BP Takes It Slow and Steady

Stung by recent missteps, the oil and gas giant will adopt a more cautious approach and reduce production targets, incoming CEO Tony Hayward says

by Stanley Reed

We have been burned, and we're turning conservative. That was the message communicated by results and comments from the once-swashbuckling, wheeling-and-dealing BP on Jan. 6. In one of his first public appearances since being tapped as CEO designate, Tony Hayward announced a sharp paring back of BP's future production estimates, while also sounding a note of caution on deals.

The company had said it would increase production at around 4% per year, but now Hayward, until recently the exploration and production chief, is warning that output will be flat this year, at about 3.9 million barrels per day. That will increase ever so slowly, to more than 4.0 million in 2009—a big drop from the roughly 4.8 million barrel-per-day 2009 estimate of a year ago.

Why the big change? BP (BP) has been hurt by a range of events, from nasty accidents to slower-than-expected startups of important projects such as the giant Thunderhorse field in the deepwater Gulf of Mexico. With a new chief executive officer coming in, the company seems to be gearing down and taking a close look at its operations, some of which have been troubled. BP may even be trying to ease the pressure on Hayward by lowering expectations. The market was disappointed by the new no-growth outlook. BP's stock fell by 1.2% to $63.02 in early trading Feb. 6 on the New York Stock Exchange.

Tapping the Brakes

Like all of its competitors, BP is finding that high oil prices, meaning anything above roughly $40 per barrel, are a mixed blessing. With capital investment up across the industry, it's now jockeying with its competitors for the limited numbers of skilled contractors and equipment available. BP has the reserves in place; it just can't round up the people, rigs, steel, and the rest to develop them as fast as it might like.

"Trying to go at the pace of two to three years ago would be unwise, not safe," Hayward said. He added that a lot of the people being hired by oil-service companies such as Halliburton (HAL), which are essential contractors to the majors, are "sort of green."

For BP, costs are rising at an annual rate of about 14%, Hayward said, with drilling-rig rates alone rising by 44% in 2006, although BP was able to hold the increase to 34% through long-term contracts. Hayward also said governments were taking advantage of the high price environment to push up tax rates. He mentioned Britain, Alaska in the U.S., and Venezuela as examples.

Playing Defense

Hayward has also learned a harsh lesson from watching the pummeling his predecessor, John Browne, has taken in the media and from U.S. politicians this year. Browne, who has been struggling with the fallout from the March, 2005, explosion that killed 15 people at a BP refinery in Texas City, Tex., recently announced he would step down at the end of July, 2007, rather than at the end of 2008 as planned.

Other operational issues, such as leaks and production shutdowns in Alaska, have also darkened the twilight phase of Browne's 12-year tenure. Hayward said that in the coming months he would be "focusing like a laser on safe and reliable operations."

In an indication of how much Browne's luster has faded, Hayward was almost forced by reporters' questions to come to his predecessor's defense. "John has done an absolutely outstanding job leading this company for a decade or more," he said.

Despite the controversy over U.S. operations, it's still clear that Browne has built a profit machine at BP, which generated $28.2 billion in net cash flow for 2006, a 5% year-on-year increase. Production has almost tripled under his tenure, and reserves have more than doubled.

Eye on Russia

Still, the company came under some pressure in the fourth quarter, largely because of a 5% drop in production volumes and lower prices. Sharply lower margins in refining and marketing, not BP's strong suit, also hurt. Replacement cost profits were down year-on-year by 14%, to $3.89 billion for the fourth quarter, but cash flow of $5 billion was actually up 17%. Prices of natural gas, where BP is a big player, were down $4 per barrel, equivalent to $35.21, compared to the fourth quarter of 2005.

BP put a brave face on the issue that's worrying investors most—the fate of its Russian joint venture, called TNK-BP. The company's CEO, Robert Dudley, brushed away concerns that BP might suffer the same fate as Royal Dutch Shell, which was recently pressured into ceding a majority of its centerpiece Russian project, Sakhalin 2, to Gazprom. Dudley says that his company was "operating in the sector without difficulty." He also says he was having "constructive discussions" with Gazprom on developing the giant Kovytka gas fields in East Siberia, though he warned that the project, whose end customer is likely to be China, was "complicated and going to take a long time."

With Browne sitting by his side, Hayward didn't give many clues about where he will be taking BP. He indicated he would continue to follow Browne's strategy of seeking out giant discoveries that offer economies of scale. On the issue of mergers, Hayward said that he had learned from Browne that M&A was just a tool for implementing strategy. He said that thanks to recent high prices, there has "been more value in selling than in purchasing" assets.

Europe vs. Apple: Facing the Music

At some point, the company will need to address concerns about its iPod-iTunes DRM link. Will Apple eventually inch toward interoperability?

by Dan Carlin

When Norway's consumer protection agency filed a complaint last June against Apple (AAPL), the Cupertino (Calif.)-based digital music and computing giant barely blinked. After all, with sales booming around the world, how much damage could a small band of critics in a nation of 4 million people wreak?

Plenty, it turns out. The Norwegian Consumer Ombudsman continued to develop its case, which alleges that the exclusive link between Apple's iPod and iTunes music store violates Norwegian consumer law by preventing iPod owners from playing songs bought from other online services or listening to iTunes songs on rival MP3 players. "We want to make it very clear in Norway that their business isn't fair to consumers," says Torgeir Waterhouse, a senior advisor to the Norwegian Consumer Council, who is leading the Apple investigation.

Consumer Backlash

Now the mouse that roared is picking up supporters. On Jan. 25, the Dutch Consumer Ombudsman weighed in with its own concerns over what spokesman Ewald van Kouwen called "illegal practices" by Apple. That brings to seven the number of European countries that are looking into the iPod-iTunes connection, including France, Germany, Sweden, Denmark, and Finland (see BusinessWeek.com, 1/25/07, "Consumer Groups Wage War on Apple DRM").

The implications of a snowballing consumer backlash can't be lost on the digital music star, which sold nearly $9.6 billion worth of iPods and digital music in the fiscal year ended last September and got 40% of revenues outside the U.S. Indeed, the growing chorus of discontent—and the likelihood of a legal showdown in Norway—could have a ripple effect across Europe and throughout the digital music business.

Experts say Apple and its competitors, especially Sony (SNE) and Microsoft (MSFT), who could likewise be targeted for similarly closed business models, must take this David vs. Goliath battle seriously. "Apple is concerned about precedent," says Mark Mulligan, senior analyst with JupiterResearch in London. "There's a good chance whatever happens in Norway will be followed elsewhere in Europe."

EU Opposition

Indeed, the risk facing Apple is that the European Commission, which made waves with its antitrust case against Microsoft and could strike again against Intel (INTC), might step into the battle. "If Apple becomes the major hub between the consumer and the music industry, one could argue there's a need for Europe-level intervention," says Stefan Bechtold, senior research fellow at the Max Planck Institute for Research on Collective Goods in Bonn, Germany.

Such a move, were it to happen, could take five or more years, cautions Andrew Sheehy, the founder and vice-president at digital music consultancy Generator Research, in Newton Abbot, England. "Getting an EU-wide interoperability directive would be very difficult and time-consuming," he says. "Apple will try to string it out as long as possible." And if the matter made it to European court, Sheehy argues, "Apple would take them to the cleaners" because the legal underpinnings are weak.

Long before then, however, Apple must deal with Norway. By September of this year, the company will be required to show authorities there that it has begun modifying its digital rights management (DRM) system to comply with Norwegian law. If it does not, the Norwegian Supreme Court could order a shutdown of the Norwegian iTunes site. Or Apple, which declines to comment, could pull out of the market. "It's up to them to do the right thing," says Norway's Waterhouse.

Deconstructing DRM

The stakes are far greater than the tiny Norwegian market. If Apple agrees to modify its DRM policy under order, or avoids the situation by pulling out of Norway altogether, it may have to take the same steps to accommodate other European countries with strong consumer protection laws. With a combined population of nearly 200 million, the seven countries already examining the iPod problem represent a big, wealthy market. Indeed, in a report released last year, Credit Suisse Group (CS) analyst Robert Semple projected Apple could sell more than 309 million iPods in Europe by 2009.

That makes this a tough call for Apple, which has built its digital music empire on the seamless integration of the best-selling iPod and iTunes. Apple's FairPlay DRM system enforces the restriction that iTunes downloads can be played only on iPods and that iPods can't play songs downloaded from other paid services.

The close link has been a key to Apple's success, and the company is loath to weaken it in any way. "[Apple's] overwhelming market share is based in large part on its ability to lock people into that device," says Josh Bernoff, principal analyst with Forrester Research (FORR) in Boston. "Hell will freeze over before Apple gives up the secrets to its DRM system."

Apple's Options

Though it won't discuss the issue publicly, Apple quietly acknowledged the risk in its 2006 10-K. Noting that "certain countries have passed legislation or may propose legislation that would force the Company to license its DRM solutions so that content would be interoperable with competitor devices," Apple cautioned that such moves might lessen antipiracy protection for digital content and affect its licenses with suppliers. What's more, if the company were unable to devise alternative solutions in a timely manner, it "could have a materially adverse affect on the Company's operating results and financial position."

So far that risk hasn't spooked investors, who have driven up Apple shares 43%, to $85, since the Norwegians made their move last June. Some say there are obvious holes in the case—including the fact that tech-savvy consumers can disable its DRM simply by burning the songs onto a CD and ripping them back onto a computer. Analysts say Apple would marshal that and other arguments in its defense. Norway might have to settle for a compromise solution, such as a requirement that Apple more clearly disclose to potential customers that its products are not interoperable with rival offerings.

Changing Market

Norway and the EU aside, Apple may not be able to resist responding to market forces. Some major music companies have already discussed the possibility of selling non-DRM-protected MP3s directly on their own Web sites, which would put pressure on Apple to modify or eliminate FairPlay. And the growing strength of music phones and other alternatives to the iPod eventually may force Apple to modify its business model.

Until that happens, the erstwhile computer company will continue to make hay with its music bonanza—and Europeans will likely continue snapping up iPods and iTunes by the millions. The long-term outlook of Apple's digital music business in Europe may be darkened a bit by the prospect of heavier regulation, but the company's rapid growth isn't likely to be halted anytime soon.

Belgian Court Deals Google a Bombshell

Publishers who sued the Internet giant for copyright infringement have won their case. A one-off glitch—or the end of search-engines as we know them?

by Kate Norton

It has all the makings of an epic David vs. Goliath battle: A band of scrappy Belgian publishers, citing copyright infringement, have taken on Google and emerged victorious. On Feb. 13, a Belgian court said the search giant could not reproduce certain copyrighted titles and summaries on its Belgian Google news or Google.be Web site. What's more, the Mountain View (Calif.) company must pay €25,000 a day ($32,500) until it removes all related content. Google says it will appeal.

At first glance, it might be easy to dismiss the case as a one-off. After all, the ruling only applies to French- and German-language publications in Belgium, including Le Soir and La Dernière Heure, that are represented by Brussels-based copyright group Copiepresse.

But if the Belgian case is upheld, or if similar cases are filed and won in other jurisdictions, it could have radical implications for Google (GOOG). "A lot of the value of the [Google] service is its comprehensive nature," says Frédéric Louis, a partner at the law firm Wilmer, Cutler & Pickering in Brussels. "The more national exceptions you have to make, the more it loses that value."

An Internet in Disarray

Indeed, the search powerhouse has traditionally taken a very aggressive position on copyright, citing the principle that "fair use" allows it to use snippets of material and a link to the full story on the copyright-holders' sites, says Lee Bromberg, an intellectual property attorney at Bromberg & Sunstein in Boston. "The Belgian ruling suggests that…they're going to have to be more compromising," Bromberg says. "That's a pretty serious wake-up call."

And it's not just a wake-up call for Google. That's because the entire concept of search indexing and news aggregation relies largely on compiling Web pages and online content for free. "I think if the Belgium decision holds up on a broader basis the whole Internet will be thrown in disarray," says Mark P. Kesslen, an attorney with Lowenstein Sandler who chairs the firm's intellectual property group. "Go to Yahoo! news; go to any of the sites that are an aggregator of content, and they are not getting approval."

No question, search engines and portals direct vast amounts of traffic to Web sites. But the Copiepresse case underscores publishers' concern that, while their sites may get more visitors thanks to Google and the like, it's the news aggregators who take more of the revenue. In many cases material is being reproduced outright, with no return to the copyright owner. Copiepresse has also accused Yahoo! (YHOO) of copyright violation, and Microsoft's (MSFT) MSN has also landed in hot water with some Belgian newspapers.

Not Even Summaries

"All publishers are worried that they have developed too great a dependence on portals, which now makes it hard to oppose them and get a fair deal," says François le Hodey, chief executive of Brussels-based publisher IPM, which puts out La Libre Belgique and other publications and is represented by Copiepresse. "It's time to say 'hold on' and take some time to establish the rules of the game."

To be sure, Google News doesn't reproduce entire articles. Instead, it posts news summaries and includes links to the full articles on the original site. But the Belgian group argues that even Google's use of headlines and story summaries violates copyright law.

The Belgian papers aren't alone in taking issue with Google. Two years ago, Agence France-Presse filed a suit seeking damages after Google put photos and story snippets from the French newswire on its news search page. The case is still pending and Google has dropped AFP content in the interim. Google has also run into trouble with publishers and authors over the scanning and digital reproduction of books. (The McGraw-Hill Companies, parent of BusinessWeek.com, is among them.)

Defining Fair Use

Google said in a statement that it believes its news service is entirely legal and that it was "disappointed" with today's judgement, which affirms a preliminary ruling last September (see BusinessWeek.com, 9/27/06, "Google in Tussle for Digital Rights"). Google has long held that any publisher not wanting to be indexed on Google News can opt out, or use a tool called robots.txt, which enables publishers to block items from being indexed.

Le Hodey of Copiepresse believes the ruling could embolden other publishers that operate under EU copyright directives to initiate proceedings against Google, Yahoo!, and MSN. Perhaps, but copyright laws aren't harmonized across the EU. For example, the concept of what constitutes "fair use"—usually sufficient acknowledgment of authorship—is more elastic in some countries than in others.

While some copyright holders are bound to try to exploit the ruling, "it would be a consumer tragedy if [the decision] became globally accepted," says Scott Devitt of Stifel Nicolaus & Co., who views the ruling as a one-off. "I think that Google will do what it needs to do to set it straight."

That seems to be exactly what Copiepresse wants. While some papers are happy to get whatever exposure they can from being included in Google News, le Hodey says most are eager to establish a more rewarding arrangement. "Finding a fair deal is in everyone's interest," le Hodey says. "The portals need content, and to keep producing that quality content, while we the publishers need to keep reinvesting in the publications that generate it."

With Dan Carlin, Robert Hof, and Catherine Holahan

Audi Aims Even Higher

The German automaker's 63% profit jump for 2006 came on global sales growth and better revenues per car. Its CEO predicts a 50% rise in sales by 2015

by Gail Edmondson

The driver of the silver, $100,000 Audi A8 cruised gracefully into Audi's headquarters plaza in Ingolstadt, Germany, passing an arc of gleaming models ranging from the sassy new TT coupe to the $130,000 R8 super sports car. For visitors arriving one by one in a continuous stream of identical, chauffeur-driven A8 sedans, the corporate choreography carried one loud message: Audi has made it.

The Bavarian automaker's profits and sales are surging, and its cars continue to win best-in-class accolades. On Feb. 28, Audi's new chief executive, Rupert Stadler, delivered 2006 financial results that matched the high-octane model lineup. Group revenues rose 17.1%, to $40.7 billion, powered by strong sales growth in Europe, the U.S., and Asia. Net profits jumped 63%, to $1.75 billion.

"By 2015, Audi will be No. 1," vowed Stadler, Audi's former finance chief, who became CEO on Jan. 1 after former chief Martin Winterkorn was kicked upstairs to become CEO of parent company Volkswagen.

Bottom-Line Bonanza

Though Audi's revenues and vehicle sales still lag behind those of German premium-car rivals BMW and Mercedes (DCX), its engineering edge and design savvy have polished Audi's premium-brand image to a high sheen. Now, global market-share gains and profit improvement are narrowing the gap and transforming Audi into an ever more powerful rival. Stadler forecasts Audi's sales will sprint from 924,085 cars in 2006 to 1.5 million by 2015.

The most telling shift was Audi's bottom line. The carmaker's 6.2% operating margin, up from 4.9% in 2005, reflected the rising number of high-priced models in Audi's overall lineup—and an increase in sales of pricey options. The 2005 launch of the $40,000 Q7 luxury sport-utility vehicle also helped boost the mix, as did sales of the spaceship-like R8 sports car.

Average revenues per car for the A6 sedan, one of Audi's most important models, have risen 70% over the past five years as well-heeled buyers outfit their cars with expensive options such as high-end audio systems, leather seats, and more powerful engines. The increase in average revenues per model helped Audi match Mercedes' 2006 operating margin and edge closer to BMW's vaunted 8% return on sales. Audi's return on investment, meanwhile, hit a record 14.2%.

Lineup Expansion

Stadler isn't bent on topping Mercedes or BMW in vehicle sales, but rather a combination of metrics such as quality, customer satisfaction, innovation, brand image, and financial performance. "If one of our competitors is selling more [than Audi] in 2015, I wouldn't worry about it," he says. "This is not a volume-based strategy alone."

Even so, Audi carried out a blistering sprint for volume in 2006, bringing new models to market nearly every month, adding sportier cars such as the $130,000, 480-horsepower R8, and new niche models like the plush, seven-seat Q7 SUV, which goes head-to-head with Mercedes' M-Class and BMW's X5.

At the Geneva Auto Show on Mar. 6, Audi will expand its lineup further with the A5 coupe, followed by a new A4 small sedan late this year. In 2008, the company will launch a baby SUV dubbed the Q5. Stadler also announced that Audi is developing a sporty small car, likely to rival BMW's hot-selling Mini.

Serious Challenger

Audi's widening product palate and huge global marketing push is finally giving it traction in the U.S., where sales are much weaker than those of BMW and Mercedes. In 2006, Audi's U.S. sales rose to 90,000 cars, up 8.5%, including 10,000 Q7 SUVs. Marketing chief Ralph Weyler says Audi will reach the 100,000-car milestone in the U.S. in 2007 and top 1 million in sales globally. In January, Audi's global sales rose 8% over the same period.

China is the real jewel in Audi's global crown. Last year, Audi sold 81,700 cars there, up 39%, defending its position as market leader among premium automakers in one of the world's fastest-growing markets. "We feel like China is our second home market," Stadler says.

It has now been 17 years since Audi launched its audacious quest to equal global luxury kingpins BMW and Mercedes. Few believed back in 1990 that Volkswagen's mid-market unit would make the premium grade. Until recently, both BMW and Mercedes dismissed Audi as a serious global rival, citing its weakness in the U.S. and smaller share of expensive models among overall sales. But Audi's gains in 2006 have proven its competitors naive.

Carbon Concerns

True, Audi was relatively late to the market with an SUV, but first-year sales of the Q7 showed its adeptness at designing models that hit a consumer nerve. Worldwide, Audi sold 52,000 Q7s in 2007, overshooting its initial forecast despite the trend toward shrinking sales of large SUVs. To address concerns about fuel consumption and emissions, the automaker recently unveiled a clean-diesel V-12, 500-horsepower version of the monster Q7, which gets better mileage than gasoline while still offering serious horsepower and torque. The diesel version sprints from zero to 100 kilometers per hour in 5.5 seconds.

The only cloud hanging over the ambitious Bavarians in Ingolstadt is the growing alarm over global warming and the threat of government regulation to force drastic cuts in emission levels. For high-performance cars such as those made by Audi, BMW, and Mercedes, the challenge of meeting cuts in carbon dioxide levels is nearly impossible, Stadler said.

For now, Audi is proffering smaller models such as the A3, which has carbon dioxide emissions below the restricted levels being debated by the European Union. It also has launched a pilot project to synchronize traffic flows with traffic lights, minimizing start-stop patterns that exacerbate emissions. But if the climate-change debate heats up, Audi's new management may have to change gears and delve rapidly into new technologies—just when the race was starting to get really fun.

A Backlash Against Private Equity

Grumbling by unions over post-deal job cuts has escalated into a public outcry

by Kerry Capell

For titans of finance, the annual Super Return Conference in Frankfurt is a chance to hobnob, broker deals, and attend sessions on topics such as "How big can financing, funds, and fees get?" But when legions of private equity heavyweights arrived at this year's conclave on Feb. 27, they faced union protesters brandishing placards saying "Conference of the locusts" and "Private equity equals asset stripping."

The small demonstration was just the latest protest against the growing clout of private equity in Europe—a trend not lost on the gathering. Inside the hall the talk often turned to why private equity's image has gotten so tarnished, how big an anti-private equity backlash might become, and what participants could do to restore a bit of luster to their corner of finance. "We're all trying to figure out how to deal with the onslaught of public equity," Texas Pacific Group founder David Bonderman told the 1,700 delegates at the conference.

As the size and number of private equity deals multiply across Europe, opposition is brewing. Even in Britain, which boasts the most active private equity market in Europe, low-level grumbling by trade unions over job cuts has escalated into a public outcry. In recent weeks, Labour politicians and even City of London bigwigs have criticized the industry for its lack of transparency and the amount of debt foisted on takeover targets. "High levels of debt at a time when interest rates are rising could lead to a financially destabilizing environment," says Michael Hughes, chief investment officer at Baring Asset Management Ltd. in London.

The controversy has arisen at a time of unease in Britain over record numbers of corporate takeovers, huge bonuses and salaries in the financial sector, and the growing compensation gap between the City of London and the rest of the country. "It's a shame that an industry that has contributed so much to the economy is suddenly seen as the lightning rod for everything that ails British business," says Patrick Dunne, managing director at 3i Group PLC in London.

NO LONGER UNDER THE RADAR
The tipping point came on Feb. 6, when a quartet of private equity firms said they were mulling a $22 billion bid for British supermarket chain J Sainsbury PLC (JSAIY). "Until recently the firms have operated well below the radar screen of public interest,'' Richard Lambert, director-general of the Confederation of British Industry, noted in a Feb. 14 speech in London. "Now they have reached a size where that approach has to change.''

The industry is making moves to get out in front of the issues—and to stay one step ahead of regulators who might seek to rein it in. Notoriously media-shy Damon M. Buffini, managing partner at Permira, Europe's largest private equity firm, is speaking out about the industry's need to become more open. "You only have to look at the British car industry to understand that if you don't take action to put a business on a firm footing, things can go badly wrong," he said in a rare radio interview with British Broadcasting Corp. on Feb. 23. In addition to agreeing to meet with union leaders, Permira has promised to reveal the names of its investors and provide more information about the companies it owns.

No doubt private equity has played a big role in London's success as a global financial center. Taking advantage of a strong economy and low interest rates, buyout firms have been able to borrow vast amounts of cash, pay themselves hefty dividends, and give their shareholders high returns. But with public scrutiny at an all-time high, industry executives fret that all it would take is one bad deal for regulators to crack down. Says Steven G. Puccinelli, head of private equity in Europe for buyout firm Investcorp: "We need to do a better job explaining what we do."

with Gail Edmondson in Frankfurt

Identity Theft: The 'Business Bust-Out'

The "bust-out" is just one of the schemes fraudsters use to steal your business identity, a crime that has gone largely unnoticed in a legal system focused on consumer ID theft

by John Tozzi

A criminal rents space in the same building as your company. Then he applies for corporate credit cards using your firm's name. The application passes a credit check because the company name and address match, but the cards are delivered to the criminal's mailbox. He sells them on the street and vanishes before you discover your firm's credit is wrecked.

The so-called "business bust-out" scam is one way sophisticated criminals steal business identities across the country (see BusinessWeek.com, 4/17/06, "Would I Lie to You? Five Cons Still Kicking"). Identity thieves increasingly target businesses instead of individuals, experts and law enforcement officials say, but federal law and many state statutes don't consider business identity theft a crime. That's because the raft of identity theft laws passed in the last decade apply mostly to individual consumers—not business entities.

A Gap in Statutes

While business identity theft can often be prosecuted under other statutes, like mail fraud or wire fraud, businesses victimized lose many of the protections afforded to consumers under identity theft laws, like access to information about their credit. Before California last year amended its 1997 identity theft law explicitly to include crimes targeting business entities, a business whose identity had been co-opted could not even get a police report. "We were having businesses being taken over and their names being used and I could not prosecute them, at least under ID theft statutes," California Deputy Attorney General Robert Morgester says.

It's difficult to say how many businesses have been victims of identity theft because most of the research focuses on complaints by consumers. Some studies say there were as many as 8.9 million individual victims nationwide last year, and estimated annual losses approach $50 billion. But the most sophisticated identity thieves increasingly are targeting businesses because the payoffs are bigger, Morgester says. Business accounts generally have higher credit limits and make larger purchases than consumers, so hefty charges by scammers are less likely to raise red flags. While most consumer frauds won't net a criminal more than $5,000, targeting a business can bring in 10 times that or more, he says—so "From a criminal's viewpoint, it's far more cost-effective to target a business rather than a consumer."

In a July 19 proposal, the Justice Dept. asked Congress explicitly to include businesses and organizations in the federal identity theft statute. "This is a real gap," says Betsy Broader, assistant director of the Federal Trade Commission's identity theft division. "The current federal law looks at ID theft as a crime against individuals."

Small Businesses at Risk

Small businesses in particular make ripe targets because they may be less savvy about protecting sensitive information than big companies that can afford to hire dedicated privacy officers. Often, small-business owners are just too busy to worry about identity theft—until it happens to their firm. "The worst thing a small business can do is think of themselves as a small business," says Linda Foley, co-founder of the nonprofit Identity Theft Resource Center. "You have to be a small business with a Big Business mentality."

Foley says business owners can protect themselves by keeping sensitive files under lock and key (electronic or otherwise), by restricting access only to employees who need it, and by closely watching their books. But sometimes there is little a business can do to keep from becoming a victim, as in the "business bust-out" scheme described above.

The new laws in California and the proposed federal change may give law enforcement the tools it needs to go after business identity theft. But because perpetrators can be elusive and investigators have limited resources, often the crime isn't prosecuted at all. According to a 2002 study by the Government Accountability Office, local prosecutors reported only being able to pursue a "small fraction" of reported identity thefts. Morgester says some detectives have 50 identity theft cases on their desk at once, and they must focus on the handful where they think they can make an arrest and get a conviction. If the loss is relatively small—under $10,000, he suggests—police may be reluctant to take it on. At the federal level, some U.S. attorneys have thresholds of $1 million.

Victims Must Investigate

But the best solution for businesses that have been victims of identity theft can be to do the legwork of an investigation themselves, says Morgester. Often business owners must do so anyway to recover their credit and reputation. If victims follow the paper trail and bring investigators a lead, police and prosecutors will be more willing to pursue it, he says.

"There's a lot of cases where the corporation or an individual by themselves can put together 90% of the evidence," Morgester says. "We've had a number of cases where, based on the material we had brought to us by the victims, the only last step we had to do was write a search warrant and kick down a door."

The Richest Zip Codes—and How They Got That Way

As the ranks of the super-rich grow, they are increasingly grouping in tighter—and wealthier—communities. Find out where

by Peter Coy

Search the Internet for luxury real estate across the U.S. and you might be surprised by the results. Just because a neighborhood has a rarefied Zip code, it's no guarantee that all the houses listed within it will be equally opulent. Some may even be downright modest.

Take, for example, Greenwich, Conn. There in 06831 is a house selling for just $575,000. For the Wall Street and hedge-fund crowd who have flooded into town in recent years, a price that low is a rounding error. Far from a palace, it's a 672-square-foot cottage with two bedrooms and one bath, and it sits on just a tenth of an acre.

Why would anyone build such a dinky house in a place like Greenwich? Today, of course, no one would. The explanation is that the house was built way back in 1926, when Greenwich was a more or less normal country town with a handful of large estates. And therein hangs a tale about the transformative power of money.

Into the Stratosphere

Here's what's happening: The rising tide of wealth in the U.S., and the growing concentration of that wealth in relatively few hands, is being reflected in the tiering of the U.S. real estate market. Across the country, there are communities such as Greenwich that were once home to the merely affluent but have been gradually transformed into magnets for the growing class of the super-wealthy. In some of these towns—like Newport Beach in California's sunny Orange County, or Paradise Valley, Ariz.—the golden transformation is recent. Others, like Greenwich and Glen Head, N.Y., have been gilded for years.

In each of them, though, the same pattern is occurring: The very rich replace the well-to-do. The very rich, in turn, are displaced by the super-wealthy. Eventually, these towns levitate into the real-estate stratosphere, with anachronistic houses such as that little Greenwich cottage as the only reminder of what once was. (Interestingly, even in wealthy areas like Greenwich; Paoli, Penn.; or Manhasset, N.Y., more modest dwellings once were common. These were, after all, home to the mechanics, teachers and servants who worked for their richer neighbors. Today, even these homes, assuming they aren't torn down by a new owner and replaced with a much larger edifice, are priced well beyond the reach of ordinary taxpayers.)

In 2006, the nation-leading median sales price for a single-family house in 06831 was just a hair under $3 million—a figure that was pulled up by the big country estates and down by relics like the 672-square-foot cottage.

Short-Term Fall

More evidence that the top of the market is becoming detached from the rest: During the five-year boom in housing prices, from the third quarter of 2001 through the third quarter of 2006—the last period for which data is available—overall housing prices rose rapidly, but prices in the nation's richest Zip codes went up even faster.

For the U.S. as a whole, the five-year increase in the Case-Shiller Home Price Index was 63.7%, while the increase was 79.5% for those Zip codes with a median sales price of $750,000 or more, according to Fiserv Lending Solutions, a unit of Brookfield (Wisc.)-based Fiserv that supplies data and software to lenders.

Even the most expensive Zip codes aren't immune to the current market downturn. Prices have fallen in most of them. But the increase in the ranks of the very well-to-do almost guarantees that demand to live in exclusive areas will continue to drive prices upward over the long run. (Last year's third quarter is the most recent for which Fiserv has complete data for its index, and last year's second quarter is the most recent for which it can calculate a reliable median price for each Zip code.)

The Lure of Zoning

Moreover, despite commanding lower values, the majority of homes have only fallen beyond the already inflated prices of recent years. Very few indeed have actually fallen below the price for which they were bought. In the case of homes that were bought prior to the real estate boom of this decade, their values still have seen significant, if not astronomical, appreciation.

The role of wealth in elevating certain areas was explained last year in an academic paper called "Superstar Cities" by economists Joseph Gyourko and Todd Sinai of the University of Pennsylvania's Wharton School and Christopher Mayer of Columbia University. The authors focus on entire metro areas, such as San Francisco and Boston, but in an interview, Sinai says that it's true on the Zip code level as well. Says Sinai: "High-income people are essentially outbidding low-income people for the more desirable suburbs."

Critical to the authors' argument is the limited supply of land in "superstar cities." Most of the Zip codes at the top of the list have either no developable land left or extremely restrictive zoning. So the only way people can get in is by buying from someone who's already there. That fits with the experience of Daniel Bowerstock, a broker in the barrier-island beach community of Avalon, N.J., which is the Garden State's most expensive Zip code. Says Bowerstock: "We have some of the most stringent zoning that I've seen. That, I would say, is the No. 1 draw."

No Poor People

The top Zip codes by state aren't all alike, reflecting the fact that the rich have varying tastes just like the rest of us. Glen Head is a glacier-sculpted, old-money town on Long Island's North Shore. Newport Beach is sun-baked and buzzing with the energy of high tech and other expanding businesses. Cambridge, Mass., is the home of both Harvard University and the Massachusetts Institute of Technology. Hinsdale, Ill., outside Chicago, is quiet. "The paper has, you know, if a cat's stuck in a tree," says John Eyen, a Coldwell Banker broker who lives in Hinsdale.

Some places can trace their surge in property values to the presence of booming local industry. A good example is the 98004 Zip in Washington state, which covers upscale Bellevue. Long a haven for executives who worked at Boeing (BA) or local lumber companies, beginning in the 1980s employees from tech companies such as Microsoft (MSFT), Amazon.com (AMZN), and Real Networks (RNWK) have used their lucrative stock options to drive up local real estate prices.

Even within Greenwich, there are distinctions, says Tamar Lurie, a Coldwell Banker broker. Some people migrate to the big estates of 06831 for peace, quiet, and horses, while others move to the shoreline Zip of 06830 (No. 3 on the national list) for water views and a livelier lifestyle.

One commonality, though, is that you will be rubbing elbows with people who, like you, don't have to worry much about where their next meal is coming from. That in itself is a powerful lure for people who have finally made it to the top.

With Maya Roney

Yellow Light for High-Speed-Train Deals in Asia

Kawasaki, Siemens, and Alstom have picked up juicy contracts, but China and Korea are focused on their own systems, while India balks at the cost

by Brian Bremner

The launch of the new $15 billion Taiwan High Speed Rail service, built with imported Japanese high-velocity-train technology, on Jan. 5 once again confirmed the Asia's economic dynamism. And global engineering and transportation companies sure hope the Taiwanese bullet train (which will cut travel time between Taipei and the southern port city of Kaohsiung from four hours to 90 minutes) heralds the start of a 21st century build-out of the region's public rail transport systems.

In many ways, Asia should be an ideal staging ground for next-generation train systems now being pitched by Japanese firms such as Mitsui (MITSY) and Kawasaki Heavy Industries (KWHIY) as well as European players such as Germany's Siemens (SI) and Alstom of France.

A group of Japanese companies led by Central Japan Railway Company is developing a lightning-fast, superconducting magnetic levitation train called the JR-Maglev MLX01 that has reached record speeds of 361 mph (581 km/h) in test runs. Since 2004, the Shanghai Maglev Train—built with German technology—in China has delivered passengers from Pudong International Airport to the Longyang Road Station, a downtown subway station, in about eight minutes.

High Hopes in Japan

The region is economically prosperous, densely populated, and eager to connect major urban centers to boost development. Japan pretty much invented high-speed rail service—generally defined as trains that clock speeds in excess of 125 mph (200 km/h)—in 1964 with the debut of its first bullet-shaped train, the Tokaido Shinkansen, which connected Tokyo, Nagoya, and Kyoto.

And in Japan there are big hopes that Kawasaki and others will cash in on proposed high-speed train projects in China, India, and other emerging markets such as Russia. Kawasaki Heavy, for instance, manufactured train cars for the Taiwan bullet train, and is selling other transportation gear in China. "The Taiwan Shinkansen is the first case (for Kawasaki) to export and it is symbolic as a trigger," points out Nomura Securities analyst Shigeki Okazaki in Tokyo. "In the future, there are good prospects in India and Russia."

All that may be true, but there are good reasons to think the Japanese and European high-tech train manufacturers won't exactly waltz through the region picking up big contracts. For one thing, these massive, big-ticket, public transportation projects can take ages to design and build. Taiwan conceived its bullet train system back in 1980, and successive governments dithered over project details and then abruptly dumped French and German contractors for the Japanese team in 2000.

Sure, Asia contracts can be lucrative, but South Korea and China have pressured foreign companies to agree to technology-transfer clauses to build up their own industries.

Focus on Tech Transfer

Back in 2004, South Korea became the second Asian nation after Japan to build a high-speed train service between major cities. The Korean KTX (Korean Train Express) high-speed rail service is based largely on France's TGV technology developed by Alstom.

But the South Koreans insisted upon and won technology transfer rights as part of the project. Now, the government and private companies such as Hyundai Motor Group unit Rotem are working on next-generation high-speed train systems and have ambitions to compete with Alstom, Siemens, and the Japanese for contracts in Asia, Latin America, and the Middle East. "We now have high-speed train technology that could be offered in export markets," says Bang Yoon Sock, deputy director at the Ministry of Construction and Transportation's railway industry division.

With its vast build-out of national rail networks, China also has extraordinary leverage to extract technology-sharing concessions. True, there have been some big contract wins by foreigners on the mainland.

Siemens, one of the big overseas suppliers to the mainland's rail industry, played a big role in the Maglev project in Shanghai, and in late 2004 won an order from the Chinese Railway Ministry to build 180 double locomotives in a contract valued at roughly $487 million at current exchange rates.

Decrease in China Sales?

More recently, it has received contracts for signaling and power systems on a new, high-speed, passenger rail line between Beijing and Tianjin expected to be completed ahead of the 2008 Beijing Olympic Games. And just last month, French engineering group Alstom was awarded a $4.75 billion government contract to supply 1,500 freight locomotives.

Japan's Kawasaki has also nailed contract work and, along with Canada's Bombardier and Alstom, has agreed to help Chinese rail companies improve their manufacturing know-how. Already China firms and the government are working on a domestically designed (the government owns the intellectual property rights) next-generation railway locomotive. For that reason, Nomura analyst Okazaki thinks that foreign "…sales to China will gradually decrease because the Chinese government aims to produce domestically."

Other high-speed railway projects in Asia are looking promising but will take time to develop—that is if they materialize at all. Last June, Malaysian infrastructure group YTL Corp proposed a high-speed train linking Singapore and the Malaysian capital, Kuala Lumpur. "What takes about four and half hours by road or 50 minutes by plane, you could do it in less than 90 minutes by train from central Kuala Lumpur to downtown Singapore," says YTL Chief Executive Officer Francis Yeoh,

There is even talk of extending the rail network to Bangkok and thereby connecting three major business hubs in Southeast Asia. Yet Malaysia and Singapore aren't on the best of diplomatic terms, and it could be years before such a project got government approval; and it would take even more time to design, test, and construct.

Reluctant to Spend Billions

Then there is India, a country with vast infrastructure needs not just for rail but also roads, shipping ports, and airports. The Japanese would love to export their Shinkansen technology into such a rapidly developing economy. But the Indian government isn't all that keen to spend the billions it would take to connect major urban centers in such a vast country.

"We don't need such fast trains as it's too expensive to lay those tracks all the way," says Rajiv Lall, managing director of the government's Infrastructure Development Finance Corp.—though he thinks a high-speed line between Mumbai and nearby Pune might make sense down the road.

Even companies with extensive business ties in the country, such as Siemens, which has built signaling and telecom systems for the New Delhi Metro, think the appetite for big-ticket, high-speed train networks is quite modest. "I would love to see the high-speed train happening in India, but it's not a priority for the country now," says V.B. Parulekar, executive vice-president with Siemens Transportation Systems in India.

Unlike these high-speed locomotives that represent the cutting edge of rail technology, the actual roll-out of these multi-billion systems is going to be slow going in Asia.

Bremner is the Asia Regional Editor for BusinessWeek
With Hiroko Tashiro in Tokyo, Moon Ihlwan in Seoul, Nandini Lakshman in Mumbai, and Assif Shameen in Singapore

Porsche Zooms Ahead of the Pack

CEO Wendelin Wiedeking's savvy approach is allowing the automaker to deliver more car for the buck, but potholes could lie ahead

by Gail Edmondson

Porsche Chief Executive Wendelin Wiedeking loves to relax on weekends by rumbling around the farmed fields near his home in a tractor. But when it comes to running the world's most profitable automaker, Wiedeking never takes his foot off the gas.

With sales growth fueled by one hit model after the next, Porsche's revenues are set to double in the next five years, from $10 billion this year to $21.3 billion in 2012, according to Morgan Stanley (MS), while car sales zoom over the same period from 99,000 to nearly 200,000. And while many automakers struggle with squeezed profit margins, Porsche's earning power is the industry envy: For the fiscal year ended July 31, analysts forecast net profit of $2 billion, up 33%, and an operating margin of 19.8%.

Wiedeking has long defied predictions that Porsche (PSHG_P.DE) was too small to survive, despite its near-brush with bankruptcy in 1992. Last year the cash-rich sportscar maker took a controlling stake in Volkswagen (VOWG.DE), the world's fourth-largest car company, and rumors abound that Wiedeking will soon swallow up the rest. Overseeing an empire that spans from $120,000 sports coupes to prosaic $12,000 subcompacts is a new challenge for Wiedeking. But after 14 years at the helm, the 54-year-old engineer has already proven to be one of the world's most talented auto chiefs.

Wiedeking's winning formula at Porsche is making high-performance sports cars with Toyota-like quality at a competitive price—a feat no rival automaker has yet managed to copy. "The 911 costs $80,000, but given the performance it delivers, it's a good value," says John Casesa, of auto advisory Casesa Shapiro Group in New York. "Porsche has the latest technologies in its cars, and they work reliably. The product has real integrity. Porsche has the performance of an exotic [car] but the reliability of a Honda."

Learning from Toyota

Porsche traditionally ranks high in quality surveys, but for two years running it has even moved past Toyota (TM) and Lexus to top J.D. Power's initial quality survey with the lowest number of problems after three months of ownership. This year, the Porsche Boxster also aced the J.D. Power competition for compact premium sports cars. When it comes to quality, "Porsche is one of the industry leaders," says Joe Ivers, executive director of quality and customer satisfaction at J.D. Power (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP) ).

That's thanks in large part to Wiedeking's vision. Long before other German automakers, Porsche was studying the Toyota bible on quality manufacturing. In the mid-1990s, as he struggled to steer Porsche out of a death spiral, Wiedeking turned to Toyota for help, cloning its obsessive quality processes at Porsche's Stuttgart plant and sending many Porsche workers and engineers to Toyota factories in Japan to learn its ways.

But Porsche's rapid growth going forward will test Wiedeking's winning formula as never before. Wiedeking has stoked profits at Porsche for a decade by outsourcing part of the production of the entry-level Boxster model to Finland's Valmet Automotive and by co-developing the Cayenne SUV with Volkswagen, while keeping control of top-of-the-line 911 models in-house. He also relied heavily on suppliers such as Robert Bosch to co-develop new automotive technologies.

That savvy approach helped minimize costs and risks for Porsche and allowed Wiedeking to deliver more car for the buck. As demand for older models waned, for example, Porsche cut orders from Valmet but kept Porsche's own Boxster production running at full capacity. "The key is keeping supply and demand tight," says Casesa. "That's especially important when rivals are producing good sports cars for half the price of a Porsche." And by teaming up with others on research and development, Wiedeking engineered innovation at a fraction of the usual investment.

Cayenne Troubles

But growth is already putting a strain on Porsche's fabled quality, especially as emerging markets pump up demand for Porsche's iconic sports cars. And with rival models multiplying, Wiedeking can't afford a slip as Porsche adds a fourth model line, the Panamera four-door coupe, in 2009.

Wiedeking aims to co-engineer the Panamera with Volkswagen, sharing parts, electronics development, and production facilities, as it did with the Cayenne. But the first tandem with VW wasn't a flawless performance: Porsche's venerable quality reputation took a nasty hit when it launched the Cayenne in 2003. The Cayenne and VW's Touareg are built on a common platform, and the bodies of both are assembled at the same Volkswagen plant in Bratislava, Slovakia. According to J.D. Power, both the Cayenne and the Touareg were riddled with defects—though not all of the same kind.

Many of the Touareg's problems were related to Volkswagen's drive train, which differed from the Cayenne's. The Cayenne suffered faulty door locks, malfunctioning keyless entry system, wind noise, poor radio reception, and condensation inside the headlights.

Though a roaring market success, the first Cayennes to hit the market dragged down Porsche's quality reputation and its ranking in quality surveys, which measure the number of problems per 100 cars after three years on the market. Still reeling from the Cayenne quality debacle, Porsche ranked 29th this year in J.D. Power's long-term reliability survey, far below its traditional level.

Competition from Audi and Others

Individually, the Porsche 911 and Boxster models are among the best performers. "The Cayenne single-handedly drags Porsche down below average," says Ivers, who notes the ranking should steadily improve since Porsche has raced to fix those problems on recent models. In the 2007 initial quality survey, the Cayenne had 125 problems per 100 vehicles, down from 233 problems in 2004. "That's drastic improvement," says Ivers. The Porsche 911, by contrast, set a benchmark of only 69 problems per 100 cars.

Quality isn't the only challenge Wiedeking faces. Porsche has to grapple with a slew of new high-performance models from Audi, Maserati (FIA), Aston Martin (F), and Bentley, all eager to claw sales from traditional Porsche owners. "The Audi R8 super sports car is phenomenal,"says Karl Ludvigson, an independent motor-industry consultant based in Suffolk, England. "Audi is making a run at Porsche."

At the same time, government regulations to curb carbon-dioxide emissions could one day crimp the attractiveness of Porsche's cars for some buyers. In July, Greenpeace demonstrated at Porsche's headquarters as the company tried to talk up its green credentials by giving a sneak preview of a hybrid Cayenne that will boost fuel efficiency by one-third, to about 26 miles per gallon, when it hits the market in 2009. Demonstrators nonetheless branded Porsche's cars "environmental pigs." Warns Casesa: "The biggest risk to Porsche is not the competitive threat but the environmental threat."

An energetic Wiedeking shows no fatigue after 14 years at the helm, working the auto-show circuit until the wee hours of the morning. But steering the fast-moving automaker into the future—especially if Porsche takes control of Volkswagen—may well mean less time tooling around the potato patch in his favorite tractor.

Best (Hiring) Practices

By Julie Gordon

In today's tight job market, recruiters should avoid alienating potential candidates—who may share their bad impressions with others

When Sarah Breiner interviewed for a prestigious post-college program at General Electric (GE) in the fall of 2004, she figured she'd spend the majority of her on-site meeting discussing her internship and academic experience. Boy was she wrong.

One recruiter she met with asked hardly any questions about her and, instead, arrogantly talked about his own work experience and how he achieved his career goals. "He was tooting his own horn," says Breiner, a graduate of New York University's Stern School of Business. "I got a bad taste in my mouth. So throughout the day, while meeting with other people, I asked more probing questions."

Because of Breiner's negative interviewing experience, GE lost her to investment bank JPMorgan Chase (JPM). At JPMorgan and Goldman Sachs (GS),where she currently works, Breiner feels that teamwork and her background were valued more highly during the interview process.

SELLER'S MARKET. Contrary to popular belief, the employer isn't always in the driver's seat. And, as the job market continues to improve and more candidates receive multiple offers, companies have to work harder to attract a large, high-quality pool of applicants (see BusinessWeek.com, 5/15/06, "Never Too Late to Find the Right Job"). In fact, many candidates have increased confidence about receiving choice job offers, so they're conducting a more focused search and forgoing back-up options, according to WetFeet's 2006 Winning Campus Marketing Strategies Report, which came out this summer. Unfortunately, some organizations are still forgetting to factor in job-seeker satisfaction when playing the hiring game.

Hiring is never a one-way street, and applicant happiness should be considered from initial interaction until the end of the process, whether it leads to employment or not. Often a candidate isn't contacted quickly enough after an interview, which can lead the person to assume the manager is uninterested. "There's a need for urgency. Candidates today have multiple offers on the table. One possibility could be very compensation-focused. Another opportunity could offer a different variable," says Erin Barriere, vice-president for staffing at Monster Worldwide. "If you don't close, the candidate could go to another company" (see BusinessWeek.com, 3/21/06, "The Jobs Come Looking for Grads").

STAY PROFESSIONAL. During an interview, a recruiter may fail to create a warm atmosphere and opt instead for a condescending or unprofessional tone, sometimes without even realizing it. Lauren Kossak knows that scenario all too well. When interviewing for a sales position at a computer company, Kossak says the recruiter treated her more like a friend than a potential employee. "The office was located near my apartment, so he asked me what I did the night before and where I hang out," says Kossak. "He was very intrusive."

Kossak's recruiter didn't make her feel comfortable in the work environment—a common mistake. So what can companies do to make candidates feel more at ease? Fostering communication tops the list. During the interview process at Deloitte & Touche USA, entry-level candidates meet with all types of employees, from recent college graduates to senior members of the organization. That way, the company ensures that potential hires get relevant information on a wide range of subjects from diverse sources.

"A candidate might ask a staff person about policy on vacation and might hesitate to ask the same vacation question of a partner," says Bill Ziegler, director of recruiting for the Big Four accounting firm. "Candidates relate to different people on different levels"

That communication should continue right through the employee's first day on the job. Often, there's a long gap between the time when a person accepts an offer and follow-up from the employer. "It's a strange dead time. You've got a candidate who is pretty sure he has a job but doesn't have anything in writing or a start date, and feels very vulnerable," says Marcie Schorr Hirsch, partner of HirschHills Associates, a Newton (Mass.) boutique management consulting firm.

WORD OF MOUTH. Even if a company is not interested in a candidate, recruiting personnel should make some type of effort. A poor impression of a company can only translate to one thing—a candidate sharing a negative perception with friends and co-workers, all of whom are potential employees. "The PR part of the job is a continuous thing whether or not you like a candidate," says Bob Eubank, president of the Harvard (Mass.) Swift Murdock, a general management and human resources consulting practice.

These and other mistakes can be avoided through preparation and training. "Most managers will sit there and do a decent job of verifying surface-level information from a resume. 'OK, you were a tech consultant. How'd that go?' That's not digging. That is really almost an administrative job," says Dan Kilgore, director of talent acquisition for North America at Getronics, an IT services company. Preparation can come in the form of weeklong intensive classes, daylong seminars, or simple run-throughs with higher-ups to identify exactly what is needed from a candidate. Kilgore says the minority of hiring managers go through training and it is often outdated.

Intel's in Hot Water in Europe

The European Commission's ruling against Microsoft—as well as other recent antitrust cases—put the chipmaker in a vulnerable position

by Jennifer L. Schenker

The repercussions from the Sept. 17 ruling by Europe's second highest court affirming a landmark 2004 antitrust order against Microsoft (MSFT) are only just starting to be felt. But of all the technology companies facing scrutiny by the European Commission, perhaps none has more to worry about than semiconductor giant Intel (INTC), which became the subject of a formal proceeding in July.

The EC cases against Microsoft and Intel are based on different kinds of alleged market abuse and draw on separate legal precedents. But both reflect a widening gap in how the U.S. and Europe view the legality of hardball business tactics by dominant companies. While regulators in both regions look for signs of harm to consumers from monopoly behavior, Europe gives as much or more weight to the impact on competitors.

That distinction played a critical role in the Microsoft ruling. On the face of it, Microsoft's free inclusion of Media Player in Windows was a boon to consumers. But the EC was able to show that the software bundling harmed rivals such as Real Networks (RNWK) and Apple (AAPL) and reduced competition in the media player market—thus potentially hurting customers in the long run by leading to less choice in digital content formats. A similar argument held that by limiting the information it gave out about Windows networking standards, Microsoft had foreclosed competition in desktop and server operating systems, to the detriment of consumer choice.

Crossing the Line?

The same kind of thinking is at the core of the commission's case against Intel. Prompted by complaints from rival chipmaker AMD (AMD) dating back to 2000, the EC has charged Intel with illegal use of sales tactics such as rebates and incentives to maintain or increase its market share in microprocessors. Such programs are normally permissible but can cross the line into abuse when practiced by companies with monopoly market share.

Intel strongly denies any wrongdoing and says it has acted within the law with its market incentive programs. It also argues that the programs have led to lower chip prices for consumers.

That may not be enough of a defense in Europe—especially now that the commission's hand has been strengthened in the wake of the Microsoft defeat. "European authorities and courts put a higher duty on dominant firms to deal fairly with their competitors," says Philip Marsden, a senior research fellow at the British Institute of International & Comparative Law. "They want to foster gentlemanly competition, a premise that is foreign to American antitrust thinking."

A recent ruling from Europe's highest court, the European Court of Justice, could make matters even tougher for Intel. In March, the court upheld a case against British Airways (BAY.L) in which the carrier was found guilty of harming competition though the use of loyalty rebates and discounts for travel agents. Also on the books is an earlier case against French tiremaker Michelin (ML.PA) that found its retail incentive program illegal. "If you apply the law as it is, Intel is in a very difficult position," says Simon Bishop, a co-founder of RBB Economics, a European firm specializing in antitrust economics.

Dawn Raids

AMD has been pressing the European Commission for years to take antitrust action against its larger rival. After on-and-off investigations, the commission and national regulatory officials carried out a series of coordinated dawn raids (BusinessWeek, 7/14/05) of Intel's European offices in July, 2005. But it wasn't until two years later that the EC finally brought charges (BusinessWeek, 7/27/07) alleging that Intel engaged in three categories of abuse of its dominant market position. "The three types of conduct reinforce each other and are part of a single overall anticompetitive strategy," said the Commission in a press release about its confidential Statement of Objections, a legal step roughly equivalent to an indictment.

The commission alleges that Intel used loyalty rebates to entice computer makers to limit their use of AMD chips, and also used threats or payments to dissuade computer makers from promoting AMD's product launches. The commission further charges that Intel occasionally offered its products below cost—a major antitrust no-no—when trying to help computer makers win bids against AMD-based systems in the strategically important server market.

The upshot, argues the commission, is that consumer choice was limited by an abuse of a dominant position, the same broad-brush argument used successfully in the Microsoft case.

"There is no question that our market share today would have been significantly higher if we had not been held back by these practices," AMD Chief Executive Hector Ruiz told BusinessWeek in an interview (BusinessWeek, 9/21/07).

Intel insists that its customers aren't complaining about its business practices. What's more, it says, the fiercely competitive market for x86 microprocessors, which are used in virtually all desktop PCs and most servers, is functioning properly to the benefit of consumers. The company has until mid-October to respond to the European Commission, though it is likely to file for an extension. Chuck Mulloy, Intel's legal affairs spokesman in Santa Clara, Calif., declined to comment on what impact the Microsoft ruling might have on the European Commission's case against Intel.

Bonus Schemes

The EC's victory against Microsoft clearly provided a confidence boost to competition authorities in Brussels and strongly affirmed the fundamental principles of Article 82 of the European Treaty—the Continental equivalent of the Sherman Antitrust Act in the U.S. But perhaps even more relevant for Intel is the 1999 suit brought by Virgin Atlantic Airways against British Airways in both the U.S. and Europe, which charged that BA abused its dominant market position through bonus schemes for air travel agency services.

A U.S. court threw the case out. But in March, after a series of appeals, Europe's highest court upheld the commission's ruling on abusive conduct and a fine of €6.8 million ($9.5 million). The decision creates important precedents that could affect the Intel case.

Among other things, the court ruled that bonuses granted by dominant companies can be abusive if they are likely to reduce market competition. This applies if the bonuses make it difficult or impossible for competitors of a dominant company to enter the market, or if the existence of the bonuses distorts the ability of customers to pick freely among various suppliers or partners. More generally, the court noted that the examples of abusive conduct listed in Article 82 are not exhaustive but merely illustrative. In theory, this gives the commission leeway to expand the definition of market abuse.

The 2002 decision against Michelin also makes life tricky for Intel. The tiremaker was found to have abused its market dominance by offering rebates and incentives to dealers that had the effect of excluding competitors. The comparisons to the Intel-AMD situation are striking because much of AMD's argument is built on the allegedly predatory impact of Intel's "market development" rebates to PC makers, also known as the Intel Inside program, which include payments to offset the cost of advertising. Intel responds that consumers have benefited from these rebates through lower prices.

No Guarantee

Despite the precedents set by the Microsoft, British Airways, and Michelin cases, there's no guarantee the commission will rule against Intel in the end. The chipmaker assiduously polices its own behavior in light of local competition laws and has avoided any unfavorable antitrust rulings in the U.S. But some other jurisdictions are taking a more Europe-like approach in cases against Intel—and occasionally landing blows.

In March, 2005, Japan's Fair Trade Commission ruled that Intel had violated that country's antimonopoly laws by illegally forcing full or partial exclusivity with five Japanese PC makers. Intel paid a fine and agreed to alter its business practices but did not acknowledge any wrongdoing. Another antitrust investigation in South Korea—with data seizures similar to those in Japan and Europe—led to charges on Sept. 11 of this year by the Korean Fair Trade Commission that Intel violated that country's antitrust laws. No date has been set for a ruling.

AMD has also brought a civil antitrust action against Intel in the U.S. As part of the discovery process, Intel says it has so far handed over more than 40 million pages of documents. The case is expected to be decided in 2009.

No question, the EU's powerful win against Microsoft has raised its stature among global antitrust cops. The moves against Intel in Korea and Japan also add momentum. But the EU hasn't been given a prosecutorial carte blanche: It still has to prove every case on the facts. Intel will put up a tough fight, so this story is far from over.

Is Europe's Health Care Better?

U.S. health care has been declared a disaster. Britain's subsidized NHS is little better. France's hybrid system works, but faces rising costs

by Kerry Capell

In his new film Sicko, gadfly Michael Moore's latest target is the U.S. health-care system. He makes his case that it is expensive, unfair, and leaves nearly 47 million Americans uninsured. The director's answer to the U.S. national crisis? Europe. Across the Atlantic, France, Britain, and most other Old World countries long ago took the plunge into universal health insurance and have made it work, with varying degrees of success.

Moore likes to spark controversy, but when it comes to health care, many of the conservative groups he aims to inflame are already on the same page as he is. A recently formed coalition of 36 major corporations led by grocery chain Safeway's (SWY) chairman and chief executive officer Steven A. Burd and including PepsiCo (PEP), General Mills (GIS), insurer Aetna (AET), and drugmaker Eli Lilly (LLY) is calling for major reforms.

In the May 16 issue of The Journal of the American Medical Association, Dr. Ezekiel J. Emanuel, chairman of the department of clinical bioethics at the National Institutes of Health, wrote "The U.S. health-care system is considered a dysfunctional mess."

French Success Story

Indeed, a May 15 study from the Commonwealth Fund study comparing the quality of the U.S. system with five other countries found that despite spending twice as much per capita, the U.S. ranks last or near last on basic performance measures of quality, access, efficiency, equity, and healthy lives. "The U.S. stands out as the only nation in these studies that does not ensure access to health care through universal coverage," says Commonwealth Fund President Karen Davis (see BusinessWeek.com, 6/12/07, "Universal Health Care: Say Yes").

Gazing across the Atlantic won't lead Americans to a model that fits everyone's requirements. Britain, in particular, suffers myriad problems in its National Health Service (NHS). But in some respects, France comes pretty close to the ideal. Not only are its 62 million citizens healthier than the U.S. population, but per capita spending on health care is also roughly half as much.

France relies on a mixture of public and private funding, as does the U.S. But unlike Americans, every French citizen has access to basic health-care coverage through national insurance funds, to which both employers and employees contribute. Some 90% of the population also buys supplementary private insurance to provide benefits that aren't covered, and the government picks up the tab for those out of work who cannot gain coverage through a family member. "We pay higher taxes in France, but at least we get something for our money," says Leslie Charbonnel, an American who has lived in Paris for two decades.

The key to France's success is that its system, like the U.S.'s, values patient choice and physician control over medical decision-making. But France does it for far less, with per capita health-care spending in 2004 at just $3,500, compared with $6,100 in the U.S., according to the World Health Organization. All told, France spends 10.7% of gross domestic product on health care, vs. 16.5% in the U.S.

Keeping Rates Low

"The French model suggests that you can have universal coverage without relying totally on the state, without restricting patient choice, and without abolishing private medical practice and the insurance industry," says Victor G. Rodwin, a professor of health policy and management at New York University's Robert F. Wagner School of Public Service. One reason the French system seems able to do it all is its practice of using price controls.

A national fee schedule determines reimbursement paid by the government and by most private insurers.

Doctors can charge extra, and more than one-third do. But the low rates set by the national fee schedule—typically less than $50 for a routine office visit—help keep salaries modest. French doctors on average earn just one-third the salary of their U.S. counterparts, says Paul Dutton, an associate professor of European history at Northern Arizona University and author of Differential Diagnoses, a comparison of the French and U.S. health systems.

Despite this, rising costs and an aging population make it a struggle for France to finance its system. On May 29, the government warned that health-care inflation this year is running ahead of projections, threatening to deepen an already worrisome $5.2 billion deficit. In Britain, the National Health Service presents a much grimmer picture. It has provided universal coverage for nearly 60 years and boasts benefits such as drug prescriptions that cost no more than $13 for a month's supply.

Fewer Drugs Covered

Yet despite the government pouring $81 billion into the NHS over the last six years, access to treatment is spotty, and long waiting lists are the norm. In 2005, 41% of British patients waited four months or longer for elective surgery, compared with less than 10% in the U.S., according to London-based think tank Civitas. Limited resources also mean medical care varies widely depending on where you live. Access to life-extending new cancer drugs is especially constrained. As a result, Britain has one of the lowest five-year survival rates for cancer overall: 43% for men and 53% for women, vs. 53% and 71%, respectively, in France.

Many critics of the British system blame the National Institute for Health and Clinical Excellence (NICE), whose mission is to analyze the cost-benefit of treatments to determine which should be covered by the NHS. Some of the new cancer therapies NICE has nixed include Imclone's (IMCL) Erbitux, for colon cancer, Genentech's (DNA) Tarceva, for non-small-cell lung and pancreatic cancer, and Avastin, another Genentech drug used to treat bowel cancer.

The picture is no brighter concerning access to advanced, gene-based medicine. It was only after two women sued for access to the treatment that health authorities approved the use of Genentech's Herpacin for early-stage breast cancer in people whose genetic makeup strongly indicates that they will be helped by the drug. Herpacin costs $44,000 for a year's treatment.

Still About Money

A further downside for residents of Britain: The cash-strapped NHS places less emphasis than the U.S. or France on preventive care. Annual physicals aren't insured. And screening programs are less generous than in the U.S. So despite the fact that pap smears can help detect cervical cancer, the second leading cause of death for women, they are only offered once every three years, as opposed to the recommended annual test in the U.S.

What neither the French nor the British system can overcome is the stark math of cost-benefit analysis. A cancer drug like Avastin, which can extend a patient's life by a few months, costs $48,000 annually per patient. It's far too expensive, by NICE's reckoning, to provide to all colon cancer patients, so it's available to none. In France, the state pays a portion and the wealthy are free to make up the difference. Money, in other words, buys good health—on both sides of the Atlantic.