Connected: 24 Hours in the Global Economy

Daniel Altman

Farrar, Straus and Giroux

Connected: 24 Hours in the Global Economy
CHAPTER 1
"ERICSSON AND NAPSTER TO UNVEIL ONLINE MUSIC SERVICE": WHEN DOES WORKING TOGETHER REALLY WORK?
 
 
A scratched-up old train pulls in to the small station at Helenelund, just a few stops from the center of Stockholm. Outside the station, a road leads through a leafy working-class suburb. It passes under a low-slung highway, and there, across a two-way street, is a six-story cement building with the word "Ericsson" on the side. Next to it is another one, this one faced in brick. Behind them are two more. And there, off in the distance, the name of one of the world's biggest builders of telephone networks is visible again.
Six thousand miles away, at the wrong end of Los Angeles's trendy Melrose Avenue, a plain office block lies unmarked except for a white sign that bears an abstract image of a cat wearing headphones. A couple of blocks down the street, a heavy metal band is scorching its way through a set in a studio that used to besomeone's house. These two buildings are the headquarters of Napster, a former file-sharing service that is now an online music store listed on the stock market.
On the face of it, the two businesses make one of the oddest couples in the corporate world. One company is a pillar of its nation's corporate identity, a leader in design and manufacturing for over a century. The other is an upstart that began life as an illegal network of tech junkies and only recently became a respectable brand. Ericsson has more than fifty thousand employees in 140 countries. Napster has a couple hundred, most of them located in those two largely anonymous buildings on the edge of Beverly Hills. Yet in the global economy, the age-old telecommunications giant and the cutting-edge music retailer had no trouble finding each other.
For some time, Ericsson has been helping the operators of mobile phone networks to sell music to their customers, says Svante Holm, Ericsson's sales manager for applications and content. Some of them want to slap their own name on the services, but others think that there's a better way.
"A lot of them say, we are not a music store, that's not our core competence," Holm says, speaking--how else?--from his mobile phone on a train somewhere in Europe. Instead, these operators want to piggyback on an established brand in the music world. Though it's less than ten years old, Napster may hold the answer.
"We looked at the different brands in the industry, and we saw that their brand was recognized more than anybody else for legal and illegal downloads," Holm recounts. "We actually called them up," he says. "We flew over to L.A. and met their president and their business development team. That was the first meeting, really, and then it all went from there."
In this case, Muhammad was not expecting a visit from the mountain.
"We were like, 'Wow, that's a very interesting opportunity. I didn't even think about partnering with you in this way,'" says Larry Linietsky, Napster's senior vice president for worldwide business development. "And then over time, we began to understand what they were doing." Where Ericsson had a technical platform looking for a brand, he explains, Napster had a brand looking for as many platforms as possible.
It took six months of negotiation, but Ericsson and Napster came up with an online music service that would deliver songs to mobile phones and personal computers interchangeably. "The timing was perfect," Linietsky says. "There's nothing else like it out there today."
This time, working together really worked; Ericsson's corporate customers wanted online music for their mobile phone networks, and Napster was glad to supply it--along with its hot brand name. But that's not always how it goes. The road to corporate hell can be paved with extremely good intentions.
Companies link up for reasons ranging from the idealistic to the downright venal, and they do it in several different ways. The most minor can be sharing technologies, as American and Japanese car manufacturers have done for decades. After that, there are several steps up the ladder to a complete merger, which can take the form of anything from two companies joining together under an all-new banner to a hostile takeover followed by layoffs and liquidation.
The most successful linkups are usually built on a combination of comforting similarities and useful differences. Though that notion seems fairly obvious now, it wasn't always so.
In the 1960s, ambitious executives like James Ling of LTV and Harold Geneen of ITT constructed gargantuan conglomerates made up of dozens or even hundreds of often unrelated businesses. The rationale was to insulate investors against the ups and downs in any one industry by diversifying across several sectors. The reality was disappointing; with little in common, the component businesses were often hampered rather than helped by coming under unified management. In addition, executives sometimes used profitable businesses to subsidize those that were failing instead of simply letting them die. Their priority, it seemed, was not to make a profit for investors but to keep their own empires intact. Still, within a few decades, almost all of the conglomerates had crumbled or dissolved.
These days you can usually find a strategic reason for a merger announcement, even if it's not immediately obvious. An apt case study comes from eBay's acquisitions. In July 2002, the leading Internet auction site bought PayPal, a Web-based system for buying and selling products, for $1.5 billion. At that time, eBay had its own payment system, called Billpoint, but PayPal's was more popular. PayPal's technology, like Billpoint's, could be combined with eBay's existing auction platform. By bringing on PayPal--with its well-developed payment infrastructure and its valuable brand name--the company would provide a streamlined, immediately familiar tool for buyers and sellers alike.
Then, in September 2005, eBay offered $2.6 billion--with up to $1.5 billion more in performance-based bonuses--for Skype, one of the pioneers in voice-over-Internet telephony. Why did an Internet auction site need a telephone service? The reason wasn't obvious right away, but there certainly was one. Several companies with big online platforms, like Yahoo!, Google, and Microsoft,were getting into the voice-over-Internet business. If, one day, they decided to offer auction services, then they'd also have an added feature--voice--that eBay lacked. Nobody knew whether customers would want to talk along with their auctions ... but they might. With a voice partner in place, eBay wouldn't have to worry about getting caught in an unfair fight later on.
Even mergers that make sense on paper can run into trouble because of personal and cultural factors. In 1997, when Morgan Stanley, one of Wall Street's top investment banks, merged with Dean Witter, a similarly big name from the world of financial brokerages, it was the latest in a string of mergers bringing these two seemingly complementary types of businesses together. Yet the corporate cultures were jarringly different--a hierarchical, bread-and-butter retail brokerage firm versus a sparkling hothouse for financial wizards--and their respective leaders were intent on hanging on to power. They were so intent, in fact, that they touched off an eight-year battle over the future of the company. The infighting didn't end until Philip J. Purcell, the Dean Witter man who had been leading the merged company, resigned in June 2005. His replacement, installed by rebels on the board of directors, was John Mack, the former Morgan Stanley president who was passed over for the top job eight years earlier.
And those two companies were both based in the United States. When Daimler-Benz and Chrysler got together in 1998, the results were even messier. Daimler-Benz was a classic German conglomerate, backed by big banks and with its fingers in a variety of transport industries ranging from heavy trucks to airplane engines. Its name meant solidity and permanence, if not the cutting edge of technology. Chrysler was a down-the-line car company that had set a new standard for efficiency in the costlydesign process during the early 1990s but was shackled by a history of financial problems. In the past, its emphasis had been more on innovation than on long-lasting quality.
At first it seemed as though the merged companies had little interest in cooperating, even in the tried-and-true format of basing their vehicles on similar chassis. The new company's problems were amplified by several lawsuits related to the merger. But the main problem was figuring out which corporate model to adopt: that of Chrysler, striving to retain a lean-and-mean focus on building cars, or Daimler-Benz, a giant that relied on its workers' loyalty and its reputation for quality.
In 2000, amid calls for the resignation of the company's chief executive, a well-known investors' rights advocate said, "It may be better to have a miserable end rather than endless misery." As the economy slumped in 2001, a downturn in the global car market made the company appear even more bulky and uncompetitive, a product of empire building by power-hungry managers. It took five years for the chief executive, Jürgen Schrempp, to resign, a decision that raised the company's share price by 9 percent in a day, and other senior management from the German side soon followed. In the meantime, the economy had picked up, and the merger looked like it could finally work.
For both Morgan Stanley Dean Witter and DaimlerChrysler, part of the problem was the idea that the marriages would be those of corporate equals. When two businesses of similar size get together, it's not always obvious who should take control or whose culture should dominate. It may seem, in hindsight, that both merged companies made the wrong choice. The real failure, however, may have been to make the hard choices: which staff tocut, which operations to close, even which directors to force out, in order to stay true to a single vision of the new company. As they learned, there is little point in pursuing such a big merger anything less than wholeheartedly.
Culture clash isn't the only thing that can sink a corporate marriage, though. Sometimes, one spouse quickly finds out that the other is basically a gold digger. When the high-tech boom of the late 1990s sent the share prices of Internet companies skyward, some of them decided to turn their newfound paper wealth, which was based mainly on investors' eager expectations, into real assets. The shining example was America Online, the Internet service provider that arranged to buy Time Warner, one of the world's biggest media companies, in 2001. Initially, there was talk of synergies: how AOL's platform could carry Time Warner's content to larger audiences. But nowadays the deal is seen more as AOL's clever way of trading its Internet-bubble-inflated shares for Time Warner's real, tangible assets--in other words, as a steal. Indeed, the new-media-plus-old-media equation doesn't even fit anymore. It is AOL's Internet hand-holding service, not Time Warner's mature media empire, that is now seen as teetering on the brink of obsolescence.
For each of the evils described above, however, there can be a contrasting benefit. The most obvious is economies of scale. When two companies that do the same thing get together, they usually find that they don't need quite so many managers and back-office staff; duplicate departments for human resources, accounting, and similar functions tend to disappear. More controversially, the motivation for a partnership is often simply a lower cost of production for goods or services. That's the driving forcebehind so much of the outsourcing now used by companies in rich countries.
But on a more subtle level, buyouts can also enliven the buyers. Adding a hungry, up-and-coming division to a big firm can be just the thing to shake up a mature business and bring in new ideas--something Andrew Ertel, the chief executive of Evolution Markets, was taking advantage of on June 15.
Evolution Markets, which is based in New York, provides a setting for companies and countries to trade pollution permits handed out, respectively, by governments and treaties. All over the world, countries have found that emissions of carbon dioxide and other pollutants can be controlled by issuing these permits. They provide the lowest-cost way for society to reduce pollution.
The permits to pollute exist because it's not easy for governments, on their own, to know which companies can cut emissions most cheaply. All the governments have to do is issue permits covering the target amount of emissions, either by assigning them to companies--mostly in the energy and manufacturing sectors, which generate more pollution than service-sector businesses--or by putting them up for auction. In either case, companies can buy and sell the permits until they're left in the hands of the ones for whom cutting emissions is the most costly; those companies, clearly, are the ones to whom the permits to pollute are most valuable. The other companies are better off selling the permits and cutting their emissions to obey the law; for them, it's the cheaper option.
Evolution Markets is in the business of making this trading happen. Ertel was in Slovakia to check on Evolution Markets' joint venture there.
 
7:30 A.M. BRATISLAVA (1:30 A.M. NEW YORK)
I arrived late last night from London, where I was working to shore up our emissions brokerage desk in London (which is on top of the market, and we want to keep it that way) and meet with long-standing clients.
So I roll out of bed in Bratislava after a deep slumber--thank God for Ambien--and meet up with the senior management of Evolution Markets' Slovak joint venture, Evolution Menert. Our breakfast is at the hotel café's outdoor balcony, which overlooks a refurbished plaza in the Old City and the heavily secured American embassy. Greeting me are Ivan Mojík, a former official with the Slovak Ministry of the Environment and now director of Evolution Menert, and Miroslav Wöllner, Jr., the young, ambitious business director for the joint venture.
Our one-hour breakfast turns into a four-hour affair as we have an extensive, and at times animated, discussion of the state of the business and our plans for expansion.
Although we have the industry's most experienced emissions trading team working for us in the U.S., staffing is a huge issue for us in Europe--especially central Europe. Expanding in a region whose economy is in transition to cover an emerging commodity market, such as emissions, is a big challenge. Ivan, Miro, and I review a stack of résumés from prospects in Hungary, Poland, and the Czech Republic to support our regional expansion.
I'm also looking for the full 360, so we delve deep into the Slovak market: the business situation in the region; an update on arcane Slovak politics; efforts to improve the energy infrastructure and bring more renewable energy to the country; and, perhaps most important, our emerging competitors. The good news is that althoughthere are lots of competitors in the region, our market share is strong.
The guys at Evolution Menert have ten new deals in the pipeline that will bring central European companies into the European emissions market to sell carbon allowances. The European emissions trading market is dominated by major western European energy companies. Bringing the central European players to the market has been a core part of our overall global emissions brokerage strategy for winning market share from the big guys.
Evolution Menert plays a key role in the success of Evolution Markets' global carbon market brokerage business for precisely this reason. Our joint venture gives us access to a supply of credits and carbon allowances that differentiates us from our more than two dozen competitors in the global carbon market.
This is a classic example of a joint venture that works, and it works because we have a partner we trust and that is able to deliver what is expected. The joint venture is also an example of how a Wall Streeter like myself and a small-business man from Slovakia can come together to create a thriving business.
Our meeting breaks at 1:00 p.m. Slovak time. Ivan heads off to meet with clients. Miro checks back in at the office.
I take thirty minutes to see the Old City. The plaza where my hotel is located is a beautiful renovation at the center of Bratislava's Old City. It oozes Old World charm, but venture ten blocks in any direction and you get a taste of the more recent Communist past. The two conflicting Bratislavas--one being renovated for a storied past with streets jammed with Porsches and BMWs, the other staid and depressing remnants of the past they are trying to leave behind--show the success of the nation's new economy and the work yet to be done.
I always try to break away for a few minutes during my overseas trips, time to decompress and experience a little of the local culture. Today, as with most of my overseas "breaks," I am looking for a present for my wife--my number-one fan, and I'd like to keep it that way. I hit a few antiques stores with little success.
Around 1:30 p.m. I meet back up with Miro for a business lunch. This time we talk in detail about the prospects for creating so-called greened assigned amount unit (AAU) transactions. These deals permit central European countries to sell the greenhouse gas emissions allowances they get under the Kyoto Protocol and reinvest the proceeds in projects that further reduce emissions. Miro tells me both the Slovak and the Czech governments are interested, and I know from my contacts that we have some intense interest from a Japanese buyer.
Evolution Markets worked with Miro when he was at the Slovak engineering firm Menert and Ivan when he was at the Ministry of the Environment to structure the first such "greened AAU" deal in 2001. The deal is the nexus that now bonds the joint venture.
An hour later, I hop in the car with Miro. He drives me the two-plus hours to the Vienna airport for the flight back home. I doze while Miro pounds diet Red Bull. He has been up late working on a proposal for a client and studying for a law exam. Energy and drive like Miro's is everywhere in central Europe.
We cross the border at 3:45 p.m. I make a mental note to get a new passport. No pages left in this one. I count seventy-three countries visited and am reminded of my business partner's famously sarcastic line, "Business travel is glamorous."
We arrive at the Vienna airport around 4:30 p.m. I have about an hour until my flight. I hole up in the airport lounge and try to take care of U.S. business matters until my flight departs. My BlackBerrygets a true workout--this is clearly the best productivity tool I've ever had.
I board the 5:20 p.m. Austrian Airlines flight to JFK. A couple of movies, a nap, a few chapters of the Dan Brown novel on the National Security Agency, and lots of e-mails later, I arrive in New York. Good to be home.
Ten-thirty p.m. Eastern Daylight Time: I arrive back home and peek in on the kids first thing. I take a breath--already preparing for another day--and head off to bed.
 
The moment when a new international joint venture begins is always filled with hope and expectation. Sometimes, however, the reality fails to measure up. In times when almost any chief executive, anywhere in the world, can be asked, "What's your China strategy?" quite a few companies rushed into Beijing, Shanghai, and Guangzhou just a little too quickly. One of the most notorious disappointments was a joint investment by companies including Germany's Siemens, France Telecom, and Japan's NTT in Unicom, one of China's biggest telecommunications firms.
In 2000, after just a few years, the government forced the foreign investors to take their money back, along with a small profit that was probably just a fraction of what their stakes were really worth. The foreigners had little choice but to comply; the government maintained the controlling interest in the company, and they probably wanted to stay on good terms for future opportunities. By mid-2005, despite the continuing reform of China's markets, some big banks and investors were losing interest in Chinese share offerings and other deals. The government's short-term greed--or at least its unwillingness to share even amodicum of control with foreigners in an important market--may have cut into China's long-term economic growth, if only slightly.
So what did all these potential pros and cons mean for Ericsson and Napster? Investors seemed to view the partnership as a big deal for the small company and a small deal for the big one. On June 15, Napster's stock on the Nasdaq market, a completely electronic stock exchange, opened 7 percent higher and closed with a gain of 2 percent. In other words, investors finished the day believing that the pile of money one could someday earn from holding a share of Napster--discounted a bit for the time it would take to collect it--had increased by 2 percent.
Ericsson's shares also rose, but by less than 1 percent. That's still a better response than the one that greets many mergers and buyouts, where the market picks a winner and a loser--or worse, two losers. Even considering all the benefits that can come from working together, investors often see acquisitions as a zero-sum game. In cases of empire building, they're probably right.
In this case, investors seemed to agree with Larry Linietsky; the fit for Ericsson and Napster looked pretty good, at least on paper. And despite their extraordinarily different histories, the two companies' employees seem to have a youthful, informal attitude in common. Over in Stockholm, young people stroll through the gleamingly clean hallways wearing T-shirts and shorts, with their mobile phone microphones looped over their ears and sometimes even under their noses. Back in Los Angeles, where the preferred footwear ranges from running shoes to combat boots, the Napster crew is always ready for an impromptu basketball game behind their studio building.
Nevertheless, it's easy to get the impression that Napstermoves at a somewhat faster pace than businesses in most other industries. On the sidewalk outside the studio, Becky Farina, Napster's communications manager, notes that her company structured the leases on both its buildings to end at the same time, in case it needed to move to bigger digs. But she also says, "To the extent we can make this ours, we want to. We'll be here a long time." So exactly how much time is left on those leases? Two years, she says.
Working with a partner five thousand miles away can also be difficult, and it has required a lot of costly travel. "We're doing a lot of meetings both in Europe and in the U.S., in New York and L.A., where they have their main offices," Holm says. "They're actually coming out to Stockholm quite a bit."
The two companies' workers can't always be in the same place, though, and keeping in contact by telephone has been essential--even though the companies are separated by nine time zones. Indeed, Holm says, "The one thing that can be a little annoying is the time difference. Either we stay up really late at night talking to them, or they get up really early in the morning." In the global economy, however, even this obstacle can be turned into an opportunity. "When we stop working on it in Europe, they start working on it in the U.S.," Holm says of the project. "It seems like day or night there's always something being developed. It never stops."
Copyright © 2007 by Daniel Altman