots go back to Bell Laboratories, and Agere is blessed with 6,000 patented technologies covering optics, integrated circuits and semiconductor manufacturing processes and technology.

But it also came away with horribly bloated operations. In the spring of 2001, Agere had 18,500 employees; by the end of next year that number should be down to 7,200. Lucent, in desperate straits, stuck Agere’s managers and shareholders with $2.5 billion in debt. Lucent also passed on a legacy of strategic mismanagement, which left the company saddled with semiconductor fabrication plants (known as fabs) that companies like Agere can no longer afford.

Credit Agere management for stripping the company down to its essentials. It’s closing all but one of its fabs, turning instead to contract fabrication outfits in Asia, as do most midsize and smaller chip companies. That means not only capital savings, but also savings of $100 million in annual process R&D costs. The optoelectronics business that it’s exiting — chiplike devices that route traffic on long-haul fiber-optic networks — may have brought Agere profits in the future, but it’s a business that may not recover for years. Agere can direct that investment elsewhere.

So where’s the focus going forward? Three chip markets, from fastest to slowest growing:

Wireless networks, including the fast-growing technology known as 802.11 (a.k.a. WiFi), and cellular telephones. Agere is a close No. 2 behind Intersil (NASDAQ:ISIL – News) in WiFi. Among its cell-phone customers is Samsung, which uses Agere chips in its new phones for 2.5G networks. Agere is also a major player in the flourishing cell-phone market in China.

High-density storage. Agere makes three chips essential to storage: One amplifies the signals picked up by the read head in the hard drive; another converts those amplified signals to digital; and a third controls the hard-drive motor. New chips combine the last two functions. Hard drives are commodities, but the chips that control them are not. Agere counts the four largest hard-drive manufacturers as major customers.

Multiservice network solutions. Marketing verbiage for chips that process data in networks. Customers here include Cisco (NASDAQ:CSCO – News), Riverstone (NASDAQ:RSTN – News) and Huawei, also known as the “Chinese Cisco.”

Clearly, Agere’s prospects depend on a capital-spending recovery. The company will lose money this year. But Greg Waters, senior vice president of strategy and business development at Agere, says the company is committed to paring costs to the point where it could break even on current revenues — about $500 million a quarter. “Even if the economy doesn’t improve, even if our business doesn’t improve, our cost structure will allow us to make money,” he says.

Not much money, of course, but Waters says that after breaking even, as much as 70% of new revenues could fall right down to the bottom line. In other words, when the economy turns around, Agere earnings will be positioned to take off, and midyear 2002 would prove to have been a great time to get into the stock.

Of course Agere, which is ranked as the No. 1 vendor of communications chips by Gartner, must execute — particularly with companies like Intel (NASDAQ:INTC – News) paying more attention to those very same communications chips. And Agere’s Lucent legacy gives cause for pause. But Waters, who came from Texas Instruments (NYSE:TXN – News) three years ago, says two-thirds of top management joined the company within the past two years. Another good sign.

Adding his two billion cents to the stock-options debate this week, Bill Gates said expensing options would have little negative effect on innovation.

In a recent column I argued that forcing young start-up companies to expense options would weigh down their net income, extend their periods of losses, make it harder for them to raise capital and, in the end, stifle innovation. I’m hardly the only one making that argument.

If Gates means that expensing options won’t slow innovation at huge, established companies such as Microsoft (NASDAQ:MSFT – News), he’s probably right. But if smaller, more innovative companies find it tougher to raise money, then it lowers the odds that new breakthrough technologies will emerge to challenge the giants…like Microsoft.

Russ Mitchell is a veteran technology journalist based in San Francisco.

———–

Microsoft to Pump Up R&D, Hire 5,000 Thu Jul 25,11:43 PM ET

By Reed Stevenson

REDMOND, Wash. (Reuters) – Microsoft Corp. said on Thursday it would boost spending on research and development by 20 percent and hire nearly 10 percent more workers this year, buoyed by strong sales of Windows XP ( news – web sites).

Bill Gates ( news – web sites), Microsoft’s chairman and chief software architect, said the software giant would make “aggressive” investments as it prepares to bet the company’s future and its mainstay, the Windows operating system, on Web-based services.

“We are increasing the level of investment for the future,” Gates told a gathering of about 300 analysts and reporters.

Gates said the software giant would increase research spending by 20 percent to $5.3 billion and add 5,000 employees to its workforce of 50,500 for the current year that ends in June 2003.

Thousands of new workers and billions of investment dollars are needed to deploy .NET, Microsoft’s over-arching plan to transform the way information changes hands so that software and services no longer depend on individual computers, Gates said.

Although Microsoft announced that Windows XP, the latest version of its flagship operating system, sold 46 million copies, to become the company’s fastest-selling software ever, the company emphasized repeatedly that it needed to branch out into new areas.

Analysts said Microsoft’s aggressive push into the nascent market for Web-based services was risky, but agreed that the potential rewards were also rich.

“I think it’s a huge bet. If they can get businesses to publish Web services that quickly I think they’ve got a bright future,” said Kim Caughey, an analyst at investment firm Parker/Hunter Inc. who attended the briefing.

Shares in Microsoft lost about 7 percent on Thursday, closing at $42.83, down $3.40, on the Nasdaq in a volatile session.

THE ‘NOW WAVE’

In his presentation, Gates outlined Microsoft’s strategy over the next few years, saying the company would look to migrate customers over to Web-based computing and services in three phases over the next several years.

The first phase — which he called the “Now Wave” — would center around new consumer-oriented software to be released this fall, including a new media-friendly version of Windows XP, the Tablet PC and a beefed-up browser for online service MSN, as well as a new server and updates for .NET infrastructure.

The second wave would be marked by the release of Microsoft’s database SQL Server, code-named Yukon.

“It will be a period of a modest number of releases,” Gates said.

The third and final phase will be marked by the next overhaul of Windows, a project recently code-named Longhorn, that promises to work seamlessly with .NET, Gates said.

Microsoft has long recognized the need to make itself less dependent on cyclical sales of personal computers and move into software for a wide range of devices, including cell phones, hand-held devices and interactive television.

RISKY BETS

Gates reaffirmed these efforts on Thursday, repeatedly emphasizing the long-term approach that Microsoft is taking while reminding analysts that it was willing to make big, risky bets to move its software away from the desktop and into living rooms and people’s pockets.

“Ten years ago I said (interactive TV) was important,” Gates said. “Ten years later I still say it’s important. How much money have we made? A big negative number.”

The meeting with analysts came a week after the No. 1 software company reported results for its June-ended fiscal year showing a 7 percent gain in annual earnings on a 12 percent rise in revenues.

Growth in sales of its latest platform, Windows XP, and software for businesses was offset by write-downs on investments in the cable industry in the fourth-quarter.

———–

Combine their general disregard for security with their general disregard for privacy and the issue is explosive.

“Privacy Statements”, which are displayed before you download software, can be re-worded to decrease Microsoft’s liability, however these agreements are unreadable, are largely ignored by users, and of course don’t apply when the software is OEM’d.

While Bill Gates might “get it” now, Microsoft’s culture nurtures a sort of corporate omniscience that reflects Bill Gate’s former persona. While he can change his own public tune on a dime, turning the ship using his new philosophical underpinnings will be hard.

Anyway, Microsoft’s key market spoiler is TRUST.

-Ian.

——–

http://digitalmass.boston.com/news/2002/02/20/ms_privacy.html

Microsoft music, movie player logs users entertainment habits By D. Ian Hopper, Associated Press, 2/20/02   

WASHINGTON — Microsoft’s new version of its popular Media Player software is logging the songs and movies that customers play.

The company said Wednesday it was changing its privacy statement to notify customers about the technology after inquiries from The Associated Press.

The system creates a list on each computer that could be a treasure for marketing companies, lawyers or others. Microsoft says it has no plans to sell the data collected by Media Player 8, which comes free with the Windows XP operating system.

“If you’re watching DVDs you don’t want your wife to know about, you might not want to give her your password,” said David Caulton, Microsoft’s lead program manager for Windows Media.

The new privacy policy was issued Wednesday.

The media player has been bundled as a free addition to Windows for several years and allows users to play music CDs, DVD movies and digitally stored songs on their computers.

When a CD is played, the player downloads the disc name and titles for each song from a Web site licensed by Microsoft. That information is stored on a small file on each computer in the latest version of the software.

The new version released with Windows XP last fall also added the same technology for DVD movies.

Microsoft’s original privacy statement informed customers that they were downloading the information about CDs but never stated it was being stored in a log file on each computer.

The new statement makes clear that information is being downloaded for both DVDs and CDs, but does not explain how users can eliminate or get into the log file.

“It definitely could have been clearer and more specific about DVDs,” Caulton said.

As part of downloading the information about songs and movies from the Web site, the program also transmits an identifier number unique to each user on the computer. That creates the possibility that user habits could be tracked and sold for marketing purposes.

Privacy experts said they feared the log file could be used by investigators, divorce lawyers, snooping family members, marketing companies or others interested in learning about a person’s entertainment habits. It also could be used to make sure users have paid for the music or movie, and have not made an illegal copy.

“The big picture might be the owners of intellectual property wanting to track access to their property,” said Peter Swire, a law professor at Ohio State University.

Microsoft said the program creates the log file so a user does not have to download repeatedly the same track, album or movie information. The company said the ID number was created simply to allow Media Players users to have a personal account on the Web site dealing with the software.

Neither is sold or shared with others, and no information is collected on Microsoft’s servers that would be personally identifiable, officials said.

“This is essentially a case where it (the ID) doesn’t serve any purpose and it isn’t used,” Caulton said.

Jonathan Usher, another Windows Media executive, said Microsoft has no plans to market aggregate information about its customers’ viewing habits, but would not rule it out.

“If users tell us that they want the ability to get recommendations, that’s something we could look into on the behalf of users,” Usher said.

In a recent memo, Microsoft chairman Bill Gates ordered his company to check for privacy and security concerns before adding new features.

“Users should be in control of how their data is used,” Gates wrote. “Policies for information use should be clear to the user. Users should be in control of when and if they receive information to make best use of their time.”

Privacy researcher Richard Smith, who researched how Media Player stored and transmitted the information, questioned why the program has to give chapter information for DVDs at all because almost all discs have chapter listings in an interactive menu within the movie.

He said the feature seems to conflict with Gates’ directive.

“You can really see the Microsoft culture coming through that Gates wants to change. These guys are digging in their heels,” he said.

To drive the point even further, the WEF invited apologists from a wide array of dignitaries from wealthy society to proclaim that “we’re not doing enough” including Bono, Bill Gates, Hillary Clinton, and Queen Rania of Jordan.

I don’t think it would be possible to assemble a panel of pundits who are further disconnected from the ills which befall downtrodden peoples from around the world. Of course, those folks probably couldn’t afford the airfare and the motorcade to get them to Manhattan.

What’s most disturbing is that not a breath of “helping other people” is mentioned outside of the context of the violence directed toward the Western world. All that these folks are reinforcing is that a slap in the face such as September 11th is a healthy spark for discourse on the subject of world equality.

Anyway, as Shakespeare said, it’s an event “full of sound and fury, signifying nothing.”

-Ian.

——– http://biz.yahoo.com/apf/020204/world_forum_6.html

Monday February 4, 11:46 am Eastern Time

WEF Speakers Criticize America

Some World Economic Forum Speakers Assail America As Smug Superpower, Decry Policies By JIM KRANE Associated Press Writer

NEW YORK (AP) — They came in solidarity with this terror-wounded city.

But since they arrived, speaker after speaker at the World Economic Forum has lambasted America as a smug superpower, too beholden to Israel at the expense of the Muslim world, and inattentive to the needs of poor countries or the advice of allies.

With the forum wrapping up its five-day session Monday, some of the criticism has been simple scolding by non-Western leaders. But a large measure has come in public soul-searching by U.S. politicians and business leaders.

U.S. Sen. Hillary Clinton, D-N.Y., cited a global poll that characterized Americans as selfish and bent on arranging the global economy for their own benefit.

“We’ve not done our fair share to take on some of the global challenges” like poverty, disease and women’s rights, Clinton said Sunday. “We need to convince the U.S. public that this is a role that we have to play.”

Microsoft Corp. (NasdaqNM:MSFT – news) Chairman Bill Gates warned that the terms of international trade were too favorable to the rich world, a disparity that feeds resentment.

“People who feel the world is tilted against them will spawn the kind of hatred that is very dangerous for all of us,” Gates said. “I think it’s a healthy sign that there are demonstrators in the streets. They are raising the question of ‘is the rich world giving back enough?”’

At a press conference at the forum Monday, representatives of humanitarian groups had differing views on how much their messages were resonating with corporate and political leaders.

“Today I think there is broad recognition that no business concerned with its brand name can afford to be indifferent to human rights and social issues,” said Kenneth Roth, executive director of the New York-based Human Rights Watch Group.

Others said that the rich and powerful are listening to the needs of the poor, but that it’s unclear whether the forum will prompt any changes.

“We are swimming against the tide within a meeting like this…especially when you’re talking about the rights of homeless children, but at least we are swimming in the same river,” said Bruce Harris, executive director of Casa Alianza, a Costa Rica group that helps street children.

Held in the Swiss ski resort of Davos in its first 31 years, sponsors decided to move this year’s forum to New York to show support for the city after the Sept. 11 terror attacks.

About 2,700 corporate and political leaders, clergy and celebrities came to discuss the world’s problems, and have spent much time dissecting U.S. foreign policy, its possible role in breeding terrorism and the potential harms of globalization.

Few protesters turned up Sunday near the Waldorf-Astoria hotel, site of the forum, on the fourth day of the conference. But mostly peaceful demonstrations miles from the hotel generated 159 arrests — the largest in a single day since the conference started — and one case of vandalism was reported.

The total arrested so far during the meeting grew to over 200, mostly for disorderly conduct. Two demonstrations were planned Monday afternoon by a group promoting a wide range of causes, from environmental protection to the cancellation of developing countries’ debts.

In a curious convergence, the titans of business and politics at the meeting have seized on many of the same socially liberal issues that they have been accused of ignoring at past gatherings.

The forum’s agenda may have taken some of the steam out of street protests, which were sparse except for Saturday’s turnout of about 7,000 demonstrators, and has even paralleled issues under discussion at the World Social Forum, an anti-globalization conference under way in Porto Alegre, Brazil.

In Brazil, speakers on Saturday condemned the Israeli occupation of Palestinian lands, with one comparing the practice to apartheid-era South Africa’s creation of “Bantustans,” which were economically poor areas designated as homelands for blacks.

In New York, guests heard a similar message Sunday.

Zbigniew Brzezinski, former U.S. national security adviser, warned that Palestinian violence risked evolving into large-scale urban terror, while Israel’s response “will slide into a pattern of behavior that resembles the South Africans.”

Jordan’s King Abdullah II called for “international intervention to help steer the parties from the brink,” arguing that the “burning injustice of Palestine” had “fed extremism around the world.”

U.S. Sen. Patrick Leahy, D-Vt., chided his colleagues in Congress for giving too much foreign aid to Israel, the largest recipient of American help, and said too little aid flows to the neediest.

“I’ve been critical of the aid we’ve given to Israel,” Leahy said in an interview. “But the same complaint could be made of a number of wealthy Muslim countries. They’re not giving aid to the poorest of their own people.”