May 30 — June 6, 2016 | bloomberg.com
The
Hardest
Job in
America
Reince Priebus
and the remaking of the
Republican Party
p50
far co
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06-15-0895.D
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“Even people who don’t
eat pork tell me they
had to try it, and it absolutely
blows their minds”
p43
PHOTOGRAPH BY BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK
5
“Five years ago,
self-publishing
was a scar.
Now it’s a tattoo”
p44
“You people in the media,
you think we’re all like monkeys,
like we’re just sitting around
waiting for the bananas, and when
we get the bananas, we jump
up and down and eat them”
“Here you are,
fine-tuning the system
to deliver a victory,
when the system became
the enemy”
p56
p50
Cover
Trail
May 30 — June 6, 2016
How the cover gets made
Opening Remarks In South Africa, empty stadiums may be a bad omen for the ANC
10
Bloomberg View Suing the Saudis only hurts the U.S. • So does impeaching the IRS chief
12
Global Economics
Bailout and austerity are sideshows. Puerto Rico’s failing economy is the main event
14
Volcker, Greenspan, Bernanke, Yellen … and Hal?
15
The black market in greenbacks is thriving in Libya
16
Layoffs at South Korea’s shipbuilders will set thousands of workers adrift
18
Companies/Industries
Can Carlos Ghosn’s cost-cutting tactics also save Mitsubishi?
21
Shanghai Disney works a little magic with its Chinese performers
22
Fill up the cooler with cold-coffee brews
24
Briefs: Toyota hails Uber; New York state looks to give Domino’s workers a big tip
26
①
“The cover is on Reince Priebus.”
“I’m sure this is a famous banker
I’m supposed to know who made a
billion dollars doing something
incomprehensible. Well, lay it on me.
Who’s this guy?”
“He’s the head of the RNC.”
“Oooohhh, I probably should’ve
known that. So what exactly does
he do?”
“Among other things, uniting the
Republican Party.”
“Oh, wow! Oh, wow!
Can we shoot him?”
Politics/Policy
Donald Trump invented a new model for campaign advertising. But it only works for him
28
An Oregon court will decide if a bakery can have its wedding cake and not sell it, too
29
Why is Larry Kotlikoff running for president? To warn of looming economic doom
30
A Referendum: A Maine initiative to tax the rich is one of several proposed across the country
31
Technology
6
Nervve’s visual-search tools open up a new frontier for advertisers
33
Machines that turn commercial food waste into smart garbage
34
Want some love from the VC crowd? Don’t start a toy company
35
Training Chinese eyes on alternate realities
36
②
“This pretty much
sums it up.”
Markets/Finance
Poor Indonesians change trash for cash, and find a way to save
38
The bulls predicting a rise in Tesla’s stock come under scrutiny
39
Bond traders: From Masters of the Universe to order takers
40
Bid/Ask: Monsanto holds out for more; GE will help the Saudis move beyond oil
41
COVER AND COVER TRAIL: PHOTOGRAPH BY BRIAN FINKE FOR BLOOMBERG BUSINESSWEEK
Focus On/Small Business
A Spanish delicacy arrives in Texas—hoofs and all
43
Why even best-selling authors turn to self-publishing startups
44
Adding theater, fun, intrigue, and urgency to the slow-moving world of luxe shoes
45
Small to Big: Build the candy emporiums, and they will come
46
Features
Mr. Switzerland Reince Priebus dug the Republicans out of a hole. Then came Trump
50
Par for the Course Why Phil Mickelson wasn’t charged with insider trading
56
Surf’s Up Forever How Kelly Slater plans to roll out his near-perfect man-made wave
60
Etc.
The risqué Snapchat account ArsenicTV is spawning a generation of influencers
67
Design: Neon signs help restaurateurs on social media
70
Astrology: There is a better break room in your future
72
Rant: It’s time to get comfortable with office-appropriate yoga pants
73
Travel: Why hit the beach when you can help struggling business owners in Detroit?
74
What I Wear to Work: Bartender Igor Hadzismajlovic has strong feelings about when an untucked shirt is suitable
75
How Did I Get Here? AARP chief Jo Ann Jenkins has worked with Potuses and Flotuses since 1981
76
③
“This REALLY
sums it up.”
Index
People/Companies
Jonas, Adam
39
JPMorgan Chase (JPM) 15, 39
A rare site
in San Juan
K
Kantar Media (WPPGY)
Kasich, John
Kelly Slater Wave Co.
KKR (KKR)
Klein, Aaron
Klein, Melissa
Klukowski, Ken
Koch, Charles
Koch, David
Koskinen, John
Kotlikoff, Laurence
Kroger (KR)
28
51
62
51
29
29
29
28
28
12
30
24
L
A
8
ABC (DIS)
68
Aberdeen Asset
Management (ADN:LN)
40
Acornseekers
43
Adidas (ADS:GR)
26
Adrià, Ferran
43
Advanced Research Japan 21
Aecom (ACM)
22
Aikawa, Tetsuro
21
Airbnb
68
Alibaba Group Holding (BABA)
36
Allen, Mike
51
Amazon.com (AMZN)
44
American Apparel
68
American Capital (ACAS)
41
Anagnostakos, Louis
34
Andrés, José
43
Anheuser-Busch InBev (BUD)
68
Archambault, Patrick
39
Arena Ventures
68
Ares Capital (ARCC)
41
Ariel Investments
28
Armstrong, Peter
44
ArsenicTV
68
Athleta (GPS)
73
Axa (CS:FP)
41
B
Bachelor, Andrew
68
Baidu (BIDU)
36
Barbour, Haley
51
Bayer (BAYN:GR)
41
Bharara, Preet
58
BioHiTech (BHTG)
34
BlackRock (BLK)
31
BMI Research
21
Boesky, Ivan
58
Borrell Associates
28
Bowman-Cryer, Rachel 29
BrandSnob
68
Breakout
74
Brody, Josh
44
BTIG
28
Bush, Jeb
28, 51
C
Carbon38
73
Carnival (CCL)
74
CastleOak Securities
40
Celli, Frank
34
Ceresney, Andrew
58
CF Industries Holdings (CF) 41
Chaffetz, Jason
12
Chameleon Cold-Brew
24
Chen, Tianqiao
41
Chiasson, Anthony
58
Chobani
24
Clinton, Bill
28
Clinton, Hillary
28, 30, 51
Coca-Cola (KO)
24
Codex-Group
44
Cohen, Graham
74
Computer Sciences (CSC) 26
Costco (COST)
24
Craig, Paige
68
Creative Artists Agency
68
Credit Suisse (CS)
21, 40
Cruz, Ted
51
41
Tianqiao
Chen
Fischman, Ben
Flanders, Scott
FlockU
Frank N. Magid Associates
45
68
68
28
G
Gangemi, Maria
45
Gannett (GCI)
41
General Electric (GE)
41
General Motors (GM)
26
GetTaxi
26
Ghosn, Carlos
21
Gingrich, Newt
51
Goellner, Jacob
33
Gogolak, Caroline
73
Goldman Sachs (GS)
21, 39
Google (GOOG) 15, 28, 39, 51
Graham, Janice
44
Grand Central Publishing
44
H
D
Daewoo Shipbuilding & Marine
Engineering (042660:KS) 18
Dalian Wanda Group
26
Davis, Thomas
58
Dean Foods (DF)
58
Dell
58
Diplo
69
Dole, Elizabeth
76
Domino’s Pizza (DPZ)
26
Douglas, Michael
76
Dr Pepper Snapple
Group (DPS)
24
DreamWorks Animation (DWA)
22
Drummey, Corbett
68
Duff, Hilary
68
Dunkin’ Donuts (DNKN)
34
Dylan’s Candy Bar
48
E
Economic Security Planning 30
Eisenberg, Lewis
51
Elliott Management
41
EMediaStar
68
Employees Only
75
Energizer (ENR)
41
Ericsson (ERIC)
33
Euromonitor International 24
Evans, Colleen
68
F
Facebook (FB) 28, 36, 62, 68
FAO Schwarz
48
Farber, Michael
74
Fiat Chrysler
Automobiles (FCAU)
39
Fincham, Adam
62
Firewire Surfboards
62
Hadzismajlovic, Igor
Haichang Ocean Park
Holdings (2255:HK)
Haldane, Andy
Hampton Creek
Hana Financial
Investment (086790:KS)
HandStands
Hardy, Terry
Hawkins, Billy
Hershey (HSY)
Hewlett Packard
Enterprise (HPE)
High Brew Coffee
Hildick-Smith, Peter
Hilton Hotels (HLT)
Honda Motor (HMC)
HTC (2498:TT)
Hye, Park Geun
Hyundai Heavy
Industries (009540:KS)
75
22
15
26
18
41
62
68
48
26
24
44
34
21
36
18
M
M.Gemi
45
Macy’s (M)
68
Magic Leap
36
Magna Global
28
Malema, Julius
10
Manolo Blahnik
45
Marsal, Sergio
43
Martin, Garrett
31
McKnight, Bob
62
Mejias, Jason
73
Meredith (MDP)
28
Micallef, Amanda
68
Mickelson, Phil
58
Mitsubishi Motors (7211:JP) 21
Modi, Narendra
10
Moeller, Philip
30
Mondelēz International
(MDLZ)
48
Monsanto (MON)
41
Morgan Stanley (MS)
39, 40
Mulholland, Bill
34
Murga, Manolo
43
Murphy, Mike
51
Musical.ly
68
N
Nant Capital
41
Nataf, Emmanuel
44
NBC (CMCSA)
68
Nervve Technologies
33
Nestlé (NESN:VX)
24, 48
Net-a-Porter (YNAP:IM)
45
Newman, Todd
58
Nielsen (NLSN)
28, 73
Nike (NKE)
73
Nissan Motor (7201:JP)
21
Nomura Holdings (NMR)
40
Nordstrom (JWN)
68
O
36
24
24
62
44
68
34
36
36
48
J
JAB Holding
Jeep (FCAU)
Jenkins, Jo Ann
Jenner, Kylie
Jimmy Choo (CHOO:LN)
24
44
41
73
45
73
26
18
I
IiMedia Research
Illy, Andrea
Illycaffè
InBev (BUD)
Ingram Content Group
Instagram (FB)
Intel (INTC)
IQiyi.com
IResearch
It’Sugar
La Colombe
Leanpub
LendingClub (LC)
Levi Strauss
Lids (GCO)
Lululemon Athletica (LULU)
Lyft
24
62
76
68
45
Obama, Barack
OCI (OCI:NA)
O’Connor, Caitlin
Original Force
Ostrovsky, Josh
Outdoor Voices
Outerknown
12, 76
41
68
36
68
73
62
P
Pandora Media (P)
PayPal (PYPL)
PepsiCo (PEP)
Perrow, Kieren
Peterson, Amy
Pizer, Jennifer
Playboy Enterprises
Popular Pays
Power Knot
28
68
24, 68
62
74
29
68
68
34
Prada (1913:HK)
Priebus, Reince
Procter & Gamble (PG)
Pronoun
Prouty, Nicholas
Pulse Evolution
45
51
68
44
14
36
Toyota (TM)
21, 26
Tribune (TPUB)
41
Tribune Media (TRCO)
28
Trump, Donald
28, 30, 51
21st Century Fox (FOX)
68
Twitch
68
Twitter (TWTR)
51, 68
Two Sigma Investments
15
62
U
Q
Quiksilver
R
Rajaratnam, Raj
Rebecca Minkoff
Rebel Nell
Reedsy
Renaissance Technologies
Renault (RNO:FP)
Romney, Mitt
Royal Dutch Shell (RDS/A)
Rubin, Jeff
Rubio, Marco
Rue La La
Russell, Tara
Ryan, Paul
58
68
74
44
15
21
51
26
48
51
45
74
51
Uber
26, 39
UBS (UBS)
39
Ulukaya, Hamdi
24
Under Armour (UA)
26
Unilever (UL)
68
Unilever Indonesia (UNVR:IJ)
38
United Talent Agency
68
V
Varian, Hal
VaynerMedia
Vice Media
Volkswagen (VOW:GR)
15
68
68
26
S
W
Samsung (005930:KS)
62
Sanders, Bernie
51
Saynt, Daniel
68
Scavino, Dan Jr.
51
Serraj, Fayez
16
Sessions, Jeff
51
Silver, Nate
51
Singh, Manmohan
10
Six Flags Entertainment (SIX)
22
Skat Consulting
38
Slater, Kelly
62
Slowe, Thomas
33
Smith, David
24
Snapchat
68
Socialyte
68
Solman, Paul
30
Sony (SNE)
36
Soon-Shiong, Patrick
41
Speaker, Paul
62
SportsOneSource
73
SsangYong
Motor (003620:KS)
18
Star Avenue Capital
48
Starbucks (SBUX)
24
Steele, Michael
51
StubHub (EBAY)
33
Walker, Scott
51
Walmart Stores (WMT) 24, 26
Walt Disney (DIS)
22, 26
Walters, William
58
Wang Jianlin
26
Wasserman
33
Waterhouse Press
44
White, Greg
44
Whitman, Meg
26
Whole Foods Market (WFM) 26
Wild, Meredith
44
William Morris Endeavor
Entertainment
68
YouTube (GOOG)
68
10
Jacob
Zuma
T
Target (TGT)
Tegna (TGNA)
Tencent Holdings (700:HK)
Tesla Motors (TSLA)
TheStreet
Totally Green (TLGN)
Y
26
28
36
39
39
34
Z
Ziff, Dirk
Zuma, Jacob
62
10
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14
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Opening
Remarks
The ANC
Is Not
Aging
Well
By Krista Mahr
10
With growth stalled, calls
for President Zuma to
step down are coming
from all sides
It’s election season in South Africa.
Small planes drag political slogans
across autumn’s blue skies while parliamentary sessions dissolve into scenes of
protest and fisticuffs far below. In April
the nation’s three largest political parties
staged rallies to unveil lengthy election
manifestos far ahead of municipal polls
on Aug. 3, with thousands of would-be
voters packing into sports stadiums to
show their support.
Some stadiums were more packed
than others. For the governing African
National Congress, the optics of its launch
weren’t ideal, with awkward swaths of
empty seats pictured in Nelson Mandela
Bay Stadium in the southern city of Port
Elizabeth, where President Jacob Zuma
spoke. The rally’s spotty attendance
didn’t escape the attention of South
African reporters, whose “preoccupation
with stadium seat-counting” was later
lambasted by an ANC spokesman, calling
it “the new science of ‘stadiumology.’ ”
Science or no, stadiumology is a triedand-true part of the electoral theater. I
moved to South Africa in March after
working as a journalist in India for
four years. As India prepared for its
own heated election in 2014, the media
drew regular comparisons between the
thinly attended rallies of the incumbent
Indian National Congress and the frenetic
crowds drawn by the opposition’s frontman, soon-to-be Prime Minister Narendra
Modi. Nobody expected Congress to lose
as big or Modi to win as big as they did
in May 2014. In retrospect, the mood in
the stands was a clear omen.
The ANC, the party that led South
Africa out of apartheid, has historic parallels and ties with India’s Congress party,
which was instrumental in freeing the subcontinent from British rule. And the travails of the two Congress parties—Indian
and African—have a lot to say about the
challenges faced by young democracies.
Calls for Zuma, who’s led the country
since 2009, to step down have come
from both an energized opposition and
freedom-struggle stalwarts. The party
leadership has backed Zuma, easily carrying him through a parliamentary vote
in April that attempted to remove him
from office. Since then, a court ruled that
a decision by state prosecutors to drop
almost 800 corruption charges against
Zuma was “irrational” and that he should
face charges. The president has applied
for leave to appeal the decision.
Zuma has continued to campaign
enthusiastically. On May 17, members of
the ultra-left Economic Freedom Fighters
(EFF) party calling for his ouster were
Nelson Mandela
Bay Stadium
during the ANC’s
manifesto launch
thrown out of parliament amid brawling and lobbed water bottles. Zuma proceeded to address the house, taking the
podium with a chuckle.
Not everyone is amused. For many,
22 years after South Africa’s first democratic elections brought to power the
party that fought apartheid, the optimism
that once defined the Rainbow Nation is
flagging. Protests over the state’s failure to
deliver basic services, such as water and
electricity, have become a fixture of civic
life. Economic growth has fallen from an
annual average of 5 percent from 2004
through 2007 to less than 1 percent, projected for this year. In early May the government announced that unemployment
reached 26.7 percent in the first quarter,
the highest in at least eight years.
Zuma has said South Africa is still a
success story—and it is—but for some, the
ANC has lost its luster. “When our leading
party took power, we thought all would
be well,” says Johanna Nomvete, a politician and member of a small ANC breakaway party, Congress of the People, at a
Johannesburg protest. Today, “the poor
remain poor, and the rich become richer.”
The mood is strikingly similar to New
Delhi in the runup to India’s national
LUCKY NXUMALO/GETTY IMAGES
South Africans hoped for
broad changes, but “the
poor remain poor, and
the rich become richer”
elections in 2014. Public sentiment had
turned against then-Prime Minister
Manmohan Singh, whose government
also faced allegations of large-scale corruption. The heady growth that had
captured the world’s imagination had
slowed. With widespread unemployment and few prospects for new jobs,
India’s young majority was instrumental in voting Congress out—a move their
grandparents wouldn’t have dreamed
of. “The system could no longer deliver,”
says Mohan Guruswamy, a fellow at the
Observer Research Foundation in New
Delhi. “Younger people were entering
the workforce in large numbers, and you
didn’t have jobs for them.”
Some say the ANC is repeating
Congress’s mistakes. “The ANC, the last
of the iconic liberation movements, is
falling in the trap of all of them,” says
William Gumede, executive chairman of
the African nonprofit Democracy Works
Foundation. Political parties born out of
liberation struggles often retain strong
majorities during their early years in
power for good reasons. Their supporters
have deep and emotional ties to the organizations, and as the parties start to
govern, there are credible excuses for
them to take time to rebuild weak institutions. But voter loyalty also means such
a party “can mess up for a while,” says
Gumede. “People support it for much
longer than they should.”
For any party, a clear majority means
there’s no urgent impetus to do the kind
of introspection and reform an electoral
defeat can spark. Problems that emerge,
be it a corruption scandal or poor administration, can linger, widening the gap
between party leaders and supporters to
the point of genuine disconnect. It happened in 1977, when India’s Congress
party lost power for the first time since
independence, and again in 2014. And
that’s what the ANC’s critics say is happening now in South Africa.
Of course, there are clear and important differences between South Africa’s
ANC and India’s Congress—among them
the size of the countries, the nature of
the struggles, and the rule they fought
against. The ANC has been in power for
a little over two decades; Congress was
in power for three before its first ouster.
By the time of its most recent victory,
Modi’s Bharatiya Janata Party had already
run India before and presented a much
broader challenge to Congress than
either of South Africa’s two main opposition parties, the Democratic Alliance (DA)
and the EFF, presents to the ANC today.
At last count, the ANC was still going
strong, capturing 62.1 percent of the 2014
vote, down slightly from 65.9 percent in
2009. Whether a sizable number of those
voters have lost faith won’t be clear until
August. Even if opposition parties perform
well in cities, the ANC could remain the
party of choice among rural voters,
where it dominates. National elections
aren’t scheduled until 2019: If the party
does perform badly in August, there will
be a window of opportunity for the ANC
to be introspective and alter its course.
“Personally, I believe if you got the right
leadership in place, you have a party
that has the greatest commitment and
empathy for the poor people, the people
in the street,” says Mavuso Msimang, one
of several ANC veterans who have recently
called for Zuma to step down. “But that
will only happen if you employ the right
people to do these things.”
India’s problems, for the record, didn’t
disappear under new management. Modi
has hit many of the same walls Congress
faced, and his much touted bid to make
India a manufacturing hub hasn’t taken
off. In the end, notes Guruswamy of
Observer Research, the BJP’s inability to
make a dent in joblessness among young
voters—who helped bring the party to
power in 2014—could be its undoing and
Congress’s next opportunity. That kind
of power struggle is healthy for democracies such as India and South Africa, says
Democracy Works’ Gumede: “That’s what
you want in a developing country. You
need a sense of competition.”
Whatever happens at the polls, that
sense of competition is growing. At the
end of April, Soweto’s Orlando Stadium
outside Johannesburg was overflowing
with EFF supporters, eagerly awaiting
the arrival of the party chief, former ANC
youth leader Julius Malema. They roared
as the firebrand politician entered the
stadium wearing the party’s trademark
red jumpsuit, beret, and his own signature gold aviators. The stadiumologists
had a field day. Mahr, now based in Johannesburg, was
a special correspondent for Reuters and
Time magazine’s bureau chief in India.
11
Bloomberg
View
To read Adam Minter
on why climbers are
still dying on Everest
and Noah Smith on
workers getting more
of the income pie, go to
Bloombergview.com
Sue the Saudis, and
The U.S. May Be Next
Guess which nation benefits the most
from sovereign immunity
and justice. They’ve already received billions from the
victim compensation fund established by Congress, and two
government investigations spent years producing the 9/11
Commission Report.
A more productive exercise of congressional authority
would focus on that report—specifically, the so-called 28 pages
from the initial Sept. 11 investigation that remain under seal.
Some lawmakers who’ve seen them say there’s nothing damaging to national security in them and they should be released.
Others say they’re filled with hearsay implicating prominent
Saudi citizens. A compromise isn’t hard to envision: Release
the pages, along with an explanation from the commission
as to why the allegations don’t hold up. Such an agreement
would also serve the cause of truth and justice—without jeopardizing America’s moral and legal standing in the rest of
the world.
Stop Trying to Impeach
The Head of the IRS
House Republicans are wasting taxpayers’
money to hobble an agency they despise
John Koskinen agreed to take one of the worst jobs in America.
Now he’s being punished for it. In 2013, President Obama asked
Koskinen to take over at the IRS amid budgetary chaos and a
simmering scandal. House Republicans, still angry about that
scandal—and about the concept of taxation generally—are trying
to impeach him.
Their case is weak. Start with the scandal. An inspector
general report in 2013 found that IRS employees had been
improperly scrutinizing conservative groups seeking taxexempt status. This was wrong, and blame was duly apportioned. The agency’s boss resigned, a top deputy retired, and
the director of the offending unit was placed on leave and
declared in contempt of Congress. The Department of Justice
investigated and found no evidence of criminality.
Representative Jason Chaffetz of Utah, chairman of the
House Oversight and Government Reform Committee, has
made a professional specialty of berating civil servants. He
appears to view Koskinen, who, recall, joined the agency after
the scandal, as obstructing further investigation.
Impeaching Koskinen—a punishment not invoked against
an executive branch appointee since Ulysses S. Grant occupied the White House—probably isn’t the objective anyway. The
point is to embarrass the IRS. And congressional Republicans
have already done a fine job of that by slashing the agency’s
budget while helping to vastly expand its responsibilities, with
predictably frustrating results.
Taxpayers are the ones who ultimately suffer when Congress
ignores more pressing business in favor of needlessly antagonizing the IRS. They’re also the ones footing the bill for 8,000-page
reports and shambolic impeachment proceedings.
ILLUSTRATION BY TOMI UM
12
It’s not easy to defend an obscure legal doctrine against claims
for justice from the victims of the worst terrorist attack on U.S.
soil. But doing so has become a necessity, because Congress
has decided to rewrite U.S. law on sovereign immunity.
On May 17 the Senate unanimously passed the Justice Against
Sponsors of Terrorism Act, which authorizes U.S. courts to
hear civil claims for monetary damages against a foreign state
accused of direct involvement in a terrorist act harming an
American citizen in the U.S. Under current law, almost all
foreign nations are immune from lawsuits in U.S. courts.
While the bill doesn’t name any particular country, it would
enable the Sept. 11 families to sue Saudi Arabia. Fifteen of the 19
hijackers were Saudi citizens, and some officials and members
of the royal family have long been accused of involvement in
the plot. President Obama has promised to veto the bill.
A veto would be well-deserved, and before members of
Congress try to override it, they might want to consider the
value of sovereign immunity—and the nation that benefits
from it the most. (Hint: They represent it.) If other nations
follow the Senate’s lead, no country would be a bigger, better,
richer target for lawsuits than the U.S. In Cuba and Iran, courts
have already issued billions of dollars in judgments against
Washington. This potential legal liability would hang over the
U.S. fight against global terrorism and leave the government
liable for actions by U.S. troops in Afghanistan, Iraq, Syria,
and elsewhere. U.S. aid to Israel, for example, could leave it
open to suits from Palestinians injured by Israeli troops. The
entirety of U.S. foreign policy could be put on trial under the
guise of seeking monetary justice.
Acknowledging the importance of sovereign immunity
doesn’t require overlooking the Saudis’ role in the rise of
Muslim extremism. But the response to that activity properly
resides in the realm of diplomacy and trade policy, not in court.
No one can deny the right of the Sept. 11 families to truth
G ob
Eco o ics
M y 30 — June 6, 2016
May
6
Without growth,
g
it can’t hope to pay off its debtt
Tax breaks for investors could spark “tremendous resentment”
On the day after Puerto Rico’s latest
debt default, one of the island’s richest
men, developer Nicholas Prouty, is
less concerned about his $110 million
building project in the heart of
San Juan than he is about the emptiness that surrounds it. “Those are the
only cranes you’ll see on the skyline,”
Prouty says in his office next to the
condominium construction site. While
politicians are preoccupied with a debt
deal, he sees little attention being paid
to Puerto Rico’s real problem: its stagnant economy. “There’s talk of either
a bailout or austerity, and I think those
are false choices,” Prouty says. “You
need to have a growth-based model
here in order to emerge.”
Puerto Rico’s debt debacle entered a
new phase with its $370 million default
on May 1. Washington is gearing up to
put the island’s finances under federal
oversight, so a deal can be worked out
with bondholders and more revenue
can be raised to pay them. Missing from
the effort so far is a plan to end the economic malaise that’s lasted a decade—
even though a return to growth is
creditors’ only chance to get some of
their $70 billion back.
If that sounds familiar, it’s because
it pretty much describes the situation
in Greece, says Desmond Lachman,
a resident fellow at the American
Enterprise Institute and former
deputy director of the International
Monetary Fund’s Policy Development
and Review Department. As with
Greece, policymakers have set out to
squeeze extra cash from a country
without its own currency or central
bank. “We saw in Greece that all that
does is, it weakens the economy,”
he says. “Then the budget doesn’t
improve like you thought it would. The
debt ratios keep rising.”
In the past, Puerto Rico has been able
to use its limbo status as neither a sovereign nation nor a U.S. state to its advantage, mostly through tax gimmicks. For
decades, pharmaceutical companies
flocked to the island to avail themselves
of a federal rule that allowed them to
get a tax break on profits. The incentive was eliminated in 1996, although
companies were given a 10-year grace
period to move elsewhere before taxes
went up. They did—and in 2006, Puerto
Rico’s slow-motion economic collapse
began. “Since then, the Puerto Rican
government has been improvising,” says
Antonio Fernós Sagebién, an economics
professor at the Interamericana
ILLUSTRATION BY 731; CYBORG: SHUTTERSTOCK. DATA: GOVERNMENT DEVELOPMENT BANK OF PUERTO RICO; U.S. CEN
NSUS BUREAU
U
14
The illegal dollar trade
prospers in Libya 16
Korea’s shipping
industry is sinking
fast 18
University of Puerto Rico in San Juan.
Among the latest tax breaks the government has tried is a controversial provision from 2012 that sought to attract
wealthy foreign investors by offering
a tax exemption for interest and dividends. That’s partly what led Prouty to
move there in 2013 from Connecticut,
where he’d set up a distressed real
estate fund in Greenwich. As an owner
mostly of real estate rather than financial assets, Prouty says he doesn’t
personally gain much from the tax
program, but that Puerto Rico could be
benefiting more from the investment it
does attract. “It’s hot money,” he says,
warning that some in the program may
simply move on when a better deal
appears elsewhere. “Those people need
to become engaged in Puerto Rico, or
that program runs the very real risk of
creating tremendous resentment.”
Although wealthy migrants enjoy
their tax breaks, Puerto Ricans who
run domestic businesses feel they get
stuck with higher taxes, says Ricardo
Alvarez-Díaz, who runs an architecture
and interior design firm and is chairman of the island’s builders association.
“Every day there is another permit they
need to open their business,” he says.
“It gets to a point where you either close
your business or you leave.”
Puerto Ricans have the right to live
on the mainland, and as the economy
slumps, they’re exercising it. The population fell 7 percent, to 3.5 million, from
2010 to 2015, according to U.S. Census
Bureau data. Recent migrants to the
U.S. have tended to be less educated,
but many professionals are leaving, too:
Doctors departed at the rate of more
than one a day last year. Stemming the
outflow will require fixing the economy.
For now the focus is on finding revenue
to prevent further defaults. As a result,
everything, including water bills and
sales taxes, has been increased.
The next important date in Puerto
Rico’s crisis is July 1, when a $2 billion
payment comes due. Puerto Rican
authorities project a 2 percent decline
in gross national product for the year
starting on July 1, which would be
the fifth straight, after a projected
1.2 percent drop for the fiscal year
that ends on June 30. Unemployment
is running at 11.7 percent, and the
labor participation rate—the portion
of the labor force that’s economically
active—is barely above 40 percent.
Local business leaders say Puerto
Rico must again make use of its
in-between status. In tourism, for
example, it has the white-sand
beaches of a Caribbean island but with
an infrastructure that’s closer to U.S.
standards than that of some competitors. It has a bilingual professional
class and labor costs that are low for
the U.S., if not for Latin America.
Fernós Sagebién, the economics professor, says Puerto Rico can get back
into manufacturing sophisticated
products such as medical devices by
taking advantage of its engineering
programs to make products for the
U.S. market. Prouty says the island can
lure retirees with a combination of
mainlandlike emergency medical care
and year-round sunshine.
One step that Congress will probably
take in its rescue package is a reduction of the minimum wage to below
mainland levels. Lachman, the former
IMF official, says that makes sense. But
he also says the U.S. will probably have
to take more drastic action to revive
Puerto Rico’s economy—“give them
some sort of tax break,” or maybe even
inject funds, though only to stimulate
the economy, not to pay off creditors.
Congress is adamant that whatever
measures it adopts won’t be a “bailout.”
Prouty says he’s pushing for a
growth-friendly plan for Puerto
Rico by knocking on every door he
knows. That includes lawmakers in
Washington, and even Hillary Clinton:
Prouty has a photo of himself with the
Abandon Ship
4%
3.8m
Puerto Rico
population
2%
0%
Change in Puerto Rico’s
gross national product
-2%
3.5m
’05
’15
-4%
Democratic presidential candidate on
display in his office. “Businesses like
certainty, and there’s a lot of uncertainty for sure,” he says. But Prouty
says he doesn’t regret his decision to
move to the island and invest there. “I
don’t make those decisions based on
my gut,” he says. “I also believed—and
still do—in the Puerto Rican economy.”
—Jonathan Levin
The bottom line Puerto Rico’s $370 million debt
default exposes structural weaknesses of an
economy that’s smaller today than a decade ago.
Monetary Policy
Will a Computer Set the
Federal Funds Rate?
Machine learning may soon help
central bankers decide policy
15
“The capability is here. The
biggest hurdle is … cultural”
Artificial intelligence (AI), which is
already steering cars, could help
steer the world’s biggest economies
i
in the next half-decade. Brritain’s
a
central bank has been dev
velopping computer algorithms ffor
diforecasting economic conditions and helping determine
interest rate policy. Other
monetary authorities are
y
close behind. “The capabiility
is here,” says Andrew Lo,
director of MIT’s Laborato
y
ory
for Financial Engineering.. “The
biggest hurdle is the cultural
barrier. You’ve got a lot off central
bankers who are not as op
pen
to technology.”
The Bank of England, un
nder the
direction of Chief Economiist Andy
y
Haldane, has quietly becom
p
me a pacesetter in exploring the possibilities
of AI. Paul Robinson, who heads
the bank’s two-year-old Advanced
Analytics unit, says the goal is to assist
rather than replace humans. He says
“many” central banks are at roughly
the same stage of research and predicts that AI will make a meaningful
Global Economics
FRB/US doesn’t learn on its own.
“For the foreseeable future, the best
approach will involve a combination
of empirical rigor captured in models,
together with human judgment,” says
David Wilcox, director of the Fed’s division of research and statistics.
Some AI champions, such as Google
Chief Economist Hal Varian, are also
skeptical about AI’s ability to make
economic forecasts, but for different
reasons. As he sees it, the technology is
ready, but the data—the copious supply
of raw numbers that AI programs sift
through to reach conclusions—are
wanting. “The data sets are so small.
GDP is released quarterly, so 50 years of
data is only 200 observations and only
seven recessions,” he wrote in an e-mail.
AI will soon have a lot more data to
chew on. Web scrapers such as MIT’s
Billion Prices Project are already
combing the internet for real-time
price points relevant to inflation.
Economists and computer scientists
agree there will always be a role for
human beings in central banking. As
Michael Feroli, chief U.S. economist at
JPMorgan Chase, puts it: “I don’t see
why, in principle, you couldn’t have a
computer set monetary policy. Having
it testify before Congress is another
matter.” —Christopher Condon
The bottom line The machine-learning branch of
artificial intelligence could help central bankers set
interest rates within five years.
Currency
The Dollar Plays a Role
In Libya’s Woes
The black market in greenbacks
is undermining the government
“We aren’t breaking the law … there’s no law to be obeyed”
Amid the upmarket apparel and
jewelry shops along Benghazi’s Dubai
Street another luxury good is for sale:
crisp U.S. dollar notes. In plain view
of Libyan police, stores deal in illegal
foreign exchange. “The black market
is seen as the bad guy, but we just offer
services the state has failed to provide,”
says Muhsin Ahmed, a money changer.
“We aren’t breaking the law, because
there’s no law to be obeyed.”
Rival political factions control Libya.
Islamic State has captured about
250 miles along a central stretch of
the country’s Mediterranean coast.
Attacks on oil installations by militias
and a slump in crude prices are draining state coffers. Smuggling of migrants
and arms is rampant.
The illegal dollar trade shows how
little the public trusts the government. It fuels corruption among
businessmen and
finances the militias, complicating
billion
Prime Minister
Fayez Serraj’s
Libya’s foreign
efforts to unify
currency reserves,
the country
down from
under a United
$106 billion
in 2013
Nations-backed
administration.
“The deterioration of the state has
pushed individuals to black-market
activities,” says Claudia Gazzini, senior
analyst for the International Crisis
Group, a think tank in Brussels. Libyans
involved in the black market say they
want a unified government to provide
legal economic opportunities, she says.
“But at the same time, they appear
to have more to gain by continuing in
this state of economic chaos.” In May
the well-respected official audit court,
which monitors public finances, said
the black market is “causing extreme
harm to the economy and escalating
the collapse of the state.”
Oil is almost the only thing Libya
exports, and in the past it was a steady
source of foreign currency. The state’s
inability to sustain production in the
face of militia attacks as well as lower
oil prices have put the economy in critical shape. The fields currently pump
about 175,000 barrels a day, down from
about 1.6 million before the 2011 revolution. Foreign currency reserves are
$68 billion. They were $106 billion in
2013. The central bank bars Libyans
from exchanging dinars for dollars at
commercial banks. So they turn to the
black market, which is so much a part of
life that TV channels report daily rates.
Those rates are up to 2.8 times the
official rate, which is 1.39 dinar to the
dollar. Haitham Abou Zaid, a pharmacist, says he has bought hard currency
from the central bank at the official
rate to import medicine. “I used to
$68
RON SACHS/REX/SHUTTERSTOCK
16
contribution to monetary policymaking “certainly within five years.”
Improvements would be welcome.
Economists are, by their own admission, notoriously bad at making predictions. Consider the forecasts for
2015’s U.S. gross domestic product
issued by Federal Reserve policymakers at the end of 2014. All 17 overestimated the eventual rate of growth,
the closest by 0.2 percentage point, the
furthest by 1.3 percentage points. The
actual number was 1.9 percent.
Machine learning allows a computer
to acquire a skill for which it hasn’t
been explicitly programmed. Google’s
self-driving car learns to drive by
detecting patterns in vast amounts of
driving data. Hedge funds, such as Two
Sigma Investments and Renaissance
Technologies, are already using AI to
help make investment choices.
At central banks the principal task
is to set an interest rate on short-term
borrowing that guides the economy to
a sweet spot between unemployment
and inflation. Because rates work with
a lag, doing so depends on forecasting
economic conditions 6 to 12 months
down the road.
One thing that makes monetary
policy tricky is that a rate change will
alter the conditions you’re trying to
predict. And long-established connections among ecconomic variables can
ti
change.
ch
g For ex
xample, the inverse relattionship
h p between unemployment and inflation—what
m
econ
e
nomists call the Phillips
ccurrve—seems to have disap
appeared
in recent years.
R
Robinson,
of the Bank of
England, concedes that
AI works well when the
structure of the economy
is “invariant,” or stable,
bu is “less useful when it
but
do undergo shifts.”
does
T U.S. Federal Reserve
The
iis moving
g gradually on AI. It uses
mod
ccomputer
p
dels, in particular one
called FRB/US (pronounced “ferbus”),
to help with forecasts. FRB/US is a “selfcontained set of equations, data, programs, and documentation,” according
to the Fed’s website. It’s useful for
generating answers to specific what-if
questions: What will happen to
unemployment if 10-year Treasury
yields rise by 2 percentage points?
Unlike a machine-learning system,
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Healthcare
The AWS Cloud helps Philips
turn clinical data into actionable insights. Through a global network and
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draw on the wisdom of petabytes of health data to create personalized
patient diagnoses and treatments.
Global Economics
The bottom line Since Libya’s oil industry
contracted, a thriving black market in U.S. dollars
has sprung up.
Jobs
Layoffs Come to
Korea’s Shipyards
Slower growth, fewer orders, and
rivalry with China have an impact
Being fired was “like being pushed
into a desert with no water”
With the South Korean government
formulating a plan to restructure
many of the country’s indebted companies, the shipbuilding industry—the
source of about 8 percent of the country’s exports last year—is bracing for
only by his surname, Kim, initially
delivered newspapers and worked
Value of orders received
in construction after losing his
by Korean shipbuilders
job. He’s now on a temporary con$48b
tract at a retailer and taking night
shifts as a driver to get by. Even
$36b
though he’s working two jobs, his
income is half what it was. Being
$24b
fired was “like being pushed into a
desert with no water,” Kim says.
$12b
In an April cabinet meeting,
President Park Geun Hye said
0
procrastinating on restructuring
is like a sick person frightened
2012
2016*
*PROJECTION. DATA: EXPORT-IMPORT BANK OF KOREA;
about
undergoing lifesaving surgery.
CLARKSON; MINISTRY OF TRADE, INDUSTRY, AND ENERGY
Korean exports have fallen for more
especially deep layoffs. Many of the
than a year, and mounting levels of
job losses will come in industrial hubs
corporate debt are weighing down
companies that need to find new
along the southeast coast where shipsources of growth.
yards and ports dominate the landDaewoo Shipbuilding & Marine
scape. These heavy industries helped
Engineering plans to cut about
propel growth in previous decades
10 percent of its workforce, or about
but have been battered more recently
1,300 people, by the end of 2018.
by a slowdown in the global economy,
Hyundai Heavy Industries says it’s
overcapacity, and rising competition
offering some employees early retirefrom China. Korea’s government and
ment, after reducing the number
state-run banks are pushing compaof executives by 25 percent.
nies to cut back on staff and “The possibility of
me getting a new
Layoffs are expected to balloon
sell unprofitable assets.
job that offers
as the downsizing at major
About 205,000 workers
similar income and
companies ripples through the
were employed in Korea’s
benefits is about
1 percent.”
shipbuilding industry as of
rest of the industry. Ha Chang
—An employee
the end of 2014, according
Min, an official at the subwho was laid off at
to the Korea Offshore &
contractors’ labor union for
SsangYong Motor
Shipbuilding Association. Lee
Hyundai Heavy, says the union
Mi Seon, an analyst with Hana
expects about 10,000 workers
Financial Investment, wrote
to lose jobs this year.
in a report that an estimated
In Ulsan, a major indus10 percent to 15 percent of those
trial city on the southeast coast,
workers will lose their jobs.
claims for unemployment benefits
In Korea, losing a permanent, fullrose 18 percent in the first quarter
from a year earlier, compared
time position often means sliding
with a 1.3 percent increase for the
toward poverty, one reason why
labor unions stage strikes that at
whole country, data from the labor
times escalate into violent confronministry show.
tations. Because Korean companies
The worst may be yet to come. The
value of new orders at Korea’s shiptypically prefer hiring and training
young employees, rather than recruitbuilders fell 94 percent in the first
ing experienced hands, many laid-off
quarter from a year earlier, and it’s
workers drift into low-wage, temporary forecast to fall 85 percent for all of 2016,
jobs that lack insurance and pension
says the Export-Import Bank of Korea.
benefits, says Lee Jun Hyup, a research
The slide suggests companies will no
fellow for Hyundai Research Institute.
longer be able to hold on to employees
“The possibility of me getting a
once current projects end. —Jiyeun Lee
new job that offers similar income
The bottom line The government of South Korea
and benefits is about 1 percent,” says
is pressuring heavily indebted manufacturers,
especially shipbuilders, to lay off thousands.
one of about 2,600 employees who
were laid off in 2009 in the restructuring of SsangYong Motor, Korea’s
Edited by Christopher Power
No. 4 automaker. The 45-year-old
and Matthew Philips
worker, who asked to be identified
Bloomberg.com
Run Aground
ILLUSTRATION BY 731
18
sell at satisfactory prices, and
customers were happy,” he says.
“Now I have to buy dollars from
the black market. The prices got
very high, and some people cannot
afford to buy what they need.”
Companies forge invoices from
foreign suppliers to buy dollars
from the central bank to pay the
phony bills, say bankers, money
changers, and importers. They then
arrange phantom shipments to
make these fake invoices seem legitimate. Eight containers supposedly
carrying aluminum bars were found
empty in the port of Khoms, local
security forces said on May 7. They said
the containers were part of a moneysmuggling scheme. Other strategies
include businessmen opening up a
company in Libya and another in Dubai
and sending themselves fake invoices.
Next they sell the dollars gotten from
the central bank on the black market
for two to three times what they paid.
Libyans who get dollars often wire the
money to Dubai banks, says a manager
at one of Libya’s biggest private banks
who’s in charge of letters of credit.
Ten exchange shops flourish
on Dubai Street. “Everyone here
knows that we deal with our customers with more integrity than
banks do,” says Ahmed, the money
changer. “And in lawlessness, trust is
everything.” —Ghaith Shennib and
Caroline Alexander, with Saleh Sarrar
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Companies/
Industries
The Disneyfication
of China 22
Briefs: Toyota hails
Uber; New York’s
Domino’s theory 26
Everybody wants to
sell you a cold coffee
24
May 30 — June 6, 2016
Le Cost Killer
21
Carlos Ghosn, the auto industry’s superhero, is trying to save Mitsubishi Motors
PHOTO ILLUSTRATION BY 731; PHOTO: GETTY IMAGES
“There’s a huge reward if we are successful”
When Carlos Ghosn was brought
in to rescue loss-ridden Renault in
1996, it took him only a year to turn
the French carmaker around. The
20 billion French francs of expense
cuts he imposed earned him the nickname Le Cost Killer. Three years later,
Ghosn was sent to revive Renault
partner Nissan Motor, which had
been unprofitable in seven of the previous eight years and was the most
indebted carmaker in the world. By
fiscal 2003 it had become the globe’s
most profitable major automaker.
His revival of Nissan remains one of
the industry’s extraordinary success
stories. Ghosn even became the
subject of a comic book series that
reached 300,000 Japanese readers in
monthly installments in 2001.
Now he’s being called in to play
superhero again, as part of Nissan’s
agreement in May to pay $2.2 billion
for a controlling stake in Mitsubishi
Motors, which saw its shares plunge
40 percent after a scandal broke
in April. The peripatetic Ghosn—
he’s chief executive officer of both
Yokohama-based Nissan and Franceheadquartered Renault—will need to
quickly clean up Mitsubishi’s image,
which has been tainted by the company’s recent admission that for more
than two decades it used improper
fuel-economy testing methods and
since 2011 has overstated the fuel efficiency of its minicars sold in Japan.
He’ll also likely have to get out his scissors again, to eliminate overlap in purchasing and vehicle development.
An embattled Mitsubishi faces
big scandal-related costs in Japan.
Production losses, penalties, and compensation to customers could total as
much as 376 billion yen ($3.4 billion),
estimates Goldman Sachs analyst Kota
Yuzawa. Yet it isn’t in as bad financial shape as Renault and Nissan were
when Ghosn arrived to rescue them
in the 1990s. Mitsubishi had about
450 billion yen in net cash as of
Companies/Industries
22
March 31 and has been profitable for
seven years.
So if Ghosn can squelch the fuelefficiency scandal and put in place cost
cuts that restore investors’ faith in the
company’s future, Nissan stands to
get a healthy return on its Mitsubishi
stock—and protect the steady supply
of minicars Mitsubishi builds for sale
under the Nissan name.
“I don’t think we can say what’s
coming is much more difficult than
what we have seen,” says Ghosn. “It’s
going to be challenging. There’s a huge
reward if we are successful.”
A Renault-Nissan-Mitsubishi alliance—
which would create the world’s fourthlargest automotive group—could yield
big savings by combining parts and
materials purchasing, sharing powertrains, and jointly developing minivehicles, according to Credit Suisse
analyst Masahiro Akita. “If you lay out
everything that’s known currently, the
deal could represent quite a smart decision,” says Thomas Glendinning, an
auto analyst at BMI Research.
Mitsubishi and Nissan set up their
minicar venture in 2011 and have been
Desperately Seeking Carlos
Even before Mitsubishi’s fraudulent emissions
testing was exposed, the automaker had been
reporting slowing sales around the world.
Annual change in Mitsubishi Motors
vehicle sales
30%
15%
0%
-15%
-30%
’05
’15
After the news, investors quickly jumped ship.
Share price in yen
1020.5¥
549¥
12/30/15
5/23/16
FIGURES REPRESENT ANNUAL CHANGE FROM YEAR ENDED ON MARCH 31
OF FOLLOWING YEAR. DATA COMPILED BY BLOOMBERG
looking to strengthen ties, Ghosn says;
the fuel-economy scandal just accelerated the talks. He lists common
vehicle platforms, shared electric-car
technologies, and financial-services
ventures among the areas in which
Nissan and Mitsubishi can cooperate more. He’s also sending Nissan
managers to run vehicle development
at Mitsubishi.
What Ghosn wants most from the
tieup may be more exposure to fastgrowing Southeast Asia, where Nissan
trails Toyota Motor, Honda Motor,
and even the much smaller Mitsubishi.
After closing plants in Europe and the
U.S., Mitsubishi is focusing on expansion in Southeast Asia, where its
popular Triton pickup and Pajero SUV
help it sell twice as many vehicles as it
does in Japan. It has said the mileage
scandal didn’t occur there.
“They assured me that there are no
problems outside Japan,” says Ghosn.
“These are people we trust—we have
been working with them for four years,
and they never told us something
which was completely out of whack.”
Nissan, whose engineers were the
whistleblowers who initially noticed
discrepancies in the fuel economy of
minicars supplied by Mitsubishi, will
have to help its new partner overcome
the crisis first. Investigations into
Mitsubishi’s overstating of mileage
are still under way,
Sales gains in
and the company
Asia didn’t fully
offset declines in recently found that
Europe and Japan
models other than
minicars were also improperly tested
in Japan. Mitsubishi President Tetsuro
Aikawa has said he’ll step down after a
shareholder meeting in June.
Mitsubishi could burn through
its cash quickly, says Koji Endo, an
analyst at Advanced Research Japan.
That’s because Endo expects sales
of Mitsubishi vehicles to fall in Japan
as news of the scandal spreads—its
minicar sales fell 45 percent in April—
and liabilities regarding the mileage
misstatements to be large. In the worst
case, says Endo, Ghosn may even have
to shut down Mitsubishi’s Japanese
operations and rely solely on its
healthy business in Southeast Asia.
Under Nissan’s agreement with
Mitsubishi, Ghosn has a year to complete the investment deal. Yet BMI
Research’s Glendinning says even that
might not be enough time to carry out
a thorough investigation and “pinpoint all of the misconduct by the corporate management.”
Ghosn says Nissan won’t be
“jumping into a black box” and will
be able to confirm all the facts before
completing the Mitsubishi investment
deal within four months. If somehow
Mitsubishi doesn’t confirm its numbers
and projections, he says, it’s a reason
to “stop whatever we are engaging.”
If things go as planned, analysts
expect a repeat of the very nonJapanese management style—
fast-paced, sharp-penciled—Ghosn is
known for. “He is a different animal,”
says Edwin Merner, president of
Atlantis Investment Research in
Tokyo. “He sees things in a very objective way.” Mitsubishi is about to learn
that firsthand. —Kae Inoue and Ma Jie
The bottom line Nissan is trying to revive Mitsubishi
Motors, whose stock fell 40 percent in April after it
admitted overstating mileage of its minicars.
Entertainment
Disney’s New
Cultural Revolution
At its Shanghai park, it’s pushing
a novel art form: Musical theater
It’s “doing something in China
that has never been done before”
When Niu Tianlong graduated from
the Shanghai University of Sport
last year, the 22-year-old planned to
pursue his passion for a full-contact
Chinese martial art known as wushu.
Then Walt Disney came calling.
Nowadays he’s lacing up his kneehigh boots, donning pantaloons and
a blue bandanna, and rehearsing a
sword-fighting scene to prepare for
the June 16 opening of the $5.5 billion
Shanghai Disney Resort theme park.
“The physical part is not tough at
all compared to wushu, but the performance, the expressions on my face
and acting—that’s very challenging,”
says Niu, who has been hired to play a
swashbuckler and entertain park visitors between attractions.
In Disney’s effort to expand its signature character-based entertainment
to China, figuring out millions of small
Shanghai
Disney
Companies/Industries
Rehearsing for a
show at Shanghai
Disney
QILAI SHEN/BLOOMBERG (2)
Li will play Nala in
the Mandarin
version of The Lion
King
details such as the Mandarin translation for hakuna matata have been the
least of its worries. Instead, managing an epic, yearlong casting call for
the 1,000 performers for marquee
musicals such as The Lion King and all
manner of other acts that make the
Magic Kingdom such a powerful draw
has proved more challenging.
Performance arts training on the
mainland tends toward classical
Chinese forms in major urban areas,
and is pretty much nonexistent everywhere else. In the U.S., there’s a surplus
of people who can act, sing, dance, or
do all three. In China, the relatively few
performers who’ve studied Western
musical forms are more likely to have
studied operatic bel canto pieces than
belt-it-out Broadway tunes.
That’s forced Disney to improvise.
Years ago, when Shanghai Disney was
in the concept phase, the company
started building its own talent development network from scratch by partnering with 30 arts institutes around
the country. “Disney is doing something in China that has never been
done before,” says University of
Virginia Darden School of Business
professor Elliott Weiss, who has
written a case study on Shanghai
Disney. “The question is when the
park can be profitable, given the additional investment they have had to
make finding and training talent.”
Disney has long cultivated its brand
with Chinese millennials, many of
whom first encountered Mickey Mouse
only in 1986, when the state-controlled
China Central Television network
started to broadcast Disney animation. In 2008 the company launched
its Disney English-language training
schools in China, starting in Shanghai.
Disney now has 28 learning centers
in seven cities across China that teach
kids ranging from age 2 to 12, with class
materials featuring Disney characters
such as Buzz Lightyear and Nemo. It’s
also searching for talent through an outreach program with drama and dance
programs, such as the one at Shanghai
Normal University, where it discovered
Yu Liang, 24, who landed the female
lead role in a Shanghai Disneyland
production based on the Pirates of the
Caribbean character Jack Sparrow.
When Li Weiling, 28, got a callback from Disney after a year of auditioning, it was a huge career break.
The graduate of the prestigious
Shanghai Conservatory of Music had
been teaching full time after finishing a two-year run in 2014 as Silibub
in a Chinese-language production of
Cats. “In my second year of university, my teacher gave me Nala’s song,
Shadowland, to sing,” she says. “I
didn’t know about this musical then.
Now I am trying to cope with the pressure of being China’s first Nala.”
With less than a month to go before
the Shanghai Disney opening, Chinese
performers are rehearsing with directors and trainers flown in from the
U.S. After Disney gets its troupe ready
for prime time, the next challenge
may be keeping them.
Starting next year, Shanghai
Disney will face greater competition. DreamWorks Animation has a
$2.4 billion DreamCenter park scheduled for 2017 in Shanghai, while
China’s Haichang Ocean Park
Holdings will open China’s largest
marine park there next year. And Six
Flags Entertainment will open a park
on the mainland, its first outside North
America, in 2019. Industry consultant
Aecom forecasts that 59 more theme
parks will open in China by 2020,
serving an estimated 220 million
parkgoers annually. That’s roughly the
current size of the entire U.S. market.
“After it has invested in training,”
says Darden’s Weiss, Disney “might
23
We see
opportunities
when others
don’t.
Where do focus,
The bottom line The $5.5 billion Shanghai Disney
park is hiring 1,000 performers to act, sing, or
dance their way into Chinese consumers’ hearts.
Drinks
relentless
The Hot Business
Of Cold Coffee
commitment
and higher
Companies are betting big on
canned and bottled java
expectations
“Maybe you want to have a
six-pack for your picnic”
get you?
To places you’ve
only dreamt of.
We are Athene.
And we are driven
to do more.
ATHENE
lose the talent to competitors.”
Niu, the martial arts student turned
pirate, says he’s enjoying his crash
course in show business, though his
proud parents back in Henan province
are a little puzzled by the career change.
“In the village, we know characters like
Snow White and the Seven Dwarfs, but
you don’t really know that they belong
to a company called Disney,” he says.
Shanghai Disney is all about changing
that. —Bloomberg News
Driven to do more.
®
Athene.com
ANNUITIES
REINSURANCE
INSTITUTIONAL PRODUCTS
America’s seemingly insatiable thirst
for a good hot cup of joe has helped
coffee shops grow into a $21.2 billion
industry and turned java joints like
Starbucks into societal fixtures. Now
coffee makers are betting U.S. grocery
shoppers will embrace an even cooler
way of getting their caffeine jolt:
chilled bottled and canned coffee.
Global giants such as
Illycaffè and upstarts
such as High Brew
Coffee and Chameleon
Cold-Brew are rushing
to put their products
on ice. Coca-Cola,
Dr Pepper Snapple
Group, and other
beverage makers
are jumping in.
And a StarbucksPepsiCo partnership, which has long
dominated packaged cold
coffee, is introducing new
chilled brews.
While sugary iced-coffee concoctions,
like Starbucks’s
Frappuccinos, have
been popular for
years, baristas and tony coffee bars
are seeing an increasing demand for
more sophisticated iced espressos
and lattes. Some say they serve more
cold coffee than hot—even during
winter. For the fourth quarter of
2015, Starbucks reported a 20 percent
increase in iced drink sales nationwide following its introduction of
cold-brew coffee in its retail stores.
Unlike iced coffee, such drinks are
brewed cold, taking 12 hours. Now
coffee makers are pressing to get more
of those high-end, lower- calorie and
less-sugary cold brews and lattes on
the shelves of stores such as Walmart,
Kroger, and Costco.
“When given a choice, people tend
to make the healthier, better-for-you
choice as long as it’s within a reasonable cost premium,” says Chris
Campbell, co-founder of Chameleon,
where sales are growing at triple-digit
annual rates.
The U.S. market for canned or bottled
ready-to-drink coffee has been growing
by double digits annually since 2011,
and Euromonitor International expects
the market to reach
Ready-to-drink
close to $3.6 billion
U.S. coffee sales by 2020—up sixfold
$2.4b since 2001. The
global market for
such drinks was
$1.2b $18 billion in 2015.
Michael
Butterworth, cocreator of the
0
Coffee Compass
2001
2015
blog, says the cold
coffees on U.S. grocery shelves
“have a long way to go” in terms
of quality and taste. “But there’s a
proven market for these products,
and you’re going to see more and
more of them,” he says.
One of the promises of canned and
bottled coffees, which are portable
and durable, is that they’ll open up
the universe of high-end coffee
to folks who may not live around
the corner from a hipster cafe, says
Chermelle Edwards, creator of a
blog called Coffeetographer. “Maybe
you want to have a six-pack for your
picnic,” she says. “You don’t go to
a coffee shop and buy 10 coffees for
your party, but you’ll buy
cold-brew. It’s like beer,
like craft beer.”
Beverage industry
ILLUSTRATION BY JOSH FREYDKIS; DATA: EUROMONITOR
Companies/Industries
We see you reaching places
you’ve only dreamt of.
We see opportunity when others don’t. Our innovative ⇒nancial solutions combined
with relentless focus take performance to a whole new level. And for you, that
means never settling for status quo. If you see things like us, visit ATHENE.COM.
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Companies/Industries
executives hope that ready-to-drink
cold coffee in the U.S. could someday
rival the brew’s popularity in Japan.
That’s the largest such market in the
world, according to Andrea Illy, chief
executive officer of Illycaffè. CocaCola, which partners with Illy in
the U.S. and other countries, sells
more bottles and cans of coffee
than anyone else globally, largely
○q○ Toyota is buying a small stake in ridebecause of sales in Japan.
hailing leader Uber and will begin offering leases
The Starbucks-PepsiCo venture
is introducing sweetened and
to Uber drivers. The deal follows investments by
unsweetened bottled black coffee
Volkswagen and General Motors in Uber rivals The Gyeondyo-bar, a
and cold brews this summer.
grapefruit-flavored ice
Coffee & Tea, owned by
Gett and Lyft, respectively. Toyota and Uber cream bar to help cure Peet’s
JAB
Holding,
got into cold-brew
hangovers, has been
didn’t disclose the size of the investment. ○z○ introduced in Korea,
canned coffee when it agreed to
which has the highest
acquire Stumptown Coffee last fall.
Hewlett Packard Enterprise will spin off and per capita alcohol
La Colombe, backed with funding
consumption in Asia.
merge its business-services division with Comfrom Chobani yogurt founder
Hamdi Ulukaya, will release its canned
puter Sciences in a deal valued at $8.5 billion. That lets CEO
latte later this year in grocery stores
Meg Whitman exit IT outsourcing, leaving HPE to concenaround the country. The drink, which
foams like a hot latte when poured, sold
trate on selling servers, storage, and networking hardware,
10,000 cans in its first hour when it was
plus software. ○å○ Eggless mayonnaise maker Hampton
offered online in March.
In April, Dr Pepper Snapple
Creek is looking for fresh capital to fund its expansion. It’s
entered into a distribution deal with
26
been trying to raise about $200 million based on a $1.1 billion
High Brew Coffee, an independent
company started by David Smith. For
valuation, say people familiar with the matter. The company
Smith, who’s counting on Dr Pepper
sells
what
it
bills
as
sustainable
for its “merchandising muscle,” coffee
Value of the 15-year
deal struck by UCLA
is a second act. He co-founded Sweet
foods at Target, Walmart, Whole
and sportswear brand
Leaf Tea, which was sold to Nestlé
Under Armour—the
Foods Market, and other big
Waters North America in 2011. While
biggest college sports
apparel contract ever.
on a seven-month sailing trip with his
chains. It wants to increase the
Under Armour will
family, often island-hopping at night,
million
replace Adidas, UCLA’s
number of products it offers to
he found standard coffee wasn’t giving
sponsor for almost two
decades.
him the jolt he needed to stay alert.
more than 600, from 64. ○r○
So while at sea he made his own coldbrew, which carries twice the caffeine
Royal Dutch Shell will cut 2,200 jobs in response to oil prices
punch of brewed coffee.
staying “lower for longer,” it said. The move raises the tally of
“A lightbulb went off,” Smith says.
job losses at Shell since the beginning of 2015 to 12,500.
“If somebody came up with a
CEO
ready-to-drink, shelf-stable, cold○æ○ New York state filed suit against
Wisdom
brew coffee that was conveniently
Domino’s Pizza, saying the computer syspackaged, it would really be a
g
great
addition to what is available
tem used by its franchisees undercounted “One tiger
t
to
consumers
out there today.” The
is no match
r
hours worked by employees, reducing for a pack of
resulting
product, High Brew Coffee,
wolves.”
h grocery stores in 2014. Sales grew
hit
their wages. New York sued the franchisor —Wang
2
270
percent in 2015, says Smith, who
Jianlin,
rather than independent store owners, say- chairman of
de
declines
to provide dollar figures.
Dalian Wanda
—Jennifer Kaplan
Briefs
If You Can’t Beat ’Em
ing the parent required franchisees to use
a flawed computer accounting system.
Domino’s said the lawsuit was baseless and
“disregards the nature of franchising.”
Group, which runs
theme parks in China,
commenting on the
opening of Walt
Disney’s first theme
park there, Shanghai
Disney Resort, in June
The bottom line Sales of ready-to-serve canned
and bottled coffee could approach $3.6 billion in
the U.S. in 2020, up sixfold from 2001.
Edited by James E. Ellis
Bloomberg.com
FROM TOP: REUTERS; GETTY IMAGES
$280
Politics/
Policy
May 30 — June
May
June 6
6, 201
2016
16
The Post-TV Candidate
Donald Trump may not need television ads, but other campaigns still do
“What everyone has to think about is: Is this the last hurrah?”
Priorities USA Action, the Democratic
super PAC that backs Hillary Clinton,
said in mid-May that it had reserved
$96 million in television airtime
leading up to the November general
election. The announcement was
calculated to telegraph the seriousness
of the Democrats’ campaign against
presumptive Republican nominee
Donald Trump.
Trump responded with a short,
cheaply made video featuring a
photograph of a young Bill Clinton
smoking a cigar transposed with
an image of the White House. The
voices of two women who claim the
former president made unwanted
sexual advances plays in the background. “Here we go again?” pops
up in the closing frame. The clip,
posted to Instagram, went directly to
1.6 million people.
Trump has benefited from free
coverage from news media in a way
that no modern candidate has (estimated value: $3 billion). His campaign spent only about $19 million
on TV ads in the primaries, according to Kantar Media’s Campaign Media
Analysis Group (CMAG), which tracks
ad spending. That was far less than
Jeb Bush, whose super PAC blew
through $70 million. Trump has also
been a shrewd user of social media,
where he maintains a dialogue with
his supporters.
PHOTO ILLUSTRATION BY 731; IMAGES: GETTY, ALAMY
28
An economist runs for
president as a writein 30
ILLUSTRATIONS BY 731
A Referendum: Higher
taxes on top earners 31
But his approach, based largely on
his celebrity, is one that can work only
for him. For everyone else, TV ads are
still the preferred means of reaching
the most potential voters. Presidential
candidates and super PACs spent
more than $400 million this primary
season. Total TV ad spending by all
campaigns, including state and local
races, is expected to reach $4.4 billion,
according to CMAG, eclipsing the record
$3.8 billion spent in 2012.
Broadcasters reaped record revenue
from campaigns for the first quarter
of the year. Tribune Media, which
owns or operates 42 local TV stations, including some in Florida, Ohio,
and Pennsylvania, forecasts taking in
$200 million in political ads this year, a
20 percent increase from 2012. “Political
has been a major tailwind for us for a
number of years,” says John Rogers Jr.,
chairman of Ariel Investments, which
has invested in TV station owners
Meredith and Tegna, the media arm
spun off from Gannett last year. “It just
continues to grow and surprise.”
The sustained increase has been
driven in part by congressional and
gubernatorial candidates as the
amount of money available for such
campaigns has grown, thanks to the
2010 U.S. Supreme Court ruling that
relaxed limits on campaign donations. More than 137,000 broadcast TV
spots have already run since January
for House and Senate races, at an estimated cost of $122 million, according to
CMAG. The political groups backed by
conservative billionaires Charles and
David Koch and their associates have
committed more than $42 million to
reserve ad time through September to
benefit Senate candidates in Nevada,
Ohio, Pennsylvania, and Wisconsin.
The Koch groups also expect to spend
heavily on the Senate race in Florida.
The flood of TV ads comes even
though fewer people are watching
broadcast and cable TV than were
watching four years ago. According to
ratings company Nielsen, prime-time
audiences have shrunk 9 percent since
2008. Overall TV ad sales would be flat
this year from last if not for the election
and the Summer Olympics, according
to media buyers Magna Global.
Political spending on digital ads
is forecast to soar to $1 billion this
year, from about $159 million in 2012,
according to estimates from Borrell
Associates, another ad-tracking
company. The estimate includes
$35 million spent by Priorities USA to
bolster its pro-Clinton TV campaign.
That should concern TV station owners
who think political spending will continue to grow every election cycle, says
Richard Greenfield, a media analyst for
New York-based research firm BTIG. “I
think what everyone has to think about
is: Is this the last hurrah?” he says.
The shift to digital might be even
more pronounced this year if not for
contracts that give political strategists a percentage of ad spending. That
creates an incentive for them to maximize the amount of airtime candidates buy. “The dollars [will] go to
TV until the consulting class changes
the way they get comped,” says Bill
Day, a vice president at media consulting firm Frank N. Magid Associates.
“The system is rigged to drive TV
advertising.”
As he grows
into his role as the
de facto leader of
the GOP, Trump
million
has embarked
on a program
to raise more
TV ad spending on
than $1 billion by
U.S. House and Senate
November. He’s
races in 2016
also established a
joint fundraising
committee with the party—the Trump
Make America Great Again Committee—
that allows donors to give as much as
$449,400, which will be split among the
candidate and national and state party
coffers. The money will pay for offices
and field staff, as well as TV ads.
Younger Republican strategists
say Trump should push to bring
the party into his post-TV world. In
2014, Bentley Hensel, then 22, relied
on digital ads placed on Facebook,
Google, and Pandora to help his relatively unknown candidate win a district attorney race in rural Louisiana,
while his better-financed opponents
bought local airtime. “We pretty
much owned the internet in Rapides
$122
Parish,” says Hensel, who’s since
moved to Virginia to work as a GOP
consultant. TV ads just don’t work
very well, he says: “You’re taking a
sledgehammer to a job that takes a
scalpel.” —Tim Higgins
The bottom line Presidential candidates and
outside groups spent more than $400 million in
the primaries; Donald Trump spent $19 million.
Civil Rights
Sweet Cakes With a
Bitter Aftertaste
29
Christian bakers in Oregon want
out of same-sex weddings
“We’ve seen all this before with
respect to other … discrimination”
In January 2013, Rachel Bowman-Cryer
and her mother visited the Gresham,
Ore., bakery Sweet Cakes by Melissa
to do a taste test for her wedding.
According to court records, things
turned tense after Sweet Cakes coowner Aaron Klein asked for the names
of the bride and groom. Bowman-Cryer
told him there would be two brides.
Klein responded that he and his wife,
Melissa, wouldn’t bake a cake for a
same-sex wedding. Bowman-Cryer and
her mother walked out. While BowmanCryer wept in the car, her mother went
back to try to change Klein’s mind.
He held fast and quoted a line from
Leviticus calling homosexuality an
abomination. That night, BowmanCryer’s fiancée filed a complaint with
the Oregon Department of Justice.
The state determined in 2015 that
the Kleins had violated Oregon’s antidiscrimination laws and ordered
them to pay $135,000 in damages
Politics/Policy
public license to discriminate. The U.S.
Supreme Court declined to hear Elane
Photography’s appeal.
“We’ve seen all this before with
respect to other kinds of discrimination,” says Jennifer Pizer, senior
counsel for the LGBT nonprofit
Lambda Legal. In 1968, four years
after President Lyndon Johnson
signed the Civil Rights Act, the
Supreme Court ruled unanimously
against a South Carolina barbecue
owner who claimed that requiring
him to let black customers sit in his
restaurant, rather than only letting
them buy takeout, interfered with his
First Amendment rights.
The Kleins’ lawyers say such cases
shouldn’t be conflated with theirs.
“The supreme law of the land now
guarantees racial equality, just as it
guarantees religious liberty,” says
Klukowski. “The Constitution says
nothing about sexual orientation.”
—Josh Eidelson
The bottom line An Oregon case reopens the
question of whether private business owners can
refuse to provide services for same-sex weddings.
Election 2016
It’s the Economy, and
This Guy’s Not Stupid
Economist Larry Kotlikoff is
running as a write-in candidate
“I wouldn’t do this if I thought my
chances were small”
Move over, Hillary Clinton and Donald
Trump. There’s an economist running
for president: Laurence Kotlikoff,
known as Larry, who’s jumping into
the race as a write-in candidate. The
co-author of a best-selling book on
how to maximize individual payments
from Social Security, he’s running as
a fiscal conservative and a liberal on
such social issues as abortion, criminal punishment, gay marriage, gun
control, and marijuana legalization.
Kotlikoff ’s main concern is what he
believes is a $199 trillion “fiscal gap”—
the difference between how much the
government expects to spend in the
future, in today’s dollars, and how
much it projects it will take in. Most
Kotlikoff
thoughts
“Social Security, with
its maddening rules
within rules within
rules … like a million
Russian nesting
g dolls.”
“Legal immigration
is … fueling a veritable
population explosion.
Unless we reduce legal
immigration, our
population will rise by
one-third–over
100 million people–in
just 45 years.”
“Traditional banking is
unsafe at any speed. …
Just make all the
financial intermediaries
operate as 100 percent
equity-financed mutual
funds.”
“I eliminate the
corporate income
tax, the personal
income tax, and the
estate and gift tax.
In their place, I
institute a business
cash flow tax, also
called a value-added
tax (VAT), a
progressive
personalconsumption tax, an
inheritance tax, and
a tax on carbon.”
off the
h gap exists
i
because of commitments to such entitlements as Social Security. “Our true
fiscal indebtedness is 15 times larger
than the $18 trillion you’ve been told
our government owes,” he wrote on
his website. “Its tremendous size can
be summarized with these five words:
Our government is dead broke.”
Many other economists agree with
Kotlikoff that the U.S. faces a longterm fiscal challenge but reject his
concern that the Federal Reserve,
by “printing money at an astronomical rate,” will spark runaway inflation
if the economy returns to the conditions of the early 2000s. Kotlikoff
has lavished attention on his platform—a 131-page document available
for download through his campaign
website—without bothering to line up
endorsers and donors. In fact, he says
he’s uninterested in campaign contributions. His website features a slogan:
“Write me in but don’t send me a
penny.” His media strategy seems singularly reliant on stories like the one
you’re reading to raise his profile.
If economic credentials were the
contest’s only criterion, he’d win in
a landslide. Kotlikoff, 65, is an expert
on Social Security and generational
accounting, which is essentially the
study of how much debt the current
generation is heaping onto future
ones. He has a bachelor’s degree
from the University of Pennsylvania
DOMINICK REUTER
30
to the Bowman-Cryers, who got a
cake from another bakery for their
wedding. The Kleins are appealing, arguing that they had a First
Amendment right to refuse the couple
a wedding cake. The couple, who
closed the Sweet Cakes shop in 2013
and now sell their goods online, say
they’re happy to sell cookies or cupcakes to gay customers. “Aaron and
Melissa saw their bakery as their
Christian ministry to the community,”
says Ken Klukowski, senior counsel
at the Texas-based First Liberty
Institute, a legal advocacy group representing the Kleins. “To bake a cake
celebrating a same-sex marriage
would force them to engage in speech
they disagree with.”
The case is one of several nationally
involving religious business owners
who claim states that prohibit discrimination on the basis of sexual orientation or gender identity are infringing
on their First Amendment rights.
The Oregon attorney general’s office,
which declined to comment, is due to
submit a brief defending the $135,000
judgment by June 13. In his finding
against the Kleins, the administrative
law judge who reviewed the case in
April 2015 said refusing wedding cakes
to gay customers was discriminatory
behavior. He cited the U.S. Supreme
Court’s 2003 ruling that sodomy laws
banning gay sex acts violated the constitutional rights of gay people.
The Kleins claim the sodomy precedent doesn’t apply to their case
because weddings are not as “inextricably intertwined with gay identity” as sex is. Just as Oregon law
doesn’t require feminist photographers to take pictures at frat houses, it
shouldn’t single out Christian bakers,
the Kleins argue in their appellate
brief. Doing so “sends a clear message
that their identity as religious people
is not worthy of state recognition
and that they cannot operate a business in Oregon unless they facilitate
same-sex weddings.”
Similar arguments were made,
without success, in 2013 by the New
Mexico wedding vendor Elane
Photography, which refused to
photograph a same-sex wedding. The
state’s Supreme Court ruled the First
Amendment’s protections for religion and speech don’t give companies that offer services to the general
Politics/Policy
and a doctorate from Harvard. He’s
a professor of economics at Boston
University and a fellow of the prestigious American Academy of Arts
and Sciences.
His company, Economic Security
Planning, created the software used
for the calculations in his 2015 book,
Get What’s Yours: The Secrets of Maxing
Out Social Security. Written with Philip
Moeller and Paul Solman, it spent five
months in the top 10 on the New York
Times list of advice, how-to, and miscellaneous best-sellers. The book
brought so much attention to lucrative strategies for increasing Social
Security payouts that Congress stirred
itself last year to shut them down.
Kotlikoff doesn’t have a background
in foreign policy or social issues, but
he does have ideas on those topics.
“As President,” he wrote in his platform, “I would deliver a clear message
to North Korea that our patience has
run out and that we will permit no
further testing of nuclear weapons.”
He states unequivocally that the
Second Amendment protects the right
to bear arms before raising a rhetorical question he doesn’t answer: “But
does it permit us to own tanks and
drive them around town or, for that
matter, jet fighters?”
Write-in candidates face long
odds. In the 2012 presidential election, all of them together collected
0.11 percent of the vote. So far in this
election there are 82, not yet including Kotlikoff, according to the website
MyTimeToVote.com. Among the
declared write-in candidates: Mouse,
Mickey; Vader, Darth; and Bunny,
Soul. Kotlikoff nevertheless insists that
his write-in campaign can succeed
by going viral. “I value my time very
highly,” he says. “I wouldn’t do this if I
thought my chances were small.”
Kotlikoff is obviously more into
policies than polling. During an interview, he grabs a piece of paper to sketch
out a graph of life cycle consumption patterns. “What people are going
to hear from me is the truth,” he says,
“and that’s going to be refreshing.”
—Peter Coy
A Referendum
Tax the Rich!
§15697 Fund to Advance Public Kindergarten to Grade 12 Education
The
essentials
1.
In November voters in Maine will say yes or no to a ballot
proposition that imposes a state tax of 3 percent on income in
excess of $200,000 to be used to pay for staff and services
in public K-12 schools. The measure, proposed by the head
of a public policy think tank, is among several around the
U.S. that would raise taxes on the wealthy. Backers say their
goal is to fill budget holes that have resulted from the sluggish
economy and cutbacks in aid from Washington.
2.
Colorado activists are gathering signatures to put a 0.5 percentage point tax hike on incomes greater than $405,000
before voters. The Los Angeles County Board of Supervisors
has asked the state legislature for permission to hold a referendum on adding a levy of 0.5 percent on income in excess of
$1 million to pay for services for the homeless. Massachusetts
activists will try to qualify a proposal to raise state taxes on
income above $1 million by 4 percentage points, to 9 percent.
3.
Antitax groups argue that such measures would drive away
the wealthy, but a 2014 Stanford study found that higher
taxes rarely cause people to move. Morris Pearl, the former
BlackRock managing director who now chairs the pro-tax
group Patriotic Millionaires, says it’s no surprise states are
taking steps to hike taxes in response to popular angst about
income inequality: “People are realizing that the wealthy are
taking advantage of the system.”
Vital
statistics
Proponent
Garrett Martin
Executive director, Maine Center for Economic Policy
The bottom line Boston University professor Larry
Kotlikoff’s presidential platform proposes solutions
for what he warns is a $199 trillion budget gap.
Edited by Allison Hoffman
Bloomberg.com
By James Nash
1
Section 1. 20-A MRSA §15697
pp. 1-2
Section 2. 36 MRSA §5111, sub-§6
pp. 2-3
1. Fund established
2. Revenue; 30-day review
before changing use of fund
3. Use of fund to supplement and
not supplant General Fund
appropriations; direct support for
student learning
4. Report
5. Rule of construction
6. Income tax surcharge to advance public
kindergarten to grade 12 education
Includes librarians,
special ed teachers,
and health staff
2
3
31
POWERING
MODERN HEALTH CARE
TAKES MANY
PARTNERS
HEALTHIER IS HERE
A better health system requires all parts of health care to
be connected and working together. At Optum, we believe
partnerships are integral to powering modern health care.
As a health services and innovation company, we connect
all parts of the system with data, analytics, technology and
expertise. We partner with doctors, hospitals, pharmacies,
health plans, employers, governments and the people they
serve. Optum enables the partnerships and connections in
health care to make the system work better.
optum.com/healthier
T h
l
y
Waste not, want not:
W
M ki lleftovers
f
Making
fi bl 3
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pro
34
F
Folllowing VC
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by industry,
gender,
a
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d
i n 35
and
Vi
li y iis
Vir
V
iirrtuall reality
getting real in C
China
g
36
6
M y 30 — June 6, 2
May
201
20
016
01
16
33
Its software helps
p put
p a price
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p
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ILLUSTRATION BY NEJC PRAH
“We can scan an entire season of Yankees games in under two minutes”
m
s”
Advertising is coming to NBA team
jerseys next year. In April the league’s
owners voted to allow 2.5-inch-by2.5-inch sponsorship patches on the
front left shoulder of game uniforms.
It’s novel real estate: No other major
U.S. team sport permits such displays,
though soccer clubs have sold sponsorships on shirts for decades. To
figure out how much exposure the new
patches will get and how valuable they
are, some NBA teams are turning to
Nervve Technologies, a Buffalo-based
company whose visual search software
is used by U.S. intelligence agencies.
Nervve moved into sports last July,
when it linked up with Wasserman,
a talent agency and marketing consultant that specializes in sports. Earlier
this year, according to Amy Brooks,
the NBA’s head of team marketing
and business operations, the league
asked Wasserman/Nervve and about
10 other consultants to demonstrate
how they could help teams evaluate
patches. At the All-Star
sponsor patches
All Star Game
in February, both teams wore Kia logos
on their shoulders. It was, in part, a
test run. After team owners approved
leaguewide patch sales, the NBA recommended two of the consultants,
Wasserman/Nervve and Repucom,
a global sports-research company.
“Nervve really stood out from the
speed perspective,” says Brooks. A
dozen teams, including the Cleveland
Cavaliers and Orlando Magic, are
working with Wasserman/Nervve to
analyze the market for the patches.
Nervve’s software can track how
often, where, how large, and for
how long a sponsor’s logo appears to
people watching the game on TV or
any other screen. The software can
scan an hour’s worth of footage in five
seconds or less. “On a single server, we
can scan an entire season of Yankees
games in under two minutes for a particular brand,” says co-founder and
Chief Executive Officer Thomas Slowe.
Before
Nervve, says Zack Sugarman,
e Nervve
Sugarman
Wasserman’s head of properties, his
analysts sat for hours watching sporting events and logging when and where
sponsor logos appeared on stadium
signs, blimps, hats, and so on. “We’ve
been doing measurement and evaluation for years,” says Sugarman.
“Nervve just lets us do it more accurately, faster, and at larger scale.”
Wasserman uses Nervve’s raw data to
help leagues, teams, and advertisers
determine the visibility and worth of
in-game ads—and where to place them.
Slowe has been studying machine
learning since his undergraduate days
at Rutgers University. After receiving a master’s from MIT’s Media Lab
and serving as a research scientist at
Ericsson, he worked at a motion-detection startup in Northern Virginia. In
2003 he founded a company that analyzed facial expressions.
With co-founder Jacob Goellner,
Slowe started working on the
Technology
Faces in the
Crowd
What Nervve software
comes up with when
asked to scan three
hours of CNN footage
for Donald Trump
The
results
to analyze brand exposure in
football, baseball, Nascar, and
Kentucky Derby telecasts.
The first NBA patch sale came
on May 16, when the Philadelphia
76ers announced that ticket seller
StubHub would add its logo to the
team’s jerseys. (Wasserman doesn’t
work with the 76ers.) StubHub will
pay about $5 million per year for the
space, according to an NBA official
with knowledge of the deal. Sugarman
expects some teams to charge three
times as much. —Ira Boudway
The bottom line Sports teams and leagues
are using Nervve’s image-recognition software
to assess the value of in-game advertising.
Garbage
Better Business From
Dumpster Diving
Web-connected digesters reduce
waste and supply useful feedback
“It occurred to me that waste
was valuable”
When Dunkin’ Donuts franchise
owner Bill Mulholland wanted to
reduce costs, he took a closer look at
his garbage. About a year ago, he got a
deal on a $400-a-month bio-digester—a
commercial, dishwasher-size steel box
filled with bacteria that converts food
waste into sewage—from BioHiTech,
a maker of the machines. Mulholland,
who’d heard about the digester from
a friend, also liked the idea of helping
the environment by cutting down on
① The sample Trump
image that was fed into
Nervve’s search engine
② Screen grabs of the
matches
garbage. Besides shaving
a bit off his $550 monthly
trash-hauling costs, the
web-connected machine
provides Mulholland with information to help him better run his business.
“If we don’t have enough waste running
through the machine, I know we don’t
have enough product,” he says. “If we
have too much, we are overbaking. I
really can see from afar if my store managers are doing a good job.”
Extracting information from garbage
was just what Frank Celli, the chief
executive officer of BioHiTech, was after
when he and his team devised a way to
make the machines smart. “It occurred
to me that waste was valuable,” says
Celli, who as a teenager worked in his
family’s garbage-hauling business in
New York’s Hudson Valley. He could tell
a lot about customers from their trash.
BioHiTech started developing the
web-connected digesters in 2013, adding
an Intel processor, special software,
and connectivity, and it began marketing the units in 2014. Since then, the
company and a handful of competitors,
including San Jose-based Power Knot
and Canada’s Totally Green, have persuaded hundreds of businesses across
the U.S., from Hilton Hotels to the
Cheesecake Factory to the U.S. Army,
to buy the units. Business owners and
managers can track, via PC or a mobile
app, how frequently the digesters are
used, how much waste is digested, even
which supplier the waste comes from.
“It allows us to provide our customers
with a level of transparency they can’t
receive anywhere else,” Celli says.
The companies sell and lease the
machines. BioHiTech’s leasing fees
range from $6,000 to $13,000 a year,
③ Images are rated on
a scale of zero to 1 to
indicate the software’s
confidence in the match
④ Time, duration, size,
and position of each
on-screen appearance
by Trump
①
②
③
④
COURTESY NERVVE
34
technology in 2011 for what became
Nervve, aiming to serve U.S. intelligence
agencies. From his previous ventures,
he knew the intelligence community
was buried in surveillance footage. “An
analyst will get a terabyte drive of a
hundred or a thousand hours of video
on their desk each morning,” he says.
The automated systems available to scan
for threats typically required rooms full
of servers and operators with advanced
degrees. Nervve created a drag-anddrop interface that allows a minimally
trained user to find objects quickly and
accurately, without a lot of hardware.
The company spent two years figuring out how to isolate patterns in pixels
without relying on the long strings
of yes or no questions usually found
in machine-vision algorithms. Slowe
uses the metaphor of a jigsaw puzzle:
Instead of picking up pieces one at a
time, Nervve scans a jumble all at once
and makes guesses, leaving yes or no
decisions to the very end.
Late in 2012, Nervve began testing
the system for what Slowe calls “a lot
of three-letter agencies,” without specifying them. In-Q-Tel (IQT), the investment arm of U.S. intelligence agencies,
became one of Nervve’s backers in 2014;
it hasn’t said how much it’s invested.
Nervve licenses its software to government contractors, who run the searches
themselves. Slowe says the government
uses the technology, for instance, to
look at video collected by drones.
Once the government business was
up and running, Slowe turned his attention to the private sector and began
soliciting media executives. Wasserman
saw the potential value right away.
The agency, says Sugarman, has
already used Nervve’s technology
“I really can see from
afar if my store
managers are doing
a good job.”
—Bill Mulholland,
Dunkin’ Donuts
Technology
Funding
Where Venture Capital Goes
To see what kind of companies attract the most venture capital, we looked at 895 U.S. startups that have gotten
at least $20 million in equity funding since 2008. This year, funding is projected to fall 25 percent from 2015’s
record $63.3 billion, in part because of concerns about overvaluation. —Dorothy Gambrell and Laurie Meisler
Total U.S. Venture
Capital Funding
Cosmetics & personal care
Funding by Industry (2009-15)
Electronics
Toys, games,
and hobbies
$60b
Consumer products
Home furnishings
Apparel
Retail
Fifty-seven percent
of VC-funded internet
startups are based in
California
$30b
Business
services
Internet
2008
$4.1b
$28.1b
$0
2016
Food
Leisure
time
ESTIMATED
35
Food
services
Gender Gap
Beverages
$20m
South San Francisco
has the highest ratio
of women founders,
16.1 percent, among
cities with at least
20 startups
7%
$100m
of founders are women
Average-size deal
for a male-led company
Entertainment
Software
Pipelines
$77m
Average-size deal
for a female-led company
Alternative
energy
Oil &
gas
Environmental
control
Founders’ Top
Colleges
Stanford University
90
Harvard University
69
Massachusetts Institute of
57
Technology
Twenty-two percent
of listed founders got
undergrad degrees
abroad, led by the
Indian Institute of
Technology at Bombay
with 14
Media
Telecommunications
$21.8b
Advertising
Ninety-four founders
didn’t attend or dropped
out of college
Airlines
Electrical
components
Pharmaceuticals
$4.7b
29
28
Princeton University
26
University of California at
Los Angeles
25
University of Michigan
25
Real
estate
Diversified machinery
Semiconductors
Biotechnology
$6.6b
Health care
$2.2b
Massachusetts is a
magnet for biotech
(31 percent of the
companies on our
list) and pharma
(26 percent)
Diversified
financial services
$3.6b
Chemicals
Agriculture
DATA: COMPILED BY BLOOMBERG, CRUNCHBASE
Holding
companies
Building materials
University of Pennsylvania 36
Cornell University
Engineering &
construction
Manufacturing
University of California at
Berkeley
53
Yale University
Auto parts
Investment
companies
Private
equity
Insurance
Technology
beyond the U.S. and Canada. “We’re
getting calls from all over the world,”
says CEO Louis Anagnostakos. “People
are starting to understand there are
options to the truck, to the traditional
waste-disposal methods,” he says.
—Olga Kharif
The bottom line Companies can learn a lot
about their businesses by analyzing data from
web-connected bio-digesters.
Multimedia
China’s Internet Titans
All Want In on VR
They’re spending big, not on
headsets but on content
“China’s VR industry at this
point … lacks core technology”
Hip-hop dancers, military marchers, and daredevils in winged suits
are bringing China’s internet titans
into the world of virtual reality. The
video stars are central players in a
$1.1 billion global VR spending spree
by Alibaba Group Holding, Tencent
Holdings, and Baidu.
The three are taking a different
approach to the virtual-reality business from their overseas competitors.
Instead of building headsets like Sony,
Facebook, and HTC, the Chinese companies are positioning themselves
as middlemen: seeding startups and
opening their platforms to content and
hardware developers while they wait
for a dominant headset to emerge.
All three “want to focus on creating
platform and content,” says Ricky Lin, a
Beijing-based analyst at IResearch. “The
issue facing China’s VR industry at this
point is that it lacks core technology, so
they need to hedge their bets.”
Baidu, Alibaba, and Tencent have
a combined market capitalization
larger than Israel’s gross domestic
product, and they serve 688 million
internet users in China. Now they’re
trying to get ahead in a domestic VR
market expected to reach 55 billion
yuan ($8.4 billion) in value within four
years, from 1.5 billion yuan last year,
according to Guangzhou-based iiMedia
Research. IQiyi.com, a Beijing-based
unit of Baidu developing content and
hardware, says at least 200 startups are
working in China’s VR industry.
“A lot of people think this industry will mature fast with the push of
capital and media,” says Duan Youqiao,
who oversees IQiyi’s development of a
VR content platform.
Immersive video and game applications could be the first VR businesses
to mature. VR content distribution
will rely heavily on streaming; about
504 million viewers regularly use
streaming sites, according to China’s
Ministry of Industry and Information
Technology. IQiyi is experimenting
with streaming live concerts. It wants to
build the largest Chinese-language VR
service and says the key to that will be
an app suite making movies and games
compatible with any head-mounted
device. “VR will become IQiyi’s main
business,” says Duan.
Alibaba, China’s biggest e-commerce
company, is developing VR-enhanced
shopping for its 400 million users.
The Hangzhou-based emporium has
created 3D renderings of hundreds
of products and will issue standards
for merchants to create their own
VR-enabled shopping options.
Alibaba set up GnomeMagic Lab,
named after characters from World
of Warcraft, to create content with its
video streaming unit, Youku Tudou,
and Alibaba Pictures Group. It’s also
invested in Magic Leap, which promises a headset that superimposes
images on the real world.
Tencent, whose WeChat and QQ
instant-messaging services have more
than 1 billion users combined, is
increasing spending on videos, games,
and anime to keep customers engaged.
Original Force, a Tencent-backed
company specializing in computergenerated content, is working on VR
movies. Original Force is also an investor in Florida-based Pulse Evolution,
which created concert holograms of
Michael Jackson and Tupac Shakur.
“The VR industry will change the
way people engage in entertainment,”
says IQiyi’s Duan. “VR in the future
could be a much larger industry than
we imagine.” —Lulu Chen
The bottom line China’s domestic virtual-reality
market is expected to grow to $8.4 billion in the
next four years, from $229 million in 2015.
Edited by Dimitra Kessenides
Bloomberg.com
COURTESY BIOHITECH
36
depending on the size of the unit; the
purchase price ranges from $23,000 to
$42,000. A small digester—46 inches
wide, 35 inches deep, and 50 inches
high—processes up to 800 pounds of
waste in 24 hours, according to Celli.
BioHiTech estimates the market for
its type of digesters could expand to
more than 250,000 units used by businesses domestically, as cities and states
grapple with better waste management and environmental regulations.
Roughly one-third of food production
globally is lost or wasted, according to
the Food and Agriculture Organization
of the United Nations. Ninety-five
percent of that winds up in landfills, where decomposing scraps emit
methane, a greenhouse gas that contributes to climate change. Last September
the U.S. Environmental Protection
Agency and the U.S. Department of
Agriculture set a first-ever national goal
of cutting food waste in half by 2030.
Many states are pushing for reductions, too. A California law that requires
businesses to arrange for recycling their
take effect
organic waste started to tak
th year. Sin
this
nce 2014,
Ma
Massachu
a husetts has
p
prohib
h bited large
w
waste p
producers,
ssuch as food proccessors and college
ccampu
uses, from
dumpi
du
ping food
with the rest of
BioHiTech’s digesters
their garbage. The
can break down
800 pounds to
efforts are similar
2,400 pounds of waste to the move to
per day, depending
adopt recycling in
on their size
general, according
to David Bodamer, an executive director at the trade publication Waste360.
Some states lead the way, others follow.
“The same thing is going to happen
with food waste,” he says.
BioHiTech’s Celli sees even greater
opportunities to expand into larger
machines and internationally. On
May 16, the company, which is not yet
profitable, announced that a subsidiary will focus on the municipal waste
market. Last year it established a unit
in the U.K. to exploit opportunities in
Europe. The company hopes to sell
100 disposers in the U.K. in the next
24 months, and it’s also expanding in
Singapore, Latin America, and Mexico.
Totally Green, which turned a profit in
the last year, could eventually expand
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Markets/
Finance
Makassar produces
800
May 30 — June 6, 2016
THIS IS A BANK
38
Indonesia’s “trash banks” provide cash and basic savings accounts for the poor
It’s clear from the dirt floor, the battered green sofa, and the commonuse comb hanging from a string next
to the door that this is no ordinary
bank. Customers in this poor corner of
eastern Indonesia can borrow cash—
and pay back in trash.
“The program originated from
the people, it is managed by the people,
and the rewards are for the people,”
says bank manager Suryana, who wears
a black headscarf. She lives with her
family above the Mutiara Trash Bank
in the fast-growing city of Makassar
on the island of Sulawesi. “From an
economic point of view, this gets
results,” says Suryana, who like many
Indonesians goes by only one name.
In Indonesia, trash banking
has emerged as a way of reducing
pressure on ever- growing landfill
Customers typically save
sites, while allowing some of the
country’s poorest citizens access to
basic savings and credit. Residents
bring recyclable trash such as plastic
bottles, paper, and packaging to the
collection points, known as banks,
where the rubbish is weighed and
given a monetary value. As at a regular
bank, customers are
able to open accounts,
make deposits of trash—
converted to its cash
value—and periodically
withdraw funds.
In Makassar, the city
government commits
to purchasing the
rubbish at set prices
displayed at the bank,
ensuring price stability for those bringing
15¢ 22¢
to
in their accounts every week
in trash. It then sells it to waste merchants who ship it to plastic and paper
mills on the main island of Java.
Customers, most of whom are
women collecting trash part time,
typically save tiny amounts in their
accounts, around 2,000 rupiah to
3,000 rupiah (15¢ to 22¢) a week,
although those who
spend more time
collecting rubbish
can save much
more. The banks
also allow them
to borrow money,
most often to buy
rice toward the end
of the week as families await paychecks
from employers.
Borrowers pay
DIMAS ARDIAN/BLOOMBERG
“They just need to bring in more rubbish, which, after all, is everywhere”
Life’s a lot less
exciting these days for
junk-bond traders 40
tons of rubbish every day
back reliably. “So long as the people
are still living here, they will pay,” says
Suryana, who has learned bookkeeping and management skills for her role
at the bank. “They just need to bring
in more rubbish, which, after all, is
everywhere.”
The scale of the trash problem
facing Makassar is clear from a trip
to the landfill on the edge of town.
Each day the city of 2.5 million produces 800 tons of rubbish, most of it
ending up at the five-story-high pile,
which sprawls over an area the size of
two soccer fields. Scavengers, many of
them children, work alongside cows
foraging for food. About 70 percent of
Indonesia’s trash is dumped in open
landfills, according to the Ministry of
Environment and Forestry.
Mutiara is one of more than
200 trash banks in Makassar. Indonesia
as a whole last year had 2,800 trash
banks operating in 129 cities, with
175,000 account holders, according to the Environment Ministry. The
banks can do more than pay out
cash. Mutiara Trash Bank has paid
local students to help younger kids
with their homework. Elsewhere in
the country, account holders can
exchange rubbish directly for rice
or phone cards, or use it to pay their
electricity bills.
For customers such as Sitinah,
who runs a small shop just down the
alley from the bank, it’s the closest
thing they have to a financial institution. “Before, I never seemed to have
any money,” she says after withdrawing 50,000 rupiah to buy a wok she
plans to use in a home catering business. “Now I can dip into these savings
when I need to.”
The city administration sends
trucks to collect the waste from the
Mutiara Trash Bank several times a
week and brings it to a Central Trash
Bank, where it’s sorted for sale. “It’s
a simple idea and a good one,” says
Ary Budianto, a businessman who buys
several tons of trash from the central
Bid/Ask: Monsanto
says no; GE invests in
Saudi Arabia 41
bank each month.
“By intervening in
the market, the city
ensures collectors
get a stable price.
The quality here is good, and they
don’t cheat you at the weigh-in.”
For trash banking to succeed,
government support is vital, says
Sanjay Gupta, a waste management specialist at Skat Consulting in
Switzerland, who’s studied the projects in Indonesia and elsewhere.
The banks “need land and structures,” he says. “You can’t run them
in the open.” While Indonesia has the
largest network of trash banks, says
Gupta, similar practices are carried
out in African countries including
Ghana and South Africa, in the Indian
cities of Pune and Bengaluru, and in
Manila and Bogotá.
The authorities in Makassar are
supported by a local nongovernmental
organization that receives funding
from Unilever Indonesia and is
headed by Saharuddin Ridwan, a
former TV journalist. “We must all
take responsibility for rubbish,”
says Ridwan. —Chris Brummitt
The bottom line Indonesia’s 2,800 trash banks
offer their 175,000 mostly poor account holders a
way to build up small amounts of cash.
Analysts
Tracking a Tesla Bull—
And a Tesla Superbull
The company has big fans at
banks it also does deals with
Rules split analysts and sales, but
“people tend to ask questions”
Before Patrick Archambault, there was
Adam Jonas.
Archambault, an analyst at Goldman
Sachs, raised eyebrows with his May 18
upgrade of Tesla Motors from a rating
of neutral to buy. Later that same day
his company announced it would comanage with Morgan Stanley the sale
of $1.4 billion in new Tesla stock.
Great Expectations
Tesla’s stock price with target prices
from Morgan Stanley and Goldman
Sachs analysts
$400
$300
$200
$100
$0
1/2013
5/2016
DATA COMPILED BY BLOOMBERG
But Archambault’s bullish call,
which the bank says was made independently of the team underwriting
the stock deal, pales in comparison
with the optimism of Jonas, the lead
auto analyst at Morgan Stanley.
The last time Tesla sold stock, in
August 2015, the maker of electric
cars hired Morgan Stanley as one of
the lead managers of the $783 million
offering, priced at $242 a share. Three
days after the announcement, Jonas
raised his estimated future price for
the stock to $465, from $280.
Jonas’s rationale: Tesla’s selfdriving cars could help create a ridehailing business that would make the
company a major force in that industry. Tesla doesn’t have a fully functional self-driving car, at least not yet,
and hasn’t said anything about starting
a ride-hailing business. If it does, it will
have to contend with Google, which
has a jump on driverless technology
and a stake in ride-hailing leader Uber.
Even so, Tesla shares rose 7 percent,
to more than $260, in the two days
after Jonas’s report. Lauren Bellmare,
a Morgan Stanley spokeswoman,
declined to comment for this story.
According to securities law, a
figurative wall must keep researchers and underwriters from working in
concert. Regulators want to make sure
that analysts aren’t boosting stocks
to help out colleagues in sales. In the
early 2000s analysts such as Henry
Blodget got into trouble for talking
up stocks in public while sharing
rather different opinions within their
companies. Blodget was barred
39
Markets/Finance
40
from the securities industry.
When it comes to Archambault and
Jonas, there’s no indication of any
breach of that wall. And some bullishness on Tesla has proved to be warranted: The stock has risen as high as
$286 after a $17-a-share initial public
offering in 2010.
Coincidences of timing can certainly
happen, especially since both analysts
and underwriters are likely to act soon
after a company’s most recent earnings release. Analyst reports also must
disclose when a firm was involved in a
public offering. “Whenever you see a bank involved
in underwriting and you see a string
of positive reports, people tend to ask
questions,” says Charles Elson, director of the John L. Weinberg Center
for Corporate Governance at the
University of Delaware. “But they do
disclose all of this, so buyer beware.”
Leslie Shribman, a Goldman Sachs
spokeswoman, says the bank followed all standards and policies separating research and sales. Goldman
Sachs is the 11th-largest shareholder in
the carmaker. Tesla spokesmen didn’t
respond to e-mails seeking comment.
Tesla excites many investors
because it’s a potential disrupter of
the auto and battery markets, and
many see its founder, Elon Musk, as
a visionary. On the other hand, it’s
notched just one profitable quarter
and is diluting the value of its stock
by issuing shares to raise money
to launch its Model 3 sedan. At its
current price of about $220 a share,
the market already assigns Tesla a
total value of $30 billion, triple that of
Fiat Chrysler Automobiles, which
has about 30 times the revenue.
Jonas’s 12-month target price for
the stock is $333, compared with
Archambault’s $250 six-month estimate. Some analysts from boutique firms have even loftier targets,
but among Wall Street banks,
Jonas’s is highest. Neither Jonas nor
Archambault ranks among the five
most accurate forecasters of the
stock, according to data compiled by
Bloomberg. The top two from major
banks, Colin Langan of UBS and Ryan
Brinkman of JPMorgan Chase, have
targets of $160 and $185, respectively.
Jonas wields market influence. After
he issued a report on Feb. 25, 2014,
doubling his price target to $320,
Tesla’s stock price rose 14 percent. In
that report, he wrote that the company’s batteries could change both the
transportation and power-utility businesses. Within three days of Jonas
raising the target, Tesla completed
a $2 billion convertible debt offering
with Morgan Stanley and Goldman
Sachs as underwriters.
That wasn’t the first time he doubled
his target. Tesla reported its first and
only quarterly profit on May 9, 2013,
sending the stock up 38 percent in
two days. On May 14, Jonas more than
doubled his target price, to $103 a share,
and the stock rose about 10 percent in
the next two days. Archambault also
raised his share price target on May 9
to $61, from $45—though that was still
below Tesla’s price at the time. Within
eight days, Tesla sold $360 million in
stock with Goldman Sachs as underwriter and $600 million in convertible
debt with both firms underwriting.
“The spirit of the law was compromised,” argues Doug Kass, a columnist
for TheStreet.com who bets against
Tesla stock as president of hedge fund
Seabreeze Partners Management.
Tesla shares are down about 8 percent
this year. Morgan Stanley Investment
Management, an asset management
arm of the bank, has been one of the
sellers. —David Welch
The bottom line A Goldman analyst drew attention
for the timing of an upgrade, but the optimism of a
Morgan Stanley analyst is more extreme.
Trading
This Is the Bond Desk—
How May I Help You?
How high-yield traders went from
being risk jockeys to order-fillers
“Things aren’t going back to how
they were”
Junk-bond traders at major banks
were some of the savviest
people on Wall Street. Maybe
they still are—but to do their
jobs these days, pretty
much all many need is a
decent list of contacts.
Not so long ago, the
traders’ most important
“It’s harder than it
used to be to
transact without
disturbing the price
of the market. If
it’s not an urgent
trade, you could
take weeks to
completely sell
a position”
task was to take
profitable risks on behalf
of their banks. After
buying a few million
dollars’ worth of highyield bonds, a trader
would decide whether
to hold them for a little while or
flip them fast, based on an analysis of
where prices were headed.
Things have changed. In 2015 about
70 percent of major banks’ junk-bond
trading consisted of nothing more
than linking up
Trades above $2m
buyers and sellers,
in which banks take
according to a
orders, not risk
recent estimate
70%
from the consulting firm Tabb
Group. A decade
30%
ago the figure was
20%
20 percent. That
kind of middleman
service is less risky
2006 2011 2015
for the bank and
also offers fewer profit opportunities
for the traders.
Why the shift? Many on Wall Street
point to new rules. In the wake of
the financial crisis, global regulations known as Basel III have made it
more costly for banks to hang on to
risky assets. The Dodd-Frank financial reform law in the U.S. sets limits
on how much of their own money
banks can wager in the markets. These
changes have magnified the effect of
another rule, which came into force
more than a decade ago, that requires
U.S. banks and brokers to report every
trade they execute within minutes,
making it harder to keep an informational edge over rivals.
“If you’re a high-yield risk taker at
a bank, you’re thinking, ‘My hands
are tied, I can’t take risk, and it’s
so transparent, no one
lets me make money.’
It’s very frustrating,”
says Thomas Thees, a
former head of North
American credit
trading at Morgan
Stanley who oversees
fixed-income trading at
CastleOak Securities.
Banks including
Morgan Stanley,
Credit Suisse,
PREVIOUS PAGE: ILLUSTRATION BY 731; THIS PAGE: TRADES DATA: TABB GROUP; ILLUSTRATIONS BY OSCAR BOLTON GREEN
Markets/Finance
and Nomura Holdings have been
shrinking trading staff.
There’s a debate about how these
changes affect the overall junk-bond
market. In the highflying days, the big
banks stood ready to quickly buy the
blocks of bonds fund managers wanted
to sell. They could then break the purchases into chunks and sell them off
over time. Now asset managers often
have to do the work of parceling out
big trades for themselves, and it can
take longer—with the client’s money,
not the bank’s, exposed to market
swings all the while.
“It’s harder than it used to be to
transact without disturbing the price of
the market,” says Steven Logan, head
of European high yield at Aberdeen
Asset Management. “If it’s not an
urgent trade, you could take weeks to
completely sell a position.”
That might hurt funds when markets
are volatile. If investors start to cash
out of their fixed-income funds en
masse, money managers could find
their holdings aren’t very liquid—that
is, they’d have trouble quickly finding
buyers for their bonds as they try to
raise cash to meet redemptions.
Not everyone is convinced corporate
bond markets are less liquid than they
used to be. The share of outstanding
U.S. junk bonds that are bought or
sold every day is in line with historical averages, according to data from
the Securities Industry and Financial
Markets Association, a trade group.
William Dudley, president of the
Federal Reserve Bank of New York,
said in a speech in May that evidence
of declining liquidity is mixed. He
added that lower liquidity might also
be a small price to pay if regulations
are making large banks and other
systemically important institutions
less risky.
In any case, “things aren’t going
back to how they were,” says Anthony
Perrotta Jr., global head of research and
consulting at Tabb. He says asset managers are going to have to learn how to
operate in a world where the traders
at major banks have a diminished role.
—Katie Linsell and Claire Boston
The bottom line The role of the junk-bond trader
has changed, and that could have an effect on how
easily funds can sell their assets.
Edited by Pat Regnier
Bloomberg.com
Bid/Ask
By Karen Weise
$62b
Monsanto plays hard to get. The agricultural giant rejected Bayer’s
takeover bid as too low but said it’s open to talks. Buying Monsanto
would make Bayer the world’s biggest supplier of farm chemicals and
seeds. Consolidation in the industry may end up leaving just a few
global companies that can offer a comprehensive range of products
and services to farmers.
$5.4b
$3.4b
$3b
$2b
$340m
$160m
$70.5m
A fertilizer deal falls apart. In the latest plan to collapse after
the U.S. adopted rules to curb tax inversions, Illinois-based CF
Industries Holdings abandoned its purchase of Dutch rival OCI.
Money buys money. Ares Capital, a lender and private equity
firm, plans to buy asset manager American Capital, which had
been under pressure from activist investor Elliott Management.
GE invests in Saudi Arabia’s future. General Electric will team
up with a state-owned investment company to build industrial
facilities to reduce the Saudi economy’s dependence on oil.
An insurer goes smoke-free. Axa, France’s largest insurance
company, says it will divest its assets in the tobacco industry,
including selling stock and retiring bond holdings as they mature.
Energizer smells good. The battery maker will buy HandStands,
which makes car fresheners. It’s Energizer’s first acquisition since
spinning off its personal-care-products business last year.
LendingClub has a new shareholder. Companies controlled by
Chinese billionaire Tianqiao Chen disclosed a stake totaling as
much as 11.7 percent of the embattled online loan marketplace.
Tribune gets a white knight. After receiving an investment from
billionaire Patrick Soon-Shiong’s Nant Capital, the newspaper
publisher rejected Gannett’s $864 million takeover offer.
41
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Focus On/
Small Business
The pen is mightier
than the publisher 44
Turns out, Swedish
Fish are recessionproof 48
Watch out, Manolo—
fast-fashion Italian
shoes are here 45
May 30 — June 6, 2016
A Spanish Delicacy
43
Grazes in Texas
Ibérico pigs will help feed Americans’ growing appetite for specialty ham
PHOTOGRAPH BY BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK
“We’re not targeting the general public. We’re targeting the elite”
Sergio Marsal and Manuel Murga
are standing in a Columbus, Texas,
slaughterhouse describing their plan
to turn the Spanish pigs they’ve been
raising on a nearby ranch into a cured
ham often considered the world’s
best: jamón Ibérico de bellota, as it’s
known in Spain. “Instead of importing
it, we’re making it here,” Marsal says.
“Like the Europeans who planted
vines in California.”
Acornseekers, the duo’s three-yearold company, based in Flatonia, Texas,
is the first to bring Ibérico pigs, a breed
indigenous to Spain and Portugal, to the
U.S. for commercial production. The
omnivorous animals graze freely in pastures dotted with oak trees, feasting
on the hundreds of pounds of acorns
they find in the winter, a centuries-old
tradition. The goal is to produce
nutty, marbled meat that’s as good as
or better than what’s available from
Spain’s multibillion-dollar pork industry, the world’s fourth-largest producer
and exporter. About 50 high-end restaurants across the U.S. have sought
Acornseekers’ fresh cuts of pork, which
it started selling in small amounts in
April, Murga says. “We’re saying no to
clients that want a lot.”
It’s been a bureaucratic adventure for
Marsal, a former marketing executive
from Barcelona who now lives in Miami,
and Murga, an agricultural engineer
who grew up rearing Ibéricos outside
Seville and now lives in Columbus.
The duo had to persuade the Spanish
government to let them take the pigs
out of Spain and then follow the U.S.
Department of Agriculture’s protocol
regulating European swine imports,
which the agency put into effect in late
2009. In 2014, after corralling investors, Acornseekers flew 150 Ibéricos to
New York, where the pigs were quarantined for a month, per USDA regulations, then trucked to the company’s
75-acre ranch.
Marsal and Murga settled on Texas
because of its plentiful oak trees.
Acorns, the pigs’ favorite food, give the
meat its flavor and consistency. Marsal,
Murga, and five other Spaniards have
Fresh cuts of Ibérico pork
$200
Jamonwholesale.com, a site for U.S.
retailers, chefs, and caterers.
After two years of breeding, Acornseekers owns more than 2,000 Ibéricos,
250 of which were set to be slaughtered
in late May. (The slaughter happens
in the spring, after pigs have fattened
up over the winter; they gain about
one-third of their weight during acorn
season.) Marsal and Murga say they’ll
have a total of 5,000 pigs next year. The
company also supplies pigs to family
farmers in Texas and elsewhere who
raise the pigs at their own expense in
return for a cut of the annual profit. It’s
a way to lower overhead, says Hines
Boyd, a real estate broker with a Ph.D.
in agriculture who’s raising several
hundred Ibéricos for Acornseekers on
his family’s 2,000-acre farm in northern
Florida. Compared with U.S. commercial pigs, raising Ibéricos is “expensive
and time-consuming,” Boyd says.
Betting on the U.S. is smart, says José
Miguel Montoya Oliver, a professor at
Madrid’s Universidad Politécnica who’s
one of Spain’s leading forestry experts.
In Spain’s main ham-producing regions,
thousands of oaks are dying annually,
and they’re not being replanted
because of poor forestry management,
he says, resulting in “fewer and fewer”
oaks and shrinking Ibérico production.
It’s a problem for the industry, he says.
“They know that one day they’re going
to be left without product.”
For Acornseekers, the most pressing
need is to build a curing facility. Marsal
and Murga have selected a site in an
industrial area of Columbus and will
launch a $2 million crowdfunding campaign in June. They hope to complete
the project by yearend. Acornseekers
The bottom line With consumption of cured ham
rising in the U.S., Acornseekers estimates it will
raise as many as 5,000 pigs in 2017.
Publishing
It’s a Writer’s
Market
Digital platforms have emerged to
serve midlist authors
“Where publishers make guesses,
we run the numbers”
For Greg White, the last straw came
when his publisher forgot to ship
copies of his book to the launch party
last October. It was just one in a series
of lost marketing opportunities, says
White, co-host of the Food Network
show Unique Sweets. So
he decided to take his
book back. After getting
his contract canceled, he
turned to the editorial
marketplace Reedsy to
redesign The Pink Marine,
his memoir about life as a gay serviceman. The author, who lives in Santa
Monica, Calif., formed his own imprint,
PHOTOGRAPHS BY BOBBY SCHEIDEMANN FOR BLOOMBERG BUSINESSWEEK (2)
44
invested more than $3 million of
their own money in Acornseekers. Last
year it trademarked the name Ibericus
to show its pigs are purebreds, unlike
most in Spain, which are crossed with
other breeds. “We’re not targeting the
general public,” says investor Manel
Echevarría, a Miami-based executive
for crystal maker Swarovski. “We’re
targeting the elite.”
Ibérico meat, both fresh and cured,
is in demand among influential U.S.
chefs, who praise its rich taste and
texture and say it’s notably different
from the lean factory-farmed American
breeds. Consumption of cured ham
in the U.S. is at “historic highs” today,
according to a 2015 report from ICEX,
the Spanish government’s export
agency, which estimates the wholesale
value of cured ham sold in the U.S. was
about $200 million in 2014.
Katie Button, the chef and coowner of Spanish restaurant Cúrate in
Asheville, N.C., describes both fresh
and cured Ibérico as “amazing.” She’s
worked in the kitchens of Spanish star
chefs Ferran Adrià and José Andrés.
“Even people who don’t eat pork
tell me they had to try it, and it absolutely blows their minds,” she says.
Josh Merrow, a
co-founder of
Hamlovers.com,
an online
retailer based in
million
Greenwich, Conn.,
says the U.S. is the
strongest market
Estimated wholesale
of the more than
value of all cured ham
sold in the U.S. in 2014 20 countries he
serves. Merrow
recently started
will cure its ham for two years, then
sell it for as much as the imported
version to signal its quality.
After that comes the fun part:
persuading Americans to eat the entire
slice, including the creamy white fat.
At Michelin-starred Spanish restaurant
Andanada 141 in Manhattan, most leave
it on the side of their plate, says chef
Manuel Berganza. “You have to teach.
You have to explain.” Boyd is a fan: “No
other breed of pig is capable of marbling like the Ibérico. In Spain they call
them olive trees on legs because their
fat is much higher in oleic fatty acids
than almost any other breed of pig,
especially when you feed them things
like acorns,” he says. “It’s a healthier
fat.” —Nick Leiber and Guillermo Fesser
Focus On/Small Business
AboutFace Books, and cut a distribution
deal with Ingram Content Group.
“Five years ago, self-publishing was a
scar,” White says. “Now it’s a tattoo.”
A new generation of online editorial
services and self-publishing platforms
is fueling that change in perception.
The upstarts offer skills and services
that used to be available only through
traditional publishing, plus favorable
royalty splits. They also allow authors
to retain the copyright to their work.
The array of offerings is spurring
some writers to leave their publishing
houses—particularly midlist authors
whose books receive scant marketing
support. Some are also using the new
services to put out e-book versions of
their out-of-print titles.
Janice Graham used Amazon.com’s
Kindle Direct Publishing platform
to release digital versions of her
five novels , including 1998’s Firebird, a
New York Times best-seller. For a novel
in progress, she hired an editor through
Reedsy and plans to self-publish unless
a publisher offers her a good deal. “I’m
not so interested in the prestige of being
published by a traditional publisher at
this point,” says Graham, who lives in
Florence, Italy. “What I’m interested in
is maximizing sales.”
Reedsy is a community of about
450 handpicked publishing professionals available for hire. The twoyear-old London-based company
offers software that allows authors
to collaborate with editors without
having to e-mail manuscripts back and
forth. Reedsy co-founder and Chief
Executive Officer Emmanuel Nataf says
he had an epiphany when he got his
first Amazon Kindle e-reader: “The barriers to publishing had been removed.”
Self-published titles account for
almost half of all e-book purchases in
Amazon’s Kindle store, while e-books
from the five largest publishers represent just a quarter, according to
the website AuthorEarnings. Still,
demand for digital titles has weakened
somewhat: E-book purchases—which
average $4.95, compared with about
$15 for trade paperbacks—peaked in
2014, when they made up 36 percent
of the publishing market. They’ve
since declined, as consumers with
digital fatigue return to print, according to Peter Hildick-Smith, founder of
Codex-Group, a consulting firm in
New York City. “I believe the market is
One Industry, Many Revenue Models
Leanpub
Pronoun
Digital-publishing
platform and e-store
Digital-publishing
platform
○ Takes 10 percent plus
50¢ on e-book sales
through its store.
○ Negotiates revenuesharing agreements
with authors in
exchange for editing
and marketing services.
Reedsy
SparkPoint Studio
Publishing marketplace
Online publisher and
PR agency
○ Takes a 20 percent
commission on deals
between authors
and publishing
professionals who
connect on the site.
○ Charges authors
$4,900 for editing,
design, and formatting
services. Also takes
40 percent of net
print-book sales and
20 percent of net
e-book sales, plus a
distribution fee.
now in more of a steady state,” he says.
To compete against traditional publishers, self-publishing platforms target
specific niches and offer authors terms
their old-line competitors can’t match.
Pronoun, formed last year by a merger
of three companies, is free for authors
to use, distributes their e-books to
Amazon and other online retailers,
and doesn’t take a cut of their sales.
(Traditional publishers typically keep
75 percent of an e-book’s net
profit.) Pronoun only negotiates
revenue-sharing agreements
with authors who use its editorial and marketing support.
“Where publishers make
guesses, we run the numbers,”
says Josh Brody, CEO of Pronoun,
based in New York City. “We apply
advanced data science and analytics to
help authors price their book competitively, get it into retailer categories that
provide the highest visibility, and tag
their books so they show up in the most
popular and relevant reader searches.”
Leanpub gives technology writers
the ability to publish in-progress works.
That way, they get feedback from
readers and earn royalties while they’re
writing. The company, in Victoria,
B.C., takes a 10 percent cut plus 50¢
on each sale through its online store.
“If you’re writing about an area that
changes quickly, your only hope of
being relevant is to publish quickly,”
says Leanpub co-founder and author
Peter Armstrong.
Meredith Wild, an author of erotic
fiction based in Destin, Fla., snagged
a $6.25 million advance from Grand
Central Publishing’s Forever imprint
last year for five novels—four of which
she’d already self-published. Forever
had sold about 500,000 copies of the
books through January, compared with
1.5 million Wild sold before the deal
through her own aggressive marketing. That differential is one reason she’s
gone back to publishing her work—
along with that of other writers in the
genre—under the imprint Waterhouse
Press, which she started in 2014. “It’s
more of a personal investment of time
and money to have my own team,” she
says, “but at the end of the day, I like
being able to call my own shots.”
Self-publishing isn’t for everyone. “It’s definitely like running your
own business, and not everyone is
up for that,” says the author, who
uses the e-book creation software
Vellum. “For those who are, it’s a great
way to publish on your own terms.”
—Karen Angel
The bottom line A number of self-publishing
platforms are wooing established authors by
rewriting the industry’s contract terms.
45
Startups
Satisfying the Fetish
For Italian Shoes
M.Gemi peddles luxury footwear
on a fast-fashion schedule
“E-commerce has been about
search, convenience, and price”
“Give a girl the right shoes, and she
can conquer the world,” goes a saying
often attributed to Marilyn Monroe.
M.Gemi, a 15-month-old e-commerce
startup, has taken this proposition
one step further: Sell beautiful,
well-crafted, high-end shoes online
without the luxury price tag, and you
can conquer the girl.
Armed with a team of data scientists, 15 Italian factories, and
$32 million in venture capital, Bostonbased M.Gemi wants to shake up
the luxury shoe market much like
Brooklinen unmade the posh world
of 1,000-thread-count bedsheets or
Warby Parker upended the business of
fashion eyewear. Global sales of highend shoes total $18 billion annually,
46
according to consulting firm Bain.
But the major players operate the way
they have for decades, says M.Gemi’s
co-founder and chief executive officer,
Ben Fischman: “They haven’t leveraged technology or analytics, and
they haven’t leveraged a modern
supply chain.”
M.Gemi offers the kind of shoes that
retail for $500 to $2,000 for $128 to
$498, and it does so at a fast-fashion
clip. Fischman and his Sicilian-born
co-founder, Maria Gangemi, after
whom the business is named, spent
a year developing relationships with
small, family-run Italian cobblers—
many of whom had been abandoned
by long-established luxe brands in
favor of cheaper, Asian manufacturers. Styles are introduced each week
and retired after three months. In contrast, heritage brands such as Prada,
Jimmy Choo, and Manolo Blahnik
release four to five collections a year.
While Fischman tags his rivals as
old-school, he and his partners have
clearly studied the playbook of luxury
e-tailers such as Net-a-Porter. The
photography and product descriptions on M.Gemi’s website are fashionmagazine-worthy, and the company’s
buttery leather loafers and strappy
suede sandals arrive at consumers’
doors packaged in elegant ecru boxes
with cards that bear the shopper’s
name. “The mentality of e-commerce
has been about search, convenience,
and price,” Fischman says. “What’s
missing from the entire experience is
theater, fun, intrigue, and urgency.”
Fischman previously started digital
flash-sale site Rue La La and Lids, a
retailer specializing in baseball caps
and other sports headwear. He calls
M.Gemi’s business model post-luxury.
Working out of the old Sears
Roebuck mail-order center near
Boston’s Fenway Park, the company’s
staff can go from sketch to sale in 60 to
90 days. M.Gemi can quickly recalibrate production to match customer
demand. Within three hours of going
live with its line of summer espadrilles
in April, it knew the slip-on style was a
hit but the lace-up version was a dud.
So it revved up production of one and
dialed back the other.
Fischman says demand has surpassed initial projections; he estimates M.Gemi will reach $60 million
in sales this year. In 12 months the
Made in
Italy
company’s customer base has grown
500 percent. Half of those customers are repeat shoppers who spend an
average of $1,000 a year. “The luxury
market is very attractive,” says Harry
Nelis, a partner at Accel, a venture
capital firm that led an $18 million
funding round for M.Gemi that closed
in October. “There are high margins,
high price points, and it is expanding globally,” he says, “but the market
had never had to reinvent itself.” Nelis
says he got some real-world proof of
M.Gemi’s potential when Fischman
gave him 10 sales vouchers to distribute among his female friends and
colleagues. When he checked back
with them, Nelis says, their responses
were uniformly “enthusiastic and
wildly complimentary.”
Roberto Ramos, senior vice president at the Doneger Group, a retail
and fashion industry consultant, says
outfits like M.Gemi are tapping into
a shift in consumer attitudes toward
luxury. “For a long time, heritage
brands succeeded based on aspiration,” he says. “But that’s no longer
an option.” Younger consumers are
increasingly turning to the web to discover brands that deliver high-end
quality at more affordable
prices. A 2015 report from
$228
McKinsey projects e- commerce
will account for
18 percent to
25 percent of
luxury sales by
2025, up from
6 percent now.
The Noto sandal,
M.Gemi is
named after a baroque
expanding
Sicilian city
beyond women’s
shoes. In March
it unveiled a men’s line of footwear
and belts. “Once we researched it,
it seemed obvious,” says Fischman.
The company is also looking at
Europe and Asia. While e-commerce
will remain the priority, M.Gemi
will dip its toe into traditional retail
this summer, opening pop-up stores
in New York and Los Angeles. “We
believe you need to exist in all channels where the consumer is,” he says.
“Post-luxury is going to be the norm.”
—Stacy Perman
The bottom line Boston-based M.Gemi is making
a direct-to-consumer pitch for a slice of the
$18 billion market for luxury shoes.
COURTESY M. GEMI (4)
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It’Sugar
Revenue
$80m
48
Jeff Rubin, 52, has always had a sweet tooth. After
creating a candy business for the FAO Schwarz toy
store and co-founding Dylan’s Candy Bar, he decided
it was time to strike out on his own. Backed with
private equity money,
Founded 2006
he opened a store
Headquarters
called It’Sugar on the
Deerfield Beach, Fla.
Atlantic City boardStores 96
Backers Prentice
walk in 2006. It’s not
Capital, Star Avenue
your penny-candy
Capital
emporium of yore:
The merchandise includes items such
as Camel Balls (sour bubble gum) and
Flinging Poo (chocolate-covered banana
chips). Today, Rubin heads what he says
is the largest specialty candy chain in
the world, with 96 locations, all but
4 company-owned, and sales
north of $70 million. —As told
to Craig Giammona
I knew there wasn’t a war on candy.
Nothing in the data I was seeing told
me people didn’t like candy. I wanted
to embrace it. A lot of people told
me it was crazy, but the stigma
with sugar is separate from candy.
People want to cut
I grew up Michigan. My father was always
down on sugar, but in retail. He had a chain of toy stores in
they’re not going
the Midwest that he sold, and he then got
to swear off candy. into bulk candy when that was the craze in
the 1980s. I’ve seen the faces of people
Soda, maybe—but
when they buy candy—it’s fun. That’s what
not candy.
I was going for when I went out on my own.
I finally got the guts, and enough money,
to parlay what I knew into my own concept.
I started off going after
resort-type locations,
where people are on
vacation. I want them
coming off the beach
in flip-flops—they’re a
little happier. That first
location was really at
the 50-yard line, right
outside of Caesars
Palace. That’s still one
of our top locations.
$40m
0
2006
2016
proj.
We try to be different—
it’s not like people see
5,000-square-foot
candy emporiums back
in their local mall. We
want the stores to be
entertaining. We don’t
sell a box of gourmet
chocolate gummy
bears; we sell a box
of Dingle Bearies. We
partner with the big
companies—Nestlé,
Hershey, Mondelēz—
they’re very supportive.
Last year we created
the world’s largest box
of Sour Patch Kids.
Like everybody else, we pulled
back during the financial crisis.
But I noticed something in the
second half of 2009: Sales
were up. People weren’t cutting
back on Swedish Fish. So we
started opening stores again.
We were fortunate—we took
private equity money in 2012,
and that
helped us
100 stores
expand.
We’ll have
by the end of the year. I
think there could be a lot
more. It works in different
formats: in malls, in
stadiums, outside movie
theaters. America has a
love affair with candy.
Edited by Cristina Lindblad
Bloomberg.com
PHOTOGRAPH BY JOSH ANDERSON FOR BLOOMBERG BUSINESSWEEK
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It’Sugar
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J
T
50
e
h
Can
Republican
Party Chair
Reince
Priebus
put Trump
in the
White Housen?
Does he eve
want to?
By
Joshua
Green
Photographsy
B
Brian
Finke
O
Y
B ein
c
n
i
e
R
O
Y
of
g
ce
When Donald Trump wrapped up the Republican presidential
nomination on May 3 by winning Indiana and forcing Ted Cruz
from the race, it fell to Reince Priebus to formally surrender
on behalf of a shellshocked party Establishment. This being
2016 and the Age of Trump, Priebus, the long-serving chairman of the Republican National Committee, did so in a tweet:
“@realDonaldTrump will be presumtive [sic] @GOP nominee,
we all need to unite and focus on defeating @HillaryClinton
#NeverClinton.” Depending on your point of view, the misspelling was either an homage to Trump’s haphazard Twitter style
or the latest example of a Republican Party that can’t seem to
get anything right.
Three days later, Priebus climbed onto a stage in a hotel ballroom on Capitol Hill to sit for a public interview with Politico’s
Mike Allen. “This is off the record, right?” he joked, looking
a bit nauseous. To Republicans still not resigned to Trump,
Priebus was already a symbol of capitulation. John Kasich had
just dropped out and criticized Priebus’s anointment of Trump
as “completely inappropriate.” Trump, on the other hand, who
had once threatened party leaders when it looked as if they
might block him at a “rigged” convention, now cast himself
as the magnanimous liege, bestowing forgiveness and nicknames. “I call Reince Mr. Switzerland,” he told me during a
May 17 interview at his 26th-floor Trump Tower office. “He’s
doing a great job as peacemaker.”
In the weeks before Trump prevailed, the political media
made a sport of trying to get Priebus to concede that his party
was falling to pieces, while Priebus insisted against all evidence
that things were going great. Commentators on both the left
and right likened him to “Baghdad Bob,” the Saddam Hussein
spokesman who maintained during the U.S. invasion of Iraq that
victory was imminent, even as U.S. bombs rained down around
him. An April 20 interview on CNN perfectly captured Priebus’s
anguish. “People assume, oh, you must be miserable. You’ve got
a horrible job. But I don’t see it that way,” he offered. “I’m not
pouring Baileys in my cereal.” His disavowal mainly suggested
that he had contemplated pouring liquor into his cereal bowl.
When he sat down onstage, Allen, noting Trump’s victory, presented him with a large bottle of Baileys. “Oh, excellent,” said
Priebus. “Now, where’s the Lucky Charms?”
Priebus’s mission at the RNC has been to manufacture some
luck: to rebuild a party that lost the popular vote in five of the
last six presidential elections and lost power completely with
Barack Obama’s 2008 victory. While Republicans traded recriminations after Mitt Romney’s loss in 2012, Priebus announced
that the RNC would conduct a rigorous postmortem of all that
had gone wrong and figure out how to refashion the party for
the 21st century. “It wasn’t the RNC’s fault that things didn’t
work out in 2012,” says Sally Bradshaw, a senior Jeb Bush adviser
and a co-author of the resulting report. “But Priebus was willing
to say, ‘There’s no other entity that can do this, that can take
this on.’ ” The key to revival, the authors concluded, was to put
a kinder, gentler gloss on the old stalwart Republican ideals
(free trade, small government) while reforming immigration
laws to entice nonwhite voters who were tuning the party out.
This was a comforting notion, but it hasn’t panned out. “The
Jeb Bush guys wrote the autopsy,” says a frustrated Republican
strategist who works with the RNC. “Then Jeb Bush ran the
worst campaign in presidential history.” By obliterating Jeb,
Trump redefined the Republican Party’s identity off the top
of his head. And his vision of the GOP’s future is in many
ways the diametrical opposite of what Priebus and the party
Establishment had imagined. Many politicians, Trump told me,
had privately confessed to being amazed that his policies, and
his lacerating criticism of party leaders, had proved such
potent electoral medicine. Trump says this was obvious,
51
but craven Republicans wouldn’t acknowledge it. So he called
bulls---. “It’s funny,” he told me, delighted by the swift triumph
of his influence. “It’s like the paper clip: a very simple thing.
But one guy got rich, and everyone else said, ‘Why didn’t I
think of that?’ ”
52
The story Priebus would like to tell, if everyone would just
shut up about Trump for a moment, is a tale of perseverance and triumph over long odds—not Trump’s tale, but his
own. “The changes we’ve made are historic,” he told me, in
an interview at the RNC’s Washington headquarters later in
May. We were sitting in the Ronald Reagan Conference Room,
which lies within the Dwight D. Eisenhower National Republican
Center. Portraits of GOP luminaries line the walls and corridors. Priebus was laboring to convince me that Trump will
soon join them. “I think he’s gonna win,” he kept saying. But he
was getting angry. When I suggested Trump’s hostile takeover
was ruining his push to modernize the party, Priebus snapped
that I didn’t know what I was talking about. A moment later,
he apologized: “I hardly ever get testy.” He insisted his efforts
weren’t about to be wiped out by Trump—and might just save
his nominee.
When Priebus took over the RNC in 2011, the job came
freighted with problems: The committee was $24 million in
debt. Major donors were fleeing. A top official had just been
fired over a fundraiser at a bondage-themed strip club in Los
Angeles. Priebus was no obvious savior for a party in crisis. At
44, he’s short, with soft features, thinning hair, and a gentle,
guileless manner augmented by his Wisconsin accent—someone
born to deliver prefatory remarks at Rotary luncheons.
Reince (rhymes with “pints”) Priebus was born in New
Jersey, but he moved to Kenosha at age 7. By the time he was
a teenager, he was an ardent Republican driving around listening to tapes of Newt Gingrich speeches. After law school,
he made a failed run for the state Senate, but thrived at the
insider’s game of party politics. In 2007 he became the youngest-ever chairman of the Wisconsin Republican Party, and part
of a triumvirate with Paul Ryan and Scott Walker that led the
GOP takeover of Wisconsin in 2010.
This brought national attention, and for Priebus, a job in
Washington as RNC general counsel—under a chairman he
would soon be angling to replace. Michael Steele, the flashy,
telegenic, African American former Maryland lieutenant governor, had been elected after Obama’s victory. But Steele had
quickly fallen out of favor for his spendthrift ways. Priebus is
as flashy as a basset hound.
To the 168 members of the RNC, he represented sober yeoman
competence and a chance to climb out of debt. Priebus, whose
affect shrouds his ambitions, saw opportunity in a job most would
consider thankless. “When I got elected chairman,” says Haley
Barbour, who took over the RNC after George H.W. Bush’s blowout
1992 loss, “people would say, ‘Well, Haley, I’ll vote for you, but I
don’t know why you’d want it.’ I’d tell ’em, ‘I can’t think of a better
time to be chairman—there’s nowhere to go but up.’ ”
Today, Priebus is the longest-serving chairman in party
history, the debt is gone, and the wealthy insiders and functionaries who comprise and donate to the committee offer glowing
appraisals. “Terrific,” says Mel Sembler, the former RNC finance
chairman. “An unbelievable job,” says Randy Evans, a Georgia
committeeman. “He disarms you with this ‘Aw, shucks, I’m from
Kenosha’ routine,” says Lewis Eisenberg, the current RNC finance
chairman and a senior adviser at KKR. “But he’s very politically
astute. He’s the best fundraising chairman I’ve ever seen.”
Priebus won added plaudits from the donor class for the
autopsy, which was officially titled the Growth & Opportunity
Project and released in March 2013. While lauding the GOP’s
strength in Congress and statehouses, it warned that the angry,
strident tone many Republicans directed toward Hispanics and
other minorities threatened the party’s viability: “If Hispanic
Americans perceive that a GOP nominee or candidate does not
want them in the United States (i.e., self-deportation), they will
not pay attention to our next sentence.” The report continued:
“We must embrace and champion comprehensive immigration reform. If we do not, our Party’s appeal will continue to
shrink to its core constituencies only.” To Priebus, the lesson
was clear. The party had to focus “on tone, inclusiveness, and
engaging in [minority] communities on a full-time basis,” he
told me. “You’d think, ‘Wouldn’t any competent party do that?’
Yes. But we weren’t competent.”
While press coverage focused almost exclusively on the call
for immigration reform, the report mostly proposed a blizzard of technical fixes: shorten the primary calendar; move
up the convention; invest in data analytics to catch up to the
Democrats; control debates to shield candidates from what
Republicans believed was hostile questioning by liberal moderators trying to embarrass presidential hopefuls. While the
report was unblinking about the need to win more support
from women, minorities, and young people, it betrayed no
hint that Republican policies beyond immigration reform
might need adjusting to attract them. Emphasis fell instead
on such things as hiring a more ethnically diverse staff (“The
RNC must hire [Asian Pacific Islander] communications directors and political directors for key states”) and injecting a dash
of Hollywood glamour to impress fickle millennials (“Establish
an RNC Celebrity Task Force of personalities in the entertainment industry … to attract younger voters”).
In bypassing a major course correction, the party fell into an
old pattern that typically follows presidential losses. “Defeated
parties almost always behave according to the dictates of their
own party cultures rather than engage in a more objective
analysis of how they should respond,” says Philip Klinkner, a
Hamilton College political scientist and expert on party committees. Nearly every chairman attempts to make changes,
and some succeed. After Adlai Stevenson’s 1956 defeat, the
Democratic National Committee became a vigorous counterweight to conservative Democrats in Congress, pushing
a civil rights agenda that culminated in John F. Kennedy’s
New Frontier. More often, parties avoid true introspection.
“Republicans in particular,” says Klinkner, “focus on organizational and managerial changes and don’t talk about politics.”
Why not? Well, for one thing, politics is divisive. “Nobody
wants to talk content, because that’s hard and you get yelled
at on the radio by Rush Limbaugh,” says Mike Murphy, the
veteran Republican strategist who ran Jeb Bush’s super PAC,
Right to Rise. “So instead they talk process: ‘The RNC is building a new, lithium-cooled supercomputer in the basement, and
we’re going to have better microtargeting and organize everybody in America on their cell phone with go-get-’em apps.’ ”
Even so, conservatives railed against the Growth & Opportunity
Project, pointing out its major policy recommendation—
immigration reform—was something the GOP Establishment
has sought for years, over intense grass-roots opposition. “It
was shocking,” says Jeff Sessions of Alabama, the first senator
to endorse Trump, “a kick in the teeth of decent Republicans.”
Gingrich, who’s known Priebus for years and serves him as a
strategic adviser, told me he thinks the recommendation was
a grave error that might have sparked the anti-Establishment
backlash that led to Trump. Says one Washington-based strategist: “After Romney’s loss, every major donor was just distraught
and ready to bail, convinced we could never win a national election. So the autopsy was absolutely necessary from a donor
maintenance standpoint. But it was public
relations, nothing more. Reince never had
the power to implement it.”
Early on, this wasn’t clear. The tweaks
to the calendar and debates went through
(although they may have helped Trump).
In Washington, a consensus
formed that fixing
immigration was the
key to the part y’s
revival. Florida Senator
Marco Rubio, eyeing
the 2016 presidential race, took
up the issue in
earnest. Priebus’s
effort appeared to
be working. “He
had a convincing
story of how the
Republican Party could
win,” says Eisenberg. “That’s
what it’s all about, to win a
donor’s heart.”
Immigration reform
died in the House. But when
Republicans won the Senate in
iebus
ith Pr ing out of
w
2014, Priebus still looked like a
p
rum and com
success. He considered stepping T
with
)
bove 2 meeting Hill
away. “I told him, ‘Listen, you’ve (a
l
1
May on Capito
had four unbelievable years,’ ” says his
n
a
l Ry
Georgia’s Evans. “ ‘If you stop now, Pau
you’re gonna be regarded as one of the most successful party
chairmen in history. If you run [for another term], you’re going
to be judged by one presidential election.’ He said, ‘You’re
right.’ But he really thought we had in place all the pieces to
dominate the election cycle.”
In the end, Priebus stayed. “I guess I’m a bit of a riverboat
gambler,” he told me. The potential rewards were too great
to pass up—for the party, but also for him. After falling out of
power in 2009, the GOP won back the House, then the Senate,
and needed only the White House to complete its takeover of
Washington. A chairman who presided over such a feat—knocking
off Hillary Clinton in the process—would become a legend.
But then came Trump, a walking exaggeration of every negative attribute the autopsy had warned against. Priebus won the
Establishment’s heart—but it turned out voters loved Trump.
As chairman, Priebus had a choice: resign or get behind the
nominee. He chose the latter, even though it entailed addressing every outrageous comment from Trump.
Although Priebus insists, as he must, that Trump will prevail,
the prospect of the chairman leading an historic Republican
restoration is in serious jeopardy. “Reince is not the general,”
says Murphy, the Republican strategist. “He’s stuck in the job
of being the supply clerk to a losing presidential army.” To
many committee members, Priebus’s sudden turn of fortune
is simply bad luck. “Here you are, fine-tuning the system to
deliver a victory, when the system became the enemy,” says
Evans. “If the Republicans win in November, Reince will go
down as one of the greatest chairmen we have ever had. If we
lose, he’ll have succeeded by every metric but that one.” He
paused. “Of course, that’s like saying, ‘Except for that, Mrs.
Lincoln, how was the play?’ ”
FROM TOP TO BOTTOM: CHIP SOMODEVILLA/GETTY IMAGES; ANDREW HARRER/BLOOMBERG
d,
n
e
e
h
In t b u s
Prie ed.
stay ’m a bit
“I guess Iboat
of a river,”
gambler
he says
“If I didn’t come along, the Republican Party had zero chance of
winning the presidency,” Trump told me, sitting beside a scale
model Trump airplane in his
Trump Tower office. He was
explaining his own Growth &
Opportunity plan. Its primary
component is, of course,
Trump. But there’s more
to it. Just as he showed an
instinct for devastating personal invective (“Lyin’ Ted”),
he also seemed to intuit
that standard Republican
dogma no longer appeals
to large swaths of the
party electorate. Although
it was overshadowed by
his feuds and insults, he conveyed and defended
a clear set of ideas that drew record numbers of
Republican primary voters, even though—or
more likely because—they often cut against rightwing orthodoxy: protect Social Security benefits,
defend Planned Parenthood, restrict free trade,
avoid foolish Middle East wars, deport 11 million
undocumented immigrants, build a wall. Trump
believes the scale of his victory proves the strength
of his proposals. “All these millions and millions
of people,” he marveled, echoing Bernie Sanders.
“It’s a movement.”
To his allies, Trump’s movement signifies a decisive shift in
the GOP’s identity toward his brand of nativist populism. “We
had an argument in the party,” Sessions told me. “The elites
wrote the autopsy. Their theory was tested in the primary election. Trump proved they were wrong.”
I asked Trump what he thought the GOP would look like in
five years. “Love the question,” he replied. “Five, 10 years from
now—different party. You’re going to have a worker’s party.
A party of people that haven’t had a real wage increase in 18
years, that are angry. What I want to do, I think cutting Social
Security is a big mistake for the Republican Party. And I know
it’s a big part of the budget. Cutting it the wrong way is a big
mistake, and even cutting it [at all].” He explained the genesis
of his heterodox views. “I’m not sure I got there through deep
analysis,” he said. “My views are what everybody else’s views
are. When I give speeches, sometimes I’ll sign autographs and
I’ll get to talk to people and learn a lot about the party.” He says
he learned that voters were disgusted with Republican leaders
and channeled their outrage. I asked, given how immigration
drove his initial surge of popularity, whether he, like Sessions,
had considered the RNC’s call for immigration reform to be a
kick in the teeth. To my surprise, he candidly admitted that he
hadn’t known about it or even followed the issue until recently.
“When I made my [announcement] speech at Trump Tower,
the June 16 speech,” he said, “I didn’t know about the Gang of
Eight. … I just knew instinctively that our borders are a mess.”
Trump casts his break with party orthodoxy as being a
matter of common sense dictated by electoral math. “I think
Republicans lose because they have a harder highway in the
[battleground] states,” he explained. The standard conservative message holds such limited appeal that it forces Republican
nominees onto a dangerously narrow path. “If you look at the
states,” Trump said, “the Democrats have a lot of cushion; the
Republicans have no cushion.”
Trump Republicanism, on the other hand, in his estimation,
holds broader appeal, despite the clucking of lily-livered
Establishment types. “You notice my poll numbers today are
starting to get much better?” he said. “I’m above Mitt
Romney with the Hispanics. He was at 27 [percent in the
53
people that you don’t want to rewrite—you like, you appreciate, and agree with the platform the way it is.”
I told Trump I couldn’t recall seeing a nominee so openly
condescended to by his party chairman and asked if it
bothered him. He thought about it for a moment. He seemed
torn between wanting to curb-stomp someone over this act of
impertinence and sensing that restraint was the wiser course.
Finally he said, “I agree with you.” But, he added, it doesn’t
matter. “I’ve never seen anybody vote for a platform. I’m less
concerned about that than I am about my own views.” Trump
pushed a button and asked his social media manager, Dan
Scavino Jr., to bring up some charts. A moment later, Scavino
hustled in and handed him a folder, from which he drew, from
beneath printouts of the Drudge Report, a bright-red map of
the U.S. showing how he dominates Google search ratings in
all 50 states. His point was that he has the power to convey
any message he likes: “I have the loudspeaker.”
Could this really compensate for the $1 billion to $2 billion a
general campaign would cost? Priebus moved up the Republican
convention so the nominee would have time to raise such a
sum. Trump made a sour expression. “I don’t understand as a
businessperson how it’s possible to spend all of this money,” he
said. “We’ve got four months left, essentially.” He continued: “I’m
raising money for the party, and I’ll do well. But the whole system
is crazy. To spend $2 billion or $1 billion, I was saying to my people
the other day, I said, ‘Explain it to me. I just won against 17 people,
all governors and senators who are very successful people. I just
won, and I spent $45 million. That was over a period of a year.’ ”
Did he really think he would raise $1 billion? “No,” he replied.
“I’d say over $500 million. I
just don’t know why you need
that much money.”
Although he’s t aken
steps to professionalize his operation,
Trump gives no credence to the experts’
view that he’ll need
this money to go up
against a flush Clinton
campaign. “They’ve
been wrong so
much,” he said.
“Nate Silver, I
watched him.
It destroyed his
career. He was
this big guru
that never missed a call. He wasn’t
even close. And he actually did say
a few months ago, Trump is a whole
phenomenon that’s a hard thing to
figure. He sort of gave up.”
At last, Trump acknowledged a
young female aide hovering anxiously in the doorway to ferry him
to his next meeting. He stood up
and extended his hand. “Frankly,”
he said, “if they didn’t have a convention and said, ‘Congratulations,
Mr. Trump, you’re our nominee, go
ahead and run,’ I’d be very happy.”
“Reince is not
the general.
He’s stuck
in the job
of being
a supply
clerk to
a losing
presidential
army”
On July 18, Priebus will swing a
gavel and open the Republican
National Convention in Cleveland.
PHOTOGRAPH BY BRIAN FINKE FOR BLOOMBERG BUSINESSWEEK
2012 election]. I’m 29 in the NBC poll this morning. A radio
announcer, a Hispanic from New York, said, ‘I don’t know
about these polls, because every listener that I have’—they call
in Spanish—‘they’re all for Trump.’ ”
Trump believes his hidden appeal (most pollsters haven’t
yet detected it) will make him a kind of Super Republican,
endowed with the power to win states ordinary Republicans
haven’t carried in decades. “I think I’m going to do great in
the state of Washington,” he said. “Ted Cruz wouldn’t even try.
People say, ‘You’re wrong about this,’ but I think Oregon … New
Mexico … Florida, that’s my second home, right? I think I’m
going to do well in the three states they always talk about:
Florida, Pennsylvania, Ohio. I think I’m going to do really well
in Connecticut. That’s not a state that any Republican, other
than me, will go to. And I may—I think perhaps this one’s a
stretch, but I may do well in California. It could be tough. But
it could very well be a big surprise.”
Stamping the Trump brand on the party, he seemed to
believe, would have a transformative effect, as it does on all
Trump acquisitions. “It’s going to make the Republican Party
strong again,” he said. Finding himself in an expansive mood,
Trump announced he was extending our interview. “I find this
very interesting,” he said, and bellowed toward his open office
door, “Bring a Coke and a water, please!”
Most Republican officials have grudgingly accepted that
Trump will be their nominee. But they haven’t accepted his policies. They don’t want him to change the party. He’s the subject
of a steady stream of articles that describe how Republicans are
working to “shape” and “guide” his views—meaning block his
ideas. On May 9, Priebus took the unusual liberty of dictating
terms to Trump by telling a conservative radio host that Trump
wouldn’t touch the platform, and furthermore ought to “tell
Soon after, tens of millions of Americans will tune in to greet the
new face of the GOP: Trump. By then, most Republican officials
will have fallen in line. But it’s a moment many privately dread.
The GOP is slowly being strangled by demographic trends, as
women, minorities, and young people—all Democratic-leaning
groups—become an ever larger part of the American electorate. By most measures, Trump is a wrecking ball to the party’s
dream of modernization.
Still, it’s Priebus’s job to get Trump elected. He scored a coup
by persuading Eisenberg, a pillar of the GOP financial world,
to lead a joint fundraising effort between Trump and the RNC.
“As Trump became the presumptive nominee,” Eisenberg says,
“Reince put his arm around my shoulder and said, ‘We can be
partners and make this work.’ ”
But the pressure to preserve all that he’s built—and his own
dignity—is a heavy burden. Priebus has “had a tough, tough
hand to play,” says Barbour, the former chairman. Even as
Trump takes over, Priebus is trying to enforce a distinction
between “Trump” and “Republican Party” that might preserve
the inroads he believes he’s made in minority communities.
I was skeptical. And as I pushed Priebus to defend his rosy
view of the GOP’s racial appeal, his Midwestern nice vanished.
I had gone back and watched tapes of how he handled his first
public controversy, which happened to involve Donald Trump.
In 2011, when Trump was still in the embryonic stage of learning how to roil the national political debate, he began insisting
Obama wasn’t born in the U.S. Priebus, as the new chairman,
had to field awkward questions about Trump’s “birther” antics,
and while he made clear his own view that Obama was born in
Hawaii, he never denounced Trump and Trump never recanted.
How, I asked, could his plan to moderate his party’s image
possibly withstand a nominee who’s a birther and has labeled
Hispanics “rapists” and “drug dealers”?
Priebus reddened and replied, with Freudian clarity, “What
the RNC doesn’t do, we’re not able to muzzle people and put a
sock in people’s mouth and take duct tape out and tell people
what they can say and can’t say. Nor is it fair to then criticize
the national committee for something that some person says
somewhere around the country.” He added, “I can’t be judged
based on things I don’t control.”
My question wasn’t about control, I replied, but how even
a well-meaning outreach plan could survive a nominee whose
message undermines it.
“I think he recognized that the tone has to be presidential.
I think he gets that,” Priebus said. He insisted nonwhite
voters would support Trump in greater numbers than they
had Romney. “We’ve been communicating with them for two
years. You’re going to have a different outcome.”
“I don’t understand why you’d assume a different outcome,”
I said.
“How are you so sure that we wouldn’t?” he replied.
“Because I look at poll numbers.”
“What do you know about—you know something about voter
data and outcomes and messaging and microtargeting? I mean,
what kind of expert are you?”
“I know that the public face of the party saying these things
has driven his own negatives up astronomically high,” I said.
“I’m not so sure about that. Did you see the poll yesterday
that he actually had better numbers with black and Hispanic
voters than Mitt Romney?”
“I did.”
“What did you think of it?”
“I was surprised.”
“OK, well, then you don’t know what you’re talking about.”
At this, Priebus’s deputy jumped in to announce that we
were going off the record.
When he had calmed down, Priebus got back on message.
“My prediction is we’re going to get a higher percentage of the
Hispanic and black vote than we have gotten since 2004,” he
said. “And we’re going to do it because we’ve done a better
job at the RNC, and we’re also going to have a nominee who is
going to pivot in tone and tenor. He understands that.”
On May 12, Priebus officiated a shotgun wedding between
Trump and the conservative movement, represented by House
Speaker Paul Ryan, who had pointedly declined to endorse
Trump. By 9 a.m., the scene outside RNC headquarters was
charged and surreal. TV camera crews swarmed the surrounding blocks. A protester in a giant papier mâché Trump
head screamed racist invective through a bullhorn. A man in
full Scottish regalia blew on a bagpipe. Immigration activists
marched to the front door and tried to deliver to Priebus a
cardboard coffin with the slogan, “GOP: RIP.” Up above, RNC
staffers peeked through the blinds like Old West townspeople
anticipating a gunfight.
Trump loved it. “One of the congressmen said he had never
seen so much press at a [Capitol Hill] event in 20 years,” he
told me.
The meeting was supposed to be a variation on the old
Washington ritual whereby the nominee and runner-up “come
together” to unify the party before the general election. Only
Ryan, whose values and ideology Trump soundly defeated,
wasn’t conceding. He had made a big drama about how Trump
had to demonstrate fealty to the conservative cause, and evidently he thought that this would happen. (Ryan declined to
be interviewed.)
It didn’t. According to a source in the room, Trump criticized Ryan’s proposed entitlement cuts as unfair and politically
foolish. “From a moral standpoint, I believe in it,” Trump told
Ryan. “But you also have to get elected. And there’s no way a
Republican is going to beat a Democrat when the Republican
is saying, ‘We’re going to cut your Social Security’ and the
Democrat is saying, ‘We’re going to keep it and give you
more.’ ” Afterward, both sides offered platitudes, but Ryan
didn’t endorse.
Lately, Trump has softened his tone and hinted that his
more extreme pronouncements are just bargaining positions.
To placate skeptics such as Ryan, he put out a list of conservative jurists representative of the type he’d nominate to the
Supreme Court. But he’ll go only so far. “The party,” says
Gingrich, “will have to ultimately figure out how does it work
with Trump, because he will be the fact. Not us. Trump. He is
going to drive the system.”
The question everyone wonders is, what effect will this have
on the party? If Trump wins, he’ll have even less incentive to toe
the party line. If he loses, conservatives will spin it as a decisive
verdict on all that he says and stands for. They’ll cast his nomination as an embarrassing dalliance by Republican voters who, chastened, will return to the fold. Everything will be as it was before.
But presidential elections always produce new ideas. Trump
will change the Republican Party, win or lose. He chose to define
himself against conservative legacy, and voters responded.
Other politicians will see his success and mimic him. As he
says, it’s simple—like a paper clip.
A Republican Party that can’t stop Trump’s nomination
may be no better able to resist his influence. If you’re Priebus,
that’s a grim thought, because you’ve devoted five years, hundreds of millions of dollars, and every ounce of your energy to
pushing your party in the other direction.
Back at RNC headquarters, Priebus rattled off the long list
of improvements he’s made once more. “My point is, given all
that,” he told me, “we’ve done everything we can.” 55
Three wealthy people, with access
to private information about a
public company.
Advantages the majority of
investors didn’t—and aren’t
supposed to —have.
56
Several perfectly
stock trades yield
millions in profit.
Is that
timed
ing
57
legal?
Just ask Phil
By Sheelah Kolhatkar
Bharara continued, “and the integrity of
our markets continues to be a priority of
our office.”
So why wasn’t Mickelson charged?
The answer is that certain kinds of
behavior previously understood to be
insider trading are now effectively legal—
or at least not prosecutable. More than
20 years after the imprisonment of Ivan
Boesky, the infamous arbitrageur, it’s
become vastly harder to convict someone
for insider trading—the result of several
years of legal challenges that handed Wall
Street an enormous victory. An appeals
court ruling in December 2014 basically legalized the don’t-ask, don’t-tell
information-gathering model employed by
many hedge funds; it’s now OK to trade on
questionable information that one receives
secondhand, as long as you don’t know too
much about how it was obtained.
Offering someone a pile of cash in
exchange for confidential, market-moving
intelligence is still clearly over the line.
But to cite an example Bharara himself
has used: Say a CEO knows his company
is being taken over in a few weeks—he
could, potentially, pass that information
to a nephew for nothing in return, and the
nephew and his friends could, in theory,
trade on it. Alternatively, the CEO could
share the plans with a bookie in exchange
for forgiving a gambling debt. The bookie
could then tell his friends to trade, who
could then tell their friends to trade. As
long as none of those further down the
chain knew the tipper’s gambling debt
was forgiven, they would be in the clear.
Is it fair for rich, well-connected individuals with access to valuable corporate
information to freely make money from
it? Or is that deeply unfair? “I don’t know
that it gives traders carte blanche to break
the law,” Richard Holwell, a federal judge
who’s presided over major Wall Street
trials, told Bloomberg News. “But it certainly makes it easier to get away with.”
The events that led to this new legal
reality began in November 2010, when a
group of dark, unmarked cars pulled up
to an office building in Stamford, Conn.
The SEC, FBI, and prosecutors from the
Manhattan U.S. Attorney’s Office were
in the midst of a major investigation into
insider trading at multiple hedge funds. Raj
Rajaratnam, the co-founder of the $7 billion-plus Galleon Group, had been arrested
the previous October; government investigators were chasing down Rajaratnam’s
connections, and their connections’ connections. One trader on the list was Todd
Newman, a portfolio manager at the hedge
fund Diamondback Capital. The FBI had
come to Diamondback’s Stamford office
to try to persuade Newman to cooperate,
or else storm in and search the premises.
While that was happening, a separate FBI
squad was preparing to raid Level Global,
a Manhattan hedge fund co-founded by
Anthony Chiasson. A third fund, Boston’s
Loch Capital, was also targeted. Soon, FBI
agents were carting hard drives and cell
phones out of major investment firms in
broad daylight.
Chiasson and Newman were charged
with insider trading in January 2012. But
it wasn’t a typical case. Rather, the two
were at the outer extremity of a ring of
six traders and analysts the government
accused of playing a sort of demented
game of “broken telephone”—sharing and
trading on material nonpublic information. Bharara called it a “criminal club.”
In one example, an investor relations
employee at Dell shared the computer
maker’s internal financial information
with a friend at an asset management firm.
The friend passed it along to an analyst at
Diamondback, who passed it along to his
boss—Newman—as well as to a friend at
Level Global, who passed it to his boss,
Chiasson. Newman and Chiasson traded
on the information. In all, they made
over $70 million trading tech stocks this
way, according to the government. It was
unclear what, exactly, they knew about
the source of the information, but it certainly looked suspicious.
The courts began to consider: Was
this illegal—or simply what traders in the
modern market do every day?
Much of the insider trading that
occurred during the Boesky era was
straightforward and transactional, sometimes involving suitcases of cash delivered
by men in suits in hotel lobbies. By the
early 2000s, the government saw insider
trading as more amorphous, an exchange
of favors, rumors, and sometimes hard
numbers passed along for goodwill or
expectations of career help. Traders
cared less about one-off mergers and
more about companies’ quarterly earnings. But while this new mechanism for
making money was highly profitable and
unavailable to average investors, prosecuting it was hard.
The market’s driven by rumors at
all times, with stock prices yo-yoing in
response to “whisper numbers” about
earnings or word that a big investor is preparing to buy or sell. There are so many
factors and information sources affecting a share price that getting “edge”—a
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58
On Friday, July 27, 2012, Phil Mickelson
received a phone call. It wasn’t just any
call; it was, according to the U.S. Securities
and Exchange Commission, a transmission of business intelligence potentially
worth millions of dollars. Mickelson’s
friend, a gambler named William Walters,
was calling to urge him to buy shares of
Dean Foods. The Dallas-based dairy conglomerate was going to announce a spinoff
of its organic foods unit the following
week, and the company’s board thought
it would cause Dean stock to pop. Walters
had gotten the tip from the best possible
source, a board member who’d participated in the conference call where the
board encouraged the Dean chief executive officer to move ahead. It was about
as close to a sure thing as you could get,
and Walters, who understood odds better
than most people, had already accumulated almost 4 million shares, an aggressive bet worth about $50 million.
T h e go l f g re a t w a s h a rd l y a
high-velocity stock trader. Mickelson,
who’s made almost $80 million over his
playing career, had never before invested
in Dean, according to the government. Yet
that following Monday and Tuesday, he
allegedly purchased 200,240 shares, partly
on margin, for $2.4 million. A week later,
on Aug. 7, Dean announced the spinoff,
and as the board had predicted, the
stock shot up 40 percent. Walters made
$17.1 million and Mickelson $931,000.
Three people, one a celebrity athlete,
with access to internal information about
a publicly traded company. Advantages
the majority of investors in the market
didn’t—and aren’t supposed to—have.
Several perfectly timed trades yielding
millions in profit. If one were to describe
the transaction to a layperson, it’s likely
that it would sound like a crime.
Securities investigations travel at an
inchworm’s pace, and almost four years
later, on May 19, the U.S. attorney for
the Southern District of New York, Preet
Bharara, stood in front of a room full of
reporters to announce securities fraud
charges against Walters and his source,
former Dean board member Thomas Davis.
Davis had cooperated and pleaded guilty;
Walters had been arrested the night before.
With the snappy language he’s known for—
Bharara called Davis a “secret bug in the
boardroom”—the U.S. attorney explained
that Walters and Davis had used an anonymous prepaid cell phone and a code,
“Dallas Cowboys,” to refer to the target
company. “These bets were no gamble at
all,” Bharara said of their trades, because
Walters “had tomorrow’s headlines today.”
“Brazen insider trading continues
to be a blot on our securities markets,”
term for valuable market information
that others don’t have—doesn’t guarantee
that a trader will even make money. “You
people in the media, you think we’re all
like monkeys, like we’re just sitting around
waiting for the bananas, and when we get
the bananas, we jump up and down and
eat them,” a former Galleon trader told
me. “But it takes a tremendous amount of
talent to know what to do with the edge,
even if you get it.”
Soon after charges were filed against
Newman and Chiasson, their defense
lawyers got to work. They saw a major
hole in the government’s case, and they
intended to drive an 18-wheeler right
through it.
Insider trading has never been clearly
defined by law. Rather, its contours have
been shaped through a series of court
decisions, as if a major form of securities crime were a piece of beach glass at
the mercy of the waves. A major ruling
came from the Supreme Court in 1983, in
Dirks v. SEC, which held that for a crime to
have been committed, an insider leaking
company information must have disclosed
the information in return for a benefit.
Providing help or favors to a friend could
count. It followed that anyone receiving
the information secondhand could be
found liable for trading on it only if they
knew it was the bad kind of information,
i.e., that the person who first gave it out
got something in return.
By the time Newman and Chiasson’s
cases went to trial, their lawyers, Stephen
Fishbein, of Shearman & Sterling, and
charged the Dell employee, implying he
didn’t do anything illegal.) District Judge
Richard Sullivan disagreed, the jury found
Newman and Chiasson guilty, and they
were sentenced to lengthy prison terms.
The men appealed, and two years later,
in December 2014, the Second Circuit
Court of Appeals issued a harsh rebuke
to Bharara’s office, ruling that the U.S.
Attorney had been too aggressive. Newman
and Chiasson had their convictions overturned. The decision went far beyond
simply clarifying that insider trading
requires a person to know that the original source of a piece of information parted
with it for a benefit; the court also ruled
that the benefit had to be significant, an
“exchange that is objective, consequential,
and represents at least a potential gain of
a pecuniary or similarly valuable nature.”
The hope of future career advice or casual
friendship wasn’t enough. This sweeping
change to the benefit requirement was a
devastating blow to the government.
Bharara was enraged by the decision,
publicly complaining that the precedent
created an “obvious road map for unscrupulous investors.” Phones at the SEC
started ringing off the hook, as defense
lawyers called, trying to unravel or retract
civil settlements that now looked weak.
The Supreme Court may clarify the situation when it rules on another insider
“It takes a tremendous amount of
talent to know what to do with the
edge, even if you get it”
Gregory Morvillo, of Morvillo Law, respectively, were focused on the idea of “remote
tippees”—people who are several steps
removed from the original source of inside
information. The information had flowed
from Dell through two other people before
reaching Newman; three for Chiasson.
The lawyers argued that their clients had
to have known that the original leaker
had done something wrong—defined by
having received a benefit—in order to have
committed a crime themselves. The Dell
source worked in the company’s investor relations department, which made
the point harder to prove, since it was
part of his job to share information with
analysts. (In fact, the government hadn’t
trading case it agreed to take up in
January, USA v. Salman. The court will rule
on whether disclosing valuable information to help a relative—a brother in this
case—qualifies as having received a personal benefit.
In the months after the Dean Foods
trade, “Lefty,” as Mickelson is known,
gave a clue as to the extent of his preoccupation with matters of money when,
in January 2013, he complained about his
high California tax rates and threatened
to move to millionaire-friendly Florida:
“If you add up all the federal and you
look at the disability and the unemployment and the Social Security and the state,
my tax rate is 62, 63 percent,” Mickelson
said, according to the Associated Press.
“So I’ve got to make some decisions.” He
later apologized.
After Walters was charged, Mickelson
tried to back away from the Walters-Davis
train wreck. The SEC named Mickelson
only as a “relief defendant,” meaning that
he was seen to have received ill-gotten proceeds that he would be compelled to return
but not as having engaged in unlawful
behavior. “The complaint does not assert
that Phil Mickelson violated the securities
laws in any way. On that point, Phil feels
vindicated,” Mickelson’s lawyer said in a
statement. “At the same time, however,
Phil has no desire to benefit from any transaction that the SEC sees as questionable.”
Experts and pundits quickly offered
their own explanations for Mickelson’s
seemingly miraculous escape. “The government can go after the original tippee,
which is what they have done here,” says
John Coffee, a Columbia law professor.
But requiring proof that anyone else who
traded on the information knew the original tipper was paid for it is too high a bar
and will incentivize traders to simply not
ask questions. “That is irrelevant information, it’s legally dangerous, and people
don’t want to communicate it—and people
don’t want to hear it,” Coffee says. “Wall
Street runs as a favor bank, where people
know if they get information today, they’ll
get a favor tomorrow, and they keep it safe
by never disclosing the source.”
At the May 19 press conference
announcing the case, reporters in the
room refused to cooperate with Bharara’s
attempt to present the Walters indictment
as a victory for justice and homed in on
Mickelson’s glaring absence from the criminal charges. Martha Stewart, after all, did
hard time.
“Why is it that Phil Mickelson is not
charged in this?” a reporter asked as soon
as the Q&A period began. Another chimed
in: “Are you saying he didn’t realize he
was going to be making money, that he’s
an innocent person here?”
Bharara and Andrew Ceresney, the
SEC’s head of enforcement, deflected
the questions as best they could, but
the subtext was clear: Mickelson wasn’t
charged because of the Newman decision,
the new precedent they all hated.
“I’m not going to comment,” Bharara
said, more than once.
Finally, another, especially persistent
reporter weighed in: “Doesn’t it undermine
confidence in the markets to not charge the
celebrity defendant and not explain why
you are not charging the celebrity?” She
added: “What message do you think that
sends to the American public?”
Preet blinked. 59
61
62
Last December, Kelly Slater, the world’s best and bestknown surfer, released a short video on his Instagram
feed. It began with a beautifully curling left-to-right
wave, 7 or 8 feet in height, then cut to Slater in a knit
beanie raising his arms in triumph. “Oh my God!” he
yells. The next scene shows him slashing up the face of
a similar wave and then riding inside the barrel as he
says, in voice-over, “This is the best man-made wave
ever made. No doubt about it.”
The video, a teaser for a three-minute version called
“Kelly’s Wave” that posted simultaneously on the new
and otherwise empty website of Kelly Slater Wave Co.
(KSWC), was shot on a long, narrow artificial lake in
Central California. An on-demand wave of this size and
duration has been the dream of surfers for decades,
and now Slater was seeing that it was real. His team
had engineered a mechanical right break that could be
started with the press of a couple of buttons. The surf
world’s reaction to the wave was no less ecstatic than
Slater’s. The clip pinged around the internet, racking
up millions of views and comments. On Surfer magazine’s website, a staffer posted the video with just a
short caption: “I don’t know what to say and frankly
it’s not worth wasting time reading. Watch the video
immediately. To sum up: Kelly Slater Wave Company
did it. They made the dream wave we’ve all imagined
wave pools could produce.”
Six months have passed since the video was
released, and though Slater’s team still prefers not to
publicly identify the location, Reddit users found it—
tucked among fruit farms and goat ranches outside
the tiny town of Lemoore—within hours of Slater’s
post, using his comment that he was 110 miles from
the coast to scour the San Joaquin Valley in search of
a sizable strip of water. That turned out to be a manmade lake, 700 yards long and 70 yards wide, originally built for waterskiing. The run-down house beside
the lake has since been renovated, and the corrugated
aluminum barn next door now contains a cedar-lined
lounge and a room stacked with surfboards and wetsuits, many stamped with the place’s Surf Ranch logo,
which features a bear on a board. The wave, too, has
been tweaked. Slater asked for modifications to the
lake’s bottom to adjust the wave’s shape and power.
But the biggest change of all is that Slater and
his investors aren’t carrying the financial burden of
this long, expensive, and speculative engineering
venture on their own anymore: In mid-May, KSWC
was acquired by the same group that owns the World
Surf League (WSL), the professional tour on which Slater and all of the
planet’s other top surfers compete.
“This is a prototype,” Slater says, gesturing at a stripe of dark water
that looks like a seaplane runway, through a picture window in the house’s
living room. He’s 44 but seems to have stopped aging at 35. He’s still a fulltime professional surfer. “It’s a research laboratory,” adds Terry Hardy,
Slater’s longtime manager and a partner in both KSWC and the WSL.
In the aftermath of the video’s release, people speculated about
what the wave might mean in real-world terms. Plenty of surf blog commenters fretted over the potential that a machine-generated swell down
the road from an Indian casino could ruin the mystique of a sport that
depends entirely on the whims of nature and that requires its best athletes to chase waves in beautiful and exotic places. Others welcomed the
idea of a realistic artificial wave that could bring surfing to landlocked
states and countries, allow surfers to refine their skills without waiting
for nature to provide a swell, enable resorts to focus activity around
surf pools instead of golf courses, and even, perhaps, provide a way
for surfing to achieve full medal status by the 2020 Olympics in Tokyo.
“There are a lot of obvious outlets for something like this,” Slater says,
cautiously. The sudden emergence of the WSL as an owner indicates
that the first application for the pools will be for world-class surfers;
the press release announcing the deal mentions “a global network of
WSL-branded high-performance training centers.” But KSWC’s website
also now welcomes “developer inquiries” under a computer- generated
image of a beautiful circular wave pool flowing around an island shaded
by palm trees.
“I believe my job is to create and refine and evolve the technology,”
Slater says. “For me, selfishly, it’s all about high performance, and it’s
fun. How you package that into a business, well, I think there are a lot
of ways you can think of off the top of your head.”
with wave pools goes all the way
back to childhood, when he used to try to body surf on the artificial
wave at Wet n’ Wild, a water park not far from his hometown of Cocoa
Beach, Fla. At 14, he and his brother Sean—then emerging phenoms of
American surfing—flew to Texas to demonstrate surfing on an artificial
wave so small they could barely ride it. (They did, however, collect $70
in small bills other patrons had lost in the churn.) When he was 16, Slater
won a professional contest at another inland water park and got his first
Surfer cover in the process. In each case, the wave was essentially produced by brute force—something pushed a wall of water from the back
of a pool to the front. “It was a novelty, that there’s always a wave right
then,” Slater recalls. “But the quality and power was pretty minimal.”
Slater didn’t necessarily want to be the person to fix this problem,
but he hoped someone would do it. “I just thought, How cool would
it be?” he says. “People have tried for a long time to have a truly highperformance wave that’s controllable.”
Recreational man-made waves have been around since the 1970s.
If you’ve been on a cruise ship, you may have seen a FlowRider, on
which a rider on a special board attempts to surf in place while water
rushes past. But the quest to develop an authentic simulacrum of what
PHOTOGRAPH BY NATHANAEL TURNER FOR BLOOMBERG BUSINESSWEEK;
PREVIOUS SPREAD AND WAVES: TODD GLASER
pros ride at the world’s top breaks has proven elusive. Every so often, a
concept emerges, then washes out.
In 2004, Slater’s old surf coach and board shaper called to say that he’d
seen a concept from a guy named Greg Roberts that looked promising.
Slater talked to Hardy, and they decided to license the technology, only
to decide two years later that it wasn’t quite right. Then Bob McKnight,
co-founder of surf company Quiksilver, Slater’s longtime sponsor, recommended that Slater talk to the wave science guys at McKnight’s alma mater,
the University of Southern California. Slater was pointed to Adam Fincham,
a research professor in the Department of Aerospace and Mechanical
Engineering with a specialty in fluid mechanics.
Fincham is originally from Jamaica and had spent much of his career
working in Europe, so he says he “honestly had no idea” who Slater was
when he came to visit him at his USC lab in 2006. Fincham knew a lot
about waves, though, having spent years on a European Union program
called Hydrolab, which exposed him
to numerous large hydraulic facilities.
Fincham says he thought, “Who’s
this surfer dude with this crazy idea?
Very quickly, I realized he was serious.
He was very articulate and described
quite precisely what he wanted to
do.” Specifically, Slater wanted a
high- performance barreling wave,
one that would curl endlessly. “It was
very clear that he didn’t just want a
wave—he wanted his wave,” Fincham
recalls. “It had to barrel; it had to have
power; it had to have duration; and it
had to be shaped in such a way that
you could maneuver.”
He wasn’t sure it was possible, but
Fincham pulled together a team of colleagues and undertook a pilot study in
2007. They decided that, yes, it was
possible. By 2008, Fincham was the
director for science at KSWC and had
moved to a laboratory in a warehouse
in Culver City, near Los Angeles. Along
with a small team, he built a 1/15-scale
model of a concept that seemed feasible: a hydrofoil—imagine something
like an underwater airplane wing— 63
would create a swell, then turn that
swell into a surfable wave by using a
specifically shaped bottom to cause a
break, as happens in the ocean.
They proceeded, Fincham says, “as
if we were building an aircraft carrier
or an airplane.” They built a theoretical
model, then a lab model, then a computer model run on multiple supercomputers at the same time.
From talking to surfers, Fincham
learned that the best waves in nature
were typically associated with a swell
that could be described mathematically as a “solitary wave” or “soliton.”
This is a wave that covers immense distances while maintaining its shape and
velocity until something disrupts it—
for instance, a reef or the shore. That
became his target in the warehouse pool.
By late 2014 it was time to put the concept to a
test in the field. After shopping for more than a year,
the company settled on the plot in Central California
where the engineering team could work with no interference. The site sits behind a cedar fence along a
dusty road where houses are few and far between.
Secrecy was a concern, certainly, but the real reason
the prototype wave is in Lemoore is that the land was
cheap, about $575,000 for 20 acres. To find a plot
of that size with a lake outside L.A. would be a ridiculous waste of money for a startup that Slater
describes as “thrifty.” (And for good reason—a
Slater invited his first guests
to the Surf Ranch. The group included three professional
surfers and some of the key leaders of the WSL, including
Commissioner Kieren Perrow and Chief Executive Officer
Paul Speaker. Perrow is in essence the chief surfing officer,
64 the guy charged with protecting the sport and overseeing all things related to competition—including, crucially,
whether the conditions are good enough on a particular
day to surf. Perrow is a former pro; Speaker, a nonsurfer,
created Perrow’s position when he took over the league
in 2012 to help assure the athletes and the industry that
his ascension, as a man who came from New York and
wore suits, didn’t indicate that the priorities of surfers
were about to take a back seat.
Speaker, who’s held executive positions at RKO
Pictures and the National Football League, took an interest in the business of surfing after joining the board of
Quiksilver in 2010. He says it stood out as the action
sport with the biggest potential for growth in terms of
both fans and participation. People didn’t age out of
surfing the way they seemed to do with snowboarding,
skateboarding, or BMX, and it was almost uniquely aspirational, with a culture and esthetic that’s as much a lifestyle as a sport.
The Association of Surf Professionals tour, as the league
was then known, was struggling under a disjointed management structure—half-owned by pro surfers and halfowned by the endemic surf brands, with a governing body
that licensed the rights to specific events to different partners. This made it difficult to aggregate audience or sell
global sponsorships. Speaker joined forces with Hardy
and, with the financial backing of the reclusive Florida
billionaire Dirk Ziff, took over the ASP and rebranded it
as the WSL.
Speaker quickly chased global sponsorships (signing
Jeep, Samsung, and InBev) and invested heavily in technology to cover surfing events—adding helicopters and
drones. The WSL controls its own media rights and
archives, but, until now, it was at the mercy of the ocean.
Surfers can sometimes wait a week or more to actually compete, and
that makes TV next to impossible. Instead, the WSL broadcasts over
the web, via Facebook and its own app.
Speaker, Perrow, and the professional surfers couldn’t believe what
they were seeing that day in Central California. You can witness that
in the videos posted to the KSWC website, and in the social media
posts they all put up later. “It’ll be a day I’ll never forget for the rest
of my life and I can’t wait to see how the sport of surfing evolves with
this new technology,” pro surfer Kanoa Igarashi wrote on Instagram.
“I couldn’t believe the perfectness of the wave.”
“I think every surfer at some point has probably dreamt of having
a wave like this available,” Perrow says. “People have been trying to
achieve this for a long time. I wasn’t sure if I would ever see it.” As
commissioner, Perrow is charged with “upholding the integrity of
the sport.” Among his jobs, then, will be figuring out how and where
to use Slater’s wave.
Speaker and Hardy are both cagey about a commercial rollout.
“It’s so early,” Hardy says. “We’re literally still testing and refining.”
They know, though, that some pros and fans are fearful about what
Slater’s wave could do to competition. Critics worry that it could
obviate the variability of nature and the acquired art of choosing
which wave in a swell will be the best, both of which are essential
to the sport’s identity.
“It’s really important for everybody to know that we’re not moving
away from the oceans, at all,” Speaker says. “The WSL is the world’s
best surfers on the world’s best waves. This is just an enhancement
to the tour. We will always have a majority of the surf contests take
place in the ocean.”
is public,
and even tagged on Google Maps, the company has had to button up
the security. There’s a guard at the gate when I visit in late May, and
surveillance cameras cover the property. Still, drones have buzzed
over numerous times, and once a helicopter came in low, with a
man clearly filming out the side, so the hydrofoil—the wave’s secret
weapon—is camouflaged from above. If you watch any of the videos,
shot exclusively by KSWC-sanctioned personnel, they’re carefully
cropped so as not to reveal much of a hulking, whirring metal ram
as it’s dragged along a rail under the water. (The hydrofoil is separated from surfers by netting.)
Just before sunset, Slater gets word that the crew has finished
some maintenance and that the machine, powered by solargenerated electricity, is warm enough for a run. Slater zips up a
short-sleeved wetsuit and grabs a board from his new line. He left
Quiksilver in 2014 to start his own clothing company, Outerknown.
He cut ties with his board sponsor around the same time, and for
all of the 2015 season, Slater rode a naked board, opting to earn
nothing on the two most marketable surfaces a surfer has—the top
and bottom of the board. In April he introduced his own line of
boards in partnership with Firewire Surfboards, a manufacturer
GRAPHIC DESIGN BY DAVID CARSON
large chunk of the funding came out of his pocket.)
One of the first things people ask, Fincham says, is
whether the wave can be bigger. Can it, for instance, get
huge, to produce a simulation of Oahu’s absurd “Pipeline,”
devourer of men and boards? Given a large enough
pool and foil, he says, it’s possible, but that was never
Slater’s vision. “Our objective is the quality of the wave,”
Fincham explains. “Kelly made it very clear that if it met
his criteria—if it had shape and power and form—that he
would ride that all day long.”
PHOTOGRAPH BY NATHANAEL TURNER FOR BLOOMBERG BUSINESSWEEK;
that adheres to environmentally friendly practices.
Slater steps gingerly through the acres of mulch that lies along
the length of the lake around the eucalyptus trees that shade
an old driveway, and climbs up over the side of the lake’s banks
just under the newly constructed control tower. There, inside a
glass-fronted box, the control system runs on custom software.
He slips into the water and paddles out to the middle of the
lake as a cable that runs the length of the hydrofoil housing
goes taut, sounding as if someone is whizzing along a zip line.
Then, in the distance, it begins. A head-high swell rises up
suddenly and grows in size as the hydrofoil gains speed. Slater
glances back over his shoulder and paddles fast, matching
his own speed to the wave’s and,
as the swell hits the point at which
the lake’s bottom—by depth and
contour—forces it to break, Slater
is up, tucking into a barrel that curls
perfectly and never breaks. When
the pros were on-site, Nat Young
stayed in one of these tubes for
nearly 30 seconds, by far the longest
barrel ride of his life, and later said,
almost mystified, “Every drop was
falling where it had to fall.”
Slater, though, pops out of the
tube and cuts upward, ascending to
the top of the wave and then slashing hard as the roaring wall of water
carries him past a row of spectators.
The run lasts almost half a minute.
“In nature there are very few if any
waves this long,” Hardy says.
The wave is more powerful in
person than on film, without question. Slater makes it look easy, but
even he wasn’t quite prepared for
the speed; back in December, he
missed his first paddle. Another
pro, he says, fell on his first three
attempts. But this is the foil firing at
85 percent of its maximum power.
Slater’s girlfriend, an amateur, has
ridden a smaller wave, and so has
a 48-year-old waterskier who lives
next door. He’d never surfed before,
but he got up on his first wave and
rode it the entire length of the lake.
“I don’t know how many people
we’ll put in here who’ve never
surfed before,” Slater says. “But that
right there is the proof.”
He likes to say that this is
“Version 1.0”—a “shot in the dark”
full-scale prototype that shocked
them all by actually working. He’s
already messing with the shape
of the lake’s floor and the foil’s
design. It can be smaller or much
larger and, with some changes to
the engineering, even installed in a
circular pool, so that a surfer could,
in theory, ride forever. “That’s the
dream,” Slater says.
The cost of a system will depend
on many variables, most obviously
the size of the pool and the foil. “If
you said $2 million you wouldn’t be
wrong, and if you said $20 million you wouldn’t be wrong either,”
he says. “It’s literally like a buffet.”
Behind him, the sun hangs just over the tree line, and storm
clouds are building. An orange California glow has settled
upon the place. Slater, shivering, wants to get into the hot
tub that was just installed, but he can’t leave until he hears
what the visitors think of the wave he’s been dreaming about
since childhood.
It seems so unnatural to see something like that here, someone
says, gesturing at the miles of nothing in every direction.
Slater laughs, then stops and assumes a faux-serious face.
“Wait,” he says. “You’re supposed to say it seems natural.” SIGNS
OF THE TIME
YOUR 9 TO 5 YOGA PANTS
Hang out in
a bikini …
in a hot tub!
DO-GOODER
TRAVEL
JUNE
HOROSCOPES
Take selfies like
these all day!
Be ogled by
teenage boys on
the internet!
Get tons
of free whey
protein!
ArsenicTV and the influencer economy
onomy
By Max Chafkin
68
n a Wednesday morning in April, Caitlin
O’Connor, a 26-year-old actress, drove herself
to a mansion in the Coldwater Canyon neighborhood of Los Angeles and took off most of her
clothes. She spent the next few hours wearing
a black bikini and sitting in a hot tub, speaking
into a cell phone camera to an audience of several hundred
thousand followers, mostly young men and teen boys. A viewer
asked if she only dated guys with money. “I love girls who make
their own money and don’t rely on men,” she replied. The
shoot was for Woman Crush Wednesday, part of the regular programming on ArsenicTV, an underground broadcaster that’s
the Next Big Thing in media.
You probably haven’t heard of Arsenic, which airs only on
the Snapchat app. Other programming includes the Q&A 5 Snap
Facts and Arsenic Flex, a workout segment. And even if you
have, you may want to keep it to yourself. The content isn’t
pornographic by Supreme Court standards, but as the name
implies, Arsenic’s videos can feel a bit dangerous: Think of an
American Apparel ad with many, many more thong shots filmed
from what would be hard to call a respectful distance. Despite
Arsenic having no special
placement on Snapchat—it’s
merely an account, not one of
the channels managed by Vice
Media, National Geographic,
or People, for instance—its
videos attract more than
half a million views each in
a 24-hour period. In March,
Arsenic rebuffed a buyout offer
from Playboy Enterprises. “We
really like what they’re doing,”
says Playboy Chief Executive
Officer Scott Flanders. Instead
of cashing out, Arsenic has
raised money from tech investors. “Snapchat is the future of
TV,” says Paige Craig, managing partner of Arena Ventures,
who’s also backed Lyft. “And
Arsenic is the company that is
most adept at using it.”
Calling Arsenic a company is
a bit generous. Although Craig
was impressed by Arsenic’s
audience numbers and message
of empowerment—a woman,
Arsenic
Amanda Micallef, co-founded
founders
the company; models produce
Micallef (left)
and Hawkins
their own shoots; and there’s
more body-type diversity than you’d find in a lad mag—he
says, “It was the longest due diligence process I’ve ever done.”
Which makes sense: Arsenic is run out of the kitchen of CEO
Billy Hawkins, 41, a Harvard Law School graduate and former
Creative Artists Agency agent who previously represented Spike
Lee. Micallef, 39, a former movie producer, casts each shoot,
and five interns help with the cell phone camerawork. (Models
control Arsenic’s Snapchat account during their shoots, editing
and posting photos. “It’s driven by the model’s vision,” Micallef
says. “They’re the boss of who they are and how they look.”)
The only full-time employee manages the flow of portfolios that
models submit—about 1,000 a day—for consideration. Given the
enthusiasm, you’d expect Arsenic to pay big bucks. But O’Connor
doesn’t make a cent in that hot tub: She appears once a week
in exchange for the right to embed her social media handles
on the videos she records. “Girls want to do Arsenic because
they’re getting followers,” she says. “That’s the equity. In the
long run, it means dollars.”
This math is becoming more and more commonplace in
a media industry in the throes of disruption. O’Connor, who
makes money hawking products on Instagram, represents a new
kind of celebrity—and Arsenic a
new kind of celebrity vehicle—
and they’re working together
to attract the young audiences
conventional media doesn’t.
The shifting appetites of a group
that advertisers widely regard
as the most valuable —young
people have a lifetime of consumption ahead of them but
haven’t always formed strong
opinions about brands—have
created an opening for “influencers.” They’re a curious group
of former child stars (e.g., Hilary
Duff ), lesser Kardashians, and
obscure up-and-comers like
O’Connor who carve out careers
as social media salespeople. If
you’ve ever wondered why
Instagram and Twitter feeds are
full of attractive people talking
about detox teas, diet shakes,
and new apps, it’s because
they’re paid to. They’re part of
an advertising ecosystem that’s
revolutionizing marketing,
however confusing its dynamics
seem to older generations accustomed to famous spokespeople
on TV, usually not in a hot tub.
The Caitlin O’Connors of the
internet are a vital part of this
economy. Even though she’s
e
a professional actor with a
Screen Actors Guild card
and has an IMDb page
full of credits, O’Connor’s
breakout role is as an
online marketer. “Social
“Girls want to do Arsenic because
they’re getting followers. That’s the equity.
In the long run, it means dollars”
PHOTOGRAPH BY LOGAN WHITE FOR BLOOMBERG BUSINESSWEEK
Media
… because the more people who
follow her and like her posts …
Influence = $$$
… the more valuable her
endorsements are.
COURTESY SUBJECTS
O’Connor’s Snapchat videos
for ArsenicTV—here she interviews
the musician Diplo—get more
than 500,000 views each. But the
real goal is Instagram followers …
media has 100 percent made
my career,” says O’Connor, who
moved to Los Angeles from Uniontown, Pa., 10 years ago. She
has almost 300,000 Instagram followers, up from about 100,000
when she first appeared on Arsenic’s Snapchat. Because of that
following, small brands pay her $300 per post to promote their
wares. Recently, she’s talked up EMediaStar, an app developer;
FlockU, a college-focused media company; and Recor, a nutrition
supplement. (This typical post has received 5,812 likes and counting: “Follow @recornation … They have the best whey protein
and pre workouts I’ve tried!!”) In a normal month, O’Connor
grosses $6,000 to $10,000. “If you don’t see a line in my post
that says, ‘Nobody paid me for this,’ then I’ve probably been
paid for it.”
She maintains accounts on Facebook, Twitter, and Snapchat,
but she makes most of her money on Instagram. Instagram is big
with brands because it’s popular, with more than 400 million
monthly users, and not especially keen on privacy. The app provides an application program interface that allows O’Connor’s
sponsors to see how many followers she has, how many likes
each post receives, and what people say about them. She also
talks up sponsors on Snapchat, but for now, the social network’s
structure—messages disappear after 24 hours, and there’s no way
for a brand to verify how popular influencers are—prevents it
from being a major source of income for her. Sponsorships for
top players are common on video game platform Twitch and
on Musical.ly, a make-your-own music video app, where the top
user, a 15-year-old who goes by Baby Ariel, has 9 million followers and has created ads for Nordstrom and 21st Century Fox.
There are maybe 100,000 people like O’Connor, says Daniel
Saynt, CEO of Socialyte, an agency specializing in casting influencers for ad campaigns. Rates vary widely: Someone with 100,000
followers might get $100 per post, while an internet-famous
celebrity such as comedian Josh Ostrovsky, aka the Fat Jew,
can easily pull in more than $5,000. Saynt, a former fashion
blogger who later became chief marketing officer for Rebecca
Minkoff, recently negotiated what he terms “six-figure” ad campaigns for Adam Gallagher, a men’s fashion stylist and model,
and Marianna Hewitt, a beauty guru. Because campaigns that
feature mega-influencers such as Kylie Jenner can reach into the
millions, many talent agencies, including United Talent Agency
and One Management, now have influencer divisions.
Representation agreements, however, are the exception in
this world. O’Connor has a manager, but she makes most deals
herself, contacting brands directly or going through apps such
as Popular Pays or BrandSnob, online marketplaces where
advertisers post gigs. “What Airbnb did for hospitality, we’re
trying to do for advertising,” says Popular Pays founder Corbett
Drummey. Recently, Popular Pays listed sponsorship opportunities for Macy’s and Core Organic, a low-cal soft drink whose
name seems workshopped for millennials.
For now, many brands are sitting on the sidelines, wary
that these professional influencers aren’t all that influential.
“Unilever, Procter—they’re not there yet. That’s going to take two
or three years,” says Gary Vaynerchuk, CEO of VaynerMedia, a
new-media marketing agency that counts PepsiCo and AnheuserBusch InBev as clients. “Right now, you’ve got entrepreneurial people reaching out to these individuals on Instagram and
paying through PayPal. It’s rugged.” Or brands are wary about
fraud, which is rampant. Instagram followers can be purchased
from dozens of shady services that, for about $50, will populate
your feed with bots, doling out fake likes and generic comments
(“Beautiful!!!”). Saynt, of Socialyte, says he vets prospective
spokespeople before hiring them. “If somebody has 100,000 followers but they’re only getting 1,000 likes per post, we assume
50 percent of their audience is inauthentic,” he says. Advertisers
also struggle to walk the line between marketing and manipulation. Some influencers label sponsored content with “#sponsored” or “#ad,” but those hashtags are often buried at the end
of a post, and many people don’t bother marking sponsored
posts at all. O’Connor doesn’t, she says—followers understand
that most of her posts are paid.
Arsenic, for its part, has yet to make deals with marketers.
It’s “pre-revenue,” CEO Hawkins says, using a tech catchphrase
that essentially means, We’re figuring it out. Eventually, the plan
is to work with advertisers and share proceeds with models.
But Arsenic’s ambitions go beyond babes in bikinis: In April it
launched ArsenicAudio, a music-focused Snapchat account featuring interviews with DJs that attract more than 50,000 daily
viewers. “We want to be MTV in its glory days,” Hawkins says.
O’Connor says she hopes to use her status to follow the path
of other social media stars such as Andrew Bachelor, known
on the video-sharing app Vine as the comedian King Bach, and
Colleen Evans, of YouTube’s Miranda Sings, who used their
perches to win bigger roles on TV. “My goal is the mainstream,”
O’Connor says. “I’d love to have a network comedy. I don’t
feel like I’ve made it.” Some digital marketers argue that she’s
got it backward. “The real celebrities are [the influencers],”
Vaynerchuk says. “I’d much rather have a hit show on Snapchat
than on NBC or ABC.” 69
Etc.
Design
Bright Ideas
Restaurants draw in diners with new takes on neon. By Sierra Tishgart
a
CHICAGO
Happy
Camper
Nouveau pizza, opened
November 2015
“Neon has a retro feel
to it. I wanted something
iconic: The Great
Lakes give Chicagoans
something to relate to.
People in the Midwest
take a lot of pride in
where they’re from,
and Chicago is where
my heart is.”
—Clay Hamilton,
co-owner
70
g
American seafood,
reopened September 2015
o
CHICAGO
The Hampton Social
Fish shack, opened July 2015
“The ‘Rosé all day’ sign fits in with the overall ambiance of the restaurant: a bright space
that evokes a feel-good, vacationlike experience for guests. It gives our customers an
opportunity to capture something special and share it across social media, which has
resulted in an incredible amount of exposure. Neon done in a tasteful way can make a
huge impact.” —Brad Parker, founder of Parker Restaurant Group
“In 1986 I was the
manager of a restaurant
called Lucy’s Retired
Surfers Bar [in New
Orleans], and it had
a great neon sign, so
I’ve always been a fan.
Over the years, we’ve
had neon signs at the
Mermaid that said, ‘No
vacancy,’ with the ‘No’
flashing. We have a
really big storefront at
the new location, and
the logo called out to me
as something that would
look great in neon.”
—Dan Abrams,
co-owner
HAPPY CAMPER: PHOTO BY LUCY HEWETT FOR BLOOMBERG BUSINESSWEEK;
ROSE’S LUXURY: PHOTO BY STAMLER FOR BLOOMBERG BUSINESSWEEK
NEW YORK
The
Mermaid
Inn
Etc.
o
HOUSTON
Foreign Correspondents
Farm-to-table Thai, opened October 2015
“It fit, because we’re highlighting the bright and powerful flavors
of regional Thai food. Multicolored neon really creates that
excitement. It’s kind of a beacon that reaches out to you as you
drive down North Main Street.” —Chris Cusack, owner
o
NEW YORK
Le Coucou
French bistro,
opening June 2016
“Neon has always served
as a way to get attention,
as an announcement.
We loved the juxtaposition
of the refined graphic mixed
with the hyper-urban quality
of neon on the building.
There’s something frank, yet
evocative, about a neon sign—
it’s both sinister and fun.”
—Robin Standefer,
principal of Roman & Williams
Buildings & Interiors, which
designed the restaurant
g
WASHINGTON, D.C.
Rose’s
Luxury
New American tapas,
opened October 2013
“We didn’t want the sign
to give the impression we
were selling roses. Aaron
[Silverman, owner] was
hooked on green trim for
the restaurant’s facade. We
wanted our facade to be
welcoming and different
than the other storefronts
on the street, none of which
use green. The neon green
reflected the trim paint.”
—Brooke Horne,
creative director
71
Astrology
U
E
N
O
R
SC
O
H
By Ashleigh D. Johnson
Philadelphia: Hop Sing
Laundromat
72
Deal: Top-shelf spirits for
cut-rate prices (for example,
$7.77 for a Laphroaig
Quarter Cask Single Malt)
When: Tuesday-Friday, 5 p.m.-8 p.m.
Chicago: Barrelhouse Flat
Deal: $6 bourbon Old-Fashioned
When: Sunday-Thursday,
6 p.m.-8 p.m.
New Orleans: Brennan’s
Deal: Bottles of Champagne are
about half off (an $85 bottle of
Drappier Carte d’Or Brut is $38);
Champagne cocktails are $7
When: Tuesday-Thursday,
2 p.m.-7 p.m.; Friday, 8 a.m.-7 p.m.
“It is like they are giving the
Champagne away.”
—Garrick O., Google+
New York: Amelie Wine Bar
Deal: Flights of any three wines
off the by-the-glass menu for $12
When: Monday, 5 p.m.-7 p.m.;
Tuesday-Sunday, 4 p.m.-7 p.m.
Portland, Ore.: Standard
Deal: $1 Hamm’s pints
on Wednesdays
When: All day!
“Make no mistake; this place
is a dive. A gorgeous dive.”
—Janessa P., Yelp
OP
R
L L
OK, OK, if you’re
superproductive, here are
some of the best happy
hour bars in the country.
—Christopher Ross
Joh
e-ma nson’s we
ils
ek
She a are $15 a ly
“bus lso offers month.
iness
a
clarit $1,500
y ses
sion.”
E
J
Etc.
At the start of the month, Jupiter, Pluto,
and Mercury come together in a triangular
formation known as a Grand Earth Trine,
a harmonious planetary alignment that
will have you feeling as if you’re on a
lucky streak, especially when it comes to
making money. Instead of skipping out
to happy hour, put in some more time
on that report you’ve been grinding away
on, and you can expect a windfall by the
end of the month. Also, take a hard look
at your personal finances; get rid of bad
money habits, and adopt better ones.
On the 4th, the new moon will be in
Gemini, making that a great day to update
your social media strategy. Gemini, the
sign of communication and learning, also
rules community, specifically the sharing
of small bits of information among
members. Then on the 12th, Mercury, the
planet of communication and intellect,
moves into Gemini, which will give
your negotiations a power boost. It’s all
building to the 17th, when Venus, the
planet of money and attraction, moves
into the house of Cancer, which rules
domestic matters and feelings of security.
With your social media messaging set,
you’ll be able to use this time to nurture
your clients and staff. Could the office
break room use better coffee? Go ahead
and spring for it.
Make sure you aren’t fooling
yourself in any of your decisionmaking. Neptune goes into retrograde
on the 13th in P i sces, but you
probably won’t even notice. Neptune
is the planet of illusions, and Pisces
is the sign of the subconscious and
self-sacrifice.
1200
Trine (noun, trīn)
When two planets form
a 120-degree angle, with earth
in the middle; in a Grand
Earth Trine, three trines sync to
create an equilateral triangle.
g
It seems like a paradox, but giving
yourself less wiggle room can make
it easier to take a bold step, says
Betterment investing director Dan
Egan. Log in to your brokerage account
once a month or rebalance it only when
the market swings a certain amount.
“Things like selling out of safe assets
can be tough,” Egan says. “That’s why
you commit to it ahead of time.”
Joyride Coffee sells cold-brew—
on tap. Lease a professional-grade
kegerator, then select from
kegs of coffee made with beans from
quality roasters such as Counter
Culture, Four Barrel, or Parlor.
joyridecoffeedistributors.com; from
$190, which covers the leasing fee
and an 80-serving keg of coffee, with
additional kegs starting at $140
—Oliver Strand
Ra
Rant
PHOT
PHOTO
O
OTOG
TOG
OGRAPH
AP BY C
CARO
CAR
ARO
A
AR
OL
LIN
LINE
LI
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NE TOMPK
N
OMPKIN
OMPK
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NS F
FOR
FO
O
OR
R BLO
OO
OOMB
O BER
RG
G BU S
SINESS
INESS
NESS
N
ESSWE
WEEK
WEE
W
E K
E
ven i n cass ua
u a l wo rk
k places
p l es, can
peop
pe
ople
le wea
ar le
egg
ggin
ings
gs?? “P
“Pro
roba
babl
by
n ,” sa
not,
say
ys Viic
c to
oria
ia Gu
Gutier
ierre
rez,
z,, a
31-y
31
yea
earrr- ol
old
ld ma
mana
age
geme
mentt con
onsu
ull-tant in At
Atla
lant
la
ntaa. She
nt
he’s largely
y right.
Only
y 36 p
pe
erccent off employers
y
sur-v y in a 2015 Society
veyed
y of Human
Resource Management report
a
allow
workers to go casual more than
once a week. And offices that permit
p
relaxed dress often barely tolerate jeans.
j
Leggings? You’re loopy
y from staring at
y
your
monitor too long..
B if y
But
you want to be on the right
s
side
of history,
y this is the time to accept
that leggings—and their parent clothing
g
category,
y athleisure—are hitting
g
O
Outdoor
Voices
s
a hot desk
d k near you. Not just
s
gg
stretch crepe jogger
a
accept—celebrate.
l b
Already,
l dy brands
b
d
pants, merino mockand
l g l
d
such as Lululemon Athletica, Nike, neckk long-sleeve,
merino
me o crew
c e neck
ec
and Athleta sell workout attire
($120,, $85,, and $115;;
trendy
y enough to transition from
outdoorvoices.com))
o
SoulCycle
y
to Juice Generation
y
f
to wherever you’re
meeting friends
d
k
d
to continue drinking
your dinner.
f off companies want to
Now a handful
m
f
make you as comfortable
as you are
stylish
y
ffrom 9 to 5.
Outdoor Voices sells p
performance
gear in the same muted palette of black
a
and
navy
yy
you’re already
y buying
y
for the
office. (It will cost the same, too.) Worn
t
together,
its stretch crepe joggers
j
and
m
merino
wooll long-sleeve
l
l
T-shirts
h
and
d
s
l k more elegant
l g
h
h
sweaters
look
than
the
blue jeans and ffashion sneakers that
dominate some workplaces today.
y On
its website, the company
y recommends
st
stress-relieving
-r
stretches you
can do
y
d
g a conference
f
during
call
o r a rou n d t h e wate r
cooler. Seriously,
y though:
I our bosses are already
If
y
pa
p
payi
ay
yiing
n g fo
orr us to
to d o y
yo
oga
ga
iin
n the
he offic
ffice a
ass a per
e rk
tto
o keep
eep u
ee
uss the
here
re , w
re
re,
wh
hy
sh o
sh
ou
uld
dn’
n’t we
we dres
re
ess
ss as
if we’’rre
if
e rea
eady
dy t o d
do
o it
an
a
nyt
y tim
ime,
e, any
nywher
wh
w
herre
e??
An
A
n othe
oth
ot
he
her
e r se
s e lll er
e r,
er,
online
shop
Ca
C
a rbo
rb
b on
o n 38,
38
3
8, o
offf
f fe
f e rs
rs a
WEAR YO
E .
Etc.
guide for wearing
g
g athleisure at work.
b on38
l yees
y es p ose in t h
Ca
a rb
rbon
38 e mp
mplo
loye
heir
he
irr
ty
ypi
p cal work wear, outfits such
ch
h
ass an al
all
lll-bl
blac
blac
ack,
k, snu
k,
ug ne
eop
pre
ene
e
dress with a matching jjacket
t att has mesh sleeves. “A prep-inspired
th
p p
p
top paired with a cool, printed pair off
spandex is my
y go-to look,” says
y one, out-fitted in Carbon38’s $130 Polonium legggings, which feature a gloomy
y sea printed
on a poly-Lycra
y y
blend. “Active wear is defff
initely
y work-appropriate,” says
y Caroline
g
f
Gogolak,
co-founder
and president..
Of course, the co-founder and presp sident of an active-wear company
y is
g
going
to say
y that. The sector’s weekend
dominance hasn’t been enough to
maintain its growth; sales have fallen
6p
percent since the beginning of 2015,
according to SportsOneSource, a data
research firm. But that doesn’t make
Gogolak wrong—brands have long spearrheaded shifts in workplace
p
fashion.
f memory,
y but
This might be a painful
in the
khakis
became
h 1990s,, Dockers
k
kh
k b
part
of the business-casual
uniform
p
b
for men because of a marketing
g cammpaign by
y parent company
y Levi’s. Levi’s
even created
dAG
Guide
d to Casuall Business
Wearr to promote
p
looks that all happp
pened
to incorporate
p
Dockers. It was
mailed to 25,000 HR managers. There
w
were
seminars, fashion shows, and
f
f anyone
y
a toll-free
number for
Jason Mejias,
J
j
with
h questions.
i
33,, is an aerialist,
3
a
,
acrobat,, and
a
f
y lives,
Professionals
have busy
cabaret p
performer
c
and it should be easier to tran-sition from work to play.
y How sad is it
that a Nielsen survey
y found in 2016 that
75
5p
percent of working women change
into less oppressive clothing when they
y
get home? “Without leggings, women are
b
basically
lly stuck
k with
h work
k slacks,
l k which
h h
arre
a
re no
not
ot ac
acttu
actu
ual
ally
ly thing
hiin
h
ng
gs w
wo
omen
me
m
en we
wear
ar any
ny
place
pl
acce but
but wo
bu
worrk
work
k and
nd are
re pre
rett
tt y mu
tt
tty
much
h un
niii-verrssalllly
ve
vers
y un
nfl
flat
atte
teri
te
r ing
ng an
nd
d un
nc
com
om
mfo
fort
fo
rttt-rtab
a
blle
e,” say
ays E
Elliz
izab
abet
abe
eth C
Co
offin
ffin-K
ffi
-Ka
-K
Kar
arli
lin,
n, 27,
n,
7, a
sscchoo
h
ho
hool
oo
oll ad
ad
dv
vis
i se
err in Sa
S
San
an Frran
anci
cisc
iscco.
o. S
So
o if
if ath
hlle
eis
isure
urre in
u
in th
he
e offi
fficce off
ffen
ff
end
en
dss you
ur sse
e
en
nse of
nse
ns
of
prropri
p
priet
riie
etty
y,, get
et int
nto a ssh
nto
havas
avas
av
asan
ana posse an
and
d
tak
ta
ke som
ke
ome d
de
eep
p brre
eaths
eat
aths.
at
hss. Ev
Eve
erry
ytthi
hiing
ng
n
g’s
g’
’s
go
g
oin
ng to
to be OK
OK. S
Atth
A
thl
hleeiisu
hlei
issu
urree com
omp
mpa
pa n
pani
niie
ies
es arree vyyiing
ng to no
norm
nor
rmal
rmal
aliz
ize lle
ize
legg
egg
ggin
ings
in
gs in th
he ooffi
ffice
ce
Byy Kim
m Bh
ha
asi
sin
in an
and Re
Rebe
eb
beecc
cca Grreeeeenfi
nfififiel
eld
el
ld
K
73
74
T
Travel
l
THANK GOD
WE’RE HERE
W
“Social-impact” vacations take off
By Sheila Marikar
hen you think about a
summer getaway, Detroit
might not be the first place
on your list. But on June 10,
that’s where Nathalie
Molina Niño, 40, an adviser
to female entrepreneurs,
will fly to from her home
in New York. She took the same trip last
year, paying $1,500 along with 125 other
bright, young, civic-minded individuals
to tour the city and talk to the business
community. The highlight: a brainstorming session with Amy Peterson,
co-founder of Rebel Nell, a company
that hires disadvantaged women to turn
chunks of graffiti into jewelry. “We spent
close to three hours with her,” Molina
Niño says. “We created a Facebook group
so after we left she could stay in touch.”
Attendees were booked at the Greektown
Casino-Hotel and did a nighttime biking
tour, Molina Niño says, but mostly they
were there for one reason—to offer their
opinions to struggling business owners.
It’s not a weekend on the beach,
but excursions like these are more and
more popular among a new generation
of mostly millennial travelers. Molina
Niño’s trips to Detroit were organized by
Breakout, a leading company in what’s
known as the social-impact travel industry. Unlike “voluntourism” programs
such as Habitat for Humanity, which
appeal mainly to students, Breakout targets
professionals age 29 to
36. A third of its 1,500 core
members work in tech, a
quarter in media and creative fields; 98 percent
went to a four-year college.
Becoming a member requires an interview. “We or one of our ambassadors
will have a sitdown to ensure we’re
getting a good fit,” says Michael Farber,
32, who founded Breakout with Graham
Cohen, 31, in 2014.
The two met in New York in 2009
while working for a commercial real
estate company. Breakout evolved
out of their shared desire to “create a
bu
usiness where we spent all day meeting
new and interesting people,” Cohen
says. They started by combing through
sa
“40 Under 40” lists for 100 scenesters in
“4
diifferent fields who might benefit from
kn
nowing one another and invited them to
network in Miami. Two Detroit residents
ne
who went on the Miami trip persuaded
w
th
he founders to host a retreat in their city,
an
nd since last June, Breakout has also
de
escended on Baltimore, Nashville, and
Miami again with dozens of do-gooders.
M
Although it’s tiny, the social-impact
travel market is growing. Last June,
tr
Carnival Cruise Line started Fathom,
which lets passengers attend onboard
w
se
elf-improvement seminars and partake
in
n on-the-ground “impact” activities
such as making ceramic water filters in
su
th
he Dominican Republic. “We spent an
en
normous amount of time on qualitative,
etthnographic research, really studying
co
onsumers’ hunger for purpose,” says
Tara Russell, Fathom’s president. “We
found this hunger. We quantified it. We
built the business model.”
What’s harder to quantify: Do these
trips do anything more than make the
people on them feel good about themselves? There are no “next steps” after
a Breakout weekend ends; the onus
is on each attendee to follow up with
locals. (Molina Niño says activity in the
Facebook group she set up with Peterson
is occasional at best.) Some bridle at
the pretension inherent in the mission.
Participants parachute in, like a oneperson McKinsey MASH unit, and ask
how they might share their vast intelligence. “It’s patronizing,” says a former
“Breaker,” who asked to speak anonymously because the founders are friends.
Farber and Cohen counter that they
urge Breakers to engage
with underpr ivile ged
neighborhoods closer to
home, too, in local chapters. “We have people in
the network in Baltimore,
in New Orleans, in Miami,
in Detroit , and even
though we might not do as much programming as we like, they’re still masterminding with us,” Farber says. Case in
point: Ashley Sumner, 27, who lives
in Los Angeles and heads Breakout’s
chapter there. “I got to Detroit and was
like, ‘What else do I need to see?’ ” she
says. “I think I’m struggling because I
didn’t sleep last night. These people have
been struggling all their lives.” “WE FOUND THIS
HUNGER. WE
QUANTIFIED IT”
ILLUSTRATION BY BRAULIO AMADO
Et
Etc.
What I Wear to Work
IGOR
HADZISMAJLOVIC
Like that tie.
Sometimes, I like it
when a tie doesn’t make
sense with the rest of
the outfit—it’s a little bit
of craziness.
STETSON
43, co-owner,
Employees Only,
New York
SOCK HOP
What do you do?
I’ve been bartending for
almost 20 years. Twelve
years ago, my partners
and I opened a cocktail
bar, Employees Only,
in the West Village,
and next month we’re
opening another location
in Singapore. I’m the
jack of all trades—I
bartend, I manage the
floor, I bus tables, even
kick people out.
PHOTOGRAPH BY B. O’BRIEN FOR BLOOMBERG BUSINESSWEEK
How do you dress
for the job?
Things are always
getting spilled, so you
can’t be too fancy. As
long as it’s comfortable
and lets you do your
job, that’s all you’re
looking for.
Etc.
UNIQLO
TIE BAR
Your shoes must be
comfortable.
Yes, definitely. I got my first pair
of Florsheim shoes eight years
ago. There’s this scene in
Chinatown where Jack Nicholson
loses a shoe, and he shouts,
“Goddamn Florsheim!” Ever
since I saw it, I’ve associated the
shoes with that movie.
75
UNIQLO
And your job lets you
wear a fun hat!
I found this one at Meyer’s
hat shop in New Orleans,
which is kind of a big deal
in the hat world. It’s got
the perfect-size brim, and
it never loses its shape.
That’s a fun jacket, too.
It’s forgiving and gives
me a nice shape. You
can punk it up with the
right accessories.
Your shirt is
custom?
Yes, made by one
of our friends
who works here,
actually.
FLORSHEIM
Did you specify that
you would be
wearing it untucked?
I always wear my
shirts untucked. I
keep it casual. People
are coming here from
offices, so they should be
relaxed and comfortable.
Business hours are over—
now it’s cocktail hour.
Interview by Jason Chen
JO ANN JENKINS
Chief executive officer, AARP
High school graduation
“My father was
a merchant marine,
and my siblings
are all 8 to 10 years
older than me, so
when my father was
out at sea, it was
just my mother and
me at home.”
Education
Theodore High School,
Theodore, Ala.,
class of 1976
“It’s a Jesuit school, like
a close-knit family. You got to
know your professors closely
at a time when that was
unusual in universities.”
Spring Hill College,
Mobile, Ala., class of 1980
Work
Experience
Greeting President
Reagan, 1981
“One of the things I’m proudest of is working
closely with Secretary of Transportation
Elizabeth Dole to put women in leadership
positions throughout the department.”
1980
Voter outreach worker,
Ronald Reagan campaign
1981–85
Executive assistant, U.S.
Department of Housing
and Urban Development
1985–87
Special assistant to
the secretary, U.S. Dept.
of Transportation
1987–90
Partner, Quality
Management Services
1990–93
“The big issue was, how
do we digitize content? We
came up with the digital
standards for preservation
that libraries and industries
around the world use.”
With
Michael
Douglas,
2015
“I’ve been
focusing on
how increased
longevity gives
us another 20 to
30 years to
do something
different. We
have 38 million
members.”
Director, Office of
Advocacy and Enterprise,
U.S. Dept. of Agriculture
1994–2007
Senior adviser, chief of
staff, Library of Congress
Checking out a
replica of the
Capitol grounds at
the Capitol Visitor
Center, 2008
“I tried not to make any unnecessary
enemies in Washington. You never know
who will be your boss one day.”
“It’s a fascinating
place. There’s more than
4,000 staff members,
with employees who know
over 260 languages.”
“I’d always wanted to run a
nonprofit. In two years, we went
from 800,000 donors to 2 million.”
2007–10
Chief operating officer,
Library of Congress
2010–13
President,
AARP Foundation
2013–
Present
COO, executive vice
president, CEO, AARP
Published by
PublicAffairs, 2016
Liife Lessons
Watching President Obama sign the
Improving Medicare Post-Acute
Care Transformation (Impact) Act
of 2014 in the Oval Office
”3
. “Develop a reputation as a straight talker. Make your words mean something when you say them.”
“I’ve
worked for
or with every
president or
first lady since
Reagan.”
e.
1. “Barriers are only as big as you make them.” 2. “Treat people the way you want to be treated, whether it’s the person at the security desk or the executiv
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d I Get
t Here?
Clockwise from top: Timothy Greenfield-Sanders (1).
Getty Images (3). Courtesy subject (2)
Etc.
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