The Wall Street Journal Education Program
Weekly Review & Quiz
Covering front-page articles from May 27, 30 - June 2, 2006
Professor Guide with Summaries Summer 2006
Developed by: Scott R. Homan Ph.D., Purdue University
Questions from The First Section
High Tech's Latest Hot Job? Selling Online Ads
By KEVIN J. DELANEY
May 27, 2006; Page A1
http://online.wsj.com/article/SB114869829249865032.html
With ad sales on the Web booming, so is the market for online-ad salespeople, sparking
intense competition for talent that is pushing up compensation and prompting
comparisons with the earlier dot-com boom.
Keith Richman, chief executive of Web-video site Break.com, has taken to creative
measures to find ad-sales staff. After months of searching with no success, he last week
offered acquaintances a 50-inch plasma television set to anyone who connects him with
an ad-sales hire.
One referral yielded fruit, and Mr. Richman filled a sales vacancy Monday. But he's
paying about 50% more in compensation than he had planned a year ago -- plus the cost
of the plasma TV set. "We're in a rapidly growing business with a limited number of
people with the skill set," Mr. Richman says. "The question is, are we in a bubble or is
this a reality of a new market?"
Either way, hiring competition is fierce in online ads sales, whose resurgence was a
driver in alliances between eBay Inc. and Yahoo Inc. and Google Inc. and Dell Inc. this
past week. U.S. online-ad revenue increased 30% last year to $12.5 billion, according to
the Interactive Advertising Bureau trade group and consultant PricewaterhouseCoopers.
That has left Microsoft Corp., Time Warner Inc.'s AOL Internet unit, Facebook Inc.,
News Corp. and others scouring for top performers. A week ago, News Corp.'s Fox
Interactive Media division lured away Michael Barrett, executive vice president at AOL
Media Networks, which handles advertising and marketing for AOL, to be chief revenue
officer.
While Internet companies, led by Google, have built large-scale automated Web systems
for selling online ads, a majority of online-ad sales by revenue still is handled the oldfashioned way, by salespeople. The need for a human sales touch is especially strong as
traditional media companies make video and print content increasingly available on the
Web -- and support them with ads -- and traditional marketers such as packaged-goods
companies buy more advertising online.
The talent pool is small partly because of the youth of the online-ad-sales industry. Also,
some Internet-ad salespeople switched to other careers during the downturn in 2001.
Those who stuck with it generally have been richly rewarded with cheap stock options
and bonuses, and thus have little financial incentive to jump from their current jobs.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 1 of 28
Some industry executives warn that a shortage of salespeople could be holding back
revenue growth at some Internet and media companies. Small or fledgling companies
without brand names or resources to draw on could also be losing out as they go head-tohead with larger rivals for hires. And some industry executives caution that competition
for talent could raise the costs of hiring and retaining a sales force. Some worry that
could weigh on profitability, though salespeople earn a lot of their compensation through
commissions, which rise and fall with sales.
"I think we're all experiencing the same thing: a lot of poaching, a lot of phone calls,"
says Michael Kelly, president of AOL Media Networks. Mr. Kelly adds: "We were the
poacher in many cases."
Yahoo executives last year created a program to recruit and train salespeople from radio,
cable TV and print advertising. Recruits spend their first six to nine months selling ads
being coached by Yahoo veterans.
Worries About Theft
The Internet company started the program partly out of concern that rivals would try to
steal away Yahoo's sales team -- one of the largest, most experienced online-ad sales
staffs. "We're on everybody's list," says Gregory Coleman, Yahoo's executive vice
president for global ad sales.
Yahoo's concerns last year about poaching proved well-founded. Vince Messina, a highprofile Yahoo sales executive in Los Angeles, earlier this month jumped to Microsoft.
Mike Murphy, Yahoo's vice president for media sales for the Western region, in March
moved to social-networking startup Facebook. Mr. Murphy says he took a 50% cut in
base pay, but commissions at Facebook could allow him to top his Yahoo compensation.
Recruiters and Internet executives say ad salespeople with roughly five years experience
can make in the range of $125,000 a year in base salary, and the same amount in bonuses
and commissions for hitting their sales targets. The booming market means that many
salespeople are, in practice, exceeding those targets and earning even higher-percentage
commissions on the extra amount.
Total compensation for senior salespeople is up by roughly $50,000 from two years ago,
says recruiter Phyllis Egan. She says she filled 50% more online-ad posts in 2005 than in
2004, and this year is off to a rapid pace. Jeff Lanctot, general manager of Avenue
A|Razorfish, the interactive marketing unit of Seattle digital marketing company
aQuantive Inc., says he is contacted between five and 10 times a week by recruiters and
companies seeking his help in locating salespeople. "It's not uncommon for the people
contacting me to float half-a-million-dollar packages" for vice president of sales positions
or above, Mr. Lanctot says.
In early March, Todd Leslie, 35 years old, quit his job as a senior account executive at an
Internet-advertising company. Within days -- and without looking very hard -- he had six
job interviews lined up. As he neared a choice between four job offers in the middle of
last month, one Internet company said it would make Mr. Leslie a formal job offer
without having ever met him. (Mr. Leslie said no thanks.) He says his compensation,
including expected bonus, jumped 35% when he accepted an offer from Atom
Entertainment to be East Coast regional sales manager last month.
A push by TV networks, News Corp. and other media companies to move content and
ads online is fueling the market. Also, Internet start-ups are once again flush with
venture-capital cash, and many are banking on ads for revenue.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 2 of 28
Another major catalyst is Microsoft, which is in the midst of a massive push to increase
its online-ad business. In the past year, the company's MSN online unit has doubled to
100 the headcount in its New York office and doubled to 120 the number of account
managers it has across the U.S., says MSN Sales Director Lisa Utzschneider. "We're
going toe-to-toe with some of our direct competitors to hire some of these candidates,"
she says.
1. US online ad revenue increased _____ last year to $12.5 billion, according to the
Interactive Advertising Bureau trade group and consultant PricewaterhouseCoopers.
a. 10%
b. 20%
c. 30% Correct
d. 40%
2. Recruiters and Internet executives say ad salespeople with roughly five years
experience can make in the range of $________ a year in base salary.
a. 25,000
b. 52,000
c. 75,000
d. 125,000 Correct
Hackers' Xbox Game: Defeating Microsoft By Decoding Console
By BOBBY WHITE
May 30, 2006; Page A1
http://online.wsj.com/article/SB114895368789165954.html
SAN DIEGO -- Videogame fans braved long lines last fall to be among the first to buy
Microsoft Corp.'s Xbox 360 player. Andrew Huang got one so he could be among the
first to tear it apart.
The remains of Mr. Huang's Xbox 360 are now a tangle of wires and parts on a
workbench in his home office. He has spent six months dissecting the box, studying
many parts under a microscope and probing the deepest nooks of its software. "This box
is too interesting to ignore," he says.
The 31-year-old Mr. Huang, who uses the nickname "Bunnie" on- and offline, is part of a
subterranean culture of hackers who are racing to "crack" the Xbox 360 game console
and make it do things Microsoft never intended. Mr. Huang, a freelance technology
consultant in San Diego, tore apart his box to figure out ways to run his own software on
the device.
Most videogame consoles, unlike personal computers, are designed only to handle games
and hardware that the console makers approve. Microsoft and other console makers don't
want users running pirated games or other software from companies that haven't paid a
licensing fee.
But since the early 1980s, enthusiasts have tinkered with the consoles to make them do
more. Hackers have designed chips to plug into the machines to circumvent their
security, letting them play pirated games and, more recently, browse the Internet. Despite
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 3 of 28
copyright laws that prohibit hardware and software tampering, a profitable underground
industry has blossomed to sell chips to defeat the security systems.
With the previous version of the Xbox, hackers were able to manipulate the console to
copy games and store them on its hard drive. This allowed players to rent games rather
than purchase them.
Hoping to protect its system against hacking, Microsoft customized the new Xbox 360's
hardware, instead of using off-the-shelf components. It added layers of additional
security.
To hackers, that presents a challenge. So far, no one is believed to have fully cracked the
Xbox 360, though some hackers in Denmark claim they have found a way to play some
copied games on it. All over the world, teams of hackers are working to claim bragging
rights as the first to wholly decode the machine and find the loopholes in its security
system. Mr. Huang says he doesn't sell tampered chips and just wants to run self-created
videogame software on the box.
"It's about overcoming the challenge Microsoft has set out there," says Mr. Huang, who
wears his hair in a ponytail and has a doctorate in electrical engineering from the
Massachusetts Institute of Technology. "They've bragged about the security for the Xbox
360, so now it's like: Well, let's see."
Microsoft isn't happy about the hackers. Protecting intellectual property is a "high
priority" for the company, says spokeswoman Molly O'Donnell. The company declined
to comment about the security of the XBox.
Microsoft's first Xbox, released in 2001, was a favorite target of hackers. Numerous Web
sites with names like Modking.com and Xbox-modchip.com sprang up to sell hackerdesigned chips for it.
Underground wholesalers, installers and manufacturers profit from finding ways around
the original Xbox's security flaws. "I don't see the reason to get a nine-to-five job or work
part-time after school," says an Xbox maven in Ontario, Canada, who buys and sells
modified chips in his spare time. He describes himself as a 14-year-old student and
estimates he made $50,000 selling microchips and other hacker-designed products for the
original Xbox last year.
He says he sells chips to Web sites and middlemen who place the chips in the Xbox.
Because he doesn't provide additional software necessary to skirt copyright protections,
he does not see his actions as unlawful. "I'm not doing anything wrong," he said.
The Digital Millennium Copyright Act, passed in 1998, makes it a crime to circumvent
anti-piracy measures built into hardware and software. Proponents and critics of the law
say it is vague about the legality of consumers' tearing apart their game consoles and
altering them for their own use. But several federal agencies, including the Justice
Department's Computer Crime and Intellectual Property section, recently raided stores in
Maryland and California that sell modified Xboxes. They have prosecuted some sellers.
That hasn't discouraged the race to decode the Xbox 360. Many hacking groups, with
names like Team Xecuter or Team Xodus, collaborate via the Internet, divvying up
responsibilities along lines of expertise. They discuss their progress online in chat rooms.
Mr. Huang, whom friends nicknamed Bunnie after the deadly rabbit in the film "Monty
Python and the Holy Grail," has been tinkering with electronics since he was 10 years
old. The native of Kalamazoo, Mich., was at MIT getting his doctorate in 2001 when he
cracked Microsoft's original Xbox.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 4 of 28
At the behest of a professor who told him his actions might be illegal, Mr. Huang in 2002
let Microsoft know what he had done. Mr. Huang assured Microsoft he had no ill intent,
and the company decided not to take legal action against him. Microsoft confirms the
account.
In 2002, Mr. Huang presented his tampered Xbox at a conference on computer-security
technology. A year later, San Francisco-based No Starch Press published his book
"Hacking the Xbox: An Introduction to Reverse Engineering," a step-by-step guide to
cracking the Xbox. The book turned him into a celebrity hacker. Microsoft declined to
comment on the book.
When the new Xbox 360 had its debut last November, eager consumers snapped up the
highly anticipated device. Mr. Huang complained in an online chat room that he couldn't
find one. Three weeks later, a console appeared on his doorstep, apparently sent by a fan.
Mr. Huang quickly tore open the machine, pulling out components such as memory chips
to examine them more closely. He then plugged one of the chips, called a flash ROM
chip, into a device called a ROM reader. Using the reader, Mr. Huang was able to
observe how data traversed the system and see where the information was finally stored.
Once a month, Mr. Huang also meets with other local hackers, including an 18-year-old
whose goal is to play Apple Computer Inc.'s software on the Xbox 360. Over nachos at a
Mexican restaurant recently, they swapped information and discussed their progress.
Thus far, the group has made only small breakthroughs, such as figuring out a way to
manipulate game images. Mr. Huang and his cohorts predict it will take another nine
months before they can fully crack the console.
So they were taken aback when a Dutch hacker dubbed "the Specialist" emailed Mr.
Huang in February claiming he could play copied games on the Xbox 360 by altering the
console's DVD player. Several of Mr. Huang's pals tested the method and confirmed that
it works, though they don't consider it a full decoding of the machine. The Specialist
couldn't be reached for comment.
With other hackers appearing to make more progress, Mr. Huang admits he may not be
the first to fully crack the Xbox 360. "Things are different from a few years ago," he says.
"The stakes are higher for Microsoft and the hacking community has intensified its
efforts."
3. Microsoft's first Xbox, released in _____, was a favorite target of hackers.
a. 1998
b. 1999
c. 2000
d. 2001 Correct
4. Some Xbox 360 hackers in _____ claim they have found a way to play some copied
games on it.
a. Denmark Correct
b. England
c. France
d. Boston
City Lite Fake Towns Rise, Offering Urban Life Without the Grit
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 5 of 28
By THADDEUS HERRICK
May 31, 2006; Page A1
http://online.wsj.com/article/SB114904207386167125.html
PLANO, Texas -- On a recent Friday night, Bishop Road was hopping. Land Rovers and
Lexuses inched down the two-lane street. On the brick sidewalks, a steel band played
Bob Marley tunes as couples strolled past boutiques, bars and restaurants, lines spilling
out the door.
Until a few years ago, Bishop Road was a grassy field in the midst of a gargantuan office
park. Today, it's the main drag of Legacy Town Center, a 75-acre development 20 miles
north of Dallas that's home to 4,000 people. The project has been such a hit that
developers are building on an additional 75 acres across the street.
Legacy Town Center is one of dozens of faux downtowns popping up across the country,
from Kansas City to Washington, D.C., spurred by a demand for urban living scrubbed of
the reality of city life. A careful mix of retail, residential and office space built with
traditional materials such as stone and brick, Legacy looks like a city but has neither
panhandlers nor potholes. Many residents rarely venture even to downtown Dallas, which
has been trying to turn itself into place to live for almost a decade.
There's too much riffraff down there," says Ron Pettit, a 36-year-old contractor, as he
snacks on brie and grapes at a table outside Bishop Road's Main Street Bakery and
Bistro.
In Flagstaff, Ariz., buyers have snapped up almost all of the 125 residential units on offer
at Presidio in the Pines, a town center under construction on 91 acres of forest. North of
Charlotte, N.C., on the site of a former dairy farm, is Birkdale Village, which consists of
52 acres intended to recall a New England coastal town. It features 320 apartments, most
of which are stacked above shops and restaurants.
Even though these faux downtowns contain tinges of suburbia, they're taking advantage
of a growing backlash against the sprawl that rings Dallas and other U.S. cities. The
reaction began in the 1980s with the rise of New Urbanism, a movement of architects and
planners calling for a return to traditional towns where people work, shop, live and play.
Among the most prominent of those theorists was Andrés Duany, a leading figure behind
Seaside, a planned pedestrian community on the Florida Panhandle that was the setting
for the 1998 movie, "The Truman Show." Suburban growth, Mr. Duany argued, was
unsustainable because it consumes land at a high rate while creating horrendous traffic.
In the 1990s, Americans started venturing back into cities that had emptied out in prior
decades. Basking in the glow of falling crime rates and glamorized by television shows
such as "Seinfeld" and "Friends," cities themselves began to woo residential and retail
development.
For a developer, however, it's much easier to make a fake city than it is to work on real
downtowns with their patchwork landholdings and planning restrictions. The developers
of Legacy were able to carve up the land pretty much as they pleased. The result: more
than 1,500 apartments and town houses, some 80 shops and restaurants, two mid-rise
office towers and a Marriott Hotel.
The concept also attracted developers looking for alternatives to malls, a concept rapidly
losing favor among shoppers. Only one mall has opened in 2006, according to the
International Council of Shopping Centers, a New York City-based trade group. By
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 6 of 28
contrast, more than 60 so-called lifestyle centers -- outdoor shopping areas with plazas,
fountains and pedestrian streets -- are planned to open this year and next.
To attract more shoppers, and therefore retailers, developers started building homes on
these sites. Steiner + Associates of Columbus, Ohio, a leading builder of town centers,
initially included only retail and office space at the $300 million Easton Town Center
near Columbus, which was completed in 2001. When another developer added
apartments across the street, Yaromir Steiner, chief executive of Steiner + Associates,
noticed the low vacancies and high rents. "We realized how a commodity apartment
could turn into a specialty product," he said.
5. Legacy Town Center is one of dozens of ______ popping up across the country.
a. faux downtowns Correct
b. 100 screen movie theaters
c. public pools
d. modern library
6. A movement by architects and planners calling for a return to traditional towns where
people work, shop, live and play is called ______.
a. city life
b. new urbanism Correct
c. rehabitation
d. urban renewal
Collision Course Why Big Airlines Are Starting a Fight With Business Jets
By LAURA MECKLER
June 1, 2006; Page A1
http://online.wsj.com/article/SB114912609016268235.html
Airlines normally go out of their way to foster good relations with well-heeled business
travelers. But they are picking a fight with some of the most elite fliers in the sky over a
significant part of the price of air travel: air-traffic-controller fees.
The fight pits the major airlines against the thousands of business jets that ferry
executives around the country in a battle over more than $10 billion a year in taxes and
fees that go to support the Federal Aviation Administration.
Business jets represent more than 18% of all flights, but they pay just 5% of those FAA
fees. Infuriated airlines, which represent some two-thirds of flights but pay more than
90% of the fees, have long complained they are overpaying. Now they've launched a
high-stakes lobbying battle to get business jets to shoulder a bigger share of the cost of
today's system and of an advanced, satellite-based system planned for the near future.
"We've in effect been subsidizing Lee Raymond of Exxon Mobil and all these corporate
guys flying around," says Jim May, top lobbyist for the Air Transport Association, the
main airline trade group, referring to the oil giant's recently retired CEO. "I have a hard
time thinking of Lee Raymond as a 'little guy' who needs and deserves subsidies from the
airlines."
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 7 of 28
The business-jet owners argue they shouldn't be hit with higher fees because they don't
cost as much for the FAA to handle. The big expense in air-traffic control, they say, is
squadrons of airliners arriving at major airports during rush hours.
Ed Bolen, top lobbyist for the National Business Aviation Association, adds that Exxon
Mobil Corp. is not typical of his group, which includes many small companies as well.
He is teaming up with mechanics who work on business jets and a powerful lobby group
of private pilots to make his case. An Exxon spokesman, Russ Roberts, says that if Mr.
May has a problem, he should take it up with policy makers and "not single out any one
corporation."
The clash between the business jets and the airlines is a classic battle between moneyed
interests tugging at Congress to achieve their ends. The current system of levies is set to
expire next year, giving Congress an opportunity for a broad overhaul.
The outcome will affect the cost of flying, both for passengers on airliners and corporate
jets. It also could help determine whether the FAA ultimately can afford a multibilliondollar switch from today's radar system, which tracks airplanes via beacons on the
ground, to a more advanced system that would pinpoint airplane locations using satellite
communication. Because controllers and pilots would know with more precision where
each plane is, the change is expected to allow planes to fly closer together, increasing the
safe number of planes in the sky and reducing delays.
The airlines argue that all jets, commercial and corporate, should pay similar fees for airtraffic-control services. After all, they say, only one plane can take off at a time and all
planes take up space in the sky, no matter how many passengers are on board. Business
jets counter that they should pay less because it costs less to serve them. Typically, Mr.
Bolen says, they use smaller airports and avoid the most-congested routes. The airlines'
argument, he says, is like a dinner with a big group, where the people who order the
most-expensive meals insist on splitting the bill equally.
Mr. Bolen's board members include some of the nation's biggest and richest corporations.
But in search of a politically appealing grassroots face, he's working to line up the small
businesses that make up a majority of his members and the blue-collar workers who
make, fly and maintain the jets.
He also holds a potential ace: a strong alliance with the Aircraft Owners and Pilots
Association, which represents 400,000 private pilots known for their devotion to
weekend flying and aggressive advocacy on issues they care about. Under the airline
plan, these propeller-powered planes wouldn't have to pay more. But AOPA worries that
user fees for business jets will set a bad precedent and, eventually, they will apply to
everyone. Both AOPA and the business-jet group also argue that user fees would be
complicated and expensive to administer.
The airlines, meanwhile, are working to recruit groups associated with commercial
aviation -- airplane manufacturers, airline unions, suppliers and travel and tourism
professionals, plus a half million airline workers -- into a broad coalition to lobby
Congress.
Sharp Divisions
A decade ago, when Congress last debated FAA funding, the airlines were sharply
divided. The major airlines tried to shed costs by ganging up on Southwest Airlines and
other low-cost carriers, which were generating less in taxes because their ticket prices
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 8 of 28
were lower. But in the end, both sides wound up with tax increases -- "a circular firing
squad," in the words of airline lobbyist John Timmons.
Today, airlines pay into the FAA trust fund a 7.5% ticket tax, a fee of $3.20 per
passenger for each flight segment flown, a fee of $14.10 per passenger for each
international departure or arrival, and a fuel tax of 4.3 cents per gallon. All those taxes
and fees are passed on to passengers or absorbed by the airlines. Business jets pay only a
21.8 cent fuel tax.
That means, for example, that a typical roundtrip commercial flight between Philadelphia
and Buffalo would contribute about $900 altogether in FAA taxes and fees, according to
an ATA calculation the business-jet group doesn't dispute. A typical business craft flying
the same route would pay just $22.
In 2004, the latest year for which FAA data are available, passenger and cargo airlines
accounted for 65% of flights, but they paid 91% of the $9.6 billion in taxes collected to
support the FAA. Business aviation, a category that includes all jet-powered private
planes and charter flights, accounted for 18.5% of flights but paid only 5% of the taxes.
Armed with these numbers, the carriers are pressing for a fundamental change in
financing. They want to replace existing taxes with user fees, based on how much a
particular plane uses air-traffic control. They estimate their plan would shift $1.5 billion
to $2 billion in charges to business jets.
The airlines are happy to make life harder for private jets, which siphon off some of their
best customers -- those likely to pay first-class and last-minute fares. There could be even
more travelers opting out of commercial flights with the coming of new ultra-light jets,
which will allow corporations to buy their own planes for under $2 million -- compared
with $3 million or more today. The Bush administration has also signaled support for
user fees in an effort to make funding for air-traffic control more predictable. As things
stand now, tax collections fluctuate as fares go up and down.
When Mr. May, 60 years old, joined the ATA three years ago, he knew his first task was
to forge a consensus in a group that represents 19 cargo and commercial carriers. He
made a crucial decision to bypass the perpetually squabbling lobbyists who represent
each carrier in Washington and go directly to the airline CEOs. In late 2004, he appointed
a three-man committee -- the chief executives of Southwest, Continental and AMR
Corp.'s American airlines -- and asked them to come up with an FAA funding proposal.
Crunching Numbers
The three chiefs spent more than a year crunching numbers, but in the end, their proposed
formula was still not acceptable to everyone in the airline group. Mr. May broke the
impasse, suggesting broad principles instead of a precise formula. Their compromise:
user fees based on the number of departures and length of time in the system, with
adjustments for flights to small communities and night flights.
Now he's lining up allies. On a recent day, Mr. May invited Capt. Duane Woerth,
president of the Air Line Pilots Association, to his 12th floor conference room in
Washington. He showed him a seven-minute video outlining the problems with the
congested air-traffic-control system. Mr. Woerth's reaction: "The public just wants a
solution, and they don't want to pay more money." In the end, Mr. Woerth didn't take
much convincing, and the two shook hands.
Mr. Bolen, meanwhile, is rallying the business-jet troops. He tried to jolt his members
into action with a dark email: "You are under attack," he wrote in a message that the
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 9 of 28
group said went to 10,000 people. He urged them to write to their lawmakers to protest
the user-fee idea.
In one of a series of recent trips, Mr. Bolen flew to Montgomery, Ala., to rally
representatives of small airports against the user-fee initiative. After Mr. Bolen's talk,
Wayne Cameron, a onetime flight instructor who now manages the Tuscaloosa Regional
Airport, said he planned to write his representatives in Congress. The airport handles only
business jets and private planes. "We just feel they're trying to dump $1.5 billion to $2
billion on us," he said of the airlines.
On a recent day, Mr. Bolen, 46, lobbied Republican Rep. Robin Hayes of North Carolina,
a longtime private pilot whose district is dotted with tiny airports. "You know exactly
where I stand," Mr. Hayes told Mr. Bolen, adding, "Are you going to instruct us as we go
forward?" Mr. Bolen assured him that he would.
For lawmakers who may be a harder sell, Mr. Bolen points out that the airlines' user-fee
proposal would transfer some control of the FAA from Congress to a user-fee board that's
almost certain to be dominated by the airlines. The airlines argue that eliminating
Congress's role would save money by cutting pork projects and closing FAA facilities
that individual Congressmen support but that aren't FAA priorities.
7. Business jets represent more than ______ of all flights.
a. 8%
b. 18% Correct
c. 28%
d. 38%
8. In 2004 passenger and cargo airlines accounted for 65% of flights, but they paid
_____ of the $9.6 billion in taxes collected to support the FAA.
a. 11%
b. 19%
c. 91% Correct
d. 99%
After Years of Pushing Synergy, Time Warner Inc. Says Enough
By MATTHEW KARNITSCHNIG
June 2, 2006; Page A1
http://online.wsj.com/article/SB114921801650969574.html
Last year, Sports Illustrated and AOL were heading toward a clash, the latest in a series
of quarrels between Time Warner Inc.'s units. The magazine wanted to merge its Web
site with the AOL Web portal to create a massive sports site. AOL refused, saying Sports
Illustrated had little to offer.
A few years ago, when Time Warner was espousing the mantra of "corporate synergy,"
the two sides might have been forced into cooperating for the good of the company. This
time around, Time Warner President Jeffrey Bewkes told the magazine to look elsewhere
for partners. "No division should subsidize another," Mr. Bewkes says in an interview.
While Mr. Bewkes thinks cooperation should be encouraged, he's blunt in assessing the
synergy message his predecessors preached to shareholders: "It's bull-."
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 10 of 28
This is an unusual enough sentiment in a rapidly consolidating corporate world, but for
Time Warner, it's a philosophical turnabout, illustrating how the media industry has
thrown off the conventional wisdom of only a few years ago. Other media companies
such as Viacom and Liberty Media have already broken themselves up. Time Warner,
currently the world's largest, has stopped requiring that its units cooperate -- instead of
"synergies," managers speak of "adjacencies." It's also selling businesses that don't make
enough money.
The re-evaluation was driven in part by rapid changes in technology that fed investor
disquiet about the viability of older and slower media giants. Innovations such as digitalvideo recorders, online music sales and user-generated content on the Internet have
contributed to a prolonged slump in stock-market valuations. Time Warner and its peers
were also caught flat-footed by the emergence of new players such as Yahoo and Google.
"We had a lot of clout from size. Look at where it got us -- nowhere," says Sumner
Redstone, who recently divided his media empire into two companies, Viacom Inc. and
CBS Corp. "The world has changed a lot. Success depends to a large extent on your
ability to adapt."
From the time legendary CEO Steve Ross added Warner Bros. to his funeral-home and
parking-lot business in the late 1960s, through the merger with Time Inc. and the $103.5billion AOL deal, the company now known as Time Warner has been a prominent
practitioner of corporate synergy. In deal after deal, executives promised to create a welloiled, "vertically integrated" profit machine. Books and magazines and music would feed
television and movie and Internet empires, each strengthening the others.
But this vision never panned out, and the stock-market value of the mammoth media
enterprise dropped by more than $100 billion. Now divisions are encouraged to cooperate
only if they can't get a better deal on the open market. The company's units are expected
to be "best in class" -- corporate-speak for being an industry leader -- and those that fall
short are threatened with being sold.
Financier Carl Icahn argued for such an approach in his recent campaign to break up
Time Warner into several pieces, only to be ridiculed by the company's management. Yet
even as it convinced shareholders to reject Mr. Icahn's blueprint, Time Warner has been
quietly implementing something similar.
In 2004, Time Warner sold its once-mighty music arm, which was suffering amid a
prolonged music-industry slump. More recently it quit the book industry and has been
selling its sports teams one by one. Later this year, Time Warner plans to take public 16%
of its cable business, in what investors see as a prelude to further reductions in its
ownership.
Mr. Icahn, who owns 1.3% of Time Warner's stock, says these steps are encouraging but
not aggressive enough. "They are making some of the right decisions but there's a great
deal more that has to be done," he says. "I still believe that you have to divide it."
The company has hinted in the past it might also sell part of AOL and some executives
privately say they'd like to sell Time Inc., publisher of magazines such as Sports
Illustrated, Time and People. The publisher makes more than $1 billion in operating
profit each year, but investors complain that its growth potential is limited.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 11 of 28
Such a course would leave Time Warner roughly half its current size. It
would own video-entertainment operations, including Warner Bros.,
Turner Broadcasting and HBO, as well as strategic holdings in cable
and the Internet. That structure would be similar to the one put forth by
Mr. Icahn.
Dick Parsons, who became CEO in 2002, says he still opposes breaking
up Time Warner. "This is a more stable and durable company because
of its size," Mr. Parsons says. "If you have the sum of the parts under
your control you can sometimes get to the market faster."
Time Warner's new approach follows 15 years of conflict, dating back
to the very founding of the company from the 1990 merger of Time Inc.
with Warner Communications. Before the combination, Time Inc. was
primarily a publishing company that also owned HBO and a cable
company. Time executives saw their future in video and cable systems
and wanted HBO and Warner Communications Inc. to cooperate
closely. The plan largely failed.
"There wasn't a lot of synergy that took place," says Bob Daly, chairman of the Warner
Bros. studio at the time.
Mr. Daly recalls a meeting at which Time Inc. executives harangued him over "Roger &
Me," a 1989 Warner Bros. film directed by Michael Moore that was deeply critical of
General Motors Co.'s downsizing. GM was one of Time Inc.'s biggest advertisers.
Publishers worried the movie would harm their relationship with the carmaker.
Mr. Daly says he countered by noting that Time magazine had panned Warner Bros.'s
"Batman." By the end of the discussion, Mr. Daly says, both sides concluded there was
little they could do for one another.
Contentious Relationships
Other relationships proved even more contentious. After the merger, Warner complained
that HBO had started demanding special, below-market rates for movies. The studio was
also irked that HBO was gearing up to make movies of its own, because it alone wanted
to control film production within Time Warner. HBO, for its part, accused Warner of
trying to charge too much for movie rights.
Years later, former Time Inc. President Nick Nicholas, who hatched the Warner deal on a
paper napkin while returning from an African safari, decided it was all a mistake. Warner
Bros., he concluded, had little to offer either HBO or Turner Broadcasting, which Time
Warner acquired in 1996.
"If I could go back ... and rewrite history, I would, if pushed to the wall, not have done
the Warner deal," he said in a 2002 interview with the Denver-based Cable Center, which
was conducting an oral history of the cable industry.
The Warner deal was just the first in what would be a long trail of transactions
culminating in AOL's ill-fated takeover of Time Warner in 2001.
The transaction was originally sold as a synergy play designed to create a universe
encompassing the Internet, TV and print that consumers would never exit.
But after the takeover was consummated, in classic Time Warner fashion, friction
between the two cultures gnawed away at the plan. Time Warner Cable resisted giving
AOL privileged access to its broadband network, arguing that such a move would hurt
profitability. Warner Bros., Time Inc. and Warner Music refused to participate in a plan
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 12 of 28
to sell advertising companywide because they thought they could negotiate better terms
on their own. The divisions even scuttled a plan to give control of their email systems to
AOL.
In the past four years, Time Warner's revenue has risen 17% and operating profit has
rebounded to $10.6 billion in 2005 from a $38.5 billion loss in 2002. But the company's
share performance has lagged that of its rivals. After big declines in 2001 and 2002, Time
Warner's shares have stagnated, and for much of the last three years they've hovered
around the $17 mark.
Some investors worry about the long-term viability of certain units, in particular AOL. Its
revenue dipped 10% over the past four years as dial-up subscribers abandon it for
broadband. There is also concern that the cable business, Time Warner's biggest profit
generator, will come under pressure as telephone companies begin to offer television
service.
Time Warner's current management team still argues that scale is important. The
company has 87,000 employees and $44 billion in revenues, which gives it influence to
sway government policy while also shielding it from outside attack. Its breadth gives
management a bird's-eye view of the industry's shifting landscape and a better
understanding of key issues, executives say.
Backing Off
At the same time, the company has backed off efforts to force divisions to work together.
Under this looser structure, top executives meet regularly, but to share information, not to
push synergies.
Six times a year, Mr. Parsons summons his top deputies to the company's New York
headquarters where they gather in a 10th-floor conference room overlooking Central Park
to discuss their industries and settle differences. Recent meetings have focused on AOL's
content strategy and the implications of "Startover," a new feature offered by Time
Warner Cable that allows viewers to view in their entirety programs that have already
started.
"Think of it as an extended family that gets together for Saturday dinner," says Turner
Broadcasting chief Phil Kent.
Division heads say the informal gatherings allow for an open dialogue that wouldn't be
possible with customers or competitors. That give-and-take has allowed Time Warner to
occasionally leap ahead of the industry, as it did when Time Warner Cable pioneered
video-on-demand services.
The looser federation doesn't, however, rid Time Warner of some of the conflicts that
bogged it down in the past. Some believe Time Warner Cable hasn't been as aggressive in
trying to build a free video-on-demand service as its main competitor, Comcast Corp.
The reason: Warner Bros., like other studios, worried that the new service would hurt its
existing businesses, such as DVD and syndication sales.
These days, as Time Warner's various divisions pull in different directions, it's not clear
what, if any, corporate solidarity remains.
Sports Illustrated's overture to AOL came just as a separate venture between AOL and
Time Inc. was falling apart. In 2003, Time agreed to transfer some of its magazines' Web
sites to AOL's subscriber service to help prop up AOL's membership. By the spring of
last year, it was clear that the deal wasn't working. AOL continued to lose subscribers and
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 13 of 28
Time Inc. discovered that its online titles were languishing behind AOL's "walled
garden" just as Internet advertising was beginning to take off.
AOL wanted to maintain the relationship but in a different form. Time Inc., backed by
Mr. Bewkes, wanted to retake full control, and the arrangement was largely dismantled.
So when Sports Illustrated approached AOL last year about cooperating on a new Web
site, AOL executives were caught off guard. The combination would have created the
biggest sports site on the Web, but now AOL wasn't interested. It had already planned to
focus on online video and wanted to remain an aggregator of other outlets' content. While
AOL executives insist they have a good relationship with Time Inc., relying exclusively
on Sports Illustrated in this case would be too limiting, they felt.
"Magazines have mostly words and some pictures," says Ted Leonsis, a senior AOL
executive. "You tend to want to partner more with brands that have richer media."
This time around, Mr. Bewkes supported AOL. At his behest, Time Inc. approached
Yahoo and others about a partnership. It has yet to strike a deal.
Mr. Bewkes wasn't surprised. He spent most of his 27 years with Time Warner at HBO,
which, like AOL, often received unwelcome overtures from within the conglomerate.
"This is pure business," he says.
9. In the past four years, Time Warner's revenue has risen ______ and operating profit
has rebounded to $10.6 billion in 2005 from a $38.5 billion loss in 2002.
a. 17% Correct
b. 27%
c. 21%
d. 11%
10. Time Warner has ______ employees.
a. 27,000
b. 87,000 Correct
c. 187,000
d. 287,000
Questions from Marketplace
One Month to Make It
By GWENDOLYN BOUNDS
May 30, 2006; Page B1
http://online.wsj.com/article/SB114895159185065895.html
When he persuaded a Wal-Mart buyer to give his unusual pen a test run some 18 months
ago, Colin Roche thought the hard part was over. Selling to the world's largest retailer is,
after all, the entrepreneurial Holy Grail: With 138 million weekly customers, Wal-Mart
Stores Inc. dwarfs other bricks-and-mortar competitors.
But far from game over, the toughest challenge begins this week, as Mr. Roche's
"PenAgain," as the ergonomically designed writing instrument is called, rolls out in 500
Wal-Mart stores nationwide. PenAgain has 30 days to prove itself to Wal-Mart sales
officials. Meanwhile, the 34-year-old Mr. Roche is learning to manage everything from
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 14 of 28
Wal-Mart's strict shipping standards to fears that other retail partners will protest his
product's discounted price tag at the big-box chain.
During the trial, PenAgain will get space in the special displays, known as "end caps," at
the edge of aisles, in the thick of consumer traffic. The prime positioning will give the
product a fighting chance: After 30 days, the stores need to sell close to 85% of the
48,000 pens Wal-Mart ordered if the product is to be considered for wider distribution
throughout the chain.
"It's a test, that's exactly what it is," says Mr. Roche.
He conceived of PenAgain in 1987 while sitting in high-school detention and dreamed up
its design to relieve his writer's cramp. A prototype built in his Dad's garage became the
catalyst that launched the business and drove it to nearly $2 million in sales last year. Mr.
Roche and a former fraternity brother, Bobby Ronsse, also 34, launched Pacific Writing
Instruments Inc., of San Mateo, Calif., in 2001.
There are about 10,000 suppliers hawking their goods in Wal-Marts world-wide and an
equal number of newcomers trying to get in each year. Of those applicants, only about
200, or 2%, make it to the trial-run stage. While roughly 75% of those test products stay
on past the trial period in at least some stores, they won't move into new locations unless
sales are robust.
Seeing a product through this critical phase requires suppliers to shift from sales-pitch
mode to marketing backup. "A lot of times, what will hurt suppliers more than anything
is that they may not monitor the product very well" during the trial period, says Excell La
Fayette Jr., Wal-Mart's director of supplier development. "They are busy still trying to
sell the [Wal-Mart] buyer on that item. You've sold them. Now, just make sure that the
information is out there, and drive customers to the product."
Price -- low price, that is -- is another concern. The PenAgain model going into Wal-Mart
will sell for $3.76, compared with a nearly identical version priced at $6.49 on
amazon.com and more than $12 elsewhere. By slashing their price for Wal-Mart -- which
they must do to sell there -- the PenAgain entrepreneurs risk angering their bread-andbutter retail base of some 5,000 retailers, many of them small stationery shops.
It's a fine line that all manufacturers walk when they hit mass retailing's big leagues. The
PenAgain partners haven't detected a backlash yet, but says Mr. Roche, "We are bracing
ourselves."
It is up to the young entrepreneurs to provide the marketing to support their product's
Wal-Mart debut. Messrs. Roche and Ronsse say they plan a full frontal assault with all
the business contacts and networks they've amassed since launching PenAgain. Too small
to afford traditional print or TV advertising, the company will market virally, reaching
out to their national fraternity headquarters and consumer groups that have already shown
interest in the PenAgain. The company has a general email list of some 10,000 customers
who regularly buy their pens -- "people who really want to know what the heck is going
on with us," Mr. Roche says. Among them are doctors, patients and medical
organizations, for whom the PenAgain's ergonomic design has a lot of appeal.
Ergonomics is a hot niche in the $4.8 billion dollar writing-instrument industry, as aging
baby boomers face carpal tunnel syndrome and arthritis. Most traditional pens are stickshaped, requiring users to grip them. In contrast, the PenAgain's wishbone design allows
users to write by resting the index finger, and the weight of the entire hand, between two
prongs. Any pen can call itself ergonomic, but what gives PenAgain credibility is that it
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 15 of 28
has been tested with occupational therapists and physicians, many of whom sell it in their
offices. The pen also is distributed by Sammons Preston Rolyan, a rehabilitative-products
purveyor.
A notable segment of PenAgain's repeat customers are doctors whose patients, in turn,
become customers, too. It is a strategy that has paid off handsomely in some unexpected
ways. Scott Koerner, senior vice president of merchandising at Office Depot Inc., first
saw the PenAgain last year at his eye-doctor's office and noted on return visits that it had
sold out. He pursued it for his stores. Starting next month, Office Depot will stock the
PenAgain in its 1,049 stores nationwide (price: $3.99). "We sell to a lot of small
businesses, and this doctor happened to be a small business and that caught my
attention," Mr. Koerner says.
The PenAgain entrepreneurs know they must track daily sales at Wal-Mart's 500 stores
closely -- something they can do over the Internet, via the chain's Retail Link software
system. The system tracks sales data, telling vendors where their items are, and aren't,
selling. Should a product do well in say, Salt Lake City, but not in Indianapolis, WalMart can shift merchandise between stores.
But it is a common mistake of neophyte suppliers to expect Wal-Mart buyers to do the
tracking for them, says Wal-Mart's Mr. La Fayette. "When you have a buyer with 10 to
20 different categories, they cannot monitor everyone's pieces, and they depend on the
supplier to inform them of what is going on," he says.
Knowing this, PenAgain founders produced an extra 100 displays for use in Wal-Mart
stores, which they are keeping in their own warehouse. "If one store sells through like
crazy, we could ship out more to keep things going" during the test, Mr. Roche says.
They also are considering hiring a merchant service organization, a third-party group that
sends reps into stores to check out display placement and consumer traffic and then report
back electronically to the supplier.
Messrs. Roche and Ronsse also have had to navigate Wal-Mart's packaging and shipping
requirements, which are highly regimented, down to the thickness of the cardboard used
on display cartons. Shipping boxes must have a reddish stripe around the outside that
says "stationery," to help Wal-Mart staffers route the boxes at stores.
Timing is tricky, too. There are no guarantees for suppliers until Wal-Mart issues an
official purchase order. When it comes down, the window for getting products into stores
isn't open long. PenAgain manufactures all its pens and packaging in China, and so even
before they got the April 12 purchase order they were ramping up pen production -- they
needed the 48,000 for Wal-Mart, plus 5,000 more as backup -- and printing packaging.
Shipping labels must specify a litany of data, including purchase-order numbers and
distribution-center details. Because the pens for Wal-Mart were hurried out of China,
PenAgain didn't have time to have their own packaging manufacturers print all the
necessary data on the boxes. It had to be added when the boxes hit shore in Long Beach,
Calif., on May 2. "We didn't sleep during that three weeks," says Mr. Roche.
The work paid off. The pens were ready to move to Wal-Mart's distribution centers on
time, starting May 17. Currently, pens are arriving in Wal-Mart stores from Fishkill,
N.Y., to Tucson, Ariz. Helped in part by the exposure the pens are getting at Wal-Mart,
PenAgain's founders expect sales to double this year to between $4 million and $5
million.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 16 of 28
The partners haven't forgotten their smaller retail partners. The company is creating
exclusive offerings for small stores: It plans to offer an ergonomic sample set, including a
basic pen, a black marker, two highlighters and refills, for $15 to $20, and a brushedmetal pen for $20 to $30. "That's our goal: to try and prove that we will live in both
worlds," Mr. Roche says.
Some small players say they'd welcome such efforts: Fred Ebert, an owner of Edwards
Luggage Inc., San Francisco, has been selling the same PenAgain model going into WalMart, but for $9.95. He says Wal-Mart's $3.76 price "worries" him and at some point he'll
probably stop ordering from PenAgain until it comes out with a higher-end model. "I
don't want to be way out of line on pricing anything because it sends a bad message," Mr.
Ebert says.
And so, as the PenAgain partners prepare for what may be the most crucial 30 days of
their business careers, they are realistic about the challenges ahead. "There are things that
could go tremendously well, and things that could sink," Mr. Roche says. "We have a lot
on the line, and honestly, we are nervous as hell."
11. There are about 10,000 suppliers hawking their goods in Wal-Marts world-wide and
an equal number of newcomers trying to get in each year. Of those applicants, only about
______ make it to the trial run stage.
a. 2% Correct
b. 4%
c. 6%
d. 8%
Bracing for the Worst
By LIAM PLEVEN
May 31, 2006; Page B1
http://online.wsj.com/article/SB114904672421167238.html
LONG BEACH, N.Y. -- Nearly 70 years ago, a violent hurricane ripped across the south
shore of Long Island, then largely farmland. The storm, locally dubbed the Long Island
Express, sent 30- to 50-foot waves surging ashore, killing 50 people and 750,000
chickens in the Long Island counties of Nassau and Suffolk.
Tomorrow, a new hurricane season is set to begin, with the ever-present threat that a
mammoth storm could deviate from recent patterns making landfall in the Southeast and
follow a path similar to that of the Long Island Express. But where chickens scratched in
1938 now sit some of the most expensive homes in the U.S. As a result, the insurance
market here is showing glimmers of the kind of fragility that has plagued places like
Florida.
In Long Island and New York City, Allstate Corp. has been dropping customers. MetLife
Auto & Home, a division of MetLife Inc., is restricting new policies in the Northeast and
other hurricane-prone areas. Premiums are going up as much as 20% to 30%, and
hurricane deductibles may follow.
A look at Long Beach, a city of 35,000 located on a barrier island off Long Island's south
shore, shows how the insurance industry has intensified efforts to limit its exposure in the
Northeast.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 17 of 28
In Long Beach, part of Nassau County, finding any hurricane coverage at all is getting
harder and more expensive. "There are very few insurance companies that are willing to
write homeowners' policies right now," says Denis Miller, a Long Beach insurance agent.
He says he recently placed one customer with another major insurer, but for an extra
$350 annually, almost a third of the prior premium.
In the underground bunker of Nassau County's emergency-management office, a map
shows a Category 3 hurricane could propel a storm surge up to 22 feet high into
downtown Long Beach.
William Gray, a prominent storm predictor at Colorado State University, and his
colleague Phil Klotzbach, put the odds of an intense hurricane hitting the stretch of coast
between New York City and Cape Cod at about 1 in 11. That stretch includes the
shorelines of Long Island's two counties.
12. William Gray, a prominent storm predictor at Colorado State University, and his
colleague Phil Klotzbach, put the odds of an intense hurricane hitting the stretch of coast
between New York City and Cape Cod at about 1 in ______.
a. 3
b. 9
c. 11 Correct
d. 15
Pick of the Crop
By REBECCA BUCKMAN
June 1, 2006; Page B1
http://online.wsj.com/article/SB114912389881568180.html
Giants are on the prowl in Silicon Valley. The prey: start-ups.
Two of the most formidable hunters are Microsoft Corp. and International Business
Machines Corp., each aiming to forge ties with -- and sometimes acquire -- promising
companies that make software and other products for big businesses.
At a big, closed-door meeting with Silicon Valley venture capitalists last month,
Microsoft's chief executive officer, Steve Ballmer, boasted that the Redmond, Wash.,
company bought 22 companies over the past year, some of them Northern California
fledglings. IBM made 16 acquisitions last year, including several referred to the company
by a special, 20-person venture-capital outreach group that IBM set up in 2000.
The buying spree is music to the ears of venture-capital investors, who make money only
when the businesses in which they invest go public or are bought by another company.
And with the market for initial public offerings of small companies' stock languishing
these days, start-ups and their backers are anxious to work with big partners -- even
Microsoft, which has had a rocky history in Silicon Valley because of past allegations of
anticompetitive business conduct. But many investors say the company has been easier to
work with since it settled its antitrust case with the U.S. government in 2002.
Both IBM and Microsoft now "have big war chests for acquisitions," says Wes Raffel, a
general partner with Advanced Technology Ventures in Palo Alto, Calif. And start-ups
that already work with IBM and Microsoft "are the most likely suspects to be acquired
over time," he says.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 18 of 28
Yahoo Inc. and Google Inc. are also on the acquisition trail in the area, with different
motives from the software makers. Both Internet stars are scooping up tiny companies to
bolster their services for consumers on the Web -- think sharing photos, cruising
interactive maps and writing blogs.
By contrast, Microsoft and IBM seek start-ups that will use their technology products and
join them in building new services for businesses, though Microsoft is also active in the
consumer area these days. But persuading start-ups to use often-pricey Microsoft or IBM
technology can be more difficult today with the availability of cheap, often-comparable
"open source" technology that is downloaded free from the Internet.
So IBM, based in Armonk, N.Y., and Microsoft are each training their considerable
firepower on tiny new businesses -- with an emphasis on tiny.
Peter Yared, a former Sun Microsystems Inc. executive, says he was surprised two years
ago when three IBM executives showed up at a meeting to learn more about his software
start-up, ActiveGrid. One of the executives, Deborah Magid, worked with IBM's Venture
Capital Group, the IBM arm charged with wooing new ventures and venture capitalists.
"I was thinking, 'What the hell is IBM Ventures doing sitting in on a meeting with a oneperson company?" Mr. Yared recalls. At the time, he was ActiveGrid's only employee.
Since then, an IBM representative has swung by his offices every three to six months to
offer technical advice and support for ActiveGrid's software, which helps big companies
build everything from sales applications to online employee phone books, Mr. Yared
says. Now, ActiveGrid bundles IBM's big computer-database product with its software,
which has helped ActiveGrid sell to larger, Fortune 500 companies. Meantime, IBM
benefits because the partnership has made its database product more attractive, says the
company's Ms. Magid.
13. Microsoft's chief executive officer, Steve Ballmer, recently boasted that the
Redmond, Wash., company bought ______ companies over the past year, some of them
Northern California fledglings.
a. 11
b. 22 Correct
c. 33
d. 44
Estimates of Copyright Piracy Losses Vary Widely
By GEOFFREY A. FOWLER
June 2, 2006; Page A13
http://online.wsj.com/article/SB114919386653269006.html
The plastic in a blank CD or DVD costs less than a quarter. Putting a price on a disc
loaded with content is more difficult.
When the music industry finds a CD that has been ripped off by copyright pirates, it says
it is worth between $1 and $5. Hollywood says a pirate disc can be worth between
nothing and the full retail price of around $25. The software industry sometimes weighs
in at more than $200 per counterfeit disc.
Why is there such a wide range in the estimates? Counting the losses from piracy isn't a
science -- it's an art. Police in developing countries like China may count pirated goods at
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 19 of 28
their street value, but companies and industry associations have different, often political,
goals behind their counting systems. Now the growing problem of Internet piracy is
making gauging losses even harder, and more controversial.
"We can confidently say we will never know 100% the exact loss. There are several
sciences, and none of them work entirely satisfactorily," says Keith Jopling, the director
of strategic analysis and research for the International Federation of the Phonographic
Industry, the main music industry trade group.
Police data and surveys can provide estimates of the number of DVDs sold in street pirate
markets, and the numbers of songs and programs downloaded off the Internet. But the
music, movie and software industries -- which have been hammered by piracy in many
developing countries -- face a more vexing problem of reckoning their losses.
Somebody who buys a pirated disc at a steep discount isn't necessarily a lost customer for
a full-priced product. In many poor countries, a customer who buys a CD for $1 could
never afford to pay $16.95 for a legitimate copy. In countries such as China and Vietnam,
many legitimate film titles aren't even allowed on store shelves because of government
quotas and censorship standards. Moreover, music industry surveys have found that in
some developed markets, 10% to 15% of consumers actually spend more money on
legitimate music when they're also downloading songs illegally.
So is a pirated disc really a loss?
Over the past two years, the Motion Picture Association of America has spent $3 million
to figure that out. The answer it arrived at -- that Hollywood studios alone lose $6.1
billion world-wide -- was so high that some Tinseltown executives didn't want the figures
made public.
Behind the movie studios' backstage catfight about the figures was a dramatically new
system for counting the value of a pirated disc. The new method involved asking
consumers about their piracy habits directly.
In telephone, Internet and focus group polls developed by consultant L.E.K. Group, the
MPAA asked consumers how often they buy pirated discs and download pirated movies,
as well as whether they would have bought the film legitimately had the pirated version
not been available. By that approach, not every pirated disc equates to lost revenue.
But the new method has a big problem. People lie in surveys, especially folks who like to
pirate movies. The MPAA spent months revising their figures down.
To be sure, legitimate companies want and need to know how much they're losing, as the
piracy problem grows. But accurate assessments may be influenced by competing
demands. Hefty piracy loss figures can serve the interests of movie, music and software
industry organizations, all of which lobby governments for tougher intellectual property
laws and enforcement. On the other hand, member companies of these organizations
often don't want investors to be spooked by figures that suggest their piracy problems are
scaling out of control.
The computer software industry, represented by the Business Software Alliance, has
taken a simpler approach than the movie industry, and come up with a much bigger
number. According to a study it released in May, there were $34 billion in global PC
software piracy losses in 2005. The alliance hired analysts at the International Data
Group's IDC to calculate losses based on the total value of software installed on
computers around the world minus the total legitimate sales of software. That way, the
industry doesn't have to track pirated discs or files swapped online. The big loss figure it
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 20 of 28
comes up with helps push governments to sign treaties to ensure that businesses aren't
using pirated software on computers.
The software industry's figures assume that pirated software is worth the same as fullprice commercial software. Many software users in the developing world say they can't
afford to substitute in a full-priced copy of Microsoft Office, even if Microsoft already
discounts the product for developing markets.
However, the BSA's Asia regional director, Jeff Hardee, says the group's studies show
nearly a one-to-one ratio between decreases in piracy and increases in legitimate sales,
suggesting that, on average, people are willing to "replace" pirate software with the real
thing.
The music industry has long taken a more limited approach to its piracy assessments.
Instead, the IFPI estimates that the world-wide commercial disc market is worth $4.6
billion to the pirates themselves, at pirate prices, which range from $1 to $5 per CD. The
IFPI uses police data, surveys and legitimate disc sales to estimate the number of pirate
discs in the market.
That approach avoids counting customers of cheap pirate products the same as legitimate
customers, but assigns a very low value to the music on CDs. It also leaves a hole in
accounting for losses from songs swapped for free over the Internet. The IFPI says it
knows there are 885 million "infringing" songs available for download at any one time,
but doesn't know how much they're worth.
In recent months the IFPI has been sorting through surveys in a handful of markets that
try to count Internet losses, many involving direct consumer interviews about substitution
habits like the MPAA survey. Record companies are currently reviewing the findings
from those surveys, and the results could be released with the group's annual piracy
report later this month.
14. According to the Business Software Alliance in a study it released in May, there were
$____ billion in global PC software piracy losses in 2005.
a. 34 Correct
b. 43
c. 56
d. 65
Questions from Money & Investing
Inheritance Planning Without Grief
By RACHEL EMMA SILVERMAN
May 27, 2006; Page B1
http://online.wsj.com/article/SB114868234031764646.html
Getting an inheritance isn't as easy as it looks.
Inheriting money is already an emotional and financial minefield. But in the past decade
or so, amid the popularity of complex retirement investments and other assets -- and the
increasing complexity of tax laws -- it's gotten trickier to avoid the pitfalls. Transfer a
parent's individual retirement account the wrong way and you can cause a massive tax
hit. Take a treasured painting off their wall before it's accounted for in the estate, and you
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 21 of 28
could be illegally avoiding estate taxes. In some cases, it may even be smart to decline an
inheritance altogether.
The size of the wealth transfer expected in coming years is staggering. Over the next halfcentury, some $45 trillion is expected to be disbursed from estates, according to
researchers at Boston College's Center on Wealth and Philanthropy. It's the biggest
generational transfer of wealth ever, says Paul Schervish, the center's director, because of
the late 20th-century economic boom in the U.S. combined with the baby-boom
demographic bubble.
As a result, financial firms and tax advisers are increasingly targeting families in an effort
to sell them services and seminars designed to help plan for inheritance.
Fidelity Investments offers trained "Inheritor Services Specialists" to help heirs handle
inherited accounts. Insurers such as New York Life Insurance Co. offer informational
Web pages that suggest that heirs use their payouts to purchase new life-insurance
policies or annuities.
There's even the Sudden Money Institute, of Palm Beach Gardens, Fla., which provides
financial guidance and emotional support for those who receive unexpected windfalls,
and Heirs Inc., an advocacy group for trust and estate beneficiaries.
Most private banks offer financial-training programs targeted at younger family members
who stand to one day receive big inheritances. And specialized wealth counselors and
"legacy coaches" hold family retreats to help ease tensions or feuds related to estate
planning or inheritances.
15. Over the next half-century, some $____ trillion is expected to be disbursed from
estates, according to researchers at Boston College's Center on Wealth and Philanthropy.
a. 35
b. 45 Correct
c. 55
d. 65
China IPOs Shun Wall Street to Call Hong Kong Home
By KATE LINEBAUGH
May 30, 2006; Page C1
http://online.wsj.com/article/SB114894288801465737.html
HONG KONG -- Overwhelming demand for a $9.7 billion Chinese share offering
underscores how some of the world's most important IPOs are taking place far from Wall
Street.
Bank of China Ltd., shares of which are scheduled to begin trading on the Hong Kong
Stock Exchange Thursday, is the biggest stock offering anywhere for the past six years,
and China's largest to date. During the past two weeks, hundreds of individual investors
have lined up outside Hong Kong bank branches to apply for shares. Demand from
institutional investors, including some of the world's biggest mutual-fund companies and
pension funds, exceeded $120 billion. Even Saudi Prince Alwaleed bin Talal bin
Abdulaziz Alsaud is seeking to buy $2 billion of the initial-public-offering shares
together with a group of other Saudi investors.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 22 of 28
While U.S. individual investors can trade Bank of China stock once it is listed, they won't
be able to buy into the IPO. They also have been excluded from most of the world's
biggest share offerings in recent years, in part because major privatizations in Europe and
Asia have overshadowed new listings in the U.S.
But foreign companies are avoiding tough accounting and disclosure requirements that
apply to any U.S.-listed companies as a result of the Sarbanes-Oxley corporategovernance act that passed in August 2002. Only one of the world's top 10 IPOs since
Sarbanes-Oxley passed has happened on Wall Street -- and that was for China Life
Insurance Co., China's biggest life-insurance provider.
Chinese companies "are saying, 'Why subject ourselves to the reporting obligations and
corporate-governance obligations of a U.S. listing? If we're in it for the long haul, Hong
Kong will provide an awful lot of what we're after,' " says Nick Seddon, managing
director for Asia of law firm DLA Piper Rudnick Gray Cary in Hong Kong.
American litigiousness also might be a turnoff for overseas companies considering a U.S.
listing. In 2004, investors hit China Life with a class-action lawsuit in the U.S., claiming
the company failed to disclose several accounting irregularities ahead of its listing. The
company is trying to have the lawsuit dismissed. When the suit was filed, the company
said in a legal notice that it expected "to contest the complaint vigorously," but that
"given the nature of litigation in the United States, the company expects that further
lawsuits may be filed containing the same or similar allegations."
The U.S. exchanges have felt the pressure and are taking action. The New York Stock
Exchange and Nasdaq Stock Market Inc. are pursuing trans-Atlantic mergers. NYSE
Group Inc. put in a $10.1 billion bid for Euronext this past week, while Nasdaq continues
to pursue London Stock Exchange PLC, despite being rebuffed. Shrinking trading fees
are pressuring the exchanges to grow and expand into new markets to maintain revenue
and profits and counter the drop-off in foreign companies seeking to list their shares in
the U.S.
16. Bank of China Ltd., shares of which are scheduled to begin trading on the ______
Stock Exchange, is the biggest stock offering anywhere for the past six years, and China's
largest to date.
a. Beijing
b. Hong Kong Correct
c. Tokyo
d. New York
Wall Street Is Warming Up To Pipelines
By ANN DAVIS
May 31, 2006; Page C1
http://online.wsj.com/article/SB114903938426167064.html
The proposed buyout of pipeline company Kinder Morgan Inc. highlights a new way
Wall Street is seeking to profit from price moves in oil and natural gas: to physically
move the commodities.
In recent weeks, two of the financial world's biggest commodities players, Goldman
Sachs Group Inc. and Morgan Stanley, have sought to take stakes in fuel-distribution
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 23 of 28
companies that operate in the commercial side of the commodities boom. Their interest in
these transport companies, which function like toll-booth operators and deliverymen for
raw materials, suggests that as natural resources become more sought after, the
infrastructure that gets the materials to market is viewed as a hot commodity, too.
Goldman Sachs -- along with a group of other investors, including American
International Group Inc. and Carlyle Group's Riverstone Holdings affiliate -- proposes to
put up $4.5 billion as part of a management-led buyout of Kinder Morgan. The $13.5
billion deal for the Houston energy-infrastructure titan, plus the assumption of $7.5
billion of existing debt, would be one of the largest such buyouts in history.
At 4 p.m. in composite trading yesterday on the New York Stock Exchange, Kinder
Morgan's stock was up 19%, or $15.90, at $100.31, on speculation that other buyers
might enter the fray.
17. In recent weeks, two of the financial world's biggest commodities players, Goldman
Sachs Group Inc and Morgan Stanley, have sought to take stakes in _____ companies
that operate in the commercial side of the commodities boom.
a. lumber
b. beer distribution
c. fuel distribution Correct
d. roofing materials
Tale of Two Worries
By JUSTIN LAHART
June 1, 2006; Page C1
http://online.wsj.com/article/SB114912088093268135.html
The economy could deliver more news today that will leave investors unsettled about
what they're up against.
The Institute for Supply Management releases its purchasing managers' index for May.
Economists surveyed by Dow Jones Newswires and CNBC estimate the gauge of
manufacturing activity slipped to 55.5 from April's 57.3. Any number over 50 means the
manufacturing sector is expanding.
The April reading was strong, rising when economists thought it would stay put. Still, it
included some cause for concern.
The report showed the pace of manufacturers' new orders slowed in April even as
inventory levels grew. The Commerce Department's April durable-goods report, released
later, showed the same thing. That suggests manufacturers have been making stuff faster
than they can sell it and might have to slow production to let sales catch up. Economists
at J.P. Morgan find that in the past, slowing orders and rising inventories have signaled a
measurable drop in the purchasing managers' index.
The April report also showed manufacturers were paying steeply higher prices for
supplies and, in another harbinger of inflation, that delivery times slowed from their
suppliers. If today's report hints at cooler manufacturing activity and rising prices,
investors will worry the Federal Reserve will keep raising interest rates to fight inflation,
even as the economy slows. Minutes of the Fed's May rate-setting meeting suggest that it
was struggling with this concern.
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 24 of 28
For the next several months, at least, it looks as if the economy is destined to slow, says
J.P. Morgan economist Bruce Kasman. Weakness in housing will cut into consumer
spending, and companies will respond by slowing production. The economy may end up
looking as if it's in worse shape than it really is, he says, because some of the slowdown
will simply be a payback for this winter, when warm weather heated up activity.
Mr. Kasman thinks businesses will continue to hire and buy new equipment, albeit at a
reduced pace, and that should keep the economy out of real trouble. But until investors
know that safety net is going to hold, and that inflation won't break out broadly, there
could be more white-knuckle moments for stocks and bonds.
18. When the Institute for Supply Management purchasing managers' index is over ___ it
typically means the manufacturing sector is expanding.
a. 10
b. 25
c. 50 Correct
d. 75
Investors' Challenge: Markets Seem Too Linked
By SHEFALI ANAND
June 2, 2006; Page C1
http://online.wsj.com/article/SB114921233148069441.html
It's one of the golden rules of investing: Reduce risk by diversifying your money into a
variety of holdings -- stock funds, bonds, commodities -- that don't move in lockstep with
one another.
And it's a rule that's getting tougher to obey.
According to recent research, an array of investments whose prices used to rise and fall
independently, are now increasingly correlated. A recent report from Merrill Lynch &
Co. found that as of February this year, small stocks were 94% correlated to the broad
Standard & Poor's 500-stock Index -- which means, in simplified terms, in a year when
the S&P 500 rose, an index of small stocks also rose 94% of the time. By contrast, as
recently as six years ago, the figure was just 62%.
For a more dramatic example, look no further than the roller coaster in emerging-markets
stocks of recent weeks. The MSCI EAFE index, which measures emerging markets, now
shows 96% correlation to the S&P, up from just 32% six years ago.
Even commodities like oil and precious metals are increasingly moving in tandem with
stocks. The Goldman Sachs Commodity Index, which tracks 24 commodities, moved
from a correlation of negative 14% in 2000 -- in other words, it tended to fall when stocks
rose, and vice versa -- to a positive correlation of 33% at present, according to the report,
released in late March.
For investors, that poses a troubling issue: how to maintain a portfolio diversified enough
so all the pieces don't tank at once.
It turns out that there are a few options. Cash-like investments such as money-market
mutual funds, or funds that invest in short-term, 30-day to six-month Treasury bills, have
in the recent past moved increasingly independently of the stock markets, making them a
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 25 of 28
diversification play. Treasury bills with three-month durations, for instance, went from a
positive correlation of 34% in 2000 to a negative 58% by February this year.
"The uncorrelated assets are bonds and cash," says the report's co-author, Richard
Bernstein, investment strategist for Merrill Lynch.
Another diversification option in the current environment are funds that invest in highquality bonds -- either long-term government bonds, or corporate bonds with high credit
ratings, says Milton Ezrati, chief economist at money-management firm Lord Abbett &
Co.
19. According to recent research, an array of investments whose prices used to rise and
fall independently, are now ______.
a. owned by Norway
b. sold out
c. too expensive for most investors
d. increasingly correlated Correct
Questions from Personal Journal
Combining Student Debt
Anne Marie Chaker
May 30, 2006; Page D1
http://online.wsj.com/article/SB114895439455265970.html
The Problem: The interest rate on popular federal student loans is reset July 1 and is
expected to rise significantly.
The Solution: Take advantage of the Federal Consolidation Loan Program to combine
your debt before July 1 and lock in a lower rate.
The Stafford Loan's rate today is as low as 4.7%; for the Parent Loan for Undergraduate
Students, or PLUS, it's 6.1%. Since the interest rate on those loans is expected to rise
about two percentage points July 1, it makes sense for students and parents to take a oneshot opportunity to refinance by consolidating their loans.
In the future, consolidation will be less of an issue for borrowers. Legislation enacted
earlier this year changed how interest rates are calculated on Stafford and PLUS loans.
For loans disbursed on or after July 1, the government has eliminated the annual rate
reset, and moved to a fixed-rate system. Stafford Loan rates will rise -- and stay -- at
6.8%, while for PLUS loans, they'll hit 8.5%.
20. The Stafford Loan's rate is expected to rise about ______ percentage points July 1.
a. 1
b. 2 Correct
c. 4
d. 6
Getting Names to Stick
Suzanne Barlyn
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 26 of 28
May 31, 2006; Page D1
http://online.wsj.com/article/SB114904857338767299.html
To remember the name of a new acquaintance, Scott Hagwood, four-time winner of the
USA National Memory Championship, immediately repeats the person's name out loud.
Hearing a name a second time greatly increases the chance of committing it to memory,
he finds.
When joining a large party, Mr. Hagwood intentionally pauses during introductions and
reviews the first two or three names. He attempts to make a personal remark to each new
person so that he can form a connection that sticks in his mind.
When time permits, Mr. Hagwood talks with new acquaintances and looks for ways to
draw comparisons to people he knows well. He looks at character traits, body language,
eye color and job titles. He says he focuses on the other person because taking an interest
in someone is the best way for people to remember each other. He also brings up the
attributes he'll use to commit the person's name to memory.
21. To help remember a person’s name it is best to do what immediately?
a. input the name into your Blackberry
b. make up a word that rhymes with the name
c. write it down on a Post-It note and stick it on their back
d. repeat it out loud Correct
Remote Control: Parents Use Software To Track Kids' Online Activity From Work
By SUE SHELLENBARGER
June 1, 2006; Page D1
http://online.wsj.com/article/SB114911362303867929.html
Vickye Young's daughter has reached her teens, past the age when parents normally
expect child-care problems to interrupt them at work. But last year, a new kind of peril
sent the Houston paralegal racing home in the middle of the day.
Her 13-year-old daughter was chatting online with what appeared to be an Internet
predator -- a fact Ms. Young discovered at work, by using parental-monitoring software
to oversee her daughter's home-computer activity. After logging on and discovering the
chat, heavy with inappropriate sexual content, "I thought I was going to faint," Ms.
Young says.
She told her boss, Houston attorney Bob Binstock, then left for home with his full
support, Mr. Binstock says.
A growing number of parents are using consumer software to monitor their kids' home
Internet use from work. Parents say they gain invaluable information about their children,
plus the power to control what they do online. But adding a new kind of electronic tether
to the cellphones, email and other links parents already use can complicate the workhome juggling act. The trend raises new issues for employers as well.
Internet-filtering software that blocks email or Web sites by category or keyword has
been around for a while. But newer programs reach beyond that to allow secret
monitoring of a child's Web activities from a remote computer. Some send periodic
emails with the actual text of a child's emails and instant messages, plus a list of URLs
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 27 of 28
visited. Others send instant alerts, usually by email, notifying the parent that a child has
tried to access a forbidden Web site or typed in a prohibited keyword, phrase or personal
information such as a home address. Some offer a virtual peek over a child's shoulder,
with screen snapshots of online conversations.
No one tracks this kind of multitasking. However, at SpectorSoft, Vero Beach, Fla.,
president Doug Fowler estimates that annual consumer sales of its eBlaster software are
rising about 20% to 25% a year to $3 million currently; he says parents using it at work
have tripled in the past three years to more than 10,000. Aaron Kenny, co-founder of
SafeBrowse, Acworth, Ga., says sales of its Safe Eyes software are three to four times
year-ago levels. At ContentWatch, Salt Lake City maker of ContentProtect software,
sales last year rose 70% over 2004 levels, says Scott Nelson, vice president, marketing.
Children's Internet use has become a major concern for working parents, says Rich
Chaifetz, CEO of ComPsych, Chicago, an employee-assistance provider. More than onefourth of parents cite worries about kids' spending too much time online as the top
summer child-care fear, in a recent ComPsych survey of 677 working parents
After using IM Einstein software to read her daughter's alarming instant-message
exchanges, Ms. Young talked to the teen and learned that she, too, had become
frightened. The girl had tried to cut the exchanges off, but her online correspondents
wouldn't leave her alone. "She started crying, 'Mom, I don't know who these people are, I
didn't know how to tell them to stop,'" says Ms. Young, who immediately cut off home
Internet service.
Using eBlaster revealed to Cathy Wagner, a New Jersey sales manager, that her 14-yearold son was talking online with a girl about a suicide pact. Later, her son claimed he was
really just trying to dissuade his friend, Ms. Wagner says. She explained that he was
getting in "way over your head." She and her husband informed a school counselor, who
intervened. A year later, the girl is safe and her son is doing fine, she says.
Some parents tell kids about the monitoring, some don't. John Litster, a Lake Forest,
Calif., information-technology manager, was deliberately vague with his twin daughters,
13, about using eBlaster, saying he installed it "to make sure they didn't get any bad stuff
on their computers."
22. A growing number of parents are using ________ to monitor their kids' home Internet
use from work.
a. spy equipment
b. parental-monitoring software Correct
c. nannies
d. Web-cams
© Copyright 2005 Dow Jones & Company, Inc. All rights reserved.
WSJ Professor Guide: Page 28 of 28