October 27, 2002 By SAUL HANSELL

IT was, someone in the room said, “a Don Corleone moment.” The room was in the New York office of the Boston Consulting Group, to which top Microsoft executives had been summoned in November 1999.

The offer, made by executives of four big airlines, was this: They would give Microsoft’s online travel agency, Expedia, access to their discounted “Web fares” and, in return, get half of Expedia. And the threat: If Microsoft refused, the airlines would announce their own travel site the next day, which happened to be the day of Expedia’s initial public offering.

Microsoft, unaccustomed to being on the receiving end of threats, refused. So on the morning of Expedia’s offering, the airlines said they would start a rival service, ultimately known as Orbitz.

The code name for the venture was T2, which the travel industry took to mean Travelocity Terminator. The airlines wanted protection against the rising power of Expedia and Travelocity, another online agency. They also saw Orbitz as a way to force down the costs of reservations systems, like Travelocity’s owner, the Sabre Group. And, of course, they wanted to make a mint by taking Orbitz public.

Three years later, the airlines have been able to use Orbitz as a blunt instrument to make sure the savings from the Internet – which is used for booking 20 percent of air travel – accrues to their benefit, not the other travel agents. But Orbitz has also compounded the beleaguered airline industry’s biggest problem: falling revenue. By disseminating their Web fares so widely on Orbitz, the airlines have created another way to ratchet fares even lower when they can least afford it. Indeed, some carriers have called a halt to Web discounts, threatening to undercut Orbitz’s biggest selling point.

“Orbitz accelerates the difficulties that the airlines have with the Internet” because it provides such complete pricing information, said Jamie N. Baker, an airline analyst at J. P. Morgan. He estimates that Internet sales by Orbitz and others have saved airlines $3 billion a year, but he says reduced fares, especially for business travelers, cost airlines even more. What is worse, he said, the pressure will continue if the economy revives and war threats abate.

ORBITZ’S owners – American, United, Delta, Northwest and Continental – have had to postpone their dreams of profit from taking it public and instead keep funding its losses. Indeed, there is a growing opinion in the industry that in trying to fortify Orbitz, the airlines made a Faustian bargain: Orbitz would charge the airlines unusually low fees, and the airlines promised to let Orbitz sell every discount fare they offered to the public, through any other travel agent or on the airlines’ own sites.

In theory, that is great for travelers, who can click on Orbitz and see nearly every discount fare. Orbitz was also to be a major disadvantage to other travel agents, both online and traditional. Agents, in fact, have lobbied extensively – but so far unsuccessfully – to have that deal declared an antitrust violation.

It is not so clear, however, that airlines benefit from having all their fares in one place. Like any retailer, airlines advertise sales. But they also try to move unsold seats through the equivalent of outlet malls: charter companies, cruise lines and, more recently, promotions on their Web sites. Their deal with Orbitz essentially forces every liquidation into the front window on Main Street.

“The airlines are shooting themselves in the foot,” said Edward P. Gilligan, president of American Express Global Corporate Services.

Web fares are so low that more business travelers want them, even with the fares’ restrictions. The airlines “are cutting their fares by 50 or 60 percent to save 2 percent in distribution costs,” Mr. Gilligan said.

A few airlines are pulling back from Web fares. Last March, America West lowered business fares and ended most deep discounting on the Internet. Last week, US Airways agreed to give travel agents who use the Sabre systems all the fares it makes available on Orbitz. In return, Sabre agreed to cut the fees it charges the airline by 10 percent.

“We were fooling ourselves to think we could put this product here and it wouldn’t affect prices there,” said B. Ben Baldanza, senior vice president for marketing at US Airways. “It’s gotten to the point where the outlet store has taken over the retail store.”

If other airlines adopt this approach, it could mean the end of Web-only discount fares.

“How can you have a Web fare if travel agents sell it over the phone?” asked Terrell B. Jones, former chief executive of Travelocity. “Whatever incentive there was to create incremental traffic or to shift people to using the Web will be gone.”

In the last 18 months, average domestic fares have fallen 27 percent, to a 20-year low, according to the Air Transport Association. Indeed, fares have fallen more than the economic slowdown would predict: for two decades, industry revenue has been roughly 0.9 percent of the gross domestic product each year. So far this year, it is 0.8 percent.

The airlines readily agree that falling fares are largely responsible for their woes. But the wounds, they contend, are not self-inflicted. Web discounts, they say, were never as big and widespread as travelers had thought, and the savings that Orbitz is helping them achieve more than outweigh the discounts it propagates.

“Orbitz has turned out to be very successful from our point of view,” said Gregory T. Taylor, a senior vice president of United Airlines. “Has it made it more difficult to have a fare that is slightly higher than the marketplace? The answer to that is yes. Maybe we could have charged a few dollars more in the past to people who appreciated our value. But I’m not sure the airlines had any choice about participating in the Internet. And by having a distribution channel that is really low cost, it puts competitive pressure on the other channels to bring their costs down.”

IN the early 1990’s, the costs of distribution – for agent commissions, reservations systems and telephone agents – represented more than 20 percent of revenue, and airlines were looking for ways to reduce them.

The Internet was their solution. Five years ago, as the airlines were setting up their Web sites, they tried lures for travelers. American Airlines invented Net Saavers – last-minute discount fares, listed on weekly e-mail messages, for weekend travel.

“It was never anticipated, nor did it come to pass, that we sold a lot of tickets through Net Saavers,” said Craig S. Kreeger, American’s vice president for sales. “It engaged people to come to our site and give their e-mail addresses to us.” All the other airlines quickly copied that program.

Then the airlines began introducing broader, Internet-only discounts. Delta, for example, had fare sales in which people who booked on the Web could save 5 or 10 percent.

“Two or three years ago, it made sense to offer people a small nudge to give online buying a try,” said Kevin Connor, Delta’s director of pricing and revenue management.

By last year, the number and size of the Web discounts were growing, with airlines sometimes offering hundreds of dollars off their lowest published fares. The trend accelerated as business travel fell off, and again after Sept. 11.

The growth of Web fares also coincided with the start of Orbitz in June 2001. Some travel experts argue that the airlines expanded their use of Web fares, at least at first, to help attract customers to Orbitz.

The site had other advantages, too, like software that could display far more route and fare options than older online travel agents. Moreover, the one-year delay in starting Orbitz – caused by software problems and an extended review by the Justice and Transportation Departments – created a sense of anticipation.

Once out of the gate, Orbitz became one of the fastest-growing sites in history. In the first six months of this year, it sold $950 million worth of tickets, estimates PhoCusWright, a consulting firm. That gives it a 14 percent share of the online travel agency market. (Expedia has 35 percent and Travelocity has 24 percent.)

So far, Orbitz has not been a financial success. Last year, it lost $103 million on revenue of $38 million. In the first quarter this year, it lost $9 million on revenue of $27 million.

The company filed to sell shares to the public in May, but the offering was delayed because both the Transportation and Justice Departments had resumed investigations into accusations that Orbitz was anticompetitive. The Transportation Department inquiry could be completed as soon as this week.

But even if Orbitz gets a new green light, its offering is not likely to advance while war clouds loom and air travel is depressed.

Over the summer, Orbitz’s owners had to give it a cash infusion of nearly $10 million, on top of the $205 million already contributed, according to a person involved in the financing. For the airlines, which are asking for huge government subsidies, further investment in a controversial Internet venture is politically awkward. But Orbitz found the terms available from private investors unattractive, this person said.

It is also unclear how profitable Orbitz will be if the market rebounds, particularly because the site has agreed to charge the airlines – owners and nonowners alike – fees that decline each year. The fee is now $6 a ticket.

Jeffrey G. Katz, the chief executive of Orbitz, says it is within striking distance of profitability – and that it will prosper because of its low costs and the $5 fee it charges travelers for tickets. It now has such a strong reputation for its fare search technology and customer service, he said, that it could thrive even without exclusive access to discounts. “Ultimately, people will find many of these prices at other places,” he said. “We believe having the most low fares isn’t enough.”

After Orbitz appeared, other online travel sites started demanding Web fares from the airlines, too. “We called up every airline every day, and said: `Can we have the Web fares? Can we have the Web fares? We have to have them,’ ” said Richard N. Barton, the chief executive of Expedia, now controlled by USA Interactive. The Orbitz rivals prevailed after agreeing to cut their fees by several dollars a ticket.

“They created a big bat to beat us over the head with, and it worked,” Mr. Barton said.

American, for example, signed a long-term deal in August to provide Web-only fares to Travelocity, but it then cut off Expedia, which did not agree to cut fees as much.

Expedia even stopped selling Northwest Airlines tickets for three weeks this month because that airline also wanted lower fees. A deal was reached a week ago, and Northwest tickets are back on the site.

THE airlines also hope to use Orbitz to put pressure on what they consider outrageously high fees charged by the reservations systems used by travel agents. But the airlines have little leverage.

The systems are under strict regulations to treat all airlines equally, largely as a result of misdeeds by airlines that set up systems and used them to try to favor their flights. Now the two biggest – Sabre and Galileo – are no longer owned by the airlines, but they can still name their prices. This has allowed the systems to raise prices far faster than their costs and to use the difference to pay subsidies of as much as $2 a flight segment back to travel agents.

“Over the last decade, the average fare at United went up by 14 percent, but the average fee to the reservation systems increased by 350 percent,” Mr. Taylor said. “That is an intolerably high cost.”

Orbitz was set up to help the airlines in two ways. It rebates some fees it receives from the reservations system it uses, Worldspan, reducing its cost for each ticket to $8 from $11. And it has developed technology to bypass the reservations systems entirely and connect directly to the airlines. Orbitz will charge only $4 a ticket for airlines that use that system.

In August, American became the first to use the direct connection, and 10 more airlines have agreed to use it the next year or so. Mr. Katz said the move would save American more than $10 million a year.

Most technology experts say central reservations systems are too useful to be replaced by a patchwork system of direct connections. But the airlines have created enough of a competitive threat to push the reservations systems to propose some alternative financial structures.

The deal struck last week by Sabre and US Airways is significant because Sabre agreed to cut its fees and hold them steady for three years in return for access to all the airline’s special deals. But it preserved the payment to travel agents.

Nowhere have Web fares caused more turmoil than at corporations, where travelers complain that they can find better deals on Orbitz or elsewhere than through their travel agencies.

In-house corporate travel managers “hate Web fares,” said Philip Wolf, president of PhoCusWright. “Their travelers don’t follow policy and book online.” Most companies try to concentrate their business with a few airlines, which offer negotiated discounts, but those deals do not include Web fares.

TRAVEL agents, to reassure clients they are getting the best deals, have started to use so-called Web bots – programs that search Orbitz and the airline sites. Some airlines, like Northwest, invite agents to use their Web sites, figuring that they can avoid the reservations system fees. But American has sued FareChase, a provider of Web bot software, arguing that travel agents should be able to book Web fares only if they agree to its broader proposal that would have agents pay most of the reservations system fees.

Orbitz, meanwhile, reports that 20 to 30 percent of its customers say they are buying tickets for business travel, and it has started its own site to serve small businesses.

Indeed, Orbitz and the other sites have hurt airlines’ ability to keep business fares high. The average business fare is now six times as high as the average leisure fare; the multiple was only three in 1995. That bubble was ready to be popped.

“Business travelers have known for a long time that we charge them more because we provide them services that cost more, then we top off the plane with leisure travelers,” Mr. Taylor of United said. “The Internet has made this more visible.”

Over all, 42 percent of business tickets issued by American Express are now discounted and nonrefundable, up from 25 percent in 2000.

Tight corporate budgets have been a big force, but the Internet is, too. In controlled experiments, American Express found that when travelers book tickets for the same route, those who use its Internet site spend 15 to 20 percent less than those who talk to its own travel agents.

John Berkley, vice president for strategic planning at American Express, said that was because someone might buy the first convenient nonstop when talking to a travel agent but might feel obligated to take a cheaper connecting flight if it is displayed on a screen.

The big airlines have responded to the increased use of discounted, nonrefundable fares by prohibiting travelers from using those tickets to stand by for later flights.

America West took another approach in March by lowering business fares substantially while eliminating Internet discounts. “We used to sell close to 10 percent of our revenue through online discount channels,” said J. Scott Kirby, America West’s executive vice president for sales and marketing. “And on transcontinental routes it got to be that if you really wanted to sell tickets you had to price them at $150 to $200 round trip.”

The business fare on those same routes was $2,300, and the lowest published fare was about $300. Now the business round trip is $800 and the Internet discounts are gone. Revenue per seat mile at America West, which does not have a big base of business travelers, has fallen less than at the other carriers.

“When we first started using the Internet, we were able to shift market share, but now every airline is doing it,” Mr. Kirby said. “We decided this is a game that leads to inexorably lower prices.”†

http://www.nytimes.com/2002/10/27/business/yourmoney/ 27ORBI.html?ex36755597&ei=1&en\0d758824e43a6e

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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.

———–

B.C. you later Net entrepreneurs are heading to U.S. Steve Ernst Staff Writer

Speeding tickets are no longer a worry for Dimitri Sirota.

Until a few months ago, the 29-year-old entrepreneur was driving 300 miles twice a week. He would zip down to Seattle to raise money and line up partnerships, then travel back to Vancouver, B.C., to run his telecommunications infrastructure start-up, eTunnels Inc.

Finally, like a growing number of his countrymen, Sirota moved his 8-month-old company to Seattle in hopes of attracting more venture capital and establishing a foothold in the much larger U.S. market.

“It’s very, very hard for an Internet company to make it in Canada,” he said. “And it’s not just because of the taxes. The Canadian business environment just doesn’t offer the opportunities that are here. People are more conservative and are far more risk-averse up there.”

An increasing number of Canadian entrepreneurs are being lured to the Seattle area by the city’s large pools of venture capital, this country’s more accommodating tax and securities regulations, and the proximity of other established e-commerce and technology companies. While start-ups in Canada don’t pay for employee medical benefits and can receive liberal tax credits for research and development, those advantages don’t seem to offset other factors luring firms to the United States.

Sirota is following a trail most recently blazed by Canadian expatriate Glenn Ballman, chief executive officer of Onvia.com Inc. Ballman moved his company’s headquarters to Seattle in 1998 and went on to raise $71 million in venture financing for the small-business e-commerce site before taking it public last month.

And he isn’t alone. This week Canadian Terry Drayton will take public the company he founded, HomeGrocer.com Inc. Drayton started the company in Vancouver before heading south in search of capital.

The publicly traded company NetNanny Software International Inc., an Internet filtering and security firm, last month moved its headquarters from Vancouver to Bellevue, in hopes of raising more private equity and to be closer to its biggest market.

George Hunter, executive director of the British Columbia Technology Industries Association in Vancouver, is familiar with the syndrome. “The story I hear most often is Canadian companies can achieve better valuations by moving to the States,” he said. “Many of them link up with U.S. venture firms early on and set up their business development and marketing headquarters in the U.S., but keep research operations in Canada.”

Canadian venture investors also tend to be more conservative than their American counterparts, said Gordon Ross, CEO of NetNanny and a third-generation Vancouverite.

“Getting investments in Canada can be a long, long process,” Ross said. “And with technology companies, you really can’t wait. Venture capitalists down here really understand that, they understand the risks and the nature of the business.”

Last year overall venture capital investment in the United States was 18 times greater than in Canada, according to a study conducted by the Boston Consulting Group, a Boston-based research firm. An estimated $1.2 billion in venture capital flowed into the Pacific Northwest last year, while all of Canada collected about $2 billion in private financing.

One thing Canada lacks is a large pool of institutional investors, the report concluded. “The environment is less dynamic in Canada because the venture capital market is dominated by passive and semi-public investors,” the report stated.

Canadian law prevents pension funds and other government-sponsored investment funds — which constitute more than 60 percent of the venture capital investors in Canada — from taking a large ownership stake in companies. Those venture capital investors tend not to take an active role in companies primarily because labor-sponsored funds receive an upfront tax credit for their investment, lessening their drive for high returns, the report concluded.

Ross, who started NetNanny 10 years ago, plans to keep the company’s software research and development operation in Vancouver to take advantage of tax credits and government grants.

The company also recently closed on $6 million in private equity from a group of European investors.

“It’s a totally different dynamic here,” said Buzz Leonard, chief operating officer of NetNanny. “Investors here really understand the business models of dot-coms and software companies and they know how to help them. In Vancouver, particularly, it’s still very much a resource-based economy and investors just don’t move as quickly.”

In addition to a lack of early-stage investment capital, Canadian start-ups are also following Interstate 5 south to escape tax and securities regulations that can inhibit a company from going public.

Last year 165 U.S. technology companies went public on the Nasdaq exchange, while only four Canadian companies held IPOs on Canada’s major exchange, the Toronto Stock Exchange, according to the Boston Consulting Group’s report. Venture capitalists trying to cash in on Canadian investments can face several challenges, observers said.

In many cases, capital gains tax rates in Canada are double those in the United States, eating into investors’ winnings.

Also, under Canadian securities laws, investors who acquire shares of a company before its IPO must hold those shares for 12 months after the IPO date. Underwriters in the U.S. typically require pre-IPO investors to hold their shares for at least 180 days.

American VCs can also face higher tax rates when investing in Canadian companies. Most venture capital firms in the states are formed as limited liability companies or partnerships and under Canadian law those operations are subject to higher capital gain tax rates. Canadian firms trying to raise money across the border also face a similar problem.

In addition, stock options for Canadian workers are typically taxed when the options are exercised, as opposed to when the shares are sold. That gives workers even more incentive to join what Canadians are calling “the brain drain” by moving south of the border.

ETunnels CEO Sirota got what he was looking for: he is now using a $4 million infusion of venture capital, garnered from a mixture of Silicon Valley and Canadian venture firms, to set up shop in Seattle.

“It’s also just a much bigger market,” Sirota said. “It just makes more sense to start a company here or San Francisco or Boston or Austin than in Canada.”